TRACTOR SUPPLY COMPANY General
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . This Form 10-Q also contains forward-looking statements and information. The forward-looking statements included herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"). All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including sales and earnings growth, estimated results of operations in future periods, the declaration and payment of dividends, future capital expenditures (including their amount and nature), business strategy, expansion and growth of our business operations, and other such matters are forward-looking statements. These forward-looking statements may be affected by certain risks and uncertainties, any one, or a combination of which, could materially affect the results of our operations. To take advantage of the safe harbor provided by the Act, we are identifying certain factors that could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written. As with any business, many aspects of our operations are subject to influences outside our control. These factors include, without limitation, national, regional, and local economic conditions affecting consumer spending, including the effects of the COVID-19 pandemic, the timing and acceptance of new products in the stores, the timing and mix of goods sold, purchase price volatility (including inflationary and deflationary pressures), the ability to increase sales at existing stores, the ability to manage growth and identify suitable locations, failure of an acquisition to produce anticipated results, the ability to successfully manage expenses (including increased expenses as a result of operating as an essential retailer during the COVID-19 pandemic) and execute our key gross margin enhancing initiatives, the availability of favorable credit sources, capital market conditions in general, the ability to open new stores in the time, manner and number currently contemplated, particularly in light of the COVID-19 pandemic, the impact of new stores on our business, competition, including that from online competitors, weather conditions, the seasonal nature of our business, effective merchandising initiatives and marketing emphasis, the ability to retain vendors, reliance on foreign suppliers, the ability to attract, train, and retain qualified employees, product liability and other claims, changes in federal, state, or local regulations, the effects that "shelter in place" and similar federal, state, and local regulations and protocols could have on our business, including our supply chain and employees, the imposition of tariffs on imported products or the disallowance of tax deductions on imported products, potential judgments, fines, legal fees, and other costs, breach of information systems or theft of employee or customer data, ongoing and potential future legal or regulatory proceedings, management of our information systems, failure to develop and implement new technologies, the failure of customer-facing technology systems, business disruption including from the implementation of supply chain technologies, effective tax rate changes and results of examination by taxing authorities, the ability to maintain an effective system of internal control over financial reporting, and changes in accounting standards, assumptions, and estimates. We discuss in greater detail risk factors relating to our business in Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. Forward -looking statements are based on our knowledge of our business and the environment in which we operate, but because of the factors listed above or other factors, actual results could differ materially from those reflected by any forward-looking statements. Consequently, all of the forward-looking statements made are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business and operations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Information Regarding COVID-19 Coronavirus Pandemic
The Company has been and continues to closely monitor the impact of the COVID-19
outbreak on all facets of our business. This includes the impact on our team
members, customers, suppliers, vendors, business partners, and supply chain
networks.
The health and safety of our team members and customers are the primary concern
to our management team. We have taken and continue to take numerous actions to
promote health and safety, including, rapidly providing personal protective
equipment to our team members, rolling out additional functionality to support
contactless shopping experiences, additional cleaning in our stores and
distribution centers, hiring additional team members to assist in promoting
social distancing and cleaning actions in our stores, and the implementation of
remote work plans at our store support center. Additionally, we have previously
announced appreciation bonuses for team members in our stores and distribution
centers.
Although the Company has experienced an increase in our net sales in the latter
part of the first fiscal quarter and the beginning of the second fiscal quarter
of 2020, the net incremental costs of doing business as an essential retailer
during this crisis, and we
Page 17--------------------------------------------------------------------------------
Index
believe after this crisis, have increased as a result of the aforementioned actions. For the second quarter of 2020, we estimate that the net incremental costs of doing business as an essential retailer will be in the range of$30 million to$50 million . There are numerous uncertainties surrounding the crisis and its impact on our business, as further described in Part II Item 1A - Risk Factors, which make it difficult to predict the impact on our business, financial position, or results of operations for the remainder of fiscal 2020 and beyond. Therefore, given the uncertainty related to the COVID-19 pandemic, the Company withdrew its financial guidance for fiscal 2020 onApril 7, 2020 . While our stores, distribution centers, and e-commerce operations are open and plan to remain open, we cannot predict the uncertainties, or the corresponding impacts on our business, at this time. Therefore, in an effort to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic, we suspended our share repurchase program effectiveMarch 12, 2020 and increased borrowings under our debt facilities as described in Note 5 to the Condensed Consolidated Financial Statements. Seasonality and Weather Our business is seasonal. Historically, our sales and profits are the highest in the second and fourth fiscal quarters due to the sale of seasonal products. We usually experience our highest inventory and accounts payable balances during our first fiscal quarter for purchases of seasonal products to support the higher sales volume of the spring selling season, and again during our third fiscal quarter to support the higher sales volume of the cold-weather selling season. We believe that our business can be more accurately assessed by focusing on the performance of the halves, not the quarters, due to the fact that different weather patterns from year-to-year can shift the timing of sales and profits between quarters, particularly between the first and second fiscal quarters and the third and fourth fiscal quarters. Historically, weather conditions, including unseasonably warm weather in the fall and winter months and unseasonably cool weather in the spring and summer months, have affected the timing and volume of our sales and results of operations. In addition, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, extreme rain, and droughts have impacted operating results both negatively and positively, depending on the severity and length of these conditions. Our strategy is to manage product flow and adjust merchandise assortments and depth of inventory to capitalize on seasonal demand trends.
