Tractor Supply Company — Fiscal Q3 2015 Form 10-Q
Business context and reporting period
Quarterly report for the fiscal quarter ended September 26, 2015, comparing the three and nine months ended September 26, 2015 with the comparable periods ended September 27, 2014. Tractor Supply operated 1,465 stores in 49 states and sold rural-lifestyle products through its stores and TractorSupply.com.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $1.476 billion | $1.360 billion | $4.580 billion | $4.127 billion |
| Gross profit | $512.2 million | $464.1 million | $1.582 billion | $1.411 billion |
| Gross margin | 34.7% | 34.1% | 34.5% | 34.2% |
| Operating income | $139.2 million | $122.0 million | $477.2 million | $411.8 million |
| Net income | $87.3 million | $76.6 million | $298.7 million | $258.8 million |
| Diluted EPS | $0.64 | $0.55 | $2.18 | $1.85 |
Calculated operating margins were approximately 9.4% in Q3 and 10.4% for the first nine months; calculated net margins were approximately 5.9% and 6.5%, respectively. Comparable-store sales increased 2.9% in Q3 and 4.7% for the first nine months. Q3 comparable transactions increased 3.8%, while average ticket declined 0.9%.
Operating cash flow for the first nine months was $243.5 million, versus $167.6 million in the prior-year period. Capital expenditures were $163.5 million, principally for new and relocated stores, distribution-center capacity and improvements, and information technology. Ending cash was $51.4 million.
At September 26, 2015, inventories were $1.415 billion, working capital was $807.7 million, and total liabilities were $1.103 billion. The company had $190.0 million outstanding under its unsecured $400 million Senior Credit Facility, $42.8 million of outstanding letters of credit, and remained in compliance with all debt covenants. The facility matures in October 2016.
Material changes versus the prior comparable period
- Q3 sales increased 8.5%, gross profit increased 10.4%, operating income increased 14.1%, and net income increased 14.0%.
- First-nine-month sales increased 11.0%, gross profit increased 12.1%, operating income increased 15.9%, and net income increased 15.4%.
- Gross margin expanded by 60 basis points in Q3 and 30 basis points year to date, reflecting price and markdown management, lower fuel costs, and favorable deflationary effects.
- Q3 SG&A including depreciation and amortization rose to 25.3% of sales from 25.2%, driven by occupancy costs and incremental costs for new mixing centers and the Casa Grande distribution facility. Year-to-date SG&A including depreciation and amortization improved to 24.1% from 24.2%.
- Inventory increased $118.8 million year over year, or approximately 9.2%, primarily for new-store growth and seasonal merchandise. Accounts payable increased $44.1 million.
- The company opened 88 stores and closed five during the first nine months, ending with 1,465 stores versus 1,361 a year earlier.
- Share repurchases totaled $244.0 million for the first nine months, compared with $244.4 million in the prior-year period; remaining authorization was $619.4 million at quarter-end. Dividends declared per share increased to $0.56 from $0.45.
- Borrowings increased from $150.0 million at September 27, 2014 to $190.0 million at September 26, 2015.
Guidance, outlook, risks and unusual items
Management expected approximately 114 new stores in fiscal 2015, compared with 107 in fiscal 2014, and expected a full-year effective tax rate of approximately 37.0%. Management stated that cash, operating cash flow, available credit, leases and trade credit should fund operations and capital expenditures through the end of fiscal 2015.
The Casa Grande, Arizona distribution center began receiving product in October 2015 and was expected to begin shipping to stores in late 2015. Construction commitments for the facility were approximately $6.3 million at quarter-end.
Management identified consumer spending, weather and seasonality, competition, product mix, commodity and transportation costs, store expansion and execution, labor availability, foreign suppliers, information-system disruptions or data breaches, regulatory changes, tax matters, litigation, and accounting estimates as principal risks. Warmer weather in northern markets adversely affected late-quarter fall seasonal sales.
The company entered into a Clean Air Act settlement concerning certain imported engines. Most of the civil penalty was expected to be indemnified by a vendor; the settlement, compliance program and emissions-offset program were not expected to materially affect financial condition, results of operations or cash flows, and court approval remained pending. No material changes to previously disclosed risk factors were reported.
Management was evaluating the future adoption of revenue-recognition guidance under ASU 2014-09; the filing states that the impact and transition method had not yet been determined. The company did not expect ASU 2015-11 on inventory measurement to have a material effect.
Investor verification items
- Verify the sustainability of comparable-store sales growth, particularly after the reported weather-related softness in fall seasonal categories.
- Review inventory growth, seasonal build and subsequent sell-through for potential markdown or working-capital pressure.
- Monitor leverage, interest-rate exposure, covenant compliance and the October 2016 maturity of the Senior Credit Facility.
- Assess returns and execution risks from rapid store expansion and distribution-center investments, including Casa Grande.
- Confirm the fiscal 2015 tax-rate outlook and any impact from expiring or unavailable state tax incentives.
- Follow court approval and final economics of the Clean Air Act settlement and vendor indemnification.
- Evaluate the balance between share repurchases, dividends, capital expenditures and borrowings.