Summary of TRACTOR SUPPLY CO /DE/

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 27, 2008. The following discussion and analysis also contains certain historical and forward-looking 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 such things as estimated results of operations in future periods, 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.
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable weather, excessive precipitation, drought, and early or late frosts may also affect our sales. We believe, however, that the impact of severe weather conditions is somewhat mitigated by the geographic dispersion of our stores.
We experience our highest inventory and accounts payable balances during the first fiscal quarter each year for purchases of seasonal products in anticipation of the spring selling season and again during the third fiscal quarter in anticipation of the winter selling season.
As with any business, many aspects of our operations are subject to influences outside our control. These factors include general economic conditions affecting consumer spending, the timing and acceptance of new products in the stores, the 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 and negotiate favorable lease agreements on new and relocated stores, the continued availability of favorable credit sources, capital market conditions in general, failure to open new stores in the manner currently contemplated, the impact of new stores on our business, competition, 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 in the ordinary course of business, potential legal proceedings, management of our information systems, effective tax rate changes and results of examination by taxing authorities, and the ability to maintain an effective system of internal control over financial reporting. 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 ended December 27, 2008. 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.

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Results of Operations
Fiscal Three Months (First Quarter) Ended March 28, 2009 and March 29, 2008 Net sales increased 12.8% to $650.2 million for the first quarter of 2009 from $576.2 million for the first quarter of 2008. Same-store sales for the period increased 4.2%, compared with a 6.5% decrease in the prior-year period. This same-store sales increase was primarily driven by the Company's core consumable categories, including animal and pet-related products, and emergency response merchandise related to the February storms in the northeast and upper midwest. The same store sales increase reflects an increase in the comparative transaction count, partially offset by a decline in the average ticket value, resulting from softness in the sale of large ticket items. Additionally, same-store sales were positively impacted by approximately 160 basis points due to one additional selling day related to the shift of the Easter holiday from March into April.
During the first quarter of 2009, we opened a total of 28 new stores and closed one store compared to 27 new stores and no closed stores in the first quarter of 2008. We relocated one store in the first quarter of 2009 compared to no store relocations in the first quarter of 2008. We operated 882 stores as of the end of the first quarter of 2009 compared to 791 stores as of the end of the first quarter of 2008.
The following chart indicates the average percentage of sales represented by each of our major product categories during the first quarter of fiscal 2009 and 2008:

                                               Three months ended
                                           March 28,        March 29,
                                              2009             2008
               Product Category:
               Livestock and pet                   45 %             41 %
               Seasonal products                   17               19
               Hardware and tools                  15               16
               Clothing and footwear               10               10
               Truck, trailer and towing            8                9
               Agricultural                         5                5

               Total                              100 %            100 %

Gross margin increased 14.5% to $201.0 million for the first quarter of 2009 from $175.5 million for the first quarter of 2008. As a percent of sales, gross margin increased 40 basis points to 30.9% compared to 30.5% in the first quarter of 2008. The improvement in gross margin resulted primarily from lower fuel costs and improved transportation efficiencies. We have increased our transportation efficiency by in-sourcing the management of the freight movement from our distribution centers, utilizing our trailers more productively by improving our cube utilization and reducing empty backhaul miles by using common carriers more frequently.
Total selling, general and administrative expenses, including depreciation and amortization, decreased 10 basis points to 30.7% of sales in the first quarter of 2009 compared to 30.8% of sales in the first quarter of 2008. The first quarter improvement was primarily attributable to increased sales leverage and reduced marketing spend. These improvements were partially offset by higher occupancy costs due to our store expansion program.
Interest expense decreased to $0.4 million in the first quarter of 2009 from $1.2 million in the first quarter of 2008, as a result of smaller average amounts outstanding on the revolving credit loan and a lower average interest rate. Our effective income tax rate increased to 39.0% in the first quarter of 2009 compared with 38.6% for the first quarter of 2008 largely due to recent increases in certain state tax rates.
As a result of the foregoing factors, net income for the first quarter of 2009 was $0.5 million, which is a $2.5 million increase from a net loss of $2.0 million in the first quarter of 2008. Net income per diluted share was $0.01 for the first quarter of 2009 compared to a net loss per diluted share of ($0.05) for the first quarter of 2008.

