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TSCO > SEC Filings for TSCO > Form 10-Q on 3-Nov-2011All Recent SEC Filings

Show all filings for TRACTOR SUPPLY CO /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for TRACTOR SUPPLY CO /DE/


3-Nov-2011

Quarterly Report


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 25, 2010. 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, 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.

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 extreme 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 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, changes in federal, state or local regulations, breach of privacy, actual and 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 25, 2010. 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 (Third Quarter) Ended September 24, 2011 and September 25, 2010
Net sales increased 17.9% to $977.8 million for the third quarter of 2011 from $829.1 million for the third quarter of 2010. Same-store sales for the third quarter of 2011 were $924.7 million, an 11.5% increase over the third quarter of 2010. This compares to a 5.0% same-store sales increase for the third quarter of 2010. The same-store sales increase was driven by continued strong results in core consumable, usable and edible (C.U.E.) products, principally animal and pet-related merchandise; emergency-response merchandise related to Hurricane Irene; and seasonal heating-related products. Additionally, we estimate that same-store sales were favorably impacted by approximately 465 basis points due to inflation, principally in key C.U.E. categories. New store growth was approximately 8.0% or 78 net new stores opened since September 25, 2010. New store sales for the third quarter of 2011 were $53.1 million, a 6.4% increase over third quarter 2010 sales. This compares to new store sales for the third quarter of 2010 of $44.0 million, a 5.9% increase over third quarter 2009 sales.

We opened 12 new stores, relocated one store, and closed one store during the third quarter of 2011 compared to nine new store openings during the prior year's third quarter. We operated 1,054 stores at September 24, 2011, compared to 976 stores at September 25, 2010.

The following chart indicates the average percentage of sales represented by each of our major product categories for the three months ended September 24, 2011 and September 25, 2010:

                                               Fiscal three months ended
                                       September 24, 2011      September 25, 2010
    Product Category:
    Livestock and Pet                             43 %                        41 %
    Hardware, Tools and Truck                     24                          24
    Seasonal, Gift and Toy Products               19                          20
    Agriculture                                    7                           8
    Clothing and Footwear                          7                           7
    Total                                        100 %                       100 %

Gross margin increased 18.8% to $327.6 million for the third quarter of 2011 from $275.7 million in the third quarter of 2010. As a percent of sales, gross margin increased 30 basis points to 33.5% for the third quarter of fiscal 2011 compared to 33.2% for the comparable period in fiscal 2010. The increase in gross margin reflects improved direct product margin, partially offset by increased transportation costs and unfavorable product mix. Direct product margin increased as a result of improved inventory management, strategic sourcing, private branding and pricing.

As a percent of sales, selling, general and administrative ("SG&A") expenses, including depreciation and amortization, improved 100 basis points to 26.5% of sales in the third quarter of fiscal 2011 from 27.5% of sales in the third quarter of fiscal 2010. The SG&A improvement as a percent to sales for the third quarter of 2011 was primarily attributable to strong same-store sales and expense control with respect to store operating costs, partially offset by an increase in incentive compensation as a result of the strong financial performance in the quarter. Total SG&A expenses increased 13.7% to $259.5 million from $228.3 million in the third quarter of 2010. The increase in SG&A expense primarily reflects new store growth, variable costs associated with our same store sales growth, increased incentive compensation and higher advertising costs related to increased print media and special promotional events held during the quarter.

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Our effective income tax rate decreased to 36.7% in the third quarter of 2011 compared to 37.0% for the third quarter of 2010. The reduction in the tax rate was largely due to higher federal tax credits compared to the prior year.

As a result of the foregoing factors, net income for the third quarter of fiscal 2011 increased 43.1% to $42.7 million compared to $29.9 million in the third quarter of fiscal 2010. Net income per diluted share for the third quarter of fiscal 2011 increased to $0.58 from $0.40.

