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TSCO > SEC Filings for TSCO > Form 10-K on 19-Feb-2014All Recent SEC Filings

Show all filings for TRACTOR SUPPLY CO /DE/



Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended December 28, 2013 (our fiscal years 2013, 2012 and 2011). Fiscal years 2013 and 2012 contained 52 weeks of operating results compared to fiscal year 2011 which contained 53 weeks. This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements. See "Forward-Looking Statements" and "Risk Factors" included elsewhere in this report.


Tractor Supply Company is the largest operator of retail farm and ranch stores in the United States and is focused on supplying the lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses. As of December 28, 2013, we operated 1,276 retail stores in 48 states under the names Tractor Supply Company and Del's Feed & Farm Supply. We also operate a website under the name Our stores are located primarily in towns outlying major metropolitan markets and in rural communities, and they offer the following comprehensive selection of merchandise:

Equine, livestock, pet and small animal products, including items necessary for their health, care, growth and containment;

Hardware, truck, towing and tool products;

Seasonal products, including lawn and garden items, power equipment, gifts and toys;

Work/recreational clothing and footwear; and

Maintenance products for agricultural and rural use.

Our current and long-term growth strategy is to: (1) expand geographic market presence through opening new retail stores, (2) enhance financial performance through comparable store sales growth achieved through targeted merchandising programs with an "everyday value price" philosophy and supported by strong customer service, (3) enhance product margin through strategic product sourcing, inventory and markdown management, a strong exclusive brand offering, and optimization of product pricing and transportation costs, (4) leverage operating costs by focusing on opportunities for continuous improvement and elimination of waste in all of our processes, (5) expand market opportunities via e-commerce and internet-supported sales accomplished by improving our website product content and enhancing our customers' online experience and (6) expand through selective acquisition, as such opportunities arise, to enhance penetration into new and existing markets to complement organic growth.

Over the past five years we have experienced considerable growth in stores, growing from 855 stores at the end of 2008 to 1,276 stores at the end of fiscal 2013, and in sales, with a compounded annual growth rate of approximately 11.4%. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in existing and new markets. We have developed a proven method for selecting store sites and have identified over 800 additional markets for new Tractor Supply stores.

Stock Split

On August 28, 2013, our Board of Directors declared a two-for-one split of our outstanding shares of common stock to be effected in the form of a stock dividend. On September 26, 2013, stockholders of record at the close of business on September 18, 2013, received one additional share of common stock for each share owned by such stockholder. All share and per-share information in the Annual Report on Form 10-K has been retroactively restated to reflect the stock split. The total number of authorized common shares and the par value of each share was not changed by the split.

Executive Summary

We opened 102 new stores in 2013 and 93 new stores in 2012, a selling square footage increase of approximately 8.3% and 7.9%, respectively. During 2013, we opened stores in 34 states, including our first stores in Arizona, Nevada and Wyoming, and in 2014 we expect to continue our expansion into these new markets.

We achieved strong performance in fiscal 2013, delivering diluted earnings per share growth of 22.1%, $2.32 versus $1.90 in fiscal 2012.

Net sales increased 10.7% to $5.16 billion in fiscal 2013 from $4.66 billion in fiscal 2012. Comparable store sales increased 4.8% in fiscal 2013 versus a 5.3% increase in fiscal 2012. Gross profit increased 12.0% to $1.75 billion in fiscal 2013 from $1.57 billion


in fiscal 2012, and gross margin increased 40 basis points to 34.0% of sales in fiscal 2013 from 33.6% of sales in fiscal 2012. Operating profit increased 60 basis points to 10.0% of sales in fiscal 2013 from 9.4% of sales in fiscal 2012. In fiscal 2013, diluted earnings per share grew 22.1%, to $2.32 compared to $1.90 in fiscal 2012.

We ended the year with approximately $143 million in cash, after returning nearly $198 million to our stockholders through stock repurchases and dividends.

Significant Accounting Policies and Estimates

Management's discussion and analysis of our financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Our significant accounting policies are disclosed in Note 1 to our Consolidated Financial Statements. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.

