Tractor Supply Company — Q3 2020 Form 10-Q Summary
Business context and reporting period
Tractor Supply Company is a U.S. rural lifestyle retailer operating Tractor Supply, Del’s and Petsense stores, with e-commerce channels. At September 26, 2020, the Company operated 2,087 stores in 49 states, including 1,904 Tractor Supply and Del’s stores and 183 Petsense stores. The filing covers the fiscal three and nine months ended September 26, 2020, compared with the periods ended September 28, 2019. Results were materially influenced by COVID-19-related changes in consumer demand, operating costs and liquidity management.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $2.61 billion | $1.98 billion | $7.74 billion | $6.16 billion |
| Gross profit | $948.0 million | $694.2 million | $2.77 billion | $2.13 billion |
| Gross margin | 36.37% | 34.99% | 35.73% | 34.58% |
| Operating income | $252.2 million | $161.8 million | $812.5 million | $552.8 million |
| Net income | $190.6 million | $122.1 million | $613.1 million | $418.2 million |
| Diluted EPS | $1.62 | $1.02 | $5.23 | $3.45 |
| Net cash from operating activities | Not separately provided | Not separately provided | $1.005 billion | $414.3 million |
- Q3 net sales increased 31.4%; comparable-store sales increased 26.8%, supported by a 14.3% increase in transaction count and a 12.5% increase in average transaction value. E-commerce sales grew at a triple-digit rate year over year.
- For the first nine months, net sales increased 25.7% and comparable-store sales increased 21.5%. Diluted EPS increased 51.6%.
- Q3 gross margin expanded 138 basis points, primarily from reduced promotional and clearance activity and lower transportation costs as a percentage of sales. Nine-month gross margin expanded 115 basis points.
- Q3 SG&A, including depreciation and amortization, increased 30.7% but declined to 26.69% of sales from 26.83%. Nine-month SG&A as a percentage of sales declined to 25.23% from 25.60%.
- COVID-19-related costs were approximately $20 million in Q3 and $82 million for the first nine months, including incremental labor, cleaning, sanitation and frontline appreciation payments.
- Cash and cash equivalents were $1.112 billion at September 26, 2020, compared with $84.2 million at December 28, 2019 and $82.6 million at September 28, 2019. Working capital was $1.038 billion.
- Capital expenditures were $161.3 million for the first nine months, compared with $144.3 million in the prior-year period. The Company expects full-year fiscal 2020 capital expenditures of approximately $300 million to $325 million.
- Total outstanding borrowings were $910.0 million, or $909.3 million after unamortized debt issuance costs, compared with $397.5 million at December 28, 2019. The increase included $200 million borrowed under the March 2020 Term Loan and $350 million under the April 2020 Term Loan.
- $380.0 million of debt was classified as current, including the $350 million April 2020 Term Loan maturing April 21, 2021. The Company was in compliance with all debt covenants at quarter-end.
- Operating lease liabilities totaled approximately $2.47 billion, and outstanding letters of credit were $50.4 million.
Material changes versus the prior comparable period
- Demand accelerated significantly across everyday, seasonal, livestock and pet categories as customers focused on their homes, land and animals during the pandemic. Favorable weather, new customer acquisition and re-engagement of lapsed customers also supported sales.
- Store count increased to 2,087 from 1,990 at the end of the comparable prior-year quarter. During the first nine months, the Company opened 61 Tractor Supply stores and six Petsense stores, compared with 50 and three, respectively, in the prior-year period.
- The Company strengthened liquidity through increased borrowings and suspended its share repurchase program effective March 12, 2020. Nine-month share repurchases declined to $263.2 million from $490.0 million.
- Share repurchases were zero in Q3 under the authorized program, although 2,305 shares were withheld from vested awards for employee tax obligations. Remaining repurchase authorization was approximately $1.22 billion.
- Cash flow from operations increased by $590.7 million, primarily due to higher earnings and favorable changes in inventory, accounts payable and accrued expenses.
- Compensation and benefits for hourly store and distribution-center employees were permanently increased beginning June 28, 2020. The Company also introduced benefits for part-time employees and expanded frontline equity awards.
- The effective tax rate was 22.2% in Q3 for both years and 22.6% for the first nine months of 2020 versus 22.2% in the prior-year period.
Guidance, outlook, risks and unusual items
- Management stated that Q4 demand was expected to remain strong but at a lower level than in Q2 and Q3. The filing does not provide a clear numerical Q4 sales or earnings guidance value.
- The Company expected approximately 80 new Tractor Supply stores and approximately 10 new Petsense stores in fiscal 2020, although COVID-19 could delay openings.
- Management expected a full-year fiscal 2020 effective tax rate of 22.5% to 22.7%.
- The Company believed existing cash, operating cash flow, debt availability, leases and trade credit would fund operations and planned capital expenditures through the end of fiscal 2020.
- COVID-19 remains the principal uncertainty, with potential effects on store and distribution-center operations, staffing, supply chains, product availability, consumer behavior, costs, liquidity and access to capital markets. Permanent wage and benefit increases and other pandemic-response costs are expected to continue.
- Increased debt raises interest expense, leverage and refinancing risk. The April 2020 Term Loan creates a significant near-term maturity, while the Company’s credit agreements include fixed-charge coverage and leverage covenants.
- On October 16, 2020, subsequent to quarter-end, amendments removed material subsidiary guarantor requirements and permitted issuance of up to $750 million of senior unsecured notes on or before December 31, 2020.
- A derivative stockholder lawsuit was filed on October 9, 2020 concerning alleged proxy disclosures, fiduciary-duty breaches and compensation matters. Management does not currently expect a material financial impact, but litigation outcomes remain uncertain.
- Interest-rate swaps mitigated exposure on specified variable-rate term loans; the swaps had a net liability of $7.9 million at September 26, 2020.
Important facts for investors to verify
- Whether pandemic-driven demand and unusually high comparable-store sales persist after normalization of consumer behavior.
- The timing and terms of refinancing or repayment of the $350 million April 2020 Term Loan due in April 2021 and other 2022 maturities.
- Debt covenant compliance, leverage trends, interest expense and available revolver capacity.
- Inventory levels, accounts payable growth and whether elevated operating cash flow is sustained after seasonal working-capital effects reverse.
- The effect of permanent wage and benefit increases, pandemic-response costs and strategic investments on future margins.
- Progress toward the stated store-opening plan and $300 million to $325 million capital-expenditure outlook.
- Whether the share repurchase program remains suspended and how capital allocation affects per-share earnings.
- Potential supply-chain disruptions, product shortages, transportation costs and changes in gross margin.
- Developments in the derivative litigation and any other legal or regulatory matters.