TRACTOR SUPPLY CO /DE/
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
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September 29, 2012
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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to
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Commission file number
000-23314
TRACTOR SUPPLY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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13-3139732
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(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.)
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Incorporation or Organization)
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200 Powell Place, Brentwood, Tennessee
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37027
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(Address of Principal Executive Offices)
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(Zip Code)
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Not Applicable
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(615) 440-4000
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(Former name, former address and former fiscal year, if changed since last report)
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(Registrant's Telephone Number, Including Area Code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
þ
NO
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES
þ
NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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þ
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Accelerated filer
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o
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Non-accelerated filer
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o
(Do not check if a smaller reporting company)
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Smaller reporting company
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o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
YES
o
NO
þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
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Class
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Outstanding at October 27, 2012
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Common Stock, $.008 par value
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70,436,783
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TRACTOR SUPPLY COMPANY
INDEX
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Page No.
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Page
2
TRACTOR SUPPLY COMPANY
(in thousands, except per share amounts)
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September 29,
2012 |
December 31,
2011 |
September 24,
2011 |
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ASSETS
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(Unaudited)
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(Unaudited)
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Current assets:
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Cash and cash equivalents
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$
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70,185
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$
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176,965
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$
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96,590
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Restricted cash
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8,400
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21,870
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21,870
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Inventories
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1,020,140
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830,819
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913,738
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Prepaid expenses and other current assets
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50,892
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51,728
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40,198
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Deferred income taxes
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12,307
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8,867
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—
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Total current assets
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1,161,924
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1,090,249
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1,072,396
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Property and equipment:
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Land
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51,665
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36,962
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32,627
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Buildings and improvements
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499,695
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459,703
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433,382
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Furniture, fixtures and equipment
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340,285
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312,708
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286,148
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Computer software and hardware
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112,523
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107,753
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108,940
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Construction in progress
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33,000
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19,309
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27,856
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1,037,168
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936,435
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888,953
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Accumulated depreciation and amortization
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(508,169
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)
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(455,580
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)
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(438,504
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)
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Property and equipment, net
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528,999
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480,855
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450,449
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Goodwill
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10,258
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10,258
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10,258
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Deferred income taxes
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—
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—
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2,112
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Other assets
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15,122
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13,470
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12,635
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Total assets
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$
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1,716,303
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$
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1,594,832
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$
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1,547,850
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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362,059
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$
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266,409
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$
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340,208
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Accrued employee compensation
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29,221
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48,261
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36,823
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Other accrued expenses
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125,884
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134,048
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119,588
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Current portion of capital lease obligations
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35
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33
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32
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Income taxes payable
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24,834
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11,874
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2,850
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Deferred income taxes
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—
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—
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3,314
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Total current liabilities
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542,033
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460,625
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502,815
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Capital lease obligations, less current maturities
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1,255
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1,284
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1,292
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Deferred income taxes
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2,478
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13,827
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—
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Deferred rent
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77,414
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75,731
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73,091
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Other long-term liabilities
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38,910
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35,075
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33,747
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Total liabilities
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662,090
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586,542
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610,945
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Stockholders’ equity:
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Preferred stock, $1.00 par value; 40 shares authorized; no shares issued
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—
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—
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—
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Common stock, $.008 par value; 200,000 shares authorized; 81,540, 80,401 and 80,048 shares issued; 70,563, 71,265 and 71,027 shares outstanding at September 29, 2012, December 31, 2011 and September 24, 2011, respectively
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652
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643
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641
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Additional paid-in capital
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348,446
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298,426
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281,101
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Treasury stock – at cost, 10,977, 9,136 and 9,021 shares at September 29, 2012, December 31, 2011 and September 24, 2011, respectively
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(601,213
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)
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(437,373
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)
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(429,469
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)
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Retained earnings
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1,306,328
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1,146,594
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1,084,632
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Total stockholders’ equity
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1,054,213
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1,008,290
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936,905
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Total liabilities and stockholders’ equity
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$
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1,716,303
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$
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1,594,832
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$
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1,547,850
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The accompanying notes are an integral part of these financial statements.
