Tractor Supply Company — Fiscal 2014 Form 10-K Summary
Business context and reporting period
Tractor Supply Company is a U.S. rural-lifestyle retailer serving recreational farmers, ranchers, rural-lifestyle customers, tradesmen and small businesses. The company operates one reportable segment and sells through Tractor Supply Company, Del’s Feed & Farm Supply, HomeTown Pet and TractorSupply.com.
The filing covers the 52-week fiscal year ended December 27, 2014. The requested fourth-quarter period is included in the annual filing; fiscal fourth-quarter results were unaudited. At year-end, the company operated 1,382 stores in 49 states, including two HomeTown Pet stores.
Financial and operating metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Net sales | $5.712 billion | $5.165 billion | +10.6% |
| Gross profit | $1.950 billion | $1.754 billion | +11.2% |
| Gross margin | 34.1% | 34.0% | +10 basis points |
| Operating income | $589.5 million | $514.7 million | +14.5% |
| Operating margin | 10.3% | 10.0% | +30 basis points |
| Net income | $370.9 million | $328.2 million | +13.0% |
| Diluted EPS | $2.66 | $2.32 | +14.7% |
| Net cash from operations | $409.2 million | $333.7 million | +22.6% |
| Capital expenditures | $160.6 million | $218.2 million | -26.4% |
Fiscal fourth-quarter net sales were $1.584 billion, gross profit was $539.6 million, operating income was $177.7 million and net income was $112.1 million. Fourth-quarter diluted EPS was $0.81, and comparable-store sales increased 5.3% versus 3.5% in the prior-year quarter.
Annual comparable-store sales increased 3.8%, comprising a 3.2% increase in comparable transactions and a 0.6% increase in average transaction value. New stores contributed significantly to total growth: 107 stores were opened and one was closed during fiscal 2014.
Gross-margin expansion reflected improved direct product margin from inventory and markdown management, strategic sourcing, exclusive brands and retail-price management. These benefits were partially offset by higher transportation costs associated with western expansion. SG&A, including depreciation and amortization, improved to 23.8% of sales from 24.0%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $51.1 million at year-end, compared with $142.7 million at the prior year-end.
- Working capital was $670.9 million, compared with $677.1 million in fiscal 2013.
- Inventory increased to $1.115 billion from $979.3 million, primarily reflecting store growth and improved in-stock levels. Inventory turns increased to 3.32 from 3.29.
- The company had no borrowings outstanding under its unsecured Senior Credit Facility. Availability was increased from $250 million to $400 million in May 2014; $40.7 million of letters of credit were outstanding under the facility.
- Capital lease obligations totaled $5.2 million, including current and long-term portions. The filing reports $4.96 million of long-term capital lease obligations.
- The company was in compliance with all credit-facility covenants at December 27, 2014.
- Operating cash flow of $409.2 million exceeded capital expenditures of $160.6 million, but financing activities used $340.5 million, primarily for share repurchases and dividends.
Material changes versus the prior comparable period
- Sales growth remained strong but comparable-store sales slowed to 3.8% from 4.8%, while the store base expanded from 1,276 to 1,382 locations.
- Livestock and pet products increased to 44% of sales from 43%; hardware, tools, truck and towing products declined to 22% from 23%.
- Exclusive brands represented approximately 31% of sales, unchanged from fiscal 2013 and up from 25% in fiscal 2012.
- Deflation, principally in livestock feed and bird-feeding products, reduced comparable-store sales by an estimated 85 basis points.
- Net cash provided by operations increased by $75.5 million, while capital expenditures declined by $57.6 million.
- Share repurchases increased materially to approximately 4.7 million shares costing $298.5 million, versus approximately 2.3 million shares costing $129.4 million in fiscal 2013.
- Dividends paid increased to $84.1 million from $68.5 million. The quarterly dividend was increased from $0.13 to $0.16 per share during fiscal 2014.
- The effective tax rate increased to 36.9% from 36.2%, primarily because fiscal 2013 benefited from reversals of uncertain tax-position reserves.
Guidance, outlook, risks and unusual items
Management planned to open 110 to 115 stores in fiscal 2015, relocate five stores and increase renovations. Fiscal 2015 capital expenditures were estimated at $240 million to $250 million, including $75 million to $85 million for distribution-network investments. The Casa Grande, Arizona distribution center, approximately 650,000 square feet, was expected to begin operations in the fourth quarter of 2015.
Management stated that existing cash, expected operating cash flow, available credit, leases and trade credit should be sufficient to fund operations and fiscal 2015 capital requirements. The board authorized a $2 billion share-repurchase program through December 2017, with $863.3 million remaining at year-end; the program may be limited or terminated at any time.
- Results are seasonal and sensitive to weather, particularly demand for heating, lawn and garden, power equipment and other seasonal products.
- Key risks include consumer spending, competition from physical and online retailers, commodity and transportation-cost volatility, inventory markdowns, vendor concentration and foreign sourcing.
- Rapid store expansion creates execution risks involving real estate, staffing, distribution capacity, information systems, new-store profitability and pre-opening costs.
- The company relies heavily on operating leases. Future minimum operating-lease payments totaled approximately $2.076 billion, including $243.9 million due in fiscal 2015.
- Construction commitments totaled approximately $58.8 million, including $41.0 million for the Casa Grande distribution center.
- The company was engaged in settlement discussions with the DOJ and EPA regarding alleged Clean Air Act violations involving certain imported engines. Management did not expect a material adverse effect and did not believe a loss above the amount accrued was reasonably possible.
- Management identified inventory valuation, shrinkage, vendor funding, freight, self-insurance, sales-tax audits and tax contingencies as significant estimates. A 10% change in the self-insurance reserve would have affected fiscal 2014 net income by approximately $3.0 million.
- No significant impairment charges were recognized, and annual goodwill testing in the fourth quarter identified no impairment.
- The company adopted no new revenue-recognition standard in fiscal 2014; it was assessing the future impact of ASU 2014-09, effective for periods beginning after December 15, 2016.
Most important facts for an investor to verify
- Whether comparable-store sales can remain positive as the store base expands and the company enters additional western markets.
- The effect of deflation, commodity prices, freight costs and vendor funding on gross margin.
- Execution, timing and cost of the planned stores, renovations, distribution centers and technology investments.
- Inventory growth, inventory turns and markdown or shrinkage trends.
- Cash requirements from share repurchases, dividends, operating leases and construction commitments relative to operating cash flow.
- The resolution and ultimate cost of the EPA/DOJ matter and other ordinary-course litigation or regulatory proceedings.
- The impact of cybersecurity, e-commerce, supply-chain and information-technology risks on sales and operations.
- The filing’s audited financial statements and notes for detailed quarterly data, contractual obligations, tax contingencies and credit-facility terms.