UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from________to________.
Commission file number 000-23314
TRACTOR SUPPLY COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 13-3139732 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
5401 Virginia Way, Brentwood, Tennessee | 37027 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s Telephone Number, Including Area Code: | (615) 440-4000 | |
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $.008 par value | NASDAQ Global Select Market | |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o NO þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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:
Large accelerated filer | þ | Accelerated filer | o | |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
YES o NO þ
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on The NASDAQ Global Select Market on June 25, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $9.6 billion. For purposes of this response, the registrant has assumed that its directors, executive officers, and beneficial owners of 5% or more of its Common Stock are affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
Class | Outstanding at January 28, 2017 | |
Common Stock, $.008 par value | 130,725,876 | |
Portions of the Registrant’s definitive Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
Item no. | Form 10-K Report Page | |
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FORWARD-LOOKING STATEMENTS OR INFORMATION
This Form 10-K and statements included or incorporated by reference in this Form 10-K include certain historical and forward-looking information. The forward-looking statements included 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 future capital expenditures (including their amount and nature), business strategy, expansion and growth of the business operations and other such matters are forward-looking statements. 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. These factors include, without limitation, national, regional and local economic conditions affecting consumer spending, weather conditions, the seasonal nature of the business, the timing and acceptance of new products in the stores, the timing and 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, failure of an acquisition to produce anticipated results, the ability to successfully manage expenses and execute key gross margin enhancing initiatives, the availability of favorable credit sources, capital market conditions in general, the ability to open new stores in the manner and number currently contemplated, the impact of new stores on the business, competition, effective merchandising and marketing initiatives, 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 information systems or theft of employee or customer data, ongoing and potential future legal or regulatory proceedings, management of the Company’s information systems, failure to develop and implement new technologies, the failure of customer-facing technology systems, business disruption including from the implementation of new 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, changes in accounting standards, assumptions and estimates, and those described in Item 1A. “Risk Factors.” Forward-looking statements are based on currently available information and are based on our current expectations and projections about future events. 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.
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PART I
Item 1. | Business |
Overview
Tractor Supply Company (the “Company” or “we”) is the largest operator of rural lifestyle retail stores in the United States. The Company is focused on supplying the needs of recreational farmers and ranchers and others who enjoy the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. We operate retail stores under the names Tractor Supply Company, Del’s Feed & Farm Supply and Petsense and operate websites under the names TractorSupply.com and Petsense.com. Our stores are located primarily in towns outlying major metropolitan markets and in rural communities.
Tractor Supply Company has one reportable industry segment which is the retail sale of products that support the rural lifestyle. At December 31, 2016, we operated 1,738 retail stores in 49 states (1,595 Tractor Supply and Del’s retail stores and 143 Petsense retail stores). Our Tractor Supply stores typically range in size from 15,000 to 20,000 square feet of inside selling space, along with additional outside selling space and our Petsense stores have approximately 5,500 square feet of inside selling space. For Tractor Supply retail locations, we use a standard design for most new built-to-suit locations that includes approximately 15,500 square feet of inside selling space.
Business Strategy
We believe our sales and earnings growth is the result of executing our business strategy, which includes the following key components:
Market Niche
We have identified a specialized market niche: supplying the lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses. By focusing our product assortment on these core customers, we believe we are differentiated from general merchandise, home center and other specialty retailers. We cater to the rural lifestyle and often serve a market by being a trip consolidator for many basic maintenance needs for farm, ranch and rural customers.
Customers
Our target customers are home, land, pet and livestock owners who generally have above average income and below average cost of living. We seek to serve a customer base that primarily lives in towns outlying major metropolitan markets and in rural communities. This customer base includes recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses.
Customer Service
We are committed to providing our customers reliable product availability and a high level of in-store service through our motivated, well-trained store team members. We believe the ability of our store team members to provide friendly, responsive and seasoned advice helps our customers find the right products to satisfy their everyday needs as well as the specialty items needed to complete their rural lifestyle projects. We also engage with our customers through an e-commerce website (TractorSupply.com), which provides the opportunity to allow customers to shop at a time and place that fits their schedule while delivering enhanced product information, research and decision tools that support product selection and informational needs in specific subject areas. Additionally, we maintain a customer solutions center at our Store Support Center located in Brentwood, Tennessee to support our in-store and online customers as well as our store team members. We believe this commitment to customer service promotes strong customer loyalty and repeat shopping.
We use a third party provider to measure our level of customer service. This process allows customers to provide feedback on their shopping experience. Based on the third party provider’s data, we believe our customer satisfaction scores to be among the best-in-class. We carefully evaluate the feedback we receive from our customers and implement improvements at the individual store level based on that feedback.
Store Personnel and Training
We seek to hire store team members with farming and ranching backgrounds, with particular emphasis on general maintenance, equine and welding. We endeavor to staff our stores with courteous, highly motivated team members and devote considerable resources to training store team members, often in cooperation with our vendors. Our training programs include:
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• | a thorough on-boarding process to prepare new team members for their new role; |
• | new store opening training that prepares new store managers to open stores to Company standards; |
• | a management training program which covers all aspects of our store operations, delivering superior service and managing the team member experience; |
• | structured training on customer service and selling skills; |
• | online product knowledge training produced in conjunction with key vendors; |
• | leadership development programs that prepare leaders to expand their current contributions; and |
• | an annual store manager meeting with vendor product presentations. |
Store Environment
Our stores are designed and managed to make shopping an enjoyable experience and to maximize sales and operating efficiencies. Stores are strategically arranged to provide an open environment for optimal product placement and visual display. In addition, these layouts allow for departmental space to be easily re-allocated and visual displays to be changed for seasonal products and promotions. Display and product placement information is routinely sent to stores to ensure quality and uniformity among the stores. Informative signs are located in key product categories to assist customers with purchasing decisions and merchandise location. These signs provide customers with a comparison of product qualities, clear pricing, useful information regarding product benefits, and suggestions for appropriate accessories. Our store layouts and visual displays are designed to provide our customers a feeling of familiarity and enhance the shopping experience. Also, our store team members wear highly visible red vests, aprons or smocks with nametags, and our customer service and checkout counters are conveniently located near the front of the store.
Merchandising and Purchasing
We offer an extensive assortment of products for those seeking to enjoy the Out Here lifestyle, as well as tradesmen and small businesses. Our product assortment is tailored to meet the needs of our customers in various geographic markets. Our full line of product offerings includes a broad selection of high quality, reputable brand name and exclusive brand products and is supported by a strong in-stock inventory position with an average of 16,000 to 20,000 products per store. No one product accounted for more than 10% of our sales during 2016. Our comprehensive selection of merchandise is comprised of the following major product categories:
• | Equine, livestock, pet and small animal products, including items necessary for their health, care, growth and containment; |
• | Hardware, truck, towing and tool products; |
• | Seasonal products, including heating, lawn and garden items, power equipment, gifts and toys; |
• | Work/recreational clothing and footwear; and |
• | Maintenance products for agricultural and rural use. |
The following chart indicates the percentage of net sales represented by each of our major product categories during fiscal 2016, 2015 and 2014:
Percent of Net Sales | ||||||||
Product Category: | 2016 | 2015 | 2014 | |||||
Livestock and Pet | 46 | % | 44 | % | 44 | % | ||
Hardware, Tools, Truck and Towing | 22 | 23 | 22 | |||||
Seasonal, Gift and Toy Products | 19 | 20 | 20 | |||||
Clothing and Footwear | 8 | 8 | 9 | |||||
Agriculture | 5 | 5 | 5 | |||||
Total | 100 | % | 100 | % | 100 | % | ||
Our buying team continuously reviews and updates our product assortment to respond to customer needs and to offer new, relevant products. We are focused on providing key products that our customers use on a regular basis for their lifestyle and maintenance needs with emphasis on consumable, usable, and edible (“C.U.E.”) products. Examples of C.U.E. product categories include, but are not limited to, livestock feed and bedding, pet food, lubricants, and various seasonal products, such as heating, pest control and twine.
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Our products are sourced through both domestic and international vendors. Our business is not dependent upon any one vendor or particular group of vendors. We purchase our products from a group of approximately 850 vendors, with no one vendor representing more than 10% of our purchases during fiscal 2016. Approximately 300 core vendors accounted for 90% of our merchandise purchases during fiscal 2016. We have not experienced any significant difficulty in obtaining satisfactory alternative sources of supply for our products, and we believe that adequate sources of supply exist at substantially similar costs for nearly all of our products. We have no material long-term contractual commitments with any of our product vendors.
Our buying teams focus on merchandise procurement, vendor line reviews and testing of new products and programs. We also employ a dedicated inventory management team that focuses exclusively on forecasting and inventory replenishment, a committed merchandise planning team that concentrates on assortment planning and a specialized pricing team that seeks to optimize market-specific pricing for our products. Through the combined efforts of these teams, we continue to focus on improving our overall inventory productivity and in-stock position.
Intellectual Property
Our subsidiary, Tractor Supply Co. of Texas, LP (“TSCT”), owns registrations with the United States Patent and Trademark Office (“USPTO”) for various service marks including TSC®, Tractor Supply Co.®, TSC Tractor Supply Co.® and the trapezium design for retail store services. We consider these service marks, and the accompanying goodwill and name recognition, to be valuable assets of our business. TSCT also owns several other service marks for retail services, some of which have been registered with the USPTO and some of which are the subject of applications for registration pending before the USPTO.
In addition to selling products that bear nationally-known manufacturer brands, we also sell products manufactured for us under a number of exclusive brands that we consider to be important to our business. These exclusive brands are manufactured for us by a number of vendors and provide an alternative to the national brands, which helps provide value for our customers and positions us as a destination store.
Our exclusive brands represented approximately 32% of our total sales in fiscal 2016 and approximately 31% of our total sales in fiscal 2015 and fiscal 2014. Our exclusive brands include:
Ÿ 4health® (pet foods and supplies) | Ÿ JobSmart® (tools) |
Ÿ Bit & Bridle® (apparel and footwear) | Ÿ Paws & Claws® (pet foods and supplies) |
Ÿ Blue Mountain® (apparel) | Ÿ Producer’s Pride® (livestock and horse feed and supplies) |
Ÿ C.E. Schmidt® (apparel and footwear) | Ÿ Red Shed® (gifts, collectibles, and outdoor furniture) |
Ÿ Countyline® (livestock, farm and ranch equipment) | Ÿ Redstone® (heating products) |
Ÿ Dumor® (livestock and horse feed and supplies) | Ÿ Retriever® (pet foods and supplies) |
Ÿ Equistages® (horse feed) | Ÿ Royal Wing® (bird feed and supplies) |
Ÿ Groundwork® (lawn and garden supplies) | Ÿ Traveller® (truck and automotive products) |
Ÿ Huskee® (outdoor power equipment) | Ÿ TSC Tractor Supply Co® (trailers, truck tool boxes and animal |
bedding) | |
The exclusive brands identified above have been registered as trademarks with the USPTO for certain products and are the subject of applications for registration pending before the USPTO for other products.
Our trademark and service mark registrations have various expiration dates; however, provided that we continue to use the marks and renew the registrations in a timely manner, the registrations are potentially perpetual in duration.
We believe our intellectual property, which includes the trademarks and service marks identified above, together with certain trade names, domain names, patents and copyrights, has significant value and is an important component of our merchandising and marketing strategies.
Distribution
We currently operate a distribution network for supplying stores with merchandise and delivering product ordered through TractorSupply.com. In fiscal 2016, our Tractor Supply stores received approximately 75% of merchandise through this network while the remaining merchandise shipped directly to the stores from our vendors. We believe this flow facilitates the prompt and efficient distribution of merchandise in order to enhance in-stocks, minimize freight costs and improve the inventory turn rate. Our distribution facilities, located in Arizona, Georgia, Indiana, Kentucky, Maryland, Nebraska, Texas, and Washington, represent total distribution capacity of 5.0 million square feet. In fiscal 2017, we plan to begin construction on a new northeast distribution
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center as well as an expansion of our existing distribution center in Waverly, Nebraska which will provide additional distribution capacity once construction is completed.
We select the locations of our distribution facilities in an effort to minimize logistics costs and optimize the distance from distribution facilities to our stores. Our distribution centers utilize warehouse and labor management tools that support the planning, control and processing of inventory. We manage our inbound and outbound transportation activity in-house through the use of a transportation management system. We utilize multiple common carriers for store and direct to customer deliveries. We manage our transportation costs through carrier negotiations, the monitoring of transportation routes, and the scheduling of deliveries.
Marketing
We utilize an “everyday value price” philosophy to consistently offer our products at competitive prices complemented by strategically planned promotions throughout the year. To drive store traffic and position ourselves as a destination store, we promote broad selections of merchandise with newspaper circulars, customer targeted direct mail and e-mail, as well as digital and social media offerings. Vendors frequently support these specific programs by offering temporary cost reductions and honoring coupons. Our vendors also provide assistance with product presentation and fixture design, brochures, support for in-store events, and point-of-purchase materials for customer education and product knowledge for our team members.
Omni-Channel
We communicate with our customers across multiple touch points including our stores, e-commerce website (TractorSupply.com), e-mail, social media, direct mail and our customer call center. Our goal is to be available at any time and in any way our customers choose to engage with our brand. Connecting with consumers online provides the opportunity for customers to shop at a time and place that fits their schedule while delivering enhanced product information, research and decision tools that support product selection and informational needs in specific subject areas. We give our customers the ability to purchase products and have them shipped to one of our retail stores, their homes or offices. In 2016, we also began offering in certain stores an option to buy online and pick up in store. We believe our e-commerce capabilities further enhance customer service and extend our market to areas where our retail stores are not currently located. We maintain a fulfillment center within our Franklin, Kentucky distribution center to support our e-commerce activities. Additionally in 2016, we continued to invest in our omni-channel platform through expanded capabilities related to fulfillment options, product information and site research. We are focused on delivering an enhanced mobile and tablet experience, improving the site response time and expanding our product offerings for vendor direct to customer shipments.
