Tractor Supply - 10-Q quarterly report FY

Washington, D.C. 20549

 

Commission file number 000-23314

 

 

 

 

 

 

 

The accompanying notes are an integral part of this statement.

 

 

 

 

 

The accompanying notes are an integral part of this statement.

 

The accompanying unaudited interim 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 footnotes 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 30, 2006. The results of operations for the fiscal three-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 of each year due to the sale of seasonal products. Unseasonable weather, excessive rain, drought, and early or late frosts may also affect our sales. We believe, however, that the impact of adverse weather conditions is somewhat mitigated by the geographic dispersion of our stores.

We experience our highest inventory and accounts payable balances during the first fiscal quarter each year for purchases of seasonal products in anticipation of the spring selling season and again during the third fiscal quarter in anticipation of the winter selling season.

Certain amounts in previously issued financial statements have been reclassified to conform to the fiscal 2007 presentation. Inventories in-transit and inventory initially consigned but ultimately purchased have been included in the inventory and accounts payable balances in the consolidated balance sheets. Discount fees on our proprietary credit card have been reclassified from operating expenses into cost of merchandise sold in the consolidated statements of income.

Inventories are stated using the lower of last-in, first-out (LIFO) cost or market. Inventories are not in excess of market value. Quarterly inventory determinations under LIFO are based on assumptions as to projected inventory levels at the end of the fiscal year, sales for the year and the rate of inflation/deflation for the year. If the first-in, first-out (FIFO) method of accounting for inventory had been used, inventories would have been approximately $21.6 million and $20.3 million higher than reported at March 31, 2007 and December 30, 2006, respectively.

Under SFAS 123(R), forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Under our 2006 Stock Incentive Plan, options may be granted to officers, non-employee directors and other employees. The per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than ten years from the date of grant. In the case of a stockholder owning more than 10% of our outstanding voting stock, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $100,000. Vesting of options commences at various anniversary dates following the dates of grant.

 

The weighted average key assumptions used in determining the fair value of options granted in the three months ended March 31, 2007 and April 1, 2006 are as follows:

As of March 31, 2007, total unrecognized compensation expense related to non-vested stock options and restricted stock units was $23,256,675 with a weighted average expense recognition period of 2.06 years.

During the first quarter of 2007, we issued 59,500 restricted stock units which vest over a three-year term and had a grant date fair value of $46.17.

We have an Employee Stock Purchase Plan (the “ESPP”) whereby all our employees have the opportunity to purchase, through payroll deductions, shares of common stock at a 15% discount. Pursuant to the terms of the ESPP, we issued 11,503 and 8,869 shares of common stock during the first quarter of fiscal 2007 and 2006, respectively. Total stock compensation expense related to the ESPP was approximately $113,000 and $61,000 during the first fiscal quarter of 2007 and 2006, respectively. At March 31, 2007, there were 3,334,554 shares of common stock reserved for future issuance under the ESPP.

 

There were no significant modifications to our share-based compensation plans during the three months ended March 31, 2007.

We present both basic and diluted earning per share (“EPS”) on the face of the consolidated statements of income. As provided by SFAS 128 “Earnings per Share”, basic EPS is calculated as income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted EPS is calculated using the weighted average outstanding common shares and the treasury stock method for options and warrants.

Net income per share is calculated as follows (in thousands, except per share amounts):

In February 2007, we entered into a new Senior Credit Facility with largely the same lender group as under the Credit Agreement. The new Senior Credit Facility provides for borrowings up to $250 million (with sublimits of $75 million and $10 million for letters of credit and swingline loans, respectively). This agreement is unsecured and has a five-year term, with proceeds expected to be used for working capital, capital expenditures and share repurchases. Borrowings will bear interest at either the bank’s base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at March 31, 2007). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for unused capacity (0.10% at March 31, 2007). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios.