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Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for store expansion and remodeling programs, including inventory purchases and technology upgrades. Our primary ongoing sources of liquidity are funds provided from operations, commitments available under our revolving credit agreement and normal trade credit.
At March 28, 2009, we had working capital of $316.9 million, which was a $33.4 million increase and a $29.3 million decrease compared to December 27, 2008 and March 29, 2008, respectively. The shifts in working capital were primarily attributable to changes in the following components of current assets and current liabilities (in millions):

                             Mar. 28,        Dec. 27,                        Mar. 29,
                               2009            2008          Variance          2008          Variance
Current assets:
Cash and cash
equivalents                 $     37.4      $     37.2      $      0.2      $     17.4      $     20.0
Inventories                      730.1           603.4           126.7           746.1           (16.0 )
Prepaid expenses and
other current assets              33.7            42.0            (8.3 )          43.1            (9.4 )
Deferred income taxes              4.1             1.7             2.4               -             4.1

                                 805.3           684.3           121.0           806.6            (1.3 )

Current liabilities:
Accounts payable                 382.6           286.8            95.8           360.8            21.8
Other accrued expenses           103.1           113.5           (10.4 )          98.3             4.8
Current portion of
capital lease obligation           0.5             0.5               -             0.7            (0.2 )
Income tax currently
payable                            2.2               -             2.2               -             2.2
Deferred tax liabilities             -               -               -             0.6            (0.6 )

                                 488.4           400.8            87.6           460.4            28.0

Working capital             $    316.9      $    283.5      $     33.4      $    346.2      $    (29.3 )

In comparison to prior year end, working capital increased as a result of inventory balances rising more quickly than payables. The increase in inventories and related increase in accounts payable resulted primarily from the purchase of additional inventory for new stores and purchase of seasonal products in anticipation of the spring selling season.
The decrease in working capital as compared to the first quarter of 2008 was a result of declining inventories and increasing payables. We have aggressively managed inventory, increased our inventory turn and reduced our average inventory per store. At the same time, we continue to work with our vendors to achieve more favorable credit terms. The continued focus on working capital produced an increase in financed inventory from 47.0% at the end of first quarter 2008 to 47.8% at the end of the current quarter.
Operations used net cash of $12.6 million and $15.3 million in the first quarter of 2009 and 2008, respectively. The $2.7 million reduction in net cash used in 2009 compared to 2008 is due to changes in the following operating activities (in millions):

                                                  Three months ended
                                              March 28,        March 29,
                                                 2009            2008          Variance
  Net income (loss)                           $      0.5      $      (2.0 )   $      2.5
  Depreciation and amortization                     16.2             14.4            1.8
  Inventories and accounts payable                 (30.9 )           (7.7 )        (23.2 )
  Stock compensation expense                         3.3              3.2            0.1
  Prepaid expenses and other current assets          7.4             (0.2 )          7.6
  Other accrued expenses                           (10.3 )          (17.3 )          7.0
  Income taxes currently payable                     3.1             (6.0 )          9.1
  Other, net                                        (1.9 )            0.3           (2.2 )

  Net cash used in operations                 $    (12.6 )    $     (15.3 )   $      2.7

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The reduction in net cash used in operations in the first quarter of 2009 compared with the first quarter of 2008 is due to timing of payments, primarily related to income taxes, other accrued expenses and prepaid expenses, partially offset by inventory purchases.
Investing activities used $18.9 million and $26.5 million in the first quarter of 2009 and 2008, respectively. The majority of this cash requirement relates to our capital expenditures.
Capital expenditures for the first three months of fiscal 2009 and 2008 were as follows (in millions):

                                                          Three months ended
                                                      March 28,        March 29,
                                                         2009             2008
    New/relocated stores and stores not yet opened    $     10.9       $     10.2
    Existing store properties acquired from lessors            -              8.5
    Existing stores                                          4.0              2.9
    Information technology                                   3.7              3.4
    Distribution center capacity and improvements            0.3              1.5

