Tractor Supply Company — Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company, the largest U.S. rural lifestyle retailer, filed its unaudited Form 10-Q for the fiscal three months ended March 26, 2022, compared with March 27, 2021. The company operated 2,181 stores in 49 states: 2,003 Tractor Supply stores and 178 Petsense stores, supplemented by e-commerce platforms.
The business is seasonal, with typically higher sales and profits in the second and fourth quarters. First-quarter inventory and accounts payable generally increase to support the spring selling season.
Financial Performance and Key Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $3.024 billion | $2.792 billion | +8.3% |
| Gross profit | $1.057 billion | $983.8 million | +7.4% |
| Gross margin | 34.9% | 35.2% | -29 basis points |
| Operating income | $244.3 million | $230.5 million | +6.0% |
| Operating margin | 8.1% | 8.3% | Down modestly |
| Net income | $187.2 million | $181.4 million | +3.2% |
| Diluted earnings per share | $1.65 | $1.55 | +6.5% |
Comparable-store sales increased 5.2%, including a 6.7% increase in average transaction value and a 1.4% decrease in transaction count. E-commerce sales grew at a double-digit percentage rate. Livestock and pet products represented 53% of sales, followed by hardware, tools and truck products at 19%.
Gross margin pressure reflected product-cost inflation, higher transportation and fuel costs, and a mix shift toward lower-margin consumable, usable and edible products. Pricing actions and other margin initiatives offset a significant portion of these pressures. SG&A, including depreciation and amortization, was $812.2 million, or 26.9% of sales, compared with 27.0% in the prior-year quarter.
The effective tax rate increased to 21.1% from 18.8%, primarily because of a smaller discrete tax benefit associated with share-based compensation.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating activities generated $59.1 million of cash, down from $177.1 million in the prior-year quarter. The decline principally reflected seasonal inventory growth, changes in accounts payable, and the timing of accrued expense payments.
- Capital expenditures were $112.4 million, compared with $100.7 million. Net cash used in investing activities was $112.3 million.
- Financing activities used $419.4 million, including $296.2 million for share repurchases and $103.5 million for dividends.
- Cash and cash equivalents declined to $405.4 million from $878.0 million at December 25, 2021 and $1.150 billion at March 27, 2021.
- Working capital was $968.6 million, down from $1.186 billion at fiscal year-end and $1.405 billion a year earlier.
- Inventory was $2.568 billion, up from $2.191 billion at fiscal year-end and $2.085 billion a year earlier. Accounts payable was $1.342 billion.
- Total outstanding borrowings were $1.000 billion, consisting of $650 million of 1.75% senior notes due 2030, $150 million of 3.70% senior notes due 2029, and a $200 million term loan. Revolving credit borrowings were zero.
- Long-term debt, net of discounts and issuance costs, was $986.9 million. The company had $52.8 million of outstanding letters of credit and remained in compliance with its debt covenants.
- Management stated that existing cash, expected operating cash flow, available debt facilities, leases and trade credit should fund operations and planned capital needs through fiscal 2022 and the next several years.
Material Changes Versus the Prior Comparable Period
- Sales growth moderated substantially from the prior-year first-quarter increase of 42.5%, although comparable-store sales remained positive at 5.2%.
- Net income increased only 3.2% because of gross-margin compression and a higher effective tax rate.
- Operating cash flow decreased by $118.0 million, largely due to higher inventory investment and timing-related changes in accrued expenses.
- COVID-19 response costs declined to approximately $10.3 million from $28.4 million, while store wages and strategic growth investments increased.
- The company repurchased 1.358 million shares for $296.2 million, compared with 1.600 million shares for $253.4 million in the prior-year quarter. The average repurchase price increased to $218.07 from $158.35.
- The quarterly dividend increased to $0.92 per share from $0.52 per share.
- No new Tractor Supply stores opened during the quarter, compared with 21 in the prior-year quarter; one Petsense store opened and one closed. Management attributed the delay to lingering pandemic effects and construction-industry challenges.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open approximately 75 to 80 new Tractor Supply stores and approximately 10 new Petsense stores during fiscal 2022.
- Fiscal 2022 capital expenditures were estimated at approximately $625 million to $675 million, including more than 150 store remodels, side-lot improvements at approximately 100 locations, technology investments and distribution-center projects.
- A new distribution center in Navarre, Ohio, expected to be approximately 900,000 square feet, was under construction. Contractual commitments were approximately $32 million at quarter-end. Construction of a Maumelle, Arkansas distribution center was expected to begin in mid-2022.
- The proposed approximately $320 million acquisition of Orscheln Farm and Home, including 167 stores, remained subject to regulatory clearance and customary closing conditions. The company continued working with the Federal Trade Commission.
- Key risks include inflation, fuel and transportation costs, supply-chain disruption, labor costs and availability, weather and seasonality, COVID-19 uncertainty, consumer spending, competition from online retailers, technology and cybersecurity risks, execution of new stores and acquisitions, regulatory approval of the Orscheln transaction, and litigation or regulatory proceedings.
- The company’s derivative interest-rate swap had a net fair-value asset of $9.9 million at March 26, 2022. The first-quarter change in fair value, net of taxes, increased other comprehensive income by $6.0 million.
- A shareholder derivative lawsuit concerning diversity and inclusion disclosures was dismissed during the quarter with no material financial-statement impact. Other ordinary-course litigation is not expected by management to have a material adverse effect, although outcomes remain uncertain.
- Management reported effective disclosure controls and procedures and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether gross-margin pressure from inflation, freight, fuel and product mix persists or improves.
- Whether inventory growth converts into sales and operating cash flow as the spring and summer selling seasons progress.
- Execution of the $625 million to $675 million capital-spending plan and the timing of planned store openings and distribution centers.
- Regulatory clearance, closing timing, purchase price and integration risks related to the Orscheln acquisition.
- The sustainability of elevated share repurchases and dividends relative to operating cash generation and the company’s $1.0 billion debt balance.
- Exposure to COVID-19 developments, supply-chain disruptions, labor and wage inflation, fuel costs, weather variability and cybersecurity events.