Tractor Supply Company — Q1 Fiscal 2016 Form 10-Q Summary
Business context and reporting period
Tractor Supply Company operates rural lifestyle retail stores and sells related products in stores and online. For the fiscal three months ended March 26, 2016, the company operated 1,521 stores in 49 states, compared with 1,422 stores a year earlier. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $1.468 billion | $1.331 billion | +10.2% |
| Gross profit | $494.4 million | $444.6 million | +11.2% |
| Gross margin | 33.7% | 33.4% | +30 basis points |
| Operating income | $108.2 million | $92.8 million | +16.5% |
| Operating margin | 7.4% | 7.0% | Improved |
| Net income | $67.7 million | $58.0 million | +16.6% |
| Diluted EPS | $0.50 | $0.42 | +19.0% |
| Net margin | 4.6% | 4.4% | Improved |
| Cash flow from operations | $62.6 million | $36.3 million | +$26.3 million |
| Capital expenditures | $36.7 million | $48.8 million | -$12.1 million |
Comparable-store sales increased 4.9%, driven by a 4.2% increase in comparable transactions and a 0.7% increase in average ticket. All major product categories and geographic regions produced positive comparable sales. Livestock and pet products represented 50% of sales, followed by hardware, tools and truck products at 21%.
At March 26, 2016, cash and cash equivalents were $74.5 million, inventories were $1.471 billion, working capital was $812.7 million, and total assets were $2.565 billion. Total liabilities were $1.212 billion and stockholders’ equity was $1.353 billion.
Total debt was $250.0 million under the new senior credit facility, net of approximately $1.4 million of unamortized issuance costs. The company also had $47.6 million of outstanding letters of credit. The $500 million revolving facility had $50 million drawn at quarter-end. The company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Sales growth reflected both 4.9% comparable-store sales growth and $77.9 million of sales from stores opened less than one year earlier.
- Gross margin increased 30 basis points, principally from price management, imports, exclusive brands, vendor negotiations and support programs. Higher transportation costs partially offset the benefit.
- SG&A, including depreciation and amortization, increased 9.8% to $386.2 million, but declined to 26.3% of sales from 26.4%, reflecting expense control and payroll management. New distribution and mixing-center start-up costs were a partial offset.
- Inventory increased 7.3% year over year to $1.471 billion, primarily to support new-store growth, seasonal demand and the southwest distribution center.
- Operating cash flow increased 72.4%, partly due to higher profitability and more favorable timing of inventory and accounts-payable cash flows.
- The company repurchased approximately 1.2 million shares for $99.1 million, versus approximately 0.6 million shares for $47.9 million in the prior-year quarter.
- On February 19, 2016, the company replaced its prior credit facility with a $200 million term loan and a $500 million revolving facility maturing February 19, 2021.
Guidance, outlook, risks and unusual items
- Management expected approximately 115 to 120 new stores in fiscal 2016, compared with 114 openings in fiscal 2015.
- Management expected a fiscal 2016 effective income tax rate of approximately 36.9%.
- The company believed cash balances, operating cash flow, available credit, leases and trade credit would fund operations and planned capital needs through the end of fiscal 2016.
- The business is seasonal, with historically higher sales and profits in the second and fourth quarters and higher inventory and accounts payable in the first and third quarters.
- Key risks include consumer spending, weather, seasonality, competition, merchandise and commodity-cost volatility, new-store execution, supply-chain and technology disruptions, foreign sourcing, labor availability, litigation, regulatory changes, tax matters and cybersecurity.
- An interest-rate swap became effective March 31, 2016, after quarter-end, to hedge variable-rate term-loan cash flows. Hedge accounting was expected to begin in the second quarter.
- The company adopted guidance changing the presentation of debt issuance costs and deferred tax balances. These changes primarily affected balance-sheet presentation and had no material effect on reported results.
- Ordinary-course litigation was not expected to have a material adverse effect. No material construction commitments extending beyond 12 months were reported.
Important facts for investors to verify
- Confirm that comparable-store sales trends and transaction growth remain positive as the company cycles prior-year growth.
- Monitor inventory growth, inventory per store, markdown activity and transportation costs, particularly following distribution-center expansion.
- Assess leverage, required term-loan amortization, variable-rate exposure and available revolver capacity under the new credit agreement.
- Evaluate whether planned 2016 store openings and distribution-center investments produce expected sales and margin returns.
- Review the sustainability of elevated share repurchases and dividend increases relative to operating cash flow and debt levels.
- Consider the effects of seasonality and weather on subsequent-quarter sales and earnings; first-quarter results are not necessarily indicative of the full year.