Tractor Supply Company — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited quarterly results for the fiscal three months ended March 26, 2011, compared with March 27, 2010. Tractor Supply operated 1,027 stores at quarter-end, up from 948, after opening 26 stores during the quarter versus 19 openings and one closure in the prior-year period. Results are highly seasonal, with the highest sales and profits historically occurring in the second and fourth quarters.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $836.6 million | $710.9 million | 17.7% increase |
| Same-store sales | 10.7% increase | 2.8% increase | Improved |
| Gross margin | $273.6 million; 32.7% | $230.9 million; 32.5% | 18.5% increase; +20 bps |
| Operating income | $28.8 million | $16.5 million | 74.7% increase |
| Net income | $18.3 million | $10.6 million | 73.3% increase |
| Diluted EPS | $0.24 | $0.14 | Increase |
| Net cash used in operating activities | $44.8 million | $21.0 million | Use increased by $23.8 million |
| Capital expenditures | $28.9 million | $12.9 million | Increase |
Gross-margin improvement reflected stronger direct product margins, sourcing, inventory allocation, pricing, and sell-through, partly offset by higher transportation costs. SG&A and depreciation as a percentage of sales improved to 29.3% from 30.2%, primarily due to strong same-store sales. The effective tax rate increased to 35.7% from 34.5%; management expects approximately 37.0% for the full year.
Cash and cash equivalents were $140.4 million at March 26, 2011, compared with $257.3 million at December 25, 2010 and $138.1 million at March 27, 2010. Inventory was $941.4 million, up $204.9 million from year-end and $108.5 million from the prior-year quarter, reflecting seasonal purchasing and new-store growth. Working capital was $578.2 million.
Net cash used in financing activities was $43.2 million, including $53.1 million for repurchases of 1,011,500 shares and $5.1 million of dividends. The company had no borrowings under its $350 million unsecured revolving credit facility, $22.9 million of outstanding letters of credit, and was in compliance with its debt covenants. The facility matures in February 2012 and includes a potential $150 million increase option.
Material changes versus the prior comparable period
- Sales benefited from 10.7% same-store sales growth, 78 net additional stores year over year, and broad-based performance across geographies and major product categories.
- Net income and diluted EPS increased substantially, supported by sales leverage, improved gross margin, and lower operating expenses as a percentage of sales.
- Operating cash flow deteriorated because of higher seasonal inventory and changes in accounts payable and accrued expenses, despite stronger earnings.
- Capital expenditures more than doubled, largely because of distribution-center capacity and improvements, new stores, and a warehouse-management-system implementation.
- Share repurchases increased materially from $3.8 million to $53.1 million.
- The company retrospectively changed inventory accounting from LIFO to average cost, stating that average cost better reflects current inventory value and improves comparability.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to open approximately 80 to 85 new stores during fiscal 2011.
- Management stated that cash balances, operating funds, revolving-credit availability, and trade credit should be sufficient for operations and planned capital expenditures over the next several years.
- The board declared a subsequent quarterly dividend of $0.12 per share, payable June 1, 2011. It also authorized a $600 million increase to the repurchase program, bringing total authorization to $1 billion and extending the program through April 30, 2015.
- The company had approximately $23.6 million of construction commitments and $4.9 million of commitments to purchase two previously leased stores.
- The Department of Justice, on behalf of the EPA, alleged potential Clean Air Act violations involving imported engines. Tractor Supply was in settlement discussions involving a potential civil penalty and injunctive relief and expected vendor indemnification. Management did not expect a material adverse effect, but the amount and timing were not provided.
- Key operating risks include seasonality, weather, consumer spending, inflationary or deflationary product costs, transportation costs, competition, foreign suppliers, store expansion execution, employee retention, regulatory matters, litigation, information systems, tax rates, and internal controls.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether strong same-store sales and margin performance continued after the seasonally weaker first quarter.
- Inventory growth, inventory turnover, and the conversion of seasonal inventory into operating cash flow.
- The pace and returns of the planned 80 to 85 store openings and distribution-center investment.
- The February 2012 maturity and renewal or replacement status of the revolving credit facility.
- The final resolution, penalty, injunctive terms, and vendor reimbursement associated with the EPA and DOJ engine matter.
- The effect of the average-cost inventory method on comparisons with earlier reported periods and future margins.
- Whether the expanded repurchase authorization is consistent with liquidity, capital expenditure, dividend, and store-growth requirements.