                                                      $     18.9       $     26.5

The above table reflects 28 new stores and one relocated store in the first quarter of 2009, compared to 27 new stores and no relocations in the first quarter of 2008.
Financing activities provided $31.6 million and $45.4 million in the first quarter of 2009 and 2008, respectively. This decrease in net cash provided is largely due to a $6.3 million increase in the repurchase of shares of common stock in the first quarter of 2009 compared to the first quarter of 2008 and a $7.5 million decrease in borrowings net of repayments.
We are party to a Senior Credit Facility with Bank of America, N.A., as agent for a lender group, which provides for borrowings up to $350 million (with sublimits of $75 million and $20 million for letters of credit and swingline loans, respectively). The Credit Agreement has an Increase Option for $150 million (subject to additional lender group commitments). We had approximately $292.1 million available for future borrowings, net of outstanding letters of credit, under our Credit Agreement at March 28, 2009.
The Credit Agreement is unsecured and matures in February 2012, with proceeds expected to be used for working capital, capital expenditures and share repurchases. Borrowings bear interest at either the bank's base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at March 28, 2009 and March 29, 2008). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for unused capacity (0.10% at March 28, 2009 and March 29, 2008). As of March 28, 2009, we are in compliance with all debt covenants.
We believe that our cash flow from operations, borrowings available under our Credit Agreement, and normal trade credit will be sufficient to fund our operations and capital expenditure needs, including store openings and renovations, over the next several years. Share Repurchase Program
We have a Board-approved share repurchase program which provides for repurchase of up to $400 million of common stock, exclusive of any fees, commissions, or other expenses related to such repurchases, through December 2011. 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 on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares will be held in treasury. The program may be limited or terminated at any time without prior notice.

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We repurchased 280,984 and 77,025 shares under the share repurchase program during the first fiscal quarter of 2009 and 2008, respectively. The total cost of the shares repurchased was $9.1 million and $2.9 million during the first quarter of fiscal 2009 and 2008, respectively. As of March 28, 2009, we had remaining authorization under the share repurchase program of $187.1 million exclusive of any fees, commissions, or other expenses. Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. Leasing buildings and equipment for retail stores and offices rather than acquiring these significant assets allows us to utilize financial capital to operate the business rather than maintain assets. Letters of credit allow us to purchase inventory in a timely manner. We had outstanding letters of credit of $17.9 million at March 28, 2009. Significant Contractual Obligations and Commercial Commitments We had commitments for new store construction projects totaling approximately $3.3 million at March 28, 2009. There has been no material change in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2008. Significant Accounting Policies and Estimates Our discussion and analysis of our financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us 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. Significant accounting policies, including areas of critical management judgments and estimates, have primary impact on the following financial statement areas:

� Revenue recognition and sales returns

� Inventory valuation (including LIFO)

� Share-based payments

� Self-insurance reserves

� Sales tax audit reserve

� Tax contingencies

� Goodwill

� Long-lived assets

See the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 27, 2008 for a discussion of our critical accounting policies. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to changes in interest rates primarily from the Credit Agreement. The Credit Agreement bears interest at either the bank's base rate (3.25% and 5.25% at March 28, 2009 and March 29, 2008, respectively) or LIBOR (0.52% and 2.68% at March 28, 2009 and March 29, 2008, respectively) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly, based on our performance (0.50% at March 28, 2009 and March 29, 2008). We are also required to pay, quarterly in arrears, a commitment fee ranging from 0.06% to 0.18% based on the daily average unused portion of the Credit Agreement (0.10% at March 28, 2009 and March 29, 2008). See Note 6 of Notes to the Consolidated Financial Statements included herein for further discussion regarding the Credit Agreement.
Although we cannot determine the full effect of inflation and deflation on our operations, we believe our sales and results of operations are affected by both. We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, steel, grain, petroleum, corn, soybean and other commodities as well as transportation services. Therefore, we may experience both inflationary and deflationary pressure on product cost, which may impact consumer demand and, as a result, sales and gross margin. Our strategy is to reduce or mitigate the effects of purchase price volatility principally by taking advantage of vendor incentive programs, economies of scale from increased volume of purchases, adjusting retail prices and selectively buying from the most competitive vendors without sacrificing quality. Due to the competitive environment, such conditions have and may continue to adversely impact our financial performance.

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