Tractor Supply Company 10-Q Summary
Business context and reporting period
Tractor Supply Company operates rural lifestyle retail stores and TractorSupply.com. At April 1, 2017, it operated 1,769 stores in 49 states, including 1,617 Tractor Supply and Del’s stores and 152 Petsense stores. The filing covers the unaudited fiscal three months ended April 1, 2017, compared with March 26, 2016.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $1.564 billion | $1.468 billion | +6.6% |
| Gross profit | $518.2 million | $494.4 million | +4.8% |
| Gross margin | 33.1% | 33.7% | -60 bps |
| Operating income | $96.4 million | $108.2 million | -10.9% |
| Operating margin | 6.2% | 7.4% | Lower |
| Net income | $60.3 million | $67.7 million | -10.9% |
| Diluted EPS | $0.46 | $0.50 | -8.0% |
| Cash flow from operations | $(141.7) million | $65.6 million | $(207.4) million |
| Capital expenditures | $34.9 million | $36.7 million | -$1.9 million |
SG&A, including depreciation and amortization, increased 9.2% to $421.8 million and rose to 27.0% of sales from 26.3%. The effective tax rate decreased to 35.6% from 36.8%, primarily due to the adoption of stock-compensation tax accounting guidance. The company declared a $0.24 per-share dividend during the quarter and subsequently declared a $0.27 per-share dividend payable June 6, 2017.
Cash and cash equivalents were $72.7 million at April 1, 2017, compared with $53.9 million at December 31, 2016 and $74.5 million at March 26, 2016. Working capital was $1.007 billion. Inventory was $1.658 billion, up from $1.370 billion at year-end and $1.471 billion in the prior-year quarter.
Total borrowings under the senior credit facility were $612.5 million, consisting of $187.5 million under the term loan and $425.0 million under the revolver. Outstanding letters of credit were $39.5 million. The company was in compliance with its debt covenants. The facility matures February 19, 2021, and the company had a $187.5 million interest-rate-swap notional amount to hedge term-loan exposure.
Material changes versus the prior comparable period
- Sales growth was primarily supported by new stores and the Petsense acquisition; comparable-store sales declined 2.2%, with comparable transactions down 1.4% and average ticket down 0.9%.
- Comparable sales were pressured by weaker seasonal merchandise demand, warmer weather early in the year, March winter storms, and deflation in certain categories. Livestock and Pet sales partly offset the weakness.
- Gross margin declined because of higher cold-weather markdowns, targeted promotions, and higher freight expense from a greater mix of consumable, usable and edible products.
- Operating leverage deteriorated as comparable sales declined, while the company increased store payroll hours to support customer service.
- Operating cash flow shifted to a use of $141.7 million, principally because inventory increased $288.1 million and inventory-related working-capital needs were substantially higher than in the prior year.
- Net financing cash inflow was $195.3 million, driven by $337.5 million of net debt borrowings, partly offset by $114.5 million of share repurchases and $31.3 million of dividends.
- The company repurchased approximately 1.6 million shares for $114.5 million; $1.1 billion remained available under the repurchase authorization at quarter-end.
- Petsense contributed 152 stores at quarter-end following its September 2016 acquisition for $145.7 million in cash, including provisional goodwill of $84.2 million and a tradename valued at $31.3 million.
Guidance, outlook, risks and unusual items
Management expected a fiscal 2017 effective tax rate of approximately 36.1%. It expected to open approximately 100 new Tractor Supply stores and 25 to 30 new Petsense stores during fiscal 2017. The company also planned to begin construction in summer 2017 on a northeast distribution center in Frankfort, New York, targeted for operation by the end of fiscal 2018. Management stated that available cash, operating cash flow, debt capacity, leases and trade credit should fund operations and planned capital needs through fiscal year-end.
The business is seasonal, with sales and profits historically highest in the second and fourth quarters and inventory and accounts payable generally highest in the first and third quarters. Principal risks include consumer spending, weather, seasonal demand, comparable-store sales, product-cost volatility and deflation, competition, new-store execution, Petsense integration and performance, employee retention, foreign sourcing, technology and data-security disruptions, regulatory and environmental matters, litigation, tax-rate changes, and interest-rate exposure.
The company disclosed an ongoing Yolo County, California subpoena concerning hazardous-waste management and disposal practices. Management could not determine the outcome but did not expect a material adverse effect. The filing also states that there were no material changes to previously disclosed risk factors and no material construction commitments extending beyond twelve months.
Accounting updates adopted in the quarter, including inventory measurement, gift-card breakage, stock compensation, cash-flow classification and goodwill impairment guidance, did not have a material impact. The company expects to adopt revenue-recognition guidance in the first quarter of fiscal 2018 and is assessing the future impact of lease-accounting guidance.
Important facts for investors to verify
- Whether comparable-store sales recover after weather-related and seasonal weakness, particularly in seasonal categories.
- Inventory turns, markdown levels, freight costs and gross-margin trends as spring and summer selling periods progress.
- Debt paydown, revolver utilization, interest expense and compliance with the fixed-charge coverage and leverage covenants.
- Cash generation after inventory normalization, capital expenditures, dividends and share repurchases.
- Petsense sales, profitability, integration progress and the final purchase-price allocation.
- Execution of planned store openings and the Frankfort distribution-center project.
- Developments in the California environmental matter and any effect on financial statements.
- The effect of future accounting adoption, particularly revenue recognition and leases.