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TSCO > SEC Filings for TSCO > Form 10-Q on 5-Aug-2013All 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/


5-Aug-2013

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 29, 2012. This Form 10-Q also contains 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, 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 29, 2012. 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 (Second Quarter) Ended June 29, 2013 and June 30, 2012 Net sales increased 12.7% to $1.46 billion for the second quarter of fiscal 2013 from $1.29 billion for the second quarter of fiscal 2012. Same-store sales for the second quarter of fiscal 2013 were $1.39 billion, a 7.2% increase over the second quarter of fiscal 2012. This compares to a 3.2% same-store sales increase for the second quarter of fiscal 2012. Same-store sales are calculated based on the change in net sales of stores open at least one year and exclude certain adjustments to net sales.

The 2013 same-store sales increase was broad-based and driven by continued strong results in key consumable, usable and edible (C.U.E.) products, principally animal- and pet-related merchandise and seasonal merchandise. C.U.E. products represent certain high-velocity, consumable items from several of our major product categories. We estimate that same-store sales were favorably impacted by approximately 140 basis points due to inflation, principally in livestock feed and dry pet food.

In addition to same-store sales growth in the second quarter of fiscal 2013, sales from stores opened less than one year were $72.3 million for the second quarter of fiscal 2013, which represented 5.6 percentage points of the 12.7% increase over total second quarter fiscal 2012 net sales. Sales from stores opened less than one year were $77.4 million for the second quarter of fiscal 2012, which represented 6.6 percentage points of the 9.6% increase over total second quarter fiscal 2011 net sales.

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The following chart summarizes our store growth for the fiscal three months ended June 29, 2013 and June 30, 2012:

Fiscal three months ended
June 29, 2013 June 30, 2012
Store Count, Beginning of Period 1,197 1,117 New Stores Opened 26 18 Stores Closed - - Store Count, End of Period 1,223 1,135

Stores Relocated - 1

The following chart indicates the percentage of sales represented by each of our major product categories for the fiscal three months ended June 29, 2013 and June 30, 2012:

                                    Fiscal three months ended
                                June 29, 2013      June 30, 2012
Product Category:
Livestock and Pet                       40 %                 40 %
Seasonal, Gift and Toy Products         25                   25
Hardware, Tools and Truck               22                   22
Agriculture                              8                    8
Clothing and Footwear                    5                    5
Total                                  100 %                100 %

Gross margin dollars increased 12.1% to $506.1 million for the second quarter of fiscal 2013 from $451.5 million in the second quarter of fiscal 2012. As a percent of sales, gross margin decreased 10 basis points to 34.8% from 34.9% in the prior year. The decrease in gross margin as a percent of sales resulted primarily from the continued mix shift to lower-margin, freight-intensive C.U.E. products, which contributed to increased transportation costs. These decreases in margin were partially offset by the favorable impact from key margin-enhancing initiatives which include inventory markdown management, strategic sourcing, exclusive branding and price optimization.

As a percent of sales, selling, general and administrative ("SG&A") expenses, including depreciation and amortization, improved 60 basis points to 21.2% in the second quarter of fiscal 2013 from 21.8% in the second quarter of fiscal 2012. The improvement as a percent of sales was primarily attributable to strong same-store sales growth and expense control with respect to store operating costs, as well as lower year-over-year incentive compensation expense as a percent of sales. Total SG&A expenses increased 9.4% to $308.2 million from $281.6 million in the second quarter of fiscal 2012. This change is due primarily to new store growth, variable costs associated with our same-store sales growth and startup costs relating to the relocation of our southeast distribution center.

Our effective income tax rate increased to 37.4% in the second quarter of fiscal 2013 compared to 37.2% for the second quarter of fiscal 2012, due principally to higher effective state tax rates and a smaller benefit from disqualified incentive stock options relative to the prior year. The Company expects the full year effective tax rate will be approximately 36.7%.

