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TSCO > SEC Filings for TSCO > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for TRACTOR SUPPLY CO /DE/

Form 10-Q for TRACTOR SUPPLY CO /DE/


5-Nov-2012

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 31, 2011. 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.

As with any business, many aspects of our operations are subject to influences outside our control. These factors include, without limitation, general economic conditions affecting consumer spending, the timing and acceptance of new products in the stores,

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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, the ability to manage expenses, the availability of favorable credit sources, capital market conditions in general, failure to open new stores in the manner and number 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, potential judgments, fines, legal fees and other costs, breach of privacy, ongoing and potential future legal or regulatory proceedings, management of our information systems, failure to secure or develop and implement new technologies, the failure of customer-facing technology systems, business disruption including from the implementation of supply chain technologies, effective tax rate changes and results of examination by taxing authorities, the ability to maintain an effective system of internal control over financial reporting and changes in accounting standards, assumptions and estimates. We discuss in greater detail risk factors relating to our business in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. 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.

Results of Operations

Fiscal Three Months (Third Quarter) Ended September 29, 2012 and September 24, 2011
Net sales increased 9.0% to $1.07 billion for the third quarter of fiscal 2012 from $977.8 million for the third quarter of fiscal 2011. Same-store sales for the third quarter of fiscal 2012 were $1.00 billion, a 2.9% increase over the third quarter of fiscal 2011. This compares to an 11.5% same-store sales increase for the third quarter of fiscal 2011 over the third quarter of fiscal 2010. The 2012 same-store sales increase was driven primarily by continued strong results in key consumable, usable and edible ("C.U.E.") products, principally animal- and pet-related merchandise. Inflation was broad-based across all major product categories especially in livestock feed, lubricants, grass seed and fertilizer. This contributed approximately 185 basis points to the 2012 same-store sales increase. In addition to these factors, total net sales benefited from new store growth, as discussed below.

Each quarter of fiscal 2012 starts one week later than the same quarter of fiscal 2011 due to the Company's 2011 fiscal year having 53 weeks versus the normal 52 weeks. Adjusting for the one-week calendar shift, same-store sales for the third quarter of 2011 increased 11.9%.

Store growth was approximately 9.2%, a net increase of 97 stores since September 24, 2011. Non-comp sales (defined as stores opened less than one year) for the third quarter of fiscal 2012 were $64.1 million, a 6.6% increase over total third quarter fiscal 2011 net sales. Non-comp sales for the third quarter of fiscal 2011 were $53.1 million, a 6.4% increase over total third quarter fiscal 2010 net sales.

In the third quarter of fiscal 2012, we opened 17 new stores (compared to 12 new stores in the third quarter of fiscal 2011) and closed one store (compared to one closed store in the third quarter of fiscal 2011). We operated 1,151 stores at September 29, 2012 compared to 1,054 stores at September 24, 2011.

The following chart indicates the percentage of sales represented by each of our major product categories for the fiscal three months ended September 29, 2012 and September 24, 2011:

                                       Fiscal three months ended
                                September 29, 2012   September 24, 2011
Product Category:
Livestock and Pet                      45%                  43%
Hardware, Tools and Truck               24                   24
Seasonal, Gift and Toy Products         18                   19
Clothing and Footwear                   7                    7
Agriculture                             6                    7
Total                                  100%                 100%

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Gross margin dollars increased 9.0% to $357.2 million for the third quarter of fiscal 2012 from $327.6 million in the third quarter of fiscal 2011. As a percent of sales, gross margin was flat to last year, at 33.5% in the current and prior year's third quarters. Gross margin rate was favorably impacted by sales mix, as the Company sold a reduced percentage of low margin, big ticket products than in the previous year as well as improved inventory shrink results. The Company continues to benefit from key margin-driving initiatives, including strategic sourcing and price optimization. These improvements were offset by increased transportation costs related to increased imports of seasonal goods and the negative impact of the mix shift to freight-intensive C.U.E. products.

As a percent of sales, selling, general and administrative ("SG&A") expenses, including depreciation and amortization, improved 30 basis points to 26.2% in the third quarter of fiscal 2012 from 26.5% in the third quarter of fiscal 2011. The SG&A improvement as a percent of sales for the third quarter of fiscal 2012 was primarily attributable to lower year-over-year incentive compensation expense and expense control related to other store personnel costs. Total SG&A expenses increased 7.7% to $279.4 million from $259.5 million in the third quarter of fiscal 2011. The increase in SG&A expense primarily reflects new store growth, variable costs associated with our same store sales growth, and operating costs relating to the Franklin, KY distribution center that became operational in the fourth quarter of 2011.