In February 2007, our Board of Directors authorized a share repurchase program which provides for repurchase of up to $200 million of common stock over an approximate three-year period. 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 413,492 shares under the share repurchase program during the first fiscal quarter of 2007. The total cost of the share repurchases was $21.3 million. As of March 31, 2007, we had remaining authorization under the share repurchase program of $178.7 million.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”) to create a single model to address accounting for uncertainty in tax positions. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Tax positions that meet a “more-likely-than-not” recognition threshold should be measured in order to determine the tax benefit to be recognized. We are no longer subject to federal examination for years before 2005, and state and local income tax examinations for years before 2002.

We have adopted the provisions of FIN 48 in fiscal 2007, as required. As a result we have currently charged retained earning approximately $1.9 million for the cumulative effect of adoption including interest. Interest and penalties are immaterial at the date of adoption. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.3 million. In addition, we will recognize current interest accrued related to these uncertain tax positions as an operating expense.

In March 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-3”), which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of EITF 06-3 would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. EITF 06-3 was adopted as required in fiscal 2007. EITF 06-3 does not impact the method for recording and reporting these sales taxes in our consolidated financial statements as our policy is to exclude all such taxes from revenue.

We had commitments for new store construction projects totaling approximately $7.5 million at March 31, 2007.

We are involved in various litigation matters arising in the ordinary course of business. After consultation with legal counsel, our management expects these matters will be resolved without material adverse effect on our consolidated financial position or results of operations. Any estimated loss related to such matters has been adequately provided in accrued liabilities to the extent probable and reasonably estimable. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in circumstances relating to these proceedings.

 

The following discussion and analysis describes certain factors affecting our results of operations for the fiscal three month periods ended March 31, 2007 and April 1, 2006 and significant developments affecting our financial condition since the end of the fiscal year ended December 30, 2006, and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. 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, future capital expenditures (including their amount and nature), business strategy, expansion and growth of our business operations and other such matters are forward-looking statements. These forward-looking statements may be affected by certain risks and uncertainties, any one, or a combination of which could materially affect the results of our operations. To take advantage of the safe harbor provided by the Act, we are identifying certain factors that could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written.

Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable weather, excessive rain, drought, and early or late frosts may also affect our sales. We believe, however, that the impact of adverse weather conditions is somewhat mitigated by the geographic dispersion of our stores.

We experience our highest inventory and accounts payable balances during the first fiscal quarter each year for purchases of seasonal products in anticipation of the spring selling season and again during the third fiscal quarter in anticipation of the winter selling season.

As with any business, many aspects of our operations are subject to influences outside our control. These 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. These factors include general economic cycles affecting consumer spending, weather factors, operating factors affecting customer satisfaction, consumer debt levels, inflation, pricing and other competitive factors, the ability to attract, train and retain qualified employees, the ability to manage growth and identify suitable locations and negotiate favorable lease agreements on new and relocated stores, the timing and acceptance of new products in the stores, the mix of goods sold, the continued availability of favorable credit sources, capital market conditions in general, the ability to increase sales at existing stores, the ability to retain vendors, the risk of product liability and other claims, reliance on foreign suppliers, the ability to maintain and improve our management information systems and the seasonality of our business. 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 30, 2006. 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.

Net sales increased 20.3% to $559.8 million for the first quarter of 2007 from $465.5 million for the first quarter of 2006. The net sales increase resulted primarily from the addition of new stores and same-store sales improvement of 8.5%. Our same-store sales improvement was strongest in winter-related merchandise such as insulated outerwear, snow removal and heating products as well as in the apparel and animal health categories. These results were driven primarily by cold weather during January and February in the northern and midwestern states.

During the first quarter of 2007, we opened a total of 22 new stores compared to 29 stores in the first quarter of 2006. We also relocated seven stores in the first quarter of 2007 compared to five store relocations in the first quarter of 2006. We operated 698 stores as of the end of the first quarter of 2007 compared to 624 stores as of the end of the first quarter of 2006.