Petsense
On September 29, 2016, we acquired Petsense, a small-box pet specialty supply retailer focused on meeting the needs of pet owners, primarily in small and mid-sized communities, and offering a variety of pet products and services. At December 31, 2016, we operated 143 Petsense stores in 26 states. The Petsense name is registered with the USPTO. Our two HomeTown Pet stores were converted to Petsense stores in fiscal 2017.
Management and Team Members
As of December 31, 2016, we employed approximately 13,000 full-time and 13,000 part-time team members. We also employ additional part-time team members during peak periods. We are not party to any collective bargaining agreements.
At the end of fiscal 2016, our store operations were organized into eleven regions. Each region is led by a regional director or vice president, and the region is further organized into districts, each of which is led by a district manager. We have two internal advisory boards, one comprised of store managers and the other comprised of district managers. These groups bring a grassroots perspective to operational initiatives and generate chain-wide endorsement of proposed best-practice solutions.
All of our team members participate in one of various bonus incentive programs, which provide the opportunity to receive additional compensation based upon team and/or Company performance. In addition to bonus incentive programs, we provide our eligible team members the opportunity to participate in an employee stock purchase plan and a 401(k) retirement savings plan. We also share in the cost of health insurance provided to eligible team members, and team members receive a discount on merchandise purchased from the Company.
We encourage a promote-from-within environment when internal resources permit. We also provide internal leadership development programs designed to prepare our high-potential team members for greater responsibility. Our current team of district managers and store managers have an average tenure of approximately six years. Management believes internal promotions, coupled with the hiring of individuals with previous retail experience, will provide the management structure necessary to support our planned growth.
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Continuous Improvement
We are committed to a continuous improvement program called Tractor Value System (“TVS”), which is our catalyst to drive change throughout our organization. TVS is a business management system that emphasizes, through data analytics and team member engagement, a focus on continuous improvement. Through TVS, we examine business processes and identify opportunities to reduce costs, drive innovation, and improve effectiveness. We have implemented numerous continuous improvement projects (with team members from multiple areas of our business) to evaluate key operations and implement process changes. Team members are empowered and expected to challenge current paradigms and improve processes. Our management encourages the participation of all team members in decision-making, regularly solicits input and suggestions from our team members and incorporates suggestions into our improvement activities.
Management Information and Control Systems
We have invested considerable resources in our management information and control systems to support superior customer service, manage the purchase, pricing and distribution of our merchandise, improve our operating efficiencies and support online operations. Our key management information and control systems include a point-of-sale system, an e-commerce platform, a supply chain management and replenishment system, a transportation management system, warehouse and labor management tools, a price optimization system, a vendor purchase order control system and a merchandise presentation system. These systems are integrated through an enterprise resource planning (“ERP”) system. This ERP system tracks merchandise from initial order through ultimate sale and interfaces with our financial systems.
We continue to evaluate and improve the functionality of our systems to maximize their effectiveness. Such efforts include ongoing hardware and software evaluations, refreshes and upgrades to support optimal software configurations and application performance. We plan to continue to invest in information technology and implement efficiency-driving system enhancements. We continue to strengthen the security of our information systems and invest in technology to support store, distribution facility and omni-channel expansion. These efforts are directed toward improving business processes, maintaining secure, efficient and stable systems, and enabling the continued growth and success of our business.
Growth Strategy
Our current and long-term growth strategy is to: (1) expand domestic geographic market presence through opening new retail stores, (2) enhance financial performance through comparable store sales growth achieved through targeted merchandising and marketing programs with an “everyday value price” philosophy supported by strong customer service, (3) enhance product margin through strategic product sourcing, inventory and markdown management, a strong exclusive brand offering, and optimization of product pricing and transportation costs, (4) leverage operating costs by focusing on opportunities for continuous improvement and elimination of waste in all of our processes, (5) expand market opportunities via omni-channel enhancements, tying together our website product content, social media, digital and online shopping experience, and (6) expand through selective acquisitions, as such opportunities arise, to add complementary businesses and to enhance penetration into new and existing markets to supplement organic growth.
Over the past five years, we have experienced considerable sales growth, resulting in a compounded annual growth rate of approximately 9.9%. We plan to open approximately 100 new Tractor Supply and 25 to 30 new Petsense stores in fiscal 2017, a selling square footage increase of approximately 6.6%. In fiscal 2016, we opened 113 new Tractor Supply stores and began operating 143 Petsense stores as compared to 114 new Tractor Supply stores in fiscal 2015. This represents a selling square footage increase of approximately 10.8% during fiscal 2016 and 8.0% during fiscal 2015.
At December 31, 2016, we operated 1,738 retail stores in 49 states (1,595 Tractor Supply and Del’s retail stores and 143 Petsense retail stores). Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in many existing and new markets. We have developed a proven method for selecting store sites and have identified approximately 900 additional markets for new Tractor Supply stores. We also believe that there is opportunity for up to 1,000 Petsense stores. Approximately 54% of our Tractor Supply stores are in freestanding buildings and 46% are located in strip shopping centers. We lease approximately 94% of our stores and own the remaining 6%.
Competition
We operate in a competitive retail industry. The principal competitive factors include location of stores, fulfillment options, price, quality of merchandise, in-stock consistency, merchandise assortment and presentation, product knowledge and customer service. We compete with general merchandise retailers, home center retailers, specialty and discount retailers, independently owned retail farm and ranch stores, numerous privately-held regional farm store chains and farm cooperatives, as well as internet-based retailers. However, we believe we successfully differentiate ourselves from many of these retailers by focusing on our specialized
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market niche for customers living the rural lifestyle. See further discussion of competition in 1A, “Risk Factors” of this Annual Report on Form 10-K.
Seasonality and Weather
Our business is seasonal. Historically, our sales and profits are the highest in the second and fourth fiscal quarters due to the sale of seasonal products. We experience our highest inventory and accounts payable balances during our first fiscal quarter for purchases of seasonal products to support the higher sales volume of the spring selling season and again during our third fiscal quarter to support the higher sales volume of the cold-weather selling season.
Historically, weather conditions, including unseasonably warm weather in the fall and winter months and unseasonably cool weather in the spring and summer months, have affected the timing and volume of our sales and results of operations. In addition, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, heavy rain and droughts, have impacted operating results both negatively and positively, depending on the severity and length of these conditions. Our strategy is to manage product flow and adjust merchandise assortments and depth of inventory to capitalize on seasonal demand trends.
Stewardship and Compliance with Environmental Matters
Our operations are subject to numerous federal, state and local laws and regulations, enacted or adopted, regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. We are committed to complying with all applicable environmental laws and regulations. We are also committed to becoming a more environmentally sustainable company. This commitment is demonstrated through our Stewardship Program, which is our environmental sustainability program. Through this program, the Company has implemented a number of initiatives designed to reduce our impact on the environment. These initiatives include the installation of energy management systems, LED lighting, high efficiency heating/air conditioning systems in our stores, and recycling programs in our stores, distribution facilities and the Store Support Center. Our Store Support Center, opened in 2014, and our distribution center in Casa Grande, Arizona, opened in 2015, were each awarded LEED (Leadership in Energy and Environmental Design) Silver certification for environmentally sustainable design, construction and operation. We also installed solar arrays at the Store Support Center in Brentwood, Tennessee and our store in Hendersonville, Tennessee.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is included in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2017.
The following is a list of the names and ages of all executive officers of the registrant, indicating all positions and offices with the registrant held by each such person and each person’s principal occupations and employment during at least the past five years:
Name | Position | Age |
Gregory A. Sandfort | Chief Executive Officer | 61 |
Steve K. Barbarick | President – Chief Merchandising Officer | 49 |
Anthony F. Crudele | Executive Vice President – Chief Financial Officer and Treasurer | 60 |
Benjamin F. Parrish, Jr. | Executive Vice President – General Counsel and Corporate Secretary | 60 |
Chad M. Frazell | Senior Vice President – Human Resources | 44 |
Robert D. Mills | Senior Vice President – Chief Information Officer | 44 |
Gregory A. Sandfort has served as Chief Executive Officer since December 2012. He served as President and Chief Executive Officer of the Company from December 2012 to May 2016. Prior to that time, he served as President and Chief Operating Officer of the Company since February 2012. Mr. Sandfort previously served as President and Chief Merchandising Officer of the Company since February 2009, after having served as Executive Vice President – Chief Merchandising Officer of the Company since November 2007. Mr. Sandfort served as President and Chief Operating Officer at Michaels Stores, Inc. from March 2006 to August 2007 and as Executive Vice President – General Merchandise Manager at Michaels Stores, Inc. from January 2004 to February 2006. Mr. Sandfort has served as a director of the Company since February 2013.
Steve K. Barbarick has served as President and Chief Merchandising Officer since May 2016, prior to which he served as Executive Vice President – Chief Merchandising Officer for the Company since September 2012. Prior to that time, he served as Senior Vice President – Merchandising since February 2011. Mr. Barbarick previously served as Vice President – Merchandising since June 2009, after having served as Vice President and Divisional Merchandise Manager since 2003.
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Anthony F. Crudele has served as Executive Vice President – Chief Financial Officer and Treasurer since January 2007, after having served as Senior Vice President – Chief Financial Officer and Treasurer of the Company since November 2005. Mr. Crudele previously served as Chief Financial Officer at Gibson Guitar from August 2003 to September 2005 and as Chief Financial Officer of Xcelerate Corp. from January 2000 to January 2003. He held roles at The Sports Authority from 1989 through 1999 (serving as Chief Financial Officer from 1996 through 1999).
Benjamin F. Parrish, Jr. has served as Executive Vice President – General Counsel and Corporate Secretary of the Company since February 2016, after having served as Senior Vice President – General Counsel and Corporate Secretary of the Company since October 2010. Mr. Parrish previously served as Executive Vice President and General Counsel of MV Transportation, Inc. from September 2008 until he joined the Company. He served as Senior Vice President and General Counsel of Central Parking Corporation from 1998 to 2008.
Chad M. Frazell has served as Senior Vice President - Human Resources since August 2014. Mr. Frazell previously served as Senior Vice President, Human Resources for Shopko Stores Operating Co., LLC from April 2011 until he joined the Company. From 2008 to 2011, Mr. Frazell served as Vice President, Human Resources for Kohl’s Corporation, where he began as a store manager in 1999. Prior to 1999, Mr. Frazell served as a store manager and assistant manager for Target Corporation. He began his career with Wal-Mart Stores, Inc., where he served as an assistant manager and sales associate.
Robert D. Mills has served as Senior Vice President - Chief Information Officer since February 2014. Mr. Mills previously served as Chief Information Officer for Ulta Beauty from October 2011 until he joined the Company. From 2005 to 2011, Mr. Mills was Vice President, Chief Information Officer for the online business unit at Sears Holdings Corporation where he began as an Information Technology Customer Relationship Leader in 2001. Prior to 2001, Mr. Mills held roles at Allstate Insurance, Rockwell International Telecommunications Division, and Household Finance Corporation.
Additional Information
We file reports with the Securities and Exchange Commission (“SEC”), including Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports as required. The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an Internet site at sec.gov that contains the reports, proxy and information statements, and other information filed electronically.
We make available, free of charge through our Internet website, TractorSupply.com, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
Item 1A. Risk Factors
Our business faces many risks. Those risks of which we are currently aware and deem to be material are described below. If any of the events or circumstances described in the following risk factors occur, our business, financial condition or results of operations may significantly suffer, and the trading price of our common stock could decline. These risk factors should be read in conjunction with the other information in this Form 10-K.
General economic conditions may adversely affect our financial performance.
Our results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending. A weakening of economic conditions affecting disposable consumer income such as lower employment levels, uncertainty or changes in business or political conditions, higher interest rates, higher tax rates, higher fuel and energy costs, higher labor and healthcare costs, the impact of natural disasters or acts of terrorism, and other matters could reduce consumer spending or cause consumers to shift their spending to competitors. A general reduction in the level of discretionary spending, shifts in consumer discretionary spending to our competitors or shifts in discretionary spending to less profitable products sold by us could result in lower net sales, slower inventory turnover, greater markdowns on inventory, and a reduction in profitability due to lower margins.
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Failure to protect our reputation could have a material adverse effect on our brand name.
Our success depends in part on the value and strength of the Tractor Supply name. The Tractor Supply name is integral to our business as well as to the implementation of our strategies for expanding our business. Maintaining, promoting, and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide high quality merchandise and a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative publicity. Failure to comply or accusation of failure to comply with ethical, social, product, labor, data privacy, and environmental standards could also jeopardize our reputation and potentially lead to various adverse consumer actions. Any of these events could result in decreased revenue or otherwise adversely affect our business.
We may be unable to increase sales at our existing stores.
We experience fluctuations in our comparable store sales, defined as sales in stores which have been open for at least twelve months. Various factors affect comparable store sales, including the general retail sales environment, our ability to efficiently source and distribute products, changes in our merchandise assortment, competition, proximity of our locations to one another or to the locations of other retailers, increased presence of online retailers, current economic conditions, customer satisfaction with our products, the timing of promotional events, the release of new merchandise, the success of marketing programs and weather conditions. These factors may cause our comparable store sales results to differ materially from prior periods and from expectations. Past comparable store sales are not an indication of future results, and there can be no assurance that our comparable store sales will not decrease in the future.