Comparable Store Metrics
Comparable store metrics are a key performance indicator used in the retail industry to measure the performance of the underlying business. Our comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales and exclude certain adjustments to net sales. Stores closed during either of the years being compared are removed from our comparable store metrics calculations. Stores relocated during either of the years being compared are not removed from our comparable store metrics calculations. If the effect of relocated stores on our comparable store metrics calculations became material, we would remove relocated stores from the calculations. Results of Operations
Fiscal Three Months (First Quarter) Ended
Net sales for the first quarter of fiscal 2020 increased 7.5% to$1.96 billion from$1.82 billion for the first quarter of fiscal 2019. Comparable store sales for the first quarter of fiscal 2020 were$1.90 billion , a 4.3% increase as compared to the first quarter of fiscal 2019. Comparable store sales increased 5.0% for the first quarter of fiscal 2019. The comparable store sales results for the first quarter of fiscal 2020 included an increase in comparable average transaction value of 5.4% and a decrease of 1.1% in comparable average transaction count. All geographic regions of the Company had positive comparable store sales growth. The increase in comparable stores sales was primarily driven by strength in consumable, usable and edible ("C.U.E.") product categories, along with solid demand for spring seasonal categories. The performance in our C.U.E. product categories was particularly strong in the final three weeks of the quarter as our customers responded to the COVID-19 pandemic. This first quarter comparable store sales growth was partially offset by softness in sales of cold weather seasonal merchandise and discretionary categories such as clothing and footwear. In addition to comparable store sales growth for the first quarter of fiscal 2020, sales from stores open less than one year were$60.2 million for the first quarter of fiscal 2020, which represented 3.3 percentage points of the 7.5% increase over first quarter fiscal 2019 net sales. For the first quarter of fiscal 2019, sales from stores open less than one year were$57.6 million , which represented 3.4 percentage points of the 8.3% increase over first quarter fiscal 2018 net sales. Page 18
--------------------------------------------------------------------------------
Index
The following table summarizes store growth for the fiscal three months ended
Fiscal Three Months Ended
March 28, March 30,
Store Count Information: 2020 2019
Tractor Supply
Beginning of period 1,844 1,765
New stores opened 20 10
Stores closed (1) -
End of period 1,863 1,775
Petsense
Beginning of period 180 175
New stores opened - 1
Stores closed - -
End of period 180 176
Consolidated, end of period 2,043 1,951
Stores relocated 1 -
The following table indicates the percentage of net sales represented by each of
our major product categories for the fiscal three months ended March 28, 2020
and March 30, 2019 :
Percent of Net Sales
Fiscal Three Months Ended
March 28, March 30,
Product Category: 2020 2019
Livestock and Pet 54 % 52 %
Hardware, Tools and Truck 20 21
Seasonal, Gift and Toy Products 17 17
Clothing and Footwear 6 7
Agriculture 3 3
Total 100 % 100 %
Gross profit increased 7.5% to $661.2 million for the first quarter of fiscal
2020 from $615.0 million for the first quarter of fiscal 2019. As a percent of
net sales, gross margin in the first quarter of fiscal 2020 was flat to the
first quarter of fiscal 2019 at 33.75%. The gross margin performance reflected
lower transportation costs as a percent of net sales offset by pressure from the
strong sales of consumable merchandise, which generally carries a below chain
average gross margin rate, and markdowns of winter seasonal merchandise.
Selling, general and administrative ("SG&A") expenses, including depreciation
and amortization, increased 7.3% to $548.7 million for the first quarter of
fiscal 2020 from $511.6 million for the first quarter of fiscal 2019. As a
percent of net sales, SG&A expenses decreased 7 basis points to 28.00% for the
first quarter of fiscal 2020 from 28.07% for the first quarter of fiscal 2019.
