TRACTOR SUPPLY COMPANY The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the two-year period endedDecember 26, 2020 (our fiscal years 2020 and 2019). This discussion should be read in conjunction with our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this report. This discussion contains forward-looking statements and information. See "Forward-Looking Statements and Information" and "Risk Factors" included elsewhere in this report.Tractor Supply reports its financial results in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP").Tractor Supply also uses certain non-GAAP measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior reported results. Non-GAAP measures do not have standardized definitions and are not defined byU.S. GAAP. Therefore,Tractor Supply 's non-GAAP measures are unlikely to be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures should not be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance withU.S. GAAP. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. Overview Founded in 1938,Tractor Supply Company (the "Company" or "we" or "our" or "us") is the largest rural lifestyle retailer inthe United States ("U.S."). The Company is focused on supplying the needs of recreational farmers, ranchers, and all those who enjoy living the rural lifestyle (which we refer to as the "Out Here" lifestyle), as well as tradesmen and small businesses. As ofDecember 26, 2020 , we operated 2,105 retail stores in 49 states under the namesTractor Supply Company , Del's Feed & Farm Supply, andPetsense . Our stores are located primarily in towns outlying major metropolitan markets and in rural communities. We also operate websites under the names TractorSupply.com and Petsense.com as well as aTractor Supply Company mobile application. Through our stores and e-commerce channels, we offer the following comprehensive selection of merchandise: •Equine, livestock, pet, and small animal products, including items necessary for their health, care, growth, and containment; •Hardware, truck, towing, and tool products; •Seasonal products, including heating, lawn and garden items, power equipment, gifts, and toys; •Work/recreational clothing and footwear; and •Maintenance products for agricultural and rural use.Tractor Supply Company believes we can grow our business by being an integral part of our customers' lives as the dependable supplier of "Out Here" lifestyle solutions, creating customer loyalty through personalized experiences, and providing convenience that our customers expect at anytime, anywhere, and in any way they choose. Our long-term growth strategy is to: (1) expand and deepen our customer base by providing personal, localized, and memorable customer engagements by leveraging content, social media, and digital shopping experiences, attracting new customers and driving loyalty, (2) evolve customer experiences by digitizing our business processes and furthering our omni-channel capabilities, (3) offer relevant assortments and services across all channels through exclusive and national brands and continue to introduce new products and services through our test and learn strategy, (4) drive operational excellence and productivity through continuous improvement, increasing space utilization, and implementing advanced supply chain capabilities to support growth, scale and agility, and (5) expand through selective acquisitions, as such opportunities arise, to add complementary businesses and to enhance penetration into new and existing markets to supplement organic growth. Achieving this strategy will require a foundational focus on: (1) connecting, empowering and growing our team to enhance their lives and the communities they live in, enabling them to provide legendary service to our customers, and (2) allocating resources in a disciplined and efficient manner to drive profitable growth and build shareholder value, including leveraging technology and automation, to align our cost structure to support new business capabilities for margin improvement and cost reductions. Over the past five years, we have experienced considerable growth in stores, growing from 1,488 stores at the end of fiscal 2015 to 2,105 stores (1,923Tractor Supply and Del's retail stores and 182Petsense retail stores) at the end of fiscal 2020, and in net sales, with a compounded annual growth rate of approximately 11.3%. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in many existing and new markets. We have developed a proven method for selecting store sites and we believe we have significant additional opportunities for newTractor Supply stores. We also believe that there is opportunity for continued growth forPetsense stores. 30
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Executive Summary
In fiscal 2020, we opened 80 newTractor Supply stores in 31 states and nine newPetsense stores in three states. In fiscal 2019, we opened 80 newTractor Supply stores in 29 states and eight newPetsense stores in four states. This resulted in a selling square footage increase of approximately 4% in each of fiscal 2020 and fiscal 2019. Net sales increased 27.2% to$10.62 billion in fiscal 2020 from$8.35 billion in fiscal 2019 as we experienced significant demand for our products across all product categories, geographies and channels in fiscal 2020 as our customers focused on the care of their homes, land and animals while navigating the COVID-19 pandemic. Comparable store sales increased 23.1% in fiscal 2020 versus a 2.7% increase in fiscal 2019. Gross profit increased 31.0% to$3.76 billion in fiscal 2020 from$2.87 billion in fiscal 2019, and gross margin increased 104 basis points to 35.42% of net sales in fiscal 2020 from 34.38% of net sales in fiscal 2019. Operating income increased 49 basis points to 9.39% of net sales in fiscal 2020 from 8.90% of net sales in fiscal 2019. For fiscal 2020, net income was$749.0 million , or$6.38 per diluted share, compared to$562.4 million , or$4.66 per diluted share, in fiscal 2019.
