Tractor Supply Company 2011 Q3 Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company filed an unaudited Form 10-Q for the fiscal quarter and nine months ended September 24, 2011, compared with September 25, 2010. The company operates one reportable segment: retail sales of farm and ranch products. It operated 1,054 stores at quarter-end versus 976 a year earlier.
The business is highly seasonal, with typically stronger sales and profits in the second and fourth quarters. Inventory and accounts payable are generally elevated in the third quarter in preparation for the winter selling season.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $977.8 million | $829.1 million | $2.993 billion | $2.606 billion |
| Gross margin | $327.6 million | $275.7 million | $1.004 billion | $866.7 million |
| Gross margin rate | 33.5% | 33.2% | 33.5% | 33.3% |
| Operating income | $68.1 million | $47.4 million | $241.2 million | $187.5 million |
| Operating margin | 7.0% | 5.7% | 8.1% | 7.2% |
| Net income | $42.7 million | $29.9 million | $152.2 million | $117.8 million |
| Diluted EPS | $0.58 | $0.40 | $2.05 | $1.58 |
| Net cash from operations | Not separately provided | Not separately provided | $111.3 million | $94.5 million |
Q3 net margin was approximately 4.4%, compared with 3.6% in the prior-year quarter. Nine-month net margin was approximately 5.1%, compared with 4.5% in the prior-year period.
- Same-store sales increased 11.5% in Q3 and 8.5% for the first nine months. Management estimated inflation contributed approximately 465 basis points to Q3 same-store sales growth and 250 basis points to nine-month growth.
- Gross margin expansion reflected improved direct product margin from inventory management, strategic sourcing, private branding and pricing, partly offset by higher transportation costs and unfavorable product mix.
- SG&A, including depreciation and amortization, improved to 26.5% of sales in Q3 from 27.5% and to 25.5% for nine months from 26.1%.
- Cash and cash equivalents were $96.6 million at September 24, 2011, versus $170.9 million at September 25, 2010 and $257.3 million at December 25, 2010. Restricted cash was $21.9 million.
- Inventories were $913.7 million, up from $833.8 million a year earlier. Total current liabilities were $502.8 million, and working capital was $569.6 million.
- Capital expenditures were $107.3 million for the first nine months, versus $67.1 million in the prior-year period, including $44.3 million for distribution-center capacity and improvements.
- Financing activities used $159.5 million, primarily reflecting $172.1 million of share repurchases and $22.3 million of dividends, partly offset by $24.0 million of common-stock issuance proceeds.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 17.9%, operating income increased 43.7%, and net income increased 43.1%. Nine-month sales increased 14.9%, operating income increased 28.6%, and net income increased 29.3%.
- Q3 diluted EPS rose 45.0% to $0.58; nine-month diluted EPS rose 29.7% to $2.05.
- The company opened 12 stores, relocated one and closed one during Q3. For the first nine months, it opened 54 stores and relocated two, compared with 47 openings in the prior-year period.
- Share repurchases increased substantially: 2.96 million shares for $172.1 million during the first nine months versus 452,511 shares for $22.9 million in the prior year. Remaining authorization was $570.8 million at quarter-end.
- The company retrospectively changed inventory accounting from LIFO to average cost, which reduced adjusted nine-month 2010 gross margin by $78,000 and net income by $49,000. Prior-period financial statements presented in this filing reflect the adjusted method.
Debt, Liquidity, Outlook and Risks
- There were no borrowings under the unsecured revolving credit facility at September 24, 2011. Letters of credit totaled $20.6 million under the facility, and the company was in compliance with all debt covenants.
- The existing $350 million facility was scheduled to mature in February 2012. On October 24, 2011, the company entered into a new unsecured five-year facility allowing borrowings of up to $250 million, with a $20 million swingline sublimit.
- Management stated that cash balances, operating cash flow, revolving credit availability and trade credit should be sufficient to fund operations and planned capital expenditures, including expansion, remodeling and relocations, over the next several years.
- Management expected approximately 31 additional store openings in Q4, or approximately 85 new stores for fiscal 2011. The company expected a full-year effective tax rate of approximately 36.6%.
- The Board declared a $0.12 per-share dividend payable November 29, 2011. Future dividends remain subject to Board approval and the company’s earnings, financial condition and capital needs.
- Key risks include seasonality and weather, consumer spending, inflation and commodity costs, transportation costs, competition, store expansion execution, foreign suppliers, employee retention, regulatory compliance, litigation, tax matters, information systems and internal controls.
- The Department of Justice and EPA alleged potential Clean Air Act violations involving certain imported engines. Settlement discussions contemplated a civil penalty and injunctive relief. The company expected vendor indemnification and did not expect a material adverse effect; the filing does not provide a clear dollar amount for the accrued loss.
- Construction commitments for new stores were approximately $5.0 million, and commitments to purchase four previously leased stores were approximately $10.3 million. Outstanding letters of credit outside the credit facility totaled $19.9 million and were collateralized by restricted cash.
Investor Verification Priorities
- Verify the sustainability of reported same-store sales growth, particularly the portion attributable to inflation, hurricane-related demand and seasonal heating products.
- Monitor inventory growth, accounts payable timing and cash conversion as the company continues rapid store expansion.
- Assess capital-allocation tradeoffs among store growth, the expanded share-repurchase program and quarterly dividends.
- Review the terms, covenants and utilization of the new five-year credit facility, including letters of credit and interest-rate exposure.
- Follow the EPA/DOJ engine matter, settlement costs, vendor indemnification and any changes to the company’s accrual.
- Confirm execution of the approximately 85-store fiscal 2011 opening plan and the associated distribution-center and capital-expenditure commitments.