The improvement in SG&A as a percent of net sales was primarily attributable to
leverage in occupancy and other costs from the increase in comparable store
sales and a net benefit from legal settlements, primarily from the favorable
settlement in the Visa/Mastercard interchange fee class action lawsuit. Certain
first quarter costs as a percent of net sales were higher compared to the first
quarter of 2019, driven by incremental costs of approximately $7 million from
COVID-19 such as investments in pay and benefits and the impact of additional
labor hours and supply costs dedicated to COVID-19 cleaning actions.
The effective income tax rate increased to 22.1% for the first quarter of fiscal
2020 compared to 22.0% for the first quarter of fiscal 2019. The primary driver
for the increase in the Company's effective income tax rate was a reduced tax
benefit associated with share-based compensation in the first quarter of fiscal
2020. The Company expects the full fiscal year 2020 effective tax rate to be in
a range between 22.4% and 22.7%. The Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") was enacted in the U.S. on March 27, 2020 . We do not
anticipate that the enactment of this legislation will
Page 19--------------------------------------------------------------------------------
Index
significantly impact our full year effective tax rate in fiscal 2020; however, we continue to evaluate the potential impact that the legislation will have on the timing of our tax payments. As a result of the foregoing factors, net income for the first quarter of fiscal 2020 increased 9.0% to$83.8 million , or$0.71 per diluted share, as compared to net income of$76.8 million , or$0.63 per diluted share, for the first quarter of fiscal 2019.
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, remodeling and relocation programs, distribution facility capacity and improvements, information technology, inventory purchases, repayment of existing borrowings under our debt facilities, share repurchases, cash dividends, and selective acquisitions as opportunities arise. Our primary ongoing sources of liquidity are existing cash balances, cash provided from operations, remaining funds available under our debt facilities, finance and operating leases, and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters to support the higher sales volume of the spring and cold-weather selling seasons, respectively. The Company believes that its existing cash balances, expected cash flow from future operations, funds available under its debt facilities, finance and operating leases, and normal trade credit will be sufficient to fund its operations, including increased expenses associated with COVID-19, and its capital expenditure needs, including new store openings, store acquisitions, relocations and renovations, and distribution facility capacity, through the end of fiscal 2020. Working Capital AtMarch 28, 2020 , the Company had working capital of$986.1 million , which increased$445.8 million fromDecember 28, 2019 , and increased$219.0 million fromMarch 30, 2019 . The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions): March 28, December 28, March 30, 2020 2019 Variance 2019 Variance Current assets: Cash and cash equivalents$ 461.4 $ 84.2 $ 377.2 $ 102.2 $ 359.2 Inventories 1,905.9 1,602.8 303.1 1,881.3 24.6 Prepaid expenses and other current assets 112.9 100.9 12.0 90.7 22.2 Income taxes receivable - - - 4.9 (4.9) Total current assets 2,480.2 1,787.9 692.3 2,079.1 401.1 Current liabilities: Accounts payable 887.9 643.0 244.9 785.1 102.8 Accrued employee compensation 31.1 39.8 (8.7) 28.7 2.4 Other accrued expenses 234.5 247.7 (13.2) 204.8 29.7 Current portion of long-term debt 30.0 30.0 - 21.3 8.7 Current portion of finance lease liabilities 4.2 4.0 0.2 3.7 0.5 Current portion of operating lease liabilities 281.6 277.1 4.5 260.4 21.2 Income taxes payable 24.8 6.0 18.8 8.0 16.8 Total current liabilities 1,494.1 1,247.6 246.5 1,312.0 182.1 Working capital$ 986.1 $ 540.3 $ 445.8 $ 767.1 $ 219.0
In comparison to
•The increase in cash and cash equivalents was driven principally by an increase in borrowings, net of repayments, under our debt facilities as we sought to strengthen liquidity and preserve cash while navigating the COVID-19 pandemic.
Page 20--------------------------------------------------------------------------------
Index
•The increase in inventories and accounts payable resulted primarily from the purchase of additional inventory as part of normal seasonal patterns to support the spring selling season and, to a lesser extent, to support new store growth.
