Tractor Supply Company — Q1 Fiscal 2023 Form 10-Q
Business context and reporting period
Tractor Supply Company operates rural lifestyle retail stores, including Petsense by Tractor Supply. The filing covers the unaudited fiscal three months ended April 1, 2023, compared with March 26, 2022. At quarter-end, the Company operated 2,353 stores in 49 states, including 2,164 Tractor Supply and Orscheln stores and 189 Petsense stores.
The Company completed the $397.7 million acquisition of Orscheln Farm and Home in October 2022 and planned to convert the 81 retained Orscheln stores to Tractor Supply stores by the end of fiscal 2023.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $3.299 billion | $3.024 billion | +9.1% |
| Gross profit | $1.170 billion | $1.057 billion | +10.7% |
| Gross margin | 35.5% | 34.9% | +52 basis points |
| Operating income | $244.4 million | $244.3 million | Flat |
| Operating margin | 7.4% | 8.1% | Down approximately 67 basis points |
| Net income | $183.1 million | $187.2 million | -2.2% |
| Diluted EPS | $1.65 | $1.65 | Flat |
| Net cash from operations | $19.6 million | $59.1 million | Down $39.5 million |
| Capital expenditures | $157.9 million | $112.4 million | +40.5% |
Comparable-store sales increased 2.1%, consisting of a 2.8% increase in average transaction value and a 0.7% decline in transaction count. Sales from stores open less than one year, including Orscheln stores, were $140.5 million.
SG&A, including depreciation and amortization, increased 13.9% to $925.5 million, or 28.1% of sales versus 26.9% in the prior-year quarter. Management attributed the deleverage primarily to moderate comparable-store growth, higher depreciation and amortization, distribution-center onboarding, and the Orscheln acquisition.
Cash and cash equivalents were $190.1 million at April 1, 2023, compared with $202.5 million at December 31, 2022 and $405.4 million at March 26, 2022. Working capital was $1.109 billion. Inventories were $3.031 billion, up from $2.568 billion year over year, reflecting seasonal purchases, inflation, new-store growth, and Orscheln-related inventory.
Total debt was $1.602 billion at quarter-end, including $815.0 million drawn under the revolving credit facility, $650.0 million of 1.75% senior notes, and $150.0 million of 3.70% senior notes. Outstanding borrowings increased from $1.178 billion at December 31, 2022 and $1.000 billion a year earlier. The Company was in compliance with its debt covenants, including a minimum fixed-charge coverage ratio of 2.00 to 1.00 and maximum leverage ratio of 4.00 to 1.00.
Material changes versus the prior comparable period
- Sales growth benefited from Orscheln, new store openings, and positive comparable-store sales; seasonal merchandise was weaker due to weather and a delayed spring selling season.
- Gross margin improved because of lower transportation costs and margin initiatives, which more than offset product-cost inflation and mix effects.
- Operating income was essentially unchanged, while net income declined because higher interest expense and operating costs offset sales and gross-profit growth.
- Interest expense increased to $12.7 million from $7.1 million, consistent with higher borrowings and interest rates.
- Operating cash flow declined as inventory purchases, accrued-expense timing, and other working-capital movements absorbed cash.
- Capital expenditures increased by $45.5 million, driven by existing-store remodels, new stores, information technology, and distribution-center capacity.
- Financing activities provided $125.7 million, compared with a $419.4 million use of cash in the prior-year quarter, primarily because of $437.0 million of net debt borrowings and lower share repurchases.
- The Company repurchased 866,000 shares for $197.2 million and paid $113.4 million of dividends, returning approximately $310.6 million to shareholders. The quarterly dividend increased to $1.03 per share from $0.92.
Guidance, outlook, risks, contingencies, and unusual items
- Fiscal 2023 capital expenditures were estimated at $700 million to $775 million, including approximately 70 new Tractor Supply stores, Orscheln conversions, remodels, garden-center transformations, and 10 to 15 new Petsense stores.
- Management stated that cash balances, operating cash flow, debt facilities, leases, trade credit, and access to debt markets should be sufficient to fund operations and planned capital needs for the foreseeable future.
- The business is seasonal, with historically higher sales and profits in the second and fourth quarters. Weather can shift sales and profit timing between quarters, particularly between the first and second quarters.
- U.S. Customs and Border Protection proposed that certain imports from China may be subject to antidumping and countervailing duties. The Company expects the matter to be resolved without a material adverse effect, but acknowledges inherent uncertainty.
- The Company had $53.0 million of construction and distribution-center onboarding commitments and $58.4 million of outstanding letters of credit.
- The Company had $1.45 billion of remaining share-repurchase authorization. Future repurchases and dividends remain subject to Board discretion, financial condition, capital needs, and market conditions.
- Management reported no material changes to previously disclosed risk factors, no defaults under senior securities, and effective disclosure controls as of April 1, 2023.
Important facts for investors to verify
- Whether Orscheln conversions and new-store growth generate the expected sales and earnings benefits without further SG&A or inventory pressure.
- Inventory turns, seasonal inventory levels, markdown exposure, and the effect of inflation and product mix on gross margin.
- The pace of operating-cash-flow recovery as inventory purchases and accrued expenses normalize.
- Revolving-credit borrowings, variable-rate exposure, interest expense, and compliance with debt covenants.
- Execution of the $700 million to $775 million capital-expenditure plan and related distribution-center commitments.
- The resolution and potential financial impact of the proposed China import duties.
- The sustainability of share repurchases and dividends while leverage and capital spending remain elevated.