Business Context and Reporting Period
Tractor Supply Company operates rural lifestyle retail stores and sells related products through stores and TractorSupply.com. The company operated 1,575 stores in 49 states as of September 24, 2016. This unaudited Form 10-Q covers the fiscal quarter and nine months ended September 24, 2016, compared with September 26, 2015.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $1.543 billion | $1.476 billion | $4.863 billion | $4.580 billion |
| Gross profit | $535.3 million | $512.2 million | $1.679 billion | $1.582 billion |
| Gross margin | 34.7% | 34.7% | 34.5% | 34.5% |
| Operating income | $142.0 million | $139.2 million | $499.5 million | $477.2 million |
| Operating margin | 9.2% | 9.4% | 10.3% | 10.4% |
| Net income | $89.4 million | $87.3 million | $313.5 million | $298.7 million |
| Diluted EPS | $0.67 | $0.64 | $2.33 | $2.18 |
- Q3 comparable-store sales declined 0.6%; nine-month comparable-store sales increased 1.1%.
- SG&A, including depreciation and amortization, increased to 25.5% of sales in Q3 from 25.3% and to 24.3% for nine months from 24.1%.
- Effective tax rates were 36.5% in Q3 and 36.7% for nine months, compared with 36.9% and 37.1%, respectively.
- Operating cash flow for the first nine months was $274.0 million, compared with $243.5 million in the prior-year period.
- Capital expenditures were $167.2 million, versus $163.5 million, primarily for new and relocated stores, existing-store improvements, information technology, and distribution capacity.
- Cash and cash equivalents were $55.5 million at September 24, 2016. Working capital was $917.5 million.
- Total borrowings under the 2016 Senior Credit Facility were $295.0 million, comprising a $195.0 million term loan and $100.0 million drawn on the revolver. The facility matures in 2021, and the company was in compliance with its covenants.
- Outstanding letters of credit were $44.4 million. Capital lease obligations totaled $27.5 million.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 4.5%, but comparable-store sales decreased 0.6%, primarily because average ticket declined 1.1%, partly offset by a 0.5% increase in transaction count.
- Nine-month sales increased 6.2%, supported by store growth and 1.1% comparable-store sales growth. Store count increased from 1,465 to 1,575 year over year.
- Q3 net income rose 2.4%, while diluted EPS increased 4.7%, aided by lower average shares outstanding following repurchases.
- Nine-month net income increased 5.0% and diluted EPS increased 6.9%.
- Gross margins were unchanged year over year. Product-margin improvements and pricing and markdown management offset unfavorable product mix and higher transportation costs.
- SG&A deleveraged because of lower comparable-store sales and incremental costs associated with new distribution facilities.
- Net cash used in financing increased to $115.5 million from $80.1 million, reflecting higher dividends and changes in debt activity, partly offset by lower share repurchases.
- The company repurchased 2.7 million shares for $215.7 million during the first nine months, compared with 2.9 million shares for $244.0 million in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected fiscal 2016 effective tax rate of approximately 36.7% and approximately 113 new stores, compared with 114 in fiscal 2015.
- Management stated that cash balances, operating cash flow, available credit, leases, and trade credit were expected to fund operations and capital needs through the end of fiscal 2016.
- Management identified risks from consumer spending, weather and seasonality, agricultural and energy-market conditions, competition, product-cost and transportation volatility, new-store execution, distribution expansion, acquisitions, foreign suppliers, labor, information systems, cybersecurity, litigation, taxes, and accounting changes.
- On September 29, 2016, after the reporting period, the company acquired Petsense, a specialty pet retailer with 136 stores, for $145 million in cash. The transaction was financed with cash and revolver borrowings.
- On October 31, 2016, the board increased total share-repurchase authorization to $3 billion and extended the program through December 31, 2020. The remaining authorization was $355.0 million at September 24, 2016, before the subsequent increase.
- The company entered into an interest-rate swap with a $195.0 million notional amount at quarter-end to hedge variable-rate term-loan cash flows. The swap had a $1.8 million reported liability excluding accrued interest and a $1.9 million net liability including accrued interest.
- Ordinary-course litigation was not expected to have a material adverse effect. No material construction commitments extending beyond twelve months were reported.
- The company adopted debt-issuance-cost presentation and deferred-tax classification guidance in fiscal 2016. It was assessing the future effects of revenue-recognition, lease, stock-compensation, inventory, gift-card breakage, and cash-flow standards.
Important Facts for Investors to Verify
- Whether weak Q3 comparable-store sales persist, particularly in the Midwest, South Central, and Northeast regions.
- The effect of seasonal and weather-related demand on fourth-quarter sales, inventory, margins, and working capital.
- Execution and financing implications of the Petsense acquisition, including integration costs and incremental debt.
- Inventory growth, distribution-center costs, transportation expense, and their effect on gross margin and cash conversion.
- Debt balances, interest-rate exposure, swap performance, covenant compliance, and revolver availability after the acquisition.
- Future capital expenditures, store-opening pace, dividends, and share repurchases relative to operating cash flow.
- The eventual impact and transition method for pending accounting standards, particularly revenue recognition and leases.