                                  Judgments and           Effect if Actual Results
       Description                Uncertainties           Differ From Assumptions

Inventory Valuation:
Inventory Impairment
We identify potentially     We do not believe our        We have not made any
excess and slow-moving      merchandise inventories      material changes in the
inventory by evaluating     are subject to significant   accounting methodology
turn rates, historical      risk of obsolescence in      used to recognize
and expected future sales   the near term.  However,     inventory impairment
trends, age of              changes in market            reserves in the financial
merchandise, overall        conditions or consumer       periods presented.
inventory levels, current   purchasing patterns could
cost of inventory and       result in the need for       We do not believe there is
other benchmarks. The       additional reserves.         a reasonable likelihood
estimated inventory                                      that there will be a
valuation reserve to        Our impairment reserve       material change in the
recognize any impairment    contains uncertainties       future estimates or
in value (i.e., an          because the calculation      assumptions we use to
inability to realize the    requires management to       calculate
full carrying value) is     make assumptions and to      impairment. However, if
based on our aggregate      apply judgment regarding     assumptions regarding
assessment of these         forecasted customer demand   consumer demand or
valuation indicators        and the promotional          clearance potential for
under prevailing market     environment.                 certain products are
conditions and current                                   inaccurate, we may be
merchandising strategies.                                exposed to losses or gains
                                                         that could be material.

                                                         A 10% change in our
                                                         impairment reserve at
                                                         December 28, 2013, would
                                                         have affected net income
                                                         by approximately $0.4
                                                         million in fiscal 2013.


                                  Judgments and           Effect if Actual Results
       Description                Uncertainties           Differ From Assumptions
We perform physical         The estimated store          We have not made any
inventories at each store   inventory shrink rate is     material changes in the
at least once a year, and   based on historical          accounting methodology
we have established         experience. We believe       used to recognize
reserves for estimating     historical rates are a       shrinkage in the financial
inventory shrinkage         reasonably accurate          periods presented.
between physical            reflection of future
inventory counts. The       trends.                      We do not believe there is
reserve is established by                                a reasonable likelihood
assessing the chain-wide    Our shrinkage reserve        that there will be a
average shrinkage           contains uncertainties       material change in the
experience rate, applied    because the calculation      future estimates or
to the related periods'     requires management to       assumptions we use to
sales volumes. Such         make assumptions and to      calculate our shrinkage
assessments are updated     apply judgment regarding     reserve. However, if our
on a regular basis for      future shrinkage trends,     estimates regarding
the most recent             the effect of loss           inventory losses are
individual store            prevention measures and      inaccurate, we may be
experiences.                new merchandising            exposed to losses or gains
                            strategies.                  that could be material.

                                                         A 10% change in our
                                                         shrinkage reserve at
                                                         December 28, 2013, would
                                                         have affected net income
                                                         by approximately $1.0
                                                         million in fiscal 2013.
Vendor Funding
We receive funding from     The estimated purchase       We have not made any
substantially all of our    volume (and related vendor   material changes in the
significant merchandise     funding through volume       accounting methodology
vendors, in support of      rebates) is based on our     used to establish our
our business initiatives,   current knowledge of         vendor support reserves in
through a variety of        inventory levels, sales      the financial periods
programs and                trends and expected          presented.
arrangements, including     customer demand, as well
guaranteed vendor support   as planned new store         At the end of each fiscal
funds ("vendor support")    openings and                 year, a significant
and volume-based rebate     relocations. Although we     portion of the actual
funds ("volume              believe we can reasonably    purchase activity is
rebates"). The amounts      estimate purchase volume     known. Thus, we do not
received are subject to     and related volume rebates   believe there is a
terms of vendor             at interim periods, it is    reasonable likelihood that
agreements, most of which   possible that actual         there will be a material
are "evergreen",            year-end results could       change in the amounts
reflecting the on-going     differ from previously       recorded as vendor
relationship with our       estimated amounts.           support.
significant merchandise
vendors. Certain of our     Our allocation methodology   We do not believe there is
agreements, primarily       contains uncertainties       a significant
volume rebates, are         because the calculation      collectibility risk
renegotiated annually,      requires management to       related to vendor support
based on expected annual    make assumptions and to      amounts due us at the end
purchases of the vendor's   apply judgment regarding     of fiscal 2013.
product.                    customer demand,
                            purchasing activity,         If a 10% reserve had been
Vendor funding is           target thresholds, vendor    applied against our
initially deferred as a     attrition and                outstanding vendor support
reduction of the purchase   collectibility.              due as of December 28,
price of inventory and                                   2013, net income would
then recognized as a                                     have been affected by
reduction of cost of                                     approximately $1.1 million
merchandise as the                                       in fiscal 2013.
related inventory is
sold.                                                    Although it is unlikely
                                                         that there will be any
During interim periods,                                  significant reduction in
the amount of vendor                                     historical levels of
support is known and is                                  vendor support, if such a
debited to vendors                                       reduction were to occur in
systematically; however,                                 future periods, the
volume rebates are                                       Company could experience a
estimated during interim                                 higher inventory balance
periods based upon                                       and higher cost of sales.
initial commitments and
anticipated purchase
levels with applicable
We incur various types of   We allocate freight as a     We have not made any
transportation and          component of total cost of   material changes in the
delivery costs in           sales without regard to      accounting methodology
connection with inventory   inventory mix or unique      used to establish our
purchases and               freight burden of certain    capitalized freight
distribution.  Such costs   categories. This             balance or freight
are included as a           assumption has been          allocation in the
component of the overall    consistently applied for     financial periods
cost of inventories (on     all years presented.         presented.
an aggregate basis) and
recognized as a component                                If a 10% increase or
of cost of merchandise                                   decrease had been applied
sold as the related                                      against our current
inventory is sold.                                       inventory capitalized
                                                         freight balance as of
                                                         December 28, 2013, net
                                                         income would have been
                                                         affected by approximately
                                                         $4.9 million in fiscal