Fiscal Nine Months Ended September 24, 2011 and September 25, 2010 Net sales increased 14.9% to $2.99 billion for the first nine months of fiscal 2011 from $2.61 billion for the first nine months of fiscal 2010. Same-store sales for the first nine months of 2011 were $2.83 billion, an 8.5% increase over the first nine months of fiscal 2010. This compares to a 4.8% same-store sales increase for the first nine months of fiscal 2010. The same-store sales increase was driven by continued strong results in core consumable, usable and edible (C.U.E.) products, principally animal and pet-related merchandise and seasonal heating-related products. Additionally, we estimate that same-store sales were favorably impacted by approximately 250 basis points due to inflation, principally in key C.U.E. categories. New store growth was approximately 8.0% or 78 net new stores opened since September 25, 2010. New store sales for the first nine months of fiscal 2011 were $166.5 million, a 6.4% increase over sales during the first nine months of 2010. This compares to new store sales for the first nine months of fiscal 2010 of $148.2 million, a 6.3% increase over sales during the first nine months of 2009.

During the first nine months of 2011, we opened 54 new stores and relocated two stores, compared to 47 new store openings during the first nine months of 2010. We closed one store during the first nine months of both 2011 and 2010. We operated 1,054 stores at September 24, 2011, compared to 976 stores at September 25, 2010.

The following chart indicates the average percentage of sales represented by each of our major product categories for the nine months ended September 24, 2011 and September 25, 2010:

                                               Fiscal nine months ended
                                      September 24, 2011       September 25, 2010
   Product Category:
   Livestock and Pet                             42 %                     40 %
   Hardware, Tools and Truck                     23                       23
   Seasonal, Gift and Toy Products               21                       22
   Agriculture                                    7                        8
   Clothing and Footwear                          7                        7
   Total                                        100 %                    100 %

Gross margin increased 15.8% to $1.00 billion in the first nine months of 2011 compared to $866.7 million in the first nine months of 2010. For the first nine months of fiscal 2011, gross margin increased 20 basis points to 33.5% compared to 33.3% for the first nine months of fiscal 2010. The increase in gross margin reflects improved direct product margin, partially offset by increased transportation costs and unfavorable product mix. Direct product margin increased as a result of improved inventory management, strategic sourcing, private branding and pricing.

As a percent of sales, SG&A expenses, including depreciation and amortization, improved 60 basis points to 25.5% of sales in the first nine months of fiscal 2011 from 26.1% for the first nine months of fiscal 2010. The SG&A improvement as a percent of sales for the first nine months of 2011 was primarily attributable to strong same-store sales and expense control with respect to store operating costs. Total SG&A expenses for the first nine months of fiscal 2011 increased 12.3% to $762.5 million from $679.2 million for the first nine months of fiscal 2010. The increase in SG&A primarily reflects new store growth, variable costs associated with same-store sales growth and an increase in advertising costs driven by additional print media to support special events.

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For the first nine months of 2011 our effective tax rate decreased to 36.6% compared to 37.0% for the first nine months of 2010. The reduction in the tax rate was largely due to higher federal tax credits compared to the prior year.

Net income for the first nine months of fiscal 2011 increased 29.3% to $152.2 million from $117.8 million in the first nine months of the prior year. Net income per diluted share for the first nine months of fiscal 2011 increased to $2.05 from $1.58.

Liquidity and Capital Resources

In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, remodeling and relocation programs (including inventory purchases and capital expenditures), share repurchases and cash dividends. Our primary ongoing sources of liquidity are existing cash balances, funds provided from operations, commitments available under our revolving credit agreement, capital and operating leases and normal trade credit.

At September 24, 2011, we had working capital of $569.6 million, which was a $47.5 million decrease and a $5.0 million decrease compared to December 25, 2010 and September 25, 2010, respectively. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

                              September 24,    December 25,                 September 25,
                                  2011             2010        Variance         2010          Variance
Current assets:
Cash and cash equivalents    $          96.6   $       257.3   $  (160.7 ) $         170.9   $    (74.3 )
Restricted cash                         21.9              --        21.9                --         21.9
Short-term investments                    --            15.9       (15.9 )            15.9        (15.9 )
Inventories                            913.7           736.5       177.2             833.8         79.9
Prepaid expenses and other
current assets                          40.2            34.0         6.2              51.0        (10.8 )
                                     1,072.4         1,043.7        28.7           1,071.6          0.8
Current liabilities:
Accounts payable                       340.2           247.4        92.8             348.6         (8.4 )
Accrued employee
compensation                            36.8            34.6         2.2              30.0          6.8
Other accrued expenses                 119.6           127.4        (7.8 )           104.2         15.4
Current portion of capital
lease obligations                         --             0.1        (0.1 )             0.4         (0.4 )
Income taxes payable                     2.9             8.3        (5.4 )              --          2.9
Deferred income taxes                    3.3             8.8        (5.5 )            13.8        (10.5 )
                                       502.8           426.6        76.2             497.0          5.8
Working capital              $         569.6   $       617.1   $   (47.5 ) $         574.6   $     (5.0 )

