TRACTOR SUPPLY CO /DE/ - Annual Report: 2020 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 26, 2020
or
| ☐ | 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 | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $.008 par value | TSCO | 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 ☑ No ☐
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 ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☑ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of effectiveness of its internal control over financial reporting under section 404(b) of Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
Yes ☐ No ☑
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 27, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $12.6 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 23, 2021 | |||||||
| Common Stock, $.008 par value | 116,301,841 | |||||||
Documents Incorporated by Reference:
Portions of the Registrant’s definitive Proxy Statement for its 2021 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, including the effects of COVID-19, the effects that “shelter in place” or other similar mandated or suggested social distancing protocols could have on the business, the costs of doing business as a retailer during the COVID-19 pandemic, the effectiveness of the Company’s responses to COVID-19 and customer response with respect to those actions, the effects of COVID-19 on our suppliers, business partners and supply chain, the timing and acceptance of new products, the timing and mix of goods sold, weather conditions, the seasonal nature of the business, the timing and mix of goods sold, purchase price volatility (including inflationary and deflationary pressures), the ability to increase sales at existing stores, the failure to realize anticipated benefits of our investments in technology, infrastructure, and digital and omni-channel capabilities, the ability to manage growth and identify suitable locations, failure of an acquisition to produce anticipated results, the ability to successfully manage expenses, particularly in light of COVID-19, including but not limited to, increases in wages, and execute key gross margin enhancing initiatives, increases in fuel, carrier and other transportation costs, increases in wages due to competitive pressures or minimum wage laws and regulations, the availability of favorable credit sources, capital market conditions in general, the ability to open new stores in the manner, timing and number currently contemplated, the impact of new stores on the business, competition, including competition from online retailers, effective merchandising initiatives and marketing emphasis, the ability to retain vendors, reliance on foreign suppliers, the ability to attract, train and retain qualified employees, the unionization or collective bargaining of 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 supply chain technologies, effective tax rate changes, including expected effects of the Tax Cuts and Jobs Act, and results of examination by taxing authorities, the imposition of tariffs on imported products or the disallowance of tax deductions on imported products, 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.
PART I
Item 1. Business
Overview
Tractor Supply Company (the “Company” or “we” or “our” or “us”) is the largest rural lifestyle retailer in the United States (“U.S.”). The Company is focused on supplying the needs of recreational farmers, ranchers, and all those who enjoy living 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. Our stores are located primarily in towns outlying major metropolitan markets and in rural communities. We also operate websites under the names TractorSupply.com and Petsense.com as well as a Tractor Supply Company mobile application.
The Company has one reportable industry segment which is the retail sale of products that support the rural lifestyle. At December 26, 2020, we operated 2,105 retail stores in 49 states (1,923 Tractor Supply and Del’s retail stores and 182 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. Our online selling websites and our mobile application are positioned to offer an extended assortment of products beyond those offered in-store and drive traffic into our stores through our buy online and pickup in-store and ship to store programs. Our retail store locations and digital capabilities provide the convenience to allow our customers to engage with us anytime, anywhere and in any way they choose.
Business Strategy for Tractor Supply Company
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, ranchers, and all those who enjoy living 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 through convenient shopping options both in-store and online.
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, ranchers, and all those who enjoy living the rural lifestyle, as well as tradesmen and small businesses.
Customer Service
We are committed to providing our customers reliable product availability and a convenient, customer-centric experience across shopping channels. In our stores, we believe the ability of our motivated, well-trained 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. In addition, our stores have been equipped with tools such as team member communication devices, wireless internet, and mobile point-of-sale devices that enable our team members to provide an enhanced shopping experience to our customers. We also engage with our customers through our e-commerce websites and mobile application, which provide the opportunity to allow customers to shop anytime, anywhere, and in any way they choose, 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 through personalized experiences and provides convenience that our customers expect, which drives repeat shopping experiences.
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We use a third-party provider to survey and 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 are among the best-in-class. We carefully evaluate the feedback we receive from our customers and implement improvements at both the Company and the individual store level based on that feedback.
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 reallocated 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. Our store layouts and visual displays are designed to provide our customers a feeling of familiarity and convenience to enhance the shopping experience. Informative signs are located in key product categories to conveniently 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. Also, our store team members wear highly visible red vests or aprons with nametags, and our customer service and checkout counters are conveniently located near the front of the store. Our stores have been equipped with tools such as team member communication devices, wireless internet, and mobile point-of-sale devices that enable our team members to provide an enhanced shopping experience to our customers. In addition, our buy online and pick up in-store program, including curbside pick up, provides convenient access for customers to pick up merchandise from our store locations.
Merchandising and Purchasing
We offer an extensive assortment of products for all 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 with approximately 15,500 to 20,000 products per store as well as over 125,000 products online. No single product accounted for more than 10% of our sales during fiscal 2020. 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 table indicates the percentage of net sales represented by each of our major product categories during fiscal 2020, 2019, and 2018:
| Percent of Net Sales | |||||||||||||||||
| Fiscal Year | |||||||||||||||||
| Product Category: | 2020 | 2019 | 2018 | ||||||||||||||
| Livestock and Pet | 47 | % | 47 | % | 47 | % | |||||||||||
| Hardware, Tools and Truck | 21 | 21 | 22 | ||||||||||||||
| Seasonal, Gift and Toy Products | 21 | 20 | 19 | ||||||||||||||
| Clothing and Footwear | 7 | 8 | 8 | ||||||||||||||
| Agriculture | 4 | 4 | 4 | ||||||||||||||
| 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, bird seed, lubricants, propane, and various seasonal products, such as heating, fertilizer, weed control, mulch, pest control, and twine.
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Our products are sourced through both domestic and international vendors, each of whom are expected to adhere to a code of conduct that guides our relationship. Our business is not dependent upon any single vendor or particular group of vendors. We purchase our products from a group of approximately 975 vendors, with no one vendor representing more than 10% of our purchases during fiscal 2020. Approximately 375 core vendors accounted for 90% of our merchandise purchases during fiscal 2020. 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 inventory position.
Intellectual Property
Our subsidiary, Tractor Supply Co. of Texas, LP (“TSCT”), owns registrations with the U.S. Patent and Trademark Office (“USPTO”) for various service marks including TSC®, Tractor Supply Co.®, TSC Tractor Supply Co.®, and the trapezium design for retail 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 retailer.
Our exclusive brands represented approximately 29% of our total sales in fiscal 2020 and 31% of our total sales in fiscal 2019 and 2018, respectively. Our exclusive brands include:
4health® (pet foods and supplies) | Producer’s Pride® (livestock and horse feed and supplies) | ||||
American Farmworks® (livestock, farm and ranch | Red Shed® (gifts, collectibles, and outdoor furniture) | ||||
| equipment) | |||||
Bit & Bridle® (apparel and footwear) | Redstone® (heating products) | ||||
Blue Mountain® (apparel) | Retriever® (pet foods and supplies) | ||||
C.E. Schmidt® (apparel and footwear) | Ridgecut® (apparel) | ||||
Countyline® (livestock, farm and ranch equipment) | Royal Wing® (bird feed and supplies) | ||||
Dumor® (livestock and horse feed and supplies) | Strive® (pet food) | ||||
Groundwork® (lawn and garden supplies) | Traveller® (truck and automotive products) | ||||
Huskee® (outdoor power equipment) | Treeline® (hunting gear and accessories) | ||||
JobSmart® (tools) | TSC Tractor Supply Co® (trailers, truck tool boxes, and animal | ||||
| bedding) | |||||
Paws & Claws® (pet foods and supplies) | Untamed® (pet foods) | ||||
The exclusive brands identified above have been registered as trademarks with the USPTO for certain products and some are the subject of additional 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 file appropriate maintenance and renewal documentation with the USPTO in a timely manner, the registrations are potentially perpetual in duration. Our patents (both United States and foreign) have expiration dates ranging from March, 2024 to December, 2045 and protect various elements, designs or functions of farm and ranch equipment, as well as light systems for trucks and other vehicles.
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We believe our intellectual property, which includes the trademarks and service marks identified above, together with certain tradenames, 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 facility network for supplying stores with merchandise and delivering product ordered through our websites and mobile application. In fiscal 2020, our Tractor Supply stores received approximately 75% of merchandise through this network while the remaining merchandise shipped directly from our vendors to our stores or customers. We believe this flow facilitates the prompt and efficient distribution of merchandise that allows us to be a dependable supplier to our customers for their "Out Here" lifestyle solutions by enhancing in-stock inventory positions, while minimizing freight expense and improving the inventory turn rate. Our distribution facilities, located in Arizona, Georgia, Indiana, Kentucky, Maryland, Nebraska, New York, Texas, and Washington represent a total distribution center capacity of 6.1 million square feet. We also use third-party operated import centers and mixing centers which provide additional distribution capacity.
On December 7, 2020, the Company announced plans to build a new distribution center in Navarre, Ohio. The new distribution center is expected to be approximately 895,000 square feet. Construction is planned to begin in fiscal 2021 and is currently anticipated to be complete by the end of fiscal 2022.
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, monitoring of transportation routes, and 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 retailer, we promote a broad selection of merchandise through various digital and social media initiatives, television, newspaper circulars, and customer-targeted direct e-mail and direct mail, as well as limited use of radio and other media channels. In addition, our Neighbor’s Club loyalty program enhances our ability to create engagement with our best customers. 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, point-of-purchase materials for customer education, and product knowledge for our team members.
Omni-Channel
Ensuring that our customers can engage with us in the most convenient manner for them whether in our stores, on our website, on our mobile application, or via our Customer Solutions Center, is a high priority for us. Our goal is to be available anytime, anywhere, and in any way our customers choose to engage with our brand. We provide our customers the opportunity to shop in a manner that fits their lifestyle and is most convenient for them. Our focus is on delivering a comprehensive mobile experience while maintaining a straight-forward shopping experience to further offer the convenience our customers need. We offer a buy online and pick up in-store program, including curbside pick up, which provides convenient access for customers to pick up merchandise from our store locations. Additionally, our online experience offers an expansive product assortment including a direct to consumer assortment. This allows us to extend our aisles beyond our store locations and provides convenient and useful content that is relevant to our customers’ lifestyle. We provide our customers the ability to have products shipped directly to our retail store locations or to their homes or offices. We use our distribution facility network to support our e-commerce activities. Our digital capabilities have further enhanced our in-store shopping and customer service experience, allowed us to engage with our customers anytime, anywhere, and in any way they choose, and expanded our target markets outside of our current retail store locations.
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Continuous Improvement
We are committed to a continuous improvement program to drive change throughout our organization. Using data analytics and team member engagement, 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 change. Team members are empowered and expected to challenge current paradigms and improve processes. Management encourages the participation of all team members in the decision-making process, regularly solicits input and suggestions from our team members, and incorporates suggestions into our improvement activities.
Management Information and Control Systems
We have invested resources in management information and control systems to provide legendary customer service and to deliver the right products in the right place at the right time. This includes use of digital technologies that support the "Out Here" lifestyle and integrate the customer experience in-store, online, and through our Customer Solutions Center, which offers customers the ability to shop anytime, anywhere, and in any way they choose. Our key platforms include:
•Point-of-sale system;
•In-store mobility;
•E-commerce platform;
•Replenishment and allocation systems;
•Merchandising presentation and inventory management tools;
•Warehouse and transportation management systems;
•Labor management tools for stores and supply chain;
•Price optimization system;
•Vendor purchase order control system;
•Business intelligence and analytics tools; and
•Customer loyalty 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 invest in technology to support store, online, and distribution facility expansion and our long-term strategic growth initiatives focused heavily on improving the customer experience across all channels. We also 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 such as in-store mobility, labor management tools, and back-office support systems. We will continue to evaluate the use of technologies to improve productivity such as artificial intelligence, automation software, quantum computing, and other technologies. We also maintain and continue to strengthen the security of our information systems to help protect and prevent unauthorized access to personal information of our customers, employees, vendors, and other confidential Company data as well as endeavoring to adhere to industry privacy laws and standards. Areas of focus include cloud, end point protection and privacy. Collectively, these efforts are directed toward improving business processes, maintaining secure, efficient, and stable systems, and enabling the continued growth and success of our business.
Petsense
Petsense is 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 26, 2020, we operated a total of 182 Petsense stores in 25 states, with approximately 500 full-time and 1,000 part-time team members, and an e-commerce website (Petsense.com). Petsense owns a registered trademark for its exclusive brand, TrueSource® pet food, and the Petsense name is registered with the USPTO.
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Human Capital
We believe that our team members are the foundation of our business and that their hard work drives our success. As a result of our commitment to our team members, we were recognized by the Great Place to Work Institute as a "Great Place to Work-Certified" company. Below are further descriptions of our Company and our focus on the development and support of our team members:
Management and Team Members
As of December 26, 2020, we employed approximately 20,000 full-time and 21,000 part-time Tractor Supply team members. We typically employ additional part-time team members throughout the year during high sales volume periods. We are not party to any collective bargaining agreements.
Our store operations are organized into regions, each of which is led by a regional vice president. 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 our 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 additionally provide our team members with paid time off and a six-week parental leave policy for new parents.
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 nine and six years, respectively. We believe internal promotions, coupled with the hiring of individuals with previous retail experience, will provide the management structure necessary to support our long-term strategic growth initiatives.
Store Personnel and Training
We seek to hire store team members who live and appreciate the "Out Here" lifestyle, including those 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:
•A thorough on-boarding process to prepare new team members for their new role;
•Productive workplace environment training that is intended to educate team members on Company policies and procedures covering topics such as harassment, discrimination, and retaliation;
•Diversity and Inclusion training which is intended to advance a diverse and inclusive culture built on our core value of Respect, to foster different perspectives, ideas and innovative thinking;
•New store opening training that prepares our store managers to open new 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.
COVID-19 Response
The Company has been and continues to closely monitor the impact of the COVID-19 pandemic on all facets of our business. This includes the impact on our team members, customers, suppliers, vendors, business partners, and supply chain networks.
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The health and safety of our team members and customers are the primary concerns of our management team. We have taken and continue to take numerous actions to promote health and safety, including, providing personal protective equipment to our team members, establishing mask protocols in our facilities, rolling out additional functionality to support contactless shopping experiences, adding services for cleaning and sanitation in our stores and distribution centers, hiring additional team members to assist in promoting social distancing and cleaning actions in our stores, and implementing remote work plans at our store support center.
Additionally, we have taken significant actions to support our team members during this pandemic including COVID-19 paid medical leave, 100% coverage of COVID-19 testing and treatment under our medical plan, and the payment of incremental appreciation bonuses for frontline team members of approximately $44 million in fiscal 2020. Effective June 28, 2020, we implemented permanent wage increases for all of our hourly team members in our stores and distribution centers of a minimum of $1 per hour and are now providing a new benefit package for part-time team members, including medical, vision and dental coverage, behavioral health services, paid sick time and life insurance. We have also implemented annual restricted stock unit grants to more than 2,000 frontline salaried managers in our stores and distribution centers.
Diversity, Equity and Inclusion
Tractor Supply is committed to the principles of diversity, equity and inclusion. We have built a strong and diverse team by purposefully seeking highly qualified diverse candidates with different backgrounds, perspectives, ideas and skill sets. As we move forward, we are working to implement new diversity, equity and inclusion initiatives that will result in an even more diverse team across the entire company.
We are committed to providing a diverse and inclusive culture supported by our Mission & Values where we respectfully foster different perspectives, ideas and innovative thinking. We know that together we are better, and we believe in the authenticity our team members bring to work every day. By focusing on our team members, we know that our customers and communities will be well served. Diversity and inclusion play a key role in moving our business forward. Our workforce is approximately 51% male and 49% female. Minorities comprise approximately 17% of our workforce. Women serve in several key leadership roles including Executive Vice President, Chief Human Resources Officer, Senior Vice President, General Counsel and Corporate Secretary, Senior Vice President of Investor Relations and Public Relations, Senior Vice President of Marketing and Senior Vice President of E-Commerce. We have taken several steps over the past 18 months to further enhance our diversity including the hiring of a diversity, equity and inclusion officer, Company-wide training, formation of a diversity, equity and inclusion council composed of executive leaders and establishment of numerous team member engagement groups supporting the development, community involvement and allyship within our Company. We will continue to build on these initiatives to enhance our culture of respect and teamwork across our organization.
Growth Strategy
Tractor Supply believes we can grow our business by being an integral part of our customers’ lives as the dependable supplier of "Out Here" lifestyle solutions, creating customer loyalty through personalized experiences, and providing convenience that our customers expect at anytime, anywhere, and in any way they choose. Our long-term growth strategy is to: (1) expand and deepen our customer base by providing personal, localized, and memorable customer engagements by leveraging content, social media, and digital shopping experiences, attracting new customers and driving loyalty, (2) evolve customer experiences by digitizing our business processes and furthering our omni-channel capabilities, (3) offer relevant assortments and services across all channels through exclusive and national brands and continue to introduce new products and services through our test and learn strategy, (4) drive operational excellence and productivity through continuous improvement, increasing space utilization, and implementing advanced supply chain capabilities to support growth, scale and agility, and (5) 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.
Achieving this strategy will require a foundational focus on: (1) connecting, empowering and growing our team to enhance their lives and the communities they live in, enabling them to provide legendary service to our customers, and (2) allocating resources in a disciplined and efficient manner to drive profitable growth and build shareholder value, including leveraging technology and automation, to align our cost structure to support new business capabilities for margin improvement and cost reductions.
Over the past five years, we have experienced considerable sales growth, resulting in a compounded annual growth rate of approximately 11.3%. We plan to open approximately 80 new Tractor Supply and 10 new Petsense stores in fiscal 2021, a selling square footage increase of approximately 4%. In fiscal 2020, we opened 80 new Tractor Supply stores and nine new
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Petsense stores. In fiscal 2019, we opened 80 new Tractor Supply stores and eight new Petsense stores. This represents a selling square footage increase of approximately 4% during each of fiscal 2020 and fiscal 2019.
At December 26, 2020, we operated 2,105 retail stores in 49 states (1,923 Tractor Supply and Del’s retail stores and 182 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 we believe we have significant additional opportunities for new Tractor Supply stores. We also believe that there is opportunity for continued growth for Petsense stores.
Approximately 56% of our stores are in freestanding buildings and 44% are located in shopping centers. We lease approximately 95% of our stores and own the remaining 5%.
In addition to new store expansion, we also plan to further support our strategic growth through expansion of our distribution network and initiatives including, among others, space productivity and side lot improvements in certain existing stores as well as continued improvements in technology and infrastructure at our existing stores, and ongoing investments to enhance our digital and omni-channel capabilities to better serve our customers.
Competition
We operate in a competitive retail industry. The principal competitive factors include location of stores, fulfillment options, price, quality of merchandise, in-stock inventory consistency, merchandise assortment and presentation, product knowledge, online competitors, and customer service. We compete with general merchandise retailers, home center retailers, pet 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 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 usually 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. We believe that our business can be more accurately assessed by focusing on the performance of the halves, not the quarters, due to the fact that different weather patterns from year-to-year can shift the timing of sales and profits between quarters, particularly between the first and second fiscal quarters and the third and fourth fiscal quarters.
Historically, weather conditions, including unseasonably warm weather in the fall and winter months and unseasonably cool weather in the spring and summer months, have unfavorably 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 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.
Furthermore, we are not able to predict at this time the impact that the COVID-19 pandemic may have on the seasonality of our business in the future.
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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, and recycling programs in our stores, distribution facilities, and Store Support Center. Our Store Support Center and our distribution centers in Casa Grande, Arizona, and Frankfort, New York, are LEED (Leadership in Energy and Environmental Design) Silver certified for environmentally sustainable design, construction, and operation. We also installed solar arrays at the Store Support Center in Brentwood, Tennessee, and our Tractor Supply store in Hendersonville, Tennessee.
The Company has been a SmartWay Transport partner since 2013. SmartWay Transport is a public-private initiative between the U.S. Environmental Protection Agency, large and small trucking companies, retailers, and other federal and state agencies. Its purpose is to improve fuel efficiency and the environmental performance (reduction of both greenhouse gas emissions and air pollution) of supply chains.
In December 2018, we announced a goal to reduce carbon emissions from our facilities by 25% by 2025 from our 2015 baseline as part of the Company's Stewardship Program. In December 2020, we announced that we had reached this goal five years early.
Additionally in 2020, we released our inaugural report in response to the Task Force on Climate-related Financial Disclosures, announced our commitment to increasing our level of renewable energy purchased for electric consumption, and that the Company is partnering with various utility companies to purchase solar energy for select store locations and to participate in community solar programs.
Additional information can be found in our annual sustainability report on our website (TractorSupply.com).
Information about our Executive Officers
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 6, 2021.
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 | ||||||
| Harry A. Lawton, III | President and Chief Executive Officer | 46 | ||||||
| Kurt D. Barton | Executive Vice President – Chief Financial Officer and Treasurer | 49 | ||||||
| Robert D. Mills | Executive Vice President – Chief Technology, Digital Commerce and Strategy Officer | 48 | ||||||
| John P. Ordus | Executive Vice President – Chief Stores Officer | 45 | ||||||
| Jonathan S. Estep | Executive Vice President – Chief Merchandising Officer | 41 | ||||||
| Melissa D. Kersey | Executive Vice President – Chief Human Resources Officer | 46 | ||||||
| Colin W. Yankee | Executive Vice President – Chief Supply Chain Officer | 43 | ||||||
| Noni L. Ellison | Senior Vice President – General Counsel and Corporate Secretary | 49 | ||||||
| Christi C. Korzekwa | Senior Vice President – Marketing | 55 | ||||||
| Matthew L. Rubin | Senior Vice President and General Manager of Petsense | 41 | ||||||
Harry A. Lawton, III was appointed as President and Chief Executive Officer on January 13, 2020. Mr. Lawton served as President of Macy's, Inc. from September 2017 to December 2019. Prior to that time, Mr. Lawton served as Senior Vice President, North America at eBay, Inc. since May 2015. Mr. Lawton previously held a number of leadership positions at Home Depot, Inc. from 2005 to 2015, including Senior Vice President of Merchandising and head of Home Depot's online business. Since January 2019, Mr. Lawton has served as a director of Sealed Air Corporation and previously served as a director of Buffalo Wild Wings, Inc. from October 2016 to February 2018.
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Kurt D. Barton was promoted to Executive Vice President – Chief Financial Officer and Treasurer in February 2019, after having served as Senior Vice President – Chief Financial Officer and Treasurer since March 2017. Prior to that time, Mr. Barton served as Senior Vice President – Controller of the Company since February 2016. Mr. Barton previously served as Vice President – Controller from February 2009, after having served as Director, Internal Audit from July 2002 to February 2009. Mr. Barton has served in various other leadership roles in accounting since he joined the Company in 1999. Mr. Barton, a Certified Public Accountant, began his career in public accounting in 1993, spending six years at Ernst & Young, LLP.
Robert D. Mills has served as Executive Vice President – Chief Technology, Digital Commerce and Strategy Officer since August 2018, prior to which he 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. Since March 2018, Mr. Mills has served as a director of B&G Foods, Inc.
John P. Ordus was promoted to Executive Vice President – Chief Stores Officer in February 2020, after having served as Senior Vice President - Store Operations since August 2015. Prior to that time, Mr. Ordus served the Company as Regional Vice President from June 2010 and as a Regional Director for the Company since September 2008. Mr. Ordus joined the Company as a District Manager in February 2002 after the acquisition of Quality Farm and Fleet with which Mr. Ordus held roles since January 1988.
Jonathan S. Estep was promoted to Executive Vice President – Chief Merchandising Officer in February 2020, after having served as the Senior Vice President, General Merchandising since April 2017. Prior to that time, Mr. Estep served the Company as a Vice President, Divisional Merchandise Manager from February 2014. Mr. Estep also previously served in various other leadership roles in merchandising since he re-joined the Company in January 2008.
