Tractor Supply Company — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Tractor Supply Company is a U.S. rural-lifestyle retailer operating Tractor Supply, Del’s Feed & Farm Supply, and Petsense stores, together with TractorSupply.com and Petsense.com. The filing covers the 52-week fiscal year ended December 28, 2019; the requested “2019 Q4” corresponds to the fourth quarter within this annual filing.
At year-end, the Company operated 2,024 stores in 49 states, including 1,844 Tractor Supply and Del’s stores and 180 Petsense stores. It has one reportable segment. Fiscal 2019 included 80 new Tractor Supply stores and eight new Petsense stores.
Financial and operating highlights
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $8.352 billion | $7.911 billion | +5.6% |
| Gross profit | $2.872 billion | $2.703 billion | +6.3% |
| Gross margin | 34.38% | 34.16% | +22 basis points |
| Operating income | $743.2 million | $701.7 million | +5.9% |
| Operating margin | 8.90% | 8.87% | +3 basis points |
| Net income | $562.4 million | $532.4 million | +5.6% |
| Diluted EPS | $4.66 | $4.31 | +8.1% |
| Comparable store sales | +2.7% | +5.1% | Decelerated |
| Net cash from operations | $811.7 million | $694.4 million | +$117.3 million |
| Capital expenditures | $217.5 million | $278.5 million | -$61.1 million |
Fiscal 2019 net sales growth reflected 2.7% comparable-store sales growth and $237.6 million of sales from stores open less than one year. Comparable-store growth included a 2.4% increase in average transaction value and a 0.3% increase in transaction count.
Gross-margin expansion was attributed primarily to price-management initiatives and improved freight expense in the second half. SG&A, including depreciation and amortization, increased to $2.13 billion, or 25.48% of sales, from 25.29%. Higher costs reflected the new Frankfort, New York distribution center, store-team wages, and a $2.9 million executive transition agreement.
The effective tax rate was 22.3%, compared with 22.1% in 2018. The filing reports approximately $2.3 million of after-tax impact from the executive transition agreement, or $0.02 per diluted share; adjusted fiscal 2019 net income was $564.7 million, or $4.68 per diluted share.
Liquidity, debt, capital allocation, and balance sheet
- Cash and cash equivalents were $84.2 million at December 28, 2019, compared with $86.3 million at the prior year-end.
- Total debt was $396.5 million, including $150.0 million of senior notes, term loans, and $15.0 million of revolving credit borrowings. Long-term debt was $366.5 million.
- The Company had $32.0 million of outstanding letters of credit and was in compliance with its debt covenants.
- Working capital was $540.3 million, down from $856.3 million, principally because operating lease liabilities were recognized under new lease accounting guidance.
- Operating lease right-of-use assets of $2.19 billion and operating lease liabilities of $2.28 billion were recognized in fiscal 2019. Prior-period balance-sheet amounts were not recast.
- The Company repurchased approximately 5.4 million shares for $533.3 million and paid $162.7 million in cash dividends. Total fiscal 2019 shareholder returns were approximately $696.0 million.
- Remaining share-repurchase authorization was approximately $1.49 billion at year-end. Fiscal 2019 dividends declared were $1.36 per share.
Material changes versus the prior comparable period
- Sales and net income increased, but comparable-store sales slowed from 5.1% to 2.7%.
- Gross margin improved modestly, while SG&A as a percentage of sales increased because of distribution-center and wage investments.
- Operating cash flow strengthened by $117.3 million, primarily due to more favorable inventory and accounts-payable changes and higher profitability.
- Capital expenditures declined as spending on distribution-center capacity fell after completion of the Frankfort, New York facility and the Waverly, Nebraska expansion.
- Share repurchases increased materially from $349.8 million to $533.3 million.
- Fiscal fourth-quarter comparable-store sales increased only 0.1%, compared with 5.7% in the fourth quarter of 2018. Management attributed weakness to unseasonably warm weather, weaker cold-weather and holiday discretionary sales, and six fewer selling days between Thanksgiving and Christmas.
- On January 13, 2020, Harry A. Lawton III became President and Chief Executive Officer. The filing also reflects related executive transition arrangements and leadership changes.
Guidance, outlook, commentary, and risks
Management planned approximately 80 new Tractor Supply stores and 10 to 15 new Petsense stores in fiscal 2020, representing an estimated 4.5% increase in selling square footage. Planned capital expenditures principally included new stores, technology and infrastructure, and digital and omni-channel capabilities. Management stated that cash balances, operating cash flow, available debt facilities, leases, and trade credit should fund operations and fiscal 2020 capital needs.
The Company’s strategy emphasizes new-store growth, omni-channel expansion, customer loyalty and analytics, exclusive brands, infrastructure and process improvements, technology and automation, and selective acquisitions. No formal fiscal 2020 sales or earnings guidance is provided in the supplied filing text.
- Key operating sensitivities include consumer spending, weather, seasonality, comparable-store sales, product mix, inventory productivity, freight and fuel costs, commodity prices, tariffs, and transportation capacity.
- Competition includes general merchandise, home-center, pet, farm-and-ranch, specialty, discount, and online retailers.
- International sourcing and tariffs, particularly involving China, could increase product costs or reduce demand and margins.
- Supply-chain, distribution-center, technology, e-commerce, cybersecurity, payment-processing, and third-party service disruptions could affect sales, costs, liquidity, and reputation.
- Labor availability, wage inflation, minimum-wage laws, employee retention, and executive transitions may pressure expenses or execution.
- The Company self-insures significant workers’ compensation and general-liability risks; related net reserves were $64.6 million at year-end.
- Ordinary-course litigation and tax matters are not expected by management to have a material adverse effect based on currently available information, although outcomes remain uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included self-insurance reserves, goodwill valuation, and adoption of the new lease standard.
Investor verification checklist
- Verify the annual results against the audited consolidated financial statements and distinguish fiscal-year figures from fourth-quarter figures.
- Assess whether comparable-store sales can reaccelerate after the fourth-quarter slowdown and how much growth depends on new stores.
- Monitor gross-margin benefits from pricing and freight against tariff, wage, fuel, and transportation pressures.
- Evaluate cash generation after capital expenditures, dividends, and share repurchases, including the sustainability of the repurchase program.
- Review debt maturities, covenant compliance, variable-rate exposure, and the $2.3 billion present value of lease liabilities.
- Assess execution of the planned 2020 store openings, Petsense expansion, digital investments, and supply-chain initiatives.
- Consider the impact of weather, seasonality, tariffs, supply interruptions, cybersecurity incidents, litigation, and self-insurance estimates.