Page
3
TRACTOR SUPPLY COMPANY
(in thousands, except per share amounts)
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For the Fiscal
Three Months Ended |
For the Fiscal
Nine Months Ended |
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September 29,
2012 |
September 24,
2011 |
September 29,
2012 |
September 24,
2011 |
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(Unaudited)
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(Unaudited)
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Net sales
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$
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1,065,638
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$
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977,776
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$
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3,377,954
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$
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2,992,715
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Cost of merchandise sold
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708,467
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650,173
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2,236,522
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1,989,009
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Gross margin
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357,171
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327,603
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1,141,432
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1,003,706
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Selling, general and administrative expenses
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257,184
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239,883
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763,036
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705,863
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Depreciation and amortization
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22,208
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19,591
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66,380
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56,685
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Operating income
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77,779
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68,129
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312,016
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241,158
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Interest expense, net
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241
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591
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855
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1,051
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Income before income taxes
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77,538
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67,538
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311,161
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240,107
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Income tax expense
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27,517
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24,805
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114,191
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87,879
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Net income
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$
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50,021
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$
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42,733
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$
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196,970
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$
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152,228
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Net income per share – basic
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$
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0.71
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$
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0.60
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$
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2.76
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$
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2.11
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Net income per share – diluted
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$
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0.69
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$
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0.58
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$
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2.69
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$
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2.05
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Weighted average shares outstanding:
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Basic
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70,741
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71,226
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71,383
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71,988
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Diluted
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72,313
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73,343
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73,098
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74,158
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Dividends declared per common share outstanding
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$
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0.20
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$
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0.12
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$
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0.52
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$
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0.31
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The accompanying notes are an integral part of these financial statements.
Page
4
TRACTOR SUPPLY COMPANY
(in thousands)
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For the Fiscal
Nine Months Ended |
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September 29,
2012 |
September 24,
2011 |
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(Unaudited)
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Cash flows from operating activities:
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Net income
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$
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196,970
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$
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152,228
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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66,380
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56,685
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|||
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(Gain) loss on disposition of property and equipment
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(65
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)
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187
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Stock compensation expense
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14,051
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10,693
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Excess tax benefit of stock options exercised
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(19,738
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)
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(11,902
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)
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Deferred income taxes
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(14,789
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)
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(1,902
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)
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Change in assets and liabilities:
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Inventories
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(189,321
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)
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(177,218
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)
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Prepaid expenses and other current assets
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836
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(6,253
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)
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Accounts payable
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95,650
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92,820
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Accrued employee compensation
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(19,040
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)
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2,247
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Other accrued expenses
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(11,613
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)
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(12,561
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)
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Income taxes payable
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32,698
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6,483
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Other
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3,822
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(175
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)
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Net cash provided by operating activities
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155,841
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111,332
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Cash flows from investing activities:
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Capital expenditures
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(111,176
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)
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(107,326
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)
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Proceeds from sale of property and equipment
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321
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721
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Decrease (increase) in restricted cash
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13,470
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(21,870
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)
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Proceeds from sale of short-term investments
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—
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15,913
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Net cash used in investing activities
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(97,385
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)
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(112,562
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)
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Cash flows from financing activities:
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Excess tax benefit of stock options exercised
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19,738
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11,902
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Principal payments under capital lease obligations
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(27
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)
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(83
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)
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Restricted stock units withheld to satisfy tax obligations
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(6,581
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)
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(981
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)
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Repurchase of common stock
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(163,840
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)
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(172,093
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)
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Net proceeds from issuance of common stock
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22,710
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24,036
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Cash dividends paid to stockholders
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(37,236
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)
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(22,300
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)
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Net cash used in financing activities
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(165,236
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)
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(159,519
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)
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Net decrease in cash and cash equivalents
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(106,780
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)
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(160,749
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)
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Cash and cash equivalents at beginning of period
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176,965
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257,339
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Cash and cash equivalents at end of period
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$
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70,185
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$
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96,590
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Supplemental disclosures of cash flow information:
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Cash paid during the period for:
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Interest
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$
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1,143
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$
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565
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Income taxes
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95,577
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81,942
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|||
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Non-cash accruals for construction in progress
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(3,449
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)
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(4,763
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)
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The accompanying notes are an integral part of these financial statements.