Purchase price volatility, including inflationary and deflationary pressures, may adversely affect our financial performance.
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, grain, corn, steel, petroleum, cotton and other commodities as well as transportation services. Therefore, we may experience both inflationary and deflationary pressure 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 while maintaining product quality. Should our strategy to mitigate purchase price volatility not be effective, our financial performance could be adversely impacted.
Weather conditions may have a significant impact on our financial results.
Weather conditions affect the demand for, and in some cases the supply of, products, which in turn has an impact on prices. Historically, weather conditions, including unseasonably warm weather in the fall and winter months and unseasonably cool weather in the spring and summer months, have affected the timing and volume of our sales and results of operations. In addition, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, extreme rain and droughts, have impacted operating results. While extreme weather conditions can positively impact our operating results by increasing demand in affected locations for products needed to cope with the weather condition and its effects, they can also negatively affect our business depending on the severity and length of these conditions as a result of store closings or the inability of customers to shop at our stores due to weather conditions. Our strategy is to manage product flow and adjust merchandise assortments and depth of inventory to capitalize on seasonal demand trends. Should such a strategy not be effective, the weather may have a material adverse effect on our financial condition and results of operations.
Our merchandising and marketing initiatives may not provide expected results.
We believe our past performance has been based on, and future success will depend upon, in part, the ability to develop and execute merchandising initiatives with effective marketing programs. These merchandising initiatives and marketing programs may not deliver expected results, and there is no assurance that we will correctly identify and respond in a timely manner to evolving trends and consumer preferences and expectations. If we misjudge the market or our marketing programs are not successful, we may overstock unpopular products and be forced to take inventory price reductions that have a material adverse effect on our profitability. Failure to execute and promote such initiatives in a timely manner could harm our ability to grow the business and could have a material adverse effect on our results of operations and financial condition. Shortages of key merchandise could also have a material adverse impact on operating results and financial condition.
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Capital required for growth may not be available
The construction or acquisition of new stores, store support center facilities, distribution facilities or other facilities, the remodeling and renovation of existing facilities and investments in information technology require significant amounts of capital. In the past, our growth has been funded through internally generated cash flow and bank borrowings. Disruptions in the capital and credit markets could adversely affect the ability of the banks to meet their commitments. Our access to funds under our senior credit facility (as discussed in Note 5 to the Consolidated Financial Statements) is dependent on the ability of the banks that are parties to the facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. In addition, tight lending practices may make it difficult for our real estate developers to obtain financing under acceptable
loan terms and conditions. Unfavorable lending practices could impact the timing of our store openings and materially adversely affect our ability to open new stores in desirable locations.
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced funding alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating future share repurchases, cash dividends or other discretionary uses of cash.
Failure to open and manage new stores in the number and manner currently contemplated could adversely affect our financial performance.
An integral part of our business strategy includes the expansion of our store base through new store openings. This expansion strategy is dependent on our ability to find suitable locations, and we face competition from many retailers for such sites. If we are unable to implement this strategy, our ability to increase our sales, profitability, and cash flow could be impaired significantly. To the extent that we are unable to open new stores in the manner we anticipate (due to, among other reasons, site approval or unforeseen delays in construction), our sales growth may be impeded.
As we execute this expansion strategy, we may also experience managerial or operational challenges which may prevent any expected increase in sales, profitability or cash flow. Our ability to manage our planned expansion depends on the adequacy of our existing information systems, the efficiency and expansion of our distribution systems, the adequacy of the hiring and training process for new personnel (especially store managers), the effectiveness of our controls and procedures, and the ability to identify customer demand and build market awareness in different geographic areas. There can be no assurance that we will be able to achieve our planned expansion, that the new stores will be effectively integrated into our existing operations or that such stores will be profitable.
Although we have a rigorous real estate site selection and approval process, there can be no assurance that our new store openings will be successful or result in incremental sales and profitability for the Company. New stores build their sales volumes and refine their merchandise selection over time and, as a result, generally have lower gross margins and higher operating expenses as a percentage of net sales than our more mature stores. As we continue to open new stores, there may be a negative impact on our results from a lower contribution margin of these new stores until their sales levels ramp to chain average, if at all, as well as from the impact of related pre-opening costs.
We may pursue strategic acquisitions and the failure of an acquisition to produce the anticipated results or the inability to fully integrate the acquired companies could have an adverse impact on our business.
We may, from time to time, acquire businesses we believe to be complementary to our business. The success of an acquisition is based on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration and other factors relating to the target business. Acquisitions may result in difficulties in assimilating acquired companies and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to successfully integrate operations that we acquire, including their personnel, financial systems, distribution, operations and general operating procedures. If we fail to successfully integrate acquisitions, we could experience increased costs associated with operating inefficiencies which could have an adverse effect on our financial results. Also, while we employ several different methodologies to assess potential business opportunities, the new businesses may not meet our expectations and, therefore, adversely affect our financial performance.
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Competition may hinder our ability to execute our business strategy and adversely affect our operations.
We operate in the highly competitive retail merchandise sector with numerous competitors. These competitors include general merchandise retailers, home center retailers, specialty and discount retailers, independently owned retail farm and ranch stores, numerous privately-held regional farm store chains and farm cooperatives, as well as internet-based retailers. We compete for customers, merchandise, real estate locations, and employees. This competitive environment subjects us to various other risks, including the inability to continue our store and sales growth and to provide attractive merchandise to our customers at competitive prices that allow us to maintain our profitability. Our failure to compete effectively in this environment could adversely impact our financial performance.
We face risks associated with vendors from whom our products are sourced.
The products we sell are sourced from a variety of domestic and international vendors. We have agreements with our vendors in which the vendors agree to comply with applicable laws, including labor and environmental laws, and to indemnify us against certain liabilities and costs. Our ability to recover liabilities and costs under these vendor agreements is dependent upon the financial condition and integrity of the vendors. We rely on long-term relationships with our suppliers but have no long-term contracts with such suppliers. Our future success will depend in large measure upon our ability to maintain our existing supplier relationships or to develop new ones. This reliance exposes us to the risk of inadequate and untimely supplies of various products due to political, economic, social, or environmental conditions, transportation delays, or changes in laws and regulations affecting distribution. Our vendors may be forced to reduce their production, shut down their operations or file for bankruptcy protection, which could make it difficult for us to serve the market’s needs and could have a material adverse effect on our business.
We rely on foreign manufacturers for various products that we sell. In addition, many of our domestic suppliers purchase a portion of their products from foreign sources. As an importer, our business is subject to the risks generally associated with doing business internationally, such as domestic and foreign governmental regulations, economic disruptions, delays in shipments, transportation capacity and costs, currency exchange rates and changes in political or economic conditions in countries from which we purchase products. If any such factors were to render the conduct of business in particular countries undesirable or impractical or if additional United States quotas, duties, taxes or other charges or restrictions were imposed upon the importation of our products in the future, our financial condition and results of operations could be materially adversely affected.
The results of the November 2016 elections in the United States have introduced greater uncertainty with respect to tax and trade policies, tariffs and regulations affecting trade between the United States and other countries. We source a significant portion of our merchandise from manufacturers located outside the United States, primarily in Asia and Central America. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.
We are subject to personal injury, workers’ compensation, product liability and other claims in the ordinary course of business.
Our business involves a risk of personal injury, workers’ compensation, product liability and other claims in the ordinary course of business. Product liability claims from customers and product recalls for merchandise alleged to be defective or harmful could lead to the disposal or write-off of merchandise inventories, the incurrence of fines or penalties and damage to our reputation. We maintain general liability and workers’ compensation insurance with a self-insured retention for each policy type and a deductible for each occurrence. We also maintain umbrella limits above the primary general liability and product liability coverage. In many cases, we have indemnification rights against the manufacturers of the products and their products liability insurance as well as the property owners of our leased buildings. Our ability to recover costs and damages under such insurance or indemnification arrangements is subject to the financial viability of the insurers, manufacturers and landlords and the specific allegations of a claim. No assurance can be given that our insurance coverage or the manufacturers’ or landlords’ indemnity will be available or sufficient in any claims brought against us.
Our failure to attract and retain qualified team members could adversely affect our financial performance.
Our ability to continue expanding operations depends on our ability to attract and retain a large and growing number of qualified team members. Our ability to meet labor needs while controlling wage and related labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. If we are unable to locate, attract or retain qualified personnel, or if costs of labor or related costs increase significantly, our financial performance could be adversely affected.
Failure to maintain an effective system of internal control over financial reporting could materially impact our business and results.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that
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the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal
control systems, internal control over financial reporting may not prevent or detect misstatements. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud, and could expose us to litigation or adversely affect the market price of our common stock.
Any failure to maintain the security of the information relating to our business, customers, employees and vendors that we hold, whether as a result of cybersecurity attacks or otherwise, could damage our reputation with customers, employees and vendors, could cause us to incur substantial additional costs and to become subject to litigation, and could adversely affect our operating results, financial condition and liquidity.
We receive certain personal and other confidential information about our customers, employees and vendors. We also rely on business partners to provide services to us that may include important business information or data about our customers, employees and vendors. In addition, our online operations at TractorSupply.com depend upon the secure transmission of confidential information over public networks, including information permitting cashless payments. While we maintain substantial security measures to protect and to prevent unauthorized access to such information, it is possible that unauthorized parties (through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means) might compromise our security measures and obtain and misuse the personal information of customers, employees and vendors that we hold or other confidential Company data. It is possible that such a compromise could go undetected by us. Such an occurrence could materially adversely affect our reputation with our customers, employees, and vendors, as well as our operations, results of operations, financial condition and liquidity, and could result in significant legal and financial exposure beyond the scope or limits of insurance coverage. Moreover, a security breach could require that we expend significant additional resources to respond to the breach and could result in a disruption of our operations.
In addition, states and the federal government are increasingly enacting laws and regulations relating to data breaches and theft of employee and customer data. These laws will likely increase the costs of doing business and, if we fail to comply with these laws and regulations or to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these new laws, we could be subject to potential claims for damages and other remedies, which could harm our business.
As customer-facing technology systems become an increasingly important part of our sales and marketing strategy, the failure of those systems to perform effectively and reliably could keep us from delivering positive customer experiences.
Through our continued information technology enhancements, we are able to provide an improved overall shopping environment and an omni-channel experience that empowers our customers to shop and interact with us from computers, tablets, smart phones and other mobile communication devices. We use our website both as a sales channel for our products and also as a method of providing product, project and other relevant information to our customers to drive both in-store and online sales. Omni-channel retailing is continually evolving and expanding, and we must effectively respond to changing customer expectations and new developments. Disruptions, failures or other performance issues with these customer-facing technology systems could impair the benefits that they provide to our online and in-store business and negatively affect our relationship with our customers.
If we are unable to maintain or upgrade our management information systems and software programs or if we are unable to convert to alternate systems in an efficient and timely manner, our operations may be disrupted or become less efficient and our strategic business initiatives may not be successful.
We depend on management information systems for many aspects of our business. We rely on certain software vendors to maintain and periodically upgrade many of these systems so that we can continue to support our business. We could be materially adversely affected if we experienced a disruption or data loss relating to our management information systems and are unable to recover timely. We could also be adversely impacted if we are unable to improve, upgrade, maintain and expand our management information systems, particularly in light of the contemplated continued store growth.
The success of our strategic business initiatives designed to increase our sales and improve margin is dependent in varying degrees on the timely delivery and the functionality of information technology systems to support them. Extended delays or cost overruns in securing, developing and otherwise implementing technology solutions to support the strategic business initiatives would delay and possibly even prevent us from realizing the projected benefits of those initiatives.
A significant disruption to our distribution network or to the timely receipt of inventory could adversely impact sales or increase our transportation costs, which would decrease our profits.
We rely on our distribution and transportation network to provide goods to our stores in a timely and cost-effective manner through deliveries to our distribution facilities from vendors and then from the distribution facilities or direct ship vendors to our stores by various means of transportation, including shipments by sea, air, rail and truck. Any disruption, unanticipated expense or operational
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failure related to this process could affect store operations negatively. For example, unexpected delivery delays (including delays due to weather, fuel shortages or other reasons) or increases in transportation costs (including increased fuel costs or a decrease in transportation capacity for overseas shipments) could significantly decrease our ability to provide adequate product for sale, resulting in lower sales and profitability. In addition, labor shortages or work stoppages in the transportation industry or long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries could
negatively affect our business. Also, a fire, tornado, or other disaster at one of our distribution facilities could disrupt our timely receiving, processing and shipment of merchandise to our stores which could adversely affect our business.
The implementation of our supply chain initiatives could disrupt our operations in the near term, and these initiatives might not provide the anticipated benefits or might fail.
We maintain a network of distribution facilities and have plans to build new facilities to support our growth objectives. Delays in opening distribution facilities could adversely affect our future operations by slowing store growth, which may in turn reduce revenue growth. In addition, distribution-related construction or expansion projects entail risks which could cause delays and cost overruns, such as: shortages of materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of future projects could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that all projects will be completed on time or within established budgets.
We continue to make significant technology investments in our supply chain. These initiatives are designed to streamline our distribution process so that we can optimize the delivery of goods and services to our stores and distribution facilities in a timely manner and at a reasonable cost. The cost and potential problems and interruptions associated with the implementation of these initiatives, including those associated with managing third-party service providers and employing new web-based tools and services, could disrupt or reduce the efficiency of our operations in the near term. In addition, our improved supply chain technology might not provide the anticipated benefits, it might take longer than expected to realize the anticipated benefits, or the initiatives might fail altogether.
