Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 29, 2007
or
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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)
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Delaware
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13-3139732 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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200 Powell Place, Brentwood, Tennessee
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37027 |
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Address of principal executive offices
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Zip Code |
Registrants telephone number, including area code (615) 440-4000
Securities Registered Pursuant to Section 12(g) of the Act: None
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, $.008 par value
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NASDAQ Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act
YES o NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer; a
non-accelerated filer; or a smaller reporting company. See definitions of large accelerated
file, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange At (Check
one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
YES o NO þ
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on
the closing price of the Common Stock on The NASDAQ Global Select Market on June 29, 2007, the last
business day of the registrants most recently completed second fiscal quarter, was $1,701,359,547.
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 the affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrants classes of common stock as of
the latest practicable date.
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Class |
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Outstanding at January 26, 2008 |
Common Stock, $.008 par value
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37,528,371 |
Documents Incorporated by Reference:
Portions of the Registrants definitive Proxy Statement for its 2008 Annual Meeting of Shareholders
are incorporated by reference into Part III hereof.
TRACTOR SUPPLY COMPANY
INDEX
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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 general economic cycles
affecting consumer spending, weather factors, operating factors affecting customer satisfaction,
consumer debt levels, inflation, pricing and other competitive factors, the ability to attract,
train and retain qualified employees, the ability to manage growth and identify suitable locations
and negotiate favorable lease agreements on new and relocated stores, the timing and acceptance of
new products in the stores, the mix of goods sold, the continued availability of favorable credit
sources, capital market conditions in general, the ability to increase sales at existing stores,
the ability to retain vendors, reliance on foreign suppliers, management of our information systems
and the seasonality of our business 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.
ii
PART I
Item 1. Business
Overview
Tractor Supply Company is the largest operator of retail farm and ranch stores in the United States
and is focused on supplying the lifestyle needs of recreational farmers and ranchers and those who
enjoy the rural lifestyle, as well as tradesmen and small businesses. We operate retail stores
under the names Tractor Supply Company and Dels Farm Supply and operate a website under the name
TractorSupply.com. References to our website do not constitute incorporation by reference of the
information contained on the website. Our stores are located in towns outlying major metropolitan
markets and in rural communities and offer the following comprehensive selection of merchandise:
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Equine, pet and animal products, including items necessary for their health, care,
growth and containment |
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Maintenance products for agricultural and rural use |
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Hardware and tool products |
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Seasonal products, including lawn and garden power equipment |
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Truck and towing products, and |
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Work/recreational clothing and footwear for the entire family. |
Our Tractor Supply stores typically range in size from 15,500 square feet to 18,500 square feet of
inside selling space and additional outside selling space. We are developing stores using one of
five standard prototypes as well as existing building structures.
Our wholly-owned subsidiary, Dels Farm Supply, LLC (Dels), operates 23 stores, primarily in the
Pacific Northwest, that offer a wide selection of products (primarily in the equine, pet and animal
category) tailored to those who enjoy the rural lifestyle. Dels stores currently range in size
from approximately 1,500 to 5,000 square feet of inside selling space plus additional outside and
covered/sheltered selling space.
Tractor Supply Company has one reportable industry segment farm and ranch retail sales, both at
our retail locations and online.
At December 29, 2007, we operated 764 retail farm and ranch stores in 43 states.
Seasonality and Weather
Our business is highly seasonal. Historically, our sales and profits have been the highest in the
second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable
weather, excessive precipitation, natural disasters, drought, and early or late frosts may also
affect our sales. We believe, however, that the impact of severe weather conditions is somewhat
mitigated by the geographic dispersion of our stores.
We experience our highest inventory and accounts payable levels during the first fiscal quarter
each year for purchases of seasonal products in anticipation of the spring selling season and again
during the third fiscal quarter in anticipation of the winter selling season.
Business Strategy
We believe our sales and earnings growth is a result of focused execution of our business strategy,
which includes the following key components:
Market Niche
We have identified a specialized market niche: supplying the lifestyle needs of
recreational farmers and ranchers and those who enjoy the rural lifestyle (which we
refer to as the Out Here lifestyle), as well as tradesmen and small businesses.
By focusing our product mix on these core customers, we believe we are
differentiated from general merchandise, home center and other specialty retailers.
1
Customer Service
We are committed to providing our customers a high level of in-store service through
our motivated, well-trained store employees. We believe the ability of our store
employees to provide friendly, responsive and seasoned advice helps to promote
strong customer loyalty and repeat shopping. As such, we seek to provide our store
employees with decision-making authority, product knowledge and training to enable
them to meet our customers needs.
We endeavor to staff our stores with courteous, highly motivated employees and
devote considerable resources to training store employees, often in cooperation with
our vendors. Our training programs include (i) a full management training program
which covers all aspects of our operations, (ii) product knowledge modules produced
in conjunction with key vendors, (iii) frequent management skills training classes,
(iv) semi-annual store manager meetings with vendor product presentations, (v)
vendor sponsored in-store training programs and (vi) ongoing product information
updates from our management headquarters, the Store Support Center. We seek to hire
and train store employees with farming and ranching backgrounds, with particular
emphasis on general maintenance, equine and welding.
In fiscal 2007, we established our first online shopping site, TractorSupply.com.
The availability of many of our products online provides our customers the ability
to purchase products and have them shipped to their homes or offices. This
capability further enhances customer service and extends our market to areas where
retail stores are not currently located.
We offer proprietary, private label credit cards for individual retail and business
customers. In addition, we accept cash, checks, debit cards, Visa, MasterCard and
Discover credit cards and gift cards.
Store Environment
Our stores are designed and managed to make shopping an enjoyable experience and to
maximize sales and operating efficiencies. Stores utilize several layouts, designed
to provide an open environment, optimal product placement and visual display
locations. In addition, these layouts allow for departmental space to be easily
reallocated and visual displays to be easily changed for seasonal products and
promotions. Display and product placement information is sent to stores monthly to
ensure quality and uniformity among the stores. Informative signs are located
throughout each store to assist customers with purchasing decisions and merchandise
location by comparison of good, better, best qualities, clear pricing and useful
information regarding product benefits and suggestions for appropriate accessories.
The general uniformity of our store layouts and visual displays afford our customers
a feeling of familiarity and enhances the shopping experience. To further enhance
the shopping experience, all of our store employees wear highly visible red vests,
aprons or smocks and nametags, and our customer service and checkout counters are
conveniently located.
Merchandising
We offer a differentiated assortment of products for our customers. Our broad
product assortment is tailored to meet the regional and geographic needs of our
markets, as well as the physical store size. Our full line of product offerings is
supported by a strong in-stock inventory position with an average of 13,500 to
15,000 unique products per store. No one product accounted for more than 10% of our
sales during 2007.
Our stores carry a wide selection of high quality, nationally recognized, name brand
merchandise. We also market a growing list of products under our private-label
programs, i.e. products manufactured by a number of vendors at our direction and
specifically for our sole benefit. The trademarks in the private label brand names
are owned by us with the exception of a very limited number of brands over which we
have sole control but have not yet opted to own. Our private label brands include:
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Masterhand (tools and tool chests) |
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Job Smart (hardware and tools) |
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Ranch Hand (hand and garden tools) |
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Dumor and Producers Pride (livestock feed) |
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Retriever and Paws n Claws (pet foods) |
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Royal Wing (bird feeding supplies) |
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Milepost (Equine Products) |
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Groundworks (lawn and garden supplies) |
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Harvest Supreme (agricultural products) |
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Huskee (outdoor power equipment) |
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Minot (lawn and garden tractors) |
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Countyline (livestock, farm and ranch equipment) |
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Traveller (truck/automotive products) |
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C.E. Schmidt (apparel and footwear) |
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Red Shed (gifts and collectibles) |
Additionally, we have access to control brands which we market. These control
brands include Morgan Creek (lifestyle clothing) and Farm Hand (air compressors).
We believe that the availability of top quality private label products at great
prices provides superior value for our customers, a strategic advantage for us, and
positions us as a destination store.
The following chart indicates the average percentages of sales represented by each
of our major product categories during fiscal 2007, 2006 and 2005.
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Percent of Sales |
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2007 |
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2006 (a) |
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Livestock and Pet |
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33 |
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Seasonal Products |
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26 |
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26 |
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Hardware and Tools |
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15 |
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15 |
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Clothing and Footwear |
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10 |
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Truck and Towing |
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9 |
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10 |
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Agriculture |
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7 |
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7 |
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7 |
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100 |
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(a) |
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Reclassified to conform with current year presentation. |
Purchasing and Distribution
We offer a differentiated assortment of products for those seeking to enjoy the Out
Here lifestyle. Our business is not dependent upon any one vendor or particular
group of vendors. We purchase our products from a core group of approximately 850
vendors, with no one vendor representing more than 10% of our purchases during
fiscal 2007. Approximately 200 vendors accounted for approximately 80% of our
purchases during fiscal 2007. 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
substantially all of our products. We have no material long-term contractual
commitments with any of our vendors.
We maintain a dedicated supply chain management team to focus exclusively on all
replenishment and forecasting functions. This centralized direction permits our
buying teams to focus more strategic attention toward vendor line reviews,
assortment planning and testing of new products and programs. Through the combined
efforts of these teams, we expect to improve overall inventory productivity and
in-stock position.
Over 98% of our purchase orders are transmitted through an electronic data
interchange (EDI) system, and approximately 91% of merchandise vendor invoices are
transmitted through EDI. We are expanding the percentage of vendors who
electronically transmit invoices and increasing the amount of sales history
transmitted.
3
We currently operate a distribution network for supplying our stores with
merchandise and in fiscal 2007 our stores received approximately 78% of our
merchandise through this network. Our six distribution centers are located in
Indiana, Georgia, Maryland, Texas, Nebraska, and Washington, representing total
distribution capacity of 2.6 million square feet. This capacity increased by
approximately 145,000 square feet in 2007 due to an expansion of our Georgia
distribution center and relocation of our Washington distribution center. In 2008,
we have begun planning a 347,000 square foot expansion of our Waco, Texas
distribution facility. As we continue to expand in the western U.S., we expect to
establish facilities in that general area to support growth and further leverage
transportation and distribution costs.
We manage our inbound and outbound transportation activity in-house through the use
of a web-based transportation management system. We outsource the management of our
dedicated fleets to two third-party logistics providers and utilize several common
carriers as required. The third-party logistics providers are responsible for
providing drivers and tractors dedicated to transporting merchandise for us. We
endeavor to control our transportation costs through the monitoring of
transportation routes, scheduling of deliveries, backhauls and optimal utilization
of the dedicated fleet of trucks and trailers.
Marketing
We utilize an everyday low prices strategy to consistently offer our products at
competitive prices complimented by promotions to enhance peak selling seasons. We
regularly monitor prices at competing stores and adjust our prices as we deem
appropriate. We believe that by avoiding a sale-oriented marketing strategy, we
attract customers on a regular basis rather than only in response to promotional
sales.
To generate store traffic and position ourselves as a destination store, we promote
broad selections of merchandise, primarily advertised at our regular everyday low
price, with printed color circulars. We also run periodic special events promoted
through circulars and direct mail advertising. We supplement our print marketing
programs and further position our brand with national cable and local television
advertising in select markets. Due to the geographic dispersion of our stores, the
use of national cable advertising is generally more cost-effective and additionally
serves to promote our stores prior to entering a new market.
Due to the relatively small size of our stores, increased traffic in the store
ensures increased exposure to our products. Our vendors are committed to helping us
promote our brand and position ourselves as a destination store. Our vendors
provide assistance with product presentation and rack design, brochures,
point-of-purchase materials for customers education and product education for our
employees. We also receive funding through contributions and incentives on
purchases to promote new and relocated stores and earn rebates from vendors on
product purchases based on volume.
Competition
We operate in a very competitive market. The principal competitive factors include
location of stores, price and quality of merchandise, in-stock consistency,
merchandise assortment and presentation and customer service. We compete with
general merchandise retailers, home center retailers and other specialty and
discount retailers, as well as independently owned retail farm and ranch stores,
numerous privately-held regional farm store chains and farm cooperatives. Some of
these competitors are units of national or regional chains and may have
substantially greater resources and financial capacities than we do. However, we
believe we have successfully differentiated ourselves from these entities by
focusing on our specialized market niche.
Management and Employees
As of December 29, 2007, we employed approximately 6,900 full-time and approximately
4,700 part-time employees. We also employ additional part-time employees during peak
periods. We are not party to any collective bargaining agreements.
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Our store operations are organized by location into seven regions. Each region is
led by a regional manager and the region is further organized into districts, which
are led by a district manager. Our regional and district managers, store managers
and other distribution and support personnel have contributed significantly to our
performance. We have an internal advisory board comprised of store managers. This
group brings a grassroots perspective to operational initiatives and generates
chain-wide endorsement of proposed best-practice solutions. We have implemented
numerous best practice teams (comprised of employees from all areas of our
operations) to evaluate our key operations and recommend process changes that will
both improve efficiency and strengthen controls. Our management encourages the
participation of all employees in decision-making, regularly solicits input and
suggestions from our employees and responds to the suggestions. Additionally, we
are committed to a continuous improvement program called Tractor Value System
(TVS). TVS is a commitment to provide, through team member engagement, a business
management system that emphasizes continuous improvement by embracing change of
current practices to reduce cost, shorten lead times, and drive innovation.
All of our employees participate in one of various incentive programs, which provide
the opportunity to receive additional compensation based upon team and/or Company
performance. We also provide our employees the opportunity to participate in an
employee stock purchase plan and a 401(k) retirement plan (we contribute to the
401(k) plan solely through a cash match). Additionally, we share in the cost of
health insurance provided to our employees, and employees receive a discount on
merchandise purchased at our stores.
We encourage a promote from within environment when internal resources permit. We
also provide internal leadership development programs designed to mentor our high
potential employees for continued progress and believe we have satisfactory
relationships with our employees. Our district managers and store managers have an
average length of service of approximately five years. Management believes internal
promotions, coupled with the hiring of individuals with previous retail experience,
will provide the management structure necessary to support our planned store growth.
Management Information and Control Systems
We have invested considerable resources in our management information and control
systems to ensure superior customer service, manage the purchase and distribution of
our merchandise and improve our operating efficiencies. Our management information
and control systems include a point-of-sale system, a supply chain management and
replenishment system, a radio frequency picking system in the distribution centers,
a vendor purchase order control system and a merchandise presentation system. These
systems are integrated through an enterprise resource planning (ERP) system. This
ERP system tracks merchandise from initial order through ultimate sale and
interfaces with our financial systems.
We continue to evaluate and improve the functionality of our systems to maximize
their effectiveness. Such efforts include an ongoing evaluation of the optimal
software configuration (including system enhancements and upgrades) as well as the
adequacy of the underlying hardware components. These efforts are directed toward
constantly improving the overall business processes and achieving the most efficient
and effective use of the systems to manage our operations.
Growth Strategy
Our current and long-term growth strategy is to (1) expand geographic market presence through
opening new retail stores, (2) enhance financial performance through same-store sales increases,
achieved through targeted merchandising programs with an everyday low prices philosophy and
supported by strong customer service, (3) enhance product margin through assortment management,
vendor management, sourcing and optimization of transportation and distribution costs, (4)
leverage operating costs, especially occupancy, advertising and distribution, (5) expand market
opportunities via internet sales, and (6) expand through selective acquisition, as such
opportunities arise, to enhance penetration into new and existing markets as a complementary
strategy to organic growth.
We have experienced considerable sales growth over the last five years, with a compounded annual
growth rate of approximately 17.4%. We plan to continue our growth strategy, which anticipates an
annual increase in our unit count
of approximately 13%. This growth has expanded our market presence to 764 retail stores in 43
states. We believe this unit count increase will contribute substantially to our future growth. We
have also relocated 83 stores since 2002, which enabled us to keep much of our existing loyal
customer base but expand our overall reach to new customers, thereby growing the business. We
believe we have developed a proven method for selecting store sites and have identified over 650
potential additional markets for new Tractor Supply stores (excluding Dels) in the United States.
We continue to develop our site selection methodology for the Dels concept, which includes tests
in markets of varying size and demographics.
5
We expect to open approximately 95 to 100 stores (including eight to 10 Dels stores) in fiscal
2008.
The average estimated net cash investment required to open a new leased retrofit or prototype store
in fiscal 2007 was between $0.8 to $1.4 million and $0.7 to $0.9 million, respectively. A majority
of the cash outlay was for initial acquisition of inventory and capital expenditures (principally
leasehold improvements, fixtures and equipment), and approximately $95,000 for pre-opening costs.
Additional Information
We file reports with the Securities and Exchange Commission (SEC), including Annual Reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports as
required. The public may read and copy any materials the Company files with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We
are an electronic filer and the SEC maintains an Internet site at sec.gov that contains the
reports, proxy and information statements, and other information filed electronically.
We make available free of charge through our Internet website, TractorSupply.com, our Annual Report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to
those reports as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC. The information provided on our website is not part of this report, and is
therefore not incorporated by reference unless such information is otherwise specifically
referenced elsewhere in this report.
Our code of ethics, which is applicable to all of our employees, including our Chief Executive
Officer, Chief Financial Officer and Controller, along with our Corporate Governance Guidelines and
the charters of our Audit, Compensation, Corporate Governance and Nominating Committees of our
Board of Directors, is posted on our website.
Item 1A. Risk Factors
Our business faces many risks. These risks include those described below and may include
additional risks and uncertainties not presently known to us or that we currently deem immaterial.
If any of the events or circumstances described in the following risk factors occur, our business,
financial condition or results of operations may suffer, and the trading price of our common stock
could decline. These risk factors should be read in conjunction with the other information in this
Form 10-K.
General
economic conditions may adversely affect our financial
performance.
Our results of operations may be sensitive to changes in overall economic conditions that impact
consumer spending, including discretionary spending. Future economic conditions affecting
disposable consumer income such as employment levels, business conditions, interest rates, tax
rates, fuel and energy costs, higher labor and healthcare costs, the impact of natural disasters or
acts of terrorism, and other matters could reduce consumer spending or cause consumers to shift
their spending to lower-priced competitors. A general reduction in the level of discretionary
spending or shifts in consumer discretionary spending to our competitors could adversely affect our
growth and profitability. Additionally, changes in the mix of products sold to a mix with a lower
overall gross margin or other increased cost of sales, along with slower inventory turnover and
greater markdowns on inventory, could adversely affect our operations and operating results.
Inflationary pressures, including rising energy prices, may adversely affect our financial
performance.
Although we cannot determine the full effect of inflation on our operations, we believe our sales
and results of operations have been affected by inflation. We are subject to market risk with
respect to the pricing of certain products
and services, which include, among other items, steel, grain, petroleum, corn, soybean and other
commodities as well as transportation services. Moreover, in the last few years, energy prices
have risen dramatically, which has resulted in increased fuel costs for our business and utility
costs for our stores. We have been successful in reducing or mitigating the effects of inflation,
principally through selective buying from the most competitive vendors and by increasing retail
prices. However, there is no assurance that we will be successful in reducing or mitigating the
effect of inflation in the future.
6
There is no assurance that we will be able to continue to increase sales at our existing stores.
We experience fluctuations in our same-store sales, which are defined as stores which have
completed twelve months of sales, excluding relocated stores. Our success depends, in part, upon
our ability to improve sales at our existing stores. Various factors affect same-store sales,
including the general retail sales environment, our ability to efficiently source and distribute
products, changes in our merchandise mix, competition, current economic conditions, the timing of
release of new merchandise and promotional events, the success of marketing programs and weather
conditions. These factors may cause our same-store sales results to differ materially from prior
periods and from expectations. Past same-store sales are not necessarily an indication of future
results, and there can be no assurance that our same-store sales will not decrease in the future.
Any failure to meet the same-store sales expectations of investors and security analysts in one or
more future periods could adversely affect our results of operations and result in a reduction in
the market price of our common stock.
Our failure to effectively manage growth could impair our business.
Even if we are able to implement, to a significant degree, our key business strategy of expanding
our store base, we may experience managerial or operational problems, which may prevent any
significant increase in profitability or negatively impact our cash flow. To manage our planned
expansion, we must ensure the continuing adequacy of our existing systems, controls and procedures,
including product distribution facilities, store management, financial controls and information
systems. 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.
Capital requirements for growth may not be available.
The construction and opening or acquisition of new stores and the development of new production and
distribution facilities, along with the remodeling and renovation of existing stores, require
significant amounts of capital. In the past, our growth has been funded primarily through bank
borrowings and internally generated cash flow.
Failure to open new stores in the manner currently contemplated could adversely affect our
financial performance.
An integral part of our business strategy includes the expansion of our base of stores by opening
new stores. This expansion strategy is dependent on our ability to find suitable locations, and we
face competition from many retailers for such sites. If we are unable to implement this strategy,
our ability to increase our sales, profitability, and cash flow could be impaired significantly.
To the extent that we are unable to open new stores in the manner we anticipate (due to site
approval or unforeseen delays in construction), our sales growth may be impeded.
New stores may negatively impact our results.