We ended fiscal 2020 with
Information Regarding COVID-19 Coronavirus Pandemic
The Company has been and continues to closely monitor the impact of the COVID-19 pandemic 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 concerns of our management team. We have taken and continue to take numerous actions to promote health and safety, including, providing personal protective equipment to our team members, establishing mask protocols in our facilities, rolling out additional functionality to support contactless shopping experiences, adding services for cleaning and sanitation in our stores and distribution centers, hiring additional team members to assist in promoting social distancing and cleaning actions in our stores, and implementing remote work plans at our store support center. Additionally, we have taken significant actions to support our team members during this pandemic including COVID-19 paid medical leave, 100% coverage of COVID-19 testing and treatment under our medical plan, and the payment of incremental appreciation bonuses for frontline team members of approximately$44 million during fiscal 2020. EffectiveJune 28, 2020 , we implemented permanent wage increases for all of our hourly team members in our stores and distribution centers of a minimum of$1 per hour and are now providing a new benefit package for part-time team members, including medical, vision and dental coverage, behavioral health services, paid sick time and life insurance. We have also implemented annual restricted stock unit grants to more than 2,000 frontline salaried managers in our stores and distribution centers. As further described in the results of operations, our net sales have significantly increased due to unprecedented customer demand across all major product categories, channels, and geographic regions. However, the net incremental costs of doing business during this crisis have increased as a result of the aforementioned actions we have taken to support and promote the safety and well-being of our team members and customers, and we believe many of these incremental costs will continue after the pandemic is over. There are numerous uncertainties surrounding the pandemic and its impact on the economy and our business, as further described in the Risk Factors section under Part I Item 1A. of this Form 10-K, which make it difficult to predict the impact on our business, financial position, or results of operations in fiscal 2021 and beyond. 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.
Comparable Store Metrics
Comparable store metrics are a key performance indicator used in the retail
industry and by the Company to measure the performance of the underlying
business. Comparable store metrics are calculated on an annual basis using sales
generated from all stores open at least one year and all online sales, excluding
certain adjustments to net sales. Stores closed during the year are removed from
our comparable store metrics calculations. Stores relocated during the years
being compared are not removed from our comparable store metrics. If the effect
of relocated stores on our comparable store metrics becomes material, we would
remove relocated stores from the calculations.
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Significant Accounting Policies and Estimates
Management's discussion and analysis of our financial position and results of operations are based upon our 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. Our 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. Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Inventory Valuation:
Inventory Impairment
We identify potentially excess and slow-moving inventory by evaluating turn rates, historical and expected future sales trends, age of merchandise, overall inventory levels, current cost of inventory, and other benchmarks. We have established an inventory valuation reserve to recognize the estimated impairment in value (i.e., an inability to realize the full carrying value) based on our aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies. We do not believe our merchandise inventories are subject to significant risk of obsolescence in the near term. However, changes in market conditions or consumer purchasing patterns could result in the need for additional reserves. Our impairment reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding forecasted customer demand and the promotional environment. We have not made any material changes in the accounting methodology used to recognize inventory impairment reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate impairment. However, if assumptions regarding consumer demand or clearance potential for certain products are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our inventory impairment reserve as ofDecember 26, 2020 , would have affected net income by approximately$1.1 million in fiscal 2020. Shrinkage Our general policy is to perform physical inventories at least once a year for each store that has been open more than 12 months, and we have established a reserve for estimating inventory shrinkage between physical inventory counts. The reserve is established by assessing the chain-wide average shrinkage experience rate, applied to the related periods' sales volumes. Such assessments are updated on a regular basis for the most recent individual store experiences. While the Company continued to operate as an essential retailer during the year, the COVID-19 pandemic had a direct impact on our ability to complete all originally planned store physical inventories in fiscal 2020. Our plan was complicated by state and local mandates such as shelter at home restrictions and social distancing requirements. Our decision to revise our inventory schedule was based on these mandates as well as consideration of the health and safety of our team members, customers and vendor partners which are crucial to our business operations. We assessed the risks associated with the stores not inventoried and concluded there is no material risk of misstatement to the financial statements for the stores not inventoried and further concluded that effective compensating controls are in place to ensure completeness and accuracy of reported inventory balances and estimated shrink losses. The estimated store inventory shrink rate is based on historical experience. We believe historical rates are a reasonably accurate reflection of future trends. Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding future shrinkage trends, the effect of loss prevention measures and merchandising strategies. 32
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We have not made any material changes in the accounting methodology used to recognize shrinkage in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our shrinkage reserve. However, if our estimates regarding inventory losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our shrinkage reserve as ofDecember 26, 2020 , would have affected net income by approximately$2.9 million in fiscal 2020.