                                  Judgments and           Effect if Actual Results
       Description                Uncertainties           Differ From Assumptions
Self-Insurance Reserves:
We self-insure a            The full extent of certain   We have not made any
significant portion of      claims, especially           material changes in the
our employee medical        workers' compensation and    accounting methodology
insurance, workers'         general liability claims,    used to establish our
compensation and general    may not become fully         self-insurance reserves in
liability insurance         determined for several       the financial periods
plans. We have stop-loss    years.                       presented.
insurance policies to
protect from individual     Our self-insured             We do not believe there is
losses over specified       liabilities contain          a reasonable likelihood
dollar values.              uncertainties because        that there will be a
                            management is required to    material change in the
When estimating our         make assumptions and to      assumptions we use to
self-insured liabilities,   apply judgment to estimate   calculate insurance
we consider a number of     the ultimate cost to         reserves. However, if we
factors, including          settle reported claims and   experience a significant
historical claims           claims incurred but not      increase in the number of
experience, demographic     reported as of the balance   claims or the cost
factors and severity        sheet date based upon        associated with these
factors.                    historical data and          claims, we may be exposed
                            experience, including        to losses that could be
                            actuarial calculations.      material.

                                                         A 10% change in our
                                                         self-insurance reserves at
                                                         December 28, 2013, would
                                                         have affected net income
                                                         by approximately $2.6
                                                         million in fiscal 2013.
Sales Tax Audit Reserve:
A portion of our sales      We review our past audit     We have not made any
are to tax-exempt           experience and assessments   material changes to our
customers, predominantly    with applicable states to    sales tax audit assessment
agricultural-based. We      continually determine if     methodology in the
obtain exemption            we have potential exposure   financial periods
information as a            for non-compliance. Any      presented.
necessary part of each      estimated liability is
tax-exempt                  based on an initial          We do not believe there is
transaction. Many of the    assessment of compliance     a reasonable likelihood
states in which we          risk and our historical      that there will be a
conduct business will       experience with each         material change in the
perform audits to verify    state. We continually        future estimates or
our compliance with         reassess the exposure        assumptions we use to
applicable sales tax        based on historical audit    calculate the sales tax
laws. The business          results, changes in          liability
activities of our           policies, preliminary and    reserve. However, if our
customers and the           final assessments made by    estimates regarding the
intended use of the         state sales tax auditors,    ultimate sales tax
unique products sold by     and additional               liability are inaccurate,
us create a challenging     documentation that may be    we may be exposed to
and complex compliance      provided to reduce the       losses or gains that could
environment.  These         assessment.                  be material.
circumstances also create
some risk that we could     Our sales tax audit          A 10% change in our sales
be challenged as to the     reserve contains             tax audit reserve at
accuracy of our sales tax   uncertainties because        December 28, 2013, would
compliance.                 management is required to    have affected net income
                            make assumptions and to      by approximately $0.6
While we believe we         apply judgment regarding     million in fiscal 2013.
appropriately enforce       the complexity of
sales tax compliance with   agricultural-based
our customers and           exemptions, the ambiguity
endeavor to fully comply    in state tax regulations,
with all applicable sales   the number of ongoing
tax regulations, there      audits and the length of
can be no assurance that    time required to settle
we, upon final completion   with the state taxing
of such audits, would not   authorities.
have a significant
liability for disallowed