Melissa D. Kersey was appointed as Executive Vice President – Chief Human Resources Officer on July 20, 2020. Ms. Kersey was previously Senior Vice President and Chief People Officer for McDonald's USA from 2017 until July 2020. Ms. Kersey also previously held a number of executive level roles with Walmart from 2008 to 2017, including Senior Vice President of Global Human Resource Transformation and People Services, Senior Vice President and Chief Human Resources Officer for U.S. Stores, and Senior Vice President of Learning and Human Resources Strategy. Prior to that time, Ms. Kersey spent eight years with Alltel and four years with the Target Corporation in Operations, Distribution, Human Resources and Technology roles.
Colin W. Yankee was promoted to Executive Vice President - Chief Supply Chain Officer in February 2020, after having served as Senior Vice President, Supply Chain since November 2015 when he joined the Company. Mr. Yankee was previously Vice President of Logistics for Neiman Marcus from 2013 to 2015. Prior to that time, Mr. Yankee held various leadership roles in logistics and supply chain with the Target Corporation since 2004. He began his career as a Cavalry Officer, Captain in the United States Army.
Noni L. Ellison was appointed as Senior Vice President – General Counsel and Corporate Secretary on January 11, 2021. Ms. Ellison was previously General Counsel, Chief Compliance Officer and Corporate Secretary for Carestream Dental from August 2017 until January 2021. Ms. Ellison also previously served as Associate General Counsel and Assistant Corporate Secretary at W.W. Grainger, Inc. from February 2015 until July 2017. Prior to that time, Ms. Ellison held roles of increasing responsibility at Turner Broadcasting System, Inc. and Scripps Networks and practiced law with two national law firms as a corporate finance and securities associate.
Christi C. Korzekwa has served as Senior Vice President – Marketing since February 2015, having previously served as Vice President, Marketing since she joined the Company in February 2012. Prior to joining the Company, Ms. Korzekwa served as Senior Vice President, Director of Client Services for Blue Sky Agency. She worked for Home Depot, Inc. from 2004 to 2011 in roles of increasing importance in marketing and advertising, most recently as Senior Director, Marketing. Before joining Home Depot, Ms. Korzekwa spent 17 years with TM Advertising, most recently serving as their Senior Vice President, Global Media Director.
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Matthew L. Rubin was appointed Senior Vice President and General Manager of Petsense on February 1, 2021. Mr. Rubin previously served as Senior Vice President of Business Development & Growth at The Michaels Companies from October 2018 until January 2021. Mr. Rubin was previously an executive in Accenture Strategy's North America Retail Practice from April 2015 to October 2018. Before April 2015, Mr. Rubin was a Partner at Consolidated Venture Partners & Consolidated Marketing and a Co-Founder & Finance Partner at OnTrend Products. Mr. Rubin also previously served as Vice President of Specialty Business Operations at BJ’s Wholesale Club. Mr. Rubin began his career at Office Depot where he had multiple merchandising and strategic project leadership roles of increasing responsibility.
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. We are an electronic filer and the SEC maintains an Internet website at sec.gov that contains the reports, proxy and information statements, and other information we file.
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. Certain 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.
Strategic and Competitive Risks
Failure to protect our reputation could have a material adverse effect on our brand name or any of our exclusive brands.
Our success depends in part on the value and strength of the Tractor Supply name, including our exclusive brands. 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 at our existing stores, defined as sales in stores which have been open for at least twelve months. Various factors affect the comparable store sales at our existing stores, including, among others, 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 competing retailers, increased presence of online retailers, current economic conditions, customer satisfaction with our products, retail pricing, the timing of promotional events, the release of new merchandise, the success of marketing programs, weather conditions, and our ability to attract and retain qualified team members. These factors may cause the comparable store sales results at our existing stores 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.
Furthermore, the significant positive impact of the COVID-19 pandemic on the demand for our products in fiscal 2020 resulted in a significant increase in new or reacquired customers and in comparable store sales growth. Our sales performance in fiscal 2020 may present a greater risk to our ability to increase comparable store sales in the following year(s) and in our ability to
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maintain our new or reacquired customers gained in fiscal 2020. Therefore, we may not be able to sustain or increase our comparable store sales in fiscal 2021 and beyond.
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 and other businesses 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. Additionally, new stores can also impact the sales and contribution margins of existing stores located in close proximity.
Our merchandising and marketing initiatives may not provide expected results.
We believe our past performance has been based on, and future success will depend, in part, upon 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. Further, adverse publicity about our merchandise products, whether valid or not, may discourage consumers from buying the products we offer. If we misjudge the market or our marketing programs are not successful, we may overstock unpopular products and be forced to take inventory impairment or retail 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 effect on our financial condition and results of operations.
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, pet 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 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
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be able to successfully integrate an organization 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. Additionally, acquired businesses may not achieve desired profitability objectives, causing lower than expected earnings and cash flows which could subsequently require impairment of long-lived assets, goodwill and other intangible assets.
Weather and Climate Risks
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, fires 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, damage to our stores or merchandise, 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.
Weather conditions may cause a disruption in our distribution and transportation network that would adversely affect our ability to conduct our operations.
We rely on our distribution and transportation network, including third-party logistics providers, to provide goods to our stores and to our customers 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 or customers by various means of transportation, including shipments by sea, air, rail, and truck. Although we believe that our operations are efficient, disruptions due to extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, extreme rain, fires and droughts may result in delays in the transportation and delivery of merchandise to our distribution centers, our stores, or our customers. Significant disruptions or delays in our distribution and transportation network could adversely affect sales and the satisfaction of our customers which could have a material adverse impact on our financial condition and results of operations.
Factors associated with climate change could adversely affect our business.
We use natural gas, diesel fuel, gasoline and electricity in conducting our operations. Increased government regulations to limit carbon dioxide and other greenhouse gas emissions may result in increased compliance costs and legislation or regulation affecting energy inputs, which could materially affect our profitability. Further, climate change could affect our ability to procure needed commodities at costs and in the quantities that we currently expect. Additionally, climate change may be associated with extreme weather conditions, such as more frequent or intense hurricanes, thunderstorms, tornadoes, floods, fire, drought, and snow or ice storms, as well as rising sea levels, all of which may negatively impact our business and have a material adverse effect on our financial condition and results of operations.
Macroeconomic Risks
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, general health epidemics, 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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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 duties, tariffs, diesel fuel, and 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.
Team Member Risks
Our failure to attract and retain qualified team members, increases in wage, and labor costs, and changes in laws and other labor issues could adversely affect our financial performance.
Our ability to maintain and 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, increases in legally required minimum wage rates, changing demographics, health and other insurance costs, changes in employment legislation and the potential for changes in local labor practices or union activities. 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.
We are subject to federal, state, and local laws governing employment practices and working conditions. These laws cover wage and hour practices, labor relations, paid and family leave, workplace safety and immigration, among others. The laws and regulations being passed at the state and local level create unique challenges for a multi-state employer. We must continue to monitor and adapt our employment practices to comply with these various laws and regulations. If our costs of labor or related costs increase significantly as new or revised labor laws, rules or regulations or healthcare laws are adopted or implemented, our financial performance could be adversely affected.
The loss of current members of our senior management team and other key team members or the failure to successfully manage an executive officer transition may adversely affect our operating results.
Our success depends in large part on the continued availability and service of our executive officers, senior management, and other key team members. Competition for senior management and key team members in our industry is strong and we may not be able to retain our key team members or attract new qualified team members. We must continue to recruit, retain, and motivate management and other team members sufficiently, both to maintain our current business and to execute our long-term strategic growth initiatives. The loss of any of our executive officers or other key senior management without sufficient advance notice could prevent or delay the implementation and completion of our strategic initiatives or divert management’s attention to seeking qualified replacements. Additionally, any failure by us to manage a successful leadership transition of an executive officer and to timely identify a qualified permanent replacement could harm our business and have a material adverse effect on our results of operations.
Supply Chain and Third-Party Vendor Risks
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 significant 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, health (including, but not limited to, the COVID-19 coronavirus), or environmental conditions, transportation delays, or changes in laws and regulations affecting distribution. Our
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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.
While the Company selects these third-party vendors carefully, it does not control their actions or the components or manufacture of their products. Any problems caused by these third-parties, or issues associated with their products or workforce, including customer or governmental complaints, breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, and cyber attacks or security breaches at a vendor could subject the Company to litigation and adversely affect the Company’s ability to deliver products and services to its customers and have a material adverse effect on our results of operations and financial condition.
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, global or regional health epidemics, 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 U.S. quotas, duties, tariffs, 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 political landscape in the U.S. contains uncertainty with respect to tax and trade policies, tariffs and regulations affecting trade between the U.S. and other countries. We source a portion of our merchandise from manufacturers located outside the U.S., 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 financial condition.
We rely on manufacturers located in foreign countries, including China, for merchandise. Additionally, a portion of our domestically purchased merchandise is manufactured abroad. Our business may be materially adversely affected by risks associated with international trade, including the impact of tariffs (imposed and potential) by the U.S. with respect to certain consumer goods imported from China.
We source a portion of our merchandise from manufacturers located outside the U.S., primarily in Asia and Central America, and many of our domestic vendors have a global supply chain. The U.S. has imposed tariffs on certain products imported into the U.S. from China and could propose additional tariffs. The imposition of tariffs on imported products has increased our costs and could result in reduced sales and profits. In addition, the imposition of tariffs by the U.S. has resulted in the adoption of tariffs by China on U.S. exports and could result in the adoption of tariffs by other countries as well. A resulting trade war could have a significant adverse effect on world trade and the world economy. Further, the imposition of tariffs or other changes in world trade could have an impact on certain U.S. industries and consumers and could negatively impact the consumer demand for products that we sell.
We continue to evaluate the impact of the effective and potential tariffs on our supply chain, costs, sales, and profitability as well as our strategies to mitigate any negative impact, including negotiating with our vendors, seeking alternative sourcing options, and adjusting retail selling prices. Given the uncertainty regarding the scope and duration of the current and potential tariffs, as well as the potential for additional trade actions by the U.S. or other countries, the impact on our business, results of operations, and financial condition is uncertain but could be significant. Thus, we can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or other trade actions will be successful in whole or in part in mitigating the impact of any current or future tariffs. To the extent that our supply chain, costs, sales, or profitability are negatively affected by the tariffs or other trade actions, our business, financial condition, and results of operations may be materially adversely affected.
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, including third-party logistics providers, 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 or customers by various means of transportation, including shipments by sea, air, rail, and truck. Any disruption, unanticipated expense, or operational failure related to this process could negatively affect our operations. For example, unexpected delivery delays (including delays due to weather, fuel shortages, work stoppages, global or regional health epidemics, product shortages from vendors, or other reasons) or increases in transportation
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costs (including increased fuel costs or a decrease in transportation capacity for overseas shipments) could significantly decrease our ability to provide adequate products for sale, or products at a desired price, 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 distribution facilities and expand existing facilities to support our long-term strategic growth initiatives. Delays in opening new or expanded distribution facilities could adversely affect our future operations by slowing store growth or negatively impacting our fulfillment capabilities, 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, distribution facilities, and customers 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 face risks from our use of service providers or other third-parties whom we rely upon for conducting our business.
The Company is dependent upon numerous service providers and other third-parties to conduct our business, including e-commerce among others. While the Company selects these third-party vendors carefully, it does not control their actions. Any failure of these third-parties to provide the expected or agreed-upon level of service in a timely manner for any reason could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Further, our reputation or brand could be adversely impacted by the actions of these third-parties.
Technology, Data Security, Business Continuity and Disaster Recovery Risks
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 materially affect our operating results, financial condition, and liquidity.
We depend on information systems and technology, some of which are managed or provided by third-parties, for many activities important to our business. As do most retailers, we receive and store in our information systems certain personal and other sensitive information about our business, customers, employees, and vendors. Additionally, we also receive and process information permitting cashless payments as part of our in-store and online operations at TractorSupply.com and Petsense.com and on our mobile application, some of which depend upon the secure transmission of confidential information over public networks. The information that we receive and store makes us subject to cybersecurity attacks, cyber incidents and privacy regulations, which are occurring more frequently, are constantly evolving in nature, are becoming more sophisticated, and are being made by groups and individuals with a wide range of expertise and motives. We are the target of attempted cyber and other security threats and continuously monitor our information technology networks and infrastructure in an effort to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. However, these security measures cannot provide absolute assurance or guarantee that we will be successful in preventing, detecting, or responding to every such breach or disruption and/or preventing the misuse of confidential information of our business, customers, employees, or vendors. Similar risks exist with respect to the third-party vendors that we rely upon for aspects of our information technology support services and administrative functions, even if the attack or breach does not directly impact our systems or information.
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A compromise of our information security and privacy controls, or those of businesses and vendors with whom we interact, which results in confidential information being accessed, obtained, damaged, or used by unauthorized or improper parties; loss or unavailability of data; disruptions to our business activities; or any other outcome stemming from a cybersecurity incident could materially adversely affect our reputation with our customers, team members, 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 attack or 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 privacy, 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, 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.
We are subject to payments-related risks that could increase our operating costs, expose us to fraud, subject us to potential liability, and potentially disrupt our business.
We accept payments using a variety of methods, including credit cards, debit cards, credit accounts, our private label credit cards, gift cards, direct debit from a customer’s bank account, consumer invoicing, and physical bank checks, and we may offer different payment options over time. These payment options subject us to many compliance requirements, including, but not limited to, compliance with payment card association operating rules, including data security rules, certification requirements, rules governing electronic funds transfers, and Payment Card Industry Data Security Standards. They also subject us to potential fraud by criminal elements seeking to discover and take advantage of security vulnerabilities that may exist in some of these payment systems. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, electronic checks, gift cards and promotional financing, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. If we fail to comply with these rules or requirements, adequately encrypt payment transaction data, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.
Our business and operations could suffer material losses in the event of system interruptions or failures.
Our information technology systems, some of which are dependent on services managed or provided by third-parties, serve an important role in the operation and administration of our business. These systems are vulnerable to damages from any number of sources, including, but not limited to, human error, cybersecurity attacks, computer viruses, unauthorized access, fire, flood, power outages, telecommunication failures, facility or equipment damage, natural disasters, terrorism, and war. In addition, we continually make investments in technology to implement new processes and systems, as well as to maintain and update our existing processes and systems. Implementing process and system changes increases the risk of disruption. If our information technology systems are interrupted or fail and our redundant systems or recovery plans are not adequate to address such interruptions or failures on a timely basis, our revenues and profits could be reduced and the reputation of our brand and our business could be materially adversely affected. Additionally, remediation of any problems with our systems could result in significant, unplanned expenses.
Customer-facing technology systems are an important part of our sales and marketing strategy and 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 websites, TractorSupply.com and Petsense.com, and our mobile application as both a sales channel for our products and as a method of providing product, project, and other relevant information to our customers to drive 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 in-store and online business and negatively affect our relationship with our customers.
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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 long-term strategic growth 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 long-term strategic growth initiatives designed to increase our sales and improve margin are 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 long-term strategic growth initiatives would delay and possibly even prevent us from realizing the projected benefits of those initiatives.
Financial Risks
Changes in market conditions or in our credit rating could restrict capital and adversely affect our business operations and growth initiatives.
We rely on the positive cash flow we generate from our operating activities and our access to the credit and capital markets to fund our operations, growth strategy, capital expenditures, and return of cash to our shareholders through share repurchases and dividends. Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict our access to these potential sources of future liquidity. Our continued access to liquidity sources on favorable terms depends on multiple factors, including our operating performance and credit ratings. There can be no assurance that we will be able to maintain and/or improve our current credit ratings. A rating organization may lower our rating, or change our ratings’ outlook, or decide not to rate our securities, temporarily or permanently, in its sole discretion. In the event that our current credit ratings are downgraded or removed, we would most likely incur higher borrowing costs and experience greater difficulty in obtaining additional financing, which in turn would have a material adverse impact on our financial condition, results of operations, cash flows, and liquidity. We can make no assurances that our ability to obtain additional financing through the debt markets will not be adversely affected by economic conditions or that we will be able to maintain or improve our current credit ratings.
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 conditions 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.
Our level of indebtedness could limit our cash flow available for operations and could adversely affect our ability to service our debt or obtain additional financing.
As of December 26, 2020, our total outstanding consolidated debt was approximately $984.3 million. Our level of indebtedness could restrict our operations and make it more difficult for us to satisfy our debt obligations. Our ability to make payments on our indebtedness, to refinance our indebtedness, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. The risk exists that our business will be unable to generate sufficient cash flow from operations or that future borrowings will not be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance all or a portion of our indebtedness on acceptable terms, or at all, will be dependent upon a number of factors, including our degree of leverage, the value of our assets, borrowing and other financial restrictions imposed by lenders and conditions in the credit markets at the time we refinance. If we are unable to refinance our indebtedness on acceptable terms, we may be forced to agree to otherwise unfavorable financing terms. This could have a material adverse effect on our business, financial condition and results of operations.
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In addition, so long as we comply with any existing limitations in our credit and debt agreements while they are in effect, we may issue an indeterminate amount of debt securities from time to time. If new debt is added to our and our subsidiaries' current debt levels, the related risks that we and they now face could intensify.
Our credit facilities, the indenture related to our 1.75% Senior Notes, and other debt instruments have restrictive covenants and change of control provisions that could limit our financial and business flexibility.
Our credit agreement governing our senior credit facilities and our note purchase and private shelf agreement governing our senior unsecured notes due August 14, 2029 (the “2029 notes”) each contain financial, operative and other restrictive covenants in addition to the restrictive covenants contained in the indenture governing our 1.75% Senior Notes (as defined in the Notes to the Consolidated Financial Statements). Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt, which would have a material adverse effect on our financial condition. In addition, upon certain events constituting a change of control, as that term is defined in the indenture for our 1.75% Senior Notes and in our note purchase and private shelf agreement for our 2029 notes, we are required to make an offer in cash to repurchase all or any part of each holder's 1.75% Senior Notes at a repurchase price equal to 101% of the principal thereof, plus accrued interest, and to prepay all of each holder’s 2029 notes at a prepayment price equal to 100% of the principal thereof, plus accrued interest. Sufficient funds may not be available to us, however, at the time of any change of control event to repurchase and prepay, as applicable, all or a portion of the tendered notes pursuant to these requirements. Our failure to offer to repurchase 1.75% Senior Notes and prepay 2029 notes, or to repurchase and prepay, as applicable, notes tendered, following a change of control will result in a default under the indentures for our 1.75% Senior Notes and the note purchase and private shelf agreement for our 2029 notes, which could lead to a cross-default under our credit agreement for our senior credit facilities.
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 $4.5 billion, which has remaining authorization as of December 26, 2020 of $1.14 billion, we may temporarily pause or permanently discontinue this program at any time or significantly reduce the amount of repurchases under the program.
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 investors’ perception 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 has at times 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.
Impairment of the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and results of operations.
Goodwill represents the difference between the purchase price of an acquired company and the related fair value of net assets acquired. A significant amount of judgment is involved in determining if an indication of impairment of goodwill exists. As with goodwill, we also test our indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors indicating impairment of goodwill or other intangible assets may include, among others: a significant decline in our expected future cash flows; a sustained, significant
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decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated or changing competition; the testing for recoverability of a significant asset group within a reporting unit; and reduced growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and negatively affect our financial condition and results of operations. To the extent that business conditions deteriorate or if changes in key assumptions and estimates differ significantly from management's expectations, it may be necessary to record additional impairment charges in the future which could have an adverse effect on our financial condition and results of operations.
Legal, Regulatory and Compliance Risks
We are subject to personal injury, workers’ compensation, product liability, discrimination, harassment, wrongful termination, wage and hour, and other claims in the ordinary course of business.
Our business involves a risk of personal injury, workers’ compensation, product liability, discrimination, harassment, wrongful termination, wage and hour, 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 with a self-insured retention and workers’ compensation insurance with 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.
Additionally, we are subject to U.S. federal, state, and local employment laws that expose us to potential liability if we are determined to have violated such employment laws, including but not limited to, laws pertaining to minimum wage rates, overtime pay, discrimination, harassment, and wrongful termination. Compliance with these laws, including the remediation of any alleged violation, may have a material adverse effect on our business or results of operations.
Our business could be negatively impacted 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.
Our operations, including our outsourced exclusive brand manufacturing partners, are subject to regulation by the Occupational Safety and Health Administration (“OSHA”), the Food and Drug Administration (the “FDA”), the Department of Agriculture (the “USDA”), the Environmental Protection Agency (the "EPA") and by various other federal, state, local and foreign authorities regarding the processing, packaging, storage, distribution, advertising, labeling and export of our products, including food safety standards.
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 U.S. 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, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.
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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.
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 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.
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.
COVID-19 Risks
The COVID-19 coronavirus pandemic could have a material negative effect on our results of operations, cash flows, financial position, and business operations.
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which may negatively affect our business operations.
We are unable to predict the impact that COVID-19 will have on our results of operations, cash flows, financial position, and business operations due to numerous uncertainties. These uncertainties include, but are not limited to: the severity of the virus; the duration of the pandemic; governmental actions which include restrictions on our operations up to and including potential closure of our stores and distribution centers; the duration and degree of quarantine or shelter-in-place measures, including additional measures that may still occur; impacts on our supply chain which include suppliers of our products and our transportation vendors; the health of our workforce and our ability to maintain staffing needs to operate our business; how macroeconomic factors evolve including unemployment rates and recessionary pressures; the impact of the pandemic on consumer shopping patterns, both during and after the pandemic; volatility in the economy as well as the credit and financial markets during and after the pandemic; the incremental costs of doing business during the pandemic as well as on a long-term basis; potential increases in insurance premiums, medical claims costs, and workers' compensation claim costs; unknown consequences on our business performance and initiatives stemming from the substantial investment of time and other resources to the pandemic response; potential delays in growth initiatives including the timing of new store openings; potential adverse
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effects on our internal control environment and information security as a result of changes to a remote work environment; and the long-term impact of the pandemic on our business.
In addition, we cannot predict the impact that the pandemic will have on our manufacturers and suppliers of our products and other business partners such as service vendors; however, any material effect on these parties could adversely impact our results of operations and our ability to operate our business effectively.
The COVID-19 coronavirus pandemic could have a material negative effect on our supply chain.
Circumstances surrounding and related to the COVID-19 pandemic have created unprecedented impacts on the global supply chain. Our business relies on an efficient and effective supply chain, including the manufacture and transportation of our products as well as the effective functioning of our distribution centers. Impacts related to the COVID-19 pandemic are placing strains on the domestic and international supply chains that could negatively affect the flow or availability of our products and result in higher out-of-stock inventory positions due to difficulties in timely obtaining product from the manufacturers and suppliers of our products as well as transportation of those products to our distribution centers and stores. Further, we may have to source products from different manufacturers or geographic locations which could result in, among other things, higher product costs, increased transportation costs, delays in receiving products or lower quality of the products.
Additionally, the operation of our distribution centers is crucial to our business operations. If our distribution centers experience closures or worker shortages, whether temporary or sustained, we could sustain significant adverse impacts related to the flow or availability of products to our stores and customers.
Any of these circumstances could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation.
Economic impacts stemming from the COVID-19 coronavirus pandemic could significantly impact our financial position, including liquidity, capital allocation, and access to capital markets for additional funds to operate our business.
In an effort to strengthen and preserve our liquidity while navigating the COVID-19 pandemic, we took preemptive actions, including incremental borrowings under our credit facilities, issuing $650.0 million of 1.750% Senior Notes (as defined in Note 4 to the Consolidated Financial Statements), temporary suspension of our share repurchase program during a portion of fiscal 2020 and increased our balance of cash and cash equivalents.