We cannot provide any guaranty of future dividend payments or that we will continue to repurchase our common stock pursuant to our stock repurchase program.
Although our Board of Directors has indicated an intention to pay future quarterly cash dividends on our common stock, any determination to pay or increase cash dividends on our common stock in the future will be based primarily upon our financial condition, results of operations, business requirements, and our Board of Directors’ continuing determination that the declaration of dividends is in the best interests of our stockholders and is in compliance with all laws and agreements applicable to the dividend. Furthermore, although our Board of Directors has authorized a share repurchase program of up to $3 billion through December 2020, we may discontinue this program at any time.
The market price for our common stock might be volatile and could result in a decline in value.
The price at which our common stock trades may be volatile and could be subject to significant fluctuations in response to our operating results, general trends and prospects for the retail industry, announcements by our competitors, analyst recommendations, our ability to meet or exceed analysts’ or investors’ expectations, the condition of the financial markets and other factors. The Company’s stock price is dependent in part on the multiple of earnings that investors are willing to pay. That multiple is in part dependent on investors’ perception of the Company’s future earnings growth prospects. If investor perceptions of the Company’s earnings growth prospects change, the Company’s earnings multiple may decline and its stock price could be adversely affected.
In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of our common stock notwithstanding our actual operating performance.
Our costs of doing business could increase as a result of federal, state, local or foreign laws and regulations.
We are subject to numerous federal, state, local and foreign laws and governmental regulations including those relating to environmental protection, personal injury, intellectual property, consumer product safety, building, land use and zoning requirements, workplace regulations, wage and hour, privacy and information security and employment law matters. If we fail to comply with existing or future laws or regulations, or if these laws or regulations are violated by importers, manufacturers or distributors, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs. In addition, our capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.
We are also subject to the Foreign Corrupt Practices Act (the “FCPA”), which prohibits United States companies and their intermediaries from making improper payments to foreign officials for the purposes of obtaining or retaining business, and the anti-bribery laws of other jurisdictions. Failure to comply with the FCPA and similar laws could subject us to, among other things,
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penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and results of operations.
Potential noncompliance with environmental regulations could materially impact our results of operations or financial condition.
Our business is subject to various federal, state and local laws, regulations and other requirements pertaining to protection of the environment and public health, including, for example, regulations governing the management of waste materials and waste waters. Governmental agencies on the federal, state and local levels have, in recent years, increasingly focused on the retail sector’s compliance with such laws and regulations, and have at times pursued enforcement activities. We periodically receive information requests and notices of potential noncompliance with environmental laws and regulations from governmental agencies, which are addressed on a case-by-case basis with the relevant agency. Any of these events could have a material adverse effect on our results of operations or financial condition.
Effective tax rate changes and results of examinations by taxing authorities could materially impact our results.
Our future effective tax rates could be adversely affected by legislative tax reform, changes in statutory rates or changes in tax laws, or interpretations thereof. Additionally, our future effective tax rates could be adversely affected by the earnings mix being lower than historical results in states where we have lower statutory rates and higher than historical results in states where we have higher statutory rates or by changes in the measurement of our deferred tax assets and liabilities.
We are subject to periodic audits and examinations by the Internal Revenue Service (“IRS”), as well as state and local taxing authorities. Like many retailers, a portion of our sales are to tax-exempt customers. The business activities of our customers and the intended use of the unique products sold by us create a challenging and complex compliance environment. These circumstances create risk that we could be challenged as to the propriety of our sales tax compliance. Our results could be materially impacted by the determinations and expenses related to these and other proceedings by the IRS and other state and local taxing authorities.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2016, the Company operated 1,738 stores in 49 states. The Company leases approximately 94% of its stores, two distribution sites, its Merchandising Innovation Center (planogram) located in Nashville, Tennessee, as well as the Petsense corporate headquarters located in Scottsdale, Arizona. Store leases typically have initial terms of 10 to 15 years, with two to four renewal periods of five years each, exercisable at our option. No single lease is material to Company operations.
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The following is a count of store locations by state:
State | Number of Stores | State | Number of Stores | |||
Texas | 196 | New Hampshire | 21 | |||
Pennsylvania | 89 | Kansas | 20 | |||
North Carolina | 89 | Maine | 19 | |||
Ohio | 87 | Colorado | 19 | |||
Tennessee | 87 | Massachusetts | 19 | |||
Michigan | 81 | Wisconsin | 17 | |||
Georgia | 79 | Connecticut | 17 | |||
New York | 76 | Nebraska | 15 | |||
Kentucky | 63 | Utah | 15 | |||
Florida | 58 | Illinois | 14 | |||
Virginia | 54 | New Jersey | 13 | |||
Indiana | 54 | North Dakota | 13 | |||
Alabama | 52 | Minnesota | 10 | |||
Oklahoma | 51 | Iowa | 9 | |||
California | 50 | South Dakota | 7 | |||
South Carolina | 42 | Vermont | 7 | |||
Louisiana | 36 | Wyoming | 7 | |||
Arkansas | 35 | Montana | 6 | |||
Mississippi | 34 | Delaware | 5 | |||
Arizona | 32 | Idaho | 4 | |||
West Virginia | 27 | Oregon | 4 | |||
New Mexico | 27 | Rhode Island | 4 | |||
Missouri | 25 | Hawaii | 2 | |||
Washington | 24 | Nevada | 2 | |||
Maryland | 21 | |||||
1,738 | ||||||
The following is a list of distribution locations including the approximate square footage and if the location is leased or owned:
Distribution Facility Location | Approximate Square Footage | Owned/Leased Facility | ||
Franklin, Kentucky | 833,000 | Owned | ||
Pendleton, Indiana | 764,000 | Owned | ||
Macon, Georgia | 684,000 | Owned | ||
Waco, Texas | 666,000 | Owned | ||
Casa Grande, Arizona | 650,000 | Owned | ||
Hagerstown, Maryland (a) | 482,000 | Owned | ||
Hagerstown, Maryland (a) | 309,000 | Leased | ||
Waverly, Nebraska | 422,000 | Owned | ||
Seguin, Texas (b) | 71,000 | Owned | ||
Lakewood, Washington | 64,000 | Leased | ||
Longview, Texas (b) | 63,000 | Owned | ||
(a) The leased facility in Hagerstown is treated as an extension of the existing owned Hagerstown location and is not considered a separate distribution center.
(b) This is a mixing center designed to process certain high-volume bulk products.
The Company’s Store Support Center occupies approximately 260,000 square feet of owned building space in Brentwood, Tennessee, and the Company’s Merchandising Innovation Center occupies approximately 32,000 square feet of leased building space in Nashville, Tennessee.
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In fiscal 2017, we plan to begin construction on a new northeast distribution center, as well as an expansion of our existing distribution center in Waverly, Nebraska, which will provide additional distribution capacity once construction is completed.
Item 3. Legal Proceedings
Item 103 of SEC Regulation S-K requires disclosure of certain environmental legal proceedings if the proceeding reasonably involves potential monetary sanctions of $100,000 or more. We periodically receive information requests and notices of potential noncompliance with environmental laws and regulations from governmental agencies, which are addressed on a case-by-case basis with the relevant agency. The Company has received a subpoena from the District Attorney of Yolo County, California, requesting records and information regarding its hazardous waste management and disposal practices in California. The Company is currently working with Yolo County and other district attorneys in California to resolve alleged instances of noncompliance with applicable regulations. The matter is still ongoing and the ultimate outcome cannot be determined at this time; however, the Company does not expect the resolution of this matter to have a material adverse effect on its consolidated financial position, results of operations or cash flows.
The Company is also involved in various litigation matters arising in the ordinary course of business. The Company believes that any estimated loss related to such matters has been adequately provided for in accrued liabilities to the extent probable and reasonably estimable. Accordingly, the Company currently expects these matters will be resolved without material adverse effect on its consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Tractor Supply Company’s common stock trades on The Nasdaq Global Select Market under the symbol “TSCO”.
The table below sets forth the high and low sales prices of our common stock as reported by The Nasdaq Global Select Market for each fiscal quarter of the periods indicated:
Price Range | |||||||
2016 | 2015 | ||||||
High | Low | High | Low | ||||
First Quarter | $90.76 | $78.05 | $90.49 | $74.52 | |||
Second Quarter | $97.25 | $86.44 | $93.99 | $83.70 | |||
Third Quarter | $95.39 | $66.77 | $96.28 | $75.00 | |||
Fourth Quarter | $78.17 | $61.50 | $94.00 | $80.06 | |||
As of February 3, 2017, the number of record holders of our common stock was 607 (excluding individual participants in nominee security position listings), and the estimated number of beneficial holders of our common stock was 115,000.
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Common Stock Dividends
During 2016 and 2015, the Board of Directors declared the following cash dividends:
Date Declared | Dividend Amount Per Share | Stockholders of Record Date | Date Paid | |||
October 31, 2016 | $0.24 | November 14, 2016 | November 29, 2016 | |||
August 1, 2016 | $0.24 | August 15, 2016 | August 30, 2016 | |||
May 2, 2016 | $0.24 | May 16, 2016 | June 1, 2016 | |||
February 3, 2016 | $0.20 | February 22, 2016 | March 8, 2016 | |||
November 2, 2015 | $0.20 | November 16, 2015 | December 1, 2015 | |||
August 3, 2015 | $0.20 | August 17, 2015 | September 1, 2015 | |||
May 4, 2015 | $0.20 | May 18, 2015 | June 2, 2015 | |||
February 4, 2015 | $0.16 | February 23, 2015 | March 10, 2015 | |||
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, as well as other factors which the Board of Directors deem relevant.
On February 8, 2017, our Board of Directors declared a quarterly cash dividend of $0.24 per share of the Company’s common stock. The dividend will be paid on March 14, 2017, to stockholders of record as of the close of business on February 27, 2017.
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Issuer Purchases of Equity Securities
The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program. On October 31, 2016, the Board of Directors authorized a $1 billion increase to the existing share repurchase program, bringing the total amount authorized to $3 billion, exclusive of any fees, commissions, or other expenses related to such repurchases and extended the program through December 31, 2020. Additionally, the Company withholds shares from vested restricted stock units to satisfy employees’ minimum statutory tax withholding requirements. Stock purchase activity during fiscal 2016 is set forth in the table below:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total 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 | ||||||||||
First Quarter (a) | 1,194,323 | $ | 83.68 | 1,184,087 | $ | 471,601,257 | ||||||||
Second Quarter | 86,794 | 89.90 | 86,794 | 463,799,558 | ||||||||||
Third Quarter | 1,409,652 | 77.17 | 1,409,652 | 355,034,384 | ||||||||||
Fourth Quarter: | ||||||||||||||
9/25/16 – 10/22/16 | 1,200,000 | 67.41 | 1,200,000 | 274,166,426 | ||||||||||
10/23/16 – 11/19/16 (b) | 377,136 | 64.92 | 377,136 | 1,249,687,202 | ||||||||||
11/20/16 – 12/31/16 | 140,000 | 76.05 | 140,000 | 1,239,042,973 | ||||||||||
1,717,136 | 67.56 | 1,717,136 | 1,239,042,973 | |||||||||||
As of December 31, 2016 | 4,407,905 | $ | 75.44 | 4,397,669 | $ | 1,239,042,973 | ||||||||
(a) The total number of shares purchased and average price paid per share include shares withheld from vested restricted stock units to satisfy employees’ minimum statutory tax withholding requirements of 10,236 during the first quarter.
(b) The Board authorized a $1 billion increase to its existing share repurchase program, bringing the total amount authorized to date under the program to $3 billion. The program, established in February 2007, has been extended through December 31, 2020.
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 SEC and other applicable legal requirements. The timing and amount of any common stock repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions.
Any additional stock repurchase programs will be subject to the discretion of our Board of Directors and subject to our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. The program may be limited or terminated at any time, without prior notice.
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STOCK PERFORMANCE GRAPH
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Tractor Supply Company under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph compares the cumulative total stockholder return on our common stock from December 31, 2011 to December 31, 2016 (the Company’s fiscal year-end), with the cumulative total returns of the S&P 500 Index and the S&P Retail Index over the same period. The comparison assumes that $100 was invested on December 31, 2011 in our common stock and in each of the foregoing indices and in each case assumes reinvestment of dividends. The historical stock price performance shown on this graph is not indicative of future performance.