Vendor Funding
We receive funding from substantially all of our significant merchandise
vendors, in support of our business initiatives, through a variety of programs
and arrangements, including guaranteed vendor support funds ("vendor support")
and volume-based rebate funds ("volume rebates"). The amounts received are
subject to terms of vendor agreements, most of which are "evergreen", reflecting
the on-going relationship with our significant merchandise vendors. Certain of
our agreements, primarily volume rebates, are renegotiated annually, based on
expected annual purchases of the vendor's product. Vendor funding is initially
deferred as a reduction of the purchase price of inventory, and then recognized
as a reduction of cost of merchandise as the related inventory is sold. During
interim periods, the amount of vendor support and volume rebates are estimated
based upon initial commitments and anticipated purchase levels with applicable
vendors.
The estimated purchase volume (and related vendor funding) is based on our
current knowledge of inventory levels, sales trends and expected customer
demand, as well as planned new store openings and relocations. Although we
believe we can reasonably estimate purchase volume and related volume rebates at
interim periods, it is possible that actual year-end results could be different
from previously estimated amounts. Our allocation methodology contains
uncertainties because the calculation requires management to make assumptions
and to apply judgment regarding customer demand, purchasing activity, target
thresholds, vendor attrition and collectability.
We have not made any material changes in the accounting methodology used to
establish our vendor funding reserves in the financial periods presented. At the
end of each fiscal year, a significant portion of the actual purchase activity
is known. Thus, we do not believe there is a reasonable likelihood that there
will be a material change in the amounts recorded as vendor funding. We do not
believe there is a significant collectability risk related to vendor funding
amounts due to us at the end of fiscal 2020. If a 10% reserve had been applied
against our outstanding vendor funding due as of December 26, 2020 , net income
would have been affected by approximately $1.6 million in fiscal 2020. Although
it is unlikely that there will be any significant reduction in historical levels
of vendor funding, if such a reduction were to occur in future periods, the
Company could experience a higher inventory balance and higher cost of sales.
Freight
We incur various types of transportation and delivery costs in connection with inventory purchases and distribution. Such costs are included as a component of the overall cost of inventories (on an aggregate basis) and recognized as a component of cost of merchandise sold as the related inventory is sold.
We allocate freight as a component of total cost of sales without regard to inventory mix or unique freight burden of certain categories. This assumption has been consistently applied for all years presented.
We have not made any material changes in the accounting methodology used to establish our capitalized freight balance or freight allocation in the financial periods presented. If a 10% increase or decrease had been applied against our current inventory capitalized freight balance as ofDecember 26, 2020 , net income would have been affected by approximately$11.7 million in fiscal 2020. 33
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Self-Insurance Reserves:
We self-insure a significant portion of our workers' compensation insurance and general liability (including product liability) insurance plans. We have stop-loss insurance policies to protect from individual losses over specified dollar values. Provisions for losses related to our self-insured liabilities are based upon periodic independent actuarially determined estimates that consider a number of factors including historical claims experience, loss development factors, and severity factors. The full extent of certain workers' compensation and general liability claims may not become fully determined for several years. Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date based upon historical data and experience, including actuarial calculations. We have not made any material changes in the accounting methodology used to establish our self-insurance reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate insurance reserves. However, if we experience a significant increase in the number of claims or the cost associated with these claims, we may be exposed to losses that could be material. A 10% change in our self-insurance reserves as ofDecember 26, 2020 , would have affected net income by approximately$5.9 million in fiscal 2020.
Impairment of Long-Lived Assets:
Long-lived assets, including lease assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset or asset group to its estimated undiscounted future cash flows. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level. The significant assumptions used to determine estimated undiscounted cash flows include cash inflows and outflows directly resulting from the use of those assets in operations, including margin on net sales, payroll and related items, occupancy costs, insurance allocations, and other costs to operate a store. If the estimated future cash flows are less than the carrying value of the related asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the related asset or asset group to its estimated fair value, which may be based on an estimated future cash flow model, market valuation, or other valuation technique, as appropriate. We recognize an impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of that asset.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values.
We have not made any material changes in our impairment loss assessment methodology in the financial periods presented, other than to include operating lease right-of-use assets in our ongoing impairment assessment upon adoption of the new lease accounting standard in fiscal 2019. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. None of these estimates and assumptions are significantly sensitive, and a 10% change in any of these estimates would not have a material impact on our analysis. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. We have not made any material changes in our impairment loss assessment methodology in the financial periods presented in fiscal 2020. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses.