The increased debt levels have increased our interest expense costs and could place us at higher risk of default or limit our future financial flexibility. Further, the financial and credit markets have and may continue to experience significant volatility and turmoil. Whether due to our increased debt levels or to ongoing changes in the financial and credit markets, our ability to access capital on favorable terms and continue to meet our liquidity needs could be adversely affected.
Additionally, changes in our capital allocation strategy could have significant adverse impacts, both short- and long-term, on our business, results of operations, and financial position. Any future suspension of our share repurchase program, if necessary and depending on duration, will negatively impact our earnings per share which in turn could adversely impact our common stock price. While not contemplated at this time, any potential suspension or reduction in our dividend declaration could have an adverse impact on investor perception and our common stock price.
Actions taken to protect the health and safety of our team members and customers during the COVID-19 coronavirus pandemic have increased our operating costs and may not be sufficient to protect against operational or reputational harm to our business, regulatory actions or claims and litigation.
In response to the COVID-19 pandemic, we have taken a number of actions across our business to help protect our team members, customers, and others in the communities we serve. These measures include personal protective equipment for our team members, a requirement to wear masks in our facilities, increased staffing in order to provide contact-free curbside pickup from stores, expansion of our capabilities to support delivery to customer homes, increased cleaning and sanitizing measures, and monitoring for “social distancing” directives, as well as additional cleaning materials in our facilities. Additionally, we have provided appreciation bonuses as well as permanent increases in compensation and benefits for our team members in our stores and distribution centers to further support them during and after the COVID-19 pandemic. Actions such as these have resulted in significant incremental costs and we expect that we will continue to incur these costs for the foreseeable future, which in turn will have an adverse impact on our results of operations.
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The health and safety of our team members and customers are of primary concern to our management team. However, due to the unpredictable nature of this virus and the consequences of our actions, we may see unexpected outcomes notwithstanding our added safety measures. For instance, if we do not respond appropriately to the pandemic, or if our team members or customers do not participate in “social distancing”, vaccination efforts and other safety measures, the well-being of our team members and customers could be jeopardized. Furthermore, any failure to appropriately respond, or the perception of an inadequate response, could cause reputational harm to our brand and subject us to claims and litigation from team members, customers and service providers. Additionally, we may experience increased litigation expenses resulting from team member or customer lawsuits, including those related to the Company’s COVID-19 response and team member or customer contraction of COVID-19, increased insurance costs, medical claims costs and workers’ compensation claims costs and an adverse impact of regulatory and judicial changes in liability for workers’ compensation claims related to the COVID-19 pandemic.
Further, an outbreak of confirmed cases of COVID-19 in our stores or distribution centers could result in temporary or sustained workforce shortages or facility closures which would negatively impact our underlying business and results of operations.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
At December 26, 2020, the Company operated 2,105 stores in 49 states (1,923 Tractor Supply and Del’s retail stores and 182 Petsense retail stores). The Company leases approximately 95% of its stores. Store leases typically have initial terms of between 10 and 15 years, with two to four optional renewal periods of five years each, exercisable at our option. No single lease is material to the Company’s operations. Approximately 56% of our stores are in freestanding buildings and 44% are located in shopping centers. The following is a count of store locations by state:
| State | Number of Stores | State | Number of Stores | |||||||||||||||||
| Texas | 227 | Wisconsin | 26 | |||||||||||||||||
| North Carolina | 103 | Washington | 25 | |||||||||||||||||
| Pennsylvania | 98 | Illinois | 24 | |||||||||||||||||
| Tennessee | 98 | Maine | 23 | |||||||||||||||||
| Georgia | 96 | Maryland | 23 | |||||||||||||||||
| Ohio | 96 | Massachusetts | 23 | |||||||||||||||||
| Michigan | 95 | Colorado | 22 | |||||||||||||||||
| New York | 92 | New Hampshire | 22 | |||||||||||||||||
| Florida | 86 | Connecticut | 20 | |||||||||||||||||
| California | 74 | Nebraska | 18 | |||||||||||||||||
| Kentucky | 71 | Utah | 15 | |||||||||||||||||
| Alabama | 67 | Minnesota | 14 | |||||||||||||||||
| Virginia | 64 | North Dakota | 14 | |||||||||||||||||
| Indiana | 63 | Oregon | 13 | |||||||||||||||||
| Louisiana | 60 | Iowa | 9 | |||||||||||||||||
| Oklahoma | 57 | South Dakota | 9 | |||||||||||||||||
| South Carolina | 50 | Vermont | 8 | |||||||||||||||||
| Mississippi | 47 | Wyoming | 8 | |||||||||||||||||
| Arkansas | 38 | Delaware | 6 | |||||||||||||||||
| Arizona | 35 | Montana | 6 | |||||||||||||||||
| Missouri | 31 | Idaho | 6 | |||||||||||||||||
| New Mexico | 29 | Nevada | 6 | |||||||||||||||||
| West Virginia | 28 | Rhode Island | 5 | |||||||||||||||||
| Kansas | 27 | Hawaii | 2 | |||||||||||||||||
| New Jersey | 26 | |||||||||||||||||||
| 2,105 | ||||||||||||||||||||
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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 | ||||||||||||
| Frankfort, New York | 924,000 | Owned | ||||||||||||
| 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 | 592,000 | Owned | ||||||||||||
Seguin, Texas (b) | 71,000 | Owned | ||||||||||||
Lakewood, Washington (b) | 64,000 | Leased | ||||||||||||
Longview, Texas (b) | 63,000 | Owned | ||||||||||||
(a) The leased distribution center 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.
On December 7, 2020, the Company announced plans to build a new distribution center in Navarre, Ohio. The new distribution center is expected to be approximately 895,000 square feet. Construction is planned to begin in fiscal 2021 and is currently anticipated to be complete by the end of fiscal 2022.
Item 3. Legal Proceedings
On October 9, 2020, an alleged stockholder, the City of Pontiac Police and Fire Retirement System, filed a derivative lawsuit in the U.S. District Court for the Middle District of Tennessee, purportedly on the Company's behalf, against certain current and former members of our Board of Directors, and the Company as a nominal defendant, seeking unspecified compensatory and punitive damages payable to the Company, disgorgement, restitution, corporate governance and hiring changes, mandated community investment, and attorneys' fees and costs. Plaintiff alleges that defendants violated the federal securities laws governing proxy solicitations and breached their fiduciary duties by misrepresenting the Company’s commitment to and support for diversity and inclusion. The Company disputes the allegations of the complaint. The Company and the individual defendants moved to dismiss the complaint based on plaintiff’s failure to make a demand on the board and to state a claim upon which relief may be granted. Given the indeterminate claims for monetary damages and the early stage of the proceedings where key factual and legal issues have not been resolved, the Company is unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from the matter described above.
The Company is also involved in various litigation matters arising in the ordinary course of business. The Company believes that, based upon information currently available, 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. However, litigation and other legal matters involve an element of uncertainty. Future developments in such matters, including adverse decisions or settlements or resulting required changes to the Company’s business operations, could affect our consolidated operating results when resolved in future periods or could result in liability or other amounts material to the Company’s Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
The Company’s common stock trades on the Nasdaq Global Select Market under the symbol, “TSCO.”
As of January 23, 2021, the number of record holders of our common stock was 665 (excluding individual participants in nominee security position listings), and the estimated number of beneficial holders of our common stock was approximately 300,000.
Dividends
We paid cash dividends totaling $174.7 million and $162.7 million in fiscal 2020 and 2019, respectively. In fiscal 2020, we declared and paid cash dividends to stockholders of $1.50 per common share outstanding as compared to $1.36 per common share outstanding in fiscal 2019. These payments reflect an increase in the quarterly dividend in the third quarter of fiscal 2020 to $0.40 per share from $0.35 per share and an increase in the quarterly dividend in the second quarter of fiscal 2019 from $0.31 per share.
On January 27, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.52 per share of the Company’s outstanding common stock. The dividend will be paid on March 9, 2021, to stockholders of record as of the close of business on February 22, 2021.
It is the present intention of the Company’s Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Company’s Board of Directors in its sole discretion and will depend upon the earnings, financial condition, and capital needs of the Company, along with any other factors which the Company’s Board of Directors deem relevant.
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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 which was announced in February 2007. The authorization amount of the program, which has been increased from time to time, is currently authorized for up to $4.5 billion, exclusive of any fees, commissions or other expenses related to such repurchases. The share repurchase program does not have an expiration date. As of December 26, 2020, the Company had remaining authorization under the share repurchase program of $1.14 billion, exclusive of any fees, commissions or other expenses. Additionally, the Company withholds shares from vested restricted stock units and performance-based restricted share units to satisfy employees’ minimum statutory tax withholding requirements. Stock purchase activity during fiscal 2020 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) | 2,909,572 | $ | 92.33 | 2,852,519 | $ | 1,223,586,890 | ||||||||||||||||||||
Second Quarter (a) | 22,102 | 89.74 | — | 1,223,586,890 | ||||||||||||||||||||||
Third Quarter (a) | 2,305 | 147.94 | — | 1,223,586,890 | ||||||||||||||||||||||
Fourth Quarter: (a) | ||||||||||||||||||||||||||
| 9/27/20 - 10/24/20 | — | — | — | 1,223,586,890 | ||||||||||||||||||||||
| 10/25/20 - 11/21/20 | 205,486 | 131.21 | 205,000 | 1,196,695,377 | ||||||||||||||||||||||
| 11/22/20 - 12/26/20 | 381,683 | 138.45 | 381,683 | 1,143,856,948 | ||||||||||||||||||||||
| 587,169 | 135.91 | 586,683 | 1,143,856,948 | |||||||||||||||||||||||
| As of and for the year ended December 26, 2020 | 3,521,148 | $ | 99.61 | 3,439,202 | $ | 1,143,856,948 | ||||||||||||||||||||
(a) The total number of shares purchased and average price paid per share include shares withheld from vested stock awards to satisfy employees’ minimum statutory tax withholding requirements of 57,053 during the first quarter, 22,102 during the second quarter, 2,305 during the third quarter, and 486 during the fourth quarter.
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 will depend upon earnings, financial condition, and capital needs of the Company, along with any other factors which the Board of Directors deem relevant. The program may be limited, temporarily paused, 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 26, 2015 to December 26, 2020 (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 26, 2015, 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.
| 12/26/2015 | 12/31/2016 | 12/30/2017 | 12/29/2018 | 12/28/2019 | 12/26/2020 | |||||||||||||||||||||||||||||||||
| Tractor Supply Company | $ | 100.00 | $ | 89.51 | $ | 89.80 | $ | 101.50 | $ | 114.14 | $ | 183.91 | ||||||||||||||||||||||||||
| S&P 500 | $ | 100.00 | $ | 111.07 | $ | 135.32 | $ | 128.28 | $ | 170.57 | $ | 198.54 | ||||||||||||||||||||||||||
| S&P Retail Index | $ | 100.00 | $ | 105.93 | $ | 138.13 | $ | 154.77 | $ | 199.89 | $ | 286.46 | ||||||||||||||||||||||||||
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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):
| 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||
| (52 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | (53 weeks) | |||||||||||||||||||||||||
| Operating Results: | |||||||||||||||||||||||||||||
| Net sales | $ | 10,620,352 | $ | 8,351,931 | $ | 7,911,046 | $ | 7,256,382 | $ | 6,779,579 | |||||||||||||||||||
| Gross profit | 3,761,549 | 2,871,770 | 2,702,528 | 2,491,965 | 2,325,202 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 2,478,524 | 1,932,572 | 1,823,440 | 1,639,749 | 1,488,164 | ||||||||||||||||||||||||
| Depreciation and amortization | 217,124 | 195,978 | 177,351 | 165,834 | 142,958 | ||||||||||||||||||||||||
| Impairment of goodwill and other intangible assets | 68,973 | — | — | — | — | ||||||||||||||||||||||||
| Operating income | 996,928 | 743,220 | 701,737 | 686,382 | 694,080 | ||||||||||||||||||||||||
| Interest expense, net | 28,781 | 19,843 | 18,352 | 13,859 | 5,810 | ||||||||||||||||||||||||
| Income before income taxes | 968,147 | 723,377 | 683,385 | 672,523 | 688,270 | ||||||||||||||||||||||||
| Income tax expense | 219,189 | 161,023 | 151,028 | 249,924 | 251,150 | ||||||||||||||||||||||||
| Net income | $ | 748,958 | $ | 562,354 | $ | 532,357 | $ | 422,599 | $ | 437,120 | |||||||||||||||||||
Net income per share – basic (c) | $ | 6.44 | $ | 4.70 | $ | 4.34 | $ | 3.31 | $ | 3.29 | |||||||||||||||||||
Net income per share – diluted (c) | $ | 6.38 | $ | 4.66 | $ | 4.31 | $ | 3.30 | $ | 3.27 | |||||||||||||||||||
Weighted average shares – diluted (c) | 117,436 | 120,743 | 123,471 | 128,204 | 133,813 | ||||||||||||||||||||||||
| Dividends declared per common share outstanding | $ | 1.50 | $ | 1.36 | $ | 1.20 | $ | 1.05 | $ | 0.92 | |||||||||||||||||||
| Operating Data (percent of net sales): | |||||||||||||||||||||||||||||
| Gross margin | 35.4 | % | 34.4 | % | 34.2 | % | 34.3 | % | 34.3 | % | |||||||||||||||||||
| Selling, general and administrative expenses | 23.3 | % | 23.1 | % | 23.0 | % | 22.6 | % | 22.0 | % | |||||||||||||||||||
| Operating income | 9.4 | % | 8.9 | % | 8.9 | % | 9.4 | % | 10.2 | % | |||||||||||||||||||
| Net income | 7.1 | % | 6.7 | % | 6.7 | % | 5.8 | % | 6.4 | % | |||||||||||||||||||
| Store, Sales, and Other Data: | |||||||||||||||||||||||||||||
| Stores open at end of year | 2,105 | 2,024 | 1,940 | 1,853 | 1,738 | ||||||||||||||||||||||||
Comparable store sales increase (d) | 23.1 | % | 2.7 | % | 5.1 | % | 2.7 | % | 1.6 | % | |||||||||||||||||||
New store sales (as a % of net sales) (e) | 3.3 | % | 2.8 | % | 3.8 | % | 5.6 | % | 5.6 | % | |||||||||||||||||||
| Average transaction value | $ | 51.90 | $ | 46.89 | $ | 45.85 | $ | 44.61 | $ | 44.42 | |||||||||||||||||||
Comparable store average transaction value increase (decrease) (c) | 12.2 | % | 2.4 | % | 2.8 | % | 0.5 | % | (0.9) | % | |||||||||||||||||||
Comparable store average transaction count increase (d) | 10.9 | % | 0.3 | % | 2.2 | % | 2.2 | % | 2.6 | % | |||||||||||||||||||
| Total selling square footage (000’s) | 32,139 | 30,854 | 29,571 | 28,180 | 26,511 | ||||||||||||||||||||||||
| Total team members | 42,500 | 33,500 | 30,500 | 29,300 | 26,000 | ||||||||||||||||||||||||
| Capital expenditures (000’s) | $ | 294,002 | $ | 217,450 | $ | 278,530 | $ | 250,401 | $ | 226,017 | |||||||||||||||||||
| Balance Sheet Data (at end of period): | |||||||||||||||||||||||||||||
Average inventory per store (f) | $ | 793.7 | $ | 751.3 | $ | 766.8 | $ | 735.4 | $ | 741.7 | |||||||||||||||||||
| Inventory turns | 3.92 | 3.23 | 3.27 | 3.24 | 3.19 | ||||||||||||||||||||||||
| Working capital | $ | 1,514,887 | $ | 540,287 | $ | 856,292 | $ | 806,154 | $ | 740,615 | |||||||||||||||||||
Total assets (g) | $ | 7,049,116 | $ | 5,289,268 | $ | 3,085,262 | $ | 2,868,769 | $ | 2,674,942 | |||||||||||||||||||
Long-term debt, less current portion (h) | $ | 1,017,420 | $ | 396,869 | $ | 410,370 | $ | 433,686 | $ | 289,769 | |||||||||||||||||||
Operating lease liabilities, less current portion (g) | $ | 2,220,904 | $ | 2,001,162 | $ | — | $ | — | $ | — | |||||||||||||||||||
| Stockholders’ equity | $ | 1,923,840 | $ | 1,567,123 | $ | 1,561,820 | $ | 1,418,673 | $ | 1,453,218 | |||||||||||||||||||
(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 presented 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, restricted stock units, and performance-based restricted share 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. 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 as they are immaterial. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Acquired Petsense stores are considered comparable stores beginning in the fourth quarter of fiscal 2017.
(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) As a result of the adoption of new lease accounting guidance in the first quarter of fiscal 2019, we recognized lease assets and liabilities for operating leases. Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting policies. For additional information related to the impact of adopting this new accounting guidance, see Note 1 and Note 6 to the Consolidated Financial Statements.
(h) Long-term debt includes amounts outstanding under the Company’s debt facilities and finance 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 two-year period ended December 26, 2020 (our fiscal years 2020 and 2019). 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 and information. See “Forward-Looking Statements and Information” and “Risk Factors” included elsewhere in this report.
Tractor Supply reports its financial results in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Tractor Supply also uses certain non-GAAP measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior reported results. Non-GAAP measures do not have standardized definitions and are not defined by U.S. GAAP. Therefore, Tractor Supply’s non-GAAP measures are unlikely to be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures should not be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with U.S. GAAP. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations.
Overview
Founded in 1938, Tractor Supply Company (the “Company” or “we” or “our” or “us”) is the largest rural lifestyle retailer in the United States (“U.S.”). The Company is focused on supplying the needs of recreational farmers, ranchers, and all those who enjoy living the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. As of December 26, 2020, we operated 2,105 retail stores in 49 states under the names Tractor Supply Company, Del’s Feed & Farm Supply, and Petsense. Our stores are located primarily in towns outlying major metropolitan markets and in rural communities. We also operate websites under the names TractorSupply.com and Petsense.com as well as a Tractor Supply Company mobile application. Through our stores and e-commerce channels, we 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.
Tractor Supply Company believes we can grow our business by being an integral part of our customers’ lives as the dependable supplier of "Out Here" lifestyle solutions, creating customer loyalty through personalized experiences, and providing convenience that our customers expect at anytime, anywhere, and in any way they choose. Our long-term growth strategy is to: (1) expand and deepen our customer base by providing personal, localized, and memorable customer engagements by leveraging content, social media, and digital shopping experiences, attracting new customers and driving loyalty, (2) evolve customer experiences by digitizing our business processes and furthering our omni-channel capabilities, (3) offer relevant assortments and services across all channels through exclusive and national brands and continue to introduce new products and services through our test and learn strategy, (4) drive operational excellence and productivity through continuous improvement, increasing space utilization, and implementing advanced supply chain capabilities to support growth, scale and agility, and (5) 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.
Achieving this strategy will require a foundational focus on: (1) connecting, empowering and growing our team to enhance their lives and the communities they live in, enabling them to provide legendary service to our customers, and (2) allocating resources in a disciplined and efficient manner to drive profitable growth and build shareholder value, including leveraging technology and automation, to align our cost structure to support new business capabilities for margin improvement and cost reductions.
Over the past five years, we have experienced considerable growth in stores, growing from 1,488 stores at the end of fiscal 2015 to 2,105 stores (1,923 Tractor Supply and Del’s retail stores and 182 Petsense retail stores) at the end of fiscal 2020, and in net sales, with a compounded annual growth rate of approximately 11.3%. 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 we believe we have significant additional opportunities for new Tractor Supply stores. We also believe that there is opportunity for continued growth for Petsense stores.
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Executive Summary
In fiscal 2020, we opened 80 new Tractor Supply stores in 31 states and nine new Petsense stores in three states. In fiscal 2019, we opened 80 new Tractor Supply stores in 29 states and eight new Petsense stores in four states. This resulted in a selling square footage increase of approximately 4% in each of fiscal 2020 and fiscal 2019.
Net sales increased 27.2% to $10.62 billion in fiscal 2020 from $8.35 billion in fiscal 2019 as we experienced significant demand for our products across all product categories, geographies and channels in fiscal 2020 as our customers focused on the care of their homes, land and animals while navigating the COVID-19 pandemic. Comparable store sales increased 23.1% in fiscal 2020 versus a 2.7% increase in fiscal 2019. Gross profit increased 31.0% to $3.76 billion in fiscal 2020 from $2.87 billion in fiscal 2019, and gross margin increased 104 basis points to 35.42% of net sales in fiscal 2020 from 34.38% of net sales in fiscal 2019. Operating income increased 49 basis points to 9.39% of net sales in fiscal 2020 from 8.90% of net sales in fiscal 2019. For fiscal 2020, net income was $749.0 million, or $6.38 per diluted share, compared to $562.4 million, or $4.66 per diluted share, in fiscal 2019.
We ended fiscal 2020 with $1.34 billion in cash and cash equivalents and outstanding debt of $984.3 million, after returning $517.6 million to our stockholders through stock repurchases and quarterly cash dividends.
Information Regarding COVID-19 Coronavirus Pandemic
The Company has been and continues to closely monitor the impact of the COVID-19 pandemic on all facets of our business. This includes the impact on our team members, customers, suppliers, vendors, business partners, and supply chain networks.
The health and safety of our team members and customers are the primary concerns of our management team. We have taken and continue to take numerous actions to promote health and safety, including, providing personal protective equipment to our team members, establishing mask protocols in our facilities, rolling out additional functionality to support contactless shopping experiences, adding services for cleaning and sanitation in our stores and distribution centers, hiring additional team members to assist in promoting social distancing and cleaning actions in our stores, and implementing remote work plans at our store support center.
Additionally, we have taken significant actions to support our team members during this pandemic including COVID-19 paid medical leave, 100% coverage of COVID-19 testing and treatment under our medical plan, and the payment of incremental appreciation bonuses for frontline team members of approximately $44 million during fiscal 2020. Effective June 28, 2020, we implemented permanent wage increases for all of our hourly team members in our stores and distribution centers of a minimum of $1 per hour and are now providing a new benefit package for part-time team members, including medical, vision and dental coverage, behavioral health services, paid sick time and life insurance. We have also implemented annual restricted stock unit grants to more than 2,000 frontline salaried managers in our stores and distribution centers.
As further described in the results of operations, our net sales have significantly increased due to unprecedented customer demand across all major product categories, channels, and geographic regions. However, the net incremental costs of doing business during this crisis have increased as a result of the aforementioned actions we have taken to support and promote the safety and well-being of our team members and customers, and we believe many of these incremental costs will continue after the pandemic is over.
There are numerous uncertainties surrounding the pandemic and its impact on the economy and our business, as further described in the Risk Factors section under Part I Item 1A. of this Form 10-K, which make it difficult to predict the impact on our business, financial position, or results of operations in fiscal 2021 and beyond. While our stores, distribution centers, and e-commerce operations are open and plan to remain open, we cannot predict the uncertainties, or the corresponding impacts on our business, at this time.
Comparable Store Metrics
Comparable store metrics are a key performance indicator used in the retail industry and by the Company to measure the performance of the underlying business. 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.
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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 U.S. GAAP. 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 the 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.
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 inventory impairment reserve as of December 26, 2020, would have affected net income by approximately $1.1 million in fiscal 2020.
Shrinkage
Our general policy is to 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.
While the Company continued to operate as an essential retailer during the year, the COVID-19 pandemic had a direct impact on our ability to complete all originally planned store physical inventories in fiscal 2020. Our plan was complicated by state and local mandates such as shelter at home restrictions and social distancing requirements. Our decision to revise our inventory schedule was based on these mandates as well as consideration of the health and safety of our team members, customers and vendor partners which are crucial to our business operations.
