Tractor Supply Company: Fiscal 2020 Form 10-K Summary
Business Context and Reporting Period
Tractor Supply Company is the largest U.S. rural lifestyle retailer, serving recreational farmers, ranchers, rural-lifestyle customers, tradesmen, small businesses, and pet owners. The company operates Tractor Supply, Del’s Feed & Farm Supply, and Petsense stores, together with e-commerce websites and a mobile application. The filing covers the 52-week fiscal year ended December 26, 2020; the requested “2020 Q4” is included as the fourth quarter but this is an annual Form 10-K.
- 2,105 stores in 49 states at year-end: 1,923 Tractor Supply and Del’s stores and 182 Petsense stores.
- One reportable segment: retail sale of products supporting the rural lifestyle.
- Fiscal 2020 store openings: 80 Tractor Supply stores and nine Petsense stores.
- Major sales categories: livestock and pet, 47%; hardware, tools and truck, 21%; seasonal, gift and toy products, 21%; clothing and footwear, 7%; agriculture, 4%.
Financial Performance and Key Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|
| Net sales | $10.620 billion | $8.352 billion | +27.2% |
| Gross profit | $3.762 billion | $2.872 billion | +31.0% |
| Gross margin | 35.42% | 34.38% | +104 basis points |
| Operating income | $996.9 million | $743.2 million | +34.1% |
| Operating margin | 9.39% | 8.90% | +49 basis points |
| Net income | $749.0 million | $562.4 million | +33.2% |
| Diluted earnings per share | $6.38 | $4.66 | +36.9% |
| Comparable store sales | +23.1% | +2.7% | Significant acceleration |
| Capital expenditures | $294.0 million | $217.5 million | +35.2% |
- Comparable-store average transaction value increased 12.2% and comparable transaction count increased 10.9%.
- E-commerce sales grew at a triple-digit percentage rate versus fiscal 2019.
- Net income margin increased to 7.05% from 6.73%.
- Inventory turns improved to 3.92 from 3.23, while average inventory per store increased to $793.7 thousand from $751.3 thousand.
Cash Flow, Liquidity, Debt, and Capital Allocation
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|
| Operating cash flow | $1.395 billion | $811.7 million |
| Cash used in investing | $292.2 million | $215.0 million |
| Cash provided by/(used in) financing | $155.2 million | $(598.8) million |
| Year-end cash and equivalents | $1.342 billion | $84.2 million |
| Total debt | $984.3 million | $396.5 million |
| Working capital | $1.515 billion | $540.3 million |
- The company issued $650 million of 1.75% senior notes due 2030 and entered into a $200 million November 2020 term loan. Year-end borrowings totaled $1.0 billion before discounts and issuance costs.
- The company had $48.7 million of outstanding letters of credit and reported compliance with all debt covenants.
- Fiscal 2020 debt increases and reduced repurchases were intended to preserve liquidity during the COVID-19 pandemic.
- The company repurchased approximately 3.4 million shares for $343.0 million, compared with 5.4 million shares for $533.3 million in fiscal 2019.
- Cash dividends paid totaled $174.7 million, or $1.50 per common share, compared with $162.7 million, or $1.36 per share, in fiscal 2019.
- Remaining share-repurchase authorization was approximately $1.14 billion at year-end.
- Management stated that cash balances, operating cash flow, debt-facility availability, leases, and trade credit were expected to fund operations and planned capital expenditures through the end of fiscal 2021.
Material Changes Versus the Prior Comparable Period
- Sales growth accelerated sharply, primarily because COVID-19 increased demand for products supporting homes, land, animals, seasonal needs, and consumable, usable, and edible products.
- Gross margin expanded because strong demand reduced promotional and clearance activity.
- SG&A increased to 26.03% of sales from 25.48%, reflecting COVID-19 costs, higher incentive compensation, permanent wage and benefit increases, strategic investments, and Petsense impairment charges.
- COVID-19-related costs were approximately $117 million, including approximately $44 million of frontline appreciation bonuses.
- The company recorded $74.1 million of non-cash Petsense impairment charges, consisting primarily of $60.8 million of goodwill impairment, $8.2 million of tradename impairment, and $5.1 million of long-lived asset impairment. The after-tax impact was approximately $57.3 million, or $0.49 per diluted share.
- Excluding the Petsense impairment, adjusted net income was $806.2 million and adjusted diluted EPS was $6.87; these are non-GAAP measures.
- Cash and working capital increased substantially, partly due to operating cash generation and increased borrowings.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Fiscal 2021 plans called for approximately 80 new Tractor Supply stores and 10 new Petsense stores, with selling square footage expected to increase approximately 4%.
- Fiscal 2021 capital expenditures were estimated at approximately $450 million to $550 million.
- The company planned to begin construction of an approximately 895,000-square-foot distribution center in Navarre, Ohio, with an estimated initial investment of approximately $70 million and anticipated completion by the end of fiscal 2022.
- Management stated that stores, distribution centers, and e-commerce operations were open and intended to remain open, but noted that the future effects of COVID-19 could not be predicted.
- COVID-19 risks include changes in consumer demand, supply-chain disruption, workforce shortages, facility closures, higher labor and safety costs, higher insurance and medical costs, and potential litigation or regulatory actions.
- Management cautioned that the unusually strong fiscal 2020 comparable-store performance could make future comparable sales growth more difficult to sustain.
- Other key risks include competition from physical and online retailers, weather and seasonality, commodity and transportation-cost volatility, tariffs and foreign sourcing, labor availability and wage inflation, cybersecurity, technology execution, and access to capital.
- The company is exposed to variable interest rates but uses interest-rate swaps to mitigate much of the risk. A 1% interest-rate change on unhedged variable-rate debt would have affected annual interest expense by approximately $2.4 million based on fiscal 2020 exposure.
- A derivative stockholder lawsuit filed in October 2020 alleges securities-law and fiduciary-duty violations relating to diversity and inclusion disclosures. The company disputes the allegations and stated that the potential loss could not reasonably be estimated.
- On February 17, 2021, the company announced an agreement to acquire Orscheln Farm and Home, with 167 stores, for approximately $320 million in cash, subject to regulatory approval and customary closing conditions.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included self-insurance reserves and Petsense goodwill valuation.
Most Important Facts for an Investor to Verify
- Whether fiscal 2020’s COVID-driven demand and 23.1% comparable-store sales increase can be sustained or creates difficult comparisons.
- The effect of permanent wage, benefit, safety, supply-chain, and other pandemic-related costs on future operating margins.
- Petsense’s revised growth outlook, post-impairment performance, and risk of additional impairment charges.
- Debt repayment and refinancing requirements, covenant headroom, interest-rate exposure, and the effect of increased leverage on capital allocation.
- Execution of the planned 2021 store openings, $450 million to $550 million capital program, and Navarre distribution-center project.
- Completion, purchase-price funding, regulatory approval, and integration of the proposed $320 million Orscheln acquisition.
- Developments in the derivative stockholder litigation and any related financial, governance, or reputational consequences.
- Supply-chain availability, tariffs, transportation costs, labor costs, cybersecurity, and weather-related effects on inventory and margins.
