Business Context and Reporting Period
Tractor Supply Company operates farm and ranch retail stores serving recreational farmers, ranchers, rural-lifestyle customers, tradesmen and small businesses. The company operated 1,176 stores in 45 states and an e-commerce website at December 29, 2012. Fiscal 2012 comprised 52 weeks, compared with 53 weeks in fiscal 2011. The filing was submitted February 20, 2013.
Financial Performance and Key Metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net sales | $4.664 billion | $4.233 billion | +10.2%; +11.6% adjusted for the extra 2011 week |
| Gross margin | $1.566 billion; 33.6% | $1.407 billion; 33.2% | +40 basis points |
| Operating income | $436.8 million; 9.4% of sales | $352.7 million; 8.3% | +23.8% |
| Net income | $276.5 million; 6.0% of sales | $222.7 million; 5.3% | +24.1% |
| Diluted EPS | $3.80 | $3.01 | +26.2% |
| Cash flow from operations | $378.3 million | $254.1 million | +$124.2 million |
| Capital expenditures | $152.9 million | $166.2 million | -$13.2 million |
Fiscal 2012 same-store sales increased 5.3%, driven primarily by consumable, usable and edible products, especially animal and pet merchandise. Same-store transaction count increased 3.0% and average ticket increased 2.0%; management estimated approximately 250 basis points of same-store growth came from inflation.
Fourth-quarter 2012 net sales were $1.286 billion, gross margin was $424.6 million, operating income was $124.8 million and net income was $79.5 million, or $1.11 diluted EPS. Fourth-quarter same-store sales increased 4.7%.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $138.6 million, with restricted cash of $8.4 million; combined cash and restricted cash was approximately $147 million at year-end.
- The company had no borrowings under its unsecured $250 million Senior Credit Facility, which matures in October 2016. Outstanding letters of credit totaled $51.4 million under the facility and $7.3 million outside it.
- The company was in compliance with all credit-facility covenants. Long-term debt, excluding current maturities, was $1.2 million, consisting primarily of capital lease obligations.
- Working capital was $569.5 million, down from $629.6 million, while inventories increased to $908.1 million from $830.8 million.
- Fiscal 2012 cash uses included $271.8 million for share repurchases and $51.3 million for dividends. Approximately 3.1 million shares were repurchased, leaving $291.2 million of authorization.
- Quarterly dividends increased from $0.12 to $0.20 per share during 2012. A further $0.20 per-share dividend was declared for payment in March 2013.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected 93 new stores, a 5.3% same-store sales increase and higher sales from recently opened stores. The year-end store count increased from 1,085 to 1,176.
- Gross margin improved due to strategic sourcing, inventory and markdown management, exclusive-brand growth and price optimization, partially offset by higher transportation costs.
- SG&A, including depreciation and amortization, improved to 24.2% of sales from 24.9%, reflecting sales leverage, store expense control and lower incentive compensation expense.
- Operating cash flow rose substantially due to higher earnings, working-capital management and the timing of tax payments.
- Inventory turns improved to 3.28 from 3.23. Exclusive brands represented approximately 25% of sales, compared with 23% in 2011.
- Share repurchases increased in cost from $180.0 million to $271.8 million, while dividends paid increased from $30.9 million to $51.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management planned 100 to 105 new stores in fiscal 2013, representing approximately an 8% increase in selling square footage.
- Fiscal 2013 capital expenditures were estimated at $240 million to $250 million, including approximately $40 million to $45 million for distribution capacity, $45 million to $50 million for the new store support center and continued technology investments.
- A 686,000-square-foot distribution center in Macon, Georgia was under construction and expected to become operational in mid-to-late 2013. The company also planned an e-commerce upgrade integrating order management, drop shipment and fulfillment.
- Management expected cash balances, operating cash flow, available credit, leases and normal trade credit to fund operations and planned capital requirements over the next several years.
- Key risks include consumer spending and economic conditions, weather and seasonality, commodity and transportation-cost volatility, competition, new-store execution, labor availability, foreign sourcing, vendor dependence, supply-chain and information-technology implementation, cybersecurity, product liability, tax audits and regulatory compliance.
- The company was engaged in settlement discussions with the Department of Justice and EPA regarding alleged Clean Air Act violations involving certain imported engines. Management did not expect a material adverse effect and intended to seek vendor reimbursement for penalties.
- No significant long-lived-asset impairment charges were recorded in fiscal 2012, and annual goodwill testing identified no impairment. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether planned fiscal 2013 store openings and capital expenditures were achieved without weakening returns or liquidity.
- The sustainability of same-store sales growth after adjusting for inflation and the benefit from new stores.
- Whether gross-margin gains offset rising freight, fuel and import costs.
- Inventory growth, markdown activity and inventory turns as the store base expands.
- Progress, cost and operational impact of the Macon distribution center, new store support center and e-commerce upgrade.
- Resolution and ultimate cost of the EPA/DOJ Clean Air Act matter, including vendor reimbursements.
- Future share repurchases and dividends relative to operating cash flow, capital needs and the company’s substantial operating-lease commitments of $1.738 billion.