12/31/2011 | 12/29/2012 | 12/28/2013 | 12/27/2014 | 12/26/2015 | 12/31/2016 | |||||||||||||||||||
Tractor Supply Company | $ | 100.00 | $ | 126.76 | $ | 222.22 | $ | 233.15 | $ | 260.81 | $ | 236.19 | ||||||||||||
S&P 500 | $ | 100.00 | $ | 114.07 | $ | 152.98 | $ | 177.08 | $ | 178.44 | $ | 198.18 | ||||||||||||
S&P Retail Index | $ | 100.00 | $ | 123.80 | $ | 182.90 | $ | 203.34 | $ | 256.45 | $ | 271.66 | ||||||||||||
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Item 6. | Selected Financial Data |
FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS (a)(b)
The following selected financial data is derived from the Consolidated Financial Statements of Tractor Supply Company and provides summary historical financial information for the fiscal periods ended and as of the dates indicated (in thousands, except per share amounts and selected operating and other data):
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(53 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | |||||||||||||||
Operating Results: | |||||||||||||||||||
Net sales | $ | 6,779,579 | $ | 6,226,507 | $ | 5,711,715 | $ | 5,164,784 | $ | 4,664,120 | |||||||||
Gross profit | 2,325,202 | 2,143,174 | 1,950,415 | 1,753,609 | 1,566,054 | ||||||||||||||
Selling, general and administrative expenses | 1,488,164 | 1,369,097 | 1,246,308 | 1,138,934 | 1,040,287 | ||||||||||||||
Depreciation and amortization | 142,958 | 123,569 | 114,635 | 100,025 | 88,975 | ||||||||||||||
Operating income | 694,080 | 650,508 | 589,472 | 514,650 | 436,792 | ||||||||||||||
Interest expense, net | 5,810 | 2,891 | 1,885 | 557 | 1,055 | ||||||||||||||
Income before income taxes | 688,270 | 647,617 | 587,587 | 514,093 | 435,737 | ||||||||||||||
Income tax expense | 251,150 | 237,222 | 216,702 | 185,859 | 159,280 | ||||||||||||||
Net income | $ | 437,120 | $ | 410,395 | $ | 370,885 | $ | 328,234 | $ | 276,457 | |||||||||
Net income per share – basic (c) | $ | 3.29 | $ | 3.03 | $ | 2.69 | $ | 2.35 | $ | 1.94 | |||||||||
Net income per share – diluted (c) | $ | 3.27 | $ | 3.00 | $ | 2.66 | $ | 2.32 | $ | 1.90 | |||||||||
Weighted average shares – diluted (c) | 133,813 | 136,845 | 139,435 | 141,723 | 145,514 | ||||||||||||||
Dividends declared per common share outstanding | $ | 0.92 | $ | 0.76 | $ | 0.61 | $ | 0.49 | $ | 0.36 | |||||||||
Operating Data (percent of net sales): | |||||||||||||||||||
Gross margin | 34.3 | % | 34.4 | % | 34.1 | % | 34.0 | % | 33.6 | % | |||||||||
Selling, general and administrative expenses | 22.0 | % | 22.0 | % | 21.8 | % | 22.1 | % | 22.3 | % | |||||||||
Operating income | 10.2 | % | 10.4 | % | 10.3 | % | 10.0 | % | 9.4 | % | |||||||||
Net income | 6.4 | % | 6.6 | % | 6.5 | % | 6.4 | % | 6.0 | % | |||||||||
Store, Sales and Other Data: | |||||||||||||||||||
Stores open at end of year | 1,738 | 1,488 | 1,382 | 1,276 | 1,176 | ||||||||||||||
Comparable store sales increase (d) | 1.6 | % | 3.1 | % | 3.8 | % | 4.8 | % | 5.3 | % | |||||||||
New store sales (as a % of net sales) (e) | 5.6 | % | 5.6 | % | 6.2 | % | 5.4 | % | 5.9 | % | |||||||||
Average transaction value | $ | 44.42 | $ | 44.87 | $ | 44.84 | $ | 44.48 | $ | 44.40 | |||||||||
Comparable store average transaction value (decrease) increase (c) | (0.9 | )% | (0.2 | )% | 0.6 | % | — | % | 2.0 | % | |||||||||
Comparable store average transaction count increase (d) | 2.6 | % | 3.3 | % | 3.2 | % | 4.7 | % | 3.0 | % | |||||||||
Total selling square footage (000’s) | 26,511 | 23,938 | 22,176 | 20,470 | 18,893 | ||||||||||||||
Total team members | 26,000 | 23,000 | 21,100 | 19,200 | 17,300 | ||||||||||||||
Capital expenditures (000’s) | $ | 226,017 | $ | 236,496 | $ | 160,613 | $ | 218,200 | $ | 152,924 | |||||||||
Balance Sheet Data (at end of period): | |||||||||||||||||||
Average inventory per store (f) | $ | 741.7 | $ | 820.1 | $ | 752.7 | $ | 723.5 | $ | 727.4 | |||||||||
Inventory turns | 3.19 | 3.23 | 3.32 | 3.29 | 3.28 | ||||||||||||||
Working capital (g) | $ | 740,615 | $ | 768,177 | $ | 670,897 | $ | 677,107 | $ | 569,547 | |||||||||
Total assets | $ | 2,674,942 | $ | 2,370,826 | $ | 2,034,571 | $ | 1,903,391 | $ | 1,706,808 | |||||||||
Long-term debt, less current portion (h) | $ | 289,769 | $ | 166,992 | $ | 4,957 | $ | 1,200 | $ | 1,242 | |||||||||
Stockholders’ equity | $ | 1,453,218 | $ | 1,393,294 | $ | 1,293,561 | $ | 1,246,894 | $ | 1,024,974 | |||||||||
(a) Our fiscal year includes 52 or 53 weeks and ends on the last Saturday of the calendar year. References to fiscal year mean the year in which that fiscal year ended. Fiscal year 2016 consisted of 53 weeks while all other fiscal years consisted of 52 weeks.
(b) Beginning in the fourth quarter ended December 31, 2016, selected financial and operating information includes the consolidation of Petsense, unless otherwise noted.
(c) Basic net income per share is calculated based on the weighted average number of common shares outstanding applied to net income. Diluted net income per share is calculated using the treasury stock method for stock options and restricted stock units.
(d) Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Beginning in fiscal 2015, stores closed during the year are removed from our comparable store metrics calculations. This change in the calculation methodology did not have a material impact on the comparable store metrics reported in prior periods presented due to the minimal number of stores closed in those periods. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Petsense stores are not considered comparable stores until 12 months after the date of acquisition.
(e) New stores sales metrics are based on stores open for less than one year.
(f) Assumes average inventory cost, excluding inventory in-transit.
(g) Working capital for 2016 and 2015 reflects deferred tax assets as non-current as a result of the adoption of ASU 2015-17 (which is discussed in Note 15 to the Consolidated Financial Statements). Years prior to 2015 have not been adjusted to reflect the adoption of this guidance.
(h) Long-term debt includes amounts outstanding under the Company’s senior credit facility and capital lease obligations, excluding the current portions.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended December 31, 2016 (our fiscal years 2016, 2015 and 2014). This discussion should be read in conjunction with our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this report. This discussion contains forward-looking statements. See “Forward-Looking Statements” and “Risk Factors” included elsewhere in this report.
Overview
Founded in 1938, Tractor Supply Company is the largest operator of rural lifestyle retail stores in the United States. The Company is focused on supplying the needs of recreational farmers and ranchers and others who enjoy the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. As of December 31, 2016, we operated 1,738 retail stores in 49 states under the names Tractor Supply Company, Del’s Feed & Farm Supply and Petsense. We also operate websites under the names TractorSupply.com and Petsense.com. Our stores are located primarily in towns outlying major metropolitan markets and in rural communities, and they offer the following comprehensive selection of merchandise:
• | Equine, livestock, pet and small animal products, including items necessary for their health, care, growth and containment; |
• | Hardware, truck, towing and tool products; |
• | Seasonal products, including heating, lawn and garden items, power equipment, gifts and toys; |
• | Work/recreational clothing and footwear; and |
• | Maintenance products for agricultural and rural use. |
Our current and long-term growth strategy is to: (1) expand domestic geographic market presence through opening new retail stores, (2) enhance financial performance through comparable store sales growth achieved through targeted merchandising and marketing programs with an “everyday value price” philosophy supported by strong customer service, (3) enhance product margin through strategic product sourcing, inventory and markdown management, a strong exclusive brand offering, and optimization of product pricing and transportation costs, (4) leverage operating costs by focusing on opportunities for continuous improvement and elimination of waste in all of our processes, (5) expand market opportunities via omni-channel enhancements, tying together our website product content, social media, digital and online shopping experience, and (6) expand through selective acquisitions, as such opportunities arise, to add complementary businesses and to enhance penetration into new and existing markets to supplement organic growth.
Over the past five years, we have experienced considerable growth in stores, growing from 1,085 stores at the end of 2011 to 1,738 stores (1,595 Tractor Supply and Del’s retail stores and 143 Petsense retail stores) at the end of fiscal 2016, and in sales, with a compounded annual growth rate of approximately 9.9%. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in existing and new markets. We have developed a proven method for selecting store sites and have identified approximately 900 additional opportunities for new Tractor Supply stores. We also believe that there is opportunity for up to 1,000 Petsense stores.
Executive Summary
In 2016, we opened 113 new Tractor Supply stores in 37 states and began operating 143 Petsense stores in 26 states, as compared to 114 new Tractor Supply stores in 2015, resulting in a selling square footage increase of approximately 10.8% in fiscal 2016 and approximately 8.0% in fiscal 2015.
Net sales increased 8.9% to $6.78 billion in fiscal 2016 from $6.23 billion in fiscal 2015. Comparable store sales increased 1.6% in fiscal 2016 versus a 3.1% increase in fiscal 2015. Gross profit increased 8.5% to $2.33 billion in fiscal 2016 from $2.14 billion in fiscal 2015, and gross margin decreased 10 basis points to 34.3% of net sales in fiscal 2016 from 34.4% of net sales in fiscal 2015. Operating income decreased 20 basis points to 10.2% of net sales in fiscal 2016 from 10.4% of net sales in fiscal 2015. In fiscal 2016, diluted earnings per share grew 9.0% to $3.27 compared to $3.00 in fiscal 2015.
We ended the year with $53.9 million in cash and outstanding debt of $275.0 million, after returning $454.0 million to our stockholders through stock repurchases and dividends.
