Tractor Supply Company — Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company operates rural lifestyle retail stores and owns Petsense, a small-box pet specialty retailer. The filing covers the unaudited fiscal three and six months ended June 30, 2018, compared with July 1, 2017. At June 30, 2018, the Company operated 1,899 stores in 49 states, including 1,725 Tractor Supply and Del’s stores and 174 Petsense stores.
Financial Performance and Key Metrics
- Second-quarter net sales: $2.213 billion, up 9.7% year over year. Comparable-store sales increased 5.6%, driven by higher average ticket and transaction count.
- Six-month net sales: $3.896 billion, up 8.8%; comparable-store sales increased 4.7%.
- Second-quarter gross profit: $769.4 million, up 9.2%; gross margin was 34.8%, down from 34.9%, primarily because of higher freight and diesel costs.
- Six-month gross profit: $1.333 billion, up 9.0%; gross margin improved to 34.2% from 34.1%.
- Second-quarter operating income: $273.5 million, compared with $257.9 million; operating margin was approximately 12.4% versus 12.8%.
- Six-month operating income: $368.2 million, compared with $354.3 million; operating margin was approximately 9.5% versus 9.9%.
- Second-quarter net income: $207.3 million, up 29.0%; diluted EPS was $1.69 versus $1.25.
- Six-month net income: $278.7 million, up 26.1%; diluted EPS was $2.25 versus $1.70.
- Net margins: approximately 9.4% in the second quarter and 7.2% for the first six months, compared with approximately 8.0% and 6.2%, respectively, in the prior-year periods.
- Cash flow: Operating cash flow was $274.0 million for the first six months, up from $227.5 million. Capital expenditures were $116.7 million, compared with $96.6 million.
- Liquidity: Cash and cash equivalents were $70.0 million at June 30, 2018, versus $109.1 million at year-end 2017. Working capital was $869.2 million.
- Debt: Total outstanding borrowings were $543.0 million, or $541.4 million net of issuance costs, compared with $427.5 million at year-end 2017. The Company had $128.0 million drawn on its revolving facility and was in compliance with all debt covenants.
- Capital allocation: The Company repurchased approximately 3.8 million shares for $252.5 million during the first six months and paid $71.4 million in dividends. The remaining share-repurchase authorization was approximately $617.2 million.
Material Changes Versus the Prior Comparable Period
- Sales growth was supported by broad-based comparable-store gains, new-store sales, strength in everyday merchandise, and seasonal demand.
- SG&A, including depreciation and amortization, increased 11.0% in the second quarter and 11.1% for the first six months. Expense pressure reflected higher incentive compensation, wage investments, and infrastructure and technology spending.
- The effective tax rate declined to 22.8% in the second quarter and 22.3% for the first six months, from 37.0% and 36.6%, respectively, primarily because of the Tax Cuts and Jobs Act and discrete tax credits.
- Inventory increased to $1.632 billion from $1.453 billion at year-end 2017, reflecting seasonal purchasing and new-store growth. Accounts payable increased to $649.7 million from $576.6 million.
- Debt increased primarily because of $128.0 million in revolving credit borrowings, while cash declined due to share repurchases, capital expenditures, and dividends.
- The Company adopted revenue-recognition, stock-compensation, tax-effect reclassification, and related accounting guidance in fiscal 2018; management reported no material impact on the financial statements from these adoptions.
Guidance, Outlook, Risks, and Unusual Items
- Management expects a fiscal 2018 effective tax rate of approximately 23.0% to 23.5%.
- The Company expects to open approximately 80 new Tractor Supply stores and 20 new Petsense stores in fiscal 2018, below the prior-year openings as capital allocation shifts toward information technology and supply-chain infrastructure.
- Management expects existing cash, operating cash flow, debt-facility availability, leases, and trade credit to fund operations and planned capital expenditures through fiscal year-end 2018.
- The new northeast distribution center in Frankfort, New York, is expected to become operational in the first quarter of fiscal 2019. Approximately $30.0 million of construction commitments remained at June 30, 2018.
- Key risks include seasonality and weather, consumer spending, competition from online retailers, freight and commodity-cost inflation, tariffs, labor availability, supply-chain and technology execution, cybersecurity, regulatory matters, tax-rate changes, and the ability to execute store growth and margin initiatives.
- The Company had $39.9 million of outstanding letters of credit and ordinary-course litigation, which management did not expect to have a material adverse effect.
- The Company expects adoption of the new lease standard in the first quarter of fiscal 2019 to materially increase reported assets and liabilities through recognition of right-of-use assets and lease liabilities.
Investor Verification Checklist
- Verify whether comparable-store sales momentum and seasonal demand continue after the second quarter.
- Monitor freight, fuel, tariff, and commodity-cost trends and their effect on gross margin.
- Assess whether SG&A investments and wage pressures moderate relative to sales growth.
- Confirm the sustainability of the lower effective tax rate and the stated 23.0%–23.5% fiscal-year outlook.
- Review debt utilization, interest-rate exposure, covenant compliance, and liquidity after continued repurchases and dividends.
- Evaluate inventory growth, working-capital requirements, and execution of distribution-center and technology investments.
- Assess the balance-sheet impact and implementation progress of the lease-accounting standard in fiscal 2019.