Net income for the second quarter of fiscal 2013 increased 15.9% to $123.6 million compared to $106.6 million in the second quarter of fiscal 2012. Net income per diluted share for the second quarter of fiscal 2013 increased to $1.75 from $1.45 in the second quarter of fiscal 2012.

Fiscal Six Months Ended June 29, 2013 and June 30, 2012 Net sales increased 9.9% to $2.54 billion for the first six months of fiscal 2013 from $2.31 billion for the first six months of fiscal 2012. Same-store sales for the first six months of fiscal 2013 were $2.41 billion, a 4.2% increase over the first six months of fiscal 2012. This compares to a 6.7% same-store sales increase for the first six months of fiscal 2012. The 2013 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. We estimate that same-store sales were favorably impacted by approximately 140 basis points due to inflation, principally in livestock feed and dry pet food.

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In addition to same-store sales growth in the first six months of fiscal 2013, sales from stores opened less than one year were $134.5 million for the first six months of fiscal 2013, which represented 5.8 percentage points of the 9.9% increase over total first six months fiscal 2012 net sales. Sales from stores opened less than one year were $136.3 million for the first six months of fiscal 2012, which represented 6.8 percentage points of the 14.8% increase over total first six months fiscal 2011 net sales.

The following chart summarizes our store growth for the fiscal six months ended June 29, 2013 and June 30, 2012:

                                     Fiscal six months ended
                                 June 29, 2013     June 30, 2012
Store Count, Beginning of Period       1,176              1,085
New Stores Opened                         48                 51
Stores Closed                             (1 )               (1 )
Store Count, End of Period             1,223              1,135

Stores Relocated                           -                  1

The following chart indicates the percentage of sales represented by each of our major product categories for the fiscal six months ended June 29, 2013 and June 30, 2012:

                                  Fiscal six months ended
                                  June 29,        June 30,
                                    2013            2012
Product Category:
Livestock and Pet                     44 %             42 %
Hardware, Tools and Truck             22               22
Seasonal, Gift and Toy Products       21               22
Clothing and Footwear                  7                7
Agriculture                            6                7
Total                                100 %            100 %

Gross margin increased 9.4% to $858.2 million for the first six months of fiscal 2013 from $784.3 million in the first six months of fiscal 2012. As a percent of sales, gross margin decreased 10 basis points to 33.8% for the first six months of fiscal 2013 compared to 33.9% for the comparable period in fiscal 2012. The decrease in gross margin as a percent of sales resulted from the continued mix shift to lower-margin, freight-intensive C.U.E. products, which contributed to increased transportation costs. These decreases in margin were partially offset by the favorable impact from key margin-enhancing initiatives which include inventory markdown management, strategic sourcing, exclusive branding and price optimization.

As a percent of sales, SG&A expenses, including depreciation and amortization, improved 40 basis points to 23.4% in the first six months of fiscal 2013 from 23.8% in the first six months of fiscal 2012. The SG&A improvement as a percent of sales for the first six months of 2013 was primarily attributable to lower year-over-year incentive compensation expense and same-store sales growth and expense control with respect to store operating costs. Total SG&A expenses increased 7.7% to $592.3 million from $550.0 million in the first six months of fiscal 2012. This change is due primarily to new store growth and variable costs associated with our same-store sales growth.

For the first six months of 2013, our effective income tax rate decreased to 36.8% compared to 37.1% for the first six months of 2012. The reduction in the tax rate for the six month period resulted primarily from the favorable impact of the reversal of various reserves for uncertain tax positions and the reinstatement of the federal Work Opportunity Tax Credit that was approved by Congress in the early part of our first quarter, partially offset by higher effective state tax rates and a smaller benefit from disqualified incentive stock options relative to the prior year.

Net income for the first six months of fiscal 2013 increased 14.0% to $167.6 million compared to $146.9 million in the first six months of fiscal 2012. Net income per diluted share for the first six months of fiscal 2013 increased to $2.37 from $2.00 in the first six months of fiscal 2012.