Page
5
TRACTOR SUPPLY COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended
December 31, 2011
. The results of operations for the fiscal three-month and
nine
-month periods are not necessarily indicative of results for the full fiscal year.
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters 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 and our ability to effectively manage inventory allocation.
We experience our highest inventory and accounts payable balances during the first fiscal quarter for purchases of seasonal products in anticipation of the spring selling season and again during the third fiscal quarter in anticipation of the cold-weather selling season.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Our financial instruments consist of cash and cash equivalents, restricted cash, short-term receivables, trade payables and long-term debt instruments. The carrying values of cash and cash equivalents, restricted cash, short-term receivables and trade payables approximate current fair value at each balance sheet date. We had
no
borrowings under the revolving credit facility at
September 29, 2012
,
December 31, 2011
or
September 24, 2011
.
Share-based compensation includes stock options, restricted stock unit awards and certain transactions under our Employee Stock Purchase Plan (the “ESPP”). Share-based compensation expense is recognized based on grant date fair value of all options and restricted stock unit awards plus a discount on shares purchased by employees as a part of the ESPP. The discount under the ESPP represents the difference between the grant date market value and the employee’s purchase price.
There were no significant modifications to our share-based compensation plans during the fiscal
nine
months ended
September 29, 2012
.
For the
third
quarters of fiscal
2012
and
2011
, share-based compensation expense was
$4.7 million
and
$3.7 million
, respectively, and
$14.1 million
and
$10.7 million
for the first
nine
months of fiscal
2012
and
2011
, respectively.
Page
6
Stock Options
The following summarizes information concerning stock option grants during each of the first
nine
months of fiscal
2012
and
2011
:
|
|
Fiscal nine months ended
|
||||||
|
|
September 29,
2012 |
September 24,
2011 |
|||||
|
Stock options granted
|
570,277
|
|
545,455
|
|
|||
|
Weighted average exercise price
|
$
|
85.54
|
|
$
|
52.13
|
|
|
|
Weighted average fair value per option
|
$
|
26.25
|
|
$
|
17.72
|
|
|
As of
September 29, 2012
, total unrecognized compensation expense related to non-vested stock options was approximately
$14.4 million
with a remaining weighted average expense recognition period of
1.4
years.
Restricted Stock Units
The following summarizes information concerning restricted stock unit grants during each of the first
nine
months of fiscal
2012
and
2011
:
|
|
Fiscal nine months ended
|
||||||
|
|
September 29,
2012 |
September 24,
2011 |
|||||
|
Restricted stock units granted
|
40,017
|
|
63,484
|
|
|||
|
Weighted average fair value per share
|
$
|
87.10
|
|
$
|
53.23
|
|
|
As of
September 29, 2012
, total unrecognized compensation expense related to non-vested restricted stock units was approximately
$3.2 million
with a remaining weighted average expense recognition period of
1.6
years.
We present both basic and diluted earnings per share (“EPS”) on the face of the consolidated statements of income. Basic EPS is calculated as income available to common stockholders divided by the weighted average number of shares outstanding during the period. There were no participating securities other than common stock during the fiscal three and
nine
months ended
September 29, 2012
and
September 24, 2011
. Diluted EPS is calculated using the weighted average outstanding common shares and the treasury stock method for options and restricted stock units.
