Tractor Supply Company — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2018, comprising 52 weeks. The filing is an annual Form 10-K rather than a standalone quarterly filing; fourth-quarter results are included below where relevant. Tractor Supply operated 1,940 stores in 49 states, including 1,765 Tractor Supply/Del’s stores and 175 Petsense stores.
Financial performance and key metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $7.911 billion | $7.256 billion | +9.0% |
| Comparable-store sales | +5.1% | +2.7% | Improved |
| Gross profit | $2.703 billion | $2.492 billion | +8.4% |
| Gross margin | 34.16% | 34.34% | Down 18 basis points |
| Operating income | $701.7 million | $686.4 million | +2.2% |
| Operating margin | 8.87% | 9.46% | Down 59 basis points |
| Net income | $532.4 million | $422.6 million | +26.0% |
| Diluted earnings per share | $4.31 | $3.30 | +30.6% |
| Net cash from operations | $694.4 million | $631.5 million | +$62.9 million |
| Capital expenditures | $278.5 million | $250.4 million | +11.2% |
Fourth quarter: Net sales were $2.133 billion, gross profit was $716.3 million, operating income was $180.4 million, and net income was $136.9 million, or $1.11 diluted EPS. Comparable-store sales increased 5.7%.
Net income benefited substantially from a lower effective tax rate of 22.1%, compared with 37.2% in 2017, primarily due to the Tax Cuts and Jobs Act. Fiscal 2017 included a $4.9 million non-cash charge related to revaluing deferred tax assets.
Merchandise mix was led by livestock and pet products at 47% of sales, followed by hardware, tools and truck products at 22%, seasonal, gift and toy products at 19%, clothing and footwear at 8%, and agriculture at 4%. Exclusive brands represented approximately 31% of fiscal 2018 sales.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $86.3 million at year-end, compared with $109.1 million in 2017.
- Working capital was $856.3 million, up from $806.2 million.
- Total debt, net of issuance costs, was $407.4 million, compared with $426.1 million; long-term debt was $381.1 million.
- The company had no revolving credit borrowings and had $33.5 million of outstanding letters of credit.
- Debt agreements require a fixed-charge coverage ratio of at least 2.00 to 1.0 and a leverage ratio of no more than 4.00 to 1.0. The company was in compliance with all covenants at year-end.
- Fiscal 2018 financing returned approximately $496.9 million to shareholders through $349.8 million of share repurchases and $147.1 million of dividends.
- Approximately 5.0 million shares were repurchased at a total cost of $349.8 million. Remaining repurchase authorization was $520.0 million through December 2020.
- Fiscal 2018 dividends declared were $1.20 per share, compared with $1.05 in 2017. The board declared an additional $0.31 per-share quarterly dividend payable in March 2019.
Material changes versus the prior comparable period
- Sales growth accelerated to 9.0% from 7.0%, while comparable-store sales growth improved to 5.1% from 2.7%.
- The company opened 80 Tractor Supply stores and 18 Petsense stores, compared with 101 and 25, respectively, in 2017. Petsense also closed 11 stores during 2018.
- Selling square footage increased approximately 4.9%, and the year-end store count increased from 1,853 to 1,940.
- Gross margin declined because of higher freight and carrier costs, increased diesel prices, and an unfavorable fourth-quarter product mix. Price management and seasonal sell-through partly offset these pressures.
- SG&A, including depreciation and amortization, increased 10.8% and rose to 25.29% of sales from 24.88%, reflecting higher incentive compensation, technology and infrastructure investments, and higher store and distribution-center wages.
- Operating income increased modestly in dollars but operating margin contracted because expense growth exceeded sales growth.
- Inventory increased to $1.590 billion from $1.453 billion, primarily to support new stores and the new northeast distribution center.
- Net cash from operations increased, but cash declined because of capital expenditures, share repurchases, dividends, and debt repayment.
Guidance, outlook, commentary, and unusual items
- Management expected to open approximately 80 new Tractor Supply stores and 10 to 15 new Petsense stores in fiscal 2019, representing approximately 4.7% selling-square-footage growth.
- Fiscal 2019 capital spending was expected to support new stores, technology, infrastructure, and digital and omni-channel capabilities. The Frankfort, New York distribution center began receiving merchandise in the fourth quarter of 2018 and was expected to begin shipping in the first quarter of 2019.
- The company stated that cash balances, operating cash flow, debt-facility availability, leases, and trade credit should fund operations and planned capital requirements through fiscal 2019.
- Adoption of the new lease standard in the first quarter of fiscal 2019 was expected to recognize approximately $2.0 billion to $2.2 billion of operating lease right-of-use assets and liabilities and reduce reported working capital by approximately $250 million to $300 million. Management did not expect a material income-statement or cash-flow effect.
- Key risks include consumer spending and economic conditions, weather and seasonality, competition including online retailers, freight and commodity-cost volatility, tariffs and foreign sourcing, labor costs and availability, execution of store and distribution expansion, cybersecurity and technology disruptions, inventory markdowns, legal and regulatory matters, and tax examinations.
- The company self-insures portions of medical, workers’ compensation, and general liability risks; net insurance reserves were $65.0 million at year-end.
- The company reported no significant long-lived-asset, goodwill, or indefinite-lived intangible-asset impairment charges in fiscal 2018. Ordinary-course litigation was not expected to materially affect financial position, results, or cash flows.
- Management and Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether comparable-store sales momentum can continue as new-store contribution moderates and weather effects normalize.
- Whether freight, fuel, tariffs, wages, and other cost pressures cause further gross-margin or operating-margin compression.
- The profitability and ramp-up performance of new Tractor Supply and Petsense stores and the execution of the planned 2019 openings.
- Inventory growth, turnover, shrinkage, markdown exposure, and the effectiveness of the new northeast distribution center.
- The effect of the lease-standard adoption on reported assets, liabilities, working capital, leverage metrics, and debt-covenant calculations.
- Cash requirements for capital expenditures, dividends, and share repurchases relative to operating cash flow and available credit.
- Exposure to tariffs, international sourcing disruption, cybersecurity incidents, self-insured claims, and sales-tax or other tax audits.