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Significant Accounting Policies and Estimates
Management’s discussion and analysis of our financial position and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Our significant accounting policies are disclosed in Note 1 to our Consolidated Financial Statements. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions | ||
Inventory Valuation: | ||||
Inventory Impairment | ||||
We identify potentially excess and slow-moving inventory by evaluating turn rates, historical and expected future sales trends, age of merchandise, overall inventory levels, current cost of inventory and other benchmarks. We have established an inventory valuation reserve to recognize the estimated impairment in value (i.e., an inability to realize the full carrying value) based on our aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies. | We do not believe our merchandise inventories are subject to significant risk of obsolescence in the near term. However, changes in market conditions or consumer purchasing patterns could result in the need for additional reserves. Our impairment reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding forecasted customer demand and the promotional environment. | We have not made any material changes in the accounting methodology used to recognize inventory impairment reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate impairment. However, if assumptions regarding consumer demand or clearance potential for certain products are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our impairment reserve as of December 31, 2016, would have affected net income by approximately $0.5 million in fiscal 2016. | ||
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Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions | ||
Shrinkage | ||||
We perform physical inventories at least once a year for each store that has been open more than 12 months, and we have established a reserve for estimating inventory shrinkage between physical inventory counts. The reserve is established by assessing the chain-wide average shrinkage experience rate, applied to the related periods’ sales volumes. Such assessments are updated on a regular basis for the most recent individual store experiences. | The estimated store inventory shrink rate is based on historical experience. We believe historical rates are a reasonably accurate reflection of future trends. Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding future shrinkage trends, the effect of loss prevention measures and new merchandising strategies. | We have not made any material changes in the accounting methodology used to recognize shrinkage in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our shrinkage reserve. However, if our estimates regarding inventory losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our shrinkage reserve as of December 31, 2016, would have affected net income by approximately $1.4 million in fiscal 2016. | ||
Vendor Funding | ||||
We receive funding from substantially all of our significant merchandise vendors, in support of our business initiatives, through a variety of programs and arrangements, including vendor support funds (“vendor support”) and volume-based rebate funds (“volume rebates”). The amounts received are subject to terms of vendor agreements, most of which are “evergreen”, reflecting the on-going relationship with our significant merchandise vendors. Certain of our agreements, primarily volume rebates, are renegotiated annually, based on expected annual purchases of the vendor’s product. Vendor funding is initially deferred as a reduction of the purchase price of inventory and then recognized as a reduction of cost of merchandise as the related inventory is sold. During interim periods, the amount of volume rebates is estimated based upon initial commitments and anticipated purchase levels with applicable vendors. | The estimated purchase volume (and related vendor funding) is based on our current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations. Although we believe we can reasonably estimate purchase volume and related volume rebates at interim periods, it is possible that actual year-end results could be different from previously estimated amounts. Our allocation methodology contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding customer demand, purchasing activity, target thresholds, vendor attrition and collectability. | We have not made any material changes in the accounting methodology used to establish our vendor funding reserves in the financial periods presented. At the end of each fiscal year, a significant portion of the actual purchase activity is known. Thus, we do not believe there is a reasonable likelihood that there will be a material change in the amounts recorded as vendor funding. We do not believe there is a significant collectability risk related to vendor funding amounts due to us at the end of fiscal 2016. If a 10% reserve had been applied against our outstanding vendor funding due as of December 31, 2016, net income would have been affected by approximately $1.3 million in fiscal 2016. Although it is unlikely that there will be any significant reduction in historical levels of vendor funding, if such a reduction were to occur in future periods, the Company could experience a higher inventory balance and higher cost of sales. | ||
Freight | ||||
We incur various types of transportation and delivery costs in connection with inventory purchases and distribution. Such costs are included as a component of the overall cost of inventories (on an aggregate basis) and recognized as a component of cost of merchandise sold as the related inventory is sold. | We allocate freight as a component of total cost of sales without regard to inventory mix or unique freight burden of certain categories. This assumption has been consistently applied for all years presented. | We have not made any material changes in the accounting methodology used to establish our capitalized freight balance or freight allocation in the financial periods presented. If a 10% increase or decrease had been applied against our current inventory capitalized freight balance as of December 31, 2016, net income would have been affected by approximately $6.9 million in fiscal 2016. | ||
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Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions | ||
Self-Insurance Reserves: | ||||
We self-insure a significant portion of our employee medical insurance, workers’ compensation and general liability insurance plans. We have stop-loss insurance policies to protect from individual losses over specified dollar values. Provisions for losses related to our self-insured liabilities are based upon periodic independent actuarially determined estimates that consider a number of factors including historical claims experience, demographic factors and severity factors. | The full extent of certain claims, especially workers’ compensation and general liability claims, may not become fully determined for several years. Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date based upon historical data and experience, including actuarial calculations. | We have not made any material changes in the accounting methodology used to establish our self-insurance reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate insurance reserves. However, if we experience a significant increase in the number of claims or the cost associated with these claims, we may be exposed to losses that could be material. A 10% change in our self-insurance reserves as of December 31, 2016, would have affected net income by approximately $3.5 million in fiscal 2016. | ||
Sales Tax Audit Reserve: | ||||
A portion of our sales are to tax-exempt customers, predominantly agricultural-based. We obtain exemption information as a necessary part of each tax-exempt transaction. Many of the states in which we conduct business will perform audits to verify our compliance with applicable sales tax laws. The business activities of our customers and the intended use of the unique products sold by us create a challenging and complex compliance environment. These circumstances also create some risk that we could be challenged as to the accuracy of our sales tax compliance. When establishing our sales tax audit reserve, we review our past audit experience and assessments with applicable states to continually determine if we have potential exposure for non-compliance. Any estimated liability is based on an initial assessment of compliance risk as well as our historical experience with each respective state. | We continually reassess the exposure based on historical audit results, changes in policies, preliminary and final assessments made by state sales tax auditors, and additional documentation that may be provided to reduce the assessment. Our sales tax audit reserve contains uncertainties because management is required to make assumptions and to apply judgment regarding the complexity of agricultural-based exemptions, the ambiguity in state tax regulations, the number of ongoing audits and the length of time required to settle with the state taxing authorities. | We have not made any material changes to our sales tax audit assessment methodology in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate the sales tax liability reserve. However, if our estimates regarding the ultimate sales tax liability are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our sales tax audit reserve as of December 31, 2016, would have affected net income by approximately $0.7 million in fiscal 2016. | ||
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Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions | ||
Tax Contingencies: | ||||
Our income tax returns are periodically audited by United States federal and state tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record a liability for uncertain tax positions taken or expected to be taken in a tax return. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved or clarified. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, the statute of limitations expires for the relevant tax authority to examine the tax position or when more information becomes available. | Our tax contingencies reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions and whether or not the minimum requirements for recognition of tax benefits have been met. | We have not made any material changes in the accounting methodology used to establish our tax contingencies in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the reserves established for tax benefits not recognized. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution. A 10% change in our uncertain tax position reserve as of December 31, 2016 would have affected net income by approximately $0.1 million in fiscal 2016. | ||
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Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions | ||
Impairment of Long-Lived Assets: | ||||
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level. The significant assumptions used to determine estimated undiscounted cash flows include cash inflows and outflows directly resulting from the use of those assets in operations, including margin on net sales, payroll and related items, occupancy costs, insurance allocations and other costs to operate a store. If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on an estimated future cash flow model. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of that asset. | Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. | We have not made any material changes in our impairment loss assessment methodology in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. None of these estimates and assumptions are significantly sensitive, and a 10% change in any of these estimates would not have a material impact on our analysis. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. | ||
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Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions | ||
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets: | ||||
Goodwill and other indefinite-lived intangible assets are evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. The quantitative test for goodwill impairment is a two-step process. The first step of the goodwill impairment test, used to identify the potential for impairment, compares the fair value of a reporting unit with the carrying value of its net assets, including goodwill. If the fair value of the reporting unit is less than the carrying value of the reporting unit, the second step of the goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any. The second step, if required, would compare the implied fair value of goodwill with the current carrying amount of goodwill. If the implied fair value of goodwill is less than the carrying value, an impairment charge would be recorded to the Company’s operations. We determine fair values for each reporting unit using the market approach, when available and appropriate, or the income approach, or a combination of both. If multiple valuation methodologies are used, the results are weighted appropriately. The quantitative impairment test for other indefinite-lived intangible assets involves comparing the carrying amount of the asset to the sum of the discounted cash flows expected to be generated by the asset. If the implied fair value of the indefinite-lived intangible asset is less than the carrying value, an impairment charge would be recorded to the Company’s operations. | Our impairment loss calculation contains uncertainties because they require management to make assumptions and to apply judgment to qualitative factors as well as estimate future cash flows and asset fair values, including forecasting prospective financial information and selecting the discount rate that reflects the risk inherent in future cash flows. | We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate indefinite-lived asset impairment losses. None of these estimates and assumptions are significantly sensitive, and a 10% change in any of these estimates would not have a material impact on our analysis. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. | ||
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Quarterly Financial Data
Our unaudited quarterly operating results for each fiscal quarter of 2016 and 2015 are shown below (in thousands, except per share amounts):
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | ||||||||||||||||
2016 (a) | (13 weeks) | (13 weeks) | (13 weeks) | (14 weeks) | (53 weeks) | |||||||||||||||
Net sales | $ | 1,467,797 | $ | 1,852,534 | $ | 1,542,706 | $ | 1,916,542 | $ | 6,779,579 | ||||||||||
Gross profit | 494,444 | 649,222 | 535,274 | 646,262 | 2,325,202 | |||||||||||||||
Operating income | 108,195 | 249,249 | 142,020 | 194,616 | 694,080 | |||||||||||||||
Net income | 67,668 | 156,425 | 89,444 | 123,583 | 437,120 | |||||||||||||||
Net income per share: | ||||||||||||||||||||
Basic | $ | 0.51 | $ | 1.17 | $ | 0.67 | $ | 0.94 | $ | 3.29 | ||||||||||
Diluted | $ | 0.50 | $ | 1.16 | $ | 0.67 | $ | 0.94 | $ | 3.27 | ||||||||||
Comparable store sales increase (decrease) (b) | 4.9 | % | (0.5 | )% | (0.6 | )% | 3.1 | % | 1.6 | % | ||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | ||||||||||||||||
2015 | (13 weeks) | (13 weeks) | (13 weeks) | (13 weeks) | (52 weeks) | |||||||||||||||
Net sales | $ | 1,331,352 | $ | 1,772,900 | $ | 1,475,645 | $ | 1,646,610 | $ | 6,226,507 | ||||||||||
Gross profit | 444,605 | 625,320 | 512,248 | 561,001 | 2,143,174 | |||||||||||||||
Operating income | 92,847 | 245,165 | 139,208 | 173,288 | 650,508 | |||||||||||||||
Net income | 58,040 | 153,331 | 87,312 | 111,712 | 410,395 | |||||||||||||||
Net income per share: | ||||||||||||||||||||
Basic | $ | 0.43 | $ | 1.13 | $ | 0.64 | $ | 0.83 | $ | 3.03 | ||||||||||
Diluted | $ | 0.42 | $ | 1.12 | $ | 0.64 | $ | 0.82 | $ | 3.00 | ||||||||||
Comparable store sales increase (decrease) (b) | 5.7 | % | 5.6 | % | 2.9 | % | (1.4 | )% | 3.1 | % | ||||||||||
(a) Beginning in the fourth quarter ended December 31, 2016, selected financial and operating information includes the consolidation of Petsense, unless otherwise noted.
(b) Comparable store metrics are calculated using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Closed stores are removed from our comparable store metrics calculations. Stores relocated during the periods being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Petsense stores are not considered comparable stores until 12 months after the date of acquisition.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our Consolidated Statements of Income expressed as a percentage of net sales.
2016 | 2015 | 2014 | ||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of merchandise sold (a) | 65.7 | 65.6 | 65.9 | |||||
Gross margin (a) | 34.3 | 34.4 | 34.1 | |||||
Selling, general and administrative expenses(a) | 22.0 | 22.0 | 21.8 | |||||
Depreciation and amortization | 2.1 | 2.0 | 2.0 | |||||
Operating income | 10.2 | 10.4 | 10.3 | |||||
Interest expense, net | 0.1 | — | — | |||||
Income before income taxes | 10.1 | 10.4 | 10.3 | |||||
Income tax provision | 3.7 | 3.8 | 3.8 | |||||
Net income | 6.4 | % | 6.6 | % | 6.5 | % | ||
(a) Our gross margin amounts may not be comparable to those of other retailers since some retailers include all of the costs related to their distribution network in cost of merchandise sold and others (like our Company) exclude a portion of these distribution network costs from gross margin and instead include them in selling, general and administrative expenses; refer to Note 1 – Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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Fiscal 2016 Compared to Fiscal 2015
Net sales increased 8.9% to $6.78 billion in fiscal 2016 from $6.23 billion in fiscal 2015. The fourth quarter included an extra sales week as a part of the Company’s 53-week calendar in 2016, which represented 1.6% of the overall 8.9% sales increase over prior year. Comparable store sales for fiscal 2016 were $6.41 billion, a 1.6% increase over fiscal 2015. This compares to a 3.1% comparable store sales increase in the prior year. The comparable store transaction count increased 2.6%, while comparable store average ticket decreased 0.9% for fiscal 2016.
Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Stores closed during the year are removed from our comparable store metrics calculations. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Petsense stores are not considered comparable stores until 12 months after the date of acquisition.
The comparable store sales increase was driven by an increase in traffic counts and the year-round strength of consumable, usable, and edible ("C.U.E.") products, principally animal- and pet-related merchandise. Livestock equipment and hardline products such as fencing and trailers also performed well throughout the year. The full year sales performance was negatively impacted by unpredictable weather patterns during the spring selling season and unseasonably warm weather in the key cold months of the year which drove softness in cold weather seasonal categories and big ticket items such as log splitters and stoves. Additionally, the Company believes that economic conditions in the energy producing markets negatively impacted consumer spending primarily in the Midwest and South Central regions.
In addition to comparable store sales growth in fiscal 2016, sales from stores opened less than one year, including Petsense, were $378.9 million in fiscal 2016, which represented 6.1 percentage points of the 8.9% increase over fiscal 2015 net sales. Sales from stores opened less than one year were $351.0 million in fiscal 2015, which represented 6.1 percentage points of the 9.0% increase over fiscal 2014 net sales.
The following chart summarizes our store growth during fiscal 2016 and 2015:
Tractor Supply | 2016 | 2015 | |||
Store count, beginning of period | 1,488 | 1,382 | |||
New stores opened | 113 | 114 | |||
Stores closed | (6 | ) | (8 | ) | |
Store count, end of period | 1,595 | 1,488 | |||
Petsense | |||||
Beginning of period | — | — | |||
Stores acquired | 136 | — | |||
New stores opened | 8 | — | |||
Stores closed | (1 | ) | — | ||
End of period | 143 | — | |||
Consolidated end of period | 1,738 | 1,488 | |||
Stores relocated | 3 | 6 | |||
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The following chart indicates the percentage of net sales represented by each of our major product categories during fiscal 2016 and 2015:
Percent of Net Sales | |||||
Product Category: | 2016 | 2015 | |||
Livestock and Pet | 46 | % | 44 | % | |
Hardware, Tools, Truck and Towing | 22 | 23 | |||
Seasonal, Gift and Toy Products | 19 | 20 | |||
Clothing and Footwear | 8 | 8 | |||
Agriculture | 5 | 5 | |||
Total | 100 | % | 100 | % | |
Gross profit increased 8.5% to $2.33 billion in fiscal 2016 compared to $2.14 billion in fiscal 2015. As a percent of net sales, gross margin decreased 10 basis points to 34.3% for fiscal 2016 compared to 34.4% for fiscal 2015. This decrease in gross margin percentage principally reflects a higher mix of C.U.E. products, which generally carry below chain average gross margin, partially offset by benefits from our key margin driving initiatives. Freight expense as a percent of net sales experienced a marginal increase in fiscal 2016 as compared to the prior year due principally to an increase in inbound miles and domestic transportation costs, partially offset by lower diesel fuel prices and import container costs.
Selling, general and administrative (“SG&A”) expenses, including depreciation and amortization, as a percent of net sales increased 10 basis points to 24.1% in fiscal 2016 from 24.0% in fiscal 2015. SG&A expenses as a percent of net sales increased due to incremental costs associated with our new distribution facilities that began operations in late fiscal 2015, as well as acquisition and operating expenses associated with the Petsense purchase. These increases were partially offset by leverage of occupancy costs, as well as lower year-over-year incentive compensation expense. Total SG&A expenses, including depreciation and amortization, for fiscal 2016 increased 9.3% to $1.63 billion from $1.49 billion in fiscal 2015. The increase in SG&A expenses primarily reflects new store growth, incremental costs from operating the new distribution facilities, variable costs associated with our comparable store sales growth and the extra sales week during the year and incremental expenses associated with the Petsense acquisition and its operations.
Our effective tax rate decreased to 36.5% for fiscal 2016 compared to 36.6% in fiscal 2015. The decrease in the effective income tax rate was due principally to the availability of federal and state tax incentives.
As a result of the foregoing factors, net income for fiscal 2016 increased 6.5% to $437.1 million, or $3.27 per diluted share, as compared to net income of $410.4 million, or $3.00 per diluted share, in fiscal 2015.
During fiscal 2016, we repurchased approximately 4.4 million shares of the Company’s common stock at a total cost of $331.7 million as part of our $3 billion share repurchase program. In fiscal 2015, we repurchased approximately 3.4 million shares at a total cost of $292.7 million.
