Business Context and Reporting Period
Tractor Supply Company filed its Form 10-K for the fiscal year ended December 31, 2016. Fiscal 2016 comprised 53 weeks, compared with 52 weeks in fiscal 2015. The company operates a rural-lifestyle retail business through Tractor Supply, Del’s Feed & Farm Supply and Petsense stores, plus TractorSupply.com and Petsense.com.
At year-end, the company operated 1,738 stores in 49 states, including 1,595 Tractor Supply and Del’s stores and 143 Petsense stores. Petsense was acquired on September 29, 2016, for an all-cash purchase price of approximately $145.7 million.
Financial Performance and Key Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $6.780 billion | $6.227 billion | 8.9% increase |
| Gross profit | $2.325 billion | $2.143 billion | 8.5% increase |
| Gross margin | 34.3% | 34.4% | 10 basis-point decrease |
| Operating income | $694.1 million | $650.5 million | 6.7% increase |
| Operating margin | 10.2% | 10.4% | 20 basis-point decrease |
| Net income | $437.1 million | $410.4 million | 6.5% increase |
| Diluted EPS | $3.27 | $3.00 | 9.0% increase |
| Comparable-store sales | 1.6% increase | 3.1% increase | Decelerated |
| Cash flow from operations | $639.0 million | $429.2 million | $209.8 million increase |
| Capital expenditures | $226.0 million | $236.5 million | 4.4% decrease |
Comparable-store transaction count increased 2.6%, while comparable average ticket decreased 0.9%. Livestock and pet products represented 46% of sales, followed by hardware, tools, truck and towing at 22%, and seasonal, gift and toy products at 19%. Exclusive brands represented approximately 32% of total sales.
Fiscal year-end cash was $53.9 million, inventories were $1.370 billion, working capital was $740.6 million and total assets were $2.675 billion. Stockholders’ equity was $1.453 billion.
Debt, Liquidity and Capital Allocation
At December 31, 2016, total borrowings under the new unsecured senior credit facility were $275.0 million, consisting of a $190.0 million term loan and $85.0 million drawn on the revolving facility. The facility includes a $200.0 million term loan and a $500.0 million revolving facility and matures on February 19, 2021. The company was in compliance with its debt covenants at year-end.
The company had $44.3 million of outstanding letters of credit and approximately $1.2 billion of remaining share-repurchase authorization. It repurchased approximately 4.4 million shares for $331.7 million and paid $122.3 million in dividends during fiscal 2016. Total capital expenditures and the Petsense acquisition were principal uses of investing cash.
Management stated that cash balances, operating cash flow, available credit, leases and normal trade credit should be sufficient to fund operations and planned capital needs through the end of fiscal 2017.
Material Changes Versus the Prior Comparable Period
- Sales benefited from 113 new Tractor Supply stores, the 53rd fiscal week and the Petsense acquisition. The extra week represented approximately 1.6% of the reported sales increase.
- Comparable-store sales growth slowed to 1.6% from 3.1%, reflecting unpredictable spring weather, unusually warm cold-weather months, weakness in seasonal and big-ticket categories, and softer spending in energy-producing regions.
- Gross margin declined modestly because of a higher mix of lower-margin consumable, usable and edible products, partially offset by margin initiatives.
- SG&A, including depreciation and amortization, increased to 24.1% of sales from 24.0%, reflecting new distribution facilities, Petsense costs and acquisition expenses, partly offset by occupancy leverage and lower incentive compensation.
- Operating cash flow improved materially because of higher profitability and more favorable inventory and accounts-payable timing.
- Debt increased from $150.0 million at the prior year-end to $275.0 million, supporting growth investments and the Petsense acquisition.
- The quarterly dividend increased from $0.20 to $0.24 per share during 2016. The board also increased total repurchase authorization to $3.0 billion through December 2020.
Guidance, Outlook, Risks and Unusual Items
For fiscal 2017, management planned approximately 100 new Tractor Supply stores and 25 to 30 new Petsense stores, representing an expected selling-square-footage increase of approximately 6.6%. Capital expenditures were estimated at $270 million to $290 million, including store growth, LED retrofits, a new northeast distribution center, a Waverly, Nebraska distribution-center expansion, warehouse-management systems and omni-channel capabilities.
Key risks include consumer spending and economic conditions, weather and seasonality, competition from retailers and online channels, execution of new-store expansion, integration of Petsense, vendor and foreign-sourcing exposure, commodity and transportation costs, labor costs, cybersecurity and information-system disruptions, supply-chain implementation, tax matters, legal proceedings and the availability of credit.
The company received a subpoena from the District Attorney of Yolo County, California, concerning hazardous-waste management and disposal practices. The matter remained ongoing, but management did not expect a material adverse effect on consolidated financial position, results of operations or cash flows. Ordinary-course litigation was also disclosed, with estimated probable losses accrued where reasonably estimable.
No significant impairment charges were recognized in fiscal 2016. The Petsense acquisition produced provisional goodwill of $84.2 million and an indefinite-lived tradename asset of $31.3 million; no impairment was identified in the year-end testing.
The company adopted accounting guidance affecting the balance-sheet presentation of deferred taxes and debt issuance costs. It expected the new revenue-recognition standard to have no material impact, although customer incentives and principal-versus-agent considerations remained under evaluation.
Important Facts for Investors to Verify
- Whether comparable-store sales can reaccelerate after slowing to 1.6% and whether traffic growth can offset lower average tickets.
- The performance, integration costs and store economics of Petsense following the September 2016 acquisition.
- Whether planned store openings and distribution investments generate expected sales, margin and cash-flow returns.
- Inventory growth, inventory turns and the sustainability of improved operating cash flow.
- Debt paydown, revolver utilization, interest-rate exposure and compliance with the 2021 credit-facility covenants.
- The effect of weather, seasonal demand, commodity prices, freight costs and potential tariffs or trade-policy changes on margins.
- The ongoing California hazardous-waste matter, other litigation and self-insurance or sales-tax contingencies.
- The future pace of share repurchases and dividends relative to capital expenditures, acquisitions and liquidity needs.