We assessed the risks associated with the stores not inventoried and concluded there is no material risk of misstatement to the financial statements for the stores not inventoried and further concluded that effective compensating controls are in place to ensure completeness and accuracy of reported inventory balances and estimated shrink losses.
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 merchandising strategies.
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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 26, 2020, would have affected net income by approximately $2.9 million in fiscal 2020.
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 guaranteed 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 vendor support and volume rebates are 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 2020. If a 10% reserve had been applied against our outstanding vendor funding due as of December 26, 2020, net income would have been affected by approximately $1.6 million in fiscal 2020. 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 26, 2020, net income would have been affected by approximately $11.7 million in fiscal 2020.
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Self-Insurance Reserves:
We self-insure a significant portion of our workers’ compensation insurance and general liability (including product 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, loss development factors, and severity factors.
The full extent of certain 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 26, 2020, would have affected net income by approximately $5.9 million in fiscal 2020.
Impairment of Long-Lived Assets:
Long-lived assets, including lease 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 or asset group to its estimated undiscounted future cash flows. 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 related asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the related asset or asset group to its estimated fair value, which may be based on an estimated future cash flow model, market valuation, or other valuation technique, as appropriate. 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.
We have not made any material changes in our impairment loss assessment methodology in the financial periods presented, other than to include operating lease right-of-use assets in our ongoing impairment assessment upon adoption of the new lease accounting standard in fiscal 2019.
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. We have not made any material changes in our impairment loss assessment methodology in the financial periods presented in fiscal 2020. 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.
In fiscal 2020 we recognized approximately $5.1 million of impairment expense related to long-lived assets for certain underperforming Petsense stores.
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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 impairment test for goodwill 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, an impairment charge would be recorded to the Company’s operations, for the amount in which the carrying amount exceeds the reporting unit’s fair value. We determine fair values for each reporting unit using the market approach, when available and appropriate, the income approach, or a combination of both. The income approach involves forecasting projected financial information (such as revenue growth rates, profit margins, tax rates, and capital expenditures) and selecting a discount rate that reflects the risk inherent in estimated future cash flows. Under the market approach, the fair value is based on observed market data. 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 projected financial information and selecting the discount rate that reflects the risk inherent in future cash flows.
The valuation approaches utilized to estimate fair value for the purposes of the impairment tests of goodwill and other indefinite-lived intangible assets require the use of assumptions and estimates, which involve a degree of uncertainty. 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 non-cash impairment losses that could be material.
As described in further detail in Note 3 to the Consolidated Financial Statements, in fiscal 2020 we recognized goodwill impairment expense of approximately $60.8 million and tradename asset impairment expense of approximately $8.2 million related to Petsense.
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Quarterly Financial Data
Our unaudited quarterly operating results for each fiscal quarter of 2020 and 2019 are shown below (in thousands, except per share amounts):
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | ||||||||||||||||||||||||||||
| 2020 | (13 weeks) | (13 weeks) | (13 weeks) | (13 weeks) | (52 weeks) | |||||||||||||||||||||||||||
| Net sales | $ | 1,959,188 | $ | 3,176,327 | $ | 2,606,572 | $ | 2,878,265 | $ | 10,620,352 | ||||||||||||||||||||||
| Gross profit | 661,249 | 1,156,813 | 947,957 | 995,530 | 3,761,549 | |||||||||||||||||||||||||||
| Operating income | 112,538 | 447,746 | 252,177 | 184,467 | 996,928 | |||||||||||||||||||||||||||
| Net income | 83,777 | 338,678 | 190,610 | 135,893 | 748,958 | |||||||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.72 | $ | 2.92 | $ | 1.64 | $ | 1.17 | $ | 6.44 | ||||||||||||||||||||||
| Diluted | $ | 0.71 | $ | 2.90 | $ | 1.62 | $ | 1.15 | $ | 6.38 | ||||||||||||||||||||||
Comparable store sales increase (a) | 4.3 | % | 30.5 | % | 26.8 | % | 27.3 | % | 23.1 | % | ||||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | ||||||||||||||||||||||||||||
| 2019 | (13 weeks) | (13 weeks) | (13 weeks) | (13 weeks) | (52 weeks) | |||||||||||||||||||||||||||
| Net sales | $ | 1,822,220 | $ | 2,353,782 | $ | 1,984,144 | $ | 2,191,785 | $ | 8,351,931 | ||||||||||||||||||||||
| Gross profit | 614,984 | 820,745 | 694,240 | 741,801 | 2,871,770 | |||||||||||||||||||||||||||
| Operating income | 103,408 | 287,557 | 161,817 | 190,438 | 743,220 | |||||||||||||||||||||||||||
| Net income | 76,832 | 219,210 | 122,133 | 144,179 | 562,354 | |||||||||||||||||||||||||||
| Net income per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.63 | $ | 1.82 | $ | 1.03 | $ | 1.22 | $ | 4.70 | ||||||||||||||||||||||
| Diluted | $ | 0.63 | $ | 1.80 | $ | 1.02 | $ | 1.21 | $ | 4.66 | ||||||||||||||||||||||
Comparable store sales increase (a) | 5.0 | % | 3.2 | % | 2.9 | % | 0.1 | % | 2.7 | % | ||||||||||||||||||||||
(a) 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.
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Results of Operations
The following table sets forth, for the periods indicated, certain items in the Consolidated Statements of Income expressed as a percentage of net sales.
| Fiscal Year | |||||||||||
| 2020 | 2019 | ||||||||||
| Net sales | 100.00 | % | 100.00 | % | |||||||
Cost of merchandise sold (a) | 64.58 | 65.62 | |||||||||
Gross margin (a) | 35.42 | 34.38 | |||||||||
Selling, general and administrative expenses (a) | 23.34 | 23.14 | |||||||||
| Depreciation and amortization | 2.04 | 2.34 | |||||||||
| Impairment of goodwill and other intangible assets | 0.65 | — | |||||||||
| Operating income | 9.39 | 8.90 | |||||||||
| Interest expense, net | 0.27 | 0.24 | |||||||||
| Income before income taxes | 9.12 | 8.66 | |||||||||
| Income tax expense | 2.07 | 1.93 | |||||||||
| Net income | 7.05 | % | 6.73 | % | |||||||
(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 facility network in cost of merchandise sold and others (like our Company) exclude a portion of these distribution facility 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 the Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Fiscal 2020 Compared to Fiscal 2019
Net sales increased 27.2% to $10.62 billion in fiscal 2020 from $8.35 billion in fiscal 2019. Comparable store sales increased 23.1% to $10.29 billion versus a 2.7% increase in fiscal 2019. The comparable store average transaction value increased 12.2% and comparable store average transaction count increased 10.9% for fiscal 2020, as compared to an increase of 2.4% and 0.3% in fiscal 2019, respectively.
The COVID-19 pandemic had a significant, positive impact on consumer demand in fiscal 2020 as customers focused on the care of their homes, land and animals. All major product categories and geographic regions of the Company had robust comparable store sales growth. The increase in comparable store sales was driven by unprecedented demand beginning late in the first quarter and extending throughout the year for seasonal categories along with exceptional growth in everyday merchandise, including consumable, usable and edible ("C.U.E.") products. In addition, the Company’s e-commerce sales experienced triple-digit percentage growth in fiscal 2020 as compared to fiscal 2019.
In addition to comparable store sales growth in fiscal 2020, sales from stores opened less than one year were $355.3 million in fiscal 2020, which represented 4.3 percentage points of the 27.2% increase over fiscal 2019 net sales. Sales from stores opened less than one year were $237.6 million in fiscal 2019, which represented 3.0 percentage points of the 5.6% increase over fiscal 2018 net sales.
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The following table summarizes our store growth during fiscal 2020 and 2019:
| Fiscal Year | ||||||||||||||
| Store Count Information: | 2020 | 2019 | ||||||||||||
| Tractor Supply | ||||||||||||||
| Beginning of period | 1,844 | 1,765 | ||||||||||||
| New stores opened | 80 | 80 | ||||||||||||
| Stores closed | (1) | (1) | ||||||||||||
| End of period | 1,923 | 1,844 | ||||||||||||
| Petsense | ||||||||||||||
| Beginning of period | 180 | 175 | ||||||||||||
| New stores opened | 9 | 8 | ||||||||||||
| Stores closed | (7) | (3) | ||||||||||||
| End of period | 182 | 180 | ||||||||||||
| Consolidated end of period | 2,105 | 2,024 | ||||||||||||
| Stores relocated | 1 | 2 | ||||||||||||
The following table indicates the percentage of net sales represented by each of our major product categories during fiscal 2020 and 2019:
| Percent of Net Sales | ||||||||||||||
| Fiscal Year | ||||||||||||||
| Product Category: | 2020 | 2019 | ||||||||||||
| Livestock and Pet | 47 | % | 47 | % | ||||||||||
| Hardware, Tools and Truck | 21 | 21 | ||||||||||||
| Seasonal, Gift and Toy Products | 21 | 20 | ||||||||||||
| Clothing and Footwear | 7 | 8 | ||||||||||||
| Agriculture | 4 | 4 | ||||||||||||
| Total | 100 | % | 100 | % | ||||||||||
Gross profit increased 31.0% to $3.76 billion in fiscal 2020 compared to $2.87 billion in fiscal 2019. As a percent of net sales, gross margin increased 104 basis points to 35.42% for fiscal 2020 compared to 34.38% for fiscal 2019. The increase in gross margin was primarily attributable to the strong demand for our products resulting in a lower depth and frequency of sales promotions and less clearance activity.
Total selling, general and administrative (“SG&A”) expenses, including depreciation and amortization and asset impairment, increased 29.9% to $2.76 billion in fiscal 2020 from $2.13 billion in fiscal 2019. SG&A expenses, as a percent of net sales, increased 55 basis points to 26.03% in fiscal 2020 from 25.48% in fiscal 2019. The SG&A expenses in fiscal 2020 were impacted by discrete non-cash impairment charges for the Petsense business of $74.1 million due primarily to a strategic reassessment of the business and a decision to reduce the number of new store openings planned over the long term and, to a lesser extent, the impairment of long-lived assets at underperforming locations. In fiscal 2020 we also experienced incremental costs related to the COVID-19 pandemic, increased incentive compensation given the Company’s strong financial performance, investments in our team members through permanent wage and benefit increases for our store and distribution center team members that went into effect in the third quarter of fiscal 2020, and costs associated with investments in strategic initiatives. The costs related to the COVID-19 pandemic were approximately $117 million during fiscal 2020 which includes appreciation wages for frontline team members as well as additional labor hours and supply costs dedicated to cleaning and sanitation to promote the health and safety of team members and customers. These increased costs, including the impairment expense, drove an increase in our SG&A expenses as a percent of net sales in fiscal 2020 as compared to fiscal 2019. These increases as a percent of net sales were partially offset by leverage in occupancy, personnel, and other operating costs from the significant increase in comparable store sales.
Our effective income tax rate increased to 22.6% for fiscal 2020 compared to 22.3% in fiscal 2019. The primary driver for the increase in the Company’s effective income tax rate was attributable to a reduction in the benefit from investment credits as well as section 162(m) limitations, partially offset by an improvement in the benefit from share-based compensation.
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Net income in fiscal 2020 was $748.96 million, or $6.38 per diluted share, compared to $562.35 million, or $4.66 per diluted share, in fiscal 2019. The aforementioned non-cash impairment expense related to the Petsense business had an after-tax impact on fiscal 2020 net income of approximately $57.29 million or $0.49 per diluted share. On an adjusted basis, considering the after-tax impact of the non-cash impairment charges related to the Petsense business, net income was $806.24 million, or $6.87 per diluted share, for fiscal 2020. Adjusted net income and adjusted net income per diluted share are non-GAAP measures which have been provided in order to enhance comparability for the periods presented given that the impairment charges related to the Petsense business are non-recurring in nature. A reconciliation of these non-GAAP financial measures is included in the following table.
Reconciliation of Non-GAAP Financial Measures (in thousands, except per share amounts) | |||||||||||||||||
| Fiscal 2020 | Impairment | Fiscal 2020 | |||||||||||||||
| (As Reported) | (Adjustment) | (As Adjusted) | |||||||||||||||
| Net income | $ | 748,958 | $ | 57,286 | $ | 806,244 | |||||||||||
| Diluted net income per share | $ | 6.38 | $ | 0.49 | $ | 6.87 | |||||||||||
During fiscal 2020, we repurchased approximately 3.4 million shares of the Company’s common stock at a total cost of $343.0 million as part of our share repurchase program. In fiscal 2019, we repurchased approximately 5.4 million shares at a total cost of $533.3 million. Shares repurchased in fiscal 2020 were impacted by the temporary suspension of our share repurchase program from March 12, 2020 until November 5, 2020, in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.
Fiscal 2019 Compared to Fiscal 2018
For a comparison of our performance and financial metrics for the fiscal years ended December 28, 2019 and December 29, 2018, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, filed with the SEC on February 20, 2020.
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 facility capacity and improvements, information technology, inventory purchases, repayment of existing borrowings under our debt facilities, share repurchases, cash dividends, and selective acquisitions as opportunities arise.
Our primary ongoing sources of liquidity are existing cash balances, cash provided from operations, remaining funds available under our debt facilities, operating and finance 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.
We believe that our existing cash balances, expected cash flow from future operations, funds available under our debt facilities, operating and finance leases, and normal trade credit will be sufficient to fund our operations, including increased expenses associated with COVID-19, and our capital expenditure needs, including new store openings, store acquisitions, relocations and renovations, distribution facility capacity, and information technology improvements through the end of fiscal 2021.
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Working Capital
At December 26, 2020, the Company had working capital of $1.51 billion, which increased $974.6 million from 2019. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):
| December 26, 2020 | December 28, 2019 | Variance | |||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 1,341.8 | $ | 84.2 | $ | 1,257.6 | |||||||||||
| Inventories | 1,783.3 | 1,602.8 | 180.5 | ||||||||||||||
| Prepaid expenses and other current assets | 133.6 | 100.9 | 32.7 | ||||||||||||||
| Total current assets | 3,258.7 | 1,787.9 | 1,470.8 | ||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | 976.1 | 643.0 | 333.1 | ||||||||||||||
| Accrued employee compensation | 119.7 | 39.8 | 79.9 | ||||||||||||||
| Other accrued expenses | 324.8 | 247.7 | 77.1 | ||||||||||||||
| Current portion of long-term debt | — | 30.0 | (30.0) | ||||||||||||||
| Current portion of finance lease obligations | 4.6 | 4.0 | 0.6 | ||||||||||||||
| Current portion of operating lease obligations | 298.7 | 277.1 | 21.6 | ||||||||||||||
| Income taxes payable | 19.9 | 6.0 | 13.9 | ||||||||||||||
| Total current liabilities | 1,743.8 | 1,247.6 | 496.2 | ||||||||||||||
| Working capital | $ | 1,514.9 | $ | 540.3 | $ | 974.6 | |||||||||||
In comparison to December 28, 2019, working capital as of December 26, 2020 was impacted most significantly by changes in cash and cash equivalents, inventories, accounts payable and accrued expenses.
•The increase in cash and cash equivalents was driven by significant net cash provided by operating activities in fiscal 2020 and an increase in borrowings, net of repayments, under our debt facilities as we sought to strengthen liquidity and preserve cash while navigating the COVID-19 pandemic. These increases in cash and cash equivalents were partially offset by share repurchases, capital expenditures to support our strategic growth, and cash dividends paid to stockholders.
•The increase in inventories resulted from both a modest increase in average inventory per store to support the strong sales performance in the business as well as the purchase of additional inventory to support new store growth.
•The increase in accounts payable was driven by Company growth, including the significant increase in overall inventory as well as strong comparable store sales during fiscal 2020. The Company growth and sales performance drove an increase in inventory purchases and produced high inventory turns, resulting in an increase in the amount of inventory purchases that remain in accounts payable at year end as compared to last year.
•Other accrued expenses increased as a result of Company growth and the timing of payments. The increase in accrued employee compensation was primarily due to incentive accruals given the strong financial performance in fiscal 2020.
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Debt
The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):
| December 26, 2020 | December 28, 2019 | |||||||||||||
| 1.75% Senior Notes due 2030 | $ | 650.0 | $ | — | ||||||||||
| 3.70% Senior Notes due 2029 | 150.0 | 150.0 | ||||||||||||
| Senior Credit Facility: | ||||||||||||||
| February 2016 Term Loan | — | 145.0 | ||||||||||||
| June 2017 Term Loan | — | 87.5 | ||||||||||||
| November 2020 Term Loan | 200.0 | — | ||||||||||||
| Revolving credit loans | — | 15.0 | ||||||||||||
| Total outstanding borrowings | 1,000.0 | 397.5 | ||||||||||||
| Less: unamortized debt discounts and issuance costs | (15.7) | (1.0) | ||||||||||||
| Total debt | 984.3 | 396.5 | ||||||||||||
| Less: current portion of long-term debt | — | (30.0) | ||||||||||||
| Long-term debt | $ | 984.3 | $ | 366.5 | ||||||||||
| Outstanding letters of credit | $ | 48.7 | $ | 32.0 | ||||||||||
On October 30, 2020, the Company issued and sold, in a public offering, $650 million in aggregate principal amount of senior unsecured notes due November 1, 2030 bearing interest at 1.75% per annum (the “1.75% Senior Notes”). In support of the issuance of the 1.75% Senior Notes, we obtained credit ratings from Moody's Investor Services and Standard & Poor's.
We manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable market costs. As of December 26, 2020 and the date of this filing, February 18, 2021, the Company's senior unsecured debt is rated “Baa1,” by Moody’s Investor Services with a stable outlook and “BBB” by Standard & Poor’s with a stable outlook. These ratings have been obtained with the understanding that Moody’s Investors Services and Standard & Poor’s will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.
Our current ratings, as well as future rating agency actions, could impact our ability to finance our operations on satisfactory terms and affect our financing costs. There can be no assurance that we will maintain or improve our current credit ratings.
For additional information about the Company’s debt and credit facilities, refer to Note 4 to the Consolidated Financial Statements. As further described in Note 5 to the Consolidated Financial Statements, the Company has entered into interest rate swap agreements in order to hedge our exposure to variable rate interest payments associated term loans under the Senior Credit Facility.
Sources and Uses of Cash
Our primary source of liquidity is cash provided by operations and funds available under our debt facilities. 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 and cash dividends paid to stockholders.
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The following table presents a summary of cash flows provided by or used in operating, investing, and financing activities for fiscal years 2020 and 2019 (in millions):
| Fiscal Year | |||||||||||
| 2020 | 2019 | ||||||||||
| (52 weeks) | (52 weeks) | ||||||||||
| Net cash provided by operating activities | $ | 1,394.5 | $ | 811.7 | |||||||
| Net cash used in investing activities | (292.2) | (215.0) | |||||||||
| Net cash provided by/(used in) financing activities | 155.2 | (598.8) | |||||||||
| Net increase/(decrease) in cash and cash equivalents | $ | 1,257.5 | $ | (2.1) | |||||||
Operating Activities
Operating activities provided net cash of $1.39 billion and $811.7 million in fiscal 2020 and 2019, respectively. The $582.8 million increase in net cash provided by operating activities in fiscal 2020, compared to fiscal 2019, was due to changes in the following (in millions):
| Fiscal Year | Variance | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| (52 weeks) | (52 weeks) | ||||||||||||||||
| Net income | $ | 749.0 | $ | 562.4 | $ | 186.6 | |||||||||||
| Depreciation and amortization | 217.1 | 196.0 | 21.1 | ||||||||||||||
| Impairment expense | 74.1 | — | 74.1 | ||||||||||||||
| Share-based compensation expense | 37.3 | 31.1 | 6.2 | ||||||||||||||
| Deferred income taxes | (31.7) | 6.8 | (38.5) | ||||||||||||||
| Inventories and accounts payable | 152.6 | 9.8 | 142.8 | ||||||||||||||
| Prepaid expenses and other current assets | (32.8) | 13.6 | (46.4) | ||||||||||||||
| Accrued expenses | 152.4 | (3.9) | 156.3 | ||||||||||||||
| Income taxes | 14.0 | 8.3 | 5.7 | ||||||||||||||
| Other, net | 62.5 | (12.4) | 74.9 | ||||||||||||||
| Net cash provided by operating activities | $ | 1,394.5 | $ | 811.7 | $ | 582.8 | |||||||||||
The $582.8 million increase in net cash provided by operating activities in fiscal 2020, compared to fiscal 2019, is primarily driven by a year-over-year increase in our net income as well as the net impact of changes in our operating assets and liabilities, principally due to significant Company growth in fiscal 2020 as well as the timing of accruals and related payments. The increase in net cash provided by operating activities was also affected by non-cash impairment charges recorded in fiscal 2020 related to the Petsense business.
Investing Activities
Investing activities used cash of $292.2 million and $215.0 million in fiscal 2020 and 2019, respectively. Cash flows from investing activities in the years presented are primarily composed of capital expenditures. Capital expenditures for fiscal 2020 and 2019 were as follows (in millions):
| Fiscal Year | |||||||||||
| 2020 | 2019 | ||||||||||
| (52 weeks) | (52 weeks) | ||||||||||
| Information technology | $ | 133.0 | $ | 89.3 | |||||||
| Existing stores | 73.7 | 45.5 | |||||||||
| New and relocated stores and stores not yet opened | 58.8 | 59.3 | |||||||||
| Distribution center capacity and improvements | 23.4 | 19.7 | |||||||||
| Corporate and other | 5.1 | 3.7 | |||||||||
| Total capital expenditures | $ | 294.0 | $ | 217.5 | |||||||
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The spending on information technology represents continued support of our store growth and our omni-channel initiatives, as well as improvements in security and compliance, enhancements to our customer relationship management program, and other strategic initiatives. In fiscal 2020, we additionally prioritized information technology capital expenditures to accelerate initiatives to enhance safety and convenience for customers, including initiatives such as Buy Online, Pickup In Store; Buy Online, Deliver from Store; Contactless Curbside Pickup; Contactless Payment capabilities; additional Mobile POS devices in all stores; and improvements to our in-store wireless internet.
Spending for existing stores includes routine refresh activity. However, the increased spend for existing stores in fiscal 2020 as compared to fiscal 2019 was driven by strategic initiatives in select stores including security enhancements, space productivity and side lot improvements.
The above table reflects an investment in 80 new Tractor Supply stores, nine new Petsense stores, and one store relocation during fiscal 2020. In fiscal 2019, we opened 80 new Tractor Supply stores, eight new Petsense stores, and had two store relocations.
Spending for distribution center capacity and improvements in fiscal 2020 and fiscal 2019 represents new equipment and various enhancements for existing facilities. The northeast distribution center in Frankfort, New York was completed and began shipping merchandise to our stores in the first quarter of fiscal 2019.
Our projected capital expenditures for fiscal 2021 are currently estimated to be in a range of approximately $450 million to $550 million. The capital expenditures include a plan to open approximately 80 new Tractor Supply stores and 10 new Petsense stores. Additionally, we plan to begin construction in fiscal 2021 on a new distribution center in Navarre, Ohio which is currently anticipated to be complete by the end of fiscal 2022. We also plan to support our strategic growth initiatives related to space productivity and side lot improvements in certain existing stores as well as continued improvements in technology and infrastructure at our existing stores, and ongoing investments to enhance our digital and omni-channel capabilities to better serve our customers.