Net income per share is calculated as follows (in thousands, except per share amounts):
|
|
Fiscal three months ended September 29, 2012
|
Fiscal three months ended September 24, 2011
|
|||||||||||||||||||
|
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Income
|
Shares
|
Per Share
Amount
|
Income
|
Shares
|
Per Share
Amount
|
|||||||||||||||
|
Basic net income per share:
|
|
|
|
|
|
|
|||||||||||||||
|
Net income
|
$
|
50,021
|
|
70,741
|
|
$
|
0.71
|
|
$
|
42,733
|
|
71,226
|
|
$
|
0.60
|
|
|||||
|
Diluted net income per share:
|
|||||||||||||||||||||
|
Dilutive stock options and restricted stock units outstanding
|
—
|
|
1,572
|
|
(0.02
|
)
|
—
|
|
2,117
|
|
(0.02
|
)
|
|||||||||
|
Net income
|
$
|
50,021
|
|
72,313
|
|
$
|
0.69
|
|
$
|
42,733
|
|
73,343
|
|
$
|
0.58
|
|
|||||
Page
7
|
|
Fiscal nine months ended September 29, 2012
|
Fiscal nine months ended September 24, 2011
|
|||||||||||||||||||
|
|
Income
|
Shares
|
Per Share
Amount
|
Income
|
Shares
|
Per Share
Amount
|
|||||||||||||||
|
Basic net income per share:
|
|
|
|
|
|
|
|||||||||||||||
|
Net income
|
$
|
196,970
|
|
71,383
|
|
$
|
2.76
|
|
$
|
152,228
|
|
71,988
|
|
$
|
2.11
|
|
|||||
|
Diluted net income per share:
|
|||||||||||||||||||||
|
Dilutive stock options and restricted stock units outstanding
|
—
|
|
1,715
|
|
(0.07
|
)
|
—
|
|
2,170
|
|
(0.06
|
)
|
|||||||||
|
Net income
|
$
|
196,970
|
|
73,098
|
|
$
|
2.69
|
|
$
|
152,228
|
|
74,158
|
|
$
|
2.05
|
|
|||||
Anti-dilutive stock options excluded from the above calculations totaled approximately
0.4 million
for each of the three months ended
September 29, 2012
and
September 24, 2011
and
0.5 million
for each of the
nine
months ended
September 29, 2012
and
September 24, 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.
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 for a total cost of
$163.8 million
and
$172.1 million
, respectively. As of
September 29, 2012
, we had remaining authorization under the share repurchase program of
$399.1 million
exclusive of any fees, commissions, or other expenses.
During the first
nine
months of fiscal
2012
, the Board of Directors declared the following dividends:
|
Date Declared
|
Dividend Amount
Per Share
|
Stockholders of Record Date
|
Date Paid
|
|||||
|
February 8, 2012
|
$
|
0.12
|
|
February 27, 2012
|
March 13, 2012
|
|||
|
May 2, 2012
|
$
|
0.20
|
|
May 21, 2012
|
June 5, 2012
|
|||
|
August 1, 2012
|
$
|
0.20
|
|
August 20, 2012
|
September 5, 2012
|
|||
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.
Page
8
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 Accounting Standard Codifications ("ASC") 740-10. These improvements were partially offset by lower federal tax credits, primarily Work Opportunity Tax Credits ("WOTC") and the HIRE Act credits, which expired in 2011. For the first
nine
months of
2012
our effective income tax rate increased slightly to
36.7%
compared to
36.6%
for the first
nine
months of
2011
. The Company expects the full year effective tax rate will be approximately
36.7%
.
Construction Commitments
At
September 29, 2012
, we had contractual commitments related to a new distribution center in Macon, GA totaling approximately
$30 million
, contractual commitments related to other construction projects totaling approximately
$5.6 million
and a contractual commitment to purchase
one
store previously under lease for approximately
$1.8 million
.
In August 2012, the Company purchased an undeveloped parcel of land in Brentwood, TN for a new store support center. The Company has no significant contractual commitments related to this project; however, construction is expected to begin by the end of the current year.
Letters of Credit
At
September 29, 2012
, there were
$41.4 million
outstanding letters of credit under the Senior Credit Facility and a
$6.2 million
outstanding letter of credit at a financial institution outside of the Senior Credit Facility which is collateralized by a time deposit classified as restricted cash.
