Business Context and Reporting Period
Tractor Supply Company filed an unaudited Form 10-Q for the fiscal quarter and six months ended June 25, 2011, compared with June 26, 2010. The company operates one reportable segment: retail sales of farm and ranch products. It operated 1,043 stores at quarter-end, up from 967 a year earlier.
The business is highly seasonal, with sales and profits generally strongest in the second and fourth quarters. Results are affected by weather, consumer spending, commodity and transportation costs, store expansion, competition, labor availability, foreign sourcing, and regulatory matters.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Net sales | $1.178 billion | $1.066 billion | $2.015 billion | $1.777 billion |
| Gross margin | $402.5 million; 34.1% | $360.1 million; 33.8% | $676.1 million; 33.6% | $591.1 million; 33.3% |
| Operating income | $144.3 million | $123.6 million | $173.0 million | $140.1 million |
| Net income | $91.2 million | $77.3 million | $109.5 million | $87.9 million |
| Diluted EPS | $1.23 | $1.04 | $1.47 | $1.18 |
| Effective tax rate | 36.7% | 37.3% | 36.6% | 37.0% |
| Net cash from operations | Not separately provided | Not separately provided | $117.4 million | $71.0 million |
Second-quarter same-store sales increased 4.6%, while first-half same-store sales increased 7.0%. Gross-margin improvement reflected stronger direct product margins from inventory management, sourcing, private branding, and pricing, partly offset by higher transportation costs. SG&A, including depreciation and amortization, improved to 21.9% of sales in the quarter and 25.0% for the first half.
At June 25, 2011, cash and cash equivalents were $185.5 million, restricted cash was $21.9 million, and inventory was $875.5 million. Working capital was $593.5 million. The company had no borrowings under its $350 million unsecured revolving credit facility, with $39.7 million of letters of credit outstanding, and was in compliance with its debt covenants. The facility matures in February 2012.
Capital expenditures were $74.1 million in the first six months, including $31.9 million for distribution-center capacity and improvements. The company repurchased $122.9 million of common stock and paid $13.8 million of dividends during the first six months.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 10.6%, gross margin increased 11.8%, operating income increased 16.7%, and net income increased 17.9% versus the prior-year quarter.
- First-half sales increased 13.4%, gross margin increased 14.4%, operating income increased 23.5%, and net income increased 24.6% versus the prior-year period.
- Diluted EPS increased from $1.04 to $1.23 in the quarter and from $1.18 to $1.47 for the first six months.
- Store growth contributed to sales: 76 stores had been added since June 26, 2010, including 16 new stores and one relocation during the quarter.
- Operating cash flow increased by $46.4 million, primarily because of stronger earnings and a more favorable accounts-payable-to-inventory change.
- Investing cash use increased to $79.9 million from $52.6 million, mainly due to higher capital expenditures and a $21.9 million restricted cash deposit.
- Financing cash use increased to $109.3 million from $10.2 million, primarily because share repurchases rose to $122.9 million from $13.7 million.
- The company retrospectively changed inventory accounting from LIFO to average cost, increasing adjusted first-half 2010 gross margin by $3.4 million, operating income by $3.4 million, and net income by $2.1 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected to open approximately 80 to 85 new stores during fiscal 2011. No specific revenue or earnings guidance was provided in the filing.
- Management expected the full-year effective tax rate to be approximately 36.8%.
- Management believed cash balances, operating cash flow, available revolving-credit capacity, and trade credit would fund operations and capital needs over the next several years.
- The board expanded the share-repurchase authorization to $1.0 billion through April 2015; $620.0 million remained available at June 25, 2011.
- A $0.12-per-share quarterly dividend was declared on July 28, 2011, payable August 30, 2011.
- The Department of Justice and EPA alleged potential Clean Air Act violations involving certain imported engines. Settlement discussions contemplated a civil penalty and injunctive relief. The company expected vendor indemnification and did not expect a material adverse effect, but the final settlement amount was not stated.
- Construction commitments totaled approximately $7.2 million, and commitments to purchase three previously leased stores totaled approximately $7.5 million.
- Inventory levels and accounts payable were elevated due to seasonality, new-store growth, and purchases for upcoming selling periods. Management also cited implementation costs and higher distribution-center labor costs related to a new warehouse management system.
- The filing states that no material changes occurred in previously disclosed risk factors. The company identified risks including weather, economic conditions, inflation and deflation, commodity prices, competition, store expansion, foreign suppliers, employee retention, regulation, litigation, tax matters, and internal controls.
Important Facts for Investors to Verify
- Whether the planned 80–85 store openings and distribution-center investment remain on schedule and within budget.
- The February 2012 maturity and renewal or replacement status of the revolving credit facility.
- The ultimate cost, timing, and vendor recoveries related to the EPA/DOJ engine matter.
- Whether elevated inventory, accounts payable, and seasonal working-capital requirements normalize as expected.
- The sustainability of same-store sales growth and gross-margin gains amid transportation, commodity, and inflationary pressures.
- The pace and valuation of share repurchases relative to operating cash generation and expansion needs.
- The effect of the retrospective inventory-accounting change when comparing results with earlier company filings or external forecasts.