Business Context and Reporting Period
Tractor Supply Company filed its Form 10-K for the fiscal year ended December 30, 2017. Fiscal 2017 comprised 52 weeks, compared with 53 weeks in fiscal 2016. The company operates a single reportable segment focused on rural-lifestyle retail, including Tractor Supply, Del’s Feed & Farm Supply and Petsense stores, as well as TractorSupply.com and Petsense.com.
At year-end, the company operated 1,853 stores in 49 states: 1,685 Tractor Supply and Del’s stores and 168 Petsense stores. Fiscal 2017 included 101 new Tractor Supply stores and 25 new Petsense stores.
Financial Performance and Key Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $7.256 billion | $6.780 billion | +7.0% |
| Gross profit | $2.492 billion | $2.325 billion | +7.2% |
| Gross margin | 34.3% | 34.3% | Flat |
| Operating income | $686.4 million | $694.1 million | -1.1% |
| Operating margin | 9.4% | 10.2% | -80 basis points |
| Net income | $422.6 million | $437.1 million | -3.3% |
| Diluted EPS | $3.30 | $3.27 | +0.9% |
| Net cash from operating activities | $631.5 million | $650.7 million | -$19.2 million |
| Capital expenditures | $250.4 million | $226.0 million | +10.8% |
Comparable-store sales increased 2.7%, supported by a 2.2% increase in comparable transactions and a 0.5% increase in average ticket. Livestock and pet products represented 47% of sales, followed by hardware, tools and truck products at 22%, and seasonal, gift and toy products at 19%.
Year-end cash and cash equivalents were $109.1 million, versus $53.9 million at the prior year-end. Working capital was $806.2 million. Total debt, net of issuance costs, was $426.1 million, including $150.0 million of senior notes, $277.5 million of term loans and no revolving credit borrowings. The company had $39.6 million of outstanding letters of credit and remained in compliance with its debt covenants.
Fiscal 2017 financing activities included $369.4 million of share repurchases and $133.8 million of cash dividends. The company repurchased approximately 5.9 million shares and ended the year with approximately $869.7 million remaining under its $3 billion repurchase authorization.
Fiscal Fourth Quarter
| Metric | Fourth Quarter 2017 | Fourth Quarter 2016 |
|---|---|---|
| Net sales | $1.953 billion | $1.917 billion |
| Gross profit | $668.6 million | $646.3 million |
| Operating income | $183.8 million | $194.6 million |
| Net income | $109.7 million | $123.6 million |
| Diluted EPS | $0.87 | $0.94 |
| Comparable-store sales | +4.0% | +3.1% |
Fourth-quarter sales and comparable-store sales benefited from solid cold-weather and other seasonal merchandise demand. Profitability declined despite higher sales, reflecting expense pressure and the absence of the extra week included in the 2016 fiscal calendar.
Material Changes Versus the Prior Comparable Period
- Sales growth improved to 7.0% from 8.9% in 2016, although the prior year included an additional sales week. Comparable-store sales improved to 2.7% from 1.6%.
- Gross margin was unchanged at 34.3%. Higher markdowns, promotional activity and freight costs offset benefits from sell-through and inventory management.
- SG&A, including depreciation and amortization, increased to 24.9% of sales from 24.1%. Drivers included wage inflation, higher store-level incentive compensation, infrastructure and technology investment, Petsense-related expenses and fixed-cost deleverage.
- Operating margin contracted by 80 basis points, and net income declined despite higher sales. Lower diluted share count from repurchases supported the increase in diluted EPS.
- Debt increased from $273.9 million to $426.1 million, primarily due to the issuance of $150 million of 2029 senior notes and the $100 million incremental term loan, partially offset by repayment of revolving borrowings and scheduled term-loan payments.
- Petsense was included for a full year in 2017 following its September 2016 acquisition. The company finalized the acquisition working-capital settlement in 2017, reducing consideration and goodwill by $1.2 million.
Guidance, Outlook, Risks and Unusual Items
Management projected fiscal 2018 net sales of $7.69 billion to $7.77 billion, comparable-store sales growth of 2.0% to 3.0%, approximately 80 new Tractor Supply stores and 20 new Petsense stores. Expected fiscal 2018 diluted EPS was $3.95 to $4.15, with net income of $490 million to $515 million. Management expected operating margin to decline to approximately 8.8% at the midpoint, reflecting fuel and transportation costs, wage investments, growth-related infrastructure spending and new distribution-center expenses.
Fiscal 2018 capital expenditures were expected to range from $260 million to $300 million, including store growth, the new Frankfort, New York distribution center, the Waverly, Nebraska expansion, additional mixing centers, an East Coast import center and omni-channel capabilities.
The Tax Cuts and Jobs Act resulted in a provisional, non-cash deferred-tax remeasurement charge of approximately $4.9 million, or $0.03 per diluted share. Excluding that item, fiscal 2017 adjusted net income was $427.5 million, or $3.33 per diluted share. Management estimated a fiscal 2018 effective tax rate of 23.0% to 23.5% following the federal rate reduction.
Key risks include sensitivity to consumer spending, weather and seasonality, comparable-store sales performance, freight and commodity costs, wage inflation, competitive pressure, execution of new-store and distribution expansion, foreign sourcing and tariffs, cybersecurity and information-system disruptions, tax audits, litigation, self-insurance exposure and the ability to maintain adequate liquidity while funding growth and shareholder returns.
The company settled an environmental matter involving hazardous-waste practices in California. It agreed to a compliance plan, civil penalty and supplemental environmental projects; management stated that the settlement would not materially affect financial position, results of operations or cash flows. The company reported no significant goodwill, indefinite-lived intangible or long-lived asset impairment charges in fiscal 2017.
Investor Verification Checklist
- Verify the sustainability of comparable-store sales growth, particularly after adjusting for weather effects and the 53-week 2016 calendar.
- Assess whether gross-margin stability can continue despite freight inflation, markdowns, promotional activity and product-mix changes.
- Reconcile the expected fiscal 2018 operating-margin decline with projected sales growth and planned cost investments.
- Review debt maturities, covenant headroom, interest-rate swaps and the company’s ability to fund capital expenditures, dividends and repurchases.
- Evaluate Petsense’s contribution, integration progress and exposure to goodwill or tradename impairment.
- Monitor the execution, timing and cost of the Frankfort distribution center, Waverly expansion and other supply-chain projects.
- Confirm the final tax impact of the Tax Cuts and Jobs Act and any subsequent adjustments to the provisional $4.9 million charge.
- Review the company’s disclosures regarding cybersecurity, data privacy, sales-tax compliance, self-insurance reserves and environmental or other litigation contingencies.