In comparison to
•The increase in cash and cash equivalents was driven principally by an increase in borrowings, net of repayments, under our debt facilities as we sought to strengthen liquidity and preserve cash while navigating the COVID-19 pandemic. Additionally, the increase in cash and cash equivalents was also attributable to year-over-year improvements in cash provided by operations. •The increase in accounts payable resulted primarily from the purchase of additional inventory to support new store growth; however, the inventory balance did not increase at the same rate as accounts payable because the average inventory per store decreased slightly year-over-year as a result of strong sales performance inMarch 2020 .
Debt
The following table summarizes the Company's outstanding debt as of the dates
indicated (in millions):
March 28, December 28, March 30,
2020 2019 2019
Senior Notes $ 150.0 $ 150.0 $ 150.0
Senior Credit Facility:
February 2016 Term Loan 140.0 145.0 155.0
June 2017 Term Loan 85.0 87.5 91.3
March 2020 Term Loan 200.0 - -
Revolving credit loans 445.0 15.0 232.0
Total outstanding borrowings 1,020.0 397.5 628.3
Less: unamortized debt issuance costs (0.9) (1.0) (1.3)
Total debt 1,019.1 396.5
627.0
Less: current portion of long-term debt (30.0) (30.0) (21.3) Long-term debt$ 989.1 $ 366.5 $ 605.7 Outstanding letters of credit$ 39.0 $ 32.0 $ 35.4 In order to strengthen its liquidity while navigating the COVID-19 pandemic, onApril 22, 2020 , the Company amended the 2016 Senior Credit Facility to, among other things, increase the option to increase the aggregate principal amount of Revolving Loan Commitments and Incremental Term Loans up to an amount not to exceed$650 million . Simultaneously, the Company entered into an Incremental Term Loan Agreement in the amount of$350 million . For additional information about the Company's debt and credit facilities, refer to Note 5 to the Condensed Consolidated Financial Statements. Refer to Note 6 to the Condensed Consolidated Financial Statements for information about the Company's interest rate swap agreements. Page 21
--------------------------------------------------------------------------------
Index Operating Activities Operating activities provided net cash of$83.9 million and used net cash of$13.0 million in the first three months of fiscal 2020 and fiscal 2019, respectively. The$96.9 million increase in net cash provided by operating activities in the first three months of fiscal 2020 compared to the first three months of fiscal 2019 is due to changes in the following operating activities (in millions): Fiscal Three Months Ended March 28, March 30, 2020 2019 Variance Net income$ 83.8 $ 76.8 $ 7.0 Depreciation and amortization 51.4 45.8 5.6 Share-based compensation expense 6.9 9.6 (2.7) Deferred income taxes 1.6 13.5 (11.9) Inventories and accounts payable (58.2) (126.7) 68.5 Prepaid expenses and other current assets (12.0) 23.8 (35.8) Accrued expenses (21.0) (56.5) 35.5 Income taxes 18.8 5.5 13.3 Other, net 12.6
(4.8) 17.4
Net cash provided by/(used in) operating activities
The$96.9 million increase in net cash provided by operating activities in the first three months of fiscal 2020 compared with the first three months of fiscal 2019 resulted principally from the net impact of changes in our operating assets and liabilities which fluctuated due to company growth and the timing of payments.
Investing Activities
Investing activities used net cash of$29.3 million and$28.4 million in the first three months of fiscal 2020 and fiscal 2019, respectively. The$0.9 million increase in net cash used in investing activities primarily reflects an increase in capital expenditures in the first three months of fiscal 2020 compared to fiscal 2019.
Capital expenditures for the first three months of fiscal 2020 and fiscal 2019 were as follows (in millions):
Fiscal Three Months Ended
March 28, March 30,
2020 2019
New and relocated stores and stores not yet opened $ 11.9 $ 7.3
Information technology 9.0 9.7
Existing stores 6.9 7.5
Corporate and other 1.5 0.1
Distribution center capacity and improvements 0.3 4.2
Total capital expenditures $ 29.6 $ 28.8
Spending on existing stores principally reflects routine refresh activity. In
the first three months of fiscal 2020, the Company opened 20 new Tractor Supply
stores compared to 10 new Tractor Supply stores during the first three months of
fiscal 2019. The Company did not open any new Petsense stores during the first
three months of fiscal 2020 compared to one new Petsense store during the first
three months of fiscal 2019. We continue to execute on our plans of opening
approximately 80 new Tractor Supply stores and approximately 10 new Petsense
stores during fiscal 2020, but the timing of new store openings in some areas
may be delayed as a result of the COVID-19 pandemic, including local and state
orders.