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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 center and store support center capacity and improvements, information technology, inventory purchases, 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 June 29, 2013, the Company had working capital of $626.2 million, which increased $56.7 million from December 29, 2012 and decreased $37.3 million from June 30, 2012. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

                                June 29,       December 29,                     June 30,
                                  2013             2012          Variance         2012         Variance
Current assets:
Cash and cash equivalents     $      55.7     $       138.6     $   (82.9 )   $     179.1     $ (123.4 )
Restricted cash                         -               8.4          (8.4 )           8.8         (8.8 )
Inventories                       1,082.9             908.1         174.8           946.9        136.0
Prepaid expenses and other
current assets                       52.7              51.8           0.9            56.3         (3.6 )
Deferred income taxes                14.4              23.1          (8.7 )           7.1          7.3
                                  1,205.7           1,130.0          75.7         1,198.2          7.5
Current liabilities:
Accounts payable                    360.8             320.4          40.4           314.8         46.0
Accrued employee compensation        26.8              48.4         (21.6 )          29.3         (2.5 )
Other accrued expenses              138.4             148.3          (9.9 )         126.4         12.0
Income taxes payable                 53.5              43.4          10.1            64.2        (10.7 )
                                    579.5             560.5          19.0           534.7         44.8
Working capital               $     626.2     $       569.5     $    56.7     $     663.5     $  (37.3 )

In comparison to December 29, 2012, working capital as of June 29, 2013 was impacted most significantly by changes in our cash, inventory, accounts payable and accrued employee compensation.
The decrease in cash is primarily attributable to inventory purchases, common stock repurchases and capital expenditures, principally related to new store construction, construction of the new distribution center in Macon, GA, which is the relocation of our current southeast distribution center in Braselton, GA, and construction of the new store support center in Brentwood, TN.

The increase in inventories and accounts payable resulted primarily from the purchase of additional inventory to support new store growth, strategic inventory purchases in key categories and additional inventory build to support the relocation of the southeast distribution center in the third quarter.

The decrease in accrued employee compensation is primarily due to the payment of annual incentive compensation.

In comparison to June 30, 2012, working capital as of June 29, 2013 was impacted most significantly by changes in our cash, inventories and accounts payable.

The decrease in cash is primarily attributable to common stock repurchases and capital expenditures, offset in part by increased earnings. Since the second quarter of fiscal 2012, we repurchased approximately 2.6 million shares of common stock under the share repurchase program at a total cost of $238.6 million. Capital expenditures of $186.0 million since the second quarter of fiscal 2012 reflect funding to support new store growth, construction of a new distribution center, technology upgrades to enhance our customer experience in our retail stores and on-line, as well as land and construction costs for our new store support center.

The increase in inventories and accounts payable is primarily a result of new store growth and increased average inventory per store of 4.7%. The increase in inventory on a per store basis is related to maintaining inventory in spring categories due to the extended spring weather, strategic early third quarter inventory purchases in key categories and additional inventory build to support the relocation of the southeast distribution center in the third quarter.

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Operating activities provided net cash of $62.8 million and $152.2 million in the first six months of fiscal 2013 and fiscal 2012, respectively. The $89.4 million decrease in net cash provided by operating activities in the first six months of fiscal 2013 compared to the first six months of fiscal 2012 is due to changes in the following operating activities (in millions):

                                                    Fiscal six months ended
                                               June 29,     June 30,
                                                 2013         2012       Variance
Net income                                    $  167.6     $  146.9     $   20.7
Depreciation and amortization                     46.9         44.2          2.7
Stock compensation expense                         6.9          9.3         (2.4 )
Excess tax benefit of stock options exercised    (24.8 )      (16.5 )       (8.3 )
Deferred income taxes                              4.5         (5.9 )       10.4
Inventories and accounts payable                (134.3 )      (67.8 )      (66.5 )
Prepaid expenses and other current assets         (0.9 )       (4.6 )        3.7
Accrued expenses                                 (41.3 )      (25.4 )      (15.9 )
Income taxes payable                              34.9         68.8        (33.9 )
Other, net                                         3.3          3.2          0.1
Net cash provided by operating activities     $   62.8     $  152.2     $  (89.4 )

The $89.4 million decrease in net cash provided by operating activities in the first six months of fiscal 2013 compared with the first six months of fiscal 2012 primarily relates to increased inventory levels and income tax payments. Inventory, net of accounts payable, was a larger use of operating funds in the first six months of fiscal 2013 than in the same period last year due to new store growth, an increase in seasonal inventory and timing of receipts and payments. Income taxes payable decreased due to the timing of estimated tax payments.