Our effective income tax rate decreased to 35.5% in the third quarter of 2012 compared to 36.7% for the third quarter of 2011. The decrease in the tax rate was largely due to a favorable impact of our provision to return reconciliation and the reversal of reserves for uncertain tax positions pursuant to ASC 740-10. These improvements were partially offset by lower federal tax credits, primarily WOTC and the HIRE Act credits, which expired in 2011. The Company expects the full year effective tax rate will be approximately 36.7%.

As a result of the foregoing factors, net income for the third quarter of fiscal 2012 increased 17.1% to $50.0 million compared to $42.7 million in the third quarter of fiscal 2011. Net income per diluted share for the third quarter of fiscal 2012 increased to $0.69 from $0.58 in the third quarter of fiscal 2011.

Fiscal Nine Months Ended September 29, 2012 and September 24, 2011 Net sales increased 12.9% to $3.38 billion for the first nine months of fiscal 2012 from $2.99 billion for the first nine months of fiscal 2011. Same-store sales for the first nine months of fiscal 2012 were $3.18 billion, a 5.5% increase over the first nine months of fiscal 2011. This compares to an 8.5% same-store sales increase for the first nine months of fiscal 2011 over the first nine months of fiscal 2010. The 2012 same-store sales increase was broad-based across all major product categories. Inflation was also broad-based across all major product categories especially in livestock feed, bird feeding, lubricants and fencing. This contributed approximately 285 basis points to the 2012 same-store sales increase. In addition to these factors, total net sales benefited from new store growth, as discussed below.

Each quarter of fiscal 2012 starts one week later than the same quarter of fiscal 2011 due to the Company's 2011 fiscal year having 53 weeks versus the normal 52 weeks. Adjusting for the one-week calendar shift, same-store sales for the first nine months of fiscal 2011 increased 8.8%. Same-store sales for the first three quarters and fiscal nine months of 2011, adjusted for the one-week calendar shift, are presented in the table below:

                                                                   FISCAL 2011
                                                                                           First
                                                  First         Second        Third         Nine
                                                 Quarter       Quarter       Quarter       Months

Same-store sales increase (originally reported)   10.7%          4.6%         11.5%         8.5%
Same-store sales increase (adjusted for week
shift)(1)                                         7.6%           7.1%         11.9%         8.8%
Impact of week shift                             (3.1)%          2.5%         0.4%          0.3%

(1) Due to the 53-week fiscal 2011, each quarter of fiscal 2012 starts one week later than the same quarter of fiscal 2011. The chart above presents same-store sales for 2011 as originally reported and as adjusted to represent the same 13-week period as the 2012 fiscal quarters. The adjusted 13-week periods end on April 2, 2011, July 2, 2011 and October 1, 2011, respectively.

Store growth was approximately 9.2%, a net increase of 97 stores since September 24, 2011. Non-comp sales for the first nine months of fiscal 2012 were $200.4 million, a 6.7% increase over total first nine months fiscal 2011 net sales. Non-comp sales for the first nine months of fiscal 2011 were $166.5 million, a 6.4% increase over total first nine months fiscal 2010 net sales.

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During the first nine months of fiscal 2012, we opened 68 new stores (compared to 54 new stores in the first nine months of fiscal 2011) and closed two stores (compared to one closed store in the first nine months of fiscal 2011).

The following chart indicates the percentage of sales represented by each of our major product categories for the fiscal nine months ended September 29, 2012 and September 24, 2011:

                                  Fiscal nine months ended
                                September 29,   September 24,
                                    2012            2011
Product Category:
Livestock and Pet                    43%             42%
Hardware, Tools and Truck            23              23
Seasonal, Gift and Toy Products      21              21
Clothing and Footwear                 7               7
Agriculture                           6               7
Total                               100%            100%

Gross margin increased 13.7% to $1.14 billion for the first nine months of fiscal 2012 from $1.00 billion in the first nine months of fiscal 2011. As a percent of sales, gross margin increased 30 basis points to 33.8% for the first nine months of fiscal 2012 compared to 33.5% for the comparable period in fiscal 2011. The increase in gross margin as a percent of sales resulted primarily from improved direct product margin. Direct product margin increased primarily as a result of continued efforts in our key margin-driving initiatives of inventory management, strategic sourcing, private branding and pricing.