There can be no assurance that our new store openings will be successful or result in greater 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 sales than our more mature stores. As we accelerate our rate
of new store openings, thus increasing the percentage of our sales from new stores and decreasing
the average age of our store base, there may be a negative impact on our results from a lower
contribution of these new stores, along with the impact of related pre-opening costs.
Competition in our industry may hinder our ability to execute our business strategy and adversely
affect our operations.
We operate in a very competitive market. The principal competitive factors include location of
stores, price and quality of merchandise, in-stock consistency, merchandise assortment and
presentation, and customer service. We believe we have successfully differentiated ourselves from
general merchandise, home center retailers and other specialty and discount retailers by focusing
on our specialized market niche. However, we do face competition from these entities, as well as
competition from independently-owned retail farm and ranch stores, several privately-held regional
farm store chains and farm cooperatives. Some of our competitors are units of national or regional
chains that have substantially greater financial and other resources.
Weather conditions may have a significant impact on our financial results.
Historically, weather conditions have had a significant impact on our operating results. Weather
conditions affect the demand for, and in some cases the supply of, products, which in turn has an
impact on prices. In recent years, we have experienced unusually severe weather conditions,
including ice storms, floods and wind damage, hurricanes and droughts in some states. Weather
conditions also directly affect the demand for petroleum products, particularly during the winter
heating season. Accordingly, the weather can have a material effect on our financial condition
and results of operations.
7
There are certain risks associated with the seasonal nature of our business.
Our working capital needs and borrowings generally peak in our first fiscal quarter because lower
sales are generated while expenses are incurred in preparation for the spring selling season. If
cash on hand and borrowings under existing credit facilities are ever insufficient to meet the
seasonal needs or if cash flow generated during the spring and summer is insufficient to repay
associated borrowings on a timely basis, this seasonality could have a material adverse effect on
our business.
There is no assurance that our merchandising initiatives and marketing emphasis will continue.
We believe our past performance has been based on, and future success will depend upon, in part,
the ability to develop and execute merchandising initiatives with effective marketing. There is no
assurance that we will be successful, or that new initiatives will be executed in a timely manner
to satisfy our customers needs or expectations. 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. Additionally, our success depends on
our ability to anticipate and respond in a timely manner to changing customer demand and
preferences for merchandise. If we misjudge the market, we may significantly overstock unpopular
products and be forced to take significant inventory markdowns. Shortages of key items could also
have a materially adverse impact on operating results.
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. All of our
vendors must comply with applicable laws, including labor and environmental laws, and otherwise be
certified as meeting required vendor standards of conduct. 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. We rely on long-term relationships with our suppliers but
have no long-term contracts with such suppliers. Our future success will depend in large measure
upon our ability to maintain our existing supplier relationships or to develop new ones. This
reliance increases the risk of inadequate and untimely supplies of various products due to local
political, economic, social, or environmental conditions, transportation delays, restrictive
actions by foreign governments, or changes in United States laws and regulations affecting imports
or domestic distribution. As an importer, our business is subject to the risks generally
associated with doing business abroad, such as foreign governmental regulations, economic
disruptions, delays in shipments, transportation capacity and costs, currency exchange rates and
changes in political or economic conditions in countries from which we purchase products. If any
such factors were to render the conduct of business in particular countries undesirable or
impractical or if additional United States quotas, duties, taxes or other charges or restrictions
were imposed upon the importation of our products in the future, our financial condition and
results of operations could be materially adversely affected.
Our failure to attract and retain qualified employees could adversely affect our financial
performance.
Our ability to continue expanding operations depends on our ability to attract and retain a large
and growing number of qualified employees. Our ability to meet labor needs while controlling wage
and related labor costs is subject to numerous external factors, including the availability of a
sufficient number of qualified persons in the work force, unemployment levels, prevailing wage
rates, changing demographics, health and other insurance costs and changes in employment
legislation. If we are unable to locate, attract or retain qualified personnel, or if costs of
labor or related costs increase significantly, our financial performance could be adversely
affected.
We may be subject to product liability and other claims in the ordinary course of business.
Our business involves a risk of product liability and other claims in the ordinary course of
business. We maintain general liability insurance with a $250,000 deductible for each occurrence
and a $25,000,000 aggregate retention. We also maintain umbrella limits above the primary general
liability and product liability cover. In many cases, we have indemnification rights against the
manufacturers of the products and their products liability insurance. Our ability to recover under
such insurance or indemnification arrangements is subject to the financial viability of the
insurers and manufacturers and the specific allegations of a claim. We cannot assure that our
insurance coverage or the manufacturers indemnity will be available or sufficient in any claims
brought against us.
Legal proceedings could materially impact our results.
From time to time, we are party to legal proceedings including matters involving personnel and
employment issues, personal injury, intellectual property, and other proceedings arising in the
ordinary course of business. Our results could be materially impacted by the decisions and expenses
related to pending or future proceedings.
8
If we experience difficulties with our management information systems, our financial performance
may be adversely affected.
We depend on management information systems for many aspects of our business. We could be
materially adversely affected if our management information systems are disrupted or if we are
unable to improve, upgrade, maintain and expand systems, particularly in light of the contemplated
continued store growth.
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 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, by changes in the valuation of our deferred tax
assets and liabilities, or by changes in tax laws or interpretations thereof. In addition, we are
subject to periodic audits and examinations by the Internal Revenue Service (IRS) and other state
and local taxing authorities. 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.
Failure of our internal control over financial reporting could materially impact our business and
results.
The Companys 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 29, 2007, we operated 764 stores in 43 states. We lease more than 93% of our stores,
two of our six distribution centers and our management headquarters. Store leases typically have
initial terms of between 10 and 15 years, with two to four renewal periods of five years each,
exercisable at our option. No single lease is material to our operations.
9
Following is a count of our store locations by state:
|
|
|
|
|
|
|
Number |
State |
|
of Stores |
Texas
|
|
|
106 |
|
Ohio
|
|
|
66 |
|
Michigan
|
|
|
57 |
|
Tennessee
|
|
|
49 |
|
New York
|
|
|
43 |
|
Pennsylvania
|
|
|
42 |
|
Indiana
|
|
|
35 |
|
Florida
|
|
|
30 |
|
Georgia
|
|
|
30 |
|
North Carolina
|
|
|
29 |
|
Kentucky
|
|
|
27 |
|
Virginia
|
|
|
24 |
|
Washington
|
|
|
19 |
|
Oklahoma
|
|
|
18 |
|
South Carolina
|
|
|
15 |
|
West Virginia
|
|
|
15 |
|
Wisconsin
|
|
|
13 |
|
California
|
|
|
12 |
|
Alabama
|
|
|
11 |
|
Arkansas
|
|
|
11 |
|
Illinois
|
|
|
11 |
|
Iowa
|
|
|
10 |
|
Kansas
|
|
|
10 |
|
Nebraska
|
|
|
10 |
|
Missouri
|
|
|
9 |
|
Minnesota
|
|
|
8 |
|
Maryland
|
|
|
7 |
|
North Dakota
|
|
|
7 |
|
Louisiana
|
|
|
5 |
|
New Jersey
|
|
|
5 |
|
South Dakota
|
|
|
5 |
|
Connecticut
|
|
|
4 |
|
Mississippi
|
|
|
4 |
|
Vermont
|
|
|
4 |
|
Hawaii
|
|
|
3 |
|
Maine
|
|
|
2 |
|
Massachusetts
|
|
|
2 |
|
Delaware
|
|
|
1 |
|
Montana
|
|
|
1 |
|
New Hampshire
|
|
|
1 |
|
New Mexico
|
|
|
1 |
|
Oregon
|
|
|
1 |
|
Rhode Island
|
|
|
1 |
|
|
|
|
|
|
|
|
|
764 |
|
|
|
|
|
|
Item 3. Legal Proceedings
We are involved in various litigation matters arising in the ordinary course of business. After
consultation with legal counsel, we expect these matters will be resolved without material adverse
effect on our consolidated financial position or results of operations. Any estimated loss related
to such matters has been adequately provided in accrued liabilities to the extent probable and
reasonably estimable. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in circumstances
relating to these proceedings.
10
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our stockholders during the fourth quarter of our fiscal year
ended December 29, 2007.
Executive Officers
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered
item 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 1, 2008.
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 persons
principal occupations and employment during at least the past five years:
|
|
|
|
|
|
|
Name |
|
Position |
|
Age |
|
|
|
James F. Wright
|
|
Chairman of the Board, President and Chief Executive Officer |
|
|
58 |
|
|
|
|
Anthony F. Crudele
|
|
Executive Vice President-Chief Financial Officer and Treasurer |
|
|
51 |
|
|
|
|
Gregory A. Sandfort
|
|
Executive Vice President-Chief Merchandising Officer |
|
|
52 |
|
|
|
|
Stanley L. Ruta
|
|
Executive Vice President-Store Operations |
|
|
56 |
|
|
|
|
Blake A. Fohl
|
|
Senior Vice President-Marketing |
|
|
48 |
|
|
|
|
Kimberly D. Vella
|
|
Senior Vice President-Human Resources |
|
|
41 |
|
James F. Wright has served as Chairman of the Board, President and Chief Executive Officer of the
Company since November 2007, and as President and Chief Executive Officer of the Company since
October 2004. Mr. Wright previously served as President and Chief Operating Officer of the Company
from October 2000 to October 2004. Mr. Wright has served as a director of the Company since 2002.
Anthony F. Crudele has served as Executive Vice President-Chief Financial Officer and Treasurer
since January 2007, after having served as Senior Vice President-Chief Financial Officer and
Treasurer of the Company since November 2005. Mr. Crudele previously served as Chief Financial
Officer at Gibson Guitar from August 2003 to September 2005, as Chief Financial Officer of
Xcelerate Corp. from 2000 to January 2003, and at The Sports Authority from 1989 through 1999
(serving as Chief Financial Officer from 1996 through 1999).
Gregory A. Sandfort has served as Executive Vice President-Chief Merchandising Officer of the
Company since November 2007. Mr. Sandfort previously served as President and Chief Operating
Officer at Michaels Stores, Inc. from March 2006 to August 2007 and as Vice President General
Merchandise Manager at Michaels Stores, Inc. from January 2004 to February 2006. Mr. Sandfort
served as Vice Chairman and Co-Chief Executive Officer of Kleinerts Inc. (d/b/a Buster Brown) from
2002 to 2003 and as a Vice President, General Merchandise Manager for Sears, Roebuck and Co. from
1998 to 2002.
Stanley L. Ruta has served as Executive Vice President-Store Operations since January 2007, after
having served as Senior Vice President-Store Operations since June 2000 and as Vice President-Store
Operations of the Company since 1994.
Blake A. Fohl has served as Senior Vice President-Marketing of the Company since January 2007,
after having served as Vice President-Marketing of the Company since January 1996.
Kimberly D. Vella has served as Senior Vice President-Human Resources of the Company since January
2007, after having served as Vice President-Human Resources of the Company since October 2001.
11
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities |
Tractor Supply Companys common stock trades on The Nasdaq Global Select Market under the symbol
TSCO.
The table below sets forth the high and low sales prices of our common stock as reported by The
Nasdaq Global Select market since August 1, 2006 and by the Nasdaq National Market for the periods
prior to August 1, 2006 for each fiscal quarter of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range |
|
|
|
2007 |
|
|
2006 |
|
|
|
High |
|
Low |
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
54.16 |
|
|
$ |
44.87 |
|
|
$ |
67.59 |
|
|
$ |
48.50 |
|
Second Quarter |
|
$ |
57.70 |
|
|
$ |
49.91 |
|
|
$ |
66.42 |
|
|
$ |
46.15 |
|
Third Quarter |
|
$ |
53.55 |
|
|
$ |
44.20 |
|
|
$ |
55.09 |
|
|
$ |
38.75 |
|
Fourth Quarter |
|
$ |
49.25 |
|
|
$ |
35.29 |
|
|
$ |
54.12 |
|
|
$ |
43.76 |
|
As of January 31, 2008, the approximate number of record holders of our common stock was 150
(excluding individual participants in nominee security position listings), and the estimated number
of beneficial holders of our common stock was 15,000.
Issuer Purchases of Equity Securities
In February 2007, our Board of Directors authorized a share repurchase program which provides for
repurchase of up to $200 million (excluding commissions) of our outstanding common stock over an
approximate three-year period. Stock repurchase activity during fiscal 2007 is set forth in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
Maximum Dollar |
|
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
|
Value of Shares |
|
|
|
Total |
|
|
|
|
|
|
Part of Publicly |
|
|
That May Yet Be |
|
|
|
Number of |
|
|
Average |
|
|
Announced |
|
|
Purchased Under |
|
|
|
Shares |
|
|
Price Paid |
|
|
Plans or |
|
|
the Plans or |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
Programs |
|
|
Programs |
|
First Quarter |
|
|
413,492 |
|
|
$ |
51.59 |
|
|
|
413,492 |
|
|
$ |
178,680,012 |
|
Second Quarter |
|
|
806,100 |
|
|
|
52.58 |
|
|
|
806,100 |
|
|
|
136,316,595 |
|
Third Quarter |
|
|
645,022 |
|
|
|
48.38 |
|
|
|
645,022 |
|
|
|
105,132,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/30/07 10/27/07 |
|
|
187,400 |
|
|
|
45.23 |
|
|
|
187,400 |
|
|
|
96,661,473 |
|
10/28/07 11/24/07 |
|
|
1,014,173 |
|
|
|
40.03 |
|
|
|
1,014,173 |
|
|
|
56,091,046 |
|
11/25/07 12/29/07 |
|
|
150,000 |
|
|
|
40.32 |
|
|
|
150,000 |
|
|
|
50,047,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,351,573 |
|
|
|
40.79 |
|
|
|
1,351,573 |
|
|
|
50,047,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 29, 2007 |
|
|
3,216,187 |
|
|
$ |
46.65 |
|
|
|
3,216,187 |
|
|
$ |
50,047,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to implement the balance of the repurchase program through purchases made from time to
time either in the open market or through private transactions, in accordance with regulations of
the Securities and Exchange Commission.
We have not declared any cash dividends during the two most recent fiscal years. Our Board of
Directors authorized a share repurchase strategy, subject to a number of factors, including price,
corporate and regulatory requirements, capital availability and other market conditions. Any
future declaration of dividends or additional share repurchase programs
will be subject to the discretion of our Board of Directors and subject to our results of
operations, financial condition, cash requirements and other factors deemed relevant by our Board
of Directors.
12
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 28, 2002 to December 29, 2007 (the Companys 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 28, 2002 in our Common Stock and in each of the foregoing
indices. The historical stock price performance shown on this graph is not necessarily indicative
of future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/28/02 |
|
|
12/27/03 |
|
|
12/25/04 |
|
|
12/31/05 |
|
|
12/30/06 |
|
|
12/29/07 |
|
Tractor Supply Company |
|
$ |
100.00 |
|
|
$ |
207.13 |
|
|
$ |
191.07 |
|
|
$ |
281.52 |
|
|
$ |
237.76 |
|
|
$ |
188.04 |
|
S&P 500 |
|
$ |
100.00 |
|
|
$ |
125.19 |
|
|
$ |
138.24 |
|
|
$ |
142.60 |
|
|
$ |
162.02 |
|
|
$ |
168.89 |
|
S&P Retail Index |
|
$ |
100.00 |
|
|
$ |
142.91 |
|
|
$ |
174.03 |
|
|
$ |
174.80 |
|
|
$ |
191.16 |
|
|
$ |
157.05 |
|
13
Item 6. Selected Financial Data
FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
The following selected financial data are derived from the consolidated financial statements of
Tractor Supply Company. 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 2005 consists of 53 weeks while all other fiscal years presented below consist of 52
weeks. The following table provides summary historical financial information for the periods ended
and as of the dates indicated (in thousands, except per share and selected operating data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
2,703,212 |
|
|
$ |
2,369,612 |
|
|
$ |
2,067,979 |
|
|
$ |
1,738,843 |
|
|
$ |
1,472,885 |
|
Gross margin |
|
|
852,708 |
|
|
|
746,146 |
|
|
|
636,631 |
|
|
|
522,573 |
|
|
|
447,120 |
|
Selling, general and administrative expenses |
|
|
641,603 |
|
|
|
555,834 |
|
|
|
466,167 |
|
|
|
393,841 |
|
|
|
329,850 |
|
Depreciation and amortization |
|
|
51,064 |
|
|
|
42,292 |
|
|
|
34,020 |
|
|
|
27,186 |
|
|
|
21,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
160,041 |
|
|
|
148,020 |
|
|
|
136,444 |
|
|
|
101,546 |
|
|
|
95,673 |
|
Interest expense, net |
|
|
5,037 |
|
|
|
2,688 |
|
|
|
1,632 |
|
|
|
1,440 |
|
|
|
3,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and cumulative
effect of accounting change |
|
|
155,004 |
|
|
|
145,332 |
|
|
|
134,812 |
|
|
|
100,106 |
|
|
|
92,229 |
|
Income tax provision |
|
|
58,763 |
|
|
|
54,324 |
|
|
|
49,143 |
|
|
|
36,037 |
|
|
|
34,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting
change |
|
|
96,241 |
|
|
|
91,008 |
|
|
|
85,669 |
|
|
|
64,069 |
|
|
|
57,582 |
|
Cumulative effect of accounting change, net of
income taxes (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
96,241 |
|
|
$ |
91,008 |
|
|
$ |
85,669 |
|
|
$ |
64,069 |
|
|
$ |
55,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic, before cumulative
effect of change in accounting principle
(b) |
|
$ |
2.45 |
|
|
$ |
2.27 |
|
|
$ |
2.19 |
|
|
$ |
1.68 |
|
|
$ |
1.55 |
|
Cumulative effect of accounting change, net of
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic, after cumulative
effect of change in accounting principle |
|
$ |
2.45 |
|
|
$ |
2.27 |
|
|
$ |
2.19 |
|
|
$ |
1.68 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share assuming dilution before
cumulative effect of change in accounting
principle (b) |
|
$ |
2.40 |
|
|
$ |
2.22 |
|
|
$ |
2.09 |
|
|
$ |
1.57 |
|
|
$ |
1.43 |
|
Cumulative effect of accounting change, net of
income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share assuming dilution, after
cumulative effect of change in accounting
principle |
|
$ |
2.40 |
|
|
$ |
2.22 |
|
|
$ |
2.09 |
|
|
$ |
1.57 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares for dilutive
earnings per share |
|
|
40,100 |
|
|
|
41,060 |
|
|
|
40,980 |
|
|
|
40,689 |
|
|
|
40,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data (percent of net sales): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
31.5 |
% |
|
|
31.5 |
% |
|
|
30.8 |
% |
|
|
30.1 |
% |
|
|
30.4 |
% |
Selling, general and administrative expenses |
|
|
23.7 |
% |
|
|
23.5 |
% |
|
|
22.6 |
% |
|
|
22.7 |
% |
|
|
22.4 |
% |
Income from operations |
|
|
5.9 |
% |
|
|
6.2 |
% |
|
|
6.6 |
% |
|
|
5.8 |
% |
|
|
6.5 |
% |
Net income before cumulative effect of change
in accounting principle |
|
|
3.6 |
% |
|
|
3.8 |
% |
|
|
4.1 |
% |
|
|
3.7 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
676 |
|
|
|
595 |
|
|
|
515 |
|
|
|
463 |
|
|
|
433 |
|
New stores opened |
|
|
89 |
|
|
|
82 |
|
|
|
65 |
|
|
|
53 |
|
|
|
31 |
|
New stores acquired |
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
Closed/sold stores |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
|
764 |
|
|
|
676 |
|
|
|
595 |
|
|
|
515 |
|
|
|
463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Number of stores relocated during year |
|
|
12 |
|
|
|
15 |
|
|
|
18 |
|
|
|
20 |
|
|
|
18 |
|
Number of stores remodeled (c) |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
5 |
|
|
|
3 |
|
Capital expenditures (d) |
|
$ |
83,986 |
|
|
$ |
90,565 |
|
|
$ |
78,835 |
|
|
$ |
92,989 |
|
|
$ |
49,982 |
|
Same-store sales increase (e) |
|
|
3.4 |
% |
|
|
1.6 |
% |
|
|
5.7 |
% |
|
|
9.9 |
% |
|
|
7.0 |
% |
Average sales per store (000s) (f) |
|
$ |
3,762 |
|
|
$ |
3,699 |
|
|
$ |
3,772 |
|
|
$ |
3,568 |
|
|
$ |
3,255 |
|
Average transaction value |
|
$ |
43.60 |
|
|
$ |
43.12 |
|
|
$ |
42.03 |
|
|
$ |
39.83 |
|
|
$ |
38.05 |
|
Average number of daily transactions per store |
|
|
239 |
|
|
|
238 |
|
|
|
245 |
|
|
|
248 |
|
|
|
237 |
|
Total employees |
|
|
11,600 |
|
|
|
9,800 |
|
|
|
8,700 |
|
|
|
7,200 |
|
|
|
6,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at end of period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
312,068 |
|
|
$ |
316,104 |
|
|
$ |
240,732 |
|
|
$ |
219,326 |
|
|
$ |
181,225 |
|
Total assets (g) |
|
|
1,057,971 |
|
|
|
998,258 |
|
|
|
803,176 |
|
|
|
661,575 |
|
|
|
527,944 |
|
Long-term debt, less current portion (h) |
|
|
57,351 |
|
|
|
2,808 |
|
|
|
10,739 |
|
|
|
34,744 |
|
|
|
21,210 |
|
Stockholders equity |
|
|
565,337 |
|
|
|
598,904 |
|
|
|
477,698 |
|
|
|
370,584 |
|
|
|
290,991 |
|
In fiscal 2006, we adopted Statement of Financial Accounting Standards (SFAS) 123(R) which
lowered pre-tax income by $10.6 million and $9.7 million for 2007 and 2006, respectively. Net
income was lowered by $6.6 million and $6.1 million for 2007 and 2006, respectively.