Financing Activities
Financing activities provided cash of $155.2 million in fiscal 2020, while financing activities used $598.8 million in fiscal 2019. The $754.0 million increase in net cash provided by financing activities in fiscal 2020, compared to fiscal 2019, was due to changes in the following (in millions):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | Variance | |||||||||||||||
| (52 weeks) | (52 weeks) | ||||||||||||||||
| Net borrowings and repayments under debt facilities | $ | 602.5 | $ | (11.3) | $ | 613.8 | |||||||||||
| Repurchase of common stock | (343.0) | (533.3) | 190.3 | ||||||||||||||
| Net proceeds from issuance of common stock | 99.3 | 116.0 | (16.7) | ||||||||||||||
| Cash dividends paid to stockholders | (174.7) | (162.7) | (12.0) | ||||||||||||||
| Other, net | (28.9) | (7.5) | (21.4) | ||||||||||||||
| Net cash provided by/(used in) financing activities | $ | 155.2 | $ | (598.8) | $ | 754.0 | |||||||||||
The increase in net cash from financing activities in fiscal 2020, compared to fiscal 2019, reflects an increase in net borrowings discussed further in Note 4 to the Consolidated Financial Statements and a reduction of repurchases of common stock, both of which were the result of an effort throughout fiscal 2020 to increase liquidity and preserve cash while navigating the COVID-19 pandemic. These increases in net cash provided year-over-year were partially offset by increased quarterly cash dividends and a decrease in net proceeds from the issuance of common stock associated with the exercise of share-based compensation awards.
Repurchase of Common Stock
The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program which was announced in February 2007. The authorization amount of the program, which has been increased from time to time, is currently authorized for up to $4.5 billion, exclusive of any fees, commissions or other expenses related to such repurchases. The share repurchase program does not have an expiration date. 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
43
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, temporarily paused, or terminated at any time without prior notice. As of December 26, 2020, the Company had remaining authorization under the share repurchase program of $1.14 billion, exclusive of any fees, commissions or other expenses.
We repurchased approximately 3.4 million and 5.4 million shares of common stock under the share repurchase program at a total cost of $343.0 million and $533.3 million in fiscal 2020 and 2019, respectively. As of December 26, 2020, the Company had remaining authorization under the share repurchase program of $1.14 billion, exclusive of any fees, commissions, or other expenses. Shares repurchased in fiscal 2020 were impacted by the temporary suspension of our share repurchase program from March 12, 2020 until November 5, 2020, in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.
Cash Dividends Paid to Stockholders
We paid cash dividends totaling $174.7 million and $162.7 million in fiscal 2020 and 2019, respectively. In fiscal 2020, we declared and paid cash dividends to stockholders of $1.50 per common share outstanding as compared to $1.36 per common share outstanding in fiscal 2019, respectively. These payments reflect an increase in the quarterly dividend in the third quarter of fiscal 2020 to $0.40 per share from $0.35 per share and an increase in the quarterly dividend in the second quarter of fiscal 2019 from $0.31 per share.
On January 27, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.52 per share of the Company’s outstanding common stock. The dividend will be paid on March 9, 2021, to stockholders of record as of the close of business on February 22, 2021.
It is the present intention of the Company’s Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Company’s Board of Directors in its sole discretion and will depend upon the earnings, financial condition, and capital needs of the Company, along with any other factors which the Company’s Board of Directors deem relevant.
Significant Contractual Obligations and Commercial Commitments
The following table reflects our future obligations and commitments as of December 26, 2020 (in thousands):
| Payment Due by Period | ||||||||||||||||||||||||||||||||
| Total | 2021 | 2022-2023 | 2024-2025 | Thereafter | ||||||||||||||||||||||||||||
Operating leases (a) (b) | $ | 3,039,043 | $ | 394,576 | $ | 733,692 | $ | 625,490 | $ | 1,285,285 | ||||||||||||||||||||||
Finance leases (b) | 48,126 | 6,269 | 9,294 | 8,060 | 24,503 | |||||||||||||||||||||||||||
Long-term debt (c) | 1,171,515 | 20,747 | 240,857 | 33,850 | 876,061 | |||||||||||||||||||||||||||
| $ | 4,258,684 | $ | 421,592 | $ | 983,843 | $ | 667,400 | $ | 2,185,849 | |||||||||||||||||||||||
(a) Operating lease payments exclude $174.1 million of legally binding minimum lease payments for leases signed, but not yet commenced.
(b) Operating and finance lease obligations both include related interest.
(c) Long-term debt obligations include an estimate of related interest after consideration of the interest rate swap agreements. See Notes 4 and 5 to the Consolidated Financial Statements for additional information regarding our interest rates.
At December 26, 2020, there were $48.7 million outstanding letters of credit under the Senior Credit Facility.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to lease agreements signed but not yet commenced and outstanding letters of credit. The balances for these arrangements are previously discussed. Letters of credit allow us to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.
New Accounting Pronouncements
The Company adopted new lease accounting guidance in the first quarter of fiscal 2019 which had a material impact on our Consolidated Balance Sheets and related disclosures. For additional information, including the required disclosures, related to the impact of adopting this new accounting guidance, see Note 1 and Note 6 to the Consolidated Financial Statements.
44
Refer to Note 14 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued pronouncements not yet adopted as of December 26, 2020.
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 Facility (as discussed in Note 4 to the Consolidated Financial Statements), which bear interest based on variable rates.
As discussed in Note 5 to the Consolidated Financial Statements, we entered into interest rate swap agreements which are intended to mitigate interest rate risk associated with future changes in interest rates for the term loan borrowings under the Senior Credit Facility. As a result of the interest rate swaps, our exposure to interest rate volatility is minimized. The interest rate swap agreements have been executed for risk management purposes and are 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 swaps would have affected interest expense by approximately $2.4 million, $1.9 million, and $1.6 million in fiscal 2020, 2019, and 2018, respectively. Based on the amount of outstanding variable rate debt as of December 26, 2020, excluding those borrowings for which we have interest rate swaps, a 1% change in interest rates would not result in any material increase in our interest expense on a prospective basis.
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 duties, tariffs, diesel fuel, and 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.
45
Item 8. Financial Statements and Supplementary Data
INDEX
TRACTOR SUPPLY COMPANY
Page | |||||
46
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 26, 2020. 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 26, 2020, 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/ Harry A. Lawton, III | /s/ Kurt D. Barton | |||||||||||||
Harry A. Lawton, III President and Chief Executive Officer | Kurt D. Barton Executive Vice President - Chief Financial Officer and Treasurer | |||||||||||||
| February 18, 2021 | February 18, 2021 | |||||||||||||
47
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Tractor Supply Company
Opinion on Internal Control Over Financial Reporting
We have audited Tractor Supply Company’s internal control over financial reporting as of December 26, 2020, 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). In our opinion, Tractor Supply Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 26, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated Balance Sheets of Tractor Supply Company as of December 26, 2020 and December 28, 2019, 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 26, 2020, and the related notes and our report dated February 18, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
The 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 18, 2021
48
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Tractor Supply Company
Opinion on the Financial Statements
We have audited the accompanying Consolidated Balance Sheets of Tractor Supply Company (the Company) as of December 26, 2020 and December 28, 2019, 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 26, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 26, 2020, 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) (PCAOB), the Company’s internal control over financial reporting as of December 26, 2020, 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 18, 2021, expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Estimate of Workers' Compensation and General Liability Self-Insurance Reserves | |||||
| Description of the Matter | At December 26, 2020, the Company’s net reserves for workers’ compensation and general liability self-insurance risks were $75.5 million. As discussed in Note 1 of the consolidated financial statements, the Company retains a significant portion of risk for its workers’ compensation and general liability exposures. Accordingly, provisions are recorded based upon periodic estimates of such losses, as determined by management. The future claim costs for the workers’ compensation and general liability exposures are estimated using actuarial methods that consider assumptions for a number of factors including, but not limited to, historical claims experience, loss development factors, and severity factors. | ||||
| Auditing management’s estimate of the recorded workers’ compensation and general liability self-insurance reserves was complex and judgmental due to the significant assumptions and judgments required by management in projecting the exposure on incurred claims that remain unresolved, including those which have not yet been reported to the Company. | |||||
49
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for self-insurance exposures. For example, we tested controls over the appropriateness of management’s review of the significant assumptions described above, including the completeness and accuracy of the underlying data, as well as management’s review of the actuarial calculations. | ||||
| To test the Company’s estimate of the self-insurance reserves, we performed audit procedures that included, among others, assessing the actuarial valuation methodologies utilized by management, testing the significant assumptions described above, testing the related underlying data used by the Company in its evaluation for completeness and accuracy, and testing the mathematical accuracy of the calculations. Our audit procedures also included, among others, comparing the significant assumptions used by management to industry accepted actuarial assumptions and reassessing the accuracy of management’s historical estimates utilized in prior period evaluations. We involved our actuarial valuation specialists to assist in assessing the valuation methodologies and significant assumptions noted above and to develop an independent range of estimates for the insurance reserves which were then compared to management’s estimates. | |||||
| Valuation of Goodwill | |||||
| Description of the Matter | At December 26, 2020, the Company had $22.2 million in goodwill, subsequent to an impairment charge of $60.8 million, related to the Petsense reporting unit. As discussed in Note 1 and Note 3 of the consolidated financial statements, goodwill is qualitatively or quantitatively tested for impairment at the reporting unit level at least annually, during the fourth quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The quantitative evaluation involves the comparison of the carrying value of the reporting unit to its fair value, as determined by management. | ||||
Auditing management’s annual goodwill impairment analysis was complex due to the significant estimation required by management in determining the fair value of a reporting unit. In particular, the fair value estimates are sensitive to significant assumptions such as projected financial information (revenue growth rates, profit margins, tax rates, and capital expenditures) and the discount rate, which are affected by expectations about future market or economic conditions. | |||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above, as well as the review of the fair value methodologies utilized. For example, we tested controls over management’s identification of reporting units and review of significant assumptions utilized within the fair value model, including the development of the projected financial information and determination of the discount rate. | ||||
To test the estimated fair value of the Petsense reporting unit, we performed audit procedures that included, among others, involvement of our valuation specialists to assess fair value methodologies, including the significant assumptions discussed above. Specifically, we compared significant assumptions used by management to current industry and economic trends and changes to the Company’s business model. As part of this assessment, we also compared the discount rate to rates for hypothetical market participants based on the capital structure of the Company and its related peer group. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of a reporting unit that would result from changes in the assumptions, as well as corroborated the estimated fair value by comparing it with peer company trading and transaction multiples. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company. | |||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2001.
Nashville, Tennessee
February 18, 2021
50
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (52 weeks) | (52 weeks) | (52 weeks) | |||||||||||||||
| Net sales | $ | 10,620,352 | $ | 8,351,931 | $ | 7,911,046 | |||||||||||
| Cost of merchandise sold | 6,858,803 | 5,480,161 | 5,208,518 | ||||||||||||||
| Gross profit | 3,761,549 | 2,871,770 | 2,702,528 | ||||||||||||||
| Selling, general and administrative expenses | 2,478,524 | 1,932,572 | 1,823,440 | ||||||||||||||
| Depreciation and amortization | 217,124 | 195,978 | 177,351 | ||||||||||||||
| Impairment of goodwill and other intangible assets | 68,973 | — | — | ||||||||||||||
| Operating income | 996,928 | 743,220 | 701,737 | ||||||||||||||
| Interest expense, net | 28,781 | 19,843 | 18,352 | ||||||||||||||
| Income before income taxes | 968,147 | 723,377 | 683,385 | ||||||||||||||
| Income tax expense | 219,189 | 161,023 | 151,028 | ||||||||||||||
| Net income | $ | 748,958 | $ | 562,354 | $ | 532,357 | |||||||||||
| Net income per share – basic | $ | 6.44 | $ | 4.70 | $ | 4.34 | |||||||||||
| Net income per share – diluted | $ | 6.38 | $ | 4.66 | $ | 4.31 | |||||||||||
| Weighted average shares outstanding | |||||||||||||||||
| Basic | 116,370 | 119,727 | 122,651 | ||||||||||||||
| Diluted | 117,436 | 120,743 | 123,471 | ||||||||||||||
| Dividends declared per common share outstanding | $ | 1.50 | $ | 1.36 | $ | 1.20 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (52 weeks) | (52 weeks) | (52 weeks) | |||||||||||||||
| Net income | $ | 748,958 | $ | 562,354 | $ | 532,357 | |||||||||||
| Other comprehensive (loss)/income: | |||||||||||||||||
| Change in fair value of interest rate swaps, net of taxes | (3,442) | (4,332) | 456 | ||||||||||||||
| Total other comprehensive (loss)/income | (3,442) | (4,332) | 456 | ||||||||||||||
| Total comprehensive income | $ | 745,516 | $ | 558,022 | $ | 532,813 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
52
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| December 26, 2020 | December 28, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,341,756 | $ | 84,241 | |||||||
| Inventories | 1,783,270 | 1,602,781 | |||||||||
| Prepaid expenses and other current assets | 133,659 | 100,865 | |||||||||
| Total current assets | 3,258,685 | 1,787,887 | |||||||||
| Property and equipment, net | 1,248,960 | 1,163,956 | |||||||||
| Operating lease right-of-use assets | 2,423,881 | 2,188,802 | |||||||||
| Goodwill and other intangible assets | 55,520 | 124,492 | |||||||||
| Deferred income taxes | 31,586 | — | |||||||||
| Other assets | 30,484 | 24,131 | |||||||||
| Total assets | $ | 7,049,116 | $ | 5,289,268 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 976,096 | $ | 643,036 | |||||||
| Accrued employee compensation | 119,701 | 39,755 | |||||||||
| Other accrued expenses | 324,813 | 247,690 | |||||||||
| Current portion of long-term debt | — | 30,000 | |||||||||
| Current portion of finance lease liabilities | 4,554 | 4,036 | |||||||||
| Current portion of operating lease liabilities | 298,696 | 277,099 | |||||||||
| Income taxes payable | 19,938 | 5,984 | |||||||||
| Total current liabilities | 1,743,798 | 1,247,600 | |||||||||
| Long-term debt | 984,324 | 366,480 | |||||||||
| Finance lease liabilities, less current portion | 33,096 | 30,389 | |||||||||
| Operating lease liabilities, less current portion | 2,220,904 | 2,001,162 | |||||||||
| Deferred income taxes | — | 153 | |||||||||
| Other long-term liabilities | 143,154 | 76,361 | |||||||||
| Total liabilities | 5,125,276 | 3,722,145 | |||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock | — | — | |||||||||
Common stock | 1,401 | 1,389 | |||||||||
| Additional paid-in capital | 1,095,500 | 966,698 | |||||||||
| Treasury stock | (3,356,953) | (3,013,996) | |||||||||
| Accumulated other comprehensive (loss)/income | (3,243) | 199 | |||||||||
| Retained earnings | 4,187,135 | 3,612,833 | |||||||||
| Total stockholders’ equity | 1,923,840 | 1,567,123 | |||||||||
| Total liabilities and stockholders’ equity | $ | 7,049,116 | $ | 5,289,268 | |||||||
Preferred Stock (shares in thousands): $1.00 par value; 40 shares authorized; no shares were issued or outstanding during any period presented.
Common Stock (shares in thousands): $0.008 par value; 400,000 shares authorized at all periods presented. 175,128 and 173,608 shares issued; 116,246 and 118,165 shares outstanding at December 26, 2020 and December 28, 2019, respectively.
Treasury Stock (at cost, shares in thousands): 58,882 and 55,443 shares at December 26, 2020 and December 28, 2019, respectively.
The accompanying notes are an integral part of these Consolidated Financial Statements.
53
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accum. Other Comp. Income | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||
| Shares | Dollars | ||||||||||||||||||||||||||||||||||||||||
| Stockholders' equity at December 30, 2017 | 125,303 | $ | 1,363 | $ | 716,228 | $ | (2,130,901) | $ | 3,358 | $ | 2,828,625 | $ | 1,418,673 | ||||||||||||||||||||||||||||
| Common stock issuance under stock award plans & ESPP | 1,512 | 12 | 79,631 | 79,643 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 28,921 | 28,921 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of shares to satisfy tax obligations | (1,367) | (1,367) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (4,987) | (349,776) | (349,776) | ||||||||||||||||||||||||||||||||||||||
| Cash dividends paid to stockholders | (147,087) | (147,087) | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of interest rate swaps, net of taxes | 456 | 456 | |||||||||||||||||||||||||||||||||||||||
| Net income | 532,357 | 532,357 | |||||||||||||||||||||||||||||||||||||||
| Stockholders' equity at December 29, 2018 | 121,828 | 1,375 | 823,413 | (2,480,677) | 3,814 | 3,213,895 | 1,561,820 | ||||||||||||||||||||||||||||||||||
| Common stock issuance under stock award plans & ESPP | 1,721 | 14 | 115,967 | 115,981 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 31,136 | 31,136 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of shares to satisfy tax obligations | (3,818) | (3,818) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (5,384) | (533,319) | (533,319) | ||||||||||||||||||||||||||||||||||||||
| Cash dividends paid to stockholders | (162,699) | (162,699) | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of interest rate swaps, net of taxes | (4,332) | (4,332) | |||||||||||||||||||||||||||||||||||||||
| Net income | 562,354 | 562,354 | |||||||||||||||||||||||||||||||||||||||
| Cumulative adjustment as a result of ASU 2017-12 adoption | 717 | (717) | — | ||||||||||||||||||||||||||||||||||||||
| Stockholders' equity at December 28, 2019 | 118,165 | 1,389 | 966,698 | (3,013,996) | 199 | 3,612,833 | 1,567,123 | ||||||||||||||||||||||||||||||||||
| Common stock issuance under stock award plans & ESPP | 1,520 | 12 | 99,328 | 99,340 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 37,273 | 37,273 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of shares to satisfy tax obligations | (7,799) | (7,799) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (3,439) | (342,957) | (342,957) | ||||||||||||||||||||||||||||||||||||||
| Cash dividends paid to stockholders | (174,656) | (174,656) | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of interest rate swaps, net of taxes | (3,442) | (3,442) | |||||||||||||||||||||||||||||||||||||||
| Net income | 748,958 | 748,958 | |||||||||||||||||||||||||||||||||||||||
| Stockholders' equity at December 26, 2020 | 116,246 | $ | 1,401 | $ | 1,095,500 | $ | (3,356,953) | $ | (3,243) | $ | 4,187,135 | $ | 1,923,840 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
54
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| (52 weeks) | (52 weeks) | (52 weeks) | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | 748,958 | $ | 562,354 | $ | 532,357 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 217,124 | 195,978 | 177,351 | ||||||||||||||
| Impairment of goodwill and other intangible assets | 68,973 | — | — | ||||||||||||||
| Impairment of other long-lived assets | 5,078 | — | — | ||||||||||||||
| Gain on disposition of property and equipment | (1,157) | (297) | (567) | ||||||||||||||
| Share-based compensation expense | 37,273 | 31,136 | 28,921 | ||||||||||||||
| Deferred income taxes | (31,739) | 6,760 | 11,887 | ||||||||||||||
| Change in assets and liabilities: | |||||||||||||||||
| Inventories | (180,489) | (13,239) | (136,334) | ||||||||||||||
| Prepaid expenses and other current assets | (32,794) | 13,582 | (26,195) | ||||||||||||||
| Accounts payable | 333,060 | 23,055 | 43,413 | ||||||||||||||
| Accrued employee compensation | 79,946 | (14,291) | 22,373 | ||||||||||||||
| Other accrued expenses | 72,405 | 10,351 | 36,406 | ||||||||||||||
| Income taxes | 13,954 | 8,327 | (8,355) | ||||||||||||||
| Other | 63,923 | (12,000) | 13,137 | ||||||||||||||
| Net cash provided by operating activities | 1,394,515 | 811,716 | 694,394 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | (294,002) | (217,450) | (278,530) | ||||||||||||||
| Proceeds from sale of property and equipment | 1,792 | 2,489 | 2,216 | ||||||||||||||
| Net cash used in investing activities | (292,210) | (214,961) | (276,314) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Borrowings under debt facilities | 2,009,000 | 1,002,000 | 1,193,500 | ||||||||||||||
| Repayments under debt facilities | (1,406,500) | (1,013,250) | (1,212,250) | ||||||||||||||
| Debt discounts and issuance costs | (17,048) | — | (346) | ||||||||||||||
| Principal payments under finance lease liabilities | (4,170) | (3,708) | (3,246) | ||||||||||||||
| Repurchase of shares to satisfy tax obligations | (7,799) | (3,818) | (1,367) | ||||||||||||||
| Repurchase of common stock | (342,957) | (533,319) | (349,776) | ||||||||||||||
| Net proceeds from issuance of common stock | 99,340 | 115,981 | 79,643 | ||||||||||||||
| Cash dividends paid to stockholders | (174,656) | (162,699) | (147,087) | ||||||||||||||
| Net cash provided by/(used in) financing activities | 155,210 | (598,813) | (440,929) | ||||||||||||||
| Net change in cash and cash equivalents | 1,257,515 | (2,058) | (22,849) | ||||||||||||||
| Cash and cash equivalents at beginning of year | 84,241 | 86,299 | 109,148 | ||||||||||||||
| Cash and cash equivalents at end of year | $ | 1,341,756 | $ | 84,241 | $ | 86,299 | |||||||||||
| Supplemental disclosures of cash flow information: | |||||||||||||||||
| Cash paid during the year for: | |||||||||||||||||
| Interest | $ | 24,540 | $ | 19,146 | $ | 18,069 | |||||||||||
| Income taxes | 235,319 | 144,377 | 146,918 | ||||||||||||||
| Supplemental disclosures of non-cash activities: | |||||||||||||||||
| Non-cash accruals for construction in progress | $ | 12,642 | $ | 7,924 | $ | 3,001 | |||||||||||
| Increase of operating lease assets and liabilities from new or modified leases | 524,141 | 365,233 | — | ||||||||||||||
| Increase of finance lease assets and liabilities from new or modified leases | 7,395 | 5,217 | — | ||||||||||||||
| Operating lease assets and liabilities recognized upon adoption of ASC 842 | — | 2,084,880 | — | ||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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TRACTOR SUPPLY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies:
Nature of Business
Founded in 1938, Tractor Supply Company (the “Company” or “we” or “our” or “us”) is the largest rural lifestyle retailer in the United States (“U.S.”). The Company is focused on supplying the needs of recreational farmers, ranchers, and all those who enjoy living the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. Stores are located primarily in towns outlying major metropolitan markets and in rural communities. The Company also owns and operates Petsense, LLC (“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 26, 2020, the Company operated a total of 2,105 retail stores in 49 states (1,923 Tractor Supply and Del’s retail stores and 182 Petsense retail stores) and also offered an expanded assortment of products through the Tractor Supply Company mobile application and online at TractorSupply.com and Petsense.com.
Basis of Presentation
In the first quarter of fiscal 2019, the Company adopted new lease accounting guidance under the Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases. Adoption of the new lease accounting guidance had a material impact to our Consolidated Balance Sheets and related disclosures and resulted in the recording of additional right-of-use assets and lease liabilities of approximately $2.08 billion as of the date of adoption. This guidance was applied using the optional transition method which allowed the Company to not recast comparative financial information but rather recognize a cumulative-effect adjustment to retained earnings as of the effective date in the period of adoption. No adjustment to retained earnings was made as a result of the adoption of this guidance. The standard did not materially impact our Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity, or Cash Flows.
In the first quarter of fiscal 2019, the Company adopted Accounting Standards Update 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” using the modified retrospective transition method. This method allows for a cumulative effect adjustment to retained earnings, as of the effective date in the period of adoption, for previously recorded amounts of hedge ineffectiveness. Upon adoption of the guidance, we recognized a cumulative-effect adjustment of $0.7 million from retained earnings to accumulated other comprehensive income. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements and related disclosures.