As a percent of sales, SG&A expenses, including depreciation and amortization, improved 90 basis points to 24.6% in the first nine months of fiscal 2012 from 25.5% in the first nine months of fiscal 2011. The SG&A improvement as a percent of sales for the first nine months of fiscal 2012 was primarily attributable to same-store sales growth as well as expense control with respect to store personnel, occupancy and other operating costs. Total SG&A expenses increased 8.8% to $829.4 million from $762.5 million in the first nine months of fiscal 2011. The increase in SG&A expense primarily reflects new store growth, variable costs associated with our same store sales growth, and operating costs relating to the Franklin, KY distribution center, which became operational in the fourth quarter of fiscal 2011.

For the first nine months of 2012 our effective tax rate increased slightly to 36.7% compared to 36.6% for the first nine months of 2011.

Net income for the first nine months of fiscal 2012 increased 29.4% to $197.0 million compared to $152.2 million in the first nine months of fiscal 2011. Net income per diluted share for the first nine months of fiscal 2012 increased to $2.69 from $2.05 in the first nine months of fiscal 2011.

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), distribution center capacity and improvements, information technology, share repurchases and cash dividends. Our primary ongoing sources of liquidity are existing cash balances, funds provided from operations, borrowings available under our Senior Credit Facility, capital and operating leases and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters in anticipation of the spring and cold-weather selling seasons, respectively.

At September 29, 2012, we had working capital of $619.9 million, a $9.7 million decrease and a $50.3 million increase from December 31, 2011 and September 24, 2011, respectively. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

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September 29, December 31, September 24,
2012 2011 Variance 2011 Variance
Current assets:
Cash and cash equivalents $ 70.2 $ 176.9 $ (106.7 ) $ 96.6 $ (26.4 ) Restricted cash 8.4 21.9 (13.5 ) 21.9 (13.5 ) Inventories 1,020.1 830.8 189.3 913.7 106.4 Prepaid expenses and other
current assets 50.9 51.7 (0.8 ) 40.2 10.7 Deferred income taxes 12.3 8.9 3.4 - 12.3 1,161.9 1,090.2 71.7 1,072.4 89.5 Current liabilities:
Accounts payable 362.1 266.4 95.7 340.2 21.9 Accrued employee compensation 29.2 48.3 (19.1 ) 36.8 (7.6 ) Other accrued expenses 125.9 134.0 (8.1 ) 119.6 6.3 Income taxes payable 24.8 11.9 12.9 2.9 21.9 Deferred income taxes - - - 3.3 (3.3 )
542.0 460.6 81.4 502.8 39.2 Working capital $ 619.9 $ 629.6 $ (9.7 ) $ 569.6 $ 50.3

Working capital as of September 29, 2012 decreased $9.7 million in comparison to December 31, 2011. The major drivers that reduced working capital were a decrease in cash, an increase in accounts payable and an increase in taxes payable, resulting in a combined decrease of $215.3 million. These negative impacts on working capital were partially offset by an increase in inventories and a decrease in accrued employee compensation, generating a combined increase of $208.4 million. The changes in cash, inventories and accounts payable resulted primarily from the purchase of incremental inventory to support store growth and seasonal demands. Cash was also negatively impacted by capital expenditures and share repurchases partially offset by stronger earnings. Taxes payable increased as a result of the timing of payments combined with an increase in pretax income. Accrued employee compensation decreased mainly as a result of payouts of prior year incentive compensation amounts earned. Working capital as of September 29, 2012 increased $50.3 million in comparison to September 24, 2011. The increase in working capital was principally driven by an increase in inventory of $106.4 million. This positive impact was partially offset by a decrease in cash, an increase in accounts payable and an increase in taxes payable, resulting in a combined decrease of $70.2 million. The changes in cash, inventories and accounts payable resulted primarily from the purchase of incremental inventory to support store growth. Cash was also negatively impacted by an increase in capital expenditures and dividends paid. Taxes payable increased as a result of the timing of payments combined with an increase in pretax income.

Operations provided net cash of $155.8 million and $111.3 million in the first nine months of fiscal 2012 and fiscal 2011, respectively. The $44.5 million increase in net cash provided by operations in 2012 over 2011 is due to changes in the following operating activities (in millions):

                                                             Fiscal nine months ended
                                                  September 29,      September 24,
                                                       2012              2011           Variance
Net income                                       $        197.0     $       152.2     $     44.8
Depreciation and amortization                              66.4              56.7            9.7
Stock compensation expense                                 14.1              10.7            3.4
Excess tax benefit of stock options exercised             (19.7 )           (11.9 )         (7.8 )
Deferred income taxes                                     (14.8 )            (1.9 )        (12.9 )
Inventories and accounts payable                          (93.7 )           (84.4 )         (9.3 )
Prepaid expenses and other current assets                   0.8              (6.3 )          7.1
Accrued expenses                                          (30.7 )           (10.3 )        (20.4 )
Income taxes payable                                       32.7               6.5           26.2
Other, net                                                  3.7                 -            3.7
Net cash provided by operations                  $        155.8     $       111.3     $     44.5