The following chart indicates the average percentage of sales represented by each of our major product categories during the first quarter of fiscal 2007 and 2006:

 

 

Gross profit increased 18.4% to 168.2 million for the first quarter of 2007 from $142.0 million for the first quarter of 2006. As a percent of sales, gross profit decreased 50 basis points to 30.0% compared to 30.5% in the first quarter of 2006, largely as a result of seasonal markdowns, product mix and increased freight costs.

Selling, general and administrative (“SG&A”) expenses decreased 170 basis points to 26.3% of sales in the first quarter of 2007 compared to 28.0% of sales in the first quarter of 2006. The expense leverage is a result of the increased sales and a planned decrease in pre-opening and marketing expenses, some of which will shift into the second quarter.

Depreciation and amortization expense increased to $12.0 million in the first quarter of 2007 from $9.6 million in the first quarter of 2006, as the result of new store growth and capital costs for infrastructure and technology.

 

Interest expense for the first quarter of 2007 remained consistent with the prior year at $0.9 million. Our effective income tax rate increased to 37.9% in the first quarter of 2007 compared with 37.1% for the first quarter of 2006 primarily due to state taxes relating to the composition of income among the states and the adoption of FIN 48 relating to uncertainties in income tax positions. This Interpretation prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Tax positions that meet a “more-likely-than-not” recognition threshold should be measured in order to determine the tax benefit to be recognized. We are no longer subject to federal examination for years before 2005, and state and local income tax examinations for years before 2002.

We have adopted the provisions of FIN 48 in fiscal 2007, as required. As a result we have currently charged retained earning approximately $1.9 million for the cumulative effect of adoption including interest. Interest and penalties are immaterial at the date of adoption. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.3 million. In addition, we will recognize current interest accrued related to these uncertain tax positions as an operating expense.

As a result of the foregoing factors, net income for the first quarter of 2007 increased $4.5 million to $5.0 million from $0.5 million in the first quarter of 2006. Net income, as a percent of sales, increased 80 basis points to 0.9% for the first quarter of 2007. Net income per diluted share was $0.12 for the first quarter of 2007 compared to $0.01 for the first quarter of 2006.

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

At March 31, 2007, we had working capital of $352.4 million, a $36.3 million increase from December 30, 2006. This increase was primarily attributable to changes in the following components of current assets and current liabilities (in millions):

The increase in inventories and related increase in accounts payable resulted primarily from the purchase of additional inventory for new stores and an increase in average inventory per store due to increased sales expectations, planned merchandising initiatives and the typical seasonal growth in inventory levels. Trade credit arises from our vendors granting extended payment terms for inventory purchases. Payment terms generally vary from 30 days to 180 days depending on the inventory product.

Operations used net cash of $19.1 million and $29.7 million in the first quarter of 2007 and 2006, respectively. The $10.6 million improvement in net cash used in 2007 over 2006 is due to changes in the following operating activities (in millions):

The improvement in net cash used in operations in the first quarter of 2007 compared with the first quarter of 2006 is primarily due to strong sales performance and the timing of payments. The decrease in cash used for inventory results from a partial build of seasonal stock levels prior to the beginning of fiscal 2007. The decrease in cash used for accrued expenses was primarily due to the timing of the accruals and the related payment of those accruals.

Investing activities used $16.3 million and $19.3 million in the first quarter of 2007 and 2006, respectively. The majority of this cash requirement relates to our capital expenditures.

Capital expenditures (including equipment acquired under capital leases) for the first three months of fiscal 2007 and 2006 were as follows (in millions):

The above table reflects 29 new/relocated stores in the first quarter of 2007, compared to 34 during the first quarter of 2006.

Financing activities provided $33.6 million and $67.4 million in the first quarter of 2007 and 2006, respectively. This reduction in net cash provided is largely due to the repurchase of shares of common stock, as well as a reduction in the tax benefit on stock option exercises. We had approximately $171.4 million and $74.2 million available for future borrowings, net of outstanding letters of credit, under our revolving credit agreement at March 31, 2007 and April 1, 2006, respectively.