COVID-19 Pandemic
The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and
volatility which may negatively affect our business operations. As a result, as the pandemic persists and/or if it worsens, our accounting estimates and assumptions could be impacted in subsequent periods, and it is reasonably possible such changes could be significant (although the potential effects cannot be estimated at this time).
Fiscal Year
The Company’s fiscal year includes 52 or 53 weeks and ends on the last Saturday of the calendar year. The fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018, all consisted of 52 weeks.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated.
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Management Estimates
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) inherently requires estimates and assumptions by management of the Company that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. Actual results could differ from those estimates.
Significant estimates and assumptions by management primarily impact the following key financial statement areas:
Inventory Valuation
Inventory Impairment Risk
The Company identifies 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. The Company has established an inventory valuation reserve to recognize the estimated impairment in value (i.e., an inability to realize the full carrying value) based on the Company’s aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies. The Company does not believe its 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.
Shrinkage
The Company typically performs physical inventories at least once a year for each store that has been open more than 12 months, and the Company has 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. The Company believes historical rates are a reasonably accurate reflection of future trends.
While the Company continued to operate as an essential retailer during fiscal 2020, the COVID-19 pandemic had a direct impact on its ability to complete all originally planned store physical inventories. The plan was complicated by state and local mandates such as shelter at home restrictions and social distancing requirements. The decision to revise the Company’s inventory schedule was based on these mandates as well as consideration of the health and safety of team members, customers and vendor partners which are crucial to the Company’s business operations.
The Company assessed the risks associated with the stores not inventoried and concluded there is no material risk of misstatement to the financial statements for the stores not inventoried and further concluded that effective compensating controls are in place to ensure completeness and accuracy of reported inventory balances and estimated shrink losses.
Vendor Funding
The Company receives funding from substantially all of its significant merchandise vendors, in support of its business initiatives, through a variety of programs and arrangements, including guaranteed 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 the Company’s 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 sold as the related inventory is sold.
During interim periods, the amount of vendor support and volume rebates are estimated based upon initial commitments and anticipated purchase levels with applicable vendors. The estimated purchase volume (and related vendor funding) is based on the Company’s current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations. Although the Company believes it 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.
Freight
The Company incurs 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.
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Self-Insurance Reserves
The Company self-insures a significant portion of its workers’ compensation and general liability (including product liability) insurance plans. The Company has stop-loss insurance policies to protect it from individual losses over specified dollar values. Our deductible or self-insured retention, as applicable, for each claim involving workers’ compensation insurance and general liability insurance is limited to $500,000 and our Texas Work Injury Policy is limited to $500,000. Further, we maintain a commercially reasonable umbrella/excess policy that covers liabilities in excess of the primary insurance policy limits.
The full extent of certain workers’ compensation and general liability claims may not become fully determined for several years. Therefore, the Company estimates potential obligations based upon historical claims experience, loss development factors, severity factors, and other actuarial assumptions. Although the Company believes the reserves established for these obligations are reasonably estimated, any significant change in the number of claims or costs associated with claims made under these plans could have a material effect on the Company’s financial results. At December 26, 2020, the Company had net insurance reserves for workers' compensation and general liability plans of $75.5 million compared to $64.6 million at December 28, 2019.
Impairment of Long-Lived Assets
Long-lived assets, including lease 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, the Company first compares the carrying value of the asset or asset group to its estimated undiscounted future cash flows. 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 related asset, the Company calculates an impairment loss. The impairment loss calculation compares the carrying value of the related asset or asset group to its estimated fair value, which may be based on an estimated future cash flow model, market valuation, or other valuation technique, as appropriate. The Company recognizes an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If the Company recognizes 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.
In fiscal 2020 we recognized approximately $5.1 million of impairment related to long-lived assets for Petsense stores. However, no significant impairment charges were recognized in fiscal 2019 or 2018. Impairment charges, if recognized, are included in selling, general and administrative (“SG&A”) expenses in the Consolidated Statements of Income.
Impairment of 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. Our annual impairment evaluation is conducted in our fourth fiscal quarter.
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 impairment test for goodwill 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, an impairment charge would be recorded to the Company’s operations, for the amount in which the carrying amount exceeds the reporting unit’s fair value. We determine fair values for each reporting unit using the market approach, when available and appropriate, the income approach, or a combination of both. The income approach involves forecasting projected financial information (such as revenue growth rates, profit margins, tax rates, and capital expenditures) and selecting a
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discount rate that reflects the risk inherent in estimated future cash flows. Under the market approach, the fair value is based on observed market data. 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.
As described in further detail in Note 3 to the Consolidated Financial Statements, in fiscal 2020 we recognized goodwill impairment of approximately $60.8 million and tradename asset impairment of approximately $8.2 million related to Petsense. No impairment charges were recognized in fiscal 2019 or 2018. Impairment charges, if recognized, are included as a separate line item within SG&A expenses in the Consolidated Statements of Income.
Revenue Recognition and Sales Returns
The Company recognizes revenue at the time the customer takes possession of merchandise. If the Company receives payment before completion of its customer obligations (as per the Company’s special order and layaway programs), the revenue is deferred until the customer takes possession of the merchandise and the sale is complete.
The Company is required to collect certain taxes and fees from customers on behalf of government agencies and remit such collections to the applicable governmental agency on a periodic basis. These taxes and fees are collected from customers at the time of purchase but are not included in net sales. The Company records a liability upon collection from the customer and relieves the liability when payments are remitted to the applicable governmental agency.
The Company estimates a liability for sales returns based on a rolling average of historical return trends, and the Company believes that its estimate for sales returns is an accurate reflection of future returns associated with past sales. However, as with any estimate, refund activity may vary from estimated amounts. The Company had a liability for sales returns of $14.2 million and $11.9 million as of December 26, 2020 and December 28, 2019, respectively.
The Company recognizes revenue when a gift card or merchandise return card is redeemed by the customer and recognizes income when the likelihood of the gift card or merchandise return card being redeemed by the customer is remote (referred to as “breakage”). The gift cards and merchandise return card breakage rate is based upon historical redemption patterns and income is recognized for unredeemed gift cards and merchandise return cards in proportion to those historical redemption patterns. The Company recognized breakage income of $3.6 million, $3.0 million, and $2.6 million in fiscal 2020, 2019, and 2018, respectively.
Cost of Merchandise Sold
Cost of merchandise sold includes the total cost of products sold; freight and duty expenses associated with moving merchandise inventories from vendors to distribution facilities, from distribution facilities to retail stores, from one distribution facility to another, and directly to our customers; tariffs on imported products; vendor support; damaged, junked or defective product; cash discounts from payments to merchandise vendors; and adjustments for shrinkage (physical inventory losses), lower of cost or net realizable value, slow moving product, and excess inventory quantities.
Selling, General and Administrative Expenses
SG&A expenses include payroll and benefit costs for retail, distribution facility, and corporate employees; share-based compensation expenses; occupancy costs of retail, distribution, and corporate facilities; advertising; tender costs, including bank charges and costs associated with credit and debit card interchange fees; outside service fees; and other administrative costs, such as computer maintenance, supplies, travel, and lodging.
Advertising Costs
Advertising costs consist of expenses incurred in connection with digital and social media offerings, television, newspaper circulars, and customer-targeted direct e-mail and direct mail, as well as limited events through radio and other media channels. Costs are expensed when incurred with the exception of television advertising and circular and direct mail promotions, which are expensed upon first showing. Advertising expenses were approximately $100.9 million, $86.6 million,
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and $83.4 million for fiscal 2020, 2019, and 2018, respectively. Prepaid advertising costs were approximately $1.6 million and $0.6 million as of December 26, 2020, and December 28, 2019, respectively.
Warehousing and Distribution Facility Costs
Costs incurred at the Company’s distribution facilities for receiving, warehousing, and preparing product for delivery are expensed as incurred and are included in SG&A expenses in the Consolidated Statements of Income. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Distribution facility costs including depreciation were approximately $292.6 million, $231.5 million, and $209.7 million for fiscal 2020, 2019, and 2018, respectively.
Pre-Opening Costs
Non-capital expenditures incurred in connection with opening new stores, primarily payroll and rent, are expensed as incurred. Pre-opening costs were approximately $8.6 million, $8.1 million, and $8.5 million for fiscal 2020, 2019, and 2018, respectively.
Share-Based Compensation
The Company has share-based compensation plans covering certain members of management and non-employee directors, which include non-qualified stock options, restricted stock units, and performance-based restricted share units. In addition, the Company offers an Employee Stock Purchase Plan (“ESPP”) to most employees that work at least 20 hours per week.
The Company estimates the fair value of its stock option awards at the date of grant utilizing a Black-Scholes option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. However, key assumptions used in the Black-Scholes model are adjusted to incorporate the unique characteristics of the Company’s stock option awards. Option pricing models and generally accepted valuation techniques require management to make subjective assumptions including expected stock price volatility, expected dividend yield, risk-free interest rate, and expected term. The Company relies on historical volatility trends to estimate future volatility assumptions. The risk-free interest rates used were actual U.S. Treasury Constant Maturity rates for bonds matching the expected term of the option on the date of grant. The expected term of the option on the date of grant was estimated based on the Company’s historical experience for similar options.
In addition to the key assumptions used in the Black-Scholes model, the estimated forfeiture rate at the time of valuation (which is based on historical experience for similar options) is a critical assumption, as it reduces expense ratably over the vesting period. The Company adjusts this estimate periodically, based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
The fair value of the Company’s restricted stock units and performance-based restricted share units is the closing stock price of the Company’s common stock the day preceding the grant date, discounted for the expected dividend yield over the term of the award.
The Company believes its estimates are reasonable in the context of historical experience. Future results will depend on, among other matters, levels of share-based compensation granted in the future, actual forfeiture rates, and the timing of option exercises.
Depreciation and Amortization
Depreciation includes expenses related to all retail, distribution facility, and corporate assets. Amortization includes expenses related to definite-lived intangible assets.
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Income Taxes
The Company uses the asset and liability method to account for income taxes whereby deferred tax assets and liabilities are determined based on differences between the financial carrying amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that are anticipated to be in effect when temporary differences reverse or are settled. The effect of a tax rate change is recognized in the period in which the law is enacted in the provision for income taxes. The Company records a valuation allowance when it is more likely than not that a deferred tax asset will not be realized.
Tax Contingencies
The Company’s income tax returns are periodically audited by U.S. federal and state tax authorities. These audits include questions regarding 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 the Company’s various tax filing positions, the Company records 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 the Company has established a reserve, is audited and fully resolved or clarified. The Company recognizes 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. The Company adjusts its tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from the established reserve, the statute of limitations expires for the relevant tax authority to examine the tax position or when more information becomes available.
Sales Tax Audit Reserve
A portion of the Company’s sales are to tax-exempt customers, predominantly agricultural-based. The Company obtains exemption information as a necessary part of each tax-exempt transaction. Many of the states in which the Company conducts business will perform audits to verify the Company’s compliance with applicable sales tax laws. The business activities of the Company’s customers and the intended use of the unique products sold by the Company create a challenging and complex tax compliance environment. These circumstances also create some risk that the Company could be challenged as to the accuracy of the Company’s sales tax compliance.
The Company reviews past audit experience and assessments with applicable states to continually determine if it has potential exposure for non-compliance. Any estimated liability is based on an initial assessment of compliance risk and historical experience with each state. The Company continually reassesses 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. The reserve for these tax audits can fluctuate depending on numerous factors, including 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.
Net Income Per Share
The Company presents both basic and diluted net income per share on the Consolidated Statements of Income. Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average diluted shares outstanding during the period. Dilutive shares are computed using the treasury stock method for share-based awards. Performance-based restricted share units are included in diluted shares only if the related performance conditions have been considered satisfied as of the end of the reporting period.
Cash and Cash Equivalents
Temporary cash investments, with a maturity of three months or less when purchased, are considered to be cash equivalents. The majority of payments due from banks for customer credit cards are classified as cash and cash equivalents, as they generally settle within 24 - 48 hours.
Sales generated through the Company’s private label credit cards are not reflected as accounts receivable. Under an agreement with Citi Cards, a division of Citigroup, consumer and business credit is extended directly to customers by Citigroup. All credit
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program and related services are performed and controlled directly by Citigroup. Payments due from Citigroup are classified as cash and cash equivalents as they generally settle within 24 - 48 hours.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company’s financial instruments consist of cash and cash equivalents, short-term receivables, trade payables, debt instruments, and interest rate swaps. Due to their short-term nature, the carrying values of cash and cash equivalents, short-term receivables, and trade payables approximate current fair value at each balance sheet date. The Company had $1.0 billion and $397.5 million in borrowings under our debt facilities (as discussed in Note 4) as of December 26, 2020 and December 28, 2019, respectively. Based on current market interest rates (Level 2 inputs), the carrying value of our borrowings under our debt facilities approximates fair value for each period reported. The fair value of the Company’s interest rate swaps is determined based on the present value of expected future cash flows using forward rate curves (a Level 2 input). As described in further detail in Note 5, the fair value of the interest rate swaps, excluding accrued interest, was a net liability of $4.4 million and a net asset of $0.3 million as of December 26, 2020 and December 28, 2019, respectively.
Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with applicable accounting standards for such instruments and hedging activities, which require that all derivatives are recorded on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.
Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge a certain portion of its risk, even though hedge accounting does not apply or the Company elects not to apply the hedge accounting standards.
Inventories
Inventories are stated at the lower of cost, as determined by the average cost method, or net realizable value. Inventory cost consists of the direct cost of merchandise including freight, duties, and tariffs. Inventories are net of shrinkage, obsolescence, other valuations, and vendor allowances.
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Property and Equipment
Property and equipment are initially recorded at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Improvements to leased premises are amortized using the straight-line method over the remaining term of the lease or the useful life of the improvement, whichever is less. The following table summarizes the Company's property and equipment balances and includes the estimated useful lives which are generally applied (in thousands, except estimated useful lives):
| Estimated Useful Lives | December 26, 2020 | December 28, 2019 | |||||||||||||||
| Land | $ | 100,138 | $ | 100,343 | |||||||||||||
| Buildings and improvements | 1 – 35 years | 1,319,559 | 1,242,544 | ||||||||||||||
| Furniture, fixtures and equipment | 5 – 10 years | 773,178 | 729,272 | ||||||||||||||
| Computer software and hardware | 2 – 7 years | 563,509 | 440,222 | ||||||||||||||
| Construction in progress | 73,950 | 39,110 | |||||||||||||||
| Property and equipment, gross | 2,830,334 | 2,551,491 | |||||||||||||||
| Accumulated depreciation and amortization | (1,581,374) | (1,387,535) | |||||||||||||||
| Property and equipment, net | $ | 1,248,960 | $ | 1,163,956 | |||||||||||||
The Company entered into agreements with various governmental entities in the states of Kentucky, Georgia, and Tennessee to implement tax abatement plans related to its distribution center in Franklin, Kentucky (Simpson County), its distribution center in Macon, Georgia (Bibb County), and its Store Support Center in Brentwood, Tennessee (Williamson County). The tax abatement plans provide for reduction of real property taxes for specified time frames by legally transferring title to its real property in exchange for industrial revenue bonds. This property was then leased back to the Company. No cash was exchanged.
The lease payments are equal to the amount of the payments on the bonds. The tax abatement period extends through the term of the lease, which coincides with the maturity date of the bonds. At any time, the Company has the option to purchase the real property by paying off the bonds, plus $1. The terms and amounts authorized and drawn under each industrial revenue bond agreement are outlined as follows, as of December 26, 2020:
| Bond Term | Bond Authorized Amount (in millions) | Amount Drawn (in millions) | ||||||||||||||||||
| Franklin, Kentucky Distribution Center | 30 years | $54.0 | $51.8 | |||||||||||||||||
| Macon, Georgia Distribution Center | 15 years | $58.0 | $56.1 | |||||||||||||||||
| Brentwood, Tennessee Store Support Center | 10 years | $78.0 | $75.3 | |||||||||||||||||
Due to the form of these transactions, the Company has not recorded the bonds or the lease obligation associated with the sale lease-back transaction. The original cost of the Company’s property and equipment is recorded on the balance sheet and is being depreciated over its estimated useful life.
Capitalized Software Costs
The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the straight-line method over the estimated useful life of the software, which is two to seven years. Computer software consists of software developed for internal-use and third-party software purchased for internal-use. A subsequent addition, modification or upgrade to internal-use software is capitalized to the extent that it enhances the software’s functionality or extends its useful life. These costs are included in property and equipment in the accompanying Consolidated Balance Sheets. Certain software costs not meeting the criteria for capitalization are expensed as incurred.
Store Closing Costs
The Company regularly evaluates the performance of its stores and periodically closes those stores that are underperforming. The Company records a liability for costs associated with an exit or disposal activity when the liability is incurred, usually in the period the store closes. Store closing costs were not significant to the results of operations for any of the fiscal years presented.
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Leases
Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment, if any, of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates corresponding to the reasonably certain lease term. As substantially all of our leases do not provide an implicit rate, we estimate our collateralized incremental borrowing rate based upon a Company specific credit rating and yield curve analysis at commencement or modification date in determining the present value of lease payments.
Assets under finance leases are amortized in accordance with the Company’s normal depreciation policy for owned assets or over the lease term, if shorter, and the related charge to operations is included in depreciation expense in the Consolidated Statements of Income.
Note 2 – Share-Based Compensation:
Share-based compensation includes stock options, restricted stock units, performance-based restricted share units, and certain transactions under the Company’s ESPP. Share-based compensation expense is recognized based on the grant date fair value of all stock options, restricted stock units, and performance-based restricted share units. Share based compensation expense is also recognized for the value of the 15% discount on shares purchased by employees as a part of the ESPP. The discount under the ESPP represents the difference between the purchase date market value and the employee’s purchase price.
There were no significant modifications to the Company's share-based compensation plans since the adoption of the 2018 Omnibus Incentive Plan (the “2018 Plan”) on May 10, 2018, which replaced the 2009 Stock Incentive Plan. Following the adoption of the 2018 Plan, no further grants may be made under the 2009 Stock Incentive Plan.
Under our share-based compensation plans, awards may be granted to officers, non-employee directors, other employees, and independent contractors. The per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such awards will expire no later than ten years from the date of grant. Vesting of awards commences at various anniversary dates following the dates of each grant and certain awards will vest only upon established performance conditions being met. At December 26, 2020, the Company had approximately 10.6 million shares available for future equity awards under the Company’s 2018 Plan.
Share-based compensation expense, including changes in expense for modifications, if any, of awards, was $37.3 million, $31.1 million, and $28.9 million for fiscal 2020, 2019, and 2018, respectively.
Stock Options
The fair value is separately estimated for each option grant. The fair value of each option is recognized as compensation expense ratably over the vesting period. The Company has estimated the fair value of all stock option awards as of the date of the grant by applying a Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The ranges of key assumptions used in determining the fair value of options granted during fiscal 2020, 2019, and 2018, as well as a summary of the methodology applied to develop each assumption, are as follows:
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Expected price volatility | 26.7 - 30.0% | 26.4 - 27.6% | 26.4 - 27.0% | ||||||||||||||
| Risk-free interest rate | 0.2 - 1.3% | 1.6 - 2.5% | 2.5 - 3.0% | ||||||||||||||
| Weighted average expected term (in years) | 4.3 | 4.5 | 4.5 | ||||||||||||||
| Forfeiture rate | 7.0 | % | 7.3 | % | 7.3 | % | |||||||||||
| Dividend yield | 1.5 | % | 1.4 | % | 1.6 | % | |||||||||||
Expected Price Volatility — This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company applies a historical volatility rate. To calculate historical changes in market value, the Company uses daily market value changes from the date of grant over a past period generally representative of the expected life of the options to determine volatility. The Company believes the use of historical price volatility provides an appropriate indicator of future volatility. An increase in the expected volatility will increase compensation expense.
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Risk-Free Interest Rate — This is the U.S. Treasury Constant Maturity rate over a term equal to the expected term of the option. An increase in the risk-free interest rate will increase compensation expense.
Weighted Average Expected Term — This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options granted generally have a maximum term of ten years. An increase in the expected term will increase compensation expense.
Forfeiture Rate — This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. This estimate is based on historical experience. An increase in the forfeiture rate will decrease compensation expense.
Dividend Yield — This is the estimated dividend yield for the weighted average expected term of the option granted. An increase in the dividend yield will decrease compensation expense.
The Company issues shares for options when exercised. A summary of stock option activity is as follows:
| Stock Option Activity | Options | Weighted Average Exercise Price | Weighted Average Fair Value | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (in thousands) | |||||||||||||||||||||||||||
| Outstanding at December 28, 2019 | 2,817,519 | $ | 75.34 | 6.8 | $ | 47,834 | ||||||||||||||||||||||||||
| Granted | 443,967 | 94.62 | $ | 19.97 | ||||||||||||||||||||||||||||
| Exercised | (1,269,533) | 74.17 | ||||||||||||||||||||||||||||||
| Canceled | (59,543) | 78.93 | ||||||||||||||||||||||||||||||
| Outstanding at December 26, 2020 | 1,932,410 | $ | 80.44 | 5.8 | $ | 128,411 | ||||||||||||||||||||||||||
| Exercisable at December 26, 2020 | 1,199,968 | $ | 75.21 | 4.1 | $ | 86,005 | ||||||||||||||||||||||||||
The aggregate intrinsic values in the table above represent the total difference between the Company’s closing stock price at each year-end and the option exercise price, multiplied by the number of in-the-money options at each year-end. As of December 26, 2020, total unrecognized compensation expense related to non-vested stock options was approximately $8.5 million with a weighted average expense recognition period of 1.8 years.
There were no material modifications to options in fiscal 2020, 2019, or 2018.
Other information relative to options activity during fiscal 2020, 2019, and 2018 is as follows (in thousands):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Total fair value of stock options vested | $ | 12,546 | $ | 16,060 | $ | 18,247 | |||||||||||
| Total intrinsic value of stock options exercised | $ | 64,395 | $ | 45,101 | $ | 43,476 | |||||||||||
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Restricted Stock Units
The Company issues shares for restricted stock units once vesting occurs and related restrictions lapse. The fair value of the restricted stock units is the closing price of the Company’s common stock the day preceding the grant date, discounted for the expected dividend yield over the term of the award. The units generally vest over a to -year term; some plan participants have elected to defer receipt of shares of common stock upon vesting of restricted stock units, and as a result, those shares are not issued until a later date. A summary of restricted stock unit activity is presented below:
| Restricted Stock Unit Activity | Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||||||||||
| Restricted at December 28, 2019 | 543,406 | $ | 73.55 | |||||||||||
| Granted | 322,485 | 96.41 | ||||||||||||
| Vested | (238,987) | 75.05 | ||||||||||||
| Forfeited | (31,259) | 80.90 | ||||||||||||
| Restricted at December 26, 2020 | 595,645 | $ | 85.27 | |||||||||||
Other information relative to restricted stock unit activity during fiscal 2020, 2019, and 2018 is as follows (in thousands):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Total grant date fair value of restricted stock units vested and issued | $ | 17,935 | $ | 8,301 | $ | 5,325 | |||||||||||
| Total intrinsic value of restricted stock units vested and issued | $ | 23,011 | $ | 10,623 | $ | 5,364 | |||||||||||
There were no material modifications to restricted stock units in fiscal 2020, 2019, or 2018.
As of December 26, 2020, total unrecognized compensation expense related to non-vested restricted stock units was approximately $28.2 million with a weighted average expense recognition period of 1.9 years.
