Tractor Supply Company — Fiscal Q2 2022 Form 10-Q
Business context and reporting period
Tractor Supply Company is a rural lifestyle retailer operating Tractor Supply and Petsense stores, as well as e-commerce channels. The filing covers the fiscal three and six months ended June 25, 2022, compared with June 26, 2021. At quarter-end, the company operated 2,194 stores in 49 states, including 2,016 Tractor Supply stores and 178 Petsense stores.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Net sales | $3.903 billion | $3.602 billion | +8.4% |
| Gross profit | $1.386 billion | $1.287 billion | +7.7% |
| Gross margin | 35.5% | 35.8% | -24 bps |
| Operating income | $525.0 million | $485.9 million | +8.1% |
| Net income | $396.5 million | $370.0 million | +7.1% |
| Diluted EPS | $3.53 | $3.19 | +10.7% |
| Metric | Six months 2022 | Six months 2021 | Change |
|---|---|---|---|
| Net sales | $6.928 billion | $6.394 billion | +8.3% |
| Gross profit | $2.443 billion | $2.271 billion | +7.6% |
| Gross margin | 35.3% | 35.5% | -26 bps |
| Operating income | $769.3 million | $716.4 million | +7.4% |
| Net income | $583.7 million | $551.4 million | +5.9% |
| Diluted EPS | $5.17 | $4.73 | +9.3% |
Q2 comparable-store sales increased 5.5%, driven by a 7.5% increase in average transaction value partially offset by a 2.0% decline in transaction count. Six-month comparable-store sales increased 5.4%, with average transaction value up 7.1% and transaction count down 1.7%.
For the six months, operating cash flow was $625.6 million, down from $808.9 million in the prior-year period. Capital expenditures were $265.3 million versus $216.0 million, while financing cash use increased to $707.7 million from $522.9 million, primarily due to share repurchases and higher dividends.
At June 25, 2022, cash and cash equivalents were $530.8 million, inventories were $2.485 billion, working capital was $988.2 million, and total assets were $7.869 billion. Total borrowings were $1.000 billion, or $987.4 million net of discounts and issuance costs; no revolving credit loans were outstanding. The company had $57.6 million of outstanding letters of credit and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales and earnings increased, but growth moderated from the unusually strong prior year, which benefited from government stimulus and favorable weather.
- Gross margin declined because of product-cost inflation, higher domestic and import transportation costs, rising fuel prices, and a mix shift toward lower-margin consumable, usable and edible products.
- SG&A, including depreciation and amortization, increased 7.4% in Q2 but improved to 22.1% of sales from 22.3%, reflecting lower COVID-19 response costs, more normalized incentive compensation, and expense leverage.
- Inventory increased $293.9 million from year-end and $492.3 million from the prior-year quarter, reflecting new-store growth, inflation, and efforts to support sales trends. Management also cited normalization of inventory levels and turns as a factor in the year-over-year cash-flow decline.
- The company repurchased $484.4 million of stock during the first six months and paid $206.1 million in dividends, returning $690.5 million to shareholders. Remaining repurchase authorization was approximately $1.9 billion.
- The store base increased to 2,194 from 2,129 a year earlier, including 61 additional Tractor Supply stores and four additional Petsense stores net of closures.
Guidance, outlook, risks, contingencies, and unusual items
Management expected to open approximately 70 to 80 new Tractor Supply stores and 10 new Petsense stores during fiscal 2022. Fiscal 2022 capital expenditures were projected at $650 million to $700 million. The company was constructing distribution centers in Maumelle, Arkansas and Navarre, Ohio, with commitments of approximately $76 million and $34 million, respectively; the Maumelle facility was expected to be completed in late 2023.
Management stated that cash balances, operating cash flow, available debt capacity, leases, trade credit, and access to debt markets should be sufficient to fund operations and capital needs through fiscal 2022 and the following several years. A quarterly dividend of $0.92 per share was declared on August 4, 2022, payable September 7, 2022.
The proposed approximately $320 million acquisition of Orscheln Farm and Home remained pending regulatory clearance and customary closing conditions. The company continued working with the Federal Trade Commission.
Key risks include inflation and fuel and transportation costs, supply-chain disruption, inventory management, weather and seasonality, consumer spending, labor availability and wage pressure, competition from online retailers, cybersecurity and technology failures, reliance on foreign suppliers, regulatory approval and integration of the Orscheln transaction, litigation, tax-rate changes, and execution of store, distribution-center, technology, and margin initiatives. The filing states that there were no material changes to previously disclosed risk factors. Ordinary-course litigation was not expected to have a material adverse effect based on information currently available, although outcomes remain uncertain.
Important facts for investors to verify
- Whether gross-margin pressure from inflation, freight, fuel, and product mix persists or worsens.
- Whether elevated inventory levels normalize without increased markdowns, shrink, or working-capital strain.
- Actual fiscal 2022 capital expenditures, store openings, distribution-center costs, and free cash flow.
- The timing, regulatory outcome, purchase price, and integration risks associated with the Orscheln acquisition.
- The sustainability of share repurchases and the $0.92 quarterly dividend given cash generation and investment requirements.
- Compliance with debt covenants and the effect of higher interest rates on the variable-rate term loan, notwithstanding the interest-rate swap.