Tractor Supply Company — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended June 29, 2013, compared with June 30, 2012. The interim financial statements are unaudited. Tractor Supply operates as one reportable segment: retail sales of farm and ranch products.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Change |
|---|
| Net sales | $1.456 billion | $1.292 billion | +12.7% |
| Same-store sales | +7.2% | +3.2% | +400 bps |
| Gross margin | $506.1 million; 34.8% | $451.5 million; 34.9% | +12.1%; -10 bps |
| Operating income | $198.0 million; 13.6% | $169.8 million; 13.1% | +16.6% |
| Net income | $123.6 million; 8.5% | $106.6 million; 8.3% | +15.9% |
| Diluted EPS | $1.75 | $1.45 | +20.7% |
| Metric | Six months 2013 | Six months 2012 | Change |
|---|
| Net sales | $2.542 billion | $2.312 billion | +9.9% |
| Same-store sales | +4.2% | +6.7% | -250 bps |
| Gross margin | $858.2 million; 33.8% | $784.3 million; 33.9% | +9.4%; -10 bps |
| Operating income | $265.9 million; 10.5% | $234.2 million; 10.1% | +13.5% |
| Net income | $167.6 million; 6.6% | $146.9 million; 6.4% | +14.0% |
| Diluted EPS | $2.37 | $2.00 | +18.5% |
- Cash and cash equivalents were $55.7 million at June 29, 2013, versus $138.6 million at December 29, 2012 and $179.1 million at June 30, 2012.
- Working capital was $626.2 million, up $56.7 million from year-end but down $37.3 million year over year.
- Inventory was $1.083 billion, up $174.7 million from year-end and $135.9 million year over year, reflecting new-store growth, seasonal purchases and inventory buildup ahead of the southeast distribution-center relocation.
- Operating cash flow for the first six months was $62.8 million, down from $152.2 million in the prior-year period. The decline primarily reflected higher inventory investment, timing of accounts payable and income-tax payments.
- Capital expenditures were $98.6 million, compared with $65.6 million in the prior-year period, including investments in distribution capacity, new stores, information technology and the new store support center.
- The company had no borrowings outstanding under its $250 million unsecured revolving credit facility, with $73.9 million of outstanding letters of credit. The facility matures in October 2016, and the company was in compliance with all covenants.
- Financing activities included $69.3 million of share repurchases and $32.1 million of dividends paid during the first six months. Remaining share-repurchase authorization was $221.9 million at June 29, 2013.
- Total assets were $1.846 billion and stockholders’ equity was $1.144 billion at June 29, 2013.
Material changes versus the prior comparable period
- Quarterly sales growth accelerated, driven by 7.2% same-store sales growth and sales from stores opened within the prior year. The store count increased to 1,223 from 1,135 at the end of the prior-year quarter.
- Six-month same-store sales growth moderated to 4.2% from 6.7%, although total sales benefited from store expansion.
- Gross margin percentage declined by 10 basis points in both the quarter and six-month period. Management attributed the pressure to a mix shift toward lower-margin, freight-intensive consumable, usable and edible products and higher transportation costs.
- SG&A, including depreciation and amortization, improved as a percentage of sales to 21.2% from 21.8% in the quarter and to 23.4% from 23.8% for six months, reflecting expense control, sales leverage and lower incentive compensation as a percentage of sales.
- The effective tax rate increased to 37.4% from 37.2% in the quarter but declined to 36.8% from 37.1% for six months. The company expects a full-year effective tax rate of approximately 36.7%.
- The company opened 48 stores and closed one during the first six months, compared with 51 openings and one closure in the prior-year period.
Guidance, outlook, risks and unusual items
- Management expected to open approximately 100 to 105 new stores in fiscal 2013, compared with 93 openings in fiscal 2012.
- Management stated that existing cash, operating cash flow, available credit, leases and trade credit should fund operations and planned capital expenditures through the end of fiscal 2014.
- The company had approximately $45.3 million of contractual commitments for construction of its new store support center and $18.3 million of letters of credit outside the revolving facility.
- The company is involved in discussions with the Department of Justice and EPA concerning alleged Clean Air Act violations involving certain engines and recreational-vehicle products. Management expects vendor reimbursement for penalties where applicable and does not expect a material adverse effect; it also stated that a loss exceeding the amount accrued is not reasonably possible.
- Key operating risks include consumer spending, seasonality and weather, commodity and transportation-cost volatility, competition, execution of store and distribution-center expansion, foreign-supplier dependence, labor availability, technology and supply-chain disruptions, tax matters and litigation.
- The business is seasonal, with historically higher sales and profits in the second and fourth quarters and higher inventory and accounts payable balances ahead of spring and cold-weather selling seasons.
- The board declared a $0.26 quarterly dividend on July 31, 2013, payable September 4, 2013. Future dividends remain subject to board discretion.
- Management concluded that disclosure controls were effective as of June 29, 2013, with no material changes to internal control over financial reporting.
Investor verification checklist
- Verify that inventory growth and distribution-center relocation spending convert into expected sales and cash flow without creating markdown or working-capital pressure.
- Monitor gross-margin trends, particularly freight costs and the mix of lower-margin consumable products.
- Assess whether same-store sales momentum remains sustainable after the quarter’s strong 7.2% increase and approximately 140 basis points of estimated inflation benefit.
- Reconcile capital expenditures, new-store openings and the $45.3 million store-support-center commitment with liquidity and future free cash flow.
- Track share repurchases, dividend capacity and the remaining $221.9 million authorization relative to cash balances.
- Review the EPA/DOJ environmental matter, accrued amounts and potential vendor reimbursement as settlement discussions progress.
- Confirm the projected full-year effective tax rate of approximately 36.7% and the effect of tax reserves and credits on future periods.