Investing activities used cash of $90.0 million and $52.5 million in the first six months of fiscal 2013 and fiscal 2012, respectively. The majority of the increase in investing activity relates to our capital expenditures, which is partially offset by the change in restricted cash. The decrease in restricted cash during the first six months of fiscal 2013 and 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. Capital expenditures related to our significant store expansion, coupled with distribution network expansion, new store support center and other required investments in infrastructure for the first six months of fiscal 2013 and fiscal 2012 were as follows (in millions):

                                                              Fiscal six months ended
                                                            June 29,          June 30,
                                                              2013              2012
Distribution center capacity and improvements            $        33.1     $         3.0
New and relocated stores and stores not yet opened                29.9              31.0
Information technology                                            14.7              13.1
Corporate and other                                               12.1               0.4
Existing stores                                                    5.5               7.9
Purchase of previously leased stores                               3.3              10.2
                                                         $        98.6     $        65.6

The above table reflects 48 new stores in the first six months of fiscal 2013, compared to 51 new stores during the first six months of fiscal 2012. We expect to open approximately 100 to 105 new stores during fiscal 2013 compared to 93 new stores in fiscal 2012. The increase in distribution center capacity and improvements in the first six month of fiscal 2013 compared to the first six months of fiscal 2012 is primarily due to the construction of our new Macon, GA distribution center, which is the relocation of our current southeast distribution center in Braselton, GA. The increase in corporate and other in the first six months of fiscal 2013 compared to the first six months of fiscal 2012 is primarily due to the construction of our new store support center in Brentwood, TN.

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Financing activities used cash of $55.8 million and $97.5 million in the first six months of fiscal 2013 and fiscal 2012, respectively. This change in net cash used in financing activities is largely due to $33.2 million less in common stock repurchases during the first six months of fiscal 2013 compared to the first six months of fiscal 2012.

The Senior Credit Facility provides for borrowings up to $250 million (with a sublimit of $20 million for swingline loans. The Senior Credit Facility has an Increase Option for $150 million (subject to additional lender group commitments). 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 June 29, 2013, there were no outstanding borrowings and $73.9 million outstanding letters of credit under the Senior Credit Facility. 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 (0.50% at June 29, 2013), adjusted quarterly based on our leverage ratio. We are also required to pay quarterly in arrears, a commitment fee for unused capacity ranging from 0.08% to 0.20% per annum (0.10% at June 29, 2013), adjusted quarterly based on our leverage ratio. The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios. As of June 29, 2013, we were in compliance with all debt covenants.

We believe that our 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 our capital expenditure needs, including new store openings, store acquisitions, relocations and renovations, and distribution center capacity, through the end of fiscal 2014.

Share Repurchase Program

The Company's Board of Directors has authorized common stock repurchases under the share repurchase program up to $1.0 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 176,825 and 1,106,000 shares of common stock under the share repurchase program for a total cost of $19.4 million and $98.4 million during the second quarter of fiscal 2013 and fiscal 2012, respectively. During the first six months of 2013 and 2012, we repurchased 699,325 and 1,160,700 shares under the share repurchase program for a total cost of $69.3 million and $102.5 million, respectively. As of June 29, 2013, we had remaining authorization under the share repurchase program of $221.9 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 six months of fiscal 2013, the Board of Directors declared the following
dividends:

                    Dividend Amount
 Date Declared         Per Share       Stockholders of Record Date     Date Paid
February 6, 2013   $           0.20         February 25, 2013        March 12, 2013
  May 1, 2013      $           0.26           May 20, 2013            June 4, 2013

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.

. . .

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