                                  Judgments and           Effect if Actual Results
       Description                Uncertainties           Differ From Assumptions
Tax Contingencies:
Our income tax returns      Our tax contingencies        We have not made any
are periodically audited    reserve contains             material changes in the
by U.S. federal and state   uncertainties because        accounting methodology
tax authorities. These      management is required to    used to establish our tax
audits include questions    make assumptions and to      contingencies in the
regarding our tax filing    apply judgment to estimate   financial periods
positions, including the    the exposures associated     presented.
timing and amount of        with our various filing
deductions and the          positions and whether or     We do not believe there is
allocation of income        not the minimum              a reasonable likelihood
among various tax           requirements for             that there will be a
jurisdictions. At any       recognition of tax           material change in the
time, multiple tax years    benefits have been met.      reserves established for
are subject to audit by                                  tax benefits not
the various tax                                          recognized.
authorities. In
evaluating the exposures                                 Although management
associated with our                                      believes that the
various tax filing                                       judgments and estimates
positions, we record a                                   discussed herein are
liability for uncertain                                  reasonable, actual results
tax positions taken or                                   could differ, and we may
expected to be taken in a                                be exposed to losses or
tax return. A number of                                  gains that could be
years may elapse before a                                material.
particular matter, for
which we have established                                To the extent we prevail
a reserve, is audited and                                in matters for which
fully resolved or                                        reserves have been
clarified. We recognize                                  established, or are
the effect of income tax                                 required to pay amounts in
positions only if those                                  excess of our reserves,
positions are more likely                                our effective income tax
than not of being                                        rate in a given financial
sustained. Recognized                                    statement period could be
income tax positions are                                 materially affected. An
measured at the largest                                  unfavorable tax settlement
amount that is greater                                   would require use of our
than 50% likely of being                                 cash and would result in
realized. Changes in                                     an increase in our
recognition or                                           effective income tax rate
measurement are reflected                                in the period of
in the period in which                                   resolution. A favorable
the change in judgment                                   tax settlement would be
occurs. We adjust our tax                                recognized as a reduction
contingencies reserve and                                in our effective income
income tax provision in                                  tax rate in the period of
the period in which                                      resolution.
actual results of a
settlement with tax                                      A 10% change in our
authorities differs from                                 uncertain tax position
our established reserve,                                 reserve at December 28,
the statute of                                           2013 would have affected
limitations expires for                                  net income by
the relevant tax                                         approximately $0.2 million
authority to examine the                                 in fiscal 2013.
tax position or when more
information becomes


                                  Judgments and           Effect if Actual Results
       Description                Uncertainties           Differ From Assumptions
Impairment of Long-Lived
Long-lived assets other     Our impairment loss          We have not made any
than goodwill and           calculations contain         material changes in our
indefinite-lived            uncertainties because they   impairment loss assessment
intangible assets, which    require management to make   methodology in the
are separately tested for   assumptions and to apply     financial periods
impairment, are evaluated   judgment to estimate         presented.
for impairment whenever     future cash flows and
events or changes in        asset fair values,           We do not believe there is
circumstances indicate      including forecasting        a reasonable likelihood
that the carrying value     useful lives of the assets   that there will be a
may not be recoverable.     and selecting the discount   material change in the
                            rate that reflects the       estimates or assumptions
When evaluating             risk inherent in future      we use to calculate
long-lived assets for       cash flows.                  long-lived asset
potential impairment, we                                 impairment losses. None of
first compare the                                        these estimates and
carrying value of the                                    assumptions are
asset to the asset's                                     significantly sensitive,
estimated future cash                                    and a 10% change in any of
flows (undiscounted and                                  these estimates would not
without interest                                         have a material impact on
charges). The evaluation                                 our analysis.  However, if
for long-lived assets is                                 actual results are not
. . .
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