Fiscal 2015 Compared to Fiscal 2014
Net sales increased 9.0% to $6.23 billion in fiscal 2015 from $5.71 billion in fiscal 2014. Comparable store sales for fiscal 2015 were $5.89 billion, a 3.1% increase over fiscal 2014. This compares to a 3.8% comparable store sales increase in the prior year. The comparable store transaction count increased 3.3%, while comparable store average ticket decreased 0.2% for fiscal 2015.
Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Beginning in fiscal 2015, stores closed during the year are removed from our comparable store metrics calculations. This change in the calculation methodology did not have a material impact on the comparable store metrics reported in prior periods due to the minimal number of stores closed in those periods. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations.
The comparable store sales increase was driven by an increase in traffic counts and the year-round strength of C.U.E. products, principally animal- and pet-related merchandise. Hardline products such as fencing, trailers and towing also performed well throughout the year. The full year sales performance was negatively impacted by fourth quarter weakness in the key cold weather seasonal categories of heating (stoves and fuel) and insulated outerwear along with softness in seasonal big ticket items such as snow blowers, log splitters and generators.
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In addition to comparable store sales growth in fiscal 2015, sales from stores opened less than one year were $351.0 million in fiscal 2015, which represented 6.1 percentage points of the 9.0% increase over fiscal 2014 net sales. Sales from stores opened less than one year were $353.4 million in fiscal 2014, which represented 6.8 percentage points of the 10.6% increase over fiscal 2013 net sales.
The following chart summarizes our store growth during fiscal 2015 and 2014:
2015 | 2014 | ||||
Store Count, Beginning of Period | 1,382 | 1,276 | |||
New Stores Opened | 114 | 107 | |||
Stores Closed | (8 | ) | (1 | ) | |
Store Count, End of Period | 1,488 | 1,382 | |||
Stores Relocated | 6 | 2 | |||
The following chart indicates the percentage of net sales represented by each of our major product categories during fiscal 2015 and 2014:
Percent of Net Sales | |||||
Product Category: | 2015 | 2014 | |||
Livestock and Pet | 44 | % | 44 | % | |
Hardware, Tools, Truck and Towing | 23 | 22 | |||
Seasonal, Gift and Toy Products | 20 | 20 | |||
Clothing and Footwear | 8 | 9 | |||
Agriculture | 5 | 5 | |||
Total | 100 | % | 100 | % | |
Gross profit increased 9.9% to $2.14 billion in fiscal 2015 compared to $1.95 billion in fiscal 2014. As a percent of net sales, gross margin increased 30 basis points to 34.4% for fiscal 2015 compared to 34.1% for fiscal 2014. This increase in gross margin principally reflects improved direct product margin. Direct product margin increased as a result of strong execution on our four strategic margin initiatives which include inventory and markdown management, strategic sourcing, exclusive branding and retail price management.
As a percent of net sales, SG&A expenses, including depreciation and amortization, increased 20 basis points to 24.0% in fiscal 2015 from 23.8% in fiscal 2014. This increase in SG&A expense as a percent of net sales was mainly related to deleverage in rent and other occupancy costs at the stores and incremental costs associated with our two new mixing centers and our new distribution facility in Casa Grande, Arizona. Total SG&A expenses, including depreciation and amortization, for fiscal 2015 increased 9.7% to $1.49 billion from $1.36 billion in fiscal 2014. The increase in SG&A expense primarily reflects new store growth and variable costs associated with our comparable store sales growth.
Our effective tax rate decreased to 36.6% for fiscal 2015 compared to 36.9% in fiscal 2014 predominantly as a result of the reversal of various reserves for uncertain tax positions.
As a result of the foregoing factors, net income for fiscal 2015 increased 10.7% to $410.4 million, or $3.00 per diluted share, as compared to net income of $370.9 million, or $2.66 per diluted share, in fiscal 2014.
During fiscal 2015, we repurchased approximately 3.4 million shares of the Company’s common stock at a total cost of $292.7 million as part of our share repurchase program. In fiscal 2014, we repurchased approximately 4.7 million shares at a total cost of $298.5 million.
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, remodeling and relocation programs, distribution facilities capacity and improvements, information technology, inventory purchases, share repurchases, cash dividends and selective acquisitions as opportunities arise. Our primary ongoing sources of liquidity are existing
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cash balances, cash provided from operations, funds available under our senior credit facility (as discussed in Note 5 to the Consolidated Financial Statements), capital and operating leases and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters to support the higher sales volume of the spring and cold-weather selling seasons, respectively.
Working Capital
At December 31, 2016, the Company had working capital of $740.6 million, which decreased $27.6 million from December 26, 2015. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):
2016 (a) | 2015 (a) | Variance | |||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 53.9 | $ | 63.8 | $ | (9.9 | ) | ||||
Inventories | 1,369.7 | 1,284.4 | 85.3 | ||||||||
Prepaid expenses and other current assets | 90.6 | 87.5 | 3.1 | ||||||||
Income taxes receivable | 3.6 | 3.8 | (0.2 | ) | |||||||
Total current assets | 1,517.8 | 1,439.5 | 78.3 | ||||||||
Current liabilities: | |||||||||||
Accounts payable | 519.5 | 427.2 | 92.3 | ||||||||
Accrued employee compensation | 25.2 | 42.7 | (17.5 | ) | |||||||
Other accrued expenses | 215.7 | 195.0 | 20.7 | ||||||||
Current portion of long-term debt | 10.0 | — | 10.0 | ||||||||
Current portion of capital lease obligation | 1.3 | 0.9 | 0.4 | ||||||||
Income taxes payable | 5.5 | 5.5 | — | ||||||||
Total current liabilities | 777.2 | 671.3 | 105.9 | ||||||||
Working capital | $ | 740.6 | $ | 768.2 | $ | (27.6 | ) | ||||
(a) Working capital for 2016 and 2015 reflects deferred tax assets as non-current as a result of the adoption of ASU 2015-17 in 2016 (which is discussed in Note 15 to the Consolidated Financial Statements).
In comparison to December 26, 2015, working capital as of December 31, 2016 was impacted most significantly by changes in our inventory and accounts payable.
• | The increase in inventory resulted from the purchase of additional inventory to support new store growth as well as the acquisition of Petsense. We actively manage our inventory balances and in-stock levels at our stores. Average inventory per store decreased year-over-year principally due to an improvement in inventory turns of seasonal and cold-weather merchandise at the end of fiscal 2016 compared to fiscal 2015. |
• | Accounts payable increased primarily as a result of new store growth along with timing of payments to vendors. |
• | The decrease in accrued employee compensation is due to lower year-over-year incentive compensation and the timing of payroll accruals. |
• | The increase in other accrued expenses is a result of Company growth and the timing of payments. |
• | The current portion of long-term debt relates to the term loan which was entered into in fiscal 2016. |
Borrowings and Senior Credit Facility
On February 19, 2016, the Company entered into a senior credit facility (the “2016 Senior Credit Facility”) consisting of a $200 million term loan and a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans). This agreement is unsecured and matures on February 19, 2021.
During the period of October 24, 2011 through February 19, 2016, the Company was party to a senior credit facility (the “2011 Senior Credit Facility”), which provided for borrowings up to $400 million (with a sublimit of $30 million for swingline loans) as of December 26, 2015.
2016 Senior Credit Facility
The 2016 Senior Credit Facility contains a $200 million term loan which requires quarterly payments totaling $10 million per year in years one and two and $20 million per year in years three through five, with the remaining balance due in full on the maturity
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date of February 19, 2021. The 2016 Senior Credit Facility also contains a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans).
As of December 31, 2016, the Company had outstanding total borrowings of $275.0 million under the 2016 Senior Credit Facility consisting of $190.0 million in borrowings under the term loan and $85.0 million in borrowings under the revolving credit facility. Unamortized debt issuance costs recorded as an offset to the outstanding borrowings were approximately $1.1 million at December 31, 2016. Additionally, there were $44.3 million of outstanding letters of credit under the 2016 Senior Credit Facility as of December 31, 2016.
Borrowings under both the term loan and the revolver bear interest at either the bank’s base rate (3.750% at December 31, 2016) or the London Inter-Bank Offer Rate (“LIBOR”) (0.772% at December 31, 2016) plus an additional amount ranging from 0.500% to 1.125% per annum (0.625% at December 31, 2016), adjusted quarterly based on our leverage ratio. The Company is also required to pay, quarterly in arrears, a commitment fee for unused capacity ranging from 0.075% to 0.200% per annum (0.100% at December 31, 2016), adjusted quarterly based on the Company’s leverage ratio.
Proceeds from the 2016 Senior Credit Facility may be used for working capital, capital expenditures, dividends, share repurchases, and other matters. There are no compensating balance requirements associated with the 2016 Senior Credit Facility.
The 2016 Senior Credit Facility requires quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. Both ratios are calculated on a trailing twelve-month basis at the end of each fiscal quarter. The fixed charge coverage ratio compares earnings before interest, taxes, depreciation, amortization, share-based compensation and rent expense (“consolidated EBITDAR”) to the sum of interest paid and rental expense (excluding any straight-line rent adjustments). The fixed charge coverage ratio shall be greater than or equal to 2.00 as of the last day of each fiscal quarter. The leverage ratio compares rental expense (excluding any straight-line rent adjustments) multiplied by a factor of six plus total debt to consolidated EBITDAR. The leverage ratio shall be less than or equal to 4.00 as of the last day of each fiscal quarter. The 2016 Senior Credit Facility also contains certain other restrictions regarding additional indebtedness, capital expenditures, business operations, guarantees, investments, mergers, consolidations and sales of assets, transactions with subsidiaries or affiliates, and liens. As of December 31, 2016, the Company was in compliance with all debt covenants.
2011 Senior Credit Facility
Under the 2011 Senior Credit Facility, the Company had outstanding borrowings of $150.0 million as of December 26, 2015. In addition, there were $48.7 million of outstanding letters of credit under the 2011 Senior Credit Facility as of December 26, 2015.
Interest Rate Swap
On March 28, 2016, the Company entered into an interest rate swap agreement which became effective on March 31, 2016 with a maturity date of February 19, 2021. The interest rate swap was executed for risk management and is not held for trading purposes. The objective of the interest rate swap is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap is intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. The notional amount of the interest rate swap began at $197.5 million (the principal amount of the term loan borrowings as of March 31, 2016) and will amortize at the same time and in the same amount as the term loan borrowings as described in Note 5 to the Consolidated Financial Statements. As of December 31, 2016, the notional amount of the interest rate swap was $190.0 million. The interest rate swap entitles the Company to receive, at specified intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreement without exchange of the underlying notional amount.
Sources and Uses of Cash
Our primary source of liquidity is cash provided by operations and funds available under our senior credit facility (as discussed in Note 5 to the Consolidated Financial Statements). Principal uses of cash for investing activities are capital expenditures, while principal uses of cash for financing activities are repurchase of the Company’s common stock, cash dividends paid to stockholders and selective acquisitions as opportunities arise.
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The following table presents a summary of cash flows provided by or used in operating, investing and financing activities for the last three fiscal years (in millions):
2016 | 2015 | 2014 | |||||||||
Net cash provided by operating activities | $ | 639.0 | $ | 429.2 | $ | 409.2 | |||||
Net cash used in investing activities | (369.2 | ) | (235.9 | ) | (160.3 | ) | |||||
Net cash used in financing activities | (279.7 | ) | (180.6 | ) | (340.5 | ) | |||||
Net (decrease) increase in cash and cash equivalents | $ | (9.9 | ) | $ | 12.7 | $ | (91.6 | ) | |||
Operating Activities
Operating activities provided net cash of $639.0 million, $429.2 million and $409.2 million in fiscal 2016, 2015 and 2014, respectively. The $209.8 million increase in net cash provided by operating activities in fiscal 2016 compared to fiscal 2015 was primarily due to changes in the following (in millions):
2016 | 2015 | Variance | |||||||||
Net income | $ | 437.1 | $ | 410.4 | $ | 26.7 | |||||
Depreciation and amortization | 143.0 | 123.6 | 19.4 | ||||||||
Share-based compensation expense | 23.6 | 19.4 | 4.2 | ||||||||
Excess tax benefit of stock options exercised | (11.7 | ) | (27.0 | ) | 15.3 | ||||||
Deferred income taxes | 10.0 | (5.5 | ) | 15.5 | |||||||
Inventories and accounts payable | 14.8 | (112.5 | ) | 127.3 | |||||||
Prepaid expenses and other current assets | 1.8 | (21.1 | ) | 22.9 | |||||||
Accrued expenses | 2.1 | 16.9 | (14.8 | ) | |||||||
Income taxes | 11.8 | 16.3 | (4.5 | ) | |||||||
Other, net | 6.5 | 8.7 | (2.2 | ) | |||||||
Net cash provided by operating activities | $ | 639.0 | $ | 429.2 | $ | 209.8 | |||||
The $209.8 million increase in net cash provided by operating activities in fiscal 2016 compared with fiscal 2015 primarily reflects incremental profitability and the impact of effective management of inventory and accounts payable levels. Average inventory per store decreased year-over-year principally due to an improvement in inventory turns of seasonal and cold-weather merchandise at the end of fiscal 2016 compared to fiscal 2015. Additionally, the timing of payments to vendors more closely aligned with receipt of inventory at the end of fiscal 2016 in comparison with the end of fiscal 2015, resulting in an improvement in cash flow year-over-year.