Performance-Based Restricted Share Units
We issue performance-based restricted share units to senior executives that represent shares potentially issuable in the future, subject to the achievement of specified performance goals. The performance metrics for the units are growth in net sales and growth in earnings per diluted share over a specified performance period. Issuance is based upon the level of achievement of the relative performance targets. The fair value of the performance-based restricted share units is the closing price of the Company’s common stock the day preceding the grant date, discounted for the expected dividend yield over the term of the awards. A summary of performance-based restricted share unit activity is presented below:
| Performance-Based Restricted Share Unit Activity | Performance-Based Restricted Share Units | Weighted Average Grant Date Fair Value | ||||||||||||
| Restricted at December 28, 2019 | 93,461 | $ | 75.97 | |||||||||||
Granted (a) | 83,368 | 88.76 | ||||||||||||
| Vested | (29,710) | 63.77 | ||||||||||||
| Forfeited | (3,851) | 74.91 | ||||||||||||
| Restricted at December 26, 2020 | 143,268 | $ | 87.94 | |||||||||||
(a)Assumes 100% target level achievement of the relative performance targets. The actual number of shares that will be issued, which may be higher or lower than the target, will be determined by the level of achievement of the relative performance targets.
Other information relative to performance-based restricted stock unit activity during fiscal 2020 is as follows (in thousands):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Total grant date fair value of performance-based restricted stock units vested and issued | $ | 1,895 | $ | 2,035 | $ | — | |||||||||||
| Total intrinsic value of performance-based restricted stock units vested and issued | $ | 2,826 | $ | 2,666 | $ | — | |||||||||||
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There were no material modifications to performance-based restricted share units in fiscal 2020, 2019, or 2018.
As of December 26, 2020, total unrecognized compensation expense related to non-vested performance-based restricted share units was approximately $8.5 million with a weighted average expense recognition period of 1.5 years.
Shares Withheld to Satisfy Tax Withholding Requirements
For the majority of restricted stock units and performance-based restricted share units granted, the number of shares issued on the date these stock awards vest is net of shares withheld by the Company to satisfy the minimum statutory tax withholding requirements, which the Company pays on behalf of its employees. The Company issued 186,751, 103,124, and 53,714 shares as a result of vested restricted stock units and performance-based restricted share units during fiscal 2020, 2019, and 2018, respectively. Although shares withheld are not issued, they are treated similar to common stock repurchases as they reduce the number of shares that would have been issued upon vesting. The amounts are net of 81,946, 41,786, and 17,131 shares withheld to satisfy $7.8 million, $3.8 million, and $1.4 million of employees’ tax obligations during fiscal 2020, 2019, and 2018, respectively.
Employee Stock Purchase Plan
The ESPP provides Company employees the opportunity to purchase, through payroll deductions, shares of common stock at a 15% discount. Pursuant to the terms of the ESPP, the Company issued 63,704, 61,678, and 77,458 shares of common stock during fiscal 2020, 2019, and 2018, respectively. The total cost related to the ESPP, including the compensation expense calculations, was approximately $1.4 million, $1.1 million, and $1.1 million in fiscal 2020, 2019, and 2018, respectively. There is a maximum of 16.0 million shares of common stock that are reserved under the ESPP. At December 26, 2020, there were approximately 11.8 million remaining shares of common stock reserved for future issuance under the ESPP.
Note 3 – Goodwill and Other Intangible Assets:
Goodwill
The changes in the carrying amount of goodwill by reporting unit for the years ended December 26, 2020 and December 28, 2019 are as follows (in thousands):
| Fiscal Year 2020 | Fiscal Year 2019 | ||||||||||||||||||||||||||||||||||
| Tractor Supply | Petsense | Consolidated | Tractor Supply | Petsense | Consolidated | ||||||||||||||||||||||||||||||
| Balance, beginning of year | $ | 10,258 | $ | 82,934 | $ | 93,192 | $ | 10,258 | $ | 82,934 | $ | 93,192 | |||||||||||||||||||||||
| Impairment expense | — | (60,773) | (60,773) | — | — | — | |||||||||||||||||||||||||||||
| Balance, end of year | $ | 10,258 | $ | 22,161 | $ | 32,419 | $ | 10,258 | $ | 82,934 | $ | 93,192 | |||||||||||||||||||||||
Goodwill is allocated to each identified reporting unit, which is defined as an operating segment or one level below the operating segment. Goodwill is not amortized, but is evaluated for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Our annual impairment evaluation is conducted in our fourth fiscal quarter.
In the fourth quarter of fiscal 2020, the Company identified qualitative indicators of impairment as a result of a strategic reassessment of the Petsense business, including an evaluation of current operations and its future growth outlook due to changing consumer trends within certain identified growth markets, which resulted in a decision to reduce the number of new store openings planned over the long term. The carrying value of goodwill for the Petsense reporting unit is indicative of the expected growth and development of the business. The aforementioned decision to reduce the long-term growth outlook resulted in a downward adjustment of the future financial forecasts for the Petsense business which indicated that impairment of the goodwill asset was a more-likely-than-not outcome.
We conducted a quantitative impairment analysis of the Petsense reporting unit using the income approach. The determination of fair value under the income approach requires management to make subjective judgments involving, among other items, forecasts of projected financial information (such as revenue growth rates, profit margins, tax rates, and capital expenditures) and selection of a discount rate that reflects the risk inherent in estimated future cash flows. These are unobservable inputs classified as Level 3 inputs under the fair value hierarchy. If actual results are not consistent with our estimates and
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assumptions used in estimating future cash flows and asset fair values, we may be exposed to additional impairment losses in a future period. As a result of the quantitative impairment analysis of the Petsense reporting unit, it was determined that the carrying value exceeded the fair value, resulting in a pre-tax impairment loss of approximately$60.8 million in fiscal 2020.
In the fourth quarter of fiscal 2020, the Company also completed its annual impairment testing of goodwill for the Tractor Supply reporting unit and no impairment was identified. The Company determined that the fair value of the reporting unit (including goodwill) was significantly in excess of the carrying value of the reporting unit.
Other Intangible Assets
The Company had approximately $23.1 million and $31.3 million of intangible assets other than goodwill at December 26, 2020 and December 28, 2019, respectively. The intangible asset balance in both periods represents the carrying value of the Petsense tradename, which is not subject to amortization as it has an indefinite useful life on the basis that it is expected to contribute cash flows beyond the foreseeable horizon. The tradename asset is evaluated for impairment annually and whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. Our annual impairment evaluation is conducted in our fourth fiscal quarter.
The aforementioned decision to reduce the long-term growth outlook for Petsense resulted in a downward adjustment of its future financial forecasts which indicated that impairment of the tradename asset was a more-likely-than-not outcome. We conducted a quantitative impairment analysis in the fourth quarter of fiscal 2020 using the relief-from-royalty method. The determination of fair value requires management to make subjective judgments involving forecasts of projected revenue growth rates, royalty rates, and tax rates, as well as the selection of a discount rate that reflects the risk inherent in estimated future cash flows. These are unobservable inputs classified as Level 3 inputs under the fair value hierarchy. 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 additional impairment losses in a future period. As a result of the quantitative impairment analysis, it was determined that the carrying value of the Petsense tradename was in excess of the fair value, resulting in a pre-tax impairment loss of approximately $8.2 million in fiscal 2020.
Note 4 – Debt:
The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):
| December 26, 2020 | December 28, 2019 | |||||||||||||
| 1.75% Senior Notes due 2030 | $ | 650.0 | $ | — | ||||||||||
| 3.70% Senior Notes due 2029 | 150.0 | 150.0 | ||||||||||||
| Senior Credit Facility: | ||||||||||||||
| February 2016 Term Loan | — | 145.0 | ||||||||||||
| June 2017 Term Loan | — | 87.5 | ||||||||||||
| November 2020 Term Loan | 200.0 | — | ||||||||||||
| Revolving credit loans | — | 15.0 | ||||||||||||
| Total outstanding borrowings | 1,000.0 | 397.5 | ||||||||||||
| Less: unamortized debt discounts and issuance costs | (15.7) | (1.0) | ||||||||||||
| Total debt | 984.3 | 396.5 | ||||||||||||
| Less: current portion of long-term debt | — | (30.0) | ||||||||||||
| Long-term debt | $ | 984.3 | $ | 366.5 | ||||||||||
| Outstanding letters of credit | $ | 48.7 | $ | 32.0 | ||||||||||
1.75% Senior Notes due 2030
On October 30, 2020, the Company issued and sold, in a public offering, $650 million in aggregate principal amount of senior unsecured notes due November 1, 2030 bearing interest at 1.75% per annum (the “1.75% Senior Notes”). The entire principal amount of the 1.75% Senior Notes is due in full on November 1, 2030. Interest is payable semi-annually in arrears on each November 1 and May 1. The terms of the 1.750% Notes are governed by an indenture dated as of October 30, 2020 (the “Base
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Indenture”) between the Company and Regions Bank, as trustee, as amended and supplemented by a first supplemental indenture dated as of October 30, 2020 (the “Supplemental Indenture”) between the Company and Regions Bank, as trustee.
The 1.75% Senior Notes are senior unsecured debt obligations of the Company and will rank equally with the Company’s other senior unsecured liabilities and senior to any future subordinated indebtedness of the Company. The 1.75% Senior Notes are subject to customary covenants restricting the Company’s ability, subject to certain exceptions, to incur debt secured by liens, to enter into sale and leaseback transactions or to merge or consolidate with another entity or sell substantially all of its assets to another person.
At any time prior to August 1, 2030, the Company will have the right, at its option, to redeem the 1.75% Senior Notes, in whole or in part, at any time and from time to time, by paying the greater of 100% of the principal amount of the 1.75% Senior Notes to be redeemed, or the sum of the present values of the remaining scheduled payments of principal and interest through the par call date, plus, in each case, accrued and unpaid interest to, but not including, the date of redemption. In addition, on or after August 1, 2030, the Company will have the right, at its option, to redeem the 1.75% Senior Notes, in whole or in part, at any time and from time to time, at a redemption price equal to 100% of the principal amount of the 1.75% Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the date of redemption.
If a Change of Control Triggering Event (as defined in the Supplemental Indenture) occurs, unless the Company has exercised its right to redeem the 1.75% Senior Notes, holders of the 1.75% Senior Notes may require the Company to repurchase all or any part of such holder’s 1.75% Senior Notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, on such 1.75% Senior Notes to, but not including, the purchase date. Upon the occurrence of an event of default with respect to the 1.75% Senior Notes, which includes payment defaults, defaults in the performance of certain covenants, cross defaults, and bankruptcy and insolvency related defaults, the Company’s obligations under the 1.75% Senior Notes may be accelerated, in which case the entire principal amount of the 1.75% Senior Notes would be due and payable immediately.
Senior Note Facility (including 3.70% Senior Notes due 2029)
On August 14, 2017, the Company entered into a note purchase and private shelf agreement (the “Note Purchase Agreement”), as amended from time to time, pursuant to which the Company agreed to sell, in a private placement, $150 million aggregate principal amount of senior unsecured notes due August 14, 2029 bearing interest at 3.70% per annum (the “3.70% Senior Notes”). The entire principal amount of the 3.70% Senior Notes is due in full on August 14, 2029. Interest is payable semi-annually in arrears on each annual and semi-annual anniversary of the issuance date. The obligations under the Note Purchase Agreement are unsecured.
The Company may from time to time issue and sell additional senior unsecured notes (the “Shelf Notes”) pursuant to the Note Purchase Agreement, in an aggregate principal amount of up to $300 million minus the aggregate principal amount of all Notes outstanding and issued under the Note Purchase Agreement. The Shelf Notes will have a maturity date of no more than 12 years after the date of original issuance and may be issued through November 4, 2023, unless earlier terminated in accordance with the terms of the Note Purchase Agreement.
Pursuant to the Note Purchase Agreement, the 3.70% Senior Notes and any Shelf Notes (collectively, the "Senior Note Facility") are redeemable by the Company, in whole at any time or in part from time to time, at 100% of the principal amount of the Senior Note Facility being redeemed, together with accrued and unpaid interest thereon and a make whole amount calculated by discounting all remaining scheduled payments on the Senior Note Facility by the yield on the U.S. Treasury security with a maturity equal to the remaining average life of the Senior Note Facility plus 0.50%.
Senior Credit Facility
On February 19, 2016, the Company entered into a senior credit facility, as amended from time to time, and as amended and restated on November 4, 2020 (the “Senior Credit Facility”), which provides borrowing capacity under term loan facilities as well as a revolving credit facility. There are no compensating balance requirements associated with the Senior Credit Facility.
The Senior Credit Facility contains a $500 million revolving credit facility (the “Revolver”) with a sublimit of $50 million for swingline loans and a sublimit of $150 million for letters of credit. This agreement is unsecured and matures on November 4, 2023, which, subject to satisfaction of certain terms and conditions, may be extended at the option of the Company to November 4, 2024 (as may be extended, the “ Senior Credit Facility Maturity Date”).
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Under the Senior Credit Facility, on November 4, 2020, a $200 million term loan (the “November 2020 Term Loan”) was extended to the Company. The November 2020 Term Loan is unsecured and the entire principal amount is due in full on the Senior Credit Facility Maturity Date.
Borrowings under both the Revolver and the November 2020 Term Loan each bear interest either at the bank’s base rate (3.250% at December 26, 2020) plus an additional amount ranging from 0.000% to 0.375% (0.125% at December 26, 2020) or at the London Inter-Bank Offer Rate (“LIBOR”) (0.146% at December 26, 2020) plus an additional amount ranging from 0.875% to 1.375% per annum (1.125% at December 26, 2020), adjusted based on the Company's public credit ratings. The Company is also required to pay, quarterly in arrears, a commitment fee related to unused capacity on the Revolver ranging from 0.090% to 0.200% per annum (0.125% at December 26, 2020), adjusted based on the Company's public credit ratings.
As further described in Note 5, the Company has entered into an interest rate swap agreement in order to hedge our exposure to variable rate interest payments associated with the Senior Credit Facility.
On February 19, 2016, the Company entered into a $200 million term loan agreement (the “February 2016 Term Loan”). This agreement was repaid in full on November 4, 2020 and is no longer in effect.
On June 15, 2017, the Company entered into a $100 million incremental term loan agreement (the “June 2017 Term Loan”). This agreement was repaid in full on November 4, 2020 and is no longer in effect.
On March 12, 2020, the Company entered into a $200 million incremental term loan agreement (the “March 2020 Term Loan”). This agreement was repaid in full on November 4, 2020 and is no longer in effect.
On April 22, 2020, the Company entered into a $350 million incremental term loan agreement (the "April 2020 Term Loan"). This agreement was repaid in full on October 30, 2020 and is no longer in effect.
Covenants and Default Provisions of the Debt Agreements
The Senior Credit Facility and the Note Purchase Agreement (collectively, the “Debt Agreements”) require 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 to 1.0 as of the last day of each fiscal quarter. The leverage ratio compares total funded debt to consolidated EBITDAR. The leverage ratio shall be less than or equal to 4.00 to 1.0 as of the last day of each fiscal quarter. The Debt Agreements also contain certain other restrictions regarding additional subsidiary indebtedness, business operations, subsidiary guarantees, mergers, consolidations and sales of assets, transactions with subsidiaries or affiliates, and liens. As of December 26, 2020, the Company was in compliance with all debt covenants.
The Debt Agreements contain customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events and invalidity of loan documents. Upon certain changes of control, payment under the Debt Agreements could become due and payable. In addition, under the Note Purchase Agreement, upon an event of default or change of control, the make whole payment described above may become due and payable.
The Note Purchase Agreement also requires that, in the event the Company amends its Senior Credit Facility, or any subsequent credit facility of $100 million or greater, such that it contains covenant or default provisions that are not provided in the Note Purchase Agreement or that are similar to those contained in the Note Purchase Agreement but which contain percentages, amounts, formulas or grace periods that are more restrictive than those set forth in the Note Purchase Agreement or are otherwise more beneficial to the lenders thereunder, the Note Purchase Agreement shall be automatically amended to include such additional or amended covenants and/or default provisions.
Note 5 – Interest Rate Swaps:
The Company entered into an interest rate swap agreement which became effective on March 18, 2020, with a maturity date of March 18, 2025. The notional amount of this swap agreement is fixed at $200 million.
The Company previously had interest rate swap agreements associated with the February 2016 Term Loan and the June 2017 Term Loan, each of which was settled in full on November 10, 2020 and is no longer in effect.
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The Company’s interest rate swap agreements are executed for risk management and are not held for trading purposes. The objective of the interest rate swap agreements is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap agreements are intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the Senior Credit Facility. The interest rate swap agreements entitle 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.
The Company has designated its interest rate swap agreements as cash flow hedges and accounts for the underlying activity in accordance with hedge accounting. The interest rate swaps are presented within the Consolidated Balance Sheets at fair value. In accordance with hedge accounting, the gains and losses on interest rate swaps that are designated and qualify as cash flow hedges are recorded as a component of Other Comprehensive Income (“OCI”), net of related income taxes, and reclassified into earnings in the same income statement line and period during which the hedged transactions affect earnings.
As of December 26, 2020, amounts to be reclassified from Accumulated Other Comprehensive Income (“AOCI”) into interest during the next twelve months are not expected to be material. No significant amounts were excluded from the assessment of cash flow hedge effectiveness as of December 26, 2020.
The assets and liabilities measured at fair value related to the Company’s interest rate swaps, excluding accrued interest, were as follows (in thousands):
| Derivatives Designated as Cash Flow Hedges | Balance Sheet Location | December 26, 2020 | December 28, 2019 | |||||||||||||||||
| Interest rate swaps (short-term portion) | Other current assets | $ | — | $ | 558 | |||||||||||||||
| Interest rate swaps (long-term portion) | Other assets | — | 91 | |||||||||||||||||
| Total derivative assets | $ | — | $ | 649 | ||||||||||||||||
| Interest rate swaps (short-term portion) | Other accrued expenses | $ | 1,227 | $ | 90 | |||||||||||||||
| Interest rate swaps (long-term portion) | Other long-term liabilities | 3,137 | 292 | |||||||||||||||||
| Total derivative liabilities | $ | 4,364 | $ | 382 | ||||||||||||||||
The offset to the interest rate swap asset or liability is recorded as a component of equity, net of deferred taxes, in AOCI, and will be reclassified into earnings over the term of the underlying debt as interest payments are made. On November 10, 2020, the Company terminated two interest rate swap agreements which resulted in the reclassification of settlement losses from AOCI to the Consolidated Statements of Income as part of interest expense.
The following table summarizes the changes in AOCI, net of tax, related to the Company’s interest rate swaps (in thousands):
| Fiscal Year | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Beginning fiscal year AOCI balance | $ | 199 | $ | 3,814 | ||||||||||
| Current fiscal year loss recognized in OCI | (5,666) | (4,332) | ||||||||||||
| Amounts reclassified from AOCI | 2,224 | — | ||||||||||||
| Cumulative adjustment as a result of ASU 2017-12 adoption | — | 717 | ||||||||||||
| Other comprehensive loss, net of tax | (3,442) | (3,615) | ||||||||||||
| Ending fiscal year AOCI balance | $ | (3,243) | $ | 199 | ||||||||||
Cash flows related to the interest rate swaps are included in operating activities on the Consolidated Statements of Cash Flows.
The following table summarizes the impact of pre-tax gains and losses derived from the Company’s interest rate swaps (in thousands):
| Fiscal Year | ||||||||||||||||||||||||||
| Financial Statement Location | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| Amount of (losses)/gains recognized in OCI during the period | Other comprehensive (loss)/income | $ | (4,631) | $ | (5,556) | $ | 612 | |||||||||||||||||||
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The following table summarizes the impact of taxes affecting AOCI as a result of the Company’s interest rate swaps (in thousands):
| Fiscal Year | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Income tax benefit of interest rate swaps on AOCI | $ | (1,189) | $ | (1,224) | ||||||||||
Credit-risk-related contingent features
In accordance with the underlying interest rate swap agreements, the Company could be declared in default on its interest rate swap obligations if repayment of the underlying indebtedness (i.e., the Company’s term loans) is accelerated by the lender due to the Company's default on such indebtedness.
If the Company had breached any of the provisions in the underlying agreements at December 26, 2020, it could have been required to post full collateral or settle its obligations under the Company’s interest rate swap agreements. However, as of December 26, 2020, the Company had not breached any of these provisions or posted any collateral related to the underlying interest rate swap agreements.
Note 6 – Leases:
The Company leases the majority of its retail store locations, two distribution sites, its Merchandise Innovation Center, and certain equipment under various non-cancellable operating leases. The leases have varying terms and expire at various dates through 2038. Store leases typically have initial terms of between 10 and 15 years, with two to four optional renewal periods of five years each. The exercise of lease renewal options is at our sole discretion. The Company has included lease renewal options in the lease term for calculations of its right-of-use assets and liabilities when it is reasonably certain that the Company plans to renew these leases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company accounts for lease components (e.g., fixed payments including rent, real estate taxes, and insurance costs) together with non-lease components (e.g., fixed payment common-area maintenance) as a single component for all classes of underlying assets. Certain lease agreements require variable payments based upon actual costs of common-area maintenance, real estate taxes, and insurance. Further, certain lease agreements require variable payments based upon store sales above agreed-upon sales levels for the year and others require payments adjusted periodically for inflation. As substantially all of our leases do not provide an implicit rate, we estimate our collateralized incremental borrowing rate based upon a Company specific credit rating and yield curve analysis at commencement or modification date in determining the present value of lease payments.
The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. Short-term lease cost during the periods presented was immaterial.
In addition to the operating lease right-of-use assets presented on the Consolidated Balance Sheets, assets, net of accumulated amortization, under finance leases of $33.5 million and $30.9 million are recorded within the Property and equipment, net line on the Consolidated Balance Sheets as of December 26, 2020 and December 28, 2019, respectively.
The following table summarizes the Company’s classification of lease cost (in thousands):
| Fiscal Year Ended | ||||||||||||||||||||
| Statement of Income Location | December 26, 2020 | December 28, 2019 | ||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||
| Amortization of lease assets | Depreciation and amortization | $ | 4,765 | $ | 4,281 | |||||||||||||||
| Interest on lease liabilities | Interest expense, net | 1,765 | 1,629 | |||||||||||||||||
| Operating lease cost | Selling, general and administrative expenses | 379,318 | 353,961 | |||||||||||||||||
| Variable lease cost | Selling, general and administrative expenses | 80,154 | 73,768 | |||||||||||||||||
| Net lease cost | $ | 466,002 | $ | 433,639 | ||||||||||||||||
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The following table summarizes the future maturities of the Company’s lease liabilities (in thousands):
Operating Leases (a) | Finance Leases | Total | ||||||||||||||||||
| 2021 | $ | 394,576 | $ | 6,269 | $ | 400,845 | ||||||||||||||
| 2022 | 377,051 | 5,243 | 382,294 | |||||||||||||||||
| 2023 | 356,641 | 4,051 | 360,692 | |||||||||||||||||
| 2024 | 327,663 | 4,066 | 331,729 | |||||||||||||||||
| 2025 | 297,827 | 3,994 | 301,821 | |||||||||||||||||
| After 2025 | 1,285,285 | 24,503 | 1,309,788 | |||||||||||||||||
| Total lease payments | 3,039,043 | 48,126 | 3,087,169 | |||||||||||||||||
| Less: Interest | (519,443) | (10,476) | (529,919) | |||||||||||||||||
| Present value of lease liabilities | $ | 2,519,600 | $ | 37,650 | $ | 2,557,250 | ||||||||||||||
(a) Operating lease payments exclude $174.1 million of legally binding minimum lease payments for leases signed, but not yet commenced.