In comparison to prior year end, working capital decreased as a result of a reduction of cash, partially offset by the increase in inventories net of the related increase in accounts payable. The decrease in cash is primarily attributable to an increased volume of share repurchases as well as an increase in capital expenditures, principally due to the construction of a new distribution center. The increase in inventories and accounts payable is primarily related to the purchase of additional inventory for new stores and increased average inventory per store due to seasonality.

The slight decrease in working capital as compared to the third quarter of 2010 was the result of a reduction in cash and an increase in other accrued expenses offset by an increase in inventory without a corresponding increase in accounts payable. The decrease in cash is primarily attributable to an increased volume of capital expenditures and share repurchases. The increase in other accrued expenses is primarily related to timing of payments, and the increase in inventory is primarily related to new store growth. Accounts payable levels decreased primarily as a result of timing of payments, a portion of which was a result of an acceleration of payments on certain trade payables in order to capture payment discounts offered by vendors.

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Operations provided net cash of $111.3 million and $94.5 million in the first nine months of fiscal 2011 and fiscal 2010, respectively. The $16.8 million increase in net cash provided by operations in 2011 over 2010 is due to changes in the following operating activities (in millions):

                                                           Fiscal nine months ended
                                                 September 24,      September 25,
                                                     2011               2010          Variance
Net income                                      $         152.2    $         117.8   $     34.4
Depreciation and amortization                              56.7               51.3          5.4
Inventories and accounts payable                          (84.4 )            (70.4 )      (14.0 )
Stock compensation expense                                 10.7                8.8          1.9
Prepaid expenses and other current assets                  (6.3 )            (12.0 )        5.7
Accrued expenses                                          (10.3 )             10.8        (21.1 )
Income taxes payable                                       (5.4 )            (15.5 )       10.1
Other, net                                                 (1.9 )              3.7         (5.6 )
Net cash provided by operations                 $         111.3    $          94.5   $     16.8

The improvement in net cash provided by operations in the first nine months of fiscal 2011 compared with the first nine months of fiscal 2010 primarily reflects stronger earnings and an increase in income taxes payable. This is partially offset by a decline in accrued expenses and an increase in inventories, net of accounts payable. The changes in income taxes and accrued expenses are due to the timing of payments while the higher inventory and accounts payable balances are due to store growth.

Investing activities used cash of $112.6 million and $82.7 million in the first nine months of fiscal 2011 and fiscal 2010, respectively. The majority of this cash requirement relates to our capital expenditures. In addition, during the first nine months of fiscal 2011 our short-term investment of $15.9 million matured, and we purchased a $21.9 million time deposit classified as restricted cash.

Capital expenditures for the first nine months of fiscal 2011 and fiscal 2010 were as follows (in millions):

                                                        Fiscal nine months ended
                                                    September 24,      September 25,
                                                        2011                2010
 Distribution center capacity and improvements     $       44.3       $         11.3
 New/relocated stores and stores not yet opened            27.2                 19.8
 Existing store properties acquired from lessors           14.0                 11.3
 Existing stores                                           13.1                 10.8
 Information technology                                     8.5                 12.7
 Corporate and other                                        0.2                  1.2
                                                   $      107.3       $         67.1

The above table reflects 54 new stores and two relocations in the first nine months of fiscal 2011, compared to 47 new stores during the first nine months of fiscal 2010. The increase in new stores, relocated stores, and stores not yet opened compared to the first nine months of prior year is due to seven additional stores opened this year, two relocations in the current period, timing of payments on stores under construction and a higher mix of retrofit stores, which require greater construction cost. We expect to open approximately 31 new stores in the fourth quarter of 2011, resulting in approximately 85 new stores during fiscal 2011. The increase in distribution center capacity and improvements in the first nine months of fiscal 2011 compared to fiscal 2010 is primarily due to the construction of a new distribution center in Franklin, KY.