The $20.0 million increase in net cash provided by operating activities in fiscal 2015 over fiscal 2014 was primarily due to changes in the following (in millions):
2015 | 2014 | Variance | |||||||||
Net income | $ | 410.4 | $ | 370.9 | $ | 39.5 | |||||
Depreciation and amortization | 123.6 | 114.6 | 9.0 | ||||||||
Stock compensation expense | 19.4 | 16.2 | 3.2 | ||||||||
Excess tax benefit of stock options exercised | (27.0 | ) | (18.8 | ) | (8.2 | ) | |||||
Deferred income taxes | (5.5 | ) | (19.8 | ) | 14.3 | ||||||
Inventories and accounts payable | (112.5 | ) | (81.8 | ) | (30.7 | ) | |||||
Prepaid expenses and other current assets | (21.1 | ) | (9.1 | ) | (12.0 | ) | |||||
Accrued expenses | 16.9 | 6.8 | 10.1 | ||||||||
Income taxes payable | 16.3 | 21.9 | (5.6 | ) | |||||||
Other, net | 8.7 | 8.3 | 0.4 | ||||||||
Net cash provided by operating activities | $ | 429.2 | $ | 409.2 | $ | 20.0 | |||||
The $20.0 million increase in net cash provided by operating activities in fiscal 2015 compared with fiscal 2014 primarily reflects earnings growth, the favorable impact from the timing of deferred taxes partially offset by a net increase in inventories and accounts payable. Inventory increased due to store growth, the carry-over of cold-weather merchandise, additional investment in C.U.E.
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products and the timing of spring seasonal receipts while accounts payable grew at a lower rate due mainly to the timing of payments.
Investing Activities
Investing activities used cash of $369.3 million, $235.9 million and $160.3 million in fiscal 2016, 2015 and 2014, respectively. The changes in cash used for investing activities primarily reflects the acquisition of Petsense and changes in capital expenditures. Capital expenditures for fiscal 2016, 2015 and 2014 were as follows (in millions):
2016 | 2015 | 2014 | |||||||||
New and relocated stores and stores not yet opened | $ | 111.2 | $ | 96.7 | $ | 80.8 | |||||
Existing stores | 53.1 | 23.1 | 20.0 | ||||||||
Information technology | 40.5 | 35.8 | 22.7 | ||||||||
Distribution center capacity and improvements | 21.0 | 80.2 | 9.2 | ||||||||
Corporate and other | 0.2 | 0.7 | 27.9 | ||||||||
Total capital expenditures | $ | 226.0 | $ | 236.5 | $ | 160.6 | |||||
The above table reflects 113 new Tractor Supply stores and three relocations, as well as eight new Petsense stores during fiscal 2016, 114 new stores and six relocations during fiscal 2015 and 107 new stores and two relocations during fiscal 2014. The increase in spending on existing stores in fiscal 2016 primarily reflects an investment in the chain-wide LED lighting retrofit, which will be completed in fiscal 2017. The sustained increase in spending on information technology represents continued support of our store growth and our omni-channel platform as well as improvements in security and compliance, enhancements to our customer relationship management and other strategic initiatives. Spending for distribution center capacity and improvements increased substantially in fiscal 2015 as a result of the construction of two mixing centers in Texas and the southwest distribution center in Casa Grande, Arizona, all of which began operations in fiscal 2015. Lastly, the construction of our Store Support Center in Brentwood, Tennessee, resulted in higher costs in fiscal 2014 for corporate and other spending.
We currently estimate that capital expenditures in fiscal 2017 will range between $270 million and $290 million.
• | We plan to open approximately 100 Tractor Supply stores and 25 to 30 Petsense stores in fiscal 2017. |
• | We will to continue to invest in our ongoing sustainability efforts to retrofit our stores with LED lighting, a chain-wide initiative which began in fiscal 2016 and will be completed in fiscal 2017. |
• | We also plan to invest in the initial development of a new northeast distribution center, expansion of our distribution center in Waverly, Nebraska, and an investment to improve our warehouse management system. |
• | Additionally, we will continue to enhance our digital and omni-channel capabilities. |
Financing Activities
Financing activities used cash of $279.7 million, $180.6 million, and $340.5 million in fiscal 2016, 2015 and 2014, respectively. The net cash used in financing activities in fiscal 2016 was mainly the result of repurchases of common stock and quarterly cash dividends paid to stockholders, partially offset by net borrowings under the senior credit facility, net proceeds from issuance of common stock related to share-based compensation and excess tax benefits recognized on stock options exercised.
The increase in net cash used in financing activities in fiscal 2016 compared to fiscal 2015 is largely due to incremental share repurchases of common stock and quarterly cash dividends paid to stockholders, as well as a year-over-year decrease in net borrowings under the senior credit facility and a reduced excess tax benefit recognized on stock options exercised. The decrease in net cash used in financing activities in fiscal 2015 compared to fiscal 2014 is largely due to $150 million of net borrowings under the senior credit facility.
The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program. On October 31, 2016, the Board of Directors authorized a $1 billion increase to the existing share repurchase program, bringing the total amount authorized to $3 billion, exclusive of any fees, commissions, or other expenses related to such repurchases and extended the program through December 31, 2020. 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 are accounted for at cost and will be held in treasury for future issuance. The program may be limited or terminated at any time, without prior notice.
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We repurchased approximately 4.4 million, 3.4 million and 4.7 million shares of common stock under the share repurchase program at a total cost of $331.7 million, $292.7 million and $298.5 million in fiscal 2016, 2015 and 2014, respectively. As of December 31, 2016, we had remaining authorization under the share repurchase program of $1.2 billion, exclusive of any fees, commissions, or other expenses.
In the second quarter of fiscal 2016, we increased our quarterly dividend from $0.20 per share to $0.24 per share and, in the second quarter of fiscal 2015, we increased our quarterly dividend from $0.16 per share to $0.20 per share. We paid dividends totaling $122.3 million, $103.1 million and $84.1 million in fiscal 2016, 2015 and 2014, respectively.
We believe that our existing cash balances, expected cash flow from future operations, funds available under our senior credit facility, operating and capital leases and normal trade credit will be sufficient to fund our operations and our capital expenditure needs, including new store openings, store acquisitions, relocations and renovations and distribution facility capacity through the end of fiscal 2017.
Significant Contractual Obligations and Commercial Commitments
The following table reflects our future obligations and commitments as of December 31, 2016 (in thousands):
Payment Due by Period | ||||||||||||||||||||
Total | 2017 | 2018-2019 | 2020-2021 | Thereafter | ||||||||||||||||
Operating leases | $ | 2,533,254 | $ | 299,463 | $ | 573,812 | $ | 500,611 | $ | 1,159,368 | ||||||||||
Capital leases(a) | 39,898 | 2,936 | 5,872 | 5,872 | 25,218 | |||||||||||||||
Senior credit facility | 275,000 | 10,000 | 35,000 | 230,000 | — | |||||||||||||||
$ | 2,848,152 | $ | 312,399 | $ | 614,684 | $ | 736,483 | $ | 1,184,586 | |||||||||||
(a) Capital lease obligations include related interest.
At December 31, 2016, there were $44.3 million outstanding letters of credit under the 2016 Senior Credit Facility.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. The balances for these arrangements are previously discussed. We typically lease buildings for retail stores rather than acquiring these assets through purchases. Letters of credit allow us to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which implemented a one-year deferral of ASU 2014-09. As a result of the deferral, the amendments in ASU 2014-09 are effective for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which further clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which further clarifies the aspects of (a) identifying performance obligations and (b) the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which provides implementation guidance in regards to (a) assessing the collectability criterion, (b) the presentation of taxes collected from customers, (c) noncash consideration, (d) contract modification at transition, (e) completed contracts at transition and (f) other technical corrections. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to clarify the codification and to
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correct unintended application of guidance pertaining to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as the effective date and transition requirements of ASU 2014-09. Entities that transition to these standards may either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the updates with an adjustment to retained earnings at the date of adoption. The Company anticipates adopting this guidance in the first quarter of fiscal 2018. Based on an evaluation of the standard as a whole, the Company has identified customer incentives and principal versus agent considerations as the areas that will most likely be affected by the new revenue recognition guidance. The Company continues to evaluate the adoption of this standard, including the transition method; however, adoption is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This update requires that debt issuance costs related to a recognized debt liability be presented in the consolidated balance sheet as a direct reduction from the carrying amount of that debt liability. ASU 2015-03 requires retrospective application and is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted this guidance in the first quarter of fiscal 2016. The adoption of this guidance affected the presentation of debt issuance costs in our Consolidated Balance Sheet but did not have any other material impacts on our Consolidated Financial Statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory.” This update requires an entity that determines the cost of inventory by methods other than last-in, first-out and the retail inventory method to measure inventory at the lower of cost and net realizable value. ASU 2015-11 requires prospective application and is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” This update simplifies the accounting for measurement-period adjustments by eliminating the requirement to retrospectively account for such adjustments. The amendments in ASU 2016-15 require an entity to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The entity must also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The entity must present, separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 requires prospective application and is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance in fiscal 2016. It had no impact on our Consolidated financial statements and related disclosures in fiscal 2016.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This update requires that deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2016. The Company elected to apply this guidance retrospectively for all periods presented. The adoption of this guidance affected the presentation of the deferred tax liabilities and assets within the Company’s Consolidated Balance Sheet and related disclosures; however, the updated guidance did not affect the accounting for deferred tax liabilities and assets. Other than the change in presentation, the adoption of this guidance did not have any material impact on our Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This update requires a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The Company is currently assessing the impact that adoption of this guidance will have on its Consolidated Financial Statements and related disclosures.
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In March 2016, the FASB issued ASU 2016-04, “Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.” This update requires that liabilities related to the sale of prepaid stored-value products (gift cards) be adjusted periodically to reflect breakage. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The guidance can be applied using either a modified retrospective transition method or retrospectively to each period presented. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The update addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy election to account for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impacts on the statement of cash flows. The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company will adopt this guidance in the first quarter of fiscal 2017. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement will be applied prospectively. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the awards are exercised or settled. The Company does not expect the impact to be material to the consolidated results of operations taken as a whole; however, such determination is subject to change based on facts and circumstances at the time when awards vest or settle. The Company will elect to continue estimating forfeitures of share-based awards. The Company will elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using a retrospective transition method, and as a result, excess tax benefits related to share-based awards which are currently classified as cash flows from financing activities will be reclassified as cash flows from operating activities.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by U.S. GAAP and thereby reduces the current and potential future diversity in practice. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The guidance should be applied using a retrospective transition method to each period presented. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies the measurement of goodwill by eliminating the second step from the goodwill impairment test, which requires the comparison of the implied fair value of goodwill with the current carrying amount of goodwill. Instead, under the amendments in this guidance, an entity shall perform a goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount and an impairment charge is to be recorded for the amount, if any, in which the carrying value exceeds the reporting unit’s fair value. This guidance should be applied prospectively and is effective for public business entities that are United States Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate changes, primarily as a result of borrowings under our senior credit facilities (as discussed in Note 5 to the Consolidated Financial Statements), which bear interest based on variable rates.
As discussed in Note 6 to the Consolidated Financial Statements, we entered into an interest rate swap agreement effective March 31, 2016, which is intended to mitigate interest rate risk associated with future changes in interest rates for the term loan borrowings under the 2016 Senior Credit Facility. As a result of this interest rate swap, our exposure to interest rate volatility is minimized beginning in the second fiscal quarter of 2016. The interest rate swap agreement has been executed for risk management purposes and is not held for trading purposes.
A 1% change in interest rates on our variable rate debt in excess of that amount covered by the interest rate swap would have
affected interest expense by approximately $1.5 million, $1.1 million, and $0.7 million in the fiscal years ended December 31, 2016, December 26, 2015, and December 27, 2014, respectively. On a prospective basis, a 1% change in interest rates on our variable rate debt, in excess of that amount covered by the interest rate swap, existing as of December 31, 2016, would result in interest expense fluctuating approximately $0.9 million per year.
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, grain, corn, steel, petroleum, cotton and other commodities as well as transportation services. Therefore, we may experience both inflationary and deflationary pressure 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.
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Item 8. | Financial Statements and Supplementary Data |
INDEX
TRACTOR SUPPLY COMPANY
Page | |
Consolidated Statements of Income for the fiscal years ended December 31, 2016, December 26, 2015, and December 27, 2014 | |
Consolidated Balance Sheets as of December 31, 2016 and December 26, 2015 | |
Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 31, 2016, December 26, 2015, and December 27, 2014 | |
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2016, December 26, 2015, and December 27, 2014 | |
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Based on this assessment, management believes that, as of December 31, 2016, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm which also audited the Company’s consolidated financial statements, has issued a report on the Company’s internal control over financial reporting, which is included herein.
/s/ Gregory A. Sandfort | /s/ Anthony F. Crudele | |||
Gregory A. Sandfort Chief Executive Officer | Anthony F. Crudele Executive Vice President - Chief Financial Officer and Treasurer | |||
February 23, 2017 | February 23, 2017 | |||
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Tractor Supply Company
We have audited Tractor Supply Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Tractor Supply Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Tractor Supply Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tractor Supply Company as of December 31, 2016 and December 26, 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 31, 2016, and our report dated February 23, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 23, 2017
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Tractor Supply Company
We have audited the accompanying consolidated balance sheets of Tractor Supply Company as of December 31, 2016 and December 26, 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tractor Supply Company at December 31, 2016 and December 26, 2015, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tractor Supply Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 23, 2017
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TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Fiscal Year | |||||||||||