Litigation
The Company responded to a Request for Information from the United States Environmental Protection Agency (“EPA”) in the first quarter of fiscal 2009 relating to certain recreational vehicles and non-road spark ignition engines sold by the Company. In the first quarter of fiscal 2011, the Environmental Enforcement Section of the Department of Justice (“DOJ”), on behalf of the EPA, informed the Company that it believed the Company had violated the Clean Air Act by importing or causing the importation of certain engines that were noncompliant, and that unless the DOJ and the Company were able to reach a settlement, the DOJ was prepared to commence a civil action. The engines were purchased by the Company pursuant to agreements with vendors under which the vendors represented that their products complied with all applicable laws and regulations and under which the vendors agreed to indemnify the Company for any liabilities or costs relating to, among other matters, the noncompliance or alleged noncompliance of their products. The Company notified these vendors of the EPA's position and has been working with these vendors to provide additional information to the DOJ and EPA regarding the alleged violations. As a result of this process, the Company believes it has provided evidence that many of the products identified by the DOJ and EPA were in compliance with the Clean Air Act and that most of the remaining issues relate to products purchased from
one
vendor. The vendor of these products and the Company are engaged in settlement discussions with the DOJ and EPA that would call for the payment of a civil penalty and certain injunctive relief. In addition, the EPA in May 2012 provided the Company with a summary of preliminary findings based on inspections of certain products sold by the Company. The Company is working with the vendor of these products to provide additional information to EPA. The Company does not expect the resolution of these matters to have a material adverse effect on its financial condition, results of operations or cash flows. We do not believe it is reasonably possible that a loss in excess of the amount accrued will be incurred.
We are also involved in various litigation matters arising in the ordinary course of business. We expect these matters will be resolved without material adverse effect on our consolidated financial position, results of operations or cash flows. We believe that any estimated loss related to such matters has been adequately provided in accrued liabilities to the extent probable and reasonably estimable.
Tractor Supply Company has one reportable segment which is the retail sale of farm and ranch products. The Company manages the business on the basis of
one
operating segment. The following chart indicates the percentage of sales represented by each of our major product categories for the fiscal
three and nine
months ended
September 29, 2012
and
September 24, 2011
:
Page
9
|
|
Fiscal three months ended
|
Fiscal nine months ended
|
|||||
|
|
September 29, 2012
|
September 24, 2011
|
September 29, 2012
|
September 24, 2011
|
|||
|
Product Category:
|
|
|
|||||
|
Livestock and Pet
|
45%
|
43%
|
43%
|
42%
|
|||
|
Hardware, Tools and Truck
|
24
|
24
|
23
|
23
|
|||
|
Seasonal, Gift and Toy Products
|
18
|
19
|
21
|
21
|
|||
|
Clothing and Footwear
|
7
|
7
|
7
|
7
|
|||
|
Agriculture
|
6
|
7
|
6
|
7
|
|||
|
Total
|
100%
|
100%
|
100%
|
100%
|
|||
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05 which provides new guidance on the presentation of comprehensive income. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and instead requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the standard for the interim period ended March 31, 2012. There are no items of other comprehensive income for the periods presented; thus there was no impact on the Company’s condensed consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” The ASU gives an entity the option in its annual goodwill impairment test to first assess qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is more than its carrying amount (“qualitative assessment”). If it is more likely than not the fair value of a reporting unit is more than its carrying amount, an entity would not be required to perform the existing two-step impairment test. The amendments to Topic 350 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted the standard for the interim period ended March 31, 2012. There was no impact on the Company’s condensed consolidated financial statements.
On
October 31, 2012
, our Board of Directors declared a quarterly cash dividend of
$0.20
per share of the Company’s common stock. The dividend will be paid on
December 4, 2012
to stockholders of record as of the close of business on
November 19, 2012
.
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,
Page
10
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%
|
|
Page
11
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 Quarter
|
Second Quarter
|
Third Quarter
|
First Nine 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.
Page
12
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,
2012 |
September 24,
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):
Page
13
|
|
September 29,
2012 |
December 31,
2011 |
Variance
|
September 24,
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,
2012 |
September 24,
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
|
|
||
Page
14
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,
2012 |
September 24,
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.
Page
15
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 for a total cost of
$163.8 million
and
$172.1 million
, respectively. As of
September 29, 2012
, we had remaining authorization under the share repurchase program of
$399.1 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 fiscal
2012
, the Board of Directors declared the following dividends:
|
Date Declared
|
Dividend Amount
Per Share
|
Stockholders of Record Date
|
Date Paid
|
|||||
|
February 8, 2012
|
$
|
0.12
|
|
February 27, 2012
|
March 13, 2012
|
|||
|
May 2, 2012
|
$
|
0.20
|
|
May 21, 2012
|
June 5, 2012
|
|||
|
August 1, 2012
|
$
|
0.20
|
|
August 20, 2012
|
September 5, 2012
|
|||
In addition to the above, on
October 31, 2012
, our Board of Directors declared a quarterly cash dividend of
$0.20
per share of the Company’s common stock. The dividend will be paid on
December 4, 2012
to stockholders of record as of the close of business on
November 19, 2012
.