In February 2007, we entered into a new Senior Credit Facility with largely the same lender group as under the Credit Agreement. The new Senior Credit Facility provides for borrowings up to $250 million (with sublimits of $75 million and $10 million for letters of credit and swingline loans, respectively). This agreement is unsecured and has a five-year term, with proceeds expected to be used for working capital, capital expenditures and share repurchases. Borrowings will bear interest at either the bank’s base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at March 31, 2007). We are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for unused capacity (0.10% at March 31, 2007). The agreement requires quarterly compliance with respect to fixed charge coverage and leverage ratios.

We believe that our cash flow from operations, borrowings available under our revolving credit agreement, and normal trade credit will be sufficient to fund our operations and capital expenditure needs, including store openings and renovations, over the next several years.

In February 2007, our Board of Directors authorized a share repurchase program which provides for repurchase of up to $200 million of our outstanding common stock over an approximate three-year period. 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. The program may be limited or terminated at any time without prior notice.

In the first quarter of 2007, we repurchased 413,492 shares of our common stock, at a total cost of $21.3 million. Repurchased shares are accounted for at cost and will be held in treasury for future issuance.

Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. Leasing buildings and equipment for retail stores and offices rather than acquiring these significant assets allows us to utilize financial capital to operate the business rather than maintain assets. Letters of credit allow us to purchase inventory in a timely manner.

We had outstanding letters of credit of $25.2 million at March 31, 2007.

There has been no material change in our contractual obligations and commercial commitments other than in the ordinary course of business since the end of fiscal 2006.

 

Our 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 accounting principles generally accepted in the United States. The preparation of these financial statements requires us 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. Significant accounting policies, including areas of critical management judgments and estimates, have primary impact on the following financial statement areas:

 

See Note 1 to the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 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.

We are exposed to changes in interest rates primarily from our revolving credit agreement (the “Credit Agreement”). The Credit Agreement bears interest at either the bank’s base rate (8.25% and 7.75% at March 31, 2007 and April 1, 2006, respectively) or LIBOR (5.32% and 4.83% at March 31, 2007 and April 1, 2006, respectively) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly, based on our performance (0.50% at March 31, 2007). We are also required to pay, quarterly in arrears, a commitment fee ranging from 0.06% to 0.18% based on the daily average unused portion of the Credit Agreement (0.10% at March 31, 2007). See Note 6 of Notes to the Consolidated Financial Statements included herein for further discussion regarding the Credit Agreement.

Although we cannot accurately determine the precise effect of inflation on our operations, we believe our sales and results of operations have been affected by inflation. We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, petroleum, steel, corn, soybean and other commodities as well as transportation services. If prices of these materials continue to increase consumer demand may fall and/or we may not be able to pass all such increases on to our customers and, as a result, sales and/or gross margins could decline. Our strategy is to reduce or mitigate the effects of inflation principally by taking advantage of vendor incentive programs, economies of scale from increased volume of purchases, increasing retail prices and selectively buying from the most competitive vendors without sacrificing quality. Due to the competitive environment, such conditions have and may continue to adversely impact our gross margin.

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 March 31, 2007. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2007, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in our internal control over financial reporting during the first fiscal quarter of 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

We are involved in various litigation matters arising in the ordinary course of business. After consultation with legal counsel, management expects these matters will be resolved without material adverse effect on our consolidated financial position or results of operations. Any estimated loss related to such matters has been adequately provided for in accrued liabilities to the extent probable and reasonably estimable. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in circumstances relating to these proceedings.

There have been no material changes to our risk factors as previously disclosed in our Form 10-K for the fiscal year ended December 30, 2006.

In February 2007, our Board of Directors authorized a share repurchase program which provides for repurchase of up to $200 million of our outstanding common stock over an approximate three-year period. Stock repurchase activity during the first quarter of 2007 was as follows:

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

None

None

 

               Exhibits

 

 

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.