|
|
|
(a) |
|
The Company adopted Emerging Issues Task Force No. 02-16 (EITF 02-16) which changed its
method of accounting for consideration received from vendors whereby such consideration is
considered a reduction of inventory cost as opposed to a reduction of selling, general and
administrative costs. As a result, the Company recorded a non-cash charge of $1.9 million,
net of income tax, in the first quarter of fiscal 2003 for the cumulative effect of the change
on fiscal years prior to fiscal 2003. |
|
(b) |
|
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 options and warrants. All share and per share data have been
adjusted for stock splits. |
|
(c) |
|
Reflects remodelings costing more than $150,000. |
|
(d) |
|
Includes assets acquired through capital leases. |
|
(e) |
|
Same-store sales increases are calculated on an annual basis, excluding relocations, using
all stores open at least one year. |
|
(f) |
|
Average sales per store calculated based on the weighted average number of days open in the
applicable period. |
|
(g) |
|
Total assets have been restated to reflect cash held in our bank concentration account as a
reduction of book overdraft balances. |
|
(h) |
|
Long-term debt includes borrowings under the Companys revolving credit agreement and term
loan agreement and amounts outstanding under its capital lease obligations, excluding the
current portions of each. |
15
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Tractor Supply Company is the largest operator of retail farm and ranch stores in the United States
and is focused on supplying the lifestyle needs of recreational farmers and ranchers and of those
who enjoy the rural lifestyle, as well as tradesmen and small businesses. Our stores are located in
towns outlying major metropolitan markets and in rural communities and offer the following
comprehensive selection of merchandise:
|
|
|
Equine, pet and animal products, including items necessary for their health, care,
growth and containment |
|
|
|
|
Maintenance products for agricultural and rural use
|
|
|
|
|
Hardware and tool products |
|
|
|
|
Seasonal products, including
lawn and garden power equipment |
|
|
|
|
Truck and towing products, and |
|
|
|
|
Work/recreational clothing and footwear for the entire family. |
Tractor Supply Company stores typically range in size from 15,500 to 18,500 square feet of inside
selling space plus additional outside selling space. We are developing stores using one of five
standard prototypes as well as existing building structures. Our wholly-owned subsidiary, Dels
Farm Supply, LLC (Dels), operates 23 stores, primarily in the Pacific Northwest, that offer a
wide selection of products (primarily in the equine, pet and animal category) tailored to those who
enjoy the rural lifestyle. Dels stores currently range in size from approximately 1,500 to 5,000
square feet of inside selling space plus additional outside and covered/sheltered selling space.
Our current and long-term growth strategy is to (1) expand geographic market presence through
opening new retail stores, (2) enhance financial performance through same-store sales increases,
achieved through aggressive merchandising programs with an everyday low prices philosophy and
supported by strong customer service, (3) enhance product margin through assortment management,
vendor management, sourcing and optimization of transportation and distribution costs, (4)
leverage operating costs, especially occupancy, advertising and distribution, (5) expand market
opportunities via internet sales, and (6) expand through selective acquisition, as such
opportunities arise, to enhance penetration into new and existing markets as a complimentary
strategy to organic growth.
We have experienced considerable sales growth over the last five years, with a compounded annual
growth rate of approximately 17.4%. We plan to continue this growth strategy with an annual
projected increase in our unit count of approximately 13%. This growth has expanded our market
presence to 764 stores in 43 states. We believe this unit count increase will contribute
substantially to our future growth. The acquisition of Dels enabled us to establish an initial
presence in the Pacific Northwest, primarily in Washington, with three additional stores in Hawaii.
We operated 764 retail farm and ranch stores as of December 29, 2007 and have plans to open 95 to
100 stores (including eight to 10 Dels stores) in fiscal 2008. We have developed a proven method
for selecting store sites and have identified over 650 potential additional markets for new Tractor
Supply stores (excluding Dels) in the United States.
We have placed significant emphasis on our merchandising programs, evaluating the sales and
profitability of our products through detailed line reviews, review of vendor performance measures
and modification of the overall product offerings. These efforts, coupled with a strong marketing
program and in-depth product knowledge training of our store employees, have enhanced our sales and
financial performance.
Seasonality and Weather
Our business is highly seasonal. Historically, our sales and profits have been the highest in the
second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable
weather, excessive precipitation, natural disasters, drought, and early or late frosts may also
affect our sales. We believe, however, that the impact of adverse weather conditions is somewhat
mitigated by the geographic dispersion of our stores.
We experience our highest inventory and accounts payable levels during our first fiscal quarter
each year for purchases of seasonal product in anticipation of the spring selling season and again
during our third fiscal quarter in anticipation of the winter selling season.
16
Inflation
Although we cannot determine the full effect of inflation on our operations, we believe our sales
and results of operations are affected by inflation. We are subject to market risk with respect to
the pricing of certain products and services, which include, among other items, steel, grain,
petroleum, corn, soybean and other commodities as well as transportation services. Moreover, in
the last few years, energy prices have risen dramatically, which has resulted in increased fuel
costs for our business and utility costs for our stores. We have been successful in reducing or
mitigating the effects of inflation, principally through selective buying from the most competitive
vendors and by increasing retail prices. However, there is no assurance that we will be successful
in reducing or mitigating the effect of inflation in the future.
Significant Accounting Policies and Estimates
Managements discussion and analysis of our financial position and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with United
States generally accepted accounting principles. The preparation of these financial statements
requires management to make informed estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent assets and
liabilities. Our financial position and/or results of operations may be materially different when
reported under different conditions or when using different assumptions in the application of such
policies. In the event estimates or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information. Our significant
accounting policies are disclosed in Note 1 to our Consolidated Financial Statements. The
following discussion addresses our most critical accounting policies, which are those that are both
important to the portrayal of our financial condition and results of operations and that require
significant judgment or use of complex estimates.
Revenue Recognition
and Sales Returns:
We recognize
revenue at the
time the
customer takes
possession of
merchandise or
receives
services. If we
receive payment
before the
customer has
taken possession
of the
merchandise (as
per our layaway
program), the
revenue is
deferred until
the sale is
complete.
Revenues from
the sale of gift
cards are
deferred and
recognized upon
redemption.
Judgments and Uncertainties
We estimate a liability
for sales returns based on
a one-year rolling average
of historical return
trends and we believe that
our estimate for sales
returns is an accurate
reflection of future
returns associated with
past sales. Our
estimation methodologies
have been consistently
applied from year to year,
however, as with any
estimates, refunds
activity may vary from
estimated amounts.
We recognize a benefit for
gift cards when: (i) the
gift card or merchandise
return card is redeemed by
the customer; or (ii) the
likelihood of the gift
card being redeemed by the
customer is remote
(referred to as
breakage) or (iii) the
unredeemed merchandise
returns cards expire (one
year from issuance). The
gift card breakage rate is
based upon historical
redemption patterns and a
benefit is recognized for
unredeemed gift cards in
proportion to those
historical redemption
patterns.
Effect if Actual Results Differ From
Assumptions
We have not made any
material changes in the
accounting methodology used
to recognize sales returns
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 sales returns or
gift card breakage.
However, if actual consumer
return or gift card
redemption patterns are not
consistent with our
estimates or assumptions,
we may be exposed to losses
or gains that could be
material.
A 10% change in our sales
return reserve at December
29, 2007, would have
affected net earnings by
approximately $190,000 in
fiscal 2007.
A 10% change in our
assumptions regarding gift
card breakage would have
affected net earnings by
approximately $225,000 in
fiscal 2007.
17
|
|
|
|
|
|
|
|
|
Effect if Actual Results Differ From |
Description |
|
Judgments and Uncertainties |
|
Assumptions |
|
|
|
|
|
Inventory Valuation: |
|
|
|
|
|
Impairment Risk |
|
|
|
|
|
We identify
potentially excess
and slow-moving
inventory by
evaluating turn
rates, sales trends,
age of merchandise,
overall inventory
levels and other
benchmarks. The
estimated inventory
valuation reserve to
recognize any
impairment in value
(i.e., an inability
to realize the full
carrying value) is
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 consumer
demand, overall aging, the
promotional environment,
historical results and
current inventory loss
trends.
|
|
We have not made
any material
changes in the
accounting
methodology used to
recognize
impairment reserves
in the financial
periods presented.
We do not believe
there is a
reasonable
likelihood that
there will be a
material change in
the future
estimates or
assumptions we use
to calculate
impairment.
However, if
assumptions
regarding consumer
demand or clearance
potential for
certain products
are inaccurate, we
may be exposed to
losses or gains
that could be
material.
A 10% change in our
impairment reserve
at December 29,
2007, would have
affected net
earnings by
approximately
$315,000 in fiscal
2007. |
|
|
|
|
|
Shrinkage |
|
|
|
|
|
Our stores perform
physical inventories
at least once a year
and we have
established reserves
for estimating
inventory shrinkage
between physical
inventory counts.
This is done 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 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
historical trends, loss
prevention measures and
new merchandising
strategies.
|
|
We have not made
any material
changes in the
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
at December 29,
2007, would have
affected net
earnings by
approximately
$810,000 in fiscal
2007. |
18
|
|
|
|
|
|
|
|
|
Effect if Actual Results Differ From |
Description |
|
Judgments and Uncertainties |
|
Assumptions |
|
|
|
|
|
Vendor Support |
|
|
|
|
|
We receive funding
from substantially
all of our
significant
merchandise vendors
for the promotion of
our brand as well as
the sale of their
products through a
variety of programs
and arrangements,
including guaranteed
funding and volume
rebate programs. The
amounts received are
subject to terms of
vendor agreements,
which have varying
expiration dates
ranging in duration
from several months
to several years.
Many agreements are
negotiated annually
and are based on
expected annual
purchases of the
vendors 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, which is in
compliance with
Emerging Issues Task
Force No. 02-16,
Accounting by a
Customer (Including a
Reseller) for Certain
Consideration
Received from a
Vendor (EITF
02-16). The amount
of expected funding
is estimated based
upon initial
guaranteed
commitments, as well
as 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 vendor funding, it
is possible that actual
results could
significantly differ from
estimated amounts.
Our allocation methodology
contains uncertainties
because the calculation
requires management to
make assumptions and to
apply judgment regarding
purchasing activity,
target thresholds and
vendor attrition.
|
|
At the end of each
fiscal year, the
estimated support
is reconciled to
the actual amounts
earned based upon
actual purchase
activity.
We do not believe
there is a
significant
collectibility risk
related to vendor
support amounts due
us at the end of
fiscal 2007.
Although it is
unlikely that there
will be any
significant
reduction in
historical levels
of vendor support,
if such a reduction
were to occur, the
Company could
experience a higher
inventory balance
and higher cost of
sales.
If a 10% reserve
had been applied
against our
outstanding vendor
support due as of
December 29, 2007,
net earnings would
have been affected
by approximately
$1.1 million. |
|
|
|
|
|
Freight |
|
|
|
|
|
We incur various
types of
transportation and
delivery costs in
connection with
inventory purchases.
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.
|
|
If a 10% increase
or decrease had
been applied
against our current
inventory
capitalized freight
balance, net
earnings would have
been affected by
approximately
$3.0 million. |
19
|
|
|
|
|
|
|
|
|
Effect if Actual Results Differ From |
Description |
|
Judgments and Uncertainties |
|
Assumptions |
|
|
|
|
|
Stock-Based Compensation: |
|
|
|
|
|
We have a stock-based
compensation plan,
which includes
incentive and
non-qualified stock
options, nonvested
share awards, and an
employee stock
purchase plan. See
Note 1, Summary of
Significant
Accounting Policies ,
and Note 2,
Shareholders Equity , to the Notes to
Consolidated
Financial Statements,
included in Item 8,
Financial Statements
and Supplementary
Data, of this Annual
Report on Form 10-K,
for a complete
discussion of our
stock-based
compensation
programs.
We estimate the fair
value of our stock
option awards at the
date of grant
utilizing a
Black-Scholes option
pricing model. We
estimate the fair
value of our
market-based
nonvested share
awards at the date of
grant utilizing
average market price
of our stock on the
date of the related
award.
Management reviews
its assumptions and
the valuations
provided by
independent
third-party valuation
advisors to determine
the fair value of
stock-based
compensation awards.
|
|
Option-pricing models and
generally accepted
valuation techniques
require management to make
subjective assumptions and
to apply judgment to
determine the fair value
of our awards. These
assumptions and judgments
include estimating the
future volatility of our
stock price, expected
dividend yield, future
employee turnover rates
and future employee stock
option exercise behaviors.
In addition to the key
assumptions used to
estimate the fair value,
the estimated forfeiture
rate of the awarded
options is a critical
assumption, as it reduces
expense ratably over the
vesting period. Changes
in these assumptions can
materially affect the fair
value estimate.
|
|
While we update our
assumptions
annually, 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 determine
stock-based
compensation
expense. However,
if actual results
are not consistent
with our estimates
or assumptions, we
may be exposed to
changes in
stock-based
compensation
expense that could
be material. The
reported
stock-based
compensation
expense may not be
representative of
the actual economic
cost of the
stock-based
compensation.
A 10% change in our
stock-based
compensation
expense for the
year ended December
29, 2007, would
have affected net
earnings by
approximately
$659,000. |
|
|
|
|
|
Self-Insurance Reserves: |
|
|
|
|
|
We self-insure a
significant portion
of our employee
medical insurance,
workers compensation
and general liability
insurance plans. We
have stop-loss
insurance policies to
protect from
individual losses
over specified dollar
values ($200,000 for
employee health
insurance claims,
$350,000 for workers
compensation and
$250,000 for general
liability).
When estimating our
self-insured
liabilities, we
consider a number of
factors, including
historical claims
experience,
demographic factors,
severity factors and
valuations provided
by independent
third-party
actuaries.
Management reviews
its assumptions and
the valuations
provided by
independent
third-party actuaries
to determine the adequacy of our
self-insured
liabilities.
|
|
The full extent of certain
claims, especially
workers compensation and
general liability claims,
may not become fully
determined for several
years.
Our self-insured
liabilities contain
uncertainties because
management is required to
make assumptions and to
apply judgment to estimate
the ultimate cost to
settle reported claims and
claims incurred but not
reported as of the balance
sheet date.
|
|
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 or gains
that could be
material.
A 10% change in our
insurance reserves
at December 29,
2007, would have
affected net
earnings by
approximately $1.3
million in fiscal
2007. |
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
Effect if Actual Results Differ From |
Description |
|
Judgments and Uncertainties |
|
Assumptions |
|
|
|
|
|
Sales Tax Audit Reserve: |
|
|
|
|
|
A portion of our
sales are to
tax-exempt customers.
We obtain exemption
information as a
necessary part of
each tax-exempt
transaction. Many of
the states in which
we conduct business
will perform audits
to verify our
compliance with
applicable sales tax
laws. The business
activities of our
customers and the
intended use of the
unique products sold
by us create a
challenging and
complex environment
of compliance. These
circumstances also
create some risk that
we could be
challenged as to the
propriety of our
sales tax compliance.
While we believe we
reasonably enforce
sales tax compliance
with our customers
and endeavor to fully
comply with all
applicable sales tax
regulations, there
can be no assurance
that we, upon final
completion of such
audits, would not
have a significant
liability for
disallowed
exemptions.
|
|
We review our past audit
experience and assessments
with applicable states to
determine if we have
potential exposure for
non-compliance. Any
estimated liability is
based on an initial
assessment of compliance
risk and our to-date
experience with each
audit. As each audit
progresses, we quantify
the exposure based on
preliminary assessments
made by the state
auditors, adjusted for
additional documentation
that may be provided to
reduce the assessment.
Our sales tax audit
reserve contains
uncertainties because
management is required to
make assumptions and to
apply judgment regarding
the regulatory support for
SKU-specific
agricultural-based
exemptions, ambiguity in
state tax regulations,
and the level of
exemptions support
required by applicable
states.
|
|
We have not made
any material
changes in the
methodology used to
recognize the sales
tax audit revenue
in the financial
periods presented.
We do not believe
there is a
reasonable
likelihood that
there will be a
material change in
the future
estimates or
assumptions we use
to calculate the
sales tax liability
reserve for current
audits. However,
if our estimates
regarding the
ultimate sales tax
liability are
inaccurate, we may
be exposed to
losses or gains
that could be
material.
A 10% change in our
sales tax liability
reserve at December
29, 2007, would
have affected net
earnings by
approximately
$350,000 in fiscal
2007. |
|
|
|
|
|
Tax Contingencies: |
|
|
|
|
|
Our income tax
returns are
periodically audited
by U.S. federal and
state tax
authorities. These
audits include
questions regarding
our tax filing
positions, including
the timing and amount
of deductions and the
allocation of income
among various tax
jurisdictions. At any
one time, multiple
tax years are subject
to audit by the
various tax
authorities. In
evaluating the
exposures associated
with our various tax
filing positions, we
record reserves for
uncertain tax
positions. A number
of years may elapse
before a particular
matter, for which we
have established a
reserve, is audited
and fully resolved or
clarified. We adjust
our tax contingencies
reserve and income
tax provision in the
period in which
actual results of a
settlement with tax
authorities differs
from our established
reserve, the statute
of limitations
expires for the
relevant tax
authority to examine
the tax position or
when more information
becomes available.
Effective December
31, 2006, we adopted
FASB Interpretation
(FIN) No. 48,
Accounting for
Uncertainty in Income
Taxes, an
Interpretation of
FASB Statement
No. 109.
Accordingly, we
recognize a liability
for certain tax
benefits that do not
meet the minimum
requirements for
recognition in the
financial statements.
See Note 10.
|
|
Our tax contingencies
reserve contains
uncertainties because
management is required to
make assumptions and to
apply judgment to estimate
the exposures associated
with our various filing
positions and whether or
not the minimum
requirements for
recognition of tax
benefits have been met.
Our effective income tax
rate is also affected by
changes in tax law, the
tax jurisdiction of new
stores or business
ventures, the level of
earnings and the results
of tax audits.
|
|
We do not believe
there is a
reasonable
likelihood that
there will be a
material change in
the reserves
established for tax
benefits not
recognized.
Although management
believes that the
judgments and
estimates discussed
herein are
reasonable, actual
results could
differ, and we may
be exposed to
losses or gains
that could be
material.
To the extent we
prevail in matters
for which reserves
have been
established, or are
required to pay
amounts in excess
of our reserves,
our effective
income tax rate in
a given financial
statement period
could be materially
affected. An
unfavorable tax
settlement would
require use of our
cash and would
result in an
increase in our
effective income
tax rate in the
period of
resolution. A
favorable tax
settlement would be
recognized as a
reduction in our
effective income
tax rate in the
period of
resolution.
A 10% change in our
unrecognized tax
benefit reserve at
December 29, 2007
would have affected
net earnings by
approximately
$265,000 in fiscal
2007. |
21
|
|
|
|
|
|
|
|
|
Effect if Actual Results Differ From |
Description |
|
Judgments and Uncertainties |
|
Assumptions |
|
|
|
|
|
|
Goodwill: |
|
|
|
|
|
We evaluate goodwill
for impairment
annually and whenever
events or changes in
circumstances
indicate the carrying
value of the goodwill
may not be
recoverable. We
complete our
impairment evaluation
by performing
internal valuation
analyses, considering
other publicly
available market
information and using
an independent
valuation firm, as
appropriate.
In the fourth quarter
of fiscal 2007, we
completed our annual
impairment testing of
goodwill using the
methodology described
herein, and
determined there was
no impairment.
|
|
We determine fair value
using widely accepted
valuation techniques,
including discounted cash
flow and market multiple
analyses. These types of
analyses contain
uncertainties because they
require management to make
assumptions and to apply
judgment to estimate
industry economic factors
and the profitability of
future business
strategies. It is our
policy to conduct
impairment testing based
on our current business
strategy in light of
present industry and
economic conditions, as
well as future
expectations.
|
|
We have not made
any material
changes in our
impairment loss
assessment
methodology in the
financial periods
presented.
We do not believe
there is a
reasonable
likelihood that
there will be a
material change in
the future
estimates or
assumptions we use
to test for
impairment losses
on goodwill.