Financing activities used cash of $159.5 million and $13.7 million in the first nine months of fiscal 2011 and fiscal 2010, respectively. This increase in net cash used in financing activities is largely due to the repurchase of common stock and cash dividends paid to stockholders, partially offset by increased net proceeds from issuance of common stock.

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Through October 23, 2011 we were party to a Senior Credit Facility (the "Credit Agreement"), 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). The Credit Agreement is unsecured and matures in February 2012, with proceeds available to be used for working capital, capital expenditures, dividends, share repurchases and other matters.

At September 24, 2011 and September 25, 2010, there were no outstanding borrowings under the Credit Agreement. There were $20.6 million outstanding letters of credit as of September 24, 2011. 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 leverage ratio (0.40% at September 24, 2011 and 0.50% at September 25, 2010). We are also required to pay quarterly in arrears, a commitment fee for unused capacity ranging from 0.06% to 0.18% per annum, adjusted quarterly based on our leverage ratio (0.08% at September 24, 2011 and 0.10% at September 25, 2010). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios. As of September 24, 2011, we were in compliance with all debt covenants.

On October 24, 2011, we entered into a new Senior Credit Facility with largely the same lender group as under the Credit Agreement. The new Senior Credit Facility provides for borrowings up to $250 million (with sublimits of $250 million and $20 million for letters of credit and swingline loans, respectively). This agreement is unsecured and has a five-year term, with proceeds available to be used for working capital, capital expenditures, dividends, share repurchases and other matters. Borrowings will bear interest at either the agent's base rate or LIBOR plus an additional amount ranging from 0.40% to 1.00% per annum, adjusted quarterly based on our performance (0.50% at October 24, 2011). We will also be required to pay a commitment fee ranging from 0.08% to 0.20% per annum for unused capacity (0.10% at October 24, 2011). This new agreement continues to require quarterly compliance with respect to fixed charge coverage and leverage ratios.

We believe that existing cash balances, funds provided from operations, commitments available under our revolving Credit Agreement, and normal trade credit will be sufficient to fund our operations and capital expenditure needs, including store expansion, remodeling and relocations over the next several years.

Share Repurchase Program

On April 28, 2011, the Company's Board of Directors authorized a $600 million increase to the existing share repurchase program, bringing the total amount authorized to date under the program to an aggregate of $1 billion, exclusive of any fees, commissions, or other expenses related to such repurchases, through April 2015. 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.

We repurchased 805,040 and 230,100 shares under the share repurchase program for a total cost of $49.2 million and $9.2 million during the third quarters of 2011 and 2010, respectively. During the first nine months of 2011 and 2010 we repurchased 2,961,450 and 452,511 shares under the share repurchase program for a total cost of $172.1 million and $22.9 million, respectively. The treasury shares held at the time of our 2010 stock split were not adjusted. As of September 24, 2011, we had remaining authorization under the share repurchase program of $570.8 million exclusive of any fees, commissions, or other expenses.

Dividends

We believe our ability to generate cash allows us to invest in the growth of our
business and, at the same time, distribute a quarterly dividend. During the
first nine months of 2011, the Board of Directors declared the following
dividends:
                      Dividend Amount
   Date Declared         Per Share        Stockholders of Record Date    Date Paid
  February 4, 2011   $         0.07            February 22, 2011       March 8, 2011
   April 28, 2011    $         0.12              May 16, 2011          June 1, 2011
   July 28, 2011     $         0.12             August 15, 2011       August 30, 2011

On October 26, 2011, our Board of Directors declared a quarterly cash dividend of $0.12 per share of the Company's common stock. The dividend will be paid on November 29, 2011 to stockholders of record as of the close of business on November 14, 2011.

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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 other factors which the Board of Directors deems relevant.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. We typically lease buildings for retail stores and offices rather than acquiring these assets which allows us to utilize financial capital to operate the business rather than invest in fixed assets. Letters of credit allow us to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.

Significant Contractual Obligations and Commercial Commitments

At September 24, 2011, we had commitments related to construction projects for new stores totaling approximately $5.0 million and commitments to purchase four . . .

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