Tractor Supply Company: Fiscal Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company operates rural lifestyle retail stores and sells related products through stores and TractorSupply.com. The unaudited report covers the fiscal three months ended March 28, 2015, compared with March 29, 2014. The company operated 1,422 stores in 49 states at quarter-end, versus 1,308 stores a year earlier.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $1.331 billion | $1.184 billion | +12.5% |
| Gross profit | $444.6 million | $396.2 million | +12.2% |
| Gross margin | 33.4% | 33.5% | -10 basis points |
| Operating income | $92.8 million | $78.7 million | +17.9% |
| Operating margin | 7.0% | 6.7% | +30 basis points |
| Net income | $58.0 million | $48.8 million | +18.9% |
| Diluted EPS | $0.42 | $0.35 | +20.0% |
| Net cash from operating activities | $36.3 million | $(38.1) million | +$74.4 million |
| Capital expenditures | $48.8 million | $41.9 million | +16.5% |
Net margin was approximately 4.4% versus 4.1% in the prior-year quarter. SG&A, including depreciation and amortization, was 26.4% of sales versus 26.8%, reflecting operating leverage from comparable-store growth, partly offset by higher incentive compensation. The effective tax rate declined to 36.9% from 37.6%.
Cash and cash equivalents were $57.1 million at March 28, 2015. Working capital was $721.9 million. Inventory was $1.371 billion, up from $1.225 billion a year earlier, primarily reflecting store growth and early purchases for spring seasonal categories.
The company had $60.0 million outstanding under its unsecured $400 million Senior Credit Facility, with $50.5 million of letters of credit outstanding. The facility matures in October 2016, and the company reported compliance with all debt covenants. Total liabilities were $1.007 billion and stockholders’ equity was $1.315 billion.
Material Changes Versus the Prior Comparable Period
- Comparable-store sales increased 5.7%, compared with 2.2% in Q1 2014. Comparable transaction count increased 4.8% and average ticket increased 0.8%.
- New stores contributed $82.3 million of sales and accounted for approximately 7.0 percentage points of total sales growth. The company opened 41 stores and closed one during the quarter.
- Gross margin declined modestly because of increased clearance activity, timing of new-store vendor support and slightly higher shrink. Lower fuel costs provided a partial offset through reduced transportation costs.
- Operating cash flow improved substantially because of the timing of inventory receipts and payments, including a smaller working-capital cash use from inventory and accounts payable.
- Share repurchases declined to $47.9 million for 0.6 million shares from $84.5 million for 1.3 million shares in Q1 2014. Remaining repurchase authorization was $815.4 million at quarter-end.
- The quarterly dividend increased to $0.16 per share from $0.13. On May 4, 2015, the board declared a subsequent quarterly dividend of $0.20 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open 110 to 115 new stores during fiscal 2015, compared with 107 openings in fiscal 2014.
- The new Casa Grande, Arizona distribution center was expected to open in late fiscal 2015. The company had approximately $26.7 million of related construction commitments and $9.7 million of commitments for two Texas mixing centers.
- Management expected the full-year fiscal 2015 effective tax rate to be approximately 37.0% and stated that available liquidity should fund operations and planned capital requirements through the end of fiscal 2015.
- The business is seasonal, with historically higher sales and profits in the second and fourth quarters. Weather can materially affect the timing and volume of sales.
- Management identified risks including consumer spending, competition, store expansion, merchandise and commodity-cost volatility, weather, foreign sourcing, employee retention, technology and supply-chain execution, data security, regulatory matters, litigation and changes in tax or accounting standards.
- Comparable-store sales were estimated to have been negatively affected by approximately 85 basis points from deflation, principally in livestock feed, propane and bird seed.
- The company continued settlement discussions with the DOJ and EPA regarding alleged Clean Air Act violations involving certain imported engines. Management did not expect a material adverse financial impact and stated that losses beyond amounts accrued were not reasonably possible.
- Management was assessing the future impact and transition method for the new revenue recognition standard, ASU 2014-09.
Important Facts for Investors to Verify
- Whether comparable-store sales momentum and store-opening productivity support the 2015 expansion plan.
- Whether clearance activity, shrink, deflation and merchandise costs continue to pressure gross margin.
- Inventory growth, seasonal working-capital needs and the sustainability of improved operating cash flow.
- Capital spending and construction progress for the Casa Grande distribution center and Texas mixing centers.
- Borrowings, letters of credit, interest-rate exposure and covenant compliance under the Senior Credit Facility.
- The outcome and financial terms of the DOJ/EPA environmental matter.
- The effect of the planned revenue recognition standard adoption on reported revenue, earnings and disclosures.
- Future dividends and share repurchases, which remain subject to board discretion, capital needs and market conditions.