Page 22--------------------------------------------------------------------------------
Index
The spending on information technology represents continued support of our store growth and our omni-channel initiatives, as well as improvements in security and compliance, enhancements to our customer relationship management program, and other strategic initiatives. As we continue throughout fiscal 2020, we intend to prioritize our information technology capital expenditures to accelerate initiatives to enhance safety and convenience for customers, including initiatives such as Buy Online,Pickup In Store ; Buy Online, Deliver from Store; Contactless Curbside Pickup; Contactless Payment capabilities; and additional Mobile POS devices in all stores. Spending for distribution center capacity and improvements was higher in the first fiscal quarter of 2019 due to the construction of our new northeast distribution center inFrankfort, New York , which began shipping merchandise to our stores in the first quarter of fiscal 2019.
Financing Activities
Financing activities provided net cash of$322.6 million and$57.4 million in the first three months of fiscal 2020 and fiscal 2019, respectively. The$265.2 million change in net cash provided by financing activities in the first three months of fiscal 2020 compared to the first three months of fiscal 2019 is due to changes in the following (in millions): Fiscal Three Months Ended March 28, March 30, 2020 2019 Variance Net borrowings and repayments under debt facilities$ 622.5 $ 219.5 $ 403.0 Repurchase of common stock (263.2) (155.3) (107.9) Net proceeds from issuance of common stock 10.6 34.7 (24.1) Cash dividends paid to stockholders (40.8) (37.6) (3.2) Other, net (6.5) (3.9) (2.6) Net cash provided by financing activities$ 322.6 $
57.4
The$265.2 million change in net cash provided by financing activities in the first three months of fiscal 2020 compared with the first three months of fiscal 2019 is due to an increase in net borrowings under debt facilities which included the addition of a$200 million term loan. This was partially offset by an increase in the repurchase of common stock. However, we have suspended our share repurchase program effectiveMarch 12, 2020 , in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.
Dividends
During the first three months of fiscal 2020 and 2019, the Board of Directors declared the following cash dividends:
Dividend Amount
Date Declared Per Share of Common Stock Record Date Date Paid
February 5, 2020 $ 0.35 February 24, 2020 March 10, 2020
February 6, 2019 $ 0.31 February 25, 2019 March 12, 2019
It is the present intention of the Board of Directors to continue to pay a
quarterly cash dividend; however, the declaration and payment of future
dividends will be determined by the Board of Directors in its sole discretion
and will depend upon the earnings, financial condition and capital needs of the
Company, along with any other factors that the Board of Directors deems
relevant.
On
Share Repurchase Program
The Company's Board of Directors has authorized common stock repurchases under a share repurchase program up to$4.5 billion , exclusive of any fees, commissions, or other expenses related to such repurchases. The repurchases may be made from Page 23
--------------------------------------------------------------------------------
Index
time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares are accounted for at cost and will be held in treasury for future issuance. The program may be limited or terminated at any time without prior notice. As ofMarch 28, 2020 , the Company had remaining authorization under the share repurchase program of$1.22 billion , exclusive of any fees, commissions, or other expenses.
The Company has suspended the share repurchase program effective
The following table provides the number of shares repurchased, average price paid per share, and total amount paid for share repurchases during the fiscal three months endedMarch 28, 2020 andMarch 30, 2019 , respectively (in thousands, except per share amounts): Fiscal Three Months EndedMarch 28 ,March 30, 2020 2019 Total number of shares repurchased 2,853
1,724
Average price paid per share$ 92.28 $ 90.09 Total cash paid for share repurchases$ 263,219
Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements are limited to outstanding letters of credit. Letters of credit allow the Company to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.
Significant Contractual Obligations and Commercial Commitments
At
At
Significant Accounting Policies and Estimates
Management's discussion and analysis of the Company's financial position and results of operations are based upon its Condensed Consolidated Financial Statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company's significant accounting policies, including areas of critical management judgments and estimates, have primary impact on the following financial statement areas: - Inventory valuation - Impairment of long-lived assets - Self-insurance reserves - Impairment of
goodwill and other indefinite-lived
intangible assets
See the Notes to the Consolidated Financial Statements in our Annual Report on
Form 10-K for the fiscal year ended December 28, 2019 , for a discussion of the
Company's critical accounting policies. The Company's financial position and/or
results of operations may be materially different when reported under different
conditions or when using different assumptions in the application of such
policies. In the event estimates or assumptions prove to be different from
actual amounts, adjustments are made in subsequent periods to reflect more
current information.
New Accounting Pronouncements
Refer to Note 12 to the Condensed Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as ofMarch 28, 2020 . Page 24
--------------------------------------------------------------------------------
Index
© Edgar Online, source
