Brentwood, Tennessee-based Tractor Supply Company today reported financial results for its first quarter ended March 28, 2020.
“Our year-to-date results underscore the importance of Tractor Supply as an essential, needs-based retailer. Tractor Supply delivered solid results in the first quarter, and second quarter sales are off to a strong start,” said Hal Lawton, Tractor Supply’s president and chief executive officer. “I can’t thank the Tractor Supply team members enough for their dedication and support of each other and our customers. During these unprecedented times, I am incredibly proud of how the team is responding. The health and safety of our team members and customers will continue to be our highest priority. Across our business, we have taken more than 100 actions in response to the COVID-19 crisis with a focus on being preemptive and proactive. Tractor Supply has a strong and resilient business model, and we are confident we will emerge from the crisis even stronger.”
Lawton continued, “At this critical time, Tractor Supply is committed to supporting our customers’ ability to take care of their families, property and animals. We are leveraging our strengths and pursuing opportunities as we adapt to our customers’ changing needs, as they rely on us to be the dependable supplier to support their lifestyle.”
First Quarter Results
Net sales for the first quarter 2020 increased 7.5% to $1.96 billion from $1.82 billion in the first quarter of 2019. Comparable store sales increased 4.3% compared to an increase of 5.0% in the prior year’s first quarter. The comparable store sales results included an increase in comparable average ticket of 5.4% and a decrease in comparable transaction count of 1.1%. All geographic regions of the company had positive comparable store sales growth. The increase in comparable store sales was primarily driven by strength in consumable, usable and edible product categories, along with solid demand for spring seasonal categories. This growth was partially offset by softness in sales of cold weather seasonal merchandise and discretionary categories such as clothing and footwear.
Gross profit increased 7.5% to $661.2 million from $615.0 million in the prior year’s first quarter, and gross margin was 33.8%, essentially flat to the prior year’s first quarter. The gross margin performance reflected lower transportation costs as a percent of net sales offset by pressure from the strong sales of consumable merchandise, which generally carry a below chain average gross margin rate, and markdowns of winter seasonal merchandise.
Selling, general and administrative (SG&A) expenses, including depreciation and amortization, increased 7.3% to $548.7 million from $511.6 million in the prior year’s first quarter. As a percent of net sales, SG&A expenses improved seven basis points to 28.0% from 28.1% in the prior year’s first quarter. The improvement in SG&A as a percent of net sales was primarily attributable to leverage in occupancy and other costs from the increase in comparable store sales and a net benefit from legal settlements, primarily from the favorable settlement in the Visa/Mastercard interchange fee class action lawsuit. Certain first quarter costs as a percent of net sales were higher than the prior year, driven by incremental costs from COVID-19 such as investments in pay and benefits and the impact of additional labor hours and supply costs dedicated to COVID-19 cleaning actions.
The effective income tax rate was 22.1% compared to 22.0% in the prior year’s first quarter.
Net income increased 9.0% to $83.8 million in the first quarter of 2020 from $76.8 million in the prior year’s first quarter, and diluted earnings per share increased 12.7% to $0.71 from $0.63 in the first quarter of 2019.
The company repurchased approximately 2.9 million shares of its common stock for $263.2 million and paid quarterly cash dividends totaling $40.9 million, returning $304.1 million of capital to shareholders in the first quarter of 2020. As previously announced, the Company suspended its share repurchase program effective March 12, 2020.
The company opened 20 new Tractor Supply stores and closed one Del’s store in the first quarter of 2020 compared to 10 new Tractor Supply store openings and one Petsense store opening in the prior year’s first quarter.
Fiscal 2020 and Liquidity
Given the uncertainty related to the COVID-19 pandemic, the company withdrew its guidance for fiscal 2020 on April 7, 2020. The uncertainties related to the COVID-19 pandemic include, but are not limited to: how macroeconomic factors evolve, including unemployment rates; the impact of the crisis on consumer shopping patterns; the timing of when consumer stimulus checks arrive; the duration and degree of quarantine measures, including additional measures that may still occur; uncertainty in the economy in the remainder of 2020; and the incremental costs of doing business as an essential, needs-based retailer in the current environment. For the second quarter of 2020, the net incremental costs of doing business as an essential retailer are currently anticipated to be in the range of $30 million to $50 million.
Capital expenditures for fiscal 2020 are still expected to be in the range of $225 million to $275 million. The company is moving ahead with its new store opening program, but the timing of new store openings in some areas may be delayed as a result of the COVID-19 pandemic, including local and state orders.
Tractor Supply’s strong balance sheet, coupled with its robust operating cash flow, provide the Company with significant financial flexibility. Preemptive actions to strengthen its liquidity and preserve cash while navigating the COVID-19 pandemic include:
- Suspending its share repurchase program effective March 12, 2020,
- Borrowing $200 million on March 12, 2020 under the accordion feature of the company’s existing credit facility, and
- Entering into an amendment to the company’s credit facility on April 22, 2020, under which the company borrowed an additional $350 million.
At this time, the company does not expect to suspend or reduce its quarterly cash dividend.
Tractor Supply has taken a number of immediate steps to adjust to the impact of COVID-19. During the first quarter, incremental operating costs related to COVID-19 were approximately $7 million. The primary contributing factors to these costs were appreciation bonuses to frontline team members, medical and sick leave coverage and sanitation and safety supplies. As previously stated, the net incremental costs of these actions in response to COVID-19 are currently anticipated to be between $30 to $50 million in the second quarter.
Additionally, Tractor Supply is reprioritizing capital spend to accelerate initiatives to enhance safety and convenience for customers, including Buy Online, Pickup In Store; Buy Online, Deliver from Store; Contactless Curbside Pickup; Contactless Payment capabilities; and additional Mobile POS devices in all stores, which all have been announced in the past several weeks. These additions are all related to incremental actions the company is taking as an essential retailer during this time.