Tractor Supply Company 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company operates rural lifestyle retail stores and Petsense pet-supply stores, with online sales through TractorSupply.com and Petsense.com. The filing covers the unaudited fiscal three months ended March 31, 2018, compared with April 1, 2017. At quarter-end, the Company operated 1,872 stores in 49 states: 1,700 Tractor Supply and Del’s stores and 172 Petsense stores.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $1.683 billion | $1.564 billion | 7.6% increase |
| Comparable-store sales | 3.7% increase | 2.2% decrease | Improved |
| Gross profit | $563.6 million | $518.2 million | 8.8% increase |
| Gross margin | 33.5% | 33.1% | Up 36 basis points |
| Operating income | $94.7 million | $96.4 million | 1.7% decrease |
| Net income | $71.4 million | $60.3 million | 18.4% increase |
| Diluted EPS | $0.57 | $0.46 | 21.7% increase |
| Effective tax rate | 20.9% | 35.6% | Down 1,470 basis points |
| Cash flow from operations | $(21.9) million | $(141.7) million | Improved by $119.8 million |
| Capital expenditures | $45.1 million | $34.9 million | 29.4% increase |
Operating margin was approximately 5.6%, compared with 6.2% in the prior-year quarter. Net margin was approximately 4.2%, compared with 3.9%. SG&A, including depreciation and amortization, rose 11.2% to $468.9 million and increased to 27.9% of sales from 27.0%, reflecting wage investments, higher utilities and maintenance costs, and strategic infrastructure spending.
Cash and cash equivalents totaled $132.4 million at March 31, 2018, compared with $109.1 million at December 30, 2017 and $72.7 million at April 1, 2017. Working capital was $970.2 million. Inventories were $1.760 billion, up $306.9 million from year-end, primarily reflecting seasonal merchandise and new-store growth.
Total debt, net of issuance costs, was $704.6 million, including $150.0 million of senior notes and $554.6 million under the senior credit facility. Outstanding borrowings increased from $427.5 million at December 30, 2017 and $612.5 million at April 1, 2017. The Company had $42.8 million of outstanding letters of credit and was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth benefited from a 3.7% comparable-store sales increase, higher transaction counts of 3.2%, a 0.5% increase in average ticket, and one additional sales day. The additional day was estimated to contribute approximately 60 basis points to comparable sales.
- Demand was strong in everyday merchandise and winter seasonal categories, while spring and summer seasonal sales were lower.
- Gross margin improved due primarily to strong winter seasonal sell-through, partly offset by higher transportation and diesel fuel costs.
- Operating income declined despite higher sales because SG&A grew faster than revenue.
- Net income and EPS benefited materially from the lower tax rate following the Tax Cuts and Jobs Act and discrete federal and state tax credits.
- Operating cash use narrowed substantially because of more favorable inventory, accounts payable, and accrued-expense timing.
- The Company repurchased approximately 2.4 million shares for $157.5 million, compared with 1.6 million shares for $114.5 million in the prior-year quarter. Remaining repurchase authorization was approximately $712.3 million.
- Store count increased from 1,769 to 1,872 year over year, including 83 additional Tractor Supply stores and 20 additional Petsense stores.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fiscal 2018 to open approximately 80 new Tractor Supply stores and 20 new Petsense stores, below fiscal 2017 openings of 101 and 25, respectively, as capital allocation shifted toward information technology and supply-chain infrastructure.
- Management projected a fiscal 2018 effective tax rate of 23.0% to 23.5%.
- The Company stated that cash balances, operating cash flow, debt availability, leases, and trade credit should fund operations and planned capital expenditures through the end of fiscal 2018.
- Capital spending supported information technology, omni-channel capabilities, distribution capacity, new stores, and store improvements. A new distribution center in Frankfort, New York, was expected to be operational in the first quarter of fiscal 2019, with approximately $30.0 million of related contractual commitments outstanding.
- The business is seasonal, with higher sales and profits generally in the second and fourth quarters. Weather can shift sales and profits between quarters, particularly between the first and second quarters.
- Principal disclosed risks include consumer spending, weather, competition including online retailers, merchandise and transportation cost volatility, tariffs, execution of store and supply-chain expansion, employee retention, cybersecurity, technology disruptions, tax-rate changes, litigation, and accounting changes.
- The Company adopted revenue-recognition guidance using the modified retrospective method; management reported no material impact. It also adopted guidance concerning share-based compensation, stranded tax effects, and the Tax Cuts and Jobs Act.
- The Company was assessing the future effects of the new lease and hedging accounting standards. Ordinary-course litigation was not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether comparable-store sales and gross-margin improvement continue after the seasonal benefit from winter merchandise and the additional sales day.
- Whether SG&A growth moderates relative to revenue growth as wage, utility, maintenance, technology, and infrastructure investments continue.
- Inventory levels, sell-through, markdown exposure, and working-capital conversion during the spring and summer selling seasons.
- Debt reduction, interest expense, covenant compliance, and liquidity after the increased use of revolving credit borrowings.
- Whether the lower quarterly tax rate translates into the projected full-year rate of 23.0% to 23.5% as provisional Tax Cuts and Jobs Act estimates are refined.
- Execution, cost, and timing of the Frankfort distribution center and broader supply-chain and technology investments.
- The sustainability of share repurchases and dividends relative to operating cash flow and capital requirements.