However, if actual
results are not
consistent with our
estimates or
assumptions, we may
be exposed to an
impairment charge
that could be
material. |
|
|
|
|
|
Long-Lived Assets: |
|
|
|
|
|
Long-lived assets
other than goodwill
and indefinite-lived
intangible assets,
which are separately
tested for
impairment, are
evaluated for
impairment whenever
events or changes in
circumstances
indicate that the
carrying value may
not be recoverable.
When evaluating
long-lived assets for
potential impairment,
we first compare the
carrying value of the
asset to the assets
estimated future cash
flows (undiscounted
and without interest
charges). If the
estimated future cash
flows are less than
the carrying value of
the asset, we
calculate an
impairment loss. The
impairment loss
calculation compares
the carrying value of
the asset to the
assets estimated
fair value, which may
be based on estimated
future cash flows
(discounted and with
interest charges). We
recognize an
impairment loss if
the amount of the
assets carrying
value exceeds the
assets 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 useful life
of that asset.
|
|
Our impairment loss
calculations contain
uncertainties because they
require management to make
assumptions and to apply
judgment to estimate
future cash flows and
asset fair values,
including forecasting
useful lives of the assets
and selecting the discount
rate that reflects the
risk inherent in future
cash flows.
|
|
We have not made
any material
changes in our
impairment loss
assessment
methodology in the
financial periods
presented.
We do not believe
there is a
reasonable
likelihood that
there will be a
material change in
the estimates or
assumptions we use
to calculate
long-lived asset
impairment losses.
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. |
22
Quarterly Financial Data
Our unaudited quarterly operating results for each fiscal quarter of 2007 and 2006 are shown below
(dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Total |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
559,832 |
|
|
$ |
790,929 |
|
|
$ |
629,199 |
|
|
$ |
723,252 |
|
|
$ |
2,703,212 |
|
Gross margin |
|
|
168,180 |
|
|
|
250,424 |
|
|
|
198,647 |
|
|
|
235,457 |
|
|
|
852,708 |
|
Income from operations |
|
|
8,980 |
|
|
|
71,108 |
|
|
|
29,669 |
|
|
|
50,284 |
|
|
|
160,041 |
|
Net income |
|
|
4,999 |
|
|
|
43,757 |
|
|
|
17,468 |
|
|
|
30,017 |
|
|
|
96,241 |
|
Net income per share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.12 |
|
|
$ |
1.10 |
|
|
$ |
0.45 |
|
|
$ |
0.79 |
|
|
$ |
2.45 |
|
Diluted |
|
$ |
0.12 |
|
|
$ |
1.08 |
|
|
$ |
0.44 |
|
|
$ |
0.77 |
|
|
$ |
2.40 |
|
Same-store sales increase |
|
|
8.5 |
% |
|
|
1.0 |
% |
|
|
1.9 |
% |
|
|
3.8 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
465,547 |
|
|
$ |
714,944 |
|
|
$ |
559,222 |
|
|
$ |
629,899 |
|
|
$ |
2,369,612 |
|
Gross margin |
|
|
141,995 |
|
|
|
224,507 |
|
|
|
174,919 |
|
|
|
204,725 |
|
|
|
746,146 |
|
Income from operations |
|
|
1,741 |
|
|
|
68,931 |
|
|
|
29,103 |
|
|
|
48,245 |
|
|
|
148,020 |
|
Net income |
|
|
525 |
|
|
|
42,927 |
|
|
|
18,059 |
|
|
|
29,497 |
|
|
|
91,008 |
|
Net income per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
1.07 |
|
|
$ |
0.45 |
|
|
$ |
0.73 |
|
|
$ |
2.27 |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
1.05 |
|
|
$ |
0.44 |
|
|
$ |
0.72 |
|
|
$ |
2.22 |
|
Same-store sales increase |
|
|
3.7 |
% |
|
|
0.5 |
% |
|
|
2.4 |
% |
|
|
0.5 |
% |
|
|
1.6 |
% |
|
|
|
(1) |
|
Due to the nature of interim earnings per share calculations, the sum of quarterly earnings per share amounts may
not equal the reported earnings per share for the year. |
23
Results of Operations
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. The fiscal year ended
December 31, 2005 contains 53 weeks while the fiscal years ended December 29, 2007 and December 30,
2006 contain 52 weeks.
The following table sets forth, for the periods indicated, certain items in our Consolidated
Statements of Income expressed as a percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of merchandise sold |
|
|
68.5 |
|
|
|
68.5 |
|
|
|
69.2 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
31.5 |
|
|
|
31.5 |
|
|
|
30.8 |
|
Selling, general and administrative expenses |
|
|
23.7 |
|
|
|
23.5 |
|
|
|
22.6 |
|
Depreciation and amortization |
|
|
1.9 |
|
|
|
1.8 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5.9 |
|
|
|
6.2 |
|
|
|
6.6 |
|
Interest expense, net |
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5.7 |
|
|
|
6.1 |
|
|
|
6.5 |
|
Income tax provision |
|
|
2.1 |
|
|
|
2.3 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3.6 |
% |
|
|
3.8 |
% |
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Compared to Fiscal 2006
Net sales increased 14.1% to $2,703.2 million in fiscal 2007 from $2,369.6 million in fiscal 2006.
This increase resulted from the opening of new stores as well as a same-store sales improvement of
3.4%. Our average transaction value increased 1.1% to $43.60 while same-store transaction value
decreased 0.1% for fiscal 2007. Average daily transaction count per store increased 0.6% to 239,
and same-store transaction count increased 3.5%.
Same-store sales improvements of 3.4% compared to 1.6% in the prior year were strongest in the
livestock/pet and truck/towing categories, but were partially offset by lower than expected
performance in seasonal and hardware/tool products.
In fiscal 2007, we opened 89 new stores (compared to 82 new stores in fiscal 2006), relocated 12
stores (compared to 15 in fiscal 2006) and sold our only Dels store located in Canada (compared to
one closed store in fiscal 2006).
As a percent of sales, gross margin was unchanged at 31.5% compared with the prior year.
Reductions in direct product costs were achieved through improved sourcing and mix of sales, but
were offset by slightly higher transportation costs and increased shrinkage.
As a percent of sales, selling, general and administrative (SG&A) expenses increased 20 basis
points to 23.7% in fiscal 2007 from 23.5% in fiscal 2006. The increase is primarily attributable to
increased occupancy and payroll costs from new stores, which generally have higher costs in
relation to sales volume than the chain average. Depreciation and amortization expense increased
20.7% in fiscal 2007 over fiscal 2006 due mainly to costs associated with new stores.
Net interest expense increased 10 basis points as a percent of sales to $5.0 million in fiscal 2007
from $2.7 million in fiscal 2006. This increase is due largely to borrowings related to the stock
repurchase program.
Our effective tax rate was 37.9% for fiscal 2007 compared to 37.4% in fiscal 2006, resulting
primarily from state taxes relating to the composition of income among the states and the adoption
of FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes, (FIN 48) relating to
uncertainties in income tax positions. This interpretation prescribes the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements.
Tax positions that meet a more-likely-than-not recognition threshold should be measured in order
to determine the tax benefit to be recognized. We are no longer subject to federal examination for
years before 2005, and state and local income tax examinations for years before 2002.
We adopted the provisions of FIN 48 in fiscal 2007, as required. As a result, we charged
approximately $1.9 million to retained earnings for the cumulative effect of adoption including
interest. Interest and penalties were immaterial at the date of adoption. The total amount of
unrecognized tax benefits that, if recognized, would affect the effective tax rate is
$2.3 million. In addition, we recognize current interest accrued related to these uncertain tax
positions as interest expense.
24
As a result of the foregoing factors, net income for fiscal 2007 increased 5.8% to $96.2 million,
or $2.40 per diluted share. Compared to net income of $91.0 million, or $2.22 per diluted share,
in fiscal 2006. During 2007, the Company repurchased 3.2 million shares of its stock for $150.0
million as part of our previously announced $200 million share repurchase program.
Fiscal 2006 Compared to Fiscal 2005
Net sales increased 14.6% to $2,369.6 million in fiscal 2006 from $2,068.0 million in fiscal 2005.
Fiscal 2005 included an additional week of sales which impacted the current year sales increase by
1.5%. This increase resulted from the opening of new stores as well as a same-store sales
improvement of 1.6%. Our average transaction value increased 2.6% to $43.12 and same-store
transaction value increased 0.8% for fiscal 2006. Average daily transaction count per store
decreased 2.9% to 238, while same-store transaction count increased 0.7%.
Same-store sales improvements of 1.6% compared to 5.7% in the prior year were strongest in the
clothing/footwear and equine/pet/animal categories, but were partially offset by lower than
expected performance in seasonal power equipment, generators and cold weather-related products,
including insulated outerwear, snow removal and heating.
In fiscal 2006, we opened 82 new stores (compared to 65 new stores and the acquisition of 16 Dels
stores in fiscal 2005), relocated 15 stores (compared to 18 in fiscal 2005) and closed one store
(compared to one closure in fiscal 2005).
As a percent of sales, gross margin increased 80 basis points to 31.7% for fiscal 2006 from 30.9%
for fiscal 2005. Gross margin was primarily impacted by a more favorable product mix, increased
importing and improved inventory shrinkage.
During the year, we refined our method of estimating the freight cost component of inventory based
on changes in our business and operating environment which included a change in mix of goods, an
increased level of importing and rapidly increasing fuel costs. This refinement provides a more
appropriate matching of freight cost incurred with inventory and cost of merchandise sold. This
change in estimate increased the inventory value and reduced the freight component of cost of
merchandise sold by approximately $2.9 million for fiscal 2006.
As a percent of sales, selling, general and administrative expenses increased 90 basis points to
23.5% in fiscal 2006 from 22.6% in fiscal 2005. The increase is primarily attributable to increased
occupancy costs and a charge of $9.7 million (or 0.4% of sales) related to stock compensation
expense.
During the year, we refined our method of estimating the amount of gift cards sold that will
ultimately go unredeemed. Our estimate was based on an analysis of gift card sale and redemption
patterns across an extended historical timeline. We accordingly recognized a benefit of $2.4
million and $0.3 million in fiscal 2006 and 2005, respectively. Of the $2.4 million recognized in
fiscal 2006, $2.1 million (or 0.1% of sales) was due to a modification of the redemption
assumptions based on an analysis of historical redemption patterns. This benefit has been included
as a reduction in selling, general, and administrative expenses and is reflected as a reduction of
other accrued expenses in the accompanying Consolidated Balance Sheets.
Effective January 1, 2006, we adopted SFAS No. 123(R) Share-Based Payment (SFAS 123(R)) using
the modified prospective method and began recognizing compensation expense for share-based payments
based on the fair value of the awards. Share-based payments include stock option grants and
certain transactions under our other stock plans. SFAS 123(R) requires share-based compensation
expense recognized since the beginning of fiscal 2006 to be based on the following: a) grant date
fair value estimated in accordance with the original provisions of SFAS 123 for unvested options
granted prior to the adoption date; b) grant date fair value estimated in accordance with the
provisions of SFAS 123(R) for all share-based payments granted subsequent to the adoption date; and
c) the discount on shares sold to employees post-adoption, which represents the difference between
the grant date fair value and the employee purchase price.
For fiscal 2006, the adoption of the SFAS 123(R) fair value method resulted in additional
compensation expense (a component of selling, general and administrative expenses) related to our
stock plans that we would not have recognized had we continued to account for share-based
compensation under Accounting Principles Board Opinion No. 25,
25
Accounting for Stock Issued to Employees (APB 25). For fiscal 2006, this share-based
compensation expense lowered pre-tax income by $9.7 million and net income by $6.1 million.
Depreciation and amortization expense increased 24.3% in fiscal 2006 over fiscal 2005 due mainly to
costs associated with new and relocated stores and remodeled existing stores.
Net interest expense increased 64.7% in fiscal 2006 from fiscal 2005. This increase is primarily
due to higher average interest rates in fiscal 2006 and interest incurred as the result of federal
and sales tax audits; partially offset by a reduction in average long-term borrowings under our
revolving credit agreement.
Our effective tax rate was 37.4% for fiscal 2006 compared to 36.5% in fiscal 2005, resulting
primarily from a higher effective income tax rate due to the non-deductibility of certain stock
compensation expense related to the adoption of SFAS123(R).
As a result of the foregoing factors, net income for fiscal 2006 increased 6.2% to $91.0 million,
or $2.22 per diluted share, which includes a $9.7 million charge, or $0.15 per diluted share, in
stock compensation expense. This compares to net income of $85.7 million, or $2.09 per diluted
share, in fiscal 2005.
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for expansion,
remodeling and relocation programs, including inventory purchases and capital expenditures. Our
primary ongoing sources of liquidity are funds provided from operations, commitments available
under our revolving credit agreement, capital and operating leases and normal trade credit. Our
inventory and accounts payable levels typically build in the first and third fiscal quarters in
anticipation of the spring and winter selling seasons, respectively.
Working Capital
At December 29, 2007, we had working capital of $312.1 million, a $4.0 million decrease from
December 30, 2006. This decrease was primarily attributable to changes in the following components
of current assets and current liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13.7 |
|
|
$ |
26.4 |
|
|
$ |
(12.7 |
) |
Inventories |
|
|
636.0 |
|
|
|
594.9 |
|
|
|
41.1 |
|
Prepaid expenses and other current assets |
|
|
41.9 |
|
|
|
37.0 |
|
|
|
4.9 |
|
Deferred income taxes |
|
|
0.3 |
|
|
|
11.3 |
|
|
|
(11.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
691.9 |
|
|
|
669.6 |
|
|
|
22.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
258.3 |
|
|
$ |
229.2 |
|
|
$ |
29.1 |
|
Accrued expenses |
|
|
115.6 |
|
|
|
111.7 |
|
|
|
3.9 |
|
Income taxes payable |
|
|
5.1 |
|
|
|
11.5 |
|
|
|
(6.4 |
) |
Other, net |
|
|
0.8 |
|
|
|
1.1 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
379.8 |
|
|
|
353.5 |
|
|
|
26.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
312.1 |
|
|
$ |
316.1 |
|
|
$ |
(4.0 |
) |
|
|
|
|
|
|
|
|
|
|
The increase in inventories and related increase in accounts payable resulted primarily from the
purchase of inventory for new stores. Trade credit arises from our vendors granting extended
payment terms for inventory purchases. Payment terms generally vary from 30 days to 180 days
depending on the inventory product. We experienced an increase in our financed inventory from
approximately 37.3% to 38.3%. (The calculated financed inventory assumes average inventory,
excludes in-transit inventories and includes only unopened stores with significant inventory).
While we experienced a seven basis point decrease in inventory turns (approximately 2.60 times per
year), we improved our per-store inventory levels through targeted inventory level improvement
initiatives. These initiatives included better exit strategies on one-time, special buys; a
focused approach on new store inventory levels and less productive inventory; and a more rigorous
training program on our E3 inventory management software.
26
The decrease in the deferred tax assets is a result of changes in temporary differences associated
with the accounting for income taxes. Certain items of income and expense such as gift card
receipts, inventory costing and depreciation expense may not be recognized in the same accounting
period for income tax purposes as they are for financial reporting purposes.
Borrowings and Credit Facilities
In August 2002, we entered into a credit agreement with Bank of America, N.A., as agent for a
lender group (the Credit Agreement), whereby we were permitted to borrow up to $155 million. The
Credit Agreement was subsequently amended on January 28, 2004 and September 30, 2004 (primarily
with respect to financial covenants) and replaced on February 22, 2007.
On February 22, 2007 we entered into a new Senior Credit Facility with Bank of America, N.A, as
agent for a lender group (the Credit Agreement), allowing us to borrow up to $250 million (with
sublimits of $75 million and $10 million for letters of credit and swingline loans, respectively).
This agreement is unsecured and has a five year term, with proceeds expected to be used for working
capital, capital expenditures and share repurchases.
At December 29, 2007, there were $55 million in borrowings outstanding under the Credit Agreement
and there were no outstanding borrowings at December 30, 2006. There were an additional $25.0
million and $24.9 million outstanding letters of credit as of December 29, 2007 and December 30,
2006, respectively. Borrowings bear interest at either the banks base rate (7.25% at December 29,
2007) or the London Inter-Bank Offer Rate (LIBOR) (4.86% at December 29, 2007) plus an additional
amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at
December 29, 2007). We are also required to pay, quarterly in arrears, a commitment fee ranging
from 0.06% to 0.18% per annum and adjusted quarterly based on our performance, for unused capacity
(0.10% at December 29, 2007). There are no compensating balance requirements associated with the
Credit Agreement.
The Credit Agreement contains certain restrictions regarding additional indebtedness, capital
expenditures, business operations, guarantees, investments, mergers, consolidations and sales of
assets, transactions with subsidiaries or affiliates, and liens. The new agreement eliminated the
capital expenditures, net worth and current ratio requirements from the previous agreement and
requires quarterly compliance with respect to fixed charge coverage and leverage ratios. We were
in compliance with all covenants at December 29, 2007.
In February 2008, we exercised the increase option on our Senior Credit Facility increasing the
overall capacity from $250 million to $350 million. Each of the nine lenders within our credit
facility bank group participated in the increase. Simultaneously, definitions within the existing
credit facility were modified as follows: (1) added an additional Increase Option for $150
million; (2) modified the definition of swingline committed amount from $10 million to $20 million;
and (3) revised the definition of the fixed charge coverage ratio covenant to remove certain
defined fixed charges. All pricing terms and the term of the facility remained the same.
Sources and Uses of Cash
Our primary source of liquidity is cash provided by operations. Principal uses of cash for
investing activities are capital expenditures and financing activities are payments on debt and
repurchase of the Companys common stock. The following table presents a summary of cash flows
from operating, investing and financing activities for the last three fiscal years (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net cash provided by operating activities |
|
$ |
155.0 |
|
|
$ |
87.5 |
|
|
$ |
104.5 |
|
Net cash used in investing activities |
|
|
(82.6 |
) |
|
|
(80.8 |
) |
|
|
(90.7 |
) |
Net cash provided by (used in) financing activities |
|
|
(85.1 |
) |
|
|
10.1 |
|
|
|
(16.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
(12.7 |
) |
|
$ |
16.8 |
|
|
$ |
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
27
Operating Activities
The $67.5 million increase in net cash provided by operations in fiscal 2007 over fiscal 2006 is
primarily due to changes in the following operating activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Variance |
|
Net income |
|
$ |
96.2 |
|
|
$ |
91.0 |
|
|
$ |
5.2 |
|
Depreciation and amortization |
|
|
51.1 |
|
|
|
42.3 |
|
|
|
8.8 |
|
Stock compensation expense |
|
|
10.6 |
|
|
|
9.7 |
|
|
|
0.9 |
|
Deferred income taxes |
|
|
7.0 |
|
|
|
(3.5 |
) |
|
|
10.5 |
|
Inventories and accounts payable |
|
|
(11.9 |
) |
|
|
(78.7 |
) |
|
|
66.8 |
|
Accrued expenses |
|
|
4.3 |
|
|
|
8.8 |
|
|
|
(4.5 |
) |
Income taxes currently payable |
|
|
(6.5 |
) |
|
|
10.1 |
|
|
|
(16.6 |
) |
Other, net |
|
|
4.2 |
|
|
|
7.8 |
|
|
|
(3.6 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations |
|
$ |
155.0 |
|
|
$ |
87.5 |
|
|
$ |
67.5 |
|
|
|
|
|
|
|
|
|
|
|
We reclassified cash balances in our bank concentration account against the book overdraft included
in accounts payable, resulting in a change in fiscal 2006 and fiscal 2005 net cash provided by
operations.
The improvement in net cash provided by operations in fiscal 2007 compared with fiscal 2006 was
primarily due to changes in inventory levels and the timing of payments. Inventory levels
increased less in 2007 compared to 2006, due to the timing of imports and a focus on inventory
management in 2007. Additionally, we achieved a slight increase in financed inventory, resulting
in a higher increase in accounts payable relative to inventory. The change in cash used for income
taxes relates to the timing of quarterly payments caused by annualized proration requirements.
The $17.0 million decrease in net cash provided by operations in fiscal 2006 over fiscal 2005 is
primarily due to changes in the following operating activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Variance |
|
Net income |
|
$ |
91.0 |
|
|
$ |
85.7 |
|
|
$ |
5.3 |
|
Tax benefit of stock options exercised |
|
|
|
|
|
|
12.5 |
|
|
|
(12.5 |
) |
Depreciation and amortization |
|
|
42.3 |
|
|
|
34.0 |
|
|
|
8.3 |
|
Stock compensation expense |
|
|
9.7 |
|
|
|
|
|
|
|
9.7 |
|
Deferred income taxes |
|
|
(3.5 |
) |
|
|
(12.7 |
) |
|
|
9.2 |
|
Inventories and accounts payable |
|
|
(78.7 |
) |
|
|
(29.6 |
) |
|
|
(49.1 |
) |
Accrued expenses |
|
|
8.8 |
|
|
|
12.8 |
|
|
|
(4.0 |
) |
Income taxes currently payable |
|
|
10.1 |
|
|
|
1.4 |
|
|
|
8.7 |
|
Other, net |
|
|
7.8 |
|
|
|
0.4 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations. |
|
$ |
87.5 |
|
|
$ |
104.5 |
|
|
$ |
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
The decrease in net cash provided by operations in fiscal 2006 compared with fiscal 2005 is
primarily due to the net increase in inventory and accounts payable (as discussed in the Working
Capital section), partially offset by an increase in net income adjusted for non-cash items.
Investing Activities
Investing activities used $82.6 million, $80.8 million, and $90.7 million in fiscal 2007, 2006 and
2005, respectively. The majority of this cash requirement relates to our capital expenditures and,
in fiscal 2005, the acquisition of the assets of Dels.
Our significant store expansion, coupled with required investment in infrastructure, required the
following capital expenditures, including capital leases (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
New and relocated stores and stores not yet opened |
|
$ |
38,119 |
|
|
$ |
54,111 |
|
|
$ |
40,525 |
|
Existing store properties acquired from lessor |
|
|
6,790 |
|
|
|
|
|
|
|
|
|
Existing stores |
|
|
18,276 |
|
|
|
20,214 |
|
|
|
11,424 |
|
Distribution center capacity and improvements |
|
|
3,280 |
|
|
|
2,302 |
|
|
|
19,585 |
|
Information technology |
|
|
17,377 |
|
|
|
13,336 |
|
|
|
6,612 |
|
Corporate and other |
|
|
144 |
|
|
|
602 |
|
|
|
689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
83,986 |
|
|
$ |
90,565 |
|
|
$ |
78,835 |
|
|
|
|
|
|
|
|
|
|
|
28
Our long-term growth strategy anticipates continued geographic market expansion and further
concentration within existing markets. This growth will also require continuing investment in
information technology and people. The costs reflected above are typically building improvements,
as we lease the majority of our facilities. We currently estimate that capital expenditures will
range between $100 million and $105 million in fiscal 2008.
Financing Activities
Financing activities used $85.1 million, provided $10.1 million, and used $16.2 million in fiscal
2007, 2006 and 2005, respectively. The cash used by financing activities in fiscal 2007 is mainly
the result of share repurchase activity partially offset by borrowings and share issuances.
In February 2007, our Board of Directors authorized a share repurchase program which provides for
repurchase of up to $200 million (excluding commissions) of our outstanding common stock over an
approximate three-year period. The repurchases may be made from time to time on the open market or
in privately negotiated transactions. The timing and amount of any shares repurchased under the
program will depend on a variety of factors, including price, corporate and regulatory
requirements, capital availability, and other market conditions. The program may be limited or
terminated at any time without prior notice.
For fiscal 2007, we repurchased approximately 3.2 million shares at a total cost of $150.0 million.
Repurchased shares are accounted for at cost and will be held in treasury for future issuance.
We believe that our cash flow from operations, borrowings available under the Credit Agreement, and
normal trade credit will be sufficient to fund our operations and our capital expenditure needs,
including store openings, relocations and renovations, over the next several years.
Significant Contractual Obligations and Commercial Commitments
The following table reflects our future obligations and commitments as of December 29, 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual |
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Obligations |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Long-term debt (1) |
|
$ |
55,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
55,000 |
|
|
$ |
|
|
Operating leases |
|
|
1,205,020 |
|
|
|
126,419 |
|
|
|
239,516 |
|
|
|
217,675 |
|
|
|
621,410 |
|
Capital leases (2) |
|
|
5,242 |
|
|
|
1,040 |
|
|
|
1,222 |
|
|
|
336 |
|
|
|
2,644 |
|
Purchase obligations (3) |
|
|
13,226 |
|
|
|
10,712 |
|
|
|
2,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,278,488 |
|
|
$ |
138,171 |
|
|
$ |
243,252 |
|
|
$ |
273,011 |
|
|
$ |
624,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt balances represent principal maturities, excluding interest. At December 29, 2007, this entire amount
relates to the Companys Credit Agreement. |
|
(2) |
|
Capital lease obligations include related interest. |
|
(3) |
|
The amounts for purchase obligations include commitments for construction of stores expected to be opened in fiscal 2008
and for acquisition of a store property previously under lease. |
The Company had outstanding standby letters of credit of $25.0 million as of December 29, 2007.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of operating leases and outstanding letters of credit.
The balances for these arrangements are discussed above. We typically lease buildings for retail
stores and offices rather than acquiring these assets which allows us to utilize financial capital
to operate the business rather than invest in fixed assets. Letters of credit allow us to purchase
inventory, primarily sourced overseas, and support certain risk management programs in a timely
manner.
29
Known Trends, Events, Demands, Commitments and Uncertainties
Litigation
We are involved in various litigation matters arising in the ordinary course of business. After
consultation with legal counsel, we expect these matters will be resolved without material adverse
effect on our consolidated financial position or results of operations. Any estimated loss related
to such matters has been adequately provided in accrued liabilities to the extent probable and
reasonably estimable. It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected by changes in circumstances
relating to these proceedings.
Recent Accounting Pronouncements
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement
In March 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross Versus Net Presentation), which allows companies to adopt a
policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the
scope of this EITF would include taxes that are imposed on a revenue transaction between a seller
and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise
taxes. EITF 06-3 is effective for interim and annual reporting periods beginning in fiscal 2007.
The adoption of EITF 06-3 did not impact the method for recording and reporting these sales taxes
in our Consolidated Financial Statements as our policy is to exclude all such taxes from revenue.
Accounting for Uncertainty in Income Taxes
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48) to create a single model to address accounting for uncertainty in tax positions. This
Interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This
Interpretation prescribes the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. Tax positions that meet a
more-likely-than-not recognition threshold should be measured in order to determine the tax
benefit to be recognized. We adopted FIN 48 in fiscal 2007, as required. (See Note 10 to the
Consolidated Financial Statements for further information.)
Fair Value Measurements
In September 2006, the FASB issued statement No. 157, Fair Value Measurements, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. On December 14, 2007, the FASB issued proposed FASB Staff Position No. FAS
157-b, Effective Date of FASB Statement No. 157 (the proposed FSP). The proposed FSP would amend
FASB Statement No. 157, Fair Value Measurements (Statement 157), to delay the effective date of
Statement 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at
least annually). The proposed FSP defers the effective date of Statement 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years for items within
the scope of the proposed FSP. The Company is subject to the remaining provisions of SFAS 157
beginning December 30, 2007. The adoption of SFAS 157 did not have a material impact on our
financial condition, results of operations, or cash flow.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 allows entities the option to measure eligible
financial instruments at fair value as of specified dates. Such election, which may be applied on
an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not result in a
material impact to our financial condition, results of operations, or cash flow.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily from the Credit Agreement. The Credit
Agreement bears interest at either the banks base rate (7.25% and 8.25% at December 29, 2007 and
December 30, 2006, respectively) or LIBOR (4.86% and 5.32% at December 29, 2007 and December 30,
2006, respectively) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted
quarterly, based on our performance (0.50% at both December 29, 2007 and December 30, 2006). We
are also required to pay (quarterly in arrears) a commitment fee ranging from 0.06% to 0.18% based
on the daily average unused portion of the credit line (0.10% at December 29, 2007). A hypothetical
100 basis point adverse move (increase) in interest rates along the entire interest rate yield
curve would result in approximately $900,000 of additional annual interest expense and would not
impact the fair market value of the long-term debt.
31
Item 8. Financial Statements and Supplementary Data
INDEX
TRACTOR SUPPLY COMPANY
32
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
The Board of Directors and Stockholders of
Tractor Supply Company
We have audited Tractor Supply Companys internal control over financial reporting as of December
29, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Tractor
Supply Companys 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 Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys 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
companys 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 companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Tractor Supply Company maintained, in all material respects, effective internal
control over financial reporting as of December 29, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Tractor Supply Company as of December 29,
2007 and December 30, 2006 and the related consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended December 29, 2007 and our report
dated February 25, 2008 expressed an unqualified opinion thereon.
Nashville, Tennessee
February 25, 2008
33
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Tractor Supply Company
We have audited the accompanying consolidated balance sheets of Tractor Supply Company as of
December 29, 2007 and December 30, 2006, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three years in the period ended December 29,
2007. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Tractor Supply Company at December 29, 2007 and
December 30, 2006, and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 29, 2007, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 10 to the consolidated financial statements, in 2007 the Company changed its
method of accounting for uncertainty in income taxes.
As discussed in Note 2 to the consolidated financial statements, in 2006 the Company changed its
method of accounting for share-based compensation using the modified-prospective method.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Tractor Supply Companys internal control over financial reporting as of
December 29, 2007, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February
25, 2008 expressed an unqualified opinion thereon.
Nashville, Tennessee
February 25, 2008
34
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
2,703,212 |
|
|
$ |
2,369,612 |
|
|
$ |
2,067,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of merchandise sold |
|
|
1,850,504 |
|
|
|
1,623,466 |
|
|
|
1,431,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
852,708 |
|
|
|
746,146 |
|
|
|
636,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
641,603 |
|
|
|
555,834 |
|
|
|
466,167 |
|
Depreciation and amortization |
|
|
51,064 |
|
|
|
42,292 |
|
|
|
34,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
160,041 |
|
|
|
148,020 |
|
|
|
136,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
5,037 |
|
|
|
2,688 |
|
|
|
1,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
155,004 |
|
|
|
145,332 |
|
|
|
134,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
58,763 |
|
|
|
54,324 |
|
|
|
49,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
96,241 |
|
|
$ |
91,008 |
|
|
$ |
85,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
2.45 |
|
|
$ |
2.27 |
|
|
$ |
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share assuming dilution |
|
$ |
2.40 |
|
|
$ |
2.22 |
|
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
35
TRACTOR SUPPLY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Dec. 29, |
|
|
Dec. 30, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,700 |
|
|
$ |
26,393 |
|
Inventories |
|
|
635,988 |
|
|
|
594,851 |
|
Prepaid expenses and other current assets |
|
|
41,959 |
|
|
|
37,007 |
|
Deferred income taxes |
|
|
277 |
|
|
|
11,360 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
691,924 |
|
|
|
669,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment: |
|
|
|
|
|
|
|
|
Land |
|
|
23,151 |
|
|
|
19,495 |
|
Buildings and improvements |
|
|
279,313 |
|
|
|
248,063 |
|
Furniture, fixtures and equipment |
|
|
175,941 |
|
|
|
146,128 |
|
Computer software and hardware |
|
|
61,732 |
|
|
|
46,853 |
|
Construction in progress |
|
|
10,006 |
|
|
|
15,404 |
|
|
|
|
|
|
|
|
|
|
|
550,143 |
|
|
|
475,943 |
|
Accumulated depreciation and amortization |
|
|
(217,215 |
) |
|
|
(174,339 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
332,928 |
|
|
|
301,604 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
10,258 |
|
|
|
10,288 |
|
Deferred income taxes |
|
|
16,692 |
|
|
|
10,779 |
|
Other assets |
|
|
6,169 |
|
|
|
5,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,057,971 |
|
|
$ |
998,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
258,346 |
|
|
$ |
229,171 |
|
Other accrued expenses |
|
|
115,601 |
|
|
|
111,721 |
|
Current portion of capital lease obligations |
|
|
847 |
|
|
|
1,065 |
|
Income taxes currently payable |
|
|
5,062 |
|
|
|
11,550 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
379,856 |
|
|
|
353,507 |
|
|
|
|
|
|
|
|
|
|
Revolving credit loan |
|
|
55,000 |
|
|
|
|
|
Capital lease obligations, less current maturities |
|
|
2,351 |
|
|
|
2,808 |
|
Straight line rent liability |
|
|
30,886 |
|
|
|
24,399 |
|
Other long-term liabilities |
|
|
24,541 |
|
|
|
18,640 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
492,634 |
|
|
|
399,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred Stock, 40,000 shares authorized; $1.00 par value; no shares issued |
|
|
|
|
|
|
|
|
Common Stock, 100,000,000 shares authorized, $.008 par value; 40,700,209
shares issued and 37,484,022 shares outstanding at December 29, 2007 and 40,281,732 shares issued and outstanding at December 30, 2006 |
|
|
326 |
|
|
|
322 |
|
Additional paid-in capital |
|
|
151,317 |
|
|
|
129,249 |
|
Treasury stock, at cost, 3,216,187 shares |
|
|
(150,049 |
) |
|
|
|
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
(22 |
) |
Retained earnings |
|
|
563,743 |
|
|
|
469,355 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
565,337 |
|
|
|
598,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,057,971 |
|
|
$ |
998,258 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
36
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common |
|
|
Paid-in |
|
|
Treasury |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Stock |
|
|
Capital |
|
|
Stock |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
Stockholders equity at December 25, 2004 |
|
$ |
306 |
|
|
$ |
77,600 |
|
|
$ |
|
|
|
$ |
292,678 |
|
|
$ |
|
|
|
$ |
370,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee
stock purchase plan (42,065 shares) |
|
|
|
|
|
|
1,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,648 |
|
Exercise of stock options (1,089,011 shares) |
|
|
9 |
|
|
|
7,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,291 |
|
Tax benefit on disqualifying disposition of
stock options |
|
|
|
|
|
|
12,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,517 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,669 |
|
|
|
|
|
|
|
85,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at December 31, 2005 |
|
|
315 |
|
|
|
99,047 |
|
|
|
|
|
|
|
378,347 |
|
|
|
(11 |
) |
|
|
477,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee
stock purchase plan (38,354 shares) |
|
|
1 |
|
|
|
1,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,931 |
|
Exercise of stock options (809,929 shares) |
|
|
6 |
|
|
|
8,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,142 |
|
Stock compensation |
|
|
|
|
|
|
9,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,664 |
|
Tax benefit on disqualifying disposition
of stock options |
|
|
|
|
|
|
10,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,472 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,008 |
|
|
|
|
|
|
|
91,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at December 30, 2006 |
|
|
322 |
|
|
|
129,249 |
|
|
|
|
|
|
|
469,355 |
|
|
|
(22 |
) |
|
|
598,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting
principle (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,853 |
) |
|
|
|
|
|
|
(1,853 |
) |
Issuance of common stock under employee
stock purchase plan (46,654 shares) |
|
|
1 |
|
|
|
1,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845 |
|
Exercise of stock options (371,823 shares) |
|
|
3 |
|
|
|
5,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,589 |
|
Stock compensation |
|
|
|
|
|
|
10,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,620 |
|
Tax benefit on disqualifying disposition of
stock options |
|
|
|
|
|
|
4,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,018 |
|
Repurchase of common stock
(3,216,187 shares) |
|
|
|
|
|
|
|
|
|
|
(150,049 |
) |
|
|
|
|
|
|
|
|
|
|
(150,049 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
22 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,241 |
|
|
|
|
|
|
|
96,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at December 29, 2007 |
|
$ |
326 |
|
|
$ |
151,317 |
|
|
$ |
(150,049 |
) |
|
$ |
563,743 |
|
|
$ |
|
|
|
$ |
565,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
37
TRACTOR SUPPLY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
96,241 |
|
|
$ |
91,008 |
|
|
$ |
85,669 |
|
Tax benefit of stock options exercised |
|
|
|
|
|
|
|
|
|
|
12,517 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
51,064 |
|
|
|
42,292 |
|
|
|
34,020 |
|
Gain on disposition of property and equipment |
|
|
30 |
|
|
|
(1,606 |
) |
|
|
(1,824 |
) |
Stock compensation expense |
|
|
10,620 |
|
|
|
9,664 |
|
|
|
|
|
Deferred income taxes |
|
|
7,047 |
|
|
|
(3,530 |
) |
|
|
(12,735 |
) |
Change in assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
|
(41,137 |
) |
|
|
(134,100 |
) |
|
|
(71,302 |
) |
Prepaid expenses and other current assets |
|
|
(4,557 |
) |
|
|
57 |
|
|
|
(7,097 |
) |
Accounts payable |
|
|
29,175 |
|
|
|
55,393 |
|
|
|
41,704 |
|
Accrued expenses |
|
|
4,339 |
|
|
|
8,757 |
|
|
|
12,817 |
|
Income taxes currently payable |
|
|
(6,488 |
) |
|
|
10,129 |
|
|
|
1,421 |
|
Other |
|
|
8,687 |
|
|
|
9,486 |
|
|
|
9,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
155,021 |
|
|
|
87,550 |
|
|
|
104,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(83,547 |
) |
|
|
(88,894 |
) |
|
|
(77,507 |
) |
Proceeds from sale of property and equipment |
|
|
974 |
|
|
|
8,810 |
|
|
|
4,413 |
|
Acquisition of Dels Farm Supply |
|
|
|
|
|
|
|
|
|
|
(17,603 |
) |
Other |
|
|
|
|
|
|
(746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(82,573 |
) |
|
|
(80,830 |
) |
|
|
(90,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit agreement |
|
|
1,050,931 |
|
|
|
394,404 |
|
|
|
242,992 |
|
Repayments under revolving credit agreement |
|
|
(995,931 |
) |
|
|
(402,616 |
) |
|
|
(267,059 |
) |
Tax benefit of stock options exercised |
|
|
3,149 |
|
|
|
9,456 |
|
|
|
|
|
Principal payments under capital lease obligations |
|
|
(675 |
) |
|
|
(1,228 |
) |
|
|
(1,094 |
) |
Repurchase of common stock |
|
|
(150,049 |
) |
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock |
|
|
7,434 |
|
|
|
10,073 |
|
|
|
8,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(85,141 |
) |
|
|
10,089 |
|
|
|
(16,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(12,693 |
) |
|
|
16,809 |
|
|
|
(2,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
26,393 |
|
|
|
9,584 |
|
|
|
12,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
13,700 |
|
|
$ |
26,393 |
|
|
$ |
9,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,953 |
|
|
$ |
2,822 |
|
|
$ |
1,715 |
|
Income taxes |
|
|
54,939 |
|
|
|
36,898 |
|
|
|
47,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired through capital leases |
|
$ |
439 |
|
|
$ |
1,671 |
|
|
$ |
1,328 |
|
The accompanying notes are an integral part of these financial statements.
38
Note 1 Significant Accounting Policies:
Nature of Business
Tractor Supply Company (the Company, we, us and/or our) is the largest operator of retail
farm and ranch stores in the United States. We are focused on supplying the lifestyle needs of
recreational farmers and ranchers and those who enjoy the rural lifestyle, as well as tradesmen and
small businesses. Stores are located in towns outlying major metropolitan markets and in rural
communities. At December 29, 2007, we operated 764 retail farm and ranch stores in 43 states and
also offered a limited number of products online at TractorSupply.com.
Fiscal Year
Our fiscal year ends on the last Saturday of the calendar year and includes 52 or 53 weeks. The
fiscal years ended December 29, 2007 and December 30, 2006 consist of 52 weeks, while the fiscal
year ended December 31, 2005 consists of 53 weeks.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
subsidiaries. All material intercompany accounts and transactions have been eliminated.
Reclassifications
Certain amounts in previously issued financial statements have been reclassified to conform to the
fiscal 2007 presentation: (1) Cash balances in our bank concentration account have been
reclassified and netted against the related book overdraft included in accounts payable in the
Consolidated Balance Sheets; (2) Inventory initially consigned but ultimately purchased has been
included in the inventory and accounts payable balances in the Consolidated Balance Sheets;
(3) Discount fees on our proprietary credit card have been reclassified from operating expenses
into cost of merchandise sold in the Consolidated Statements of Income.
Segment Information
In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information, Tractor Supply Company has one reportable
industry segment the operation of farm and ranch retail stores and also offers a limited number
of products online at TractorSupply.com.
Management Estimates
Our preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States inherently requires estimates and assumptions by us 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:
Revenue Recognition and Sales Returns
We recognize revenue at the time the customer takes possession of merchandise or receives
services. If we receive payment before the customer has taken possession of the merchandise
(as per our layaway program), the revenue is deferred until the sale is complete. Revenues
from the sale of gift cards are deferred and recognized upon redemption.
We are required to collect certain taxes and fees from customers on behalf of government
agencies and remit these back to the applicable governmental entity on a periodic basis.
These taxes are collected from customers at the time of purchase, but are not included in
net sales. We record a liability upon collection from the customer and relieve the
liability when payments are remitted to the applicable governmental agency.
39
We estimate a liability for sales returns based on a one-year rolling average of historical
return trends, and we believe that our estimate for sales returns is an accurate reflection
of future returns associated with past sales. Our estimation methodologies have been
consistently applied from year to year; however, as with any estimates, refunds activity may
vary from estimated amounts. Estimated sales returns are shown net, as a reduction in
gross margin in the Consolidated Statements of Income. At December 29, 2007 we had a
liability of $3.0 million reserved for sales returns, compared to $3.2 million at
December 30, 2006.
We recognize a benefit for gift cards when: (i) the gift card or merchandise return card is
redeemed by the customer; or (ii) the likelihood of the gift card being redeemed by the
customer is remote (referred to as breakage) or (iii) the unredeemed merchandise returns
cards expire (one year from issuance). The gift card breakage rate is based upon historical
redemption patterns and a benefit is recognized for unredeemed gift cards in proportion to
those historical redemption patterns.
We recognized a benefit of $1.2 million and $2.4 million in fiscal 2007 and 2006,
respectively. Of the $2.4 million recognized in 2006, $2.1 million (or $.03 per diluted
share) was due to a modification of the estimation of redemption assumptions based on an
analysis of historical redemption patterns. This benefit has been included as a reduction
in selling, general and administrative expenses and is reflected as a reduction of other
accrued expenses in the accompanying Consolidated Balance Sheets.
Inventory Valuation
Impairment Risk
We identify potentially excess and slow-moving inventory by evaluating turn rates, sales
trends, age of merchandise, overall inventory levels and other benchmarks. The estimated
inventory valuation reserve to recognize any impairment in value (i.e. an inability to
realize the full carrying value) is 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.
Shrinkage
Our stores perform physical inventories once a year and we have established reserves for
estimating inventory shrinkage between physical inventory counts. This is done 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 shrink rate is based on historical experience. We
believe historical rates are an accurate reflection of future trends.
Vendor Support
We receive funding from substantially all of our significant merchandise vendors for the
promotion of our brand as well as the sale of their products through a variety of programs
and arrangements, including guaranteed funding and volume rebate programs. The amounts
received are subject to terms of vendor agreements, which have varying expiration dates
ranging in duration from several months to several years. Many agreements are negotiated
annually and are based on expected annual purchase of the vendors 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, which is in
compliance with Emerging Issues Task Force No. 02-16, Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor (EITF 02-16).
The amount of expected funding is estimated based upon initial guaranteed commitments, as
well as 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 have the ability to reasonably estimate purchase volume and related
vendor funding, it is possible that actual results could significantly differ from the
estimated amounts.
40
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 inventory is sold.
During 2006, we refined our method of estimating the freight cost component of inventory
based on changes in our business and operating environment which included a change in mix of
goods, an increased level of importing and rapidly increasing fuel costs. This refinement
provides a more appropriate matching of freight cost incurred with inventory and cost of
merchandise sold. This change in estimate increased the inventory value and reduced cost of
merchandise sold by approximately $2.9 million, (or $.04 per diluted share) for fiscal 2006.
Share-based Payments
We have share-based compensation plans covering certain members of management and non-employee
directors. Effective January 1, 2006, we adopted the fair value recognition provisions of
SFAS No. 123(R), Share-Based Payments (SFAS 123(R)) using the modified prospective
transition method. (See Note 2).
We estimate the fair value of stock option awards on the date of grant utilizing a modified
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 our stock option awards. Option valuation
models require the input of subjective assumptions including expected stock price volatility and
expected life. We rely on historical volatility trends to estimate future volatility
assumptions. Other assumptions required for estimating fair value with the Black-Scholes model
are the expected risk-free interest rate and expected life of the option. 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 life of the option on the date of grant
was estimated based on our 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. We adjust this
estimate annually, based on the extent to which actual forfeitures differ, or are expected to
differ, from the previous estimate.
We believe our estimates are reasonable in the context of actual (historical) experience. The
impact of adopting SFAS No. 123(R) on future results will depend on, among other matters, levels
of share-based payments granted in the future, actual forfeiture rates and the timing of option
exercises.
Sales Tax Audit Reserve
A portion of our sales are to tax-exempt customers. We obtain exemption information as a
necessary part of each tax-exempt transaction. Many of the states in which we conduct business
will perform audits to verify our compliance with applicable sales tax laws. The business
activities of our customers and the intended use of the unique products sold by us create a
challenging and complex environment of compliance. These circumstances also create some risk
that we could be challenged as to the propriety of our sales tax compliance. While we believe
we reasonably enforce sales tax compliance with our customers and endeavor to fully comply with
all applicable sales tax regulations, there can be no assurance that we, upon final completion
of such audits, would not have a significant liability for disallowed exemptions.
We review our past audit experience and assessments with applicable states to determine if we
have potential exposure for non-compliance. Any estimated liability is based on an initial
assessment of compliance risk and our to-date experience with each audit. As each audit
progresses, we quantify the exposure based on preliminary assessments made by the state
auditors, adjusted for 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, ambiguity in state tax regulations, the number of
ongoing audits and the length of time required to settle with the state taxing authorities.
41
Self-Insurance Reserves
We self-insure a significant portion of our employee medical insurance, workers compensation
and general liability insurance plans. We have stop-loss insurance policies to protect from
individual losses over specified dollar values ($200,000 for employee health insurance claims,
$350,000 for workers compensation and $250,000 for general liability). The full extent of
certain claims, especially workers compensation and general liability claims, may not become
fully determined for several years. Therefore, we estimate potential obligations for liabilities
that have been incurred but not yet reported based upon use of outside actuarial consultants,
historical data, and experience. Although we believe the reserves established for these
obligations are reasonably estimated, any significant increase in the number of claims or costs
associated with claims made under these plans could have a material adverse effect on our
financial results. At December 29, 2007, we had recorded net insurance reserves of $21.7
million, compared to $21.9 million at December 30, 2006.
Tax Contingencies
Our income tax returns are periodically audited by U.S. federal and state tax authorities. These
audits include questions regarding our tax filing positions, including the timing and amount of
deductions and the allocation of income among various tax jurisdictions. At any one time,
multiple tax years are subject to audit by the various tax authorities. In evaluating the
exposures associated with our various tax filing positions, we record reserves for probable
exposures. A number of years may elapse before a particular matter, for which we have
established a reserve, is audited and fully resolved or clarified. We adjust our tax
contingencies reserve and income tax provision in the period in which actual results of a
settlement with tax authorities differs from our established reserve, the statute of limitations
expires for the relevant tax authority to examine the tax position or when more information
becomes available.
Effective December 31, 2006, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109 (FIN 48). Accordingly, we recognize a liability for certain tax benefits
that do not meet the minimum requirements for recognition in the financial statements
Our tax contingencies reserve contains uncertainties because management is required to make
assumptions and to apply judgment to estimate the exposures associated with our various filing
positions and whether or not the minimum requirements for recognition of tax benefits have been
met.
Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of
new stores or business ventures, the level of earnings and the results of tax audits.
Credit Cards/Accounts Receivable
Sales generated through our private label credit cards are not reflected as accounts receivable.
Under an agreement with Citi Commerce Solutions, a division of Citigroup (Citigroup), consumer
and business credit is extended directly to customers by Citigroup. All credit program and related
services are performed and controlled directly by Citigroup.
Pre-opening Costs
Non-capital expenditures incurred in connection with opening new store and distribution centers,
primarily payroll and rent, are expensed as incurred. Preopening costs were approximately $9.4
million, $9.4 million and $7.2 million in 2007, 2006 and 2005, respectively.
Store Closing Costs
We regularly evaluate the performance of our stores and periodically close those that are
under-performing. We recognize store closing costs in accordance with the provisions of SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that a
liability for a cost associated with an exit or disposal activity be recognized when the liability
is incurred, usually in the period the store closes. Store closing costs were not significant to
results of operations for any of the fiscal years presented.
42
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 card
transactions process within 24-48 hours and are accordingly classified as cash and cash
equivalents.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, short-term receivables and payables
and long-term debt instruments, including capital leases. The carrying values of cash and cash
equivalents, receivables and trade payables equal current fair value. The terms of our revolving
credit agreement (the Credit Agreement) include variable interest rates, which approximate
current market rates.
Inventories
Inventories are stated using the lower of last-in, first-out (LIFO) cost or market. Inventories are
not in excess of market value. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the fiscal year, sales for the year and
the rate of inflation/deflation for the year. If the first-in, first-out (FIFO) method of
accounting for inventory had been used, inventories would have been approximately $25.5 million and
$20.3 million higher than reported at December 29, 2007 and December 30, 2006, respectively.
Vendor Concentration
Approximately 200 vendors accounted for 80% of our purchases for fiscal 2007, with no one vendor
representing more than 10% of purchases during the year.
Warehousing and Distribution Costs
Costs incurred at our distribution centers for receiving, warehousing and preparing product for
delivery are expensed as incurred and are included in selling, general and administrative expenses
in the Consolidated Statements of Income.
Property and Equipment
Property and equipment are carried 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 initial term of the lease or the useful life of
the improvement, whichever is lesser. Leasehold improvements added late in the lease term are
amortized over the term of the lease (including the first renewal option, if the renewal is
reasonably assured) or the useful life of the improvement, whichever is lesser. The following
estimated useful lives are generally applied:
|
|
|
|
|
|
|
Life |
|
Buildings |
|
30 35 years |
Leasehold and building improvements |
|
5 15 years |
Furniture, fixtures and equipment |
|
5 10 years |
Computer software and hardware |
|
3 5 years |
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 three to five years. These costs are included in Computer software and hardware
in the accompanying Consolidated Balance Sheets. Certain software costs not meeting the criteria
for capitalization are expensed as incurred.
43
Leases
Assets under capital leases are amortized in accordance with our normal depreciation policy for
owned assets or over the lease term (regardless of renewal options), if shorter, and the related
charge to operations included in depreciation expense in the Consolidated Statements of Income.
Certain leases include rent increases during the initial lease term. For these leases, we
recognize the related rental expense on a straight-line basis over the term of the lease (which
includes the pre-opening period of construction, renovation, fixturing and merchandise placement)
and record the difference between the expense charged to operations and amounts paid as a rent
liability.
We occasionally receive reimbursements from landlords to be used towards improving the related
store to be leased. Reimbursements are primarily for the purpose of performing work required to
divide a much larger location into smaller segments, one of which we will use for our store. This
work could include the addition of demising walls, separation of plumbing, utilities, electric
work, entrances (front and back) and other work as required. Leasehold improvements are recorded
at their gross costs including items reimbursed by landlords. Related reimbursements are amortized
on a straight-line basis as a reduction of rent expense over the initial lease term.
Impairment of Long-Lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately
tested for impairment, are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. We apply the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets to assets held for sale.
When evaluating long-lived assets for potential impairment, we first compare the carrying value of
the asset to the assets estimated future cash flows (undiscounted and without interest charges).
If the estimated future cash flows are less than the carrying value of the asset, we calculate an
impairment loss. The impairment loss calculation compares the carrying value of the asset to the
assets estimated fair value, which may be based on estimated future cash flows (discounted and
with interest charges). We recognize an impairment loss if the amount of the assets carrying value
exceeds the assets 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 useful life of that asset.
No significant impairment charges were recognized in fiscal years 2007, 2006 and 2005.
Goodwill
Goodwill and intangible assets with indefinite lives are not amortized. We evaluate goodwill for
impairment annually and whenever events or changes in circumstances indicate the carrying value of
the goodwill may not be recoverable. We complete our impairment evaluation by performing internal
valuation analyses, considering other publicly available market information and using an
independent valuation firm, as appropriate.
In the fourth quarter of fiscal 2007, we completed our annual impairment testing of goodwill using
the methodology described herein, and determined there was no impairment. During the current year,
we reduced recorded goodwill by $30,000 upon a final determination of the value related to acquired
intangible assets.
44
Advertising Costs
Advertising costs consist of expenses incurred in connection with newspaper circulars, television
and radio, as well as direct mail, newspaper advertisements and other promotions. 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 for fiscal 2007, 2006 and
2005 were approximately $58.6 million, $53.2 million and $47.4 million, respectively. Prepaid
advertising costs were approximately $1.3 million and $1.5 million at December 29, 2007 and
December 30, 2006, respectively.
Income Taxes
We account for income taxes using the liability method, whereby deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be in effect when the
differences are expected to be recovered or settled.
Net Income Per Share
As provided by SFAS No. 128, Earnings per Share, basic earnings per share is calculated by
dividing net income by the weighted average number of shares outstanding during the period.
Diluted EPS is calculated by dividing net income by the weighted average diluted shares
outstanding. Diluted shares are computed using the treasury stock method for options.
Foreign Currency Translation
Adjustments resulting from translating foreign functional currency financial statements into U.S.
dollars are included in the foreign currency translation adjustment, a component of accumulated
other comprehensive loss in shareholders equity. The assets and liabilities of our store in
British Columbia, which was sold in fiscal 2007, were translated into United States dollars at
year-end rates of exchange, while revenues and expense items were translated at average rates for
the period.
Note 2 Share-Based Compensation:
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payments, using the modified
prospective method and began recognizing compensation expense for share-based payments based on the
fair value of the awards. Share-based payments include stock option grants and certain
transactions under our other stock plans. SFAS No. 123(R) requires share-based compensation
expense recognized the beginning of fiscal 2006 to be based on the following: a) grant date fair
value estimated in accordance with the original provisions of SFAS No. 123 for unvested options
granted prior to the adoption date; b) grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R) for all share-based payments granted subsequent to the adoption date;
and c) the discount on shares sold to employees subsequent to the adoption date, which represents
the difference between the grant date fair value and the employee purchase price.
For fiscal 2007, the adoption of the SFAS No. 123(R) fair value method resulted in share-based
compensation expense (a component of selling and general and administrative expenses) related to
our stock plans that we would not have recognized had we continued to account for share-based
compensation under APB 25 (defined below). Share-based compensation expense lowered pre-tax
income by $10.6 million (including a reduction in expense of approximately $0.5 million related to
the modification of certain board members and officers upon resignation) and $9.7 million for
fiscal 2007 and 2006, respectively. SFAS No. 123(R) also requires the benefits of tax deductions
in excess of recognized compensation cost to be reported as a financing cash flow rather than as an
operating cash flow, as required prior to adoption of SFAS No. 123(R).
45
Prior to January 1, 2006, we accounted for share-based payments using the intrinsic-value-based
recognition method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25). As options were granted at an exercise price equal to the market
value of the underlying common stock on the date of grant, no stock-based employee compensation
cost was reflected in net income prior to adopting SFAS No. 123(R). As we adopted SFAS No. 123(R)
under the modified-prospective-transition method, results from prior periods have not been
restated.
The following table illustrates the effect on net income and earnings per share as if we applied
the fair value recognition provisions of SFAS No. 123 to options granted under our stock plans in
all periods presented (in thousands). For purposes of this pro forma disclosure, the value of the
options is estimated using a modified Black-Scholes option pricing model for all option grants.
|
|
|
|
|
|
|
2005 |
|
Net income as reported |
|
$ |
85,669 |
|
Pro forma compensation expense, net of income taxes |
|
|
(3,943 |
) |
|
|
|
|
Net income pro forma |
|
$ |
81,726 |
|
|
|
|
|
|
|
|
|
|
Net income per share basic: |
|
|
|
|
As reported |
|
$ |
2.19 |
|
Pro forma |
|
$ |
2.09 |
|
Net income per share diluted: |
|
|
|
|
As reported |
|
$ |
2.09 |
|
Pro forma |
|
$ |
2.00 |
|
Under SFAS No. 123(R), forfeitures are estimated at the time of valuation and reduce expense
ratably over the vesting period. This estimate is adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from the previous estimate. Under SFAS
No. 123 and APB 25, we elected to account for forfeitures at the time of valuation and reduce the
pro-forma expense ratably over the period.
Effective May 4, 2006, we adopted the 2006 Stock Incentive Plan, which replaced the 2000 Stock
Incentive Plan. Following the adoption of the 2006 Stock Incentive Plan, no further grants may be
made under the 2000 Stock Incentive Plan.
Under our 2006 Stock Incentive Plan, options may be granted to officers, non-employee directors and
other employees. The per share exercise price of options granted shall not be less than the fair
market value of the stock on the date of grant and such options will expire no later than ten years
from the date of grant. In the case of a stockholder owning more than 10% of the outstanding
voting stock of the Company, the exercise price of an incentive stock option may not be less than
110% of the fair market value of the stock on the date of grant and such options will expire no
later than five years from the date of grant. Also, the aggregate fair market value of the stock
with respect to which incentive stock options are exercisable on a tax deferred basis for the first
time by an individual in any calendar year may not exceed $100,000. Vesting of options commences
at various anniversary dates following the dates of grant.
Under the terms of the 2006 Stock Incentive Plan, a maximum of 2,750,000 shares are available for
grant as stock options or other awards. At December 29, 2007, we had 2,189,432 shares available
for future equity awards under the Companys 2006 Stock Incentive Plan.
46
The fair value of each option grant is separately estimated for each vesting date. The fair value
of each option is recognized as compensation expense ratably over the vesting period. We have
estimated the fair value of all stock option awards as of the date of the grant by applying a
modified 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 weighted averages for key assumptions used in determining the fair value of options granted
during fiscal 2007, 2006 and 2005, as well as a summary of the methodology applied to develop each
assumption, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Expected price volatility (a) |
|
|
38.1 41.7 |
% |
|
|
48.4 |
% |
|
|
48.1 |
% |
Risk-free interest rate (a) |
|
|
4.1 5.0 |
% |
|
|
4.6 |
% |
|
|
3.8 |
% |
Weighted average expected lives (in years) (a) |
|
|
4.1 5.4 |
|
|
|
7.3 |
|
|
|
7.1 |
|
Forfeiture rate (a) |
|
|
1.4 8.0 |
% |
|
|
8.1 |
% |
|
|
21.8 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
(a) |
|
Beginning in 2007, a range is provided instead of a weighted average. |
Expected Price Volatility This is a measure of the amount by which a price has
fluctuated or is expected to fluctuate. We use actual historical changes in the
market value of the stock to calculate expected price volatility because we believe
that this is the best indicator of future volatility. Prior to July 2006, we
calculated weekly market value changes from the date of grant over a past period
representative of the expected life of the options to determine volatility.
Beginning in July 2006, we calculated 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. An increase in the expected volatility will
increase compensation expense.
Risk-Free Interest Rate This is the U.S. Treasury Constant Maturity rate over a
term equal to the expected life of the option. An increase in the risk-free interest
rate will increase compensation expense.
Weighted Average Expected Lives 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 life will increase compensation expense.
Forfeiture Rate This is the estimated percentage of options granted that are
expected to be forfeited or cancelled before becoming fully vested. This estimate is
based on historical experience. An increase in the forfeiture rate will decrease
compensation expense.
Dividend Yield We have not made any dividend payments nor do we plan to pay
dividends in the foreseeable future. An increase in the dividend yield will decrease
compensation expense.
47
Stock Options
We issue new shares for options when exercised. A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
|
|
Options |
|
|
Price |
|
|
Term |
|
|
(in thousands) |
|
Outstanding December 25, 2004 |
|
|
3,479,494 |
|
|
$ |
12.28 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
449,100 |
|
|
|
37.31 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,089,011 |
) |
|
|
6.67 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(66,305 |
) |
|
|
25.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2005 |
|
|
2,773,278 |
|
|
$ |
18.24 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
498,150 |
|
|
|
61.51 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(809,929 |
) |
|
|
10.05 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(70,138 |
) |
|
|
42.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 30, 2006 |
|
|
2,391,361 |
|
|
$ |
29.32 |
|
|
|
6.5 |
|
|
$ |
45,301 |
|
Granted |
|
|
579,666 |
|
|
|
46.78 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(371,823 |
) |
|
|
15.03 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(310,878 |
) |
|
|
49.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 29, 2007 |
|
|
2,288,326 |
|
|
$ |
33.31 |
|
|
|
6.4 |
|
|
$ |
22,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 29, 2007 |
|
|
1,373,737 |
|
|
$ |
23.50 |
|
|
|
5.0 |
|
|
$ |
22,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values in the table above represents the total difference between our
closing stock price on December 29, 2007 and the option exercise price, multiplied by the number of
in-the-money options as of December 29, 2007. As of December 29, 2007, total unrecognized
compensation expense related to non-vested stock options is $15,361,000 with a weighted average
expense recognition period of 1.4 years.
The following summarizes information concerning stock option grants during fiscal 2007, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Options granted with exercise price equal to market value: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
46.15 |
|
|
$ |
61.07 |
|
|
$ |
36.97 |
|
Weighted average fair value |
|
$ |
19.39 |
|
|
$ |
35.59 |
|
|
$ |
20.84 |
|
Stock options granted |
|
|
473,748 |
|
|
|
463,150 |
|
|
|
399,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted with exercise price greater than market
value: (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
|
|
|
$ |
67.40 |
|
|
$ |
40.03 |
|
Weighted average fair value |
|
$ |
|
|
|
$ |
21.81 |
|
|
$ |
16.10 |
|
Stock options granted |
|
|
|
|
|
|
35,000 |
|
|
|
50,000 |
|
|
|
|
(a) |
|
According to the terms of the 2006 Stock Incentive Plan, in the case of a stockholder owning more
than 10% of the outstanding voting stock, the exercise price of an incentive stock option may not be less than
110% of the fair market value of the stock on the date of grant and such options will expire no later than five
years from the date of grant. |
48
During 2007, certain options were modified to immediately vest and extend the related exercise
period, effectively resulting in a cancellation of existing options and grant of new options. The
options retained the original exercise price and, as a result, the modified options had exercise
prices both above and below the modification date fair value. The following summarizes the
activity related to these modifications:
|
|
|
|
|
|
|
2007 |
|
Options granted with exercise price greater than market value: |
|
|
|
|
Weighted average exercise price |
|
$ |
58.87 |
|
Weighted average fair value |
|
$ |
0.93 |
|
Stock options granted |
|
|
55,668 |
|
|
|
|
|
|
Options granted with exercise price less than market value: |
|
|
|
|
Weighted average exercise price |
|
$ |
39.11 |
|
Weighted average fair value |
|
$ |
2.16 |
|
Stock options granted |
|
|
50,250 |
|
Other information relative to option activity during fiscal 2007, 2006 and 2005 is as follows (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Weighted average grant date fair value of stock
options granted |
|
$ |
16.15 |
|
|
$ |
34.61 |
|
|
$ |
20.33 |
|
Total fair value of stock options vested |
|
$ |
10,748 |
|
|
$ |
5,578 |
|
|
$ |
8,304 |
|
Total intrinsic value of stock options exercised |
|
$ |
12,075 |
|
|
$ |
37,241 |
|
|
$ |
41,662 |
|
Restricted Stock
We issue shares for restricted stock awards once vesting occurs and related restrictions lapse. We
issued 68,889 restricted shares under the 2006 Stock Incentive Plan. The shares vest over a one to
three-year term. The status of restricted shares as of December 29, 2007 is presented below:
|
|
|
|
|
|
|
|
|
Restricted Shares |
|
Shares |
|
|
Grant Date
Fair Value |
|
Restricted at December 31, 2005 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
2,480 |
|
|
|
64.45 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted at December 30, 2006 |
|
|
2,480 |
|
|
|
64.45 |
|
Granted |
|
|
68,889 |
|
|
|
46.01 |
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
7,500 |
|
|
|
46.17 |
|
|
|
|
|
|
|
|
|
Restricted at December 29, 2007 |
|
|
63,869 |
|
|
$ |
46.71 |
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan (the ESPP) whereby all our employees have the opportunity
to purchase, through payroll deductions, shares of common stock at a 15% discount. Pursuant to the
terms of the ESPP, we issued 46,654, 38,354 and 42,065 shares of common stock during fiscal 2007,
2006 and 2005, respectively. The total cost related to the ESPP, including the compensation
expense calculation under SFAS 123(R), was approximately $556,000, $430,000 and $247,000 in fiscal
2007, 2006 and 2005, respectively. At December 29, 2007, there were 3,299,403 shares of common
stock reserved for future issuance under the ESPP.
There were no significant modifications to the Companys share-based compensation plans during
fiscal 2007.
49
Note 3 Acquisition of Dels Farm Supply:
On November 10, 2005, the Company acquired the assets of privately-held Dels Farm Supply, Inc.
(Dels) for $17.6 million (including 16 stores) and the assumption of certain liabilities. Based
in Lakewood, Washington, Dels now operates 23 stores, primarily in the Pacific Northwest, that
offer a wide selection of products tailored to those who enjoy the rural lifestyle. Dels
specializes in the equine, animal and pet category. The purchase price was allocated as follows (in
thousands):
|
|
|
|
|
Inventory |
|
$ |
4,300 |
|
Current assets |
|
|
803 |
|
Fixed assets |
|
|
1,500 |
|
Other assets |
|
|
2,142 |
|
Goodwill |
|
|
10,258 |
|
Current liabilities |
|
|
(1,400 |
) |
|
|
|
|
|
|
$ |
17,603 |
|
|
|
|
|
Upon completion of the Companys procedures, the initial estimates related to goodwill were revised
to the amounts reflected above (see Note 1).
Note 4 Credit Agreement:
In August 2002, we entered into a credit agreement with Bank of America, N.A., as agent for a
lender group (the Credit Agreement), whereby we were permitted to borrow up to $155 million. The
Credit Agreement was subsequently amended on January 28, 2004 and September 30, 2004 (primarily
with respect to financial covenants) and replaced on February 22, 2007.
On February 22, 2007 we entered into a new Senior Credit Facility with Bank of America, N.A, as
agent for a lender group (the Credit Agreement), allowing us to borrow up to $250 million (with
sublimits of $75 million and $10 million for letters of credit and swingline loans, respectively).
This agreement is unsecured and has a five year term, with proceeds expected to be used for working
capital, capital expenditures and share repurchases.
At December 29, 2007, there were $55 million in borrowings outstanding under the Credit Agreement
and there were no outstanding borrowings at December 30, 2006. There were an additional $25.0
million and $24.9 million outstanding letters of credit as of December 29, 2007 and December 30,
2006, respectively. Borrowings bear interest at either the banks base rate (7.25% at December 29,
2007) or the London Inter-Bank Offer Rate (LIBOR) (4.86% at December 29, 2007) plus an additional
amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50% at
December 29, 2007). We are also required to pay, quarterly in arrears, a commitment fee ranging
from 0.06% to 0.18% per annum and adjusted quarterly based on our performance, for unused capacity
(0.10% at December 29, 2007). There are no compensating balance requirements associated with the
Credit Agreement.
The Credit Agreement contains certain restrictions regarding additional indebtedness, capital
expenditures, business operations, guarantees, investments, mergers, consolidations and sales of
assets, transactions with subsidiaries or affiliates, and liens. The new agreement eliminated the
capital expenditures, net worth and current ratio requirements from the previous agreement and
requires quarterly compliance with respect to fixed charge coverage and leverage ratios. We were
in compliance with all covenants at December 29, 2007.
In February 2008, we exercised the Increase Option on our Senior Credit Facility increasing the
overall capacity from $250 million to $350 million. Each of the nine lenders within our credit
facility bank group participated in the increase. Simultaneously, definitions within the existing
credit facility were modified as follows: (1) added an additional Increase Option for $150 million
(subject to additional lender group commitments); (2) modified the definition of swingline
committed amount from $10 million to $20 million; and (3) revised the definition of the fixed
charge coverage ratio covenant to remove certain defined fixed charges. All pricing terms and the
term of the facility remained the same.
50
Note 5 Leases:
We lease the majority of our office space and retail store locations, certain distribution centers,
transportation equipment and other equipment under various noncancellable operating leases. The
leases have varying terms and expire at various dates through 2029 and 2025 for capital leases and
operating leases, respectively. Store leases typically have initial terms of between 10 and 15
years, with two to four optional renewal periods of five years each. Some leases require the
payment of contingent rent that is based upon store sales above agreed upon sales levels for the
year. The sales levels vary for each store and are established in the lease agreements.
Generally, most of the leases also require that we pay associated taxes, insurance and maintenance
costs.
Total rent expense for fiscal 2007, 2006 and 2005 was approximately $124.0 million, $104.3 million
and $83.3 million respectively. Total contingent rent expense for fiscal 2007, 2006, and 2005 was
insignificant.
Future minimum payments, by year and in the aggregate, under leases with initial or remaining terms
of one year or more consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Operating |
|
|
|
Leases |
|
|
Leases |
|
2008 |
|
$ |
1,040 |
|
|
$ |
126,419 |
|
2009 |
|
|
710 |
|
|
|
122,408 |
|
2010 |
|
|
512 |
|
|
|
117,108 |
|
2011 |
|
|
198 |
|
|
|
112,219 |
|
2012 |
|
|
138 |
|
|
|
105,456 |
|
Thereafter |
|
|
2,644 |
|
|
|
621,410 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
5,242 |
|
|
$ |
1,205,020 |
|
|
|
|
|
|
|
|
|
Amount representing interest |
|
|
(2,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
3,198 |
|
|
|
|
|
Less: current portion |
|
|
(847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations |
|
$ |
2,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under capital leases were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Building and improvements |
|
$ |
1,581 |
|
|
$ |
1,581 |
|
Computer software and hardware |
|
|
4,275 |
|
|
|
4,306 |
|
Less: accumulated depreciation and amortization |
|
|
(2,860 |
) |
|
|
(2,156 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,996 |
|
|
$ |
3,731 |
|
|
|
|
|
|
|
|
Note 6 Capital Stock:
The authorized capital stock of the Company consists of common stock and preferred stock. The
Company is authorized to issue 100,000,000 shares of common stock. The Company is also authorized
to issue 40,000 shares of Preferred Stock, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors.
Note 7 Treasury Stock:
In February 2007, our Board of Directors authorized a share repurchase program which provides for
repurchase of up to $200 million (excluding commissions) of common stock over an approximate
three-year period. The repurchases may be made from time to time on the open market or in privately
negotiated transactions. The timing and amount of any shares repurchased under the program will
depend on a variety of factors, including price, corporate and regulatory requirements, capital
availability, and other market conditions. Repurchased shares will be held in treasury. The program
may be limited or terminated at any time without prior notice.
During 2007 we repurchased 3,216,187 shares under the share repurchase program for $150.0 million.
As of December 29, 2007, we had remaining authorization under the share repurchase program of $50.0
million.
51
Note 8 Comprehensive Income:
Comprehensive income for each fiscal year is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
96,241 |
|
|
$ |
91,008 |
|
|
$ |
85,669 |
|
Foreign currency translation adjustment |
|
|
22 |
|
|
|
(11 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
96,263 |
|
|
$ |
90,997 |
|
|
$ |
85,658 |
|
|
|
|
|
|
|
|
|
|
|
Note 9 Net Income Per Share:
Net income per share is calculated as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
96,241 |
|
|
|
39,220 |
|
|
$ |
2.45 |
|
Dilutive stock options outstanding |
|
|
|
|
|
|
880 |
|
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
96,241 |
|
|
|
40,100 |
|
|
$ |
2.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
91,008 |
|
|
|
40,016 |
|
|
$ |
2.27 |
|
Dilutive stock options outstanding |
|
|
|
|
|
|
1,044 |
|
|
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
91,008 |
|
|
|
41,060 |
|
|
$ |
2.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
Net |
|
|
|
|
|
|
Per Share |
|
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
85,669 |
|
|
|
39,062 |
|
|
$ |
2.19 |
|
Dilutive stock options outstanding |
|
|
|
|
|
|
1,918 |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
85,669 |
|
|
|
40,980 |
|
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options excluded from the above calculations totaled 194,455, 217,118 and
19,853 in 2007, 2006 and 2005, respectively.
Note 10 Income Taxes:
In June 2006, FASB issued FIN 48, to create a single model to address accounting for uncertainty in
tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This
Interpretation prescribes the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. Tax positions that meet a
more-likely-than-not recognition threshold should be measured in order to determine the tax
benefit to be recognized. We are no longer subject to federal examination for years before 2005,
nor state and local income tax examinations for years before 2002.
We adopted the provisions of FIN 48 in fiscal 2007, as required. As a result, we charged
approximately $1.9 million to retained earnings for the cumulative effect of adoption, including
interest. Interest and penalties are immaterial at the date of adoption. The total amount of
unrecognized tax benefits that, if recognized, would increase the effective tax rate, is $2.3
million. In addition, we will recognize current interest accrued related to these uncertain tax
positions as interest expense.
52
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
49,395 |
|
|
$ |
54,022 |
|
|
$ |
56,917 |
|
State |
|
|
2,321 |
|
|
|
3,832 |
|
|
|
4,961 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
51,716 |
|
|
|
57,854 |
|
|
|
61,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
4,449 |
|
|
|
(2,525 |
) |
|
|
(10,513 |
) |
State |
|
|
2,598 |
|
|
|
(1,005 |
) |
|
|
(2,222 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
7,047 |
|
|
|
(3,530 |
) |
|
|
(12,735 |
) |
|
|
|
|
|
|
|
|
|
|
Total provision |
|
$ |
58,763 |
|
|
$ |
54,324 |
|
|
$ |
49,143 |
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Current tax assets: |
|
|
|
|
|
|
|
|
Inventory valuation |
|
$ |
7,696 |
|
|
$ |
6,485 |
|
Accrued employee benefit costs |
|
|
7,670 |
|
|
|
7,803 |
|
Other |
|
|
5,367 |
|
|
|
10,463 |
|
|
|
|
|
|
|
|
|
|
|
20,733 |
|
|
|
24,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax liabilities: |
|
|
|
|
|
|
|
|
Inventory basis difference |
|
|
(20,332 |
) |
|
|
(13,273 |
) |
Other |
|
|
(124 |
) |
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
(20,456 |
) |
|
|
(13,391 |
) |
|
|
|
|
|
|
|
Net current tax asset |
|
$ |
277 |
|
|
$ |
11,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current tax assets: |
|
|
|
|
|
|
|
|
Capital lease obligation basis difference |
|
$ |
978 |
|
|
$ |
923 |
|
Rent expenses in excess of cash payments required |
|
|
12,857 |
|
|
|
10,088 |
|
Deferred compensation |
|
|
5,677 |
|
|
|
3,453 |
|
Other |
|
|
2,650 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
22,162 |
|
|
|
15,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(4,755 |
) |
|
|
(4,225 |
) |
Capital lease assets basis difference |
|
|
(618 |
) |
|
|
(636 |
) |
Other |
|
|
(97 |
) |
|
|
(183 |
) |
|
|
|
|
|
|
|
|
|
|
(5,470 |
) |
|
|
(5,044 |
) |
|
|
|
|
|
|
|
Net non-current tax asset |
|
$ |
16,692 |
|
|
$ |
10,779 |
|
|
|
|
|
|
|
|
We have evaluated the need for a valuation allowance for all or a portion of the deferred tax
assets and we believe that all of the deferred tax assets will more likely than not be realized
through future earnings.
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory
rate is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Tax provision at statutory rate |
|
$ |
54,252 |
|
|
$ |
50,867 |
|
|
$ |
47,173 |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefits |
|
|
3,205 |
|
|
|
1,837 |
|
|
|
1,780 |
|
Permanent differences |
|
|
1,306 |
|
|
|
1,620 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,763 |
|
|
$ |
54,324 |
|
|
$ |
49,143 |
|
|
|
|
|
|
|
|
|
|
|
The Company and its affiliates file income tax returns in the U. S. and various state and local
jurisdictions. With few exceptions, we are no longer subject to federal, state and local income
tax examinations by tax authorities for years before 2002. Various states have commenced an
examination of our income tax returns for 2002 through 2006. We do not anticipate any adjustments
would result in a material change to results of operations. However, we anticipate that it is
reasonably possible that an additional payment in the approximate range of $900,000 to $1.5 million
will be made by the end of 2008.
53
We adopted the provisions of FIN 48 on December 30, 2006. As a result of the implementation of FIN
48, we recognized a $1.9 million increase (net of applicable federal tax benefit) in the liability
for unrecognized tax benefits, which was accounted for as a reduction to the December 30, 2006
balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows (in thousands):
|
|
|
|
|
Balance at December 30, 2006 |
|
$ |
3,558 |
|
Additions based on tax positions related to the current year |
|
|
812 |
|
Additions for tax positions of prior years |
|
|
278 |
|
Reductions for tax positions of prior years |
|
|
(377 |
) |
Reductions due to audit results |
|
|
(35 |
) |
|
|
|
|
Balance at December 29, 2007 |
|
$ |
4,236 |
|
|
|
|
|
We recognize interest accrued related to unrecognized tax benefits as interest expense (a component
of total operating expenses), and the amount is immaterial to the Consolidated Statements of
Income.
Note 11 Retirement Benefit Plans:
We have a defined contribution benefit plan, the Tractor Supply Company 401(k) Retirement Savings
Plan (the Plan), which provides retirement and other benefits for our employees. Employees
become eligible at the first quarterly entry period following their fulfillment of the eligibility
requirements. To be eligible, an employee must be at least 21 years of age, have completed 12
months of employment, and performed 1,000 hours of service in a year of service as defined by the
Plan. We match (in cash) 100% of the employees elective contributions up to 3% of the employees
eligible compensation plus 50% of the employees elective contributions from 3% to 6% of the
employees eligible compensation. In no event shall the total Company match made on behalf of the
employee exceed 4.5% of the employees eligible compensation. All current contributions are
immediately 100% vested. Company contributions to the Plan during fiscal 2007, 2006 and 2005, were
approximately $2,595,000, $2,278,000 and $1,805,000, respectively.
We offer, through a deferred compensation program, the opportunity for certain qualifying employees
to elect a deferral of up to 40% of their annual base salary and up to 100% of their annual
incentive bonus under their respective incentive bonus programs. To be eligible for the salary
deferral, each participant must contribute the maximum amount of salary to the Tractor Supply
Company 401(k) Retirement Savings Plan subject to the Companys match. Under the deferred
compensation program, the participants salary deferral is matched by the Company, 100% on the
first $3,000 of base salary contributed and 50% on the next $3,000 of base salary contributed
limited to a maximum annual matching contribution of $4,500. Each participants account earns
simple annual interest at the prime rate as in effect on January 1 each year. Each participant is
fully vested in all amounts credited to their deferred compensation account. Payments under the
program, which are made in cash and paid in ten annual installments or in a single lump sum payment
at the election of the participant, are made within 30 days following the earlier of the
participants (i) death, (ii) retirement, (iii) total and permanent disability, (iv) separation
from service, or (v) some other date designated by the participant at the time of the initial
deferral. The Companys contributions, including accrued interest, were $464,902, $403,305 and
$257,000 for fiscal 2007, 2006 and 2005, respectively.
Note 12 Commitments and Contingencies:
Construction and Real Estate Commitments
We had commitments for new store construction projects totaling approximately $8.8 million at
December 29, 2007 and a commitment to purchase two stores previously under lease for approximately
$8.5 million.
Litigation
We are involved in various litigation matters arising in the ordinary course of business. After
consultation with legal counsel, we expect these matters will be resolved without material adverse
effect on our consolidated financial position or results of operations. Any estimated loss related
to such matters has been adequately provided in accrued
liabilities to the extent probable and reasonably estimable. It is possible, however, that future
results of operations for any particular quarterly or annual period could be materially affected by
changes in circumstances relating to these proceedings.
54
Note 13 Subsequent Events:
In January 2008, we signed a construction agreement in the amount of $10.2 million as part of a
347,000 square foot expansion of our Waco, Texas distribution facility.
In February 2008, we exercised the increase option on our Senior Credit Facility increasing the
overall capacity from $250 million to $350 million. Each of the nine lenders within our credit
facility bank group participated in the increase. Simultaneously, definitions within the existing
credit facility were modified as follows: (1) added an additional Increase Option for $150 million
(subject to additional lender group commitments); (2) modified the definition of swingline
committed amount from $10 million to $20 million; and (3) revised the definition of the fixed
charge coverage ratio covenant to remove certain defined fixed charges. All pricing terms and the
term of the facility remained the same.
Note 14 Impact of Recently Issued Accounting Standards:
How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement
In March 2006, the EITF reached a consensus on EITF Issue No. 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross Versus Net Presentation), which allows companies to adopt a policy of presenting
taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF
would include taxes that are imposed on a revenue transaction between a seller and a customer, for
example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. EITF 06-3 is
effective for interim and annual reporting periods beginning in fiscal 2007. The adoption of EITF
06-3 did not impact the method for recording and reporting these sales taxes in our Consolidated
Financial statements as our policy is to exclude all such taxes from revenue.
Accounting for Uncertainty in Income Taxes
In June 2006, FASB issued FIN 48 to create a single model to address accounting for uncertainty in
tax positions. This Interpretation clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. This Interpretation prescribes the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. Tax positions that meet a
more-likely-than-not recognition threshold should be measured in order to determine the tax
benefit to be recognized. We adopted FIN 48 in fiscal 2007, as required (see Note 10).
Fair Value Measurements
In September 2006, the FASB issued statement No. 157, Fair Value Measurements, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. On December 14, 2007, the FASB issued proposed FASB Staff Position No. FAS
157-b, Effective Date of FASB Statement No. 157 (the proposed FSP). The proposed FSP would amend
FASB Statement No. 157, Fair Value Measurements (Statement 157), to delay the effective date of
Statement 157 for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at
least annually). The proposed FSP defers the effective date of Statement 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years for items within
the scope of the proposed FSP. The Company is subject to the remaining provisions of SFAS 157
beginning December 30, 2007. The adoption of SFAS 157 did not have a material impact on our
financial condition, results of operations, or cash flow.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued statement No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 allows entities the option to measure eligible
financial instruments at fair value as of specified dates. Such election, which may be applied on
an instrument by instrument basis, is typically
irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15,
2007. The adoption of SFAS 159 did not result in a material impact to our financial condition,
results of operations, or cash flow.
55
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of 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) of the 1934 Act, as of December 29, 2007.
Based on this evaluation, our principal executive officer and principal financial officer concluded
that, as of December 29, 2007, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the 1934 Act
is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms.
Managements Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. The Companys 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 Companys internal control over financial reporting as
of December 29, 2007. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on this assessment, management believes that, as of December 29, 2007,
the Companys internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm which also audited the
Companys consolidated financial statements, has issued a report on the Companys internal control
over financial reporting, which is included herein.
Change in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our
last fiscal quarter that have materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
Item 9B. Other Information
In February 2008, we exercised the increase option on our Senior Credit Facility increasing the
overall capacity from $250 million to $350 million. Each of the nine lenders within our credit
facility bank group participated in the increase. Simultaneously, definitions within the existing
credit facility were modified as follows: (1) added an additional Increase Option for $150 million
(subject to additional lender group commitments); (2) modified the definition of swingline
committed amount from $10 million to $20 million; and (3) revised the definition of the fixed
charge coverage ratio covenant to remove certain defined fixed charges. All pricing terms and the
term of the facility remained the same.
56
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information set forth under the caption Executive Officers of the Registrant in Part I of
this Form 10-K is incorporated herein by reference.
The information set forth under the captions Corporate Governance Code of Ethics, 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 1, 2008 is incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the captions Corporate Governance Compensation Committee
Interlock and Insider Participation, Compensation of Directors, Executive Compensation,
Compensation Discussion and Analysis, Summary Compensation Table, Non-Qualified Deferred
Compensation, Grants of Plan-Based Awards, Outstanding Equity Awards At End of Fiscal Year,
Option Exercises and Stock Vested, and Potential Payments Upon Termination or Change in Control
in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 1, 2008 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 1, 2008
is incorporated herein by reference.
Following is a summary of our equity compensation plans as of December 29, 2007, under which equity
securities are authorized for issuance, aggregated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities to be |
|
|
Weighted Average |
|
|
|
|
|
|
Issued Upon Exercise of |
|
|
Exercise Price of |
|
|
Number of Securities |
|
|
|
Outstanding Options, |
|
|
Outstanding Options, |
|
|
Remaining Available |
|
Plan Category |
|
Warrants, and Rights |
|
|
Warrants and Rights |
|
|
for Future Issuance |
|
Equity compensation plans approved
by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Stock Incentive Plan |
|
|
537,969 |
|
|
$ |
41.19 |
|
|
|
2,189,432 |
|
2000 Stock Incentive Plan (1) |
|
|
1,468,864 |
|
|
|
32.39 |
|
|
|
|
|
1994 Stock Option Plan (1) |
|
|
345,362 |
|
|
|
19.43 |
|
|
|
|
|
Employee Stock Purchase Plan (2) |
|
|
|
|
|
|
|
|
|
|
3,299,403 |
|
Equity Compensation Plans not
approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,352,195 |
|
|
$ |
32.50 |
|
|
|
5,488,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The 2000 Stock Incentive Plan was superseded in May 2006. The 1994 Stock Option Plan expired in February
2004. |
|
(2) |
|
Represents shares available as of December 29, 2007. |
The information set forth in Note 2 to the Notes to Consolidated Financial Statements contained
in this Report, provides further information with respect to the material features of each plan.
57
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information set forth under the captions Item 1 Election of Directors, Corporate
Governance and Related-Party Transactions in our Proxy Statement for our Annual Meeting of
Stockholders to be held on May 1, 2008 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
Auditor in our Proxy Statement for our Annual Meeting of Stockholders to be held on May 1, 2008,
is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) (1) |
|
Financial Statements |
|
|
|
See Consolidated Financial Statements under Item 8 on pages 32 through 56 of this Report. |
|
(a) (2) |
|
Financial Statement Schedules |
|
|
|
None |
|
|
|
Financial statement schedules have been omitted because they are not applicable or because
the required information is otherwise furnished. |
|
(a) (3) |
|
Exhibits |
|
|
|
The exhibits listed in the Index to Exhibits, which appears on pages 60 through 64 of this
Form 10-K, are incorporated herein by reference or filed as part of this Form 10-K. |
58
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 27, 2008 |
By: |
/s/ Anthony F. Crudele
|
|
|
|
Anthony F. Crudele |
|
|
|
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/ Anthony F. Crudele
Anthony F. Crudele
|
|
Executive Vice President
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
|
|
February 27, 2008 |
|
|
|
|
|
/s/ James F. Wright
James F. Wright
|
|
Chairman of the Board, President
and Chief Executive Officer and Director
(Principal Executive Officer)
|
|
February 27, 2008 |
|
|
|
|
|
/s/ John Adams
John Adams
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ William Bass
William Bass
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ Jack C. Bingleman
Jack C. Bingleman
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ S.P. Braud
S.P. Braud
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ Richard W. Frost
Richard W. Frost
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ Cynthia T. Jamison
Cynthia T. Jamison
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ Gerard E. Jones
Gerard E. Jones
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ George MacKenzie
George MacKenzie
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ Edna K. Morris
Edna K. Morris
|
|
Director
|
|
February 27, 2008 |
|
|
|
|
|
/s/ Joe M. Rodgers
Joe M. Rodgers
|
|
Director
|
|
February 27, 2008 |
59
EXHIBIT INDEX
|
|
|
|
|
|
3.1 |
|
|
Restated Certificate of Incorporation, as amended, of the Company, filed
with the Delaware Secretary of State on February 14, 1994 (filed as Exhibit 4.1
to Registrants Registration Statement on Form S-8, Registration No. 333-102768,
filed with the Commission on January 28, 2003. and incorporated herein by
reference). |
|
|
|
|
|
|
3.2 |
|
|
Certificate of Amendment of the Restated Certificate of Incorporation, as
amended, of the Company, filed with the Delaware Secretary of State on April 28,
1995 (filed as Exhibit 4.2 to Registrants Registration Statement on Form S-8,
Registration No. 333-102768, filed with the Commission on January 28, 2003, and
incorporated herein by reference). |
|
|
|
|
|
|
3.3 |
|
|
Certificate of Amendment of the Restated Certificate of Incorporation, as
amended, of the Company, filed with the Delaware Secretary of State on May 13,
1994 (filed as Exhibit 4.3 to Registrants Registration Statement on Form S-8,
Registration No. 333-102768, filed with the Commission on January 28, 2003, and
incorporated herein by reference). |
|
|
|
|
|
|
3.4 |
|
|
Certificate of Amendment of the Restated Certificate of Incorporation, as
amended, of the Company (filed as Exhibit 3.1 to Registrants Quarterly Report
on Form 10-Q, filed with the Commission on May 3, 2005, Commission File No.
000-23314, and incorporated herein by reference) |
|
|
|
|
|
|
3.5 |
|
|
Amended and Restated By-laws of the Company as currently in effect (filed
as Exhibit 3.7 to Registrants Registration Statement on Form S-1, Registration
No. 33-73028, filed with the Commission on December 17, 1993, and incorporated
herein by reference). |
|
|
|
|
|
|
3.6 |
|
|
Amendment No. 1 to Amended and Restated By-Laws (filed as Exhibit 3.5 to
Registrants Quarterly Report on Form 10-Q, filed with the Commission on
August 4, 2004, Commission File No. 000-23314, and incorporated herein by
reference) |
|
|
|
|
|
|
3.7 |
|
|
Amendment No. 2 to Amended and Restated By-Laws (filed as Exhibit 3.2 to
Registrants Quarterly Report on Form 10-Q, filed with the Commission on May 3,
2005, Commission File No. 000-23314, and incorporated herein by reference) |
|
|
|
|
|
|
4.1 |
|
|
Form of Specimen Certificate representing the Companys Common Stock, par
value $.008 per share (filed as Exhibit 4.2 to Amendment No. 1 to Registrants
Registration Statement on Form S-1, Registration No. 33-73028, filed with the
Commission on January 31, 1994, and incorporated herein by reference). |
|
|
|
|
|
|
10.1 |
|
|
Indenture of Lease, dated as of January 1, 1986, between the Company and
Joseph D. Maxwell and Juliann K. Maxwell (relating to Nashville, Tennessee store)
(filed as Exhibit 10.18 to Registrants Registration Statement on Form S-1,
Registration No. 33-73028, filed with the Commission on December 17, 1993, and
incorporated herein by reference). |
|
|
|
|
|
|
10.2 |
|
|
Tractor Supply Company 1994 Stock Option Plan (filed as Exhibit 10.28 to
Registrants Registration Statement on Form S-1, Registration No. 33-73028, filed
with the Commission on December 17, 1993, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.3 |
|
|
Amendment to the Tractor Supply Company 1994 Stock Option Plan (filed as
Exhibit 4.6 to Registrants Registration Statement on Form S-8, Registration No.
333-10699, filed with the Commission on June 14, 1999, and incorporated herein by
reference).+ |
|
|
|
|
|
|
10.4 |
|
|
Second Amendment to the Tractor Supply Company 1994 Stock Option Plan
(filed as Exhibit 10.44 to Registrants Annual Report on Form 10-K, filed with
the Commission on March 24, 2000, Commission File No. 000-23314, and incorporated
herein by reference).+ |
60
|
|
|
|
|
|
10.5 |
|
|
Certificate of Insurance relating to the Medical Expense Reimbursement Plan
of the Company (filed as Exhibit 10.33 to Registrants Registration Statement on
Form S-1, Registration No. 33-73028, filed with the Commission on December 17,
1993, and incorporated herein by reference). |
|
|
|
|
|
|
10.6 |
|
|
Summary Plan Description of the Executive Life Insurance Plan of the
Company (filed as Exhibit 10.34 to Registrants Registration Statement on Form
S-1, Registration No. 33-73028, filed with the Commission on December 17, 1993,
and incorporated herein by reference).+ |
|
|
|
|
|
|
10.7 |
|
|
Tractor Supply Company 1996 Associate Stock Purchase Plan (filed as Exhibit
4.4 to Registrants Registration Statement on Form S-8, Registration No.
333-10699, filed with the Commission on August 23, 1996, and incorporated herein
by reference).+ |
|
|
|
|
|
|
10.8 |
|
|
Tractor Supply Company Restated 401(k) Retirement Plan (filed as Exhibit
4.1 to Registrants Registration Statement on Form S-3, Registration No.
333-35317, filed with the Commission on September 10, 1997, and incorporated
herein by reference).+ |
|
|
|
|
|
|
10.9 |
|
|
Second Amendment to Tractor Supply Company Restated 401(k) Retirement Plan
(filed as Exhibit 10.57 to Registrants Annual Report on Form 10-K, filed with
the Commission on March 23, 2001, Commission File No. 000-23314, and incorporated
herein by reference).+ |
|
|
|
|
|
|
10.10 |
|
|
Trust Agreement (filed as Exhibit 4.2 to Registrants Registration
Statement on Form S-3, Registration No. 333-35317, filed with the Commission on
September 10, 1997, and incorporated herein by reference). |
|
|
|
|
|
|
10.11 |
|
|
Split-Dollar Agreement, dated January 27, 1998, between the Company and
Joseph H. Scarlett, Jr., Tara Anne Scarlett and Andrew Sinclair Scarlett (filed
as Exhibit 10.45 to Registrants Annual Report on Form 10-K, filed with the
Commission on March 17, 1999, Commission File No. 000-23314, and incorporated
herein by reference). |
|
|
|
|
|
|
10.12 |
|
|
Tractor Supply Company 2000 Stock Incentive Plan (filed as Exhibit 4.5 to
Registrants Registration Statement on Form S-8, Registration No. 333-102768,
filed with the Commission on January 28, 2003 and incorporated herein by
reference).+ |
|
|
|
|
|
|
10.13 |
|
|
First Amendment to Lease Agreement, dated as of December 18, 2000, between
Tractor Supply Company and GOF Partners (filed as Exhibit 10.56 to Registrants
Annual Report on Form 10-K, filed with the Commission on March 23, 2001,
Commission File No. 000-23314, and incorporated herein by reference). |
|
|
|
|
|
|
10.14 |
|
|
Transportation Management Services Agreement between UPS Logistics Group,
Inc. and Tractor Supply Company dated May 10, 2001 (filed as Exhibit 10.58 to
Registrants Quarterly Report on Form 10-Q, filed with the Commission on August
14, 2001 Commission File No. 000-23314, and incorporated herein by reference). |
|
|
|
|
|
|
10.15 |
|
|
Tractor Supply Company Executive Deferred Compensation Plan, dated
November 11, 2001 (filed as Exhibit 10.58 to Registrants Quarterly Report on
Form 10-Q, filed with the Commission on May 13, 2002, Commission File No.
000-23314, and incorporated herein by reference). |
|
|
|
|
|
|
10.16 |
|
|
Amended Letter Agreement between the members of the joint venture
comprised of Tractor Supply Company, Great American Group, Gordon Brothers Retail
Partners, LLC and DJM Asset Management, dated January 8, 2002 (filed as Exhibit
10.60 to Registrants Quarterly Report on Form 10-Q, filed with the Commission on
May 13, 2002, Commission File No. 000-23314, and incorporated herein by
reference). |
61
|
|
|
|
|
|
10.17 |
|
|
Second Amendment to Revolving Credit Agreement, dated as of September 30,
2004 by and among Tractor Supply Company, the banks party thereto, and Bank of
America, N.A., as Administrative Agent, (filed as Exhibit 10.1 to Registrants
Quarterly Report on Form 10-Q, filed with the Commission on November 4, 2004,
Commission File No. 000-23314, and incorporated herein by reference.) |
|
|
|
|
|
|
10.18 |
|
|
Change in Control Agreement, dated August 1, 2002, between Tractor Supply
Company and Joseph H. Scarlett, Jr. (filed as Exhibit 10.76 to Registrants
Quarterly Report on Form 10-Q, filed with the Commission on November 12, 2002,
Commission File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
|
|
|
|
|
10.19 |
|
|
Change in Control Agreement, dated August 1, 2002, between Tractor Supply
Company and James F. Wright (filed as Exhibit 10.77 to Registrants Quarterly
Report on Form 10-Q, filed with the Commission on November 12, 2002, Commission
File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
|
|
|
|
|
10.20 |
|
|
Change in Control Agreement, dated August 1, 2002, between Tractor Supply
Company and Stanley L. Ruta (filed as Exhibit 10.80 to Registrants Quarterly
Report on Form 10-Q, filed with the Commission on November 12, 2002, Commission
File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.21 |
|
|
Change in Control Agreement dated October 31, 2005 between Tractor Supply
Company and Anthony F. Crudele (filed as Exhibit 10.1 to Registrants Quarterly
Report on Form 10-Q, filed with the Commission on November 1, 2005, Commission
File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.22 |
|
|
Change in Control Agreement between Tractor Supply Company and Blake A.
Fohl effective November 10, 2006 (filed as Exhibit 10.1 to Registrants Current
Report on Form 8-K, filed with the Commission on November 17, 2006, Commission
File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.23 |
|
|
Change in Control Agreement between Tractor Supply Company and Kimberly D.
Vella effective November 10, 2006 (filed as Exhibit 10.2 to Registrants Current
Report on Form 8-K, filed with the Commission on November 17, 2006, Commission
File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.24 |
|
|
Change in Control Agreement between Tractor Supply Company and Gregory A.
Sandfort effective February 11, 2008 (filed as Exhibit 10.1 to Registrants
Current Report on Form 8-K, filed with the Commission on February 12, 2008,
Commission File No. 000-23314, and incorporated herein by reference.)+ |
|
|
|
|
|
|
10.25 |
|
|
Transition and Separation Agreement dated February 17, 2006 between
Tractor Supply Company and Calvin B. Massmann (filed as Exhibit 10.1 to
Registrants Current Report on Form 8-K, Registration No. 000-23314 filed with
the Commission on February 21, 2006, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.26 |
|
|
Lease Agreement dated September 26, 2003 between Tractor Supply Company
and Duke Realty Limited (filed as Exhibit 10.52 to Registrants Annual Report on
Form 10-K, filed with the Commission on March 8, 2004, Commission File No.
000-23314, and incorporated herein by reference). |
|
|
|
|
|
|
10.27 |
|
|
First Amendment, dated December 22, 2003 to the Tractor Supply Company
401(k) Retirement Savings Plan (filed as Exhibit 10.53 to Registrants Annual
Report on Form 10-K, filed with the Commission on March 8, 2004, Commission File
No. 000-23314, and incorporated herein by reference).+ |
62
|
|
|
|
|
|
10.28 |
|
|
Lease Agreement dated January 22, 2004 between Tractor Supply Company and
The Prudential Insurance Company of America (filed as Exhibit 10.54 to
Registrants Annual Report on Form 10-K, filed with the Commission on March 8,
2004, Commission File No. 000-23314, and incorporated herein by reference). |
|
|
|
|
|
|
10.29 |
|
|
Tractor Supply Co. 2004 Cash Incentive Plan, effective April 15, 2004
(filed as Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q, filed with
the Commission on August 4, 2004, Commission File No. 000-23314, and incorporated
herein by reference). |
|
|
|
|
|
|
10.30 |
|
|
Employment Agreement between Tractor Supply Company and James F. Wright
effective July 12, 2004 (filed as Exhibit 10.2 to Registrants Quarterly Report
on Form 10-Q, filed with the Commission on August 4, 2004, Commission File No.
000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.31 |
|
|
Form of Stock Option Agreement (filed as Exhibit 10.46 to Registrants
Annual Report on Form 10-K, filed with the Commission on March 10, 2005,
Commission File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.32 |
|
|
Chairman of the Board Bonus Plan (filed as Exhibit 10.1 to Registrants
Current Report on Form 8-K, filed with the Commission on April 27, 2005,
Commission File No. 000-23314, and incorporated herein by reference).+ |
|
|
|
|
|
|
10.33 |
|
|
Form of Stock Option Agreement (filed as Exhibit 10.44 to Registrants
Annual Report on Form 10-K, filed with the Commission on March 16, 2006,
Commission File No. 000-23314, and incorporated herein by reference.)+ |
|
|
|
|
|
|
10.34 |
|
|
First Amendment, dated April 27, 2006 to the 2006 Stock Incentive Plan
(filed as Exhibit 99.1 to Registrants Current Report on Form 8-K, filed with the
Commission on April 27, 2006, Commission File No. 000-23314, and incorporated
herein by reference).+ |
|
|
|
|
|
|
10.35 |
|
|
Third Amendment to the Tractor Supply Company 1994 Stock Option Plan,
effective February 8, 2007 (filed as Exhibit 10.36 to Registrants Annual Report
on Form 10-K, filed with the Commission on February 28, 2007, Commission File No.
000-23314, and incorporated herein by reference.)+ |
|
|
|
|
|
|
10.36 |
|
|
Second Amendment to the Tractor Supply Company 2000 Stock Incentive Plan,
effective February 8, 2007 (filed as Exhibit 10.37 to Registrants Annual Report
on Form 10-K, filed with the Commission on February 28, 2007, Commission File No.
000-23314, and incorporated herein by reference.) + |
|
|
|
|
|
|
10.37 |
|
|
Second Amendment to the Tractor Supply Company 2006 Stock Incentive Plan,
effective February 8, 2007. (filed as Exhibit 10.38 to Registrants Annual Report
on Form 10-K, filed with the Commission on February 28, 2007, Commission File No.
000-23314, and incorporated herein by reference.)+ |
|
|
|
|
|
|
10.38 |
|
|
Form of Stock Option Agreement. (filed as Exhibit 10.39 to Registrants
Annual Report on Form 10-K, filed with the Commission on February 28, 2007,
Commission File No. 000-23314, and incorporated herein by reference.)+ |
|
|
|
|
|
|
10.39 |
|
|
Revolving Credit Agreement, dated as of February 22, 2007 by and among
Tractor Supply Company, the banks party thereto, and Bank of America, N.A., as
Administrative Agent. (filed as Exhibit 10.40 to Registrants Annual Report on
Form 10-K, filed with the Commission on February 28, 2007, Commission File No.
000-23314, and incorporated herein by reference.) |
63
|
|
|
|
|
|
10.40* |
|
|
First Amendment to Change in Control Agreement dated May 5, 2007 between
Tractor Supply Company and James F. Wright.+ |
|
|
|
|
|
|
10.41* |
|
|
First Amendment to Change in Control Agreement dated May 5, 2007 between
Tractor Supply Company and Anthony F. Crudele.+ |
|
|
|
|
|
|
10.42* |
|
|
First Amendment to Change in Control Agreement dated May 5, 2007 between
Tractor Supply Company and Stanley L. Ruta.+ |
|
|
|
|
|
|
10.43* |
|
|
First Amendment to Change in Control Agreement dated May 5, 2007 between
Tractor Supply Company and Blake A. Fohl.+ |
|
|
|
|
|
|
10.44* |
|
|
First Amendment to Change in Control Agreement dated May 5, 2007 between
Tractor Supply Company and Kimberly D. Vella.+ |
|
|
|
|
|
|
10.45* |
|
|
Form of Stock Option Agreement.+ |
|
|
|
|
|
|
10.46* |
|
|
Revolving Credit Agreement, dated as of February 25, 2008 by and among Tractor
Supply Company, the banks party thereto, and Bank of America, N.A., as
Administrative Agent. |
|
|
|
|
|
|
23.1* |
|
|
Consent of Ernst & Young LLP. |
|
|
|
|
|
|
31.1* |
|
|
Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2* |
|
|
Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1* |
|
|
Certification of Chief Executive Officer and Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith |
|
+ |
|
Management contract or compensatory plan or arrangement |
64