The following table summarizes the Company’s lease term and discount rate:
| December 26, 2020 | December 28, 2019 | |||||||||||||
| Weighted-average remaining lease term (years): | ||||||||||||||
| Finance leases | 10.4 | 10.0 | ||||||||||||
| Operating leases | 9.1 | 9.0 | ||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Finance leases | 4.9 | % | 5.1 | % | ||||||||||
| Operating leases | 4.1 | % | 4.3 | % | ||||||||||
The following table summarizes the other information related to the Company’s lease liabilities (in thousands):
| Fiscal Year Ended | ||||||||||||||
| December 26, 2020 | December 28, 2019 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Financing cash flows used for finance leases | $ | 4,170 | $ | 3,709 | ||||||||||
| Operating cash flows used for finance leases | 1,765 | 1,629 | ||||||||||||
| Operating cash flows for operating leases | 385,529 | 360,580 | ||||||||||||
The Company adopted new lease accounting guidance in the first quarter of fiscal 2019, as discussed in Note 1 to the Consolidated Financial Statements, and as required, the following disclosure is provided for periods prior to adoption. Total rent expense was approximately $342.2 million for fiscal 2018. Total contingent rent expense was insignificant for fiscal 2018.
Note 7 – Capital Stock and Dividends:
Capital Stock
The authorized capital stock of the Company consists of common stock and preferred stock. The Company is authorized to issue 400 million shares of common stock. The Company is also authorized to issue 40 thousand shares of preferred stock, with such designations, rights and preferences as may be determined from time to time by the Company’s Board of Directors.
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Dividends
During fiscal 2020 and 2019, the Company’s Board of Directors declared the following cash dividends:
| Date Declared | Dividend Amount Per Share of Common Stock | Record Date | Date Paid | |||||||||||||||||
| November 4, 2020 | $0.40 | November 23, 2020 | December 8, 2020 | |||||||||||||||||
| August 5, 2020 | $0.40 | August 24, 2020 | September 9, 2020 | |||||||||||||||||
| May 6, 2020 | $0.35 | May 26, 2020 | June 9, 2020 | |||||||||||||||||
| February 5, 2020 | $0.35 | February 24, 2020 | March 10, 2020 | |||||||||||||||||
| November 6, 2019 | $0.35 | November 25, 2019 | December 10, 2019 | |||||||||||||||||
| August 7, 2019 | $0.35 | August 26, 2019 | September 10, 2019 | |||||||||||||||||
| May 8, 2019 | $0.35 | May 28, 2019 | June 11, 2019 | |||||||||||||||||
| February 6, 2019 | $0.31 | February 25, 2019 | March 12, 2019 | |||||||||||||||||
It is the present intention of the Company’s Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Company’s Board of Directors in its sole discretion and will depend upon the earnings, financial condition, and capital needs of the Company, along with any other factors which the Company’s Board of Directors deem relevant.
On January 27, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.52 per share of the Company’s outstanding common stock. The dividend will be paid on March 9, 2021, to stockholders of record as of the close of business on February 22, 2021.
Note 8 – Treasury Stock:
The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program which was announced in February 2007. The authorization amount of the program, which has been increased from time to time, is currently authorized for up to $4.5 billion, exclusive of any fees, commissions or other expenses related to such repurchases. The share repurchase program does not have an expiration date. 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, temporarily paused, or terminated at any time without prior notice. As of December 26, 2020, the Company had remaining authorization under the share repurchase program of $1.14 billion, exclusive of any fees, commissions or other expenses.
The following table provides the number of shares repurchased, average price paid per share, and total amount paid for share repurchases in fiscal 2020, 2019, and 2018, respectively (in thousands, except per share amounts):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Total number of shares repurchased | 3,439 | 5,384 | 4,987 | ||||||||||||||
| Average price paid per share | $ | 99.72 | $ | 99.05 | $ | 70.14 | |||||||||||
| Total cash paid for share repurchases | $ | 342,957 | $ | 533,319 | $ | 349,776 | |||||||||||
Shares repurchased in fiscal 2020 were impacted by the temporary suspension of our share repurchase program from March 12, 2020 until November 5, 2020, in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic.
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Note 9 – Net Income Per Share:
Net income per share is calculated as follows (in thousands, except per share amounts):
| Fiscal Year | |||||||||||||||||
| 2020 | |||||||||||||||||
Net Income | Shares | Per Share Amount | |||||||||||||||
| Basic net income per share: | $ | 748,958 | 116,370 | $ | 6.44 | ||||||||||||
| Dilutive effect of share-based awards | — | 1,066 | (0.06) | ||||||||||||||
| Diluted net income per share: | $ | 748,958 | 117,436 | $ | 6.38 | ||||||||||||
| Fiscal Year | |||||||||||||||||
| 2019 | |||||||||||||||||
Net Income | Shares | Per Share Amount | |||||||||||||||
| Basic net income per share: | $ | 562,354 | 119,727 | $ | 4.70 | ||||||||||||
| Dilutive effect of share-based awards | — | 1,016 | (0.04) | ||||||||||||||
| Diluted net income per share: | $ | 562,354 | 120,743 | $ | 4.66 | ||||||||||||
| Fiscal Year | |||||||||||||||||
| 2018 | |||||||||||||||||
Net Income | Shares | Per Share Amount | |||||||||||||||
| Basic net income per share: | $ | 532,357 | 122,651 | $ | 4.34 | ||||||||||||
| Dilutive effect of share-based awards | — | 820 | (0.03) | ||||||||||||||
| Diluted net income per share: | $ | 532,357 | 123,471 | $ | 4.31 | ||||||||||||
Anti-dilutive share-based awards excluded from the above calculations totaled less than 0.1 million and approximately 0.4 million and 3.1 million shares in fiscal 2020, 2019, and 2018, respectively.
Note 10 – Income Taxes:
The provision for income taxes consists of the following (in thousands):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Current tax expense: | |||||||||||||||||
| Federal | $ | 211,228 | $ | 128,490 | $ | 123,388 | |||||||||||
| State | 38,511 | 25,091 | 15,597 | ||||||||||||||
| Total current | 249,739 | 153,581 | 138,985 | ||||||||||||||
| Deferred tax (benefit)/expense: | |||||||||||||||||
| Federal | (21,997) | 11,770 | 9,650 | ||||||||||||||
| State | (8,553) | (4,328) | 2,393 | ||||||||||||||
| Total deferred | (30,550) | 7,442 | 12,043 | ||||||||||||||
| Total provision | $ | 219,189 | $ | 161,023 | $ | 151,028 | |||||||||||
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities are as follows (in thousands):
| December 26, 2020 | December 28, 2019 | ||||||||||
| Tax assets: | |||||||||||
| Inventory valuation | $ | 20,539 | $ | 16,676 | |||||||
| Accrued employee benefits costs | 44,625 | 12,002 | |||||||||
| Accrued sales tax audit reserve | 5,967 | 4,173 | |||||||||
| Finance lease liabilities | 8,595 | 6,817 | |||||||||
| Operating lease liabilities | 645,719 | 581,593 | |||||||||
| Deferred compensation | 12,289 | 14,836 | |||||||||
| Workers’ compensation insurance | 11,804 | 10,154 | |||||||||
| General liability insurance | 7,346 | 6,025 | |||||||||
| Lease exit obligations | 2,315 | 2,087 | |||||||||
| Income tax credits | 8,744 | 6,377 | |||||||||
| Amortization | 7,269 | — | |||||||||
| Other | 8,431 | 5,768 | |||||||||
| 783,643 | 666,508 | ||||||||||
| Tax liabilities: | |||||||||||
| Finance lease assets | (7,584) | (5,684) | |||||||||
| Operating lease right-of-use assets | (612,658) | (551,751) | |||||||||
| Inventory basis difference | (4,768) | (4,667) | |||||||||
| Prepaid expenses | (2,491) | (2,024) | |||||||||
| Depreciation | (124,280) | (93,919) | |||||||||
| Amortization | — | (8,230) | |||||||||
| Other | (276) | (386) | |||||||||
| (752,057) | (666,661) | ||||||||||
| Net deferred tax asset/(liability) | $ | 31,586 | $ | (153) | |||||||
The Company has evaluated the need for a valuation allowance for all or a portion of the deferred tax assets. The Company believes that all of the deferred tax assets will more likely than not be realized through future earnings. The Company had state tax credit carryforwards of $8.6 million and $6.2 million as of December 26, 2020 and December 28, 2019, respectively, with varying dates of expiration through 2035. The Company provided no valuation allowance as of December 26, 2020 and December 28, 2019 for state tax credit carryforwards, as the Company believes it is more likely than not that all of these credits will be utilized before their expiration dates.
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows (in thousands):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Tax provision at statutory rate | $ | 203,311 | $ | 151,909 | $ | 143,511 | |||||||||||
| Tax effect of: | |||||||||||||||||
| State income taxes, net of federal tax benefits | 27,642 | 19,722 | 18,019 | ||||||||||||||
| Section 162(m) limitation | 5,080 | 2,572 | 2,581 | ||||||||||||||
| Tax credits, net of federal tax benefits | (8,828) | (7,768) | (7,140) | ||||||||||||||
| Share-based compensation programs | (9,303) | (4,484) | (4,522) | ||||||||||||||
| Other | 1,287 | (928) | (1,421) | ||||||||||||||
| Total income tax expense | $ | 219,189 | $ | 161,023 | $ | 151,028 | |||||||||||
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The Company and its affiliates file income tax returns in the U.S. and various state and local jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for years before 2016. Various states have completed an examination of our income tax returns for 2016 through 2018 with minimal adjustments.
The total amount of unrecognized tax positions that, if recognized, would decrease the effective tax rate, is $2.7 million at December 26, 2020. In addition, the Company recognizes current interest and penalties accrued related to these uncertain tax positions as interest expense, and the amount is not material to the Consolidated Statements of Income. The Company has considered the reasonably possible expected net change in uncertain tax positions during the next 12 months and does not expect any material changes to our liability for uncertain tax positions through December 25, 2021.
A reconciliation of the beginning and ending gross amount of unrecognized tax benefits (exclusive of interest and penalties) is as follows (in thousands):
| Fiscal Year | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Balance at beginning of year | $ | 2,760 | $ | 2,451 | $ | 1,993 | |||||||||||
| Additions based on tax positions related to the current year | 816 | 650 | 621 | ||||||||||||||
| Additions for tax positions of prior years | 32 | 59 | 257 | ||||||||||||||
| Reductions for tax positions of prior years | (372) | (400) | (420) | ||||||||||||||
| Balance at end of year | $ | 3,236 | $ | 2,760 | $ | 2,451 | |||||||||||
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in the U.S. on March 27, 2020. The enactment of this legislation did not have a material impact on income tax expense in fiscal 2020. However, the Company did elect to participate in the deferral of the employer’s share of social security tax deposits, with $47.0 million included within other long-term liabilities in the Consolidated Balance Sheet as of December 26, 2020. The first half of this deferral will become due on December 31, 2021 and the second half will become due on December 31, 2022.
Note 11 – Retirement Benefit Plans:
The Company has a defined contribution benefit plan, the Tractor Supply Company 401(k) Retirement Savings Plan (the “401(k) Plan”), which provides retirement benefits for eligible employees. The Company matches (in cash) 100% of the employee’s elective contributions up to 3% of eligible compensation plus 50% of the employee’s elective contributions from 3% to 6% of eligible compensation. In no event shall the total Company match made on behalf of the employee exceed 4.5% of the employee’s eligible compensation. All current contributions are immediately vested. Company contributions to the 401(k) Plan were approximately $12.9 million, $9.8 million, and $8.5 million during fiscal 2020, 2019, and 2018, respectively.
The Company offers, through a deferred compensation program, the opportunity for certain qualifying employees to elect to defer a portion of their annual base salary and/or their annual incentive bonus. Under the deferred compensation program, a percentage of the participants’ salary deferral is matched by the Company, limited to a maximum annual matching contribution of $4,500. The Company’s contributions, including accrued interest, were $0.6 million, $0.7 million, and $0.6 million during fiscal 2020, 2019, and 2018, respectively.
Note 12 – Commitments and Contingencies:
Construction and Real Estate Commitments
At December 26, 2020, the Company had no material contractual commitments related to construction projects extending greater than twelve months.
On December 7, 2020 the Company announced plans to build a new distribution center in Navarre, Ohio. The new distribution center is expected to be approximately 895,000 square feet and will require an estimated initial investment of approximately $70 million. Construction is planned to begin in fiscal 2021 and is currently anticipated to be complete by the end of fiscal 2022.
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Letters of Credit
At December 26, 2020, there were $48.7 million outstanding letters of credit under the Senior Credit Facility.
Litigation
On October 9, 2020, an alleged stockholder, the City of Pontiac Police and Fire Retirement System, filed a derivative lawsuit in the U.S. District Court for the Middle District of Tennessee, purportedly on the Company's behalf, against certain current and former members of our Board of Directors, and the Company as a nominal defendant, seeking unspecified compensatory and punitive damages payable to the Company, disgorgement, restitution, corporate governance and hiring changes, mandated community investment, and attorneys' fees and costs. Plaintiff alleges that defendants violated the federal securities laws governing proxy solicitations and breached their fiduciary duties by misrepresenting the Company’s commitment to and support for diversity and inclusion. The Company disputes the allegations of the complaint. The Company and the individual defendants moved to dismiss the complaint based on plaintiff’s failure to make a demand on the board and to state a claim upon which relief may be granted. Given the indeterminate claims for monetary damages and the early stage of the proceedings where key factual and legal issues have not been resolved, the Company is unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from the matter described above.
The Company is also involved in various litigation matters arising in the ordinary course of business. The Company believes that, based upon information currently available, 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. However, litigation and other legal matters involve an element of uncertainty. Future developments in such matters, including adverse decisions or settlements or resulting required changes to the Company’s business operations, could affect our consolidated operating results when resolved in future periods or could result in liability or other amounts material to the Company’s Consolidated Financial Statements.
Note 13 – Segment Reporting:
The Company has one reportable segment which is the retail sale of products that support the rural lifestyle. The following table indicates the percentage of net sales represented by each major product category during fiscal 2020, 2019, and 2018:
| Percent of Net Sales | |||||||||||||||||
| Fiscal Year | |||||||||||||||||
| Product Category: | 2020 | 2019 | 2018 | ||||||||||||||
| Livestock and Pet | 47 | % | 47 | % | 47 | % | |||||||||||
| Hardware, Tools and Truck | 21 | 21 | 22 | ||||||||||||||
| Seasonal, Gift and Toy Products | 21 | 20 | 19 | ||||||||||||||
| Clothing and Footwear | 7 | 8 | 8 | ||||||||||||||
| Agriculture | 4 | 4 | 4 | ||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | |||||||||||
Note 14 – New Accounting Pronouncements:
New Accounting Pronouncements Recently Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses. The new guidance applies to financial assets measured at amortized cost basis, including receivables that result from revenue transactions and held-to-maturity debt securities. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early adoption was permitted for fiscal years beginning after December 15, 2018. The Company adopted this guidance in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.
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In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This update clarifies the accounting treatment for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance on a prospective basis in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures.
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." This collective guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of LIBOR related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identify alternative reference rates. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The adoption of this guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of this guidance to have a material impact on its Condensed Consolidated Financial Statements and related disclosures.
Note 15 – Subsequent Events:
On February 17, 2021, the Company announced that it has entered into an agreement to acquire all of the outstanding equity interests of Orscheln Farm and Home, LLC, a farm and ranch retailer with 167 retail stores in 11 states, in an all-cash transaction for approximately $320 million. The Company intends to fund the acquisition through cash-on-hand. The acquisition is conditioned on the receipt of regulatory approval and satisfactory completion of customary closing conditions.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of December 26, 2020. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 26, 2020, our disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
A report of the Company’s management on the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the 1934 Act) and a report of Ernst & Young LLP, an independent registered public accounting firm, on the effectiveness of the Company’s internal control over financial reporting are included in Item 8 of this Annual Report on Form 10-K.
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There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information set forth under the caption “Information about our Executive Officers” in Part I of this Form 10-K is incorporated herein by reference.
The information set forth under the captions “Item 1: Election of Directors,” “Board Meetings and Committees,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 6, 2021, is incorporated herein by reference.
The Company has a Code of Ethics which covers all exempt employees, officers and directors of the Company, including the principal executive officer, principal financial officer, principal accounting officer and controller. The Code of Ethics is available in the “Corporate Governance” section of the Company’s website at TractorSupply.com. A copy of the Code of Ethics can also be obtained, free of charge, upon written request to the Corporate Secretary, Tractor Supply Company, 5401 Virginia Way, Brentwood, TN 37027. The Company intends to post amendments to or waivers, if any, from its Code of Ethics (to the extent applicable to its principal executive officer, principal financial officer, principal accounting officer or controller) on its website.
Item 11. Executive Compensation
The information set forth under the captions “Corporate Governance – Compensation Committee Interlocks and Insider Participation,” “Compensation of Directors,” and “Executive Compensation” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 6, 2021, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 6, 2021, is incorporated herein by reference.
Following is a summary of our equity compensation plans as of December 26, 2020, under which equity securities are authorized for issuance, aggregated as follows:
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance | |||||||||||||||||
| Equity compensation plans approved by security holders: | ||||||||||||||||||||
| Stock Incentive Plans | 2,671,323 | (a) | $ | 80.44 | (b) | 10,637,072 | ||||||||||||||
| Employee Stock Purchase Plan | — | — | 11,807,992 | |||||||||||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||||||||||
| Total | 2,671,323 | $ | 80.44 | 22,445,064 | ||||||||||||||||
(a) Includes 1,932,410 outstanding stock options, 558,711 unvested restricted stock units and 36,934 restricted stock units which have vested but the receipt of which have been deferred by the recipient, and 143,268 unvested performance-based restricted share units. The 2006 Stock Incentive Plan was superseded in May 2009 by the 2009 Stock Incentive Plan. The 2009 Stock Incentive Plan was superseded in May 2018 by the 2018 Omnibus Incentive Plan. Shares available under the 2018 Omnibus Incentive Plan are reduced by one share for each share issued pursuant to the exercise of a stock option and by two shares for each share issued pursuant to a full-value award (e.g., restricted stock unit or performance-based restricted share unit).
(b) Excludes restricted stock units and performance-based restricted share units which have a weighted average exercise price of zero.
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The information set forth in Note 2 to the Consolidated Financial Statements contained in this Form 10-K provides further information with respect to the material features of each plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions “Corporate Governance – Director Independence and Board Operations” and “Related Party Transactions” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 6, 2021, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information set forth under the caption “Item 2 – Ratification of Reappointment of Independent Registered Public Accounting Firm” in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 6, 2021, is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
See Consolidated Financial Statements under Item 8 on pages 46 through 79 of this Form 10-K.
(a) (2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, are inapplicable or the information is included in the Consolidated Financial Statements and, therefore, have been omitted.
(a) (3) Exhibits
The exhibits listed in the Index to Exhibits, which appears on pages 83 through 87 of this Form 10-K, are incorporated herein by reference or filed as part of this Form 10-K.
Item 16. Form 10-K Summary
None.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TRACTOR SUPPLY COMPANY | |||||||||||
| Date: | February 18, 2021 | By: | /s/ Kurt D. Barton Executive Vice President – Chief Financial Officer and Treasurer | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature | Title | Date | |||||||||
/s/ Kurt D. Barton Kurt D. Barton | Executive Vice President – Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | February 18, 2021 | |||||||||
/s/ Harry A. Lawton III Harry A. Lawton III | President, Chief Executive Officer, and Director (Principal Executive Officer) | February 18, 2021 | |||||||||
/s/ Cynthia T. Jamison Cynthia T. Jamison | Chairman of the Board | February 18, 2021 | |||||||||
/s/ Joy Brown Joy Brown | Director | February 18, 2021 | |||||||||
/s/ Ricardo Cardenas Ricardo Cardenas | Director | February 18, 2021 | |||||||||
/s/ Denise L. Jackson Denise L. Jackson | Director | February 18, 2021 | |||||||||
/s/ Thomas A. Kingsbury Thomas A. Kingsbury | Director | February 18, 2021 | |||||||||
/s/ Ramkumar Krishnan Ramkumar Krishnan | Director | February 18, 2021 | |||||||||
George MacKenzie | Director | February 18, 2021 | |||||||||
/s/ Edna K. Morris Edna K. Morris | Director | February 18, 2021 | |||||||||
/s/ Mark J. Weikel Mark J.Weikel | Director | February 18, 2021 | |||||||||
82
EXHIBIT INDEX
| 1.1 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | Form of Specimen Certificate representing the Company’s Common Stock, par value $.008 per share (filed as Exhibit 4.2 to Amendment No. 1 to Registrant’s Registration Statement on Form S-1, Registration No. 33-73028, filed in paper form with the Commission on January 31, 1994, and incorporated herein by reference). | |||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
| 4.6* | ||||||||
| 10.1 | Certificate of Insurance relating to the Medical Expense Reimbursement Plan of the Company (filed as Exhibit 10.33 to Registrant’s Registration Statement on Form S-1, Registration No. 33-73028, filed in paper form with the Commission on December 17, 1993, and incorporated herein by reference). | |||||||
| 10.2 | Summary Plan Description of the Executive Life Insurance Plan of the Company (filed as Exhibit 10.34 to Registrant’s Registration Statement on Form S-1, Registration No. 33-73028, filed in paper form with the Commission on December 17, 1993, and incorporated herein by reference).+ | |||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
83
| 10.9 | ||||||||
| 10.10 | ||||||||
| 10.11 | ||||||||
| 10.12 | ||||||||
| 10.13 | ||||||||
| 10.14 | ||||||||
| 10.15 | ||||||||
| 10.16 | ||||||||
| 10.17 | ||||||||
| 10.18 | ||||||||
| 10.19 | ||||||||
| 10.20 | ||||||||
| 10.21 | ||||||||
| 10.22 | ||||||||
| 10.23 | ||||||||
| 10.24 | ||||||||
| 10.25 | ||||||||
84
| 10.26 | ||||||||
| 10.27 | ||||||||
| 10.28 | ||||||||
| 10.29 | ||||||||
| 10.30 | ||||||||
| 10.31 | ||||||||
| 10.32 | ||||||||
| 10.33 | ||||||||
| 10.34 | ||||||||
| 10.35 | ||||||||
| 10.36 | ||||||||
| 10.37 | ||||||||
| 10.38 | ||||||||
| 10.39 | ||||||||
| 10.40 | ||||||||
| 10.41 | Second Amended and Restated Employment Agreement, dated August 22, 2019, by and between Tractor Supply Company and Gregory A. Sandfort (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K/A, filed with the Commission on August 23, 2019, Commission File No. 000-23314, and incorporated herein by reference).+ | |||||||
| 10.42 | ||||||||
| 10.43 | ||||||||
85
| 10.44 | ||||||||
| 10.45 | ||||||||
| 10.46 | ||||||||
| 10.47 | ||||||||
| 10.48 | ||||||||
| 10.49 | ||||||||
| 10.50 | ||||||||
| 10.51 | ||||||||
| 10.52 | ||||||||
| 10.53 | ||||||||
| 10.54 | ||||||||
| 10.55 | ||||||||
| 10.56 | ||||||||
| 10.57 | ||||||||
| 10.58 | ||||||||
86
| 10.59* | ||||||||
| 10.60* | ||||||||
| 10.61* | ||||||||
| 21* | ||||||||
| 23* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32* | ||||||||
101* The following financial information from our Annual Report on Form 10-K for fiscal 2020, filed with the SEC on February 18, 2021, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets at December 26, 2020 and December 28, 2019, (ii) the Consolidated Statements of Income for the fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018, (iii) the Consolidated Statements of Comprehensive Income for the fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018, (iv) the Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018, (v) the Consolidated Statements of Cash Flows for the fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018, and (vi) the Notes to Consolidated Financial Statements.
104 The cover page from the Company's Annual Report on Form 10-K for the year ended December 26, 2020, formatted in Inline XBRL (included in Exhibit 101).
* Filed herewith
+ Management contract or compensatory plan or arrangement
87