Tractor Supply Company FY2011 Form 10-K Summary
Business Context and Reporting Period
Tractor Supply Company operates farm and ranch retail stores and an e-commerce business serving rural lifestyle customers, tradesmen and small businesses. The filing is an annual report for the fiscal year ended December 31, 2011. Fiscal 2011 comprised 53 weeks, including a 14-week fourth quarter, compared with 52 weeks in fiscal 2010. The Company operated 1,085 stores in 44 states and had one reportable segment.
Financial Results and Key Metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $4.233 billion | $3.638 billion | +16.3% |
| Gross margin | $1.407 billion; 33.2% | $1.204 billion; 33.1% | +16.9%; +10 bps |
| Operating income | $352.7 million; 8.3% | $266.2 million; 7.3% | +32.5%; +100 bps |
| Net income | $222.7 million; 5.3% | $168.0 million; 4.6% | +32.6%; +70 bps |
| Diluted EPS | $3.01 | $2.25 | +33.8% |
| Cash flow from operations | $254.1 million | $222.6 million | +$31.5 million |
| Capital expenditures | $166.2 million | $96.5 million | +$69.7 million |
- Same-store sales increased 8.2%, including an estimated 340 basis points of benefit from inflation and approximately 30 basis points from an additional comparable sales day. Same-store transactions increased 5.0% and average ticket increased 3.1%.
- SG&A, including depreciation and amortization, improved to 24.9% of sales from 25.8%, reflecting sales leverage and expense control. The Company reported an effective tax rate of 36.5%, versus 36.6%.
- Cash and restricted cash totaled approximately $198.8 million at year-end, consisting of $177.0 million of cash and $21.9 million of restricted cash. Working capital was $629.6 million.
- Inventory increased to $830.8 million from $736.5 million, primarily due to store growth and inflation.
- The Company had no borrowings under its revolving credit facility. Long-term debt, excluding the current portion, was $1.3 million, consisting primarily of capital lease obligations.
- The new unsecured senior credit facility provides up to $250 million and matures in October 2016. The Company was in compliance with its covenants at year-end; outstanding letters of credit totaled $15.0 million under the facility.
- Net cash used in investing activities was $171.4 million, while net cash used in financing activities was $163.2 million, primarily reflecting share repurchases and dividends.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected an additional fiscal week, stronger same-store sales, and continued store expansion. The additional week contributed approximately 170 basis points to the sales increase.
- The Company opened 85 stores, relocated three and closed one, compared with 74 openings and three closures in fiscal 2010. The store base increased from 1,001 to 1,085 locations.
- Gross margin benefited from improved direct product margin and strategic sourcing, private-label growth, inventory management and price optimization, partially offset by higher transportation costs.
- Capital expenditures increased substantially, primarily because of the new 834,000-square-foot Franklin, Kentucky distribution center, new stores and technology investments.
- Share repurchases increased to approximately 3.1 million shares costing $180.0 million, compared with 0.8 million shares costing $38.2 million in 2010. The remaining authorization was $562.9 million at year-end.
- The quarterly dividend increased from $0.07 to $0.12 per share during 2011. Dividends paid totaled $30.9 million, compared with $20.4 million in 2010.
Guidance, Outlook, Risks and Unusual Items
- Management planned to open 90 to 95 stores in fiscal 2012, representing approximately 8.0% growth in selling square footage.
- Fiscal 2012 capital expenditures were expected to range from $160 million to $170 million, including approximately $30 million for distribution-center investments and approximately $30 million for information technology.
- Management expected inflation and higher fuel and transportation costs to continue affecting fiscal 2012, but anticipated maintaining reasonable margins through sourcing and retail price management.
- The Company completed construction of its Franklin, Kentucky distribution center, which became operational in the fourth quarter. A related tax-abatement sale-leaseback structure involved $51.8 million of bonds, but the Company did not record the bonds or related lease obligation under its accounting treatment.
- The Department of Justice, on behalf of the EPA, alleged potential Clean Air Act violations involving certain imported engines. Settlement discussions contemplated a civil penalty and injunctive relief. The Company expected vendor reimbursement and did not expect a material adverse effect; the filing states that no loss in excess of the amount accrued was reasonably possible.
- Other principal risks include consumer spending and economic conditions, inflation or deflation in merchandise and transportation costs, weather and seasonality, competition, new-store execution, vendor and foreign-sourcing dependence, labor costs, privacy and information-security breaches, technology and supply-chain implementation, tax audits, litigation and internal-control risks.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditors concluded that internal controls were effective as of December 31, 2011.
Important Facts for Investors to Verify
- Reconcile reported sales growth and same-store sales for the impact of the additional fiscal week, inflation and weather-related demand.
- Assess whether margin improvements can offset expected transportation, fuel, labor and merchandise-cost inflation.
- Monitor inventory growth, turnover, shrinkage and markdown exposure as the store base expands.
- Evaluate cash deployment among capital expenditures, store expansion, share repurchases and dividends, including the remaining $562.9 million repurchase authorization.
- Review the $1.621 billion of future operating lease payments and other contractual commitments, particularly in relation to planned store growth.
- Track the EPA/DOJ engine matter, vendor indemnification and any ultimate settlement payment or injunctive obligations.
- Confirm the execution and expected returns from the Franklin distribution center, warehouse-management rollout and planned e-commerce and point-of-sale upgrades.
- Verify future dividend declarations and the Company’s ability to fund growth while maintaining substantial liquidity and unused credit capacity.