In fiscal 2020 we recognized approximately
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Impairment of
Goodwill and other indefinite-lived intangible assets are evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. The quantitative impairment test for goodwill compares the fair value of a reporting unit with the carrying value of its net assets, including goodwill. If the fair value of the reporting unit is less than the carrying value of the reporting unit, an impairment charge would be recorded to the Company's operations, for the amount in which the carrying amount exceeds the reporting unit's fair value. We determine fair values for each reporting unit using the market approach, when available and appropriate, the income approach, or a combination of both. The income approach involves forecasting projected financial information (such as revenue growth rates, profit margins, tax rates, and capital expenditures) and selecting a discount rate that reflects the risk inherent in estimated future cash flows. Under the market approach, the fair value is based on observed market data. If multiple valuation methodologies are used, the results are weighted appropriately. The quantitative impairment test for other indefinite-lived intangible assets involves comparing the carrying amount of the asset to the sum of the discounted cash flows expected to be generated by the asset. If the implied fair value of the indefinite-lived intangible asset is less than the carrying value, an impairment charge would be recorded to the Company's operations. Our impairment loss calculation contains uncertainties because they require management to make assumptions and to apply judgment to qualitative factors as well as estimate future cash flows and asset fair values, including forecasting projected financial information and selecting the discount rate that reflects the risk inherent in future cash flows. The valuation approaches utilized to estimate fair value for the purposes of the impairment tests of goodwill and other indefinite-lived intangible assets require the use of assumptions and estimates, which involve a degree of uncertainty. If actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to non-cash impairment losses that could be material.
As described in further detail in Note 3 to the Consolidated Financial
Statements, in fiscal 2020 we recognized goodwill impairment expense of
approximately
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Quarterly Financial Data
Our unaudited quarterly operating results for each fiscal quarter of 2020 and 2019 are shown below (in thousands, except per share amounts):
First Fourth
Quarter Second Quarter Third Quarter Quarter Total
2020 (13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
Net sales $ 1,959,188 $ 3,176,327 $ 2,606,572 $ 2,878,265 $ 10,620,352
Gross profit 661,249 1,156,813 947,957 995,530 3,761,549
Operating income 112,538 447,746 252,177 184,467 996,928
Net income 83,777 338,678 190,610 135,893 748,958
Net income per share:
Basic $ 0.72 $ 2.92 $ 1.64 $ 1.17 $ 6.44
Diluted $ 0.71 $ 2.90 $ 1.62 $ 1.15 $ 6.38
Comparable store sales increase
(a) 4.3 % 30.5 % 26.8 % 27.3 % 23.1 %
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
2019 (13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
Net sales $ 1,822,220 $ 2,353,782 $ 1,984,144 $ 2,191,785 $ 8,351,931
Gross profit 614,984 820,745 694,240 741,801 2,871,770
Operating income 103,408 287,557 161,817 190,438 743,220
Net income 76,832 219,210 122,133 144,179 562,354
Net income per share:
Basic $ 0.63 $ 1.82 $ 1.03 $ 1.22 $ 4.70
Diluted $ 0.63 $ 1.80 $ 1.02 $ 1.21 $ 4.66
Comparable store sales increase
(a) 5.0 % 3.2 % 2.9 % 0.1 % 2.7 %
(a) Comparable store metrics are calculated using sales generated from all
stores open at least one year and all online sales, excluding certain
adjustments to net sales. Closed stores are removed from our comparable store
metrics calculations. Stores relocated during the periods being compared are not
removed from our comparable store metrics. If the effect of relocated stores on
our comparable store metrics becomes material, we would remove relocated stores
from the calculations.
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Results of Operations
The following table sets forth, for the periods indicated, certain items in the Consolidated Statements of Income expressed as a percentage of net sales.
