Tractor Supply Company — Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company reported results for the fiscal three months ended March 27, 2021, compared with March 28, 2020. The company operates Tractor Supply, Del’s and Petsense stores, as well as e-commerce channels. At quarter-end, it operated 2,121 stores in 49 states, including 1,944 Tractor Supply and Del’s stores and 177 Petsense stores.
Management attributed strong demand to COVID-19-related consumer behavior, government stimulus, favorable weather, new and re-engaged customers, and spending on homes, land and animals. The interim financial statements are unaudited and results are seasonal.
Financial Performance and Key Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $2.792 billion | $1.959 billion | +42.5% |
| Gross profit | $983.8 million | $661.2 million | +48.8% |
| Gross margin | 35.2% | 33.8% | +148 bps |
| Operating income | $230.5 million | $112.5 million | +104.9% |
| Operating margin | 8.3% | 5.7% | +252 bps |
| Net income | $181.4 million | $83.8 million | +116.5% |
| Diluted EPS | $1.55 | $0.71 | +118.3% |
| Net margin | 6.5% | 4.3% | +220 bps |
| Cash flow from operations | $177.1 million | $83.9 million | +$93.2 million |
| Capital expenditures | $100.7 million | $29.6 million | +$71.1 million |
Comparable-store sales increased 38.6%, including a 21.0% increase in comparable transaction count and a 17.6% increase in comparable average transaction value. E-commerce sales grew at a triple-digit rate for the fourth consecutive quarter. Sales from stores open less than one year contributed $82.4 million, or 4.2 percentage points, to the reported sales increase.
SG&A, including depreciation and amortization, increased 37.3% to $753.2 million, but declined to 27.0% of sales from 28.0%. COVID-19-related costs, including pay, benefits and health and safety measures, were approximately $28 million. The effective tax rate decreased to 18.8% from 22.1%, principally due to a discrete tax benefit related to share-based compensation.
Balance Sheet, Liquidity and Capital Allocation
- Cash and cash equivalents were $1.150 billion at March 27, 2021, compared with $1.342 billion at December 26, 2020 and $461.5 million at March 28, 2020.
- Inventories were $2.085 billion, up from $1.783 billion at year-end 2020 and $1.906 billion in the prior-year quarter, reflecting seasonal purchases, store growth and strong demand.
- Working capital was $1.405 billion, down $110.0 million from year-end but up $418.8 million year over year.
- Total outstanding borrowings were $1.000 billion, compared with $1.020 billion in the prior-year quarter. Reported debt, net of discounts and issuance costs, was $984.8 million.
- The company had $60.3 million of outstanding letters of credit and was in compliance with its debt covenants. Its $500 million revolving credit facility had no revolving loans outstanding at quarter-end.
- Net cash used in financing activities was $268.4 million, primarily reflecting $253.4 million of share repurchases and $60.6 million of dividends, partially offset by $58.7 million of stock issuance proceeds.
- The company repurchased approximately 1.6 million shares at a total cost of $253.4 million. Remaining authorization was approximately $890.5 million.
- The quarterly dividend increased to $0.52 per share from $0.35 per share in the prior-year quarter. A further $0.52 per-share dividend was declared on May 5, 2021.
Material Changes Versus the Prior Comparable Period
- Sales, comparable-store sales, operating income and net income accelerated sharply, benefiting from pandemic-related demand, stimulus and favorable weather.
- Gross margin expanded 148 basis points due to lower promotional and clearance activity and favorable product mix, partly offset by higher transportation costs.
- Operating leverage improved despite approximately $28 million of incremental COVID-19 costs and higher incentive compensation.
- Operating cash flow more than doubled, while capital expenditures increased substantially to support remodels, technology, new stores and distribution capacity.
- Debt composition changed materially: the company had issued $650 million of 1.75% senior notes due 2030 and had a $200 million November 2020 term loan; several 2020 term loans and revolving borrowings had been repaid.
- The store base increased to 2,121 from 2,043 stores at the end of the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2021 effective tax rate of approximately 22.1% to 22.4%.
- Fiscal 2021 capital expenditures were estimated at approximately $450 million to $550 million.
- Management expected to open approximately 80 new Tractor Supply stores and 10 new Petsense stores during fiscal 2021, subject to potential pandemic-related delays.
- The company expected existing cash, operating cash flow, debt-facility availability, leases and trade credit to fund operations and capital needs through the end of fiscal 2021.
- The company agreed to acquire Orscheln Farm and Home, which operated 167 stores, for approximately $320 million in cash. Closing remained subject to regulatory clearance and customary conditions, with funding expected from cash on hand.
- A new approximately 900,000-square-foot distribution center in Navarre, Ohio was expected to be completed by the end of fiscal 2022. Contractual commitments were approximately $75 million at quarter-end.
- COVID-19 continued to create uncertainty around customer demand, supply chains, labor, operating costs and future accounting estimates. Other stated risks include inflation and purchase-price volatility, weather, competition, foreign suppliers, technology and cybersecurity, acquisitions, employee retention, regulatory changes and litigation.
- A derivative lawsuit alleges proxy-solicitation and fiduciary-duty violations relating to diversity and inclusion disclosures. The company disputes the allegations and stated that the timing, outcome and potential loss could not be estimated.
- The company stated that there were no material changes to previously disclosed risk factors and no material changes in off-balance-sheet arrangements beyond outstanding letters of credit.
Important Facts for Investors to Verify
- Whether pandemic-driven demand, stimulus benefits and favorable weather persist after the comparable periods normalize.
- Whether gross-margin gains and SG&A leverage offset higher transportation, labor, health and safety, and incentive-compensation costs.
- The timing, regulatory clearance, financing and integration risks associated with the proposed $320 million Orscheln acquisition.
- Inventory levels, inventory turns and accounts payable growth as seasonal demand and supply-chain conditions change.
- Execution of the $450 million to $550 million capital-spending plan, new-store program and Ohio distribution-center project.
- Future share repurchases, dividends and their effect on liquidity, leverage and share count.
- Potential outcomes and costs of the pending derivative litigation and any changes in COVID-19 conditions or related regulations.