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The $44.5 million improvement in net cash provided by operations in the first nine months of fiscal 2012 compared with the first nine months of fiscal 2011 primarily reflects stronger earnings and an increase in income taxes payable, partially offset by a decrease in accrued expenses. The increase in income taxes payable is primarily attributable to the timing of tax payments and larger pretax income in fiscal 2012. The decrease in accrued expenses is primarily a result of the timing of payroll accruals and lower accrued employee compensation expense.

Investing activities used cash of $97.4 million and $112.6 million in the first nine months of fiscal 2012 and fiscal 2011, respectively. The majority of the investing activity cash requirement relates to our capital expenditures, which increased $3.9 million in the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011. The primary reason for the decrease in cash used for investing activities is the $13.5 million decrease in the restricted cash balance in the first nine months of fiscal 2012 as compared to a $21.9 million increase in restricted cash in the first nine months of fiscal 2011. The decrease in restricted cash during the first nine months of fiscal 2012 relates to less cash required as collateral for an outstanding letter of credit at a financial institution outside of the Senior Credit Facility. During the first nine months of fiscal 2011, the maturity of our short-term investment of $15.9 million was replaced by a $21.9 million time deposit classified as restricted cash.

Capital expenditures for the first nine months of fiscal 2012 and fiscal 2011 were as follows (in millions):

                                                                 Fiscal nine months ended
                                                             September 29,       September 24,
                                                                 2012                2011
New and relocated stores and stores not yet opened         $          43.7     $          27.2
Information technology                                                20.4                 8.5
Existing stores                                                       15.2                13.1
Corporate and other                                                   11.6                 0.2
Distribution center capacity and improvements                         10.4                44.3
Purchase of previously leased stores                                   9.9                14.0
                                                           $         111.2     $         107.3

The above table reflects 68 new stores in the first nine months of fiscal 2012, compared to 54 new stores during the first nine months of fiscal 2011. We expect to open 93 new stores during fiscal 2012. The increase in expenditures for information technology is primarily related to point-of-sale system upgrades and an update of our e-commerce website, which will include the integration of order management, drop shipment, fulfillment and call center activities. The increase in corporate and other expenses is mainly due to the purchase of an undeveloped parcel of land in Brentwood, TN for a new store support center. The decrease in expenditures for distribution center capacity and improvements is related to the Franklin, KY distribution center, which was constructed in the prior year and became operational in the fourth quarter of 2011.

Financing activities used cash of $165.2 million and $159.5 million in the first nine months of fiscal 2012 and fiscal 2011, respectively. This change in net cash used in financing activities is largely due to $14.9 million more in cash dividends paid to stockholders partially offset by $8.3 million less in common stock repurchases during the first nine months of fiscal 2012 compared to the first nine months of fiscal 2011.

The 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 matures in October 2016, with proceeds available to be used for working capital, capital expenditures, dividends, share repurchases and other matters. At September 29, 2012, there were no outstanding borrowings under the Senior Credit Facility. There were $41.4 million outstanding letters of credit under the Senior Credit Facility as of September 29, 2012. Borrowings bear interest at either the bank's base rate or LIBOR plus an additional amount ranging from 0.40% to 1.00% per annum, adjusted quarterly based on our leverage ratio (0.50% at September 29, 2012). We are also required to pay quarterly in arrears, a commitment fee for unused capacity ranging from 0.08% to 0.20% per annum, adjusted quarterly based on our leverage ratio (0.10% at September 29, 2012). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios. As of September 29, 2012, we were in compliance with all debt covenants.

We believe that existing cash balances, expected cash flow from future operations, borrowings available under the Senior Credit Facility, operating and capital leases and normal trade credit will be sufficient to fund our operations and capital expenditure needs, including new store openings, store acquisitions, relocations and renovations, and distribution center capacity, over the next several years.

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Share Repurchase Program

The Company's Board of Directors has authorized share repurchases under the share repurchase program up to $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 680,705 and 805,040 shares under the share repurchase program for a total cost of $61.3 million and $49.2 million during the third quarters of 2012 and 2011, respectively. During the first nine months of 2012 and 2011, we repurchased 1,841,405 and 2,961,450 shares under the share repurchase program . . .

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