Tractor Supply Company — Fiscal 2015 Form 10-K Summary
Business Context and Reporting Period
Tractor Supply Company is the largest U.S. operator of rural lifestyle retail stores, serving recreational farmers and ranchers, rural-lifestyle customers, tradesmen and small businesses. The Company operates Tractor Supply Company, Del’s Feed & Farm Supply and HomeTown Pet stores, plus TractorSupply.com. Fiscal 2015 ended December 26, 2015 and comprised 52 weeks. The Company operated 1,488 stores in 49 states and one reportable operating segment.
Financial Performance and Key Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $6.227 billion | $5.712 billion | +9.0% |
| Gross profit | $2.143 billion | $1.950 billion | +9.9% |
| Gross margin | 34.4% | 34.1% | +30 bps |
| Operating income | $650.5 million | $589.5 million | +10.4% |
| Operating margin | 10.4% | 10.3% | +10 bps |
| Net income | $410.4 million | $370.9 million | +10.7% |
| Diluted EPS | $3.00 | $2.66 | +12.8% |
| Net margin | 6.6% | 6.5% | +10 bps |
| Comparable-store sales | +3.1% | +3.8% | Slower growth |
Comparable-store transaction count increased 3.3%, while comparable average ticket declined 0.2%. Fourth-quarter comparable-store sales declined 1.4%, primarily reflecting weakness in heating, insulated outerwear and seasonal big-ticket products amid weaker cold-weather demand. Livestock and pet products represented 44% of sales, hardware/tools/truck/towing 23%, seasonal/gift/toy products 20%, clothing and footwear 8%, and agriculture 5%.
Net cash provided by operating activities was $429.2 million, compared with $409.2 million in 2014. Capital expenditures were $236.5 million, including $96.7 million for new and relocated stores, $80.2 million for distribution capacity and improvements, and $35.8 million for information technology. Ending cash and cash equivalents were $63.8 million.
Working capital was $814.1 million, including $1.284 billion of inventory and $427.2 million of accounts payable. Inventory increased 15.1%, largely due to store growth, carryover cold-weather merchandise, higher C.U.E. inventory and early spring receipts. Inventory turns declined to 3.23 from 3.32.
At year-end, the Company had $150.0 million of borrowings under its unsecured 2011 Senior Credit Facility and $48.7 million of outstanding letters of credit. Total long-term debt, excluding current portions, was $167.0 million. The Company was in compliance with its debt covenants. On February 19, 2016, it replaced the facility with a $200 million term loan and a $500 million revolving credit facility maturing in February 2021.
The Company repurchased approximately 3.4 million shares for $292.7 million and paid $103.1 million in dividends during fiscal 2015. It returned approximately $395.8 million to stockholders and had $570.7 million remaining under its $2 billion repurchase authorization. Dividends declared increased to $0.76 per share from $0.61 in 2014.
Material Changes Versus the Prior Comparable Period
- Sales growth remained strong but slowed from 10.6% in 2014 to 9.0% in 2015, while comparable-store sales growth slowed from 3.8% to 3.1%.
- The Company opened 114 stores, closed eight and relocated six, ending with 1,488 stores versus 1,382 in 2014.
- Gross margin improved through inventory and markdown management, strategic sourcing, exclusive-brand expansion and retail price management.
- SG&A, including depreciation and amortization, increased to 24.0% of sales from 23.8%, reflecting occupancy deleverage, new distribution facilities and mixing centers, and continued store expansion.
- Capital expenditures increased substantially from $160.6 million to $236.5 million, primarily due to the Casa Grande, Arizona distribution center and two Texas mixing centers.
- Debt increased from zero borrowings at the prior year-end to $150.0 million, partly funding shareholder returns and capital investment.
- Average inventory per store increased 9.0%, while inventory turns declined, creating a key working-capital and clearance risk.
Guidance, Outlook, Commentary and Risks
Management planned approximately 115 to 120 new stores, five relocations and increased renovation activity in fiscal 2016. Estimated fiscal 2016 capital expenditures were $230 million to $250 million. Planned investments included store growth, LED lighting retrofits, information-security and compliance improvements, customer technology and other strategic initiatives.
Management stated that cash balances, operating cash flow, credit-facility availability, leases and trade credit should be sufficient to fund operations and fiscal 2016 capital needs. The Company completed its Casa Grande distribution center in 2015 to support western expansion and continued investing in omni-channel capabilities.
- Retail results are seasonal and highly sensitive to weather, particularly demand for heating, lawn and garden, outdoor power equipment, apparel and other seasonal products.
- Competition includes general merchandise, home-center, specialty, discount, independent farm and ranch, cooperative and internet retailers.
- Commodity and transportation-cost volatility, including grain, corn, steel, petroleum and cotton, can affect demand, product costs and gross margin.
- Expansion depends on suitable real estate, distribution capacity, information systems, hiring and training, and successful ramp-up of new stores.
- Cybersecurity, customer-facing technology, supply-chain implementations and distribution disruptions could affect sales, operations and liquidity.
- The Company relies on approximately 800 vendors, foreign sourcing and generally has no long-term product-vendor contracts.
- Operating lease commitments totaled approximately $2.299 billion, and capital lease commitments totaled $26.1 million.
- The EPA/DOJ Clean Air Act matter was settled through a consent decree approved January 19, 2016. The civil penalty was substantially reimbursed by the vendor and the Company expects no material financial impact.
- No significant impairment charges were recorded in fiscal 2015, and goodwill impairment testing identified no impairment.
- Management and Ernst & Young concluded that disclosure controls and internal control over financial reporting were effective as of December 26, 2015.
Important Facts for Investors to Verify
- Whether comparable-store sales and fourth-quarter seasonal performance recover after the 2015 slowdown.
- Inventory productivity, clearance activity and the effect of higher inventory per store on cash flow and margins.
- Execution and returns from the planned 115 to 120 new stores and the western distribution expansion.
- Capital-expenditure requirements, operating lease obligations and use of the new 2016 credit facility.
- Sustainability of gross-margin gains and the impact of vendor funding, sourcing, freight and commodity-cost changes.
- Future share repurchases and dividends, which remain subject to Board discretion, liquidity and business requirements.
- Potential effects of weather, consumer spending, competition, cybersecurity, tax examinations and ordinary-course litigation.
- Management’s future assessment of the impact and transition method for the new revenue-recognition standard effective for reporting periods beginning after December 15, 2017.