Fiscal Year
2020 2019
Net sales 100.00 % 100.00 %
Cost of merchandise sold (a) 64.58 65.62
Gross margin (a) 35.42 34.38Selling, general and administrative expenses (a) 23.34 23.14 Depreciation and amortization
2.04 2.34
Impairment of goodwill and other intangible assets 0.65 - Operating income 9.39 8.90 Interest expense, net 0.27 0.24 Income before income taxes 9.12 8.66 Income tax expense 2.07 1.93 Net income 7.05 % 6.73 % (a) Our gross margin amounts may not be comparable to those of other retailers since some retailers include all of the costs related to their distribution facility network in cost of merchandise sold and others (like our Company) exclude a portion of these distribution facility network costs from gross margin and instead include them in selling, general, and administrative expenses; refer to Note 1 - Significant Accounting Policies of the Notes to the Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Fiscal 2020 Compared to Fiscal 2019
Net sales increased 27.2% to$10.62 billion in fiscal 2020 from$8.35 billion in fiscal 2019. Comparable store sales increased 23.1% to$10.29 billion versus a 2.7% increase in fiscal 2019. The comparable store average transaction value increased 12.2% and comparable store average transaction count increased 10.9% for fiscal 2020, as compared to an increase of 2.4% and 0.3% in fiscal 2019, respectively. The COVID-19 pandemic had a significant, positive impact on consumer demand in fiscal 2020 as customers focused on the care of their homes, land and animals. All major product categories and geographic regions of the Company had robust comparable store sales growth. The increase in comparable store sales was driven by unprecedented demand beginning late in the first quarter and extending throughout the year for seasonal categories along with exceptional growth in everyday merchandise, including consumable, usable and edible ("C.U.E.") products. In addition, the Company's e-commerce sales experienced triple-digit percentage growth in fiscal 2020 as compared to fiscal 2019. In addition to comparable store sales growth in fiscal 2020, sales from stores opened less than one year were$355.3 million in fiscal 2020, which represented 4.3 percentage points of the 27.2% increase over fiscal 2019 net sales. Sales from stores opened less than one year were$237.6 million in fiscal 2019, which represented 3.0 percentage points of the 5.6% increase over fiscal 2018 net sales. 37
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The following table summarizes our store growth during fiscal 2020 and 2019:
Fiscal Year
Store Count Information: 2020 2019
Tractor Supply
Beginning of period 1,844 1,765
New stores opened 80 80
Stores closed (1) (1)
End of period 1,923 1,844
Petsense
Beginning of period 180 175
New stores opened 9 8
Stores closed (7) (3)
End of period 182 180
Consolidated end of period 2,105 2,024
Stores relocated 1 2
The following table indicates the percentage of net sales represented by each of our major product categories during fiscal 2020 and 2019:
Percent of Net Sales
Fiscal Year
Product Category: 2020 2019
Livestock and Pet 47 % 47 %
Hardware, Tools and Truck 21 21
Seasonal, Gift and Toy Products 21 20
Clothing and Footwear 7 8
Agriculture 4 4
Total 100 % 100 %
Gross profit increased 31.0% to $3.76 billion in fiscal 2020 compared to $2.87
billion in fiscal 2019. As a percent of net sales, gross margin increased 104
basis points to 35.42% for fiscal 2020 compared to 34.38% for fiscal 2019. The
increase in gross margin was primarily attributable to the strong demand for our
products resulting in a lower depth and frequency of sales promotions and less
clearance activity.
Total selling, general and administrative ("SG&A") expenses, including
depreciation and amortization and asset impairment, increased 29.9% to $2.76
billion in fiscal 2020 from $2.13 billion in fiscal 2019. SG&A expenses, as a
percent of net sales, increased 55 basis points to 26.03% in fiscal 2020 from
25.48% in fiscal 2019. The SG&A expenses in fiscal 2020 were impacted by
discrete non-cash impairment charges for the Petsense business of $74.1 million
due primarily to a strategic reassessment of the business and a decision to
reduce the number of new store openings planned over the long term and, to a
lesser extent, the impairment of long-lived assets at underperforming locations.
In fiscal 2020 we also experienced incremental costs related to the COVID-19
pandemic, increased incentive compensation given the Company's strong financial
performance, investments in our team members through permanent wage and benefit
increases for our store and distribution center team members that went into
effect in the third quarter of fiscal 2020, and costs associated with
investments in strategic initiatives. The costs related to the COVID-19 pandemic
were approximately $117 million during fiscal 2020 which includes appreciation
wages for frontline team members as well as additional labor hours and supply
costs dedicated to cleaning and sanitation to promote the health and safety of
team members and customers. These increased costs, including the impairment
expense, drove an increase in our SG&A expenses as a percent of net sales in
fiscal 2020 as compared to fiscal 2019. These increases as a percent of net
sales were partially offset by leverage in occupancy, personnel, and other
operating costs from the significant increase in comparable store sales.
Our effective income tax rate increased to 22.6% for fiscal 2020 compared to
22.3% in fiscal 2019. The primary driver for the increase in the Company's
effective income tax rate was attributable to a reduction in the benefit from
investment credits as well as section 162(m) limitations, partially offset by an
improvement in the benefit from share-based compensation.