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, and 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 29, 2012
, we had contractual commitments related to a new distribution center in Macon, GA totaling approximately
$30 million
, contractual commitments related to other construction projects totaling approximately
$5.6 million
and a contractual commitment to purchase
one
store previously under lease for approximately
$1.8 million
.
In August 2012, the Company purchased an undeveloped parcel of land in Brentwood, TN for a new store support center. The Company has no significant contractual commitments related to this project; however, construction is expected to begin by the end of the current year.
There has been no other material changes in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal
2011
.
At
September 29, 2012
, there were
$41.4 million
outstanding letters of credit under the Senior Credit Facility and a
$6.2 million
outstanding letter of credit at a financial institution outside of the Senior Credit Facility which is collateralized by a time deposit classified as restricted cash.
Page
16
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 significant accounting policies, including areas of critical management judgments and estimates, have primary impact on the following financial statement areas:
|
-
|
Inventory valuation
|
-
|
Income tax contingencies
|
|
-
|
Self-insurance reserves
|
-
|
Long-lived assets
|
|
-
|
Sales tax audit reserve
|
|
|
See the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2011
for a discussion of our critical accounting policies. Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.
Interest Rate Risk
We may be exposed to changes in interest rates primarily from the Senior Credit Facility. The Senior Credit Facility bears interest at either the bank’s base rate (
3.25%
at
September 29, 2012
and
September 24, 2011
) or LIBOR (
0.21%
at
September 29, 2012
and
0.24%
at
September 24, 2011
) plus an additional amount per annum adjusted quarterly (ranging from
0.40%
to
1.00%
at
September 29, 2012
and
0.35%
to
0.90%
at
September 24, 2011
) based on our leverage ratio (
0.50%
at
September 29, 2012
and
0.40%
at
September 24, 2011
). We are also required to pay (quarterly in arrears) a commitment fee (ranging from
0.08%
to
0.20%
at
September 29, 2012
and
0.06%
to
0.18%
at
September 24, 2011
) based on the daily average unused portion of the credit line (
0.10%
at
September 29, 2012
and
0.08%
at
September 24, 2011
). See Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements included herein for further discussion regarding the Senior Credit Facility.
Seasonality and Weather
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters due to the sale of seasonal products. In past years, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes and droughts in some states have also affected our sales and results of operations. Our strategy is to reduce or mitigate the impact of extreme weather conditions through geographic dispersion of our stores and taking advantage of our ability to effectively manage inventory allocation.
We experience our highest inventory and accounts payable levels during our first fiscal quarter for purchases of seasonal product in anticipation of the spring selling season and again during our third fiscal quarter in anticipation of the cold-weather selling season.
Purchase Price Volatility
Although we cannot determine the full effect of inflation and deflation on our operations, we believe our sales and results of operations are affected by both. We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, steel, grain, petroleum, corn, cotton and other commodities as well as transportation services. Therefore, we may experience both inflationary and deflationary pressures on product cost, which may impact consumer demand and, as a result, sales and gross margin. Our strategy is to reduce or mitigate the effects of purchase price volatility principally by taking advantage of vendor incentive programs, economies of scale from increased volume of purchases, adjusting retail prices and selectively buying from the most competitive vendors without sacrificing quality. Should our strategy to mitigate purchase price volatility not be effective, our financial performance could be adversely impacted.