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Net income in fiscal 2020 was$748.96 million , or$6.38 per diluted share, compared to$562.35 million , or$4.66 per diluted share, in fiscal 2019. The aforementioned non-cash impairment expense related to thePetsense business had an after-tax impact on fiscal 2020 net income of approximately$57.29 million or$0.49 per diluted share. On an adjusted basis, considering the after-tax impact of the non-cash impairment charges related to thePetsense business, net income was$806.24 million , or$6.87 per diluted share, for fiscal 2020. Adjusted net income and adjusted net income per diluted share are non-GAAP measures which have been provided in order to enhance comparability for the periods presented given that the impairment charges related to thePetsense business are non-recurring in nature. A reconciliation of these non-GAAP financial measures is included in the following table. Reconciliation of Non-GAAP Financial Measures (in thousands, except per share amounts) Fiscal 2020 Impairment Fiscal 2020 (As Reported) (Adjustment) (As Adjusted) Net income$ 748,958 $ 57,286 $ 806,244 Diluted net income per share $ 6.38 $ 0.49 $ 6.87 During fiscal 2020, we repurchased approximately 3.4 million shares of the Company's common stock at a total cost of$343.0 million as part of our share repurchase program. In fiscal 2019, we repurchased approximately 5.4 million shares at a total cost of$533.3 million . Shares repurchased in fiscal 2020 were impacted by the temporary suspension of our share repurchase program fromMarch 12, 2020 untilNovember 5, 2020 , in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.
Fiscal 2019 Compared to Fiscal 2018
For a comparison of our performance and financial metrics for the fiscal years
ended
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,
operating and finance 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.
We believe that our existing cash balances, expected cash flow from future
operations, funds available under our debt facilities, operating and finance
leases, and normal trade credit will be sufficient to fund our operations,
including increased expenses associated with COVID-19, and our capital
expenditure needs, including new store openings, store acquisitions, relocations
and renovations, distribution facility capacity, and information technology
improvements through the end of fiscal 2021.
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Working Capital
At
December 26, December 28,
2020 2019 Variance
Current assets:
Cash and cash equivalents $ 1,341.8 Inventories 1,783.3 1,602.8 180.5 Prepaid expenses and other current assets 133.6 100.9 32.7 Total current assets 3,258.7 1,787.9 1,470.8 Current liabilities: Accounts payable 976.1 643.0 333.1 Accrued employee compensation 119.7 39.8 79.9 Other accrued expenses 324.8 247.7 77.1 Current portion of long-term debt - 30.0 (30.0) Current portion of finance lease obligations 4.6 4.0 0.6 Current portion of operating lease obligations 298.7 277.1 21.6 Income taxes payable 19.9 6.0 13.9 Total current liabilities 1,743.8 1,247.6 496.2 Working capital$ 1,514.9 $ 540.3 $ 974.6
In comparison to
•The increase in cash and cash equivalents was driven by significant net cash
provided by operating activities in fiscal 2020 and 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. These
increases in cash and cash equivalents were partially offset by share
repurchases, capital expenditures to support our strategic growth, and cash
dividends paid to stockholders.
•The increase in inventories resulted from both a modest increase in average
inventory per store to support the strong sales performance in the business as
well as the purchase of additional inventory to support new store growth.
•The increase in accounts payable was driven by Company growth, including the
significant increase in overall inventory as well as strong comparable store
sales during fiscal 2020. The Company growth and sales performance drove an
increase in inventory purchases and produced high inventory turns, resulting in
an increase in the amount of inventory purchases that remain in accounts payable
at year end as compared to last year.
•Other accrued expenses increased as a result of Company growth and the timing
of payments. The increase in accrued employee compensation was primarily due to
incentive accruals given the strong financial performance in fiscal 2020.
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Debt
The following table summarizes the Company's outstanding debt as of the dates
indicated (in millions):
December 26, December 28,
2020 2019
1.75% Senior Notes due 2030 $ 650.0 $ -
3.70% Senior Notes due 2029 150.0 150.0
Senior Credit Facility:
February 2016 Term Loan - 145.0
June 2017 Term Loan - 87.5
November 2020 Term Loan 200.0 -
Revolving credit loans - 15.0
Total outstanding borrowings 1,000.0 397.5
Less: unamortized debt discounts and issuance costs (15.7) (1.0)
Total debt 984.3 396.5
Less: current portion of long-term debt - (30.0) Long-term debt$ 984.3 $ 366.5 Outstanding letters of credit$ 48.7 $ 32.0 OnOctober 30, 2020 , the Company issued and sold, in a public offering,$650 million in aggregate principal amount of senior unsecured notes dueNovember 1, 2030 bearing interest at 1.75% per annum (the "1.75% Senior Notes"). In support of the issuance of the 1.75% Senior Notes, we obtained credit ratings fromMoody's Investor Services andStandard & Poor's . We manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable market costs. As ofDecember 26, 2020 and the date of this filing,February 18, 2021 , the Company's senior unsecured debt is rated "Baa1," byMoody's Investor Services with a stable outlook and "BBB" byStandard & Poor's with a stable outlook. These ratings have been obtained with the understanding that Moody's Investors Services andStandard & Poor's will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating. Our current ratings, as well as future rating agency actions, could impact our ability to finance our operations on satisfactory terms and affect our financing costs. There can be no assurance that we will maintain or improve our current credit ratings. For additional information about the Company's debt and credit facilities, refer to Note 4 to the Consolidated Financial Statements. As further described in Note 5 to the Consolidated Financial Statements, the Company has entered into interest rate swap agreements in order to hedge our exposure to variable rate interest payments associated term loans under the Senior Credit Facility.
Sources and Uses of Cash
Our primary source of liquidity is cash provided by operations and funds
available under our debt facilities. Principal uses of cash for investing
activities are capital expenditures while principal uses of cash for financing
activities are repurchase of the Company's common stock and cash dividends paid
to stockholders.
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The following table presents a summary of cash flows provided by or used in
operating, investing, and financing activities for fiscal years 2020 and 2019
(in millions):
Fiscal Year
2020 2019
(52 weeks) (52 weeks)
Net cash provided by operating activities $ 1,394.5 $ 811.7
Net cash used in investing activities (292.2)
(215.0)
Net cash provided by/(used in) financing activities 155.2 (598.8)
Net increase/(decrease) in cash and cash equivalents
(2.1) Operating Activities Operating activities provided net cash of$1.39 billion and$811.7 million in fiscal 2020 and 2019, respectively. The$582.8 million increase in net cash provided by operating activities in fiscal 2020, compared to fiscal 2019, was due to changes in the following (in millions): Fiscal Year 2020 2019 (52 weeks) (52 weeks) Variance Net income$ 749.0 $ 562.4 $ 186.6 Depreciation and amortization 217.1 196.0 21.1 Impairment expense 74.1 - 74.1 Share-based compensation expense 37.3 31.1
6.2
Deferred income taxes (31.7) 6.8
(38.5)
Inventories and accounts payable 152.6 9.8
142.8
Prepaid expenses and other current assets (32.8) 13.6 (46.4) Accrued expenses 152.4 (3.9) 156.3 Income taxes 14.0 8.3 5.7 Other, net 62.5 (12.4) 74.9
Net cash provided by operating activities
The$582.8 million increase in net cash provided by operating activities in fiscal 2020, compared to fiscal 2019, is primarily driven by a year-over-year increase in our net income as well as the net impact of changes in our operating assets and liabilities, principally due to significant Company growth in fiscal 2020 as well as the timing of accruals and related payments. The increase in net cash provided by operating activities was also affected by non-cash impairment charges recorded in fiscal 2020 related to thePetsense business.
Investing Activities
Investing activities used cash of$292.2 million and$215.0 million in fiscal 2020 and 2019, respectively. Cash flows from investing activities in the years presented are primarily composed of capital expenditures. Capital expenditures for fiscal 2020 and 2019 were as follows (in millions): Fiscal Year 2020 2019 (52 weeks) (52 weeks) Information technology$ 133.0 $ 89.3 Existing stores 73.7 45.5 New and relocated stores and stores not yet opened 58.8
59.3
Distribution center capacity and improvements 23.4 19.7 Corporate and other 5.1 3.7 Total capital expenditures$ 294.0 $ 217.5 42
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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. In fiscal 2020, we additionally prioritized 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; additional Mobile POS devices in all stores; and improvements to our in-store wireless internet. Spending for existing stores includes routine refresh activity. However, the increased spend for existing stores in fiscal 2020 as compared to fiscal 2019 was driven by strategic initiatives in select stores including security enhancements, space productivity and side lot improvements. The above table reflects an investment in 80 newTractor Supply stores, nine newPetsense stores, and one store relocation during fiscal 2020. In fiscal 2019, we opened 80 newTractor Supply stores, eight newPetsense stores, and had two store relocations. Spending for distribution center capacity and improvements in fiscal 2020 and fiscal 2019 represents new equipment and various enhancements for existing facilities. The northeast distribution center inFrankfort, New York was completed and began shipping merchandise to our stores in the first quarter of fiscal 2019. Our projected capital expenditures for fiscal 2021 are currently estimated to be in a range of approximately$450 million to$550 million . The capital expenditures include a plan to open approximately 80 newTractor Supply stores and 10 newPetsense stores. Additionally, we plan to begin construction in fiscal 2021 on a new distribution center inNavarre, Ohio which is currently anticipated to be complete by the end of fiscal 2022. We also plan to support our strategic growth initiatives related to space productivity and side lot improvements in certain existing stores as well as continued improvements in technology and infrastructure at our existing stores, and ongoing investments to enhance our digital and omni-channel capabilities to better serve our customers.
Financing Activities
Financing activities provided cash of
Fiscal Year
2020 2019
(52 weeks) (52 weeks) Variance
Net borrowings and repayments under debt facilities $ 602.5 $ (11.3) $ 613.8
Repurchase of common stock (343.0) (533.3) 190.3
Net proceeds from issuance of common stock 99.3 116.0 (16.7)
Cash dividends paid to stockholders (174.7) (162.7) (12.0)
Other, net (28.9) (7.5) (21.4)
Net cash provided by/(used in) financing activities
The increase in net cash from financing activities in fiscal 2020, compared to fiscal 2019, reflects an increase in net borrowings discussed further in Note 4 to the Consolidated Financial Statements and a reduction of repurchases of common stock, both of which were the result of an effort throughout fiscal 2020 to increase liquidity and preserve cash while navigating the COVID-19 pandemic. These increases in net cash provided year-over-year were partially offset by increased quarterly cash dividends and a decrease in net proceeds from the issuance of common stock associated with the exercise of share-based compensation awards.
Repurchase of Common Stock
The Company's Board of Directors has authorized common stock repurchases under a share repurchase program which was announced inFebruary 2007 . The authorization amount of the program, which has been increased from time to time, is currently authorized for up to$4.5 billion , exclusive of any fees, commissions or other expenses related to such repurchases. The share repurchase program does not have an expiration date. The repurchases may be made from 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 43
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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, temporarily paused, or terminated at any time without prior notice. As ofDecember 26, 2020 , the Company had remaining authorization under the share repurchase program of$1.14 billion , exclusive of any fees, commissions or other expenses. We repurchased approximately 3.4 million and 5.4 million shares of common stock under the share repurchase program at a total cost of$343.0 million and$533.3 million in fiscal 2020 and 2019, respectively. As ofDecember 26, 2020 , the Company had remaining authorization under the share repurchase program of$1.14 billion , exclusive of any fees, commissions, or other expenses. Shares repurchased in fiscal 2020 were impacted by the temporary suspension of our share repurchase program fromMarch 12, 2020 untilNovember 5, 2020 , in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.
Cash Dividends Paid to Stockholders
We paid cash dividends totaling$174.7 million and$162.7 million in fiscal 2020 and 2019, respectively. In fiscal 2020, we declared and paid cash dividends to stockholders of$1.50 per common share outstanding as compared to$1.36 per common share outstanding in fiscal 2019, respectively. These payments reflect an increase in the quarterly dividend in the third quarter of fiscal 2020 to$0.40 per share from$0.35 per share and an increase in the quarterly dividend in the second quarter of fiscal 2019 from$0.31 per share.
On
It is the present intention of the Company's Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Company's 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 which the Company's Board of Directors deem relevant.
Significant Contractual Obligations and Commercial Commitments
The following table reflects our future obligations and commitments as of
Payment Due by Period
Total 2021 2022-2023 2024-2025 Thereafter
Operating leases (a) (b) $ 3,039,043 $ 394,576 $ 733,692 $ 625,490 $ 1,285,285
Finance leases (b) 48,126 6,269 9,294 8,060 24,503
Long-term debt (c) 1,171,515 20,747 240,857 33,850 876,061
$ 4,258,684 $ 421,592 $ 983,843 $ 667,400 $ 2,185,849
(a) Operating lease payments exclude $174.1 million of legally binding minimum
lease payments for leases signed, but not yet commenced.
(b) Operating and finance lease obligations both include related interest.
(c) Long-term debt obligations include an estimate of related interest after
consideration of the interest rate swap agreements. See Notes 4 and 5 to the
Consolidated Financial Statements for additional information regarding our
interest rates.
At
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to lease agreements signed but not yet commenced and outstanding letters of credit. The balances for these arrangements are previously discussed. Letters of credit allow us to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.
New Accounting Pronouncements
The Company adopted new lease accounting guidance in the first quarter of fiscal
2019 which had a material impact on our Consolidated Balance Sheets and related
disclosures. For additional information, including the required disclosures,
related to the impact of adopting this new accounting guidance, see Note 1 and
Note 6 to the Consolidated Financial Statements.
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Refer to Note 14 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued pronouncements not yet adopted as ofDecember 26, 2020 .
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