Page
17
Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of
September 29, 2012
. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of
September 29, 2012
, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Page
18
The Company responded to a Request for Information from the United States Environmental Protection Agency (“EPA”) in the first quarter of fiscal 2009 relating to certain recreational vehicles and non-road spark ignition engines sold by the Company. In the first quarter of fiscal 2011, the Environmental Enforcement Section of the Department of Justice (“DOJ”), on behalf of the EPA, informed the Company that it believed the Company had violated the Clean Air Act by importing or causing the importation of certain engines that were noncompliant, and that unless the DOJ and the Company were able to reach a settlement, the DOJ was prepared to commence a civil action. The engines were purchased by the Company pursuant to agreements with vendors under which the vendors represented that their products complied with all applicable laws and regulations and under which the vendors agreed to indemnify the Company for any liabilities or costs relating to, among other matters, the noncompliance or alleged noncompliance of their products. The Company notified these vendors of the EPA's position and has been working with these vendors to provide additional information to the DOJ and EPA regarding the alleged violations. As a result of this process, the Company believes it has provided evidence that many of the products identified by the DOJ and EPA were in compliance with the Clean Air Act and that most of the remaining issues relate to products purchased from
one
vendor. The vendor of these products and the Company are engaged in settlement discussions with the DOJ and EPA that would call for the payment of a civil penalty and certain injunctive relief. In addition, the EPA in May 2012 provided the Company with a summary of preliminary findings based on inspections of certain products sold by the Company. The Company is working with the vendor of these products to provide additional information to EPA. The Company does not expect the resolution of these matters to have a material adverse effect on its financial condition, results of operations or cash flows. We do not believe it is reasonably possible that a loss in excess of the amount accrued will be incurred.
We are also involved in various litigation matters arising in the ordinary course of business. We expect these matters will be resolved without material adverse effect on our consolidated financial position, results of operations or cash flows. We believe that any estimated loss related to such matters has been adequately provided in accrued liabilities to the extent probable and reasonably estimable.
There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2011
.
Issuer Purchases of Equity Securities
The Company’s Board of Directors has authorized share repurchases under the share repurchase program up to $1 billion through April 2015. Stock repurchase activity during the
third
quarter of fiscal
2012
was as follows:
|
Period
|
Number of
Shares
Purchased
|
Average
Price Paid
Per Share
|
Number of Shares
Purchased as Part of Publicly Announced Plans or Programs
|
Maximum Dollar
Value of Shares That May Yet Be Purchased Under the Plans or Programs
|
||||||||||
|
July 1, 2012 – July 28, 2012
|
208,635
|
|
$
|
83.74
|
|
208,635
|
|
$
|
442,907,701
|
|
||||
|
July 29, 2012 – August 25, 2012
|
352,985
|
|
91.36
|
|
352,985
|
|
410,667,182
|
|
||||||
|
August 26, 2012 – September 29, 2012
|
119,085
|
|
97.27
|
|
119,085
|
|
399,086,246
|
|
||||||
|
As of September 29, 2012
|
680,705
|
|
$
|
90.06
|
|
680,705
|
|
$
|
399,086,246
|
|
||||
We expect to implement the balance of the repurchase program through purchases made from time to time either in the open market or through private transactions, in accordance with regulations of the Securities and Exchange Commission.
None
Page
19
Not applicable.
None.
Exhibit
31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101
|
The following financial information from our Quarterly Report on Form 10-Q for the
third
quarter of fiscal
2012
, filed with the SEC on
November 5, 2012
, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets at
September 29, 2012
;
December 31, 2011
; and
September 24, 2011
, (ii) the Condensed Consolidated Statements of Income for the fiscal three and
nine
months ended
September 29, 2012
and
September 24, 2011
, (iii) the Condensed Consolidated Statements of Cash Flows for the fiscal
nine
months ended
September 29, 2012
and
September 24, 2011
, and (iv) the Notes to Unaudited Condensed Consolidated Financial Statements.
|
Page
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
TRACTOR SUPPLY COMPANY
|
|
|
|
|
|
|
Date:
|
November 5, 2012
|
By:
|
/s/ Anthony F. Crudele
|
|
|
|
|
Anthony F. Crudele
|
|
|
|
|
Executive Vice President - Chief Financial Officer and Treasurer
|
|
|
|
|
(Duly Authorized Officer and Principal Financial Officer)
|
Page
21
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Basis Of Presentation:Note 2 Fair Value Of Financial Instruments:Note 3 Share-based Compensation:Note 4 - Net Income Per Share:Note 5 Credit Agreement:Note 6 Treasury Stock:Note 7 Dividends:Note 8 Income Taxes:Note 9 Commitments and Contingencies:Note 10 Segment Reporting:Note 11 Impact Of Recently Issued Accounting Standards:Note 12 Subsequent Events:Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits