UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to________.
Commission file number 000-23314
imagea06.jpg
TRACTOR SUPPLY COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
13-3139732
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5401 Virginia Way, Brentwood, Tennessee
 
37027
(Address of Principal Executive Offices)
 
(Zip Code)
 
 
 
Registrant’s Telephone Number, Including Area Code:
 
(615) 440-4000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.008 par value
 
NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES  þ    NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES  o    NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  þ    NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES  þ    NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
þ
Accelerated filer
o
 
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
YES  o    NO þ
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on The NASDAQ Global Select Market on June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $8.3 billion.  For purposes of this response, the registrant has assumed that its directors, executive officers, and beneficial owners of 5% or more of its Common Stock are affiliates of the registrant.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
Class
 
Outstanding at January 26, 2019
Common Stock, $.008 par value
 
121,279,792
Documents Incorporated by Reference:
Portions of the Registrant’s definitive Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.



Item no.  
 Form 10-K Report Page
 
 
 
 
 
 
 
 
 
 
 
 

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FORWARD-LOOKING STATEMENTS OR INFORMATION

This Form 10-K and statements included or incorporated by reference in this Form 10-K include certain historical and forward-looking information.  The forward-looking statements included are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”).  All statements, other than statements of historical facts, which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures (including their amount and nature), business strategy, expansion and growth of the business operations and other such matters are forward-looking statements.  To take advantage of the safe harbor provided by the Act, we are identifying certain factors that could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written.  These factors include, without limitation, national, regional and local economic conditions affecting consumer spending, weather conditions, the seasonal nature of the business, the timing and acceptance of new products in the stores, the timing and mix of goods sold,  purchase price volatility (including inflationary and deflationary pressures), the ability to increase sales at existing stores, the ability to manage growth and identify suitable locations, failure of an acquisition to produce anticipated results, the ability to successfully manage expenses and execute key gross margin enhancing initiatives, increases in fuel, carrier and other transportation costs, increases in wages due to competitive pressures or minimum wage laws and regulations, the availability of favorable credit sources, capital market conditions in general, the ability to open new stores in the manner and number currently contemplated, the impact of new stores on the business, competition, including competition from online retailers, effective merchandising and marketing initiatives, the ability to retain vendors, reliance on foreign suppliers, the ability to attract, train and retain qualified employees, product liability and other claims, changes in federal, state or local regulations, potential judgments, fines, legal fees and other costs, breach of information systems or theft of employee or customer data, ongoing and potential future legal or regulatory proceedings, management of the Company’s information systems, failure to develop and implement new technologies, the failure of customer-facing technology systems, business disruption resulting from a natural or other disaster or implementation of new technologies, including but not limited to, new supply chain technologies, effective tax rate changes, including expected effects of the Tax Cuts and Jobs Act, and results of examination by taxing authorities, the imposition of tariffs on imported products or the disallowance of tax deductions on imported products, the ability to maintain an effective system of internal control over financial reporting, changes in accounting standards, assumptions and estimates, and those described in Item 1A. “Risk Factors.”  Forward-looking statements are based on currently available information and are based on our current expectations and projections about future events.  We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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PART I

Item 1.
Business

Overview

Tractor Supply Company (the “Company” or “we” or “our” or “us”) is the largest rural lifestyle retailer in the United States (“U.S.”). The Company is focused on supplying the needs of recreational farmers and ranchers and all others who enjoy the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses.  We operate retail stores under the names Tractor Supply Company, Del’s Feed & Farm Supply, and Petsense and operate websites under the names TractorSupply.com and Petsense.com.  Our stores are located primarily in towns outlying major metropolitan markets and in rural communities.

The Company has one reportable industry segment which is the retail sale of products that support the rural lifestyle. At December 29, 2018, we operated 1,940 retail stores in 49 states (1,765 Tractor Supply and Del’s retail stores and 175 Petsense retail stores). Our Tractor Supply stores typically range in size from 15,000 to 20,000 square feet of inside selling space, along with additional outside selling space, and our Petsense stores have approximately 5,500 square feet of inside selling space. For Tractor Supply retail locations, we use a standard design for most new built-to-suit locations that includes approximately 15,500 square feet of inside selling space. Our online selling websites are positioned to offer an extended assortment of products beyond those offered in-store and drive traffic into our stores through our buy online and pickup in-store and ship to store programs.

Business Strategy

We believe our sales and earnings growth is the result of executing our business strategy, which includes the following key components:
 
Market Niche

We have identified a specialized market niche: supplying the lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses.  By focusing our product assortment on these core customers, we believe we are differentiated from general merchandise, home center and other specialty retailers. We cater to the rural lifestyle and often serve a market by being a trip consolidator for many basic maintenance needs for farm, ranch and rural customers through convenient shopping options both in-store and online.

Customers

Our target customers are home, land, pet, and livestock owners who generally have above average income and below average cost of living. We seek to serve a customer base that primarily lives in towns outlying major metropolitan markets and in rural communities. This customer base includes recreational farmers and ranchers and all others who enjoy the rural lifestyle, as well as tradesmen and small businesses.

Customer Service

We are committed to providing our customers reliable product availability and a convenient, customer-centric experience across shopping channels. In our stores, we believe the ability of our motivated, well-trained team members to provide friendly, responsive and seasoned advice helps our customers find the right products to satisfy their everyday needs, as well as the specialty items needed to complete their rural lifestyle projects. We also engage with our customers through our e-commerce website (TractorSupply.com), which provides the opportunity to allow customers to shop at anytime, anywhere, and in any way they choose, while delivering enhanced product information, research, and decision tools that support product selection and informational needs in specific subject areas.  Additionally, we maintain a Customer Solutions Center at our Store Support Center located in Brentwood, Tennessee, to support our in-store and online customers, as well as our store team members. We believe this commitment to customer service promotes strong customer loyalty through personalized experiences and provides convenience that our customers expect, which drives repeat shopping experiences.

We use a third-party provider to measure our level of customer service.  This process allows customers to provide feedback on their shopping experience.  Based on the third-party provider’s data, we believe our customer satisfaction scores are among the best-in-class.  We carefully evaluate the feedback we receive from our customers and implement improvements at the individual store level based on that feedback.

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Store Personnel and Training

We seek to hire store team members with farming and ranching backgrounds, with particular emphasis on general maintenance, equine, and welding. We endeavor to staff our stores with courteous, highly motivated team members and devote considerable resources to training store team members, often in cooperation with our vendors.  Our training programs include:

A thorough on-boarding process to prepare new team members for their new role;
Productive workplace environment training that is intended to educate team members on company policies and procedures covering topics such as harassment, discrimination, and retaliation;
New store opening training that prepares our store managers to open new stores to Company standards;
A management training program which covers all aspects of our store operations, delivering superior service, and managing the team member experience;
Structured training on customer service and selling skills;
Online product knowledge training produced in conjunction with key vendors;
Leadership development programs that prepare leaders to expand their current contributions; and
An annual store manager meeting with vendor product presentations.

Store Environment

Our stores are designed and managed to make shopping an enjoyable experience and to maximize sales and operating efficiencies.  Stores are strategically arranged to provide an open environment for optimal product placement and visual display. In addition, these layouts allow for departmental space to be easily reallocated and visual displays to be changed for seasonal products and promotions. Display and product placement information is routinely sent to stores to ensure quality and uniformity among the stores.  Our store layouts and visual displays are designed to provide our customers a feeling of familiarity and convenience to enhance the shopping experience.  Informative signs are located in key product categories to conveniently assist customers with purchasing decisions and merchandise location.  These signs provide customers with a comparison of product qualities, clear pricing, useful information regarding product benefits, and suggestions for appropriate accessories. Also, our store team members wear highly visible red vests, aprons, or smocks with nametags, and our customer service and checkout counters are conveniently located near the front of the store.

Merchandising and Purchasing

We offer an extensive assortment of products for all those seeking to enjoy the “Out Here” lifestyle, as well as tradesmen and small businesses.  Our product assortment is tailored to meet the needs of our customers in various geographic markets.  Our full line of product offerings includes a broad selection of high quality, reputable brand name and exclusive brand products and is supported by a strong in-stock inventory position with approximately 15,500 to 20,000 products per store as well as over 100,000 products online.  No single product accounted for more than 10% of our sales during fiscal 2018. Our comprehensive selection of merchandise is comprised of the following major product categories:

Equine, livestock, pet, and small animal products, including items necessary for their health, care, growth, and containment;
Hardware, truck, towing, and tool products;
Seasonal products, including heating, lawn and garden items, power equipment, gifts, and toys;
Work/recreational clothing and footwear; and
Maintenance products for agricultural and rural use.

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The following table indicates the percentage of net sales represented by each of our major product categories during fiscal 2018, 2017, and 2016:
 
Percent of Net Sales
 
Fiscal Year
Product Category:
2018
 
2017
 
2016
Livestock and Pet
47
%
 
47
%
 
46
%
Hardware, Tools and Truck
22

 
22

 
22

Seasonal, Gift and Toy Products
19

 
19

 
19

Clothing and Footwear
8

 
8

 
8

Agriculture
4

 
4

 
5

Total
100
%
 
100
%
 
100
%

Our buying team continuously reviews and updates our product assortment to respond to customer needs and to offer new, relevant products.  We are focused on providing key products that our customers use on a regular basis for their lifestyle and maintenance needs with emphasis on consumable, usable, and edible (“C.U.E.”) products.  Examples of C.U.E. product categories include, but are not limited to, livestock feed and bedding, pet food, lubricants, and various seasonal products, such as heating, pest control, and twine.

Our products are sourced through both domestic and international vendors.  Our business is not dependent upon any single vendor or particular group of vendors.  We purchase our products from a group of approximately 900 vendors, with no one vendor representing more than 10% of our purchases during fiscal 2018.  Approximately 350 core vendors accounted for 90% of our merchandise purchases during fiscal 2018.  We have not experienced any significant difficulty in obtaining satisfactory alternative sources of supply for our products, and we believe that adequate sources of supply exist at substantially similar costs for nearly all of our products.  We have no material long-term contractual commitments with any of our product vendors.

Our buying teams focus on merchandise procurement, vendor line reviews, and testing of new products and programs.  We also employ a dedicated inventory management team that focuses exclusively on forecasting and inventory replenishment, a committed merchandise planning team that concentrates on assortment planning, and a specialized pricing team that seeks to optimize market-specific pricing for our products.  Through the combined efforts of these teams, we continue to focus on improving our overall inventory productivity and in-stock inventory position.

Intellectual Property

Our subsidiary, Tractor Supply Co. of Texas, LP (“TSCT”), owns registrations with the U.S. Patent and Trademark Office (“USPTO”) for various service marks including TSC®, Tractor Supply Co.®, TSC Tractor Supply Co.®, and the trapezium design for retail services. We consider these service marks, and the accompanying goodwill and name recognition, to be valuable assets of our business. TSCT also owns several other service marks for retail services, some of which have been registered with the USPTO and some of which are the subject of applications for registration pending before the USPTO.

In addition to selling products that bear nationally-known manufacturer brands, we also sell products manufactured for us under a number of exclusive brands that we consider to be important to our business. These exclusive brands are manufactured for us by a number of vendors and provide an alternative to the national brands, which helps provide value for our customers and positions us as a destination retailer.











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Our exclusive brands represented approximately 31% of our total sales in fiscal 2018, and 32% of our total sales in both fiscal 2017 and 2016, respectively. Our exclusive brands include:
Ÿ 4health® (pet foods and supplies)
Ÿ Producer’s Pride® (livestock and horse feed and supplies)
Ÿ Bit & Bridle® (apparel and footwear)
Ÿ Red Shed® (gifts, collectibles, and outdoor furniture)
Ÿ Blue Mountain® (apparel)
Ÿ Redstone® (heating products)
Ÿ C.E. Schmidt® (apparel and footwear)
Ÿ Retriever® (pet foods and supplies)
Ÿ Countyline® (livestock, farm and ranch equipment)
Ÿ Royal Wing® (bird feed and supplies)
Ÿ Dumor® (livestock and horse feed and supplies)
Ÿ Traveller® (truck and automotive products)
Ÿ Groundwork® (lawn and garden supplies)
Ÿ Treeline® (hunting gear and accessories)
Ÿ Huskee® (outdoor power equipment)
Ÿ TSC Tractor Supply Co® (trailers, truck tool boxes, and animal
 bedding)
Ÿ JobSmart® (tools)
Ÿ Untamed® (pet foods)

Ÿ Paws & Claws® (pet foods and supplies)
 

The exclusive brands identified above have been registered as trademarks with the USPTO for certain products and are the subject of applications for registration pending before the USPTO for other products.

Our trademark and service mark registrations have various expiration dates; however, provided that we continue to use the marks and renew the registrations in a timely manner, the registrations are potentially perpetual in duration.

We believe our intellectual property, which includes the trademarks and service marks identified above, together with certain trade names, domain names, patents, and copyrights, has significant value and is an important component of our merchandising and marketing strategies.

Distribution

We currently operate a distribution facility network for supplying stores with merchandise and delivering product ordered through TractorSupply.com. In fiscal 2018, our Tractor Supply stores received approximately 74% of merchandise through this network while the remaining merchandise shipped directly from our vendors to our stores or customers. We believe this flow facilitates the prompt and efficient distribution of merchandise in order to enhance in-stock inventory positions, minimize freight expense, and improve the inventory turn rate. Our distribution facilities, located in Arizona, Georgia, Indiana, Kentucky, Maryland, Nebraska, New York, Texas, and Washington, represent a total distribution capacity of 6.1 million square feet. In fiscal 2018, we completed the expansion of our existing distribution center in Waverly, Nebraska. Additionally, we substantially completed the construction of our new northeast distribution center in Frankfort, New York, which began receiving merchandise in the fourth quarter of fiscal 2018, and is expected to begin shipping merchandise to our stores in the first quarter of fiscal 2019.

We select the locations of our distribution facilities in an effort to minimize logistical costs and optimize the distance from distribution facilities to our stores. Our distribution centers utilize warehouse and labor management tools that support the planning, control and processing of inventory. We manage our inbound and outbound transportation activity in-house through the use of a transportation management system.  We utilize multiple common carriers for store and direct to customer deliveries. We manage our transportation costs through carrier negotiations, monitoring of transportation routes, and scheduling of deliveries.

Marketing

We utilize an “everyday value price” philosophy to consistently offer our products at competitive prices complemented by strategically planned promotions throughout the year. To drive store traffic and position ourselves as a destination retailer, we promote a broad selection of merchandise through newspaper circulars, customer targeted direct mail, and e-mail, as well as various digital and social media initiatives.  In addition, our Neighbor’s Club loyalty program enhances our ability to create engagement with our best customers. Vendors frequently support these specific programs by offering temporary cost reductions and honoring coupons. Our vendors also provide assistance with product presentation and fixture design, brochures, support for in-store events, point-of-purchase materials for customer education, and product knowledge for our team members. 


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Omni-Channel

We connect with our customers in their manner of choosing, whether in our store, on our e-commerce website (TractorSupply.com), or through e-mail, social media, direct mail, or our Customer Solutions Center. Our goal is to be available anytime, anywhere, and in any way our customers choose to engage with our brand. We provide our customers the opportunity to shop in a manner that fits their lifestyle and is most convenient for them. We offer an expansive product assortment and convenient and useful content that is relevant to their lifestyle. We provide our customers the ability to have products shipped directly to our retail store locations or to their homes or offices. We use our distribution facility network to support our e-commerce activities. We offer a buy online and pick up in-store program which provides convenient access for customers to pick up merchandise from our store locations. We also provide additional convenience by offering flexible payment options and a simplified checkout process. We are focused on delivering an enhanced mobile and tablet experience, improving the site response time, and expanding our product offerings for vendor direct to customer shipments, allowing us to serve our customers at any time they choose. Our digital capabilities have further enhanced our customer service experience, allowed us to engage with our customers anytime, anywhere, and in any way they choose, and expand our target markets outside of our current retail store locations.

Management and Team Members

As of December 29, 2018, we employed approximately 15,000 full-time and 14,000 part-time Tractor Supply team members. We also employed additional part-time team members throughout the year during high sales volume periods.  We are not party to any collective bargaining agreements.

Our store operations are organized into regions, each of which is led by a regional vice president. The region is further organized into districts, each of which is led by a district manager.  We have two internal advisory boards, one comprised of store managers and the other comprised of district managers.  These groups bring a grassroots perspective to operational initiatives and generate chain-wide endorsement of proposed best-practice solutions.

All of our team members participate in one of our various bonus incentive programs, which provide the opportunity to receive additional compensation based upon team and/or Company performance. In addition to bonus incentive programs, we provide our eligible team members the opportunity to participate in an employee stock purchase plan and a 401(k) retirement savings plan. We also share in the cost of health insurance provided to eligible team members, and team members receive a discount on merchandise purchased from the Company.

We encourage a promote-from-within environment when internal resources permit.  We also provide internal leadership development programs designed to prepare our high-potential team members for greater responsibility. Our current team of district managers and store managers have an average tenure of approximately nine and six years, respectively.  We believe internal promotions, coupled with the hiring of individuals with previous retail experience, will provide the management structure necessary to support our long-term strategic growth initiatives.

Continuous Improvement

We are committed to a continuous improvement program to drive change throughout our organization.  Using data analytics and team member engagement, we examine business processes and identify opportunities to reduce costs, drive innovation, and improve effectiveness.  We have implemented numerous continuous improvement projects, with team members from multiple areas of our business, to evaluate key operations and implement process change. Team members are empowered and expected to challenge current paradigms and improve processes. Management encourages the participation of all team members in the decision-making process, regularly solicits input and suggestions from our team members, and incorporates suggestions into our improvement activities.

Management Information and Control Systems

We have invested resources in management information and control systems to provide legendary customer service.   This includes use of digital technologies to integrate the customer experience in-store, online, and through our Customer Solutions Center, which offers customers the ability to shop anytime, anywhere, and in any way they choose. Our key platforms include:

Point-of-sale system;
In-store mobility;
E-commerce platform;
Replenishment system;

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Merchandising presentation and inventory management tools;
Warehouse management system and labor management tools for stores and supply chain;
Price optimization system;
Vendor purchase order control system;
Business intelligence and analytics tools; and
Customer loyalty system.

These systems are integrated through an enterprise resource planning (“ERP”) system. This ERP system tracks merchandise from initial order through ultimate sale and interfaces with our financial systems.

We continue to invest in technology to support store, online, and distribution facility expansion and our long-term strategic growth initiatives. We also continue to evaluate and improve the functionality of our systems to maximize their effectiveness.  Such efforts include ongoing hardware and software evaluations, refreshes, and upgrades to support optimal software configurations, and application performance. We plan to continue to invest in information technology and implement efficiency-driving system enhancements. We will continue to evaluate the use of technologies to improve productivity such as artificial intelligence, automation software, and other technologies. We also maintain and continue to strengthen the security of our information systems to help protect and prevent unauthorized access to personal information of our customers, employees, vendors, and other confidential Company data. Collectively, these efforts are directed toward improving business processes, maintaining secure, efficient, and stable systems, and enabling the continued growth and success of our business.

Petsense

Petsense is a small-box pet specialty supply retailer focused on meeting the needs of pet owners, primarily in small and mid-sized communities, and offering a variety of pet products and services. At December 29, 2018, we operated a total of 175 Petsense stores in 26 states, with approximately 500 full-time and 1,000 part-time team members, and an e-commerce website (Petsense.com). Petsense owns a registration trademark for its exclusive brand, TrueSource® pet food, and the Petsense name is registered with the USPTO.

Growth Strategy

Tractor Supply Company believes we can grow our business by being the most dependable supplier of relevant products and services for the “Out Here” lifestyle, creating customer loyalty through personalized experiences, and providing convenience that our customers expect at anytime, anywhere, and in any way they choose.  Our long-term growth strategy is to: (1) drive profitable growth through new store openings and by expanding omni-channel capabilities, thus tying together our website product content, social media, digital, and online shopping experience, attracting new customers and driving loyalty, (2) build customer-centric engagement by leveraging analytics to deliver legendary customer service, seasoned advice, and personalized experiences, (3) offer relevant assortments and services across all channels through exclusive and national brands and continue to introduce new products through our test and learn strategy, (4) enhance our core and foundational capabilities by investing in infrastructure and process improvements which will support growth, scale, and agility while improving the customer experience, and (5) expand through selective acquisitions, as such opportunities arise, to add complementary businesses and to enhance penetration into new and existing markets to supplement organic growth. 

Achieving this strategy will require a foundational focus on: (1) organizing, optimizing, and empowering our team members for growth by developing skills, talent, and leadership across the organization, and (2) implementing operational efficiency initiatives, including leverage of technology, to align our cost structure to support new business capabilities for margin improvement and cost reductions.

Over the past five years, we have experienced considerable sales growth, resulting in a compounded annual growth rate of approximately 8.9%. We plan to open approximately 80 new Tractor Supply and 10 to 15 new Petsense stores in fiscal 2019, a selling square footage increase of approximately 4.7%.  In fiscal 2018, we opened 80 new Tractor Supply stores and 18 new Petsense stores. In fiscal 2017, we opened 101 new Tractor Supply stores and 25 new Petsense stores. This represents a selling square footage increase of approximately 4.9% during fiscal 2018, and 6.3% during fiscal 2017.

At December 29, 2018, we operated 1,940 retail stores in 49 states (1,765 Tractor Supply and Del’s retail stores and 175 Petsense retail stores). Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in many existing and new markets. We have developed a proven method for selecting store sites and have identified approximately 700 additional markets for new Tractor Supply stores. We also believe that there is opportunity for up to 1,000 Petsense stores.

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Approximately 55% of our stores are in freestanding buildings and 45% are located in strip shopping centers.  We lease approximately 94% of our stores and own the remaining 6%.

Competition

We operate in a competitive retail industry. The principal competitive factors include location of stores, fulfillment options, price, quality of merchandise, in-stock inventory consistency, merchandise assortment and presentation, product knowledge, and customer service. We compete with general merchandise retailers, home center retailers, specialty and discount retailers, independently owned retail farm and ranch stores, numerous privately-held regional farm store chains and farm cooperatives, as well as internet-based retailers.  However, we believe we successfully differentiate ourselves from many of these retailers by focusing on our specialized market niche for customers living the rural lifestyle. See further discussion of competition in 1A. “Risk Factors” of this Annual Report on Form 10-K.

Seasonality and Weather

Our business is seasonal.  Historically, our sales and profits are the highest in the second and fourth fiscal quarters due to the sale of seasonal products. We experience our highest inventory and accounts payable balances during our first fiscal quarter for purchases of seasonal products to support the higher sales volume of the spring selling season, and again during our third fiscal quarter to support the higher sales volume of the cold-weather selling season. We believe that our business can be more accurately assessed by focusing on the performance of the halves, not the quarters, due to the fact that different weather patterns from year-to-year can shift the timing of sales and profits between quarters, particularly between the first and second fiscal quarters and the third and fourth fiscal quarters.

Historically, weather conditions, including unseasonably warm weather in the fall and winter months and unseasonably cool weather in the spring and summer months, have affected the timing and volume of our sales and results of operations. In addition, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, extreme rain and droughts, have impacted operating results both negatively and positively, depending on the severity and length of these conditions. Our strategy is to manage product flow and adjust merchandise assortments and depth of inventory to capitalize on seasonal demand trends.

Stewardship and Compliance with Environmental Matters

Our operations are subject to numerous federal, state, and local laws and regulations, enacted or adopted, regulating the discharge of materials into the environment or otherwise relating to the protection of the environment.  We are committed to complying with all applicable environmental laws and regulations.  We are also committed to becoming a more environmentally sustainable company.  This commitment is demonstrated through our Stewardship Program, which is our environmental sustainability program.  Through this program, the Company has implemented a number of initiatives designed to reduce our impact on the environment.  These initiatives include the installation of energy management systems, LED lighting, high efficiency heating/air conditioning systems, and recycling programs in our stores, distribution facilities, and Store Support Center. Our Store Support Center and distribution center in Casa Grande, Arizona, are LEED (Leadership in Energy and Environmental Design) Silver certified for environmentally sustainable design, construction, and operation.  We also installed solar arrays at the Store Support Center in Brentwood, Tennessee, and our Tractor Supply store in Hendersonville, Tennessee.

Executive Officers of the Registrant

Pursuant to General Instruction G(3) of Form 10-K, the following list is included in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2019.

The following is a list of the names and ages of all executive officers of the registrant, indicating all positions and offices with the registrant held by each such person and each person’s principal occupations and employment during at least the past five years:
Name
Position
Age
Gregory A. Sandfort
Chief Executive Officer
63
Steve K. Barbarick
President – Chief Operating Officer
51
Kurt D. Barton
Executive Vice President – Chief Financial Officer and Treasurer
47
Benjamin F. Parrish, Jr.
Executive Vice President – General Counsel and Corporate Secretary
62
Robert D. Mills
Executive Vice President – Chief Technology, Digital Commerce and Strategy Officer
46
Chad M. Frazell
Senior Vice President – Human Resources
46

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Gregory A. Sandfort has served as Chief Executive Officer since December 2012. Mr. Sandfort served as President and Chief Executive Officer of the Company from December 2012 to May 2016. Prior to that time, Mr. Sandfort served as President and Chief Operating Officer of the Company since February 2012. Mr. Sandfort previously served as President and Chief Merchandising Officer of the Company since February 2009, after having served as Executive Vice President – Chief Merchandising Officer of the Company since November 2007.  Mr. Sandfort served as President and Chief Operating Officer at Michaels Stores, Inc. from March 2006 to August 2007, and as Executive Vice President – General Merchandise Manager at Michaels Stores, Inc. from January 2004 to February 2006. Mr. Sandfort has served as a Director of the Company since February 2013.

Steve K. Barbarick has served as President – Chief Operating Officer since August 2018, prior to which he served as President and Chief Merchandising Officer since May 2016. Prior to that time, Mr. Barbarick served as Executive Vice President – Chief Merchandising Officer for the Company since September 2012. Mr. Barbarick previously served as Senior Vice President – Merchandising since February 2011, after having served as Vice President – Merchandising since June 2009, and as Vice President and Divisional Merchandise Manager since 2003. Mr. Barbarick joined the Company as a Buyer in 1998.

Kurt D. Barton was promoted to Executive Vice President – Chief Financial Officer and Treasurer in February 2019, after having served as Senior Vice President – Chief Financial Officer and Treasurer since March 2017. Prior to that time, Mr. Barton served as Senior Vice President – Controller of the Company since February 2016.  Mr. Barton previously served as Vice President – Controller from February 2009, after having served as Director, Internal Audit from July 2002 to February 2009. Mr. Barton has served in various other leadership roles in accounting since he joined the Company in 1999. Mr. Barton, a Certified Public Accountant, began his career in public accounting in 1993, spending six years at Ernst & Young, LLP.

Benjamin F. Parrish, Jr. has served as Executive Vice President – General Counsel and Corporate Secretary of the Company since February 2016, after having served as Senior Vice President – General Counsel and Corporate Secretary of the Company since October 2010.  Mr. Parrish previously served as Executive Vice President and General Counsel of MV Transportation, Inc. from September 2008, until he joined the Company.  Mr. Parrish served as Senior Vice President and General Counsel of Central Parking Corporation from 1998 to 2008.

Chad M. Frazell has served as Senior Vice President – Human Resources since August 2014. Mr. Frazell previously served as Senior Vice President, Human Resources for Shopko Stores Operating Co., LLC from April 2011 until he joined the Company. From 2008 to 2011, Mr. Frazell served as Vice President, Human Resources for Kohl’s Corporation, where he began as a Store Manager in 1999. Prior to 1999, Mr. Frazell served as a Store Manager and Assistant Manager for Target Corporation. Mr. Frazell began his career with Wal-Mart Stores, Inc., where he served as an Assistant Manager and Sales Associate.

Robert D. Mills has served as Executive Vice President – Chief Technology, Digital Commerce and Strategy Officer since August 2018, prior to which he served as Senior Vice President – Chief Information Officer since February 2014. Mr. Mills previously served as Chief Information Officer for Ulta Beauty from October 2011, until he joined the Company. From 2005 to 2011, Mr. Mills was Vice President, Chief Information Officer for the online business unit at Sears Holdings Corporation where he began as an Information Technology Customer Relationship Leader in 2001. Prior to 2001, Mr. Mills held roles at Allstate Insurance, Rockwell International Telecommunications Division, and Household Finance Corporation.

Additional Information

We file reports with the Securities and Exchange Commission (“SEC”), including Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports as required. We are an electronic filer and the SEC maintains an Internet website at sec.gov that contains the reports, proxy and information statements, and other information we file.

We make available, free of charge through our Internet website, TractorSupply.com, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.  The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

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Item 1A.    Risk Factors

Our business faces many risks. Those risks of which we are currently aware and deem to be material are described below.  If any of the events or circumstances described in the following risk factors occur, our business, financial condition or results of operations may significantly suffer, and the trading price of our common stock could decline.  These risk factors should be read in conjunction with the other information in this Form 10-K.

General economic conditions may adversely affect our financial performance.

Our results of operations may be sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending. A weakening of economic conditions affecting disposable consumer income such as lower employment levels, uncertainty or changes in business or political conditions, higher interest rates, higher tax rates, higher fuel and energy costs, higher labor and healthcare costs, the impact of natural disasters or acts of terrorism, and other matters could reduce consumer spending or cause consumers to shift their spending to competitors. A general reduction in the level of discretionary spending, shifts in consumer discretionary spending to our competitors or shifts in discretionary spending to less profitable products sold by us could result in lower net sales, slower inventory turnover, greater markdowns on inventory, and a reduction in profitability due to lower margins.

Failure to protect our reputation could have a material adverse effect on our brand name.

Our success depends in part on the value and strength of the Tractor Supply name. The Tractor Supply name is integral to our business, as well as to the implementation of our strategies for expanding our business. Maintaining, promoting, and positioning our brand will depend largely on the success of our marketing and merchandising efforts and our ability to provide high quality merchandise and a consistent, high quality customer experience. Our brand could be adversely affected if we fail to achieve these objectives or if our public image or reputation were to be tarnished by negative publicity. Failure to comply or accusation of failure to comply with ethical, social, product, labor, data privacy, and environmental standards could also jeopardize our reputation and potentially lead to various adverse consumer actions. Any of these events could result in decreased revenue or otherwise adversely affect our business.

We may be unable to increase sales at our existing stores.

We experience fluctuations in our comparable store sales at our existing stores, defined as sales in stores which have been open for at least twelve months.  Various factors affect the comparable store sales at our existing stores, including the general retail sales environment, our ability to efficiently source and distribute products, changes in our merchandise assortment, competition, proximity of our locations to one another or to the locations of other competing retailers, increased presence of online retailers, current economic conditions, customer satisfaction with our products, the timing of promotional events, the release of new merchandise, the success of marketing programs and weather conditions.  These factors may cause the comparable store sales results at our existing stores to differ materially from prior periods and from expectations.  Past comparable store sales are not an indication of future results, and there can be no assurance that our comparable store sales will not decrease in the future.

Purchase price volatility, including inflationary and deflationary pressures, may adversely affect our financial performance.

Although we cannot determine the full effect of inflation and deflation on our operations, we believe our sales and results of operations are affected by both.  We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, grain, corn, steel, petroleum, cotton, and other commodities, as well as diesel fuel and transportation services.  Therefore, we may experience both inflationary and deflationary pressure on product cost, which may impact consumer demand and, as a result, sales and gross margin.  Our strategy is to reduce or mitigate the effects of purchase price volatility principally by taking advantage of vendor incentive programs, economies of scale from increased volume of purchases, adjusting retail prices, and selectively buying from the most competitive vendors while maintaining product quality.  Should our strategy to mitigate purchase price volatility not be effective, our financial performance could be adversely impacted.

Weather conditions may have a significant impact on our financial results.

Weather conditions affect the demand for, and in some cases the supply of, products, which in turn has an impact on prices.  Historically, weather conditions, including unseasonably warm weather in the fall and winter months and unseasonably cool weather in the spring and summer months, have affected the timing and volume of our sales and results of operations. In addition, extreme weather conditions, including snow and ice storms, flood and wind damage, hurricanes, tornadoes, extreme rain, and droughts, have impacted operating results. While extreme weather conditions can positively impact our operating results by

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increasing demand in affected locations for products needed to cope with the weather condition and its effects, they can also negatively affect our business depending on the severity and length of these conditions, as a result of store closings or the inability of customers to shop at our stores due to weather conditions. Our strategy is to manage product flow and adjust merchandise assortments and depth of inventory to capitalize on seasonal demand trends. Should such a strategy not be effective, the weather may have a material adverse effect on our financial condition and results of operations.

Our merchandising and marketing initiatives may not provide expected results.

We believe our past performance has been based on, and future success will depend upon, in part, the ability to develop and execute merchandising initiatives with effective marketing programs.  These merchandising initiatives and marketing programs may not deliver expected results, and there is no assurance that we will correctly identify and respond in a timely manner to evolving trends and consumer preferences and expectations. If we misjudge the market or our marketing programs are not successful, we may overstock unpopular products and be forced to take inventory price reductions that have a material adverse effect on our profitability. Failure to execute and promote such initiatives in a timely manner could harm our ability to grow the business and could have a material adverse effect on our results of operations and financial condition.  Shortages of key merchandise could also have a material adverse impact on operating results and financial condition.

Capital required for growth may not be available.

The construction or acquisition of new stores, store support center facilities, distribution facilities, or other facilities, the remodeling and renovation of existing facilities, and investments in information technology require significant amounts of capital. In the past, our growth has been funded through internally generated cash flow and bank borrowings.  Disruptions in the capital and credit markets could adversely affect the ability of the banks to meet their commitments.  Our access to funds under our debt facilities is dependent on the ability of the banks that are parties to the facility to meet their funding commitments.  Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time.  In addition, tight lending practices may make it difficult for our real estate developers to obtain financing under acceptable loan terms and conditions.  Unfavorable lending conditions could impact the timing of our store openings and materially adversely affect our ability to open new stores in desirable locations.

Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced funding alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business.  Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged.  Such measures could include deferring capital expenditures and reducing or eliminating future share repurchases, cash dividends, or other discretionary uses of cash.

Failure to open and manage new stores in the number and manner currently contemplated could adversely affect our financial
performance.

An integral part of our business strategy includes the expansion of our store base through new store openings. This expansion strategy is dependent on our ability to find suitable locations, and we face competition from many retailers for such sites. If we are unable to implement this strategy, our ability to increase our sales, profitability, and cash flow could be impaired significantly. To the extent that we are unable to open new stores in the manner we anticipate (due to, among other reasons, site approval or unforeseen delays in construction), our sales growth may be impeded.

As we execute this expansion strategy, we may also experience managerial or operational challenges which may prevent any expected increase in sales, profitability, or cash flow. Our ability to manage our planned expansion depends on the adequacy of our existing information systems, the efficiency and expansion of our distribution systems, the adequacy of the hiring and training process for new personnel (especially store managers), the effectiveness of our controls and procedures, and the ability to identify customer demand and build market awareness in different geographic areas. There can be no assurance that we will be able to achieve our planned expansion, that the new stores will be effectively integrated into our existing operations or that such stores will be profitable.

Although we have a rigorous real estate site selection and approval process, there can be no assurance that our new store openings will be successful or result in incremental sales and profitability for the Company. New stores build their sales volumes and refine their merchandise selection over time and, as a result, generally have lower gross margins and higher operating expenses as a percentage of net sales than our more mature stores. As we continue to open new stores, there may be a negative impact on our results from a lower contribution margin of these new stores until their sales levels ramp to chain average, if at all, as well as from the impact of related pre-opening costs.

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Our failure to attract and retain qualified team members, increases in wage and labor costs and changes in laws and other labor issues could adversely affect our financial performance.

Our ability to continue expanding operations depends on our ability to attract and retain a large and growing number of qualified team members.  Our ability to meet labor needs while controlling wage and related labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force, unemployment levels, prevailing wage rates, increases in legally required minimum wage rates, changing demographics, health and other insurance costs, changes in employment legislation and the potential for changes in local labor practices or union activities.  If we are unable to locate, attract or retain qualified personnel, or if costs of labor or related costs increase significantly, our financial performance could be adversely affected.

We are subject to federal, state, and local laws governing employment practices and working conditions.  These laws cover wage and hour practices, labor relations, paid and family leave, workplace safety and immigration, among others.  The laws and regulations being passed at the state and local level create unique challenges for a multi-state employer.  We must continue to monitor and adapt our employment practices to comply with these various laws and regulations.  If our costs of labor or related costs increase significantly as new or revised labor laws, rules or regulations or healthcare laws are adopted or implemented, our financial performance could be adversely affected.

The unanticipated loss of current members of our senior management team and other key team members or the failure to successfully manage an executive officer transition may adversely affect our operating results.

Our success depends in large part on the continued availability and service of our executive officers, senior management, and other key team members. Competition for senior management and key team members in our industry is strong and we may not be able to retain our key team members or attract new qualified team members.  We must continue to recruit, retain, and motivate management and other team members sufficiently, both to maintain our current business and to execute our long-term strategic growth initiatives. The loss of any of our executive officers or other key senior management without sufficient advance notice could prevent or delay the implementation and completion of our strategic initiatives or divert management’s attention to seeking qualified replacements. Additionally, any failure by us to manage a successful leadership transition of an executive officer and to timely identify a qualified permanent replacement could harm our business and have a material adverse effect on our results of operations.

We may pursue strategic acquisitions and the failure of an acquisition to produce the anticipated results or the inability to fully integrate the acquired companies could have an adverse impact on our business.

We may, from time to time, acquire businesses we believe to be complementary to our business. The success of an acquisition is based on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration, and other factors relating to the target business. Acquisitions may result in difficulties in assimilating acquired companies and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not be able to successfully integrate an organization that we acquire, including their personnel, financial systems, distribution, operations, and general operating procedures. If we fail to successfully integrate acquisitions, we could experience increased costs associated with operating inefficiencies which could have an adverse effect on our financial results. Also, while we employ several different methodologies to assess potential business opportunities, the new businesses may not meet our expectations and, therefore, adversely affect our financial performance.

Competition may hinder our ability to execute our business strategy and adversely affect our operations.

We operate in the highly competitive retail merchandise sector with numerous competitors. These competitors include general merchandise retailers, home center retailers, specialty and discount retailers, independently-owned retail farm and ranch stores, numerous privately-held regional farm store chains, and farm cooperatives, as well as internet-based retailers. We compete for customers, merchandise, real estate locations, and employees. This competitive environment subjects us to various other risks, including the inability to continue our store and sales growth and to provide attractive merchandise to our customers at competitive prices that allow us to maintain our profitability. Our failure to compete effectively in this environment could adversely impact our financial performance.

We face risks associated with vendors from whom our products are sourced.

The products we sell are sourced from a variety of domestic and international vendors.  We have agreements with our vendors in which the vendors agree to comply with applicable laws, including labor and environmental laws, and to indemnify us against

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certain liabilities and costs.  Our ability to recover liabilities and costs under these vendor agreements is dependent upon the financial condition and integrity of the vendors. We rely on long-term relationships with our suppliers but have no significant long-term contracts with such suppliers.  Our future success will depend in large measure upon our ability to maintain our existing supplier relationships or to develop new ones.  This reliance exposes us to the risk of inadequate and untimely supplies of various products due to political, economic, social, or environmental conditions, transportation delays, or changes in laws and regulations affecting distribution.  Our vendors may be forced to reduce their production, shut down their operations or file for bankruptcy protection, which could make it difficult for us to serve the market’s needs and could have a material adverse effect on our business.

While the Company selects these third-party vendors carefully, it does not control their actions. Any problems caused by these third-parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, and cyber attacks or security breaches at a vendor could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business.

We rely on foreign manufacturers for various products that we sell.  In addition, many of our domestic suppliers purchase a portion of their products from foreign sources.  As an importer, our business is subject to the risks generally associated with doing business internationally, such as domestic and foreign governmental regulations, economic disruptions, delays in shipments, transportation capacity and costs, currency exchange rates, and changes in political or economic conditions in countries from which we purchase products.  If any such factors were to render the conduct of business in particular countries undesirable or impractical or if additional U.S. quotas, duties, taxes, or other charges or restrictions were imposed upon the importation of our products in the future, our financial condition and results of operations could be materially adversely affected.

The current political landscape in the U.S. has introduced greater uncertainty with respect to tax and trade policies, tariffs and regulations affecting trade between the U.S. and other countries. We source a portion of our merchandise from manufacturers located outside the U.S., primarily in Asia and Central America. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.

We rely on manufacturers located in foreign countries, including China, for merchandise. Additionally, a portion of our domestically purchased merchandise is manufactured abroad. Our business may be materially adversely affected by risks associated with international trade, including the impact of tariffs recently imposed and proposed by the U.S. with respect to certain consumer goods imported from China.

We source a portion of our merchandise from manufacturers located outside the U.S., primarily in Asia and Central America, and many of our domestic vendors have a global supply chain. The U.S. recently imposed tariffs on certain products imported into the U.S. from China and could propose additional tariffs. The imposition of tariffs on imported products is expected to increase our costs and could result in reduced sales and profits. As a result, we may need to seek alternative suppliers or vendors, raise retail selling prices or make changes to our operations. Any of these actions could have a material adverse effect on our sales and profitability, results of operations, and financial condition. In addition, the imposition of tariffs by the U.S. has resulted in the adoption of tariffs by China on U.S. exports and could result in the adoption of tariffs by other countries as well. A resulting trade war could have a significant adverse effect on world trade and the world economy. Further, the imposition of tariffs or other changes in world trade could have an impact on certain U.S. industries and consumers and could negatively impact the consumer demand for products that we sell.

We continue to evaluate the potential impact of the effective and proposed tariffs on our supply chain, costs, sales, and profitability as well as our strategies to mitigate any negative impact, including negotiating with our vendors, seeking alternative sourcing options and adjusting retail selling prices. Given the uncertainty regarding the scope and duration of the current and proposed tariffs, as well as the potential for additional trade actions by the U.S. or other countries, the impact on our business, results of operations and financial condition is uncertain but could be significant. Thus, we can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or other trade actions will be successful in whole or in part in mitigating the impact of any current or future tariffs. To the extent that our supply chain, costs, sales, or profitability are negatively affected by the tariffs or other trade actions, our business, financial condition, and results of operations may be materially adversely affected.

A significant disruption to our distribution network or to the timely receipt of inventory could adversely impact sales or increase our transportation costs, which would decrease our profits.

We rely on our distribution and transportation network to provide goods to our stores in a timely and cost-effective manner through deliveries to our distribution facilities from vendors and then from the distribution facilities or direct ship vendors to our stores by various means of transportation, including shipments by sea, air, rail, and truck. Any disruption, unanticipated expense, or

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operational failure related to this process could affect store operations negatively. For example, unexpected delivery delays (including delays due to weather, fuel shortages, or other reasons) or increases in transportation costs (including increased fuel costs or a decrease in transportation capacity for overseas shipments) could significantly decrease our ability to provide adequate products for sale, or products at a desired price, resulting in lower sales and profitability. In addition, labor shortages or work stoppages in the transportation industry or long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries could negatively affect our business. Also, a fire, tornado, or other disaster at one of our distribution facilities could disrupt our timely receiving, processing and shipment of merchandise to our stores which could adversely affect our business.

The implementation of our supply chain initiatives could disrupt our operations in the near term, and these initiatives might not provide the anticipated benefits or might fail.

We maintain a network of distribution facilities and have plans to build new distribution facilities and expand existing facilities to support our long-term strategic growth initiatives. Delays in opening new or expanded distribution facilities could adversely affect our future operations by slowing store growth, which may in turn reduce revenue growth. In addition, distribution-related construction or expansion projects entail risks which could cause delays and cost overruns, such as: shortages of materials; shortages of skilled labor or work stoppages; unforeseen construction, scheduling, engineering, environmental, or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. The completion date and ultimate cost of future projects could differ significantly from initial expectations due to construction-related or other reasons. We cannot guarantee that all projects will be completed on time or within established budgets.

We continue to make significant technology investments in our supply chain. These initiatives are designed to streamline our distribution process so that we can optimize the delivery of goods and services to our stores, distribution facilities, and customers in a timely manner and at a reasonable cost. The cost and potential problems and interruptions associated with the implementation of these initiatives, including those associated with managing third-party service providers and employing new web-based tools and services, could disrupt or reduce the efficiency of our operations in the near term. In addition, our improved supply chain technology might not provide the anticipated benefits, it might take longer than expected to realize the anticipated benefits, or the initiatives might fail altogether.

We are subject to personal injury, workers’ compensation, product liability, discrimination, harassment, wrongful termination, and other claims in the ordinary course of business.

Our business involves a risk of personal injury, workers’ compensation, product liability, discrimination, harassment, wrongful termination, and other claims in the ordinary course of business.  Product liability claims from customers and product recalls for merchandise alleged to be defective or harmful could lead to the disposal or write-off of merchandise inventories, the incurrence of fines or penalties, and damage to our reputation. We maintain general liability and workers’ compensation insurance with a self-insured retention for each policy type and a deductible for each occurrence.  We also maintain umbrella limits above the primary general liability and product liability coverage.  In many cases, we have indemnification rights against the manufacturers of the products and their products liability insurance, as well as the property owners of our leased buildings.  Our ability to recover costs and damages under such insurance or indemnification arrangements is subject to the financial viability of the insurers, manufacturers, and landlords and the specific allegations of a claim.  No assurance can be given that our insurance coverage or the manufacturers’ or landlords’ indemnity will be available or sufficient in any claims brought against us.

Additionally, we are subject to U.S. federal, state, and local employment laws that expose us to potential liability if we are determined to have violated such employment laws, including but not limited to, laws pertaining to minimum wage rates, overtime pay, discrimination, harassment, and wrongful termination. Compliance with these laws, including the remediation of any alleged violation, may have a material adverse effect on our business or results of operations.

Failure to maintain an effective system of internal control over financial reporting could materially impact our business and results.

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal
control systems, internal control over financial reporting may not prevent or detect misstatements. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud, and could expose us to litigation or adversely affect the market price of our common stock.


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Any failure to maintain the security of the information relating to our business, customers, employees, and vendors that we hold, whether as a result of cybersecurity attacks or otherwise, could damage our reputation with customers, employees, and vendors, could cause us to incur substantial additional costs and to become subject to litigation, and could materially affect our operating results, financial condition, and liquidity.

We depend on information systems and technology, some of which are managed or provided by third-parties, for many activities important to our business. As do most retailers, we receive and store in our information systems certain personal and other sensitive information about our business, customers, employees, and vendors. Additionally, we also receive and process information permitting cashless payments as part of our in-store and online operations at TractorSupply.com, some of which depend upon the secure transmission of confidential information over public networks. The information that we receive and store makes us subject to cybersecurity attacks, cyber incidents and privacy regulations, which are occurring more frequently, are constantly evolving in nature, are becoming more sophisticated, and are being made by groups and individuals with a wide range of expertise and motives. We are the target of attempted cyber and other security threats and continuously monitor our information technology networks and infrastructure in an effort to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. However, these security measures cannot provide absolute assurance or guarantee that we will be successful in preventing, detecting, or responding to every such breach or disruption and/or preventing the misuse of confidential information of our business, customers, employees, or vendors. Similar risks exist with respect to the third-party vendors that we rely upon for aspects of our information technology support services and administrative functions, even if the attack or breach does not directly impact our systems or information.

A compromise of our information security and privacy controls, or those of businesses and vendors with whom we interact, which results in confidential information being accessed, obtained, damaged, or used by unauthorized or improper parties; loss or unavailability of data; disruptions to our business activities; or any other outcome stemming from a cybersecurity incident could materially adversely affect our reputation with our customers, team members, and vendors, as well as our operations, results of operations, financial condition and liquidity, and could result in significant legal and financial exposure beyond the scope or limits of insurance coverage. Moreover, a security breach could require that we expend significant additional resources to respond to the attack or breach and could result in a disruption of our operations.

In addition, states and the federal government are increasingly enacting laws and regulations relating to privacy, data breaches and theft of employee and customer data.  These laws will likely increase the costs of doing business and, if we fail to comply with these laws and regulations, to implement appropriate safeguards, or to detect and provide prompt notice of unauthorized access as required by some of these new laws, we could be subject to potential claims for damages and other remedies, which could harm our business.

We are subject to payments-related risks that could increase our operating costs, expose us to fraud, subject us to potential liability, and potentially disrupt our business.

We accept payments using a variety of methods, including credit cards, debit cards, credit accounts, our private label and co-branded credit cards, gift cards, direct debit from a customer’s bank account, consumer invoicing and physical bank checks, and we may offer different payment options over time. These payment options subject us to many compliance requirements, including, but not limited to, compliance with payment card association operating rules, including data security rules, certification requirements, rules governing electronic funds transfers, and Payment Card Industry Data Security Standards. They also subject us to potential fraud by criminal elements seeking to discover and take advantage of security vulnerabilities that may exist in some of these payment systems. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, electronic checks, gift cards and promotional financing, and it could disrupt our business if these companies become unwilling or unable to provide these services to us. If we fail to comply with these rules or requirements, adequately encrypt payment transaction data, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and operating results could be adversely affected.

Our business and operations could suffer material losses in the event of system interruptions or failures.

Our information technology systems, some of which are dependent on services managed or provided by third-parties, serve an important role in the operation and administration of our business. These systems are vulnerable to damages from any number of sources, including, but not limited to, human error, cybersecurity attacks, computer viruses, unauthorized access, fire, flood, power outages, telecommunication failures, facility or equipment damage, natural disasters, terrorism, and war.  In addition, we continually

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make investments in technology to implement new processes and systems, as well as to maintain and update our existing processes and systems. Implementing process and system changes increases the risk of disruption. If our information technology systems are interrupted or fail and our redundant systems or recovery plans are not adequate to address such interruptions or failures on a timely basis, our revenues and profits could be reduced and the reputation of our brand and our business could be materially adversely affected.  Additionally, remediation of any problems with our systems could result in significant, unplanned expenses.

Customer-facing technology systems are an important part of our sales and marketing strategy and the failure of those systems to perform effectively and reliably could keep us from delivering positive customer experiences.

Through our continued information technology enhancements, we are able to provide an improved overall shopping environment and an omni-channel experience that empowers our customers to shop and interact with us from computers, tablets, smart phones, and other mobile communication devices. We use our website, TractorSupply.com, both as a sales channel for our products and as a method of providing product, project, and other relevant information to our customers to drive both in-store and online sales. Omni-channel retailing is continually evolving and expanding, and we must effectively respond to changing customer expectations and new developments. Disruptions, failures, or other performance issues with these customer-facing technology systems could impair the benefits that they provide to our in-store and online business and negatively affect our relationship with our customers.

If we are unable to maintain or upgrade our management information systems and software programs or if we are unable to convert to alternate systems in an efficient and timely manner, our operations may be disrupted or become less efficient and our long-term strategic growth initiatives may not be successful.

We depend on management information systems for many aspects of our business.  We rely on certain software vendors to maintain and periodically upgrade many of these systems so that we can continue to support our business. We could be materially adversely affected if we experienced a disruption or data loss relating to our management information systems and are unable to recover timely. We could also be adversely impacted if we are unable to improve, upgrade, maintain and expand our management information systems, particularly in light of the contemplated continued store growth.

The success of our long-term strategic growth initiatives designed to increase our sales and improve margin are dependent in varying degrees on the timely delivery and the functionality of information technology systems to support them.  Extended delays or cost overruns in securing, developing and otherwise implementing technology solutions to support the long-term strategic growth initiatives would delay and possibly even prevent us from realizing the projected benefits of those initiatives.

We cannot provide any guaranty of future dividend payments or that we will continue to repurchase our common stock pursuant to our stock repurchase program.

Although our Board of Directors has indicated an intention to pay future quarterly cash dividends on our common stock, any determination to pay or increase cash dividends on our common stock in the future will be based primarily upon our financial condition, results of operations, business requirements, and our Board of Directors’ continuing determination that the declaration of dividends is in the best interests of our stockholders and is in compliance with all laws and agreements applicable to the dividend. Furthermore, although our Board of Directors has authorized a share repurchase program of up to $3 billion through December 2020, we may discontinue this program at any time or significantly reduce repurchases under the program.

The market price for our common stock might be volatile and could result in a decline in value.

The price at which our common stock trades may be volatile and could be subject to significant fluctuations in response to our operating results, general trends and prospects for the retail industry, announcements by our competitors, analyst recommendations, our ability to meet or exceed analysts’ or investors’ expectations, the condition of the financial markets, and other factors. The Company’s stock price is dependent in part on the multiple of earnings that investors are willing to pay. That multiple is in part dependent on investors’ perception of the Company’s future earnings growth prospects. If investors’ perception of the Company’s earnings growth prospects change, the Company’s earnings multiple may decline and its stock price could be adversely affected.

In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of our common stock notwithstanding our actual operating performance.





15

Index

Our costs of doing business could increase as a result of federal, state, local, or foreign laws and regulations.

We are subject to numerous federal, state, local, and foreign laws and governmental regulations including those relating to environmental protection, personal injury, intellectual property, consumer product safety, building, land use and zoning requirements, workplace regulations, wage and hour, privacy and information security, and employment law matters. If we fail to comply with existing or future laws or regulations, or if these laws or regulations are violated by importers, manufacturers or distributors, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs. In addition, our capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.

We are also subject to the Foreign Corrupt Practices Act (the “FCPA”), which prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purposes of obtaining or retaining business, and the anti-bribery laws of other jurisdictions. Failure to comply with the FCPA and similar laws could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition, and results of operations.

Potential noncompliance with environmental regulations could materially impact our results of operations or financial condition.

Our business is subject to various federal, state, and local laws, regulations, and other requirements pertaining to protection of the environment and public health, including, for example, regulations governing the management of waste materials and waste waters.  Governmental agencies on the federal, state, and local levels have, in recent years, increasingly focused on the retail sector’s compliance with such laws and regulations, and have at times pursued enforcement activities.  We periodically receive information requests and notices of potential noncompliance with environmental laws and regulations from governmental agencies, which are addressed on a case-by-case basis with the relevant agency. Any of these events could have a material adverse effect on our results of operations or financial condition.

Effective tax rate changes and results of examinations by taxing authorities could materially impact our results.

Our future effective tax rates could be adversely affected by legislative tax reform, changes in statutory rates or changes in tax laws, or interpretations thereof. Additionally, our future effective tax rates could be adversely affected by the earnings mix being lower than historical results in states where we have lower statutory rates and higher than historical results in states where we have higher statutory rates or by changes in the measurement of our deferred tax assets and liabilities.

We are subject to periodic audits and examinations by the Internal Revenue Service (“IRS”), as well as state and local taxing authorities. Like many retailers, a portion of our sales are to tax-exempt customers. The business activities of our customers and the intended use of the unique products sold by us create a challenging and complex compliance environment.  These circumstances create risk that we could be challenged as to the propriety of our sales tax compliance. Our results could be materially impacted by the determinations and expenses related to these and other proceedings by the IRS and other state and local taxing authorities.

Item 1B.    Unresolved Staff Comments

None.


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Index

Item 2.        Properties  

At December 29, 2018, the Company operated 1,940 stores in 49 states (1,765 Tractor Supply and Del’s retail stores and 175 Petsense retail stores).  The Company leases approximately 94% of its stores. Store leases typically have initial terms of between 10 and 15 years, with two to four optional renewal periods of five years each, exercisable at our option.  No single lease is material to the Company’s operations.

The following is a count of store locations by state:
State
 
Number
of Stores
 
State
 
Number
of Stores
Texas
 
212
 
Wisconsin
 
23
North Carolina
 
99
 
Colorado
 
22
Pennsylvania
 
97
 
Maryland
 
22
Tennessee
 
96
 
Massachusetts
 
22
Ohio
 
92
 
Maine
 
21
Michigan
 
87
 
New Hampshire
 
21
Georgia
 
86
 
Illinois
 
19
New York
 
82
 
New Jersey
 
19
Kentucky
 
70
 
Connecticut
 
18
California
 
66
 
Nebraska
 
18
Florida
 
65
 
Utah
 
15
Indiana
 
61
 
North Dakota
 
14
Virginia
 
59
 
Minnesota
 
13
Alabama
 
58
 
Iowa
 
9
Oklahoma
 
55
 
South Dakota
 
9
Louisiana
 
53
 
Wyoming
 
8
South Carolina
 
45
 
Vermont
 
7
Mississippi
 
40
 
Montana
 
6
Arkansas
 
36
 
Oregon
 
6
Arizona
 
34
 
Delaware
 
5
Missouri
 
30
 
Idaho
 
5
New Mexico
 
29
 
Rhode Island
 
5
West Virginia
 
28
 
Nevada
 
4
Kansas
 
24
 
Hawaii
 
2
Washington
 
23
 
 
 
 
 
 
 
 
 
 
1,940


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Index

The following is a list of distribution locations including the approximate square footage and if the location is leased or owned:
Distribution Facility Location
 
Approximate Square Footage
 
Owned/Leased Facility
Frankfort, New York (a)
 
924,000
 
Owned
Franklin, Kentucky
 
833,000
 
Owned
Pendleton, Indiana
 
764,000
 
Owned
Macon, Georgia
 
684,000
 
Owned
Waco, Texas
 
666,000
 
Owned
Casa Grande, Arizona
 
650,000
 
Owned
Hagerstown, Maryland (b)
 
482,000
 
Owned
Hagerstown, Maryland (b)
 
309,000
 
Leased
Waverly, Nebraska
 
592,000
 
Owned
Seguin, Texas (c)
 
71,000
 
Owned
Lakewood, Washington
 
64,000
 
Leased
Longview, Texas (c)
 
63,000
 
Owned
(a) The Frankfort, New York, distribution center began receiving merchandise in fourth quarter of fiscal 2018, and is expected to begin shipping merchandise to stores in the first quarter of fiscal 2019.
(b) The leased distribution center in Hagerstown is treated as an extension of the existing owned Hagerstown location and is not considered a separate distribution center.
(c) This is a mixing center designed to process certain high-volume bulk products.

The Company’s Store Support Center occupies approximately 260,000 square feet of owned building space in Brentwood, Tennessee, and the Company’s Merchandising Innovation Center occupies approximately 32,000 square feet of leased building space in Nashville, Tennessee. The Company also leases approximately 8,000 square feet of building space for the Petsense corporate headquarters, located in Scottsdale, Arizona.

Item 3.        Legal Proceedings

The Company is involved in various litigation matters arising in the ordinary course of business. The Company believes that any estimated loss related to such matters has been adequately provided for in accrued liabilities to the extent probable and reasonably estimable. Accordingly, the Company currently expects these matters will be resolved without material adverse effect on its consolidated financial position, results of operations or cash flows. 

Item 4.        Mine Safety Disclosures

Not applicable.


18

Index

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock trades on the Nasdaq Global Select Market under the symbol, “TSCO.”

The table below sets forth the high and low sales prices of our common stock as reported by the Nasdaq Global Select Market for each fiscal quarter of the periods indicated:
 
Price Range
 
2018
 
2017
 
High
 
Low
 
High
 
Low
First Quarter
$82.68
 
$58.78
 
$78.25
 
$67.70
Second Quarter
$79.04
 
$58.27
 
$71.53
 
$52.09
Third Quarter
$92.45
 
$74.93
 
$63.40
 
$49.87
Fourth Quarter
$97.65
 
$78.67
 
$75.64
 
$54.76

As of February 1, 2019, the number of record holders of our common stock was 571 (excluding individual participants in nominee security position listings), and the estimated number of beneficial holders of our common stock was approximately 220,000.

Common Stock Dividends

During 2018 and 2017, the Company’s Board of Directors declared the following cash dividends:
Date Declared
 
Dividend Amount
Per Share
 
Stockholders of Record Date
 
Date Paid
November 7, 2018
 
$0.31
 
November 26, 2018
 
December 11, 2018
August 8, 2018
 
$0.31
 
August 27, 2018
 
September 11, 2018
May 9, 2018
 
$0.31
 
May 29, 2018
 
June 12, 2018
February 7, 2018
 
$0.27
 
February 26, 2018
 
March 13, 2018
 
 
 
 
 
 
 
November 6, 2017
 
$0.27
 
November 20, 2017
 
December 5, 2017
August 7, 2017
 
$0.27
 
August 21, 2017
 
September 6, 2017
May 8, 2017
 
$0.27
 
May 22, 2017
 
June 6, 2017
February 8, 2017
 
$0.24
 
February 27, 2017
 
March 14, 2017

It is the present intention of the Company’s Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Company’s Board of Directors in its sole discretion and will depend upon the earnings, financial condition, and capital needs of the Company, as well as other factors which the Company’s Board of Directors deem relevant.

On February 6, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.31 per share of the Company’s common stock.  The dividend will be paid on March 12, 2019, to stockholders of record as of the close of business on February 25, 2019.


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Index

Issuer Purchases of Equity Securities

The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program of up to $3 billion, exclusive of any fees, commissions or other expenses related to such repurchases through December 31, 2020. Additionally, the Company withholds shares from vested restricted stock units and performance-based restricted share units to satisfy employees’ minimum statutory tax withholding requirements. Stock purchase activity during fiscal 2018 is set forth in the table below:
Period
 
Total Number
of Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value of Shares That May Yet Be
Purchased
Under the Plans or Programs
First Quarter (a)
 
2,375,075

 
$
66.54

 
2,366,847

 
$
712,278,077

Second Quarter
 
1,477,200

 
64.37

 
1,477,200

 
617,214,452

Third Quarter (a)
 
452,004

 
81.22

 
451,332

 
580,564,002

 
 
 
 
 
 
 
 
 
Fourth Quarter: (a)
 
 

 
 

 
 

 
 

09/30/18 – 10/27/18
 
87,256

 
87.75

 
87,256

 
572,909,246

10/28/18 – 11/24/18
 
123,689

 
91.87

 
123,000

 
561,612,001

11/25/18 – 12/29/18
 
488,631

 
86.56

 
481,089

 
520,006,956

 
 
699,576

 
87.65

 
691,345

 
520,006,956

 
 
 
 
 
 
 
 
 
As of December 29, 2018
 
5,003,855

 
$
70.17

 
4,986,724

 
$
520,006,956

(a) The total number of shares purchased and average price paid per share include shares withheld from vested stock awards to satisfy employees’ minimum statutory tax withholding requirements of 8,228 during the first quarter, 672 during the third quarter, and 8,231 during the fourth quarter.

We expect to implement the balance of the repurchase program through purchases made from time to time either in the open market or through private transactions, in accordance with regulations of the SEC and other applicable legal requirements.  The timing and amount of any common stock repurchased under the program will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions.
 
Any additional stock repurchase programs will be subject to the discretion of our Board of Directors and subject to our results of operations, financial condition, cash requirements, and other factors deemed relevant by our Board of Directors.  The program may be limited or terminated at any time, without prior notice.
 

20

Index

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, 2013 to December 29, 2018 (the Company’s fiscal year-end), with the cumulative total returns of the S&P 500 Index and the S&P Retail Index over the same period.  The comparison assumes that $100 was invested on December 28, 2013, in our common stock and in each of the foregoing indices and in each case assumes reinvestment of dividends.  The historical stock price performance shown on this graph is not indicative of future performance.

chart-c7c6c02ebc9d542c850.jpg
 
 
12/28/2013
 
12/27/2014
 
12/26/2015
 
12/31/2016
 
12/30/2017
 
12/29/2018
Tractor Supply Company
 
$
100.00

 
$
104.11

 
$
115.45

 
$
103.33

 
$
103.67

 
$
117.18

S&P 500
 
$
100.00

 
$
115.76

 
$
116.64

 
$
129.55

 
$
157.84

 
$
149.63

S&P Retail Index
 
$
100.00

 
$
111.18

 
$
140.22

 
$
148.53

 
$
193.68

 
$
217.01


21

Index

Item 6.
Selected Financial Data
 
FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS (a)(b) 
 
The following selected financial data is derived from the Consolidated Financial Statements of Tractor Supply Company and provides summary historical financial information for the fiscal periods ended and as of the dates indicated (in thousands, except per share amounts and selected operating and other data):  
 
2018
 
2017
 
2016
 
2015
 
2014
 
(52 weeks)
 
(52 weeks)
 
(53 weeks)
 
(52 weeks)
 
(52 weeks)
Operating Results:
 
 
 
 
 
 
 
 
 
Net sales
$
7,911,046

 
$
7,256,382

 
$
6,779,579

 
$
6,226,507

 
$
5,711,715

Gross profit
2,702,528

 
2,491,965

 
2,325,202

 
2,143,174

 
1,950,415

Selling, general and administrative expenses
1,823,440

 
1,639,749

 
1,488,164

 
1,369,097

 
1,246,308

Depreciation and amortization
177,351

 
165,834

 
142,958

 
123,569

 
114,635

Operating income
701,737

 
686,382

 
694,080

 
650,508

 
589,472

Interest expense, net
18,352

 
13,859

 
5,810

 
2,891

 
1,885

Income before income taxes
683,385

 
672,523

 
688,270

 
647,617

 
587,587

Income tax expense
151,028

 
249,924

 
251,150

 
237,222

 
216,702

Net income
$
532,357

 
$
422,599

 
$
437,120

 
$
410,395

 
$
370,885

Net income per share – basic (c)
$
4.34

 
$
3.31

 
$
3.29

 
$
3.03

 
$
2.69

Net income per share – diluted (c)
$
4.31

 
$
3.30

 
$
3.27

 
$
3.00

 
$
2.66

Weighted average shares – diluted (c)
123,471

 
128,204

 
133,813

 
136,845

 
139,435

Dividends declared per common share outstanding
$
1.20

 
$
1.05

 
$
0.92

 
$
0.76

 
$
0.61

Operating Data (percent of net sales):
 

 
 

 
 
 
 

 
 

Gross margin
34.2
%
 
34.3
%
 
34.3
 %
 
34.4
 %
 
34.1
%
Selling, general and administrative expenses
23.0
%
 
22.6
%
 
22.0
 %
 
22.0
 %
 
21.8
%
Operating income
8.9
%
 
9.4
%
 
10.2
 %
 
10.4
 %
 
10.3
%
Net income
6.7
%
 
5.8
%
 
6.4
 %
 
6.6
 %
 
6.5
%
Store, Sales, and Other Data:
 

 
 

 
 
 
 

 
 

Stores open at end of year
1,940

 
1,853

 
1,738

 
1,488

 
1,382

Comparable store sales increase (d)
5.1
%
 
2.7
%
 
1.6
 %
 
3.1
 %
 
3.8
%
New store sales (as a % of net sales) (e)
3.8
%
 
5.6
%
 
5.6
 %
 
5.6
 %
 
6.2
%
Average transaction value
$
45.85

 
$
44.61

 
$
44.42

 
$
44.87

 
$
44.84

Comparable store average transaction value increase (decrease) (c)
2.8
%
 
0.5
%
 
(0.9
)%
 
(0.2
)%
 
0.6
%
Comparable store average transaction count increase (d)
2.2
%
 
2.2
%
 
2.6
 %
 
3.3
 %
 
3.2
%
Total selling square footage (000’s)
29,571

 
28,180

 
26,511

 
23,938

 
22,176

Total team members
30,500

 
29,300

 
26,000

 
23,000

 
21,100

Capital expenditures (000’s)
$
278,530

 
$
250,401

 
$
226,017

 
$
236,496

 
$
160,613

Balance Sheet Data (at end of period):
 

 
 

 
 
 
 

 
 

Average inventory per store (f)
$
766.8

 
$
735.4

 
$
741.7

 
$
820.1

 
$
752.7

Inventory turns
3.27

 
3.24

 
3.19

 
3.23

 
3.32

Working capital (g)
$
856,292

 
$
806,154

 
$
740,615

 
$
768,177

 
$
670,897

Total assets
$
3,085,262

 
$
2,868,769

 
$
2,674,942

 
$
2,370,826

 
$
2,034,571

Long-term debt, less current portion (h)
$
410,370

 
$
433,686

 
$
289,769

 
$
166,992

 
$
4,957

Stockholders’ equity
$
1,561,820

 
$
1,418,673

 
$
1,453,218

 
$
1,393,294

 
$
1,293,561

(a) Our fiscal year includes 52 or 53 weeks and ends on the last Saturday of the calendar year.  References to fiscal year mean the year in which that fiscal year ended.  Fiscal year 2016 consisted of 53 weeks while all other fiscal years presented consisted of 52 weeks.
(b) Beginning in the fourth quarter ended December 31, 2016, selected financial and operating information includes the consolidation of Petsense, unless otherwise noted.
(c) Basic net income per share is calculated based on the weighted average number of common shares outstanding applied to net income.  Diluted net income per share is calculated using the treasury stock method for stock options, restricted stock units and performance-based restricted share units.
(d) Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Beginning in fiscal 2015, stores closed during the year are removed from our comparable store metrics calculations. This change in the calculation methodology did not have a material impact on the comparable store metrics reported in prior periods presented due to the minimal number of stores closed in those periods. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Acquired Petsense stores are considered comparable stores beginning in the fourth quarter of fiscal 2017.
(e) New stores sales metrics are based on stores open for less than one year.
(f) Assumes average inventory cost, excluding inventory in-transit.
(g) Working capital for 2018, 2017, 2016 and 2015 reflects deferred tax assets as non-current as a result of the adoption of ASU 2015-17. Year 2014 has not been adjusted to reflect the adoption of this guidance.
(h) Long-term debt includes amounts outstanding under the Company’s debt facilities and capital lease obligations, excluding the current portions.

22

Index

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the three-year period ended December 29, 2018 (our fiscal years 2018, 2017 and 2016). This discussion should be read in conjunction with our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this report. This discussion contains forward-looking statements. See “Forward-Looking Statements” and “Risk Factors” included elsewhere in this report.

Tractor Supply reports its financial results in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Tractor Supply also uses certain non-GAAP measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior reported results. Non-GAAP measures do not have standardized definitions and are not defined by U.S. GAAP. Therefore, Tractor Supply’s non-GAAP measures are unlikely to be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures should not be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with U.S. GAAP.

Overview

Founded in 1938, Tractor Supply Company (the “Company” or “we” or “our” or “us”) is the largest rural lifestyle retailer in the United States (“U.S.”). The Company is focused on supplying the needs of recreational farmers and ranchers and others who enjoy the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. As of December 29, 2018, we operated 1,940 retail stores in 49 states under the names Tractor Supply Company, Del’s Feed & Farm Supply, and Petsense. We also operate websites under the names TractorSupply.com and Petsense.com. Our stores are located primarily in towns outlying major metropolitan markets and in rural communities, and they offer the following comprehensive selection of merchandise:

Equine, livestock, pet, and small animal products, including items necessary for their health, care, growth, and containment;
Hardware, truck, towing, and tool products;
Seasonal products, including heating, lawn and garden items, power equipment, gifts, and toys;
Work/recreational clothing and footwear; and
Maintenance products for agricultural and rural use.

Tractor Supply Company believes we can grow our business by being the most dependable supplier of relevant products and services for the “Out Here” lifestyle, creating customer loyalty through personalized experiences, and providing convenience that our customers expect at anytime, anywhere, and in any way they choose.  Our long-term growth strategy is to: (1) drive profitable growth through new store openings and by expanding omni-channel capabilities, thus tying together our website product content, social media, digital, and online shopping experience, attracting new customers and driving loyalty, (2) build customer-centric engagement by leveraging analytics to deliver legendary customer service, seasoned advice, and personalized experiences, (3) offer relevant assortments and services across all channels through exclusive and national brands and continue to introduce new products through our test and learn strategy, (4) enhance our core and foundational capabilities by investing in infrastructure and process improvements which will support growth, scale, and agility while improving the customer experience, and (5) expand through selective acquisitions, as such opportunities arise, to add complementary businesses and to enhance penetration into new and existing markets to supplement organic growth.

Achieving this strategy will require a foundational focus on: (1) organizing, optimizing, and empowering our team members for growth by developing skills, talent, and leadership across the organization, and (2) implementing operational efficiency initiatives, including leverage of technology, to align our cost structure to support new business capabilities for margin improvement and cost reductions.

Over the past five years, we have experienced considerable growth in stores, growing from 1,276 stores at the end of fiscal 2013 to 1,940 stores (1,765 Tractor Supply and Del’s retail stores and 175 Petsense retail stores) at the end of fiscal 2018, and in net sales, with a compounded annual growth rate of approximately 8.9%. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in existing and new markets. We have developed a proven method for selecting store sites and have identified approximately 700 additional opportunities for new Tractor Supply stores. We also believe that there is opportunity for up to 1,000 Petsense stores.





23

Index

Executive Summary

In fiscal 2018, we opened 80 new Tractor Supply stores in 33 states and 18 new Petsense stores in 14 states. In fiscal 2017, we opened 101 new Tractor Supply stores and 25 new Petsense stores. This resulted in a selling square footage increase of approximately 4.9% in fiscal 2018 and approximately 6.3% in fiscal 2017.

Net sales increased 9.0% to $7.91 billion in fiscal 2018 from $7.26 billion in fiscal 2017. Comparable store sales increased 5.1% in fiscal 2018 versus a 2.7% increase in fiscal 2017. Gross profit increased 8.4% to $2.70 billion in fiscal 2018 from $2.49 billion in fiscal 2017, and gross margin decreased 18 basis points to 34.16% of net sales in fiscal 2018 from 34.34% of net sales in fiscal 2017. Operating income decreased 59 basis points to 8.87% of net sales in fiscal 2018 from 9.46% of net sales in fiscal 2017. For fiscal 2018, net income was $532.4 million, or $4.31 per diluted share, compared to $422.6 million, or $3.30 per diluted share, in fiscal 2017. Excluding the impact of the revaluation of the Company’s net deferred tax asset resulting in a one-time, non-cash charge of approximately $4.9 million, or $0.03 per diluted share, adjusted net income for fiscal 2017 was $427.5 million, or $3.33 per diluted share.

We ended the year with $86.3 million in cash and outstanding debt of $407.4 million, after returning $496.9 million to our stockholders through stock repurchases and quarterly cash dividends.

Significant Accounting Policies and Estimates

Management’s discussion and analysis of our financial position and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP.  The preparation of these financial statements requires management to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies.  In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.  Our significant accounting policies are disclosed in Note 1 to the Consolidated Financial Statements.  The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
 
 
 
 
 
Inventory Valuation:
 
 
 
 
Inventory Impairment
 
 
 
 
We identify potentially excess and slow-moving inventory by evaluating turn rates, historical and expected future sales trends, age of merchandise, overall inventory levels, current cost of inventory, and other benchmarks.  We have established an inventory valuation reserve to recognize the estimated impairment in value (i.e., an inability to realize the full carrying value) based on our aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies.
 
We do not believe our merchandise inventories are subject to significant risk of obsolescence in the near term.  However, changes in market conditions or consumer purchasing patterns could result in the need for additional reserves.
 
Our impairment reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding forecasted customer demand and the promotional environment.
 
We have not made any material changes in the accounting methodology used to recognize inventory impairment reserves in the financial periods presented.
 
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate impairment.  However, if assumptions regarding consumer demand or clearance potential for certain products are inaccurate, we may be exposed to losses or gains that could be material.
 
A 10% change in our inventory impairment reserve as of December 29, 2018, would have affected net income by approximately $0.8 million in fiscal 2018.

24

Index

Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Shrinkage
 
 
 
 
We perform physical inventories at least once a year for each store that has been open more than 12 months, and we have established a reserve for estimating inventory shrinkage between physical inventory counts.  The reserve is established by assessing the chain-wide average shrinkage experience rate, applied to the related periods’ sales volumes.  Such assessments are updated on a regular basis for the most recent individual store experiences.
 
The estimated store inventory shrink rate is based on historical experience.  We believe historical rates are a reasonably accurate reflection of future trends.

Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding future shrinkage trends, the effect of loss prevention measures and merchandising strategies.
 
We have not made any material changes in the accounting methodology used to recognize shrinkage in the financial periods presented.

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our shrinkage reserve.  However, if our estimates regarding inventory losses are inaccurate, we may be exposed to losses or gains that could be material.

A 10% change in our shrinkage reserve as of December 29, 2018, would have affected net income by approximately $2.2 million in fiscal 2018.
Vendor Funding
 
 
 
 
We receive funding from substantially all of our significant merchandise vendors, in support of our business initiatives, through a variety of programs and arrangements, including vendor support funds (“vendor support”) and volume-based rebate funds (“volume rebates”).  The amounts received are subject to terms of vendor agreements, most of which are “evergreen”, reflecting the on-going relationship with our significant merchandise vendors. Certain of our agreements, primarily volume rebates, are renegotiated annually, based on expected annual purchases of the vendor’s product.  

Vendor funding is initially deferred as a reduction of the purchase price of inventory, and then recognized as a reduction of cost of merchandise as the related inventory is sold.  

During interim periods, the amount of vendor support and volume rebates is estimated based upon initial commitments and anticipated purchase levels with applicable vendors.
 
The estimated purchase volume (and related vendor funding) is based on our current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations.  Although we believe we can reasonably estimate purchase volume and related volume rebates at interim periods, it is possible that actual year-end results could be different from previously estimated amounts.

Our allocation methodology contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding customer demand, purchasing activity, target thresholds, vendor attrition and collectability.
 
We have not made any material changes in the accounting methodology used to establish our vendor funding reserves in the financial periods presented.

At the end of each fiscal year, a significant portion of the actual purchase activity is known.  Thus, we do not believe there is a reasonable likelihood that there will be a material change in the amounts recorded as vendor funding.

We do not believe there is a significant collectability risk related to vendor funding amounts due to us at the end of fiscal 2018.

If a 10% reserve had been applied against our outstanding vendor funding due as of December 29, 2018, net income would have been affected by approximately $1.7 million in fiscal 2018.

Although it is unlikely that there will be any significant reduction in historical levels of vendor funding, if such a reduction were to occur in future periods, the Company could experience a higher inventory balance and higher cost of sales.
Freight
 
 
 
 
We incur various types of transportation and delivery costs in connection with inventory purchases and distribution.  Such costs are included as a component of the overall cost of inventories (on an aggregate basis) and recognized as a component of cost of merchandise sold as the related inventory is sold.
 
We allocate freight as a component of total cost of sales without regard to inventory mix or unique freight burden of certain categories.  This assumption has been consistently applied for all years presented.
 
We have not made any material changes in the accounting methodology used to establish our capitalized freight balance or freight allocation in the financial periods presented.

If a 10% increase or decrease had been applied against our current inventory capitalized freight balance as of December 29, 2018, net income would have been affected by approximately $11.7 million in fiscal 2018.

25

Index

Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Self-Insurance Reserves:
 
 
 
 
We self-insure a significant portion of our employee medical insurance, workers’ compensation insurance, and general liability (including product liability) insurance plans.  We have stop-loss insurance policies to protect from individual losses over specified dollar values.

Provisions for losses related to our self-insured liabilities are based upon periodic independent actuarially determined estimates that consider a number of factors including historical claims experience, demographic factors, and severity factors.
 
The full extent of certain claims, especially workers’ compensation and general liability claims, may not become fully determined for several years.

Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date based upon historical data and experience, including actuarial calculations.
 
We have not made any material changes in the accounting methodology used to establish our self-insurance reserves in the financial periods presented.

We do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate insurance reserves.  However, if we experience a significant increase in the number of claims or the cost associated with these claims, we may be exposed to losses that could be material.

A 10% change in our self-insurance reserves as of December 29, 2018, would have affected net income by approximately $5.1 million in fiscal 2018.
Impairment of Long-Lived Assets:
 
 
 
 
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level.  The significant assumptions used to determine estimated undiscounted cash flows include cash inflows and outflows directly resulting from the use of those assets in operations, including margin on net sales, payroll and related items, occupancy costs, insurance allocations, and other costs to operate a store.

If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on an estimated future cash flow model. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of that asset.
 
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values.

 
We have not made any material changes in our impairment loss assessment methodology in the financial periods presented.

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. None of these estimates and assumptions are significantly sensitive, and a 10% change in any of these estimates would not have a material impact on our analysis.  However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

26

Index

Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Assumptions
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets:
 
 
 
 
Goodwill and other indefinite-lived intangible assets are evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value.

The quantitative impairment test for goodwill compares the fair value of a reporting unit with the carrying value of its net assets, including goodwill.  If the fair value of the reporting unit is less than the carrying value of the reporting unit, an impairment charge would be recorded to the Company’s operations, for the amount, if any, in which the carrying amount exceeds the reporting unit’s fair value. We determine fair values for each reporting unit using the market approach, when available and appropriate, or the income approach, or a combination of both. If multiple valuation methodologies are used, the results are weighted appropriately.

The quantitative impairment test for other indefinite-lived intangible assets involves comparing the carrying amount of the asset to the sum of the discounted cash flows expected to be generated by the asset. If the implied fair value of the indefinite-lived intangible asset is less than the carrying value, an impairment charge would be recorded to the Company’s operations.
 
Our impairment loss calculation contains uncertainties because they require management to make assumptions and to apply judgment to qualitative factors as well as estimate future cash flows and asset fair values, including forecasting prospective financial information and selecting the discount rate that reflects the risk inherent in future cash flows.

 
The valuation approaches utilized to estimate fair value for the purposes of the impairment tests of goodwill and other indefinite-lived intangible assets require the use of assumptions and estimates, which involve a degree of uncertainty. If actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to non-cash impairment losses that could be material.


27

Index

Quarterly Financial Data

Our unaudited quarterly operating results for each fiscal quarter of 2018 and 2017 are shown below (in thousands, except per share amounts):
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
2018
 
(13 weeks)
 
(13 weeks)
 
(13 weeks)
 
(13 weeks)
 
(52 weeks)
Net sales
 
$
1,682,901

 
$
2,213,249

 
$
1,881,625

 
$
2,133,271

 
$
7,911,046

Gross profit
 
563,649

 
769,414

 
653,132

 
716,333

 
2,702,528

Operating income
 
94,749

 
273,458

 
153,148

 
180,382

 
701,737

Net income
 
71,433

 
207,289

 
116,784

 
136,851

 
532,357

 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
0.57

 
$
1.70

 
$
0.96

 
$
1.12

 
$
4.34

Diluted
 
$
0.57

 
$
1.69

 
$
0.95

 
$
1.11

 
$
4.31

 
 
 
 
 
 
 
 
 
 
 
Comparable store sales increase (a)
 
3.7
%
 
5.6
%
 
5.1
%
 
5.7
%
 
5.1
%
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
Total
2017
 
(13 weeks)
 
(13 weeks)
 
(13 weeks)
 
(13 weeks)
 
(52 weeks)
Net sales
 
$
1,564,078

 
$
2,017,762

 
$
1,721,704

 
$
1,952,838

 
$
7,256,382

Gross profit
 
518,203

 
704,708

 
600,456

 
668,598

 
2,491,965

Operating income
 
96,362

 
257,925

 
148,253

 
183,842

 
686,382

Net income
 
60,311

 
160,649

 
91,896

 
109,743

 
422,599

 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

 
 

Basic
 
$
0.46

 
$
1.25

 
$
0.73

 
$
0.87

 
$
3.31

Diluted
 
$
0.46

 
$
1.25

 
$
0.72

 
$
0.87

 
$
3.30

 
 
 
 
 
 
 
 
 
 
 
Comparable store sales (decrease) increase (a)
 
(2.2
)%
 
2.2
%
 
6.6
%
 
4.0
%
 
2.7
%
(a) Comparable store metrics are calculated using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Closed stores are removed from our comparable store metrics calculations. Stores relocated during the periods being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Petsense stores are considered comparable stores beginning in the fourth quarter of fiscal 2017.

Results of Operations

The following table sets forth, for the periods indicated, certain items in the Consolidated Statements of Income expressed as a percentage of net sales.
 
Fiscal Year
 
 
2018
 
2017
 
2016
Net sales
100.00
%
 
100.00
%
 
100.00
%
Cost of merchandise sold (a)
65.84

 
65.66

 
65.70

Gross margin (a)
34.16

 
34.34

 
34.30

Selling, general and administrative expenses (a)
23.05

 
22.60

 
21.95

Depreciation and amortization
2.24

 
2.28

 
2.11

Operating income
8.87

 
9.46

 
10.24

Interest expense, net
0.23

 
0.19

 
0.09

Income before income taxes
8.64

 
9.27

 
10.15

Income tax expense
1.91

 
3.45

 
3.70

Net income
6.73
%
 
5.82
%
 
6.45
%
(a) Our gross margin amounts may not be comparable to those of other retailers since some retailers include all of the costs related to their distribution facility network in cost of merchandise sold and others (like our Company) exclude a portion of these distribution facility network costs from gross margin and instead include them in selling, general, and administrative expenses; refer to Note 1 – Significant Accounting Policies of the Notes to the Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

28

Index

Fiscal 2018 Compared to Fiscal 2017

Net sales increased 9.0% to $7.91 billion in fiscal 2018 from $7.26 billion in fiscal 2017. Comparable store sales for fiscal 2018 were $7.63 billion, a 5.1% increase over fiscal 2017. This compares to a 2.7% comparable store sales increase in the prior year. The comparable store transaction count increased 2.2% and comparable store average ticket increased 2.8% for fiscal 2018.

Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Stores closed during the year are removed from our comparable store metrics calculations. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Acquired Petsense stores are considered comparable beginning in the fourth quarter of fiscal 2017.

The comparable store sales increase was broad-based across all merchandise categories and all geographic regions. The growth in comparable store sales was led by strength in everyday merchandise, including consumable, usable, and edible (“C.U.E.”) products, along with strong demand for seasonal merchandise in each quarter of the year.

In addition to comparable store sales growth in fiscal 2018, sales from stores opened less than one year were $300.5 million in fiscal 2018, which represented 4.1 percentage points of the 9.0% increase over fiscal 2017 net sales. Sales from stores opened less than one year, including acquired Petsense stores, were $405.0 million in fiscal 2017, which represented 6.0 percentage points of the 7.0% increase over fiscal 2016 net sales.

The following table summarizes our store growth during fiscal 2018 and 2017:
 
 
Fiscal Year
 
 
Store Count Information:
 
2018
 
2017
Tractor Supply
 
 
 
 
Beginning of period
 
1,685

 
1,595

New stores opened
 
80

 
101

Stores closed
 

 
(11
)
End of period
 
1,765

 
1,685

Petsense
 
 
 
 
Beginning of period
 
168

 
143

New stores opened
 
18

 
25

Stores closed
 
(11
)
 

End of period
 
175

 
168

Consolidated end of period
 
1,940

 
1,853

 
 
 
 
 
Stores relocated
 
4

 
3


The following table indicates the percentage of net sales represented by each of our major product categories during fiscal 2018 and 2017:
 
 
Percent of Net Sales
 
 
Fiscal Year
Product Category:
 
2018
 
2017
Livestock and Pet
 
47
%
 
47
%
Hardware, Tools and Truck
 
22

 
22

Seasonal, Gift and Toy Products
 
19

 
19

Clothing and Footwear
 
8

 
8

Agriculture
 
4

 
4

Total
 
100
%
 
100
%

Gross profit increased 8.4% to $2.70 billion in fiscal 2018 compared to $2.49 billion in fiscal 2017.  As a percent of net sales, gross margin decreased 18 basis points to 34.16% for fiscal 2018 compared to 34.34% for fiscal 2017. The decline in gross margin resulted primarily from an increase in freight expense driven by higher carrier rates and increased diesel fuel prices as well as a

29

Index

negative impact from a mix shift of products sold during the fourth quarter, partially offset by strength in the Company’s price management program and strong sell through of seasonal merchandise throughout the year.

Total selling, general and administrative (“SG&A”) expenses, including depreciation and amortization, increased 10.8% to $2.00 billion in fiscal 2018 from $1.81 billion in fiscal 2017.  SG&A expenses, as a percent of net sales, increased 41 basis points to 25.29% in fiscal 2018 from 24.88% in fiscal 2017.  SG&A expenses increased as a percentage of net sales due principally to higher incentive compensation from the strong year-over-year growth in comparable store sales, along with planned investments in infrastructure, technology, and team member wages at both the stores and distribution centers, to support the Company’s long-term strategic growth initiatives. These SG&A increases as a percent of net sales were partially offset by leverage in occupancy and other costs from the increase in comparable store sales.

Our effective income tax rate decreased to 22.1% for fiscal 2018 compared to 37.2% in fiscal 2017. The decrease in the effective income tax rate was primarily related to the U.S. Tax Cuts and Jobs Act (the “TCJA”) that was signed into law in December 2017 which made broad and complex changes to the U.S. tax code including, but not limited to, a reduction of the federal income tax rate from 35% to 21% for years beginning after December 31, 2017. To a lesser extent, the effective income tax rate in fiscal 2018 also incrementally benefited from state investment credits and share-based compensation. The tax legislation also increased the effective income tax rate in fiscal 2017 due to the revaluation of the Company’s existing deferred tax balances at the lower federal income tax rate.

Net income in fiscal 2018 was $532.4 million, or $4.31 per diluted share, compared to $422.6 million, or $3.30 per diluted share, in fiscal 2017. Excluding the impact of the revaluation of the Company’s net deferred tax asset in fiscal 2017 resulting in a one-time, non-cash charge of approximately $4.9 million, or $0.03 per diluted share, adjusted net income for fiscal 2017 was $427.5 million, or $3.33 per diluted share. Adjusted net income is a non-GAAP measure which has been provided in order to enhance comparability for the periods presented.

During fiscal 2018, we repurchased approximately 5.0 million shares of the Company’s common stock at a total cost of $349.8 million as part of our $3 billion share repurchase program.  In fiscal 2017, we repurchased approximately 5.9 million shares at a total cost of $369.4 million.

Fiscal 2017 Compared to Fiscal 2016

Net sales increased 7.0% to $7.26 billion in fiscal 2017 from $6.78 billion in fiscal 2016. The prior year included an extra sales week as a part of the Company’s 53-week calendar in 2016, which negatively impacted the overall sales increase by approximately 1.6 percentage points. Comparable store sales for fiscal 2017 were $6.85 billion, a 2.7% increase over fiscal 2016. This compares to a 1.6% comparable store sales increase in the prior year. The comparable store transaction count increased 2.2% and comparable store average ticket increased 0.5% for fiscal 2017.

Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Stores closed during the year are removed from our comparable store metrics calculations. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Acquired Petsense stores are considered comparable beginning in the fourth quarter of fiscal 2017.

The comparable store sales increase was driven by an increase in traffic counts and the year-round strength of C.U.E. products, primarily animal- and pet-related merchandise. Warmer than normal weather patterns early in the first quarter negatively impacted the sales of winter seasonal items and winter storms in March had an unfavorable impact on the start to the spring selling season. Beginning in the second quarter, we experienced broad-based improvement through the remainder of the year in all geographic regions and major product categories driven by strength in sales of everyday basic items in C.U.E. and year-round products. The third quarter experienced an additional benefit from an extended spring and summer selling season and strong sales of emergency response products related to hurricanes during the quarter while the fourth quarter experienced an additional benefit from solid sales in cold weather and other seasonal products.

In addition to comparable store sales growth in fiscal 2017, sales from stores opened less than one year, including Petsense, were $405.0 million in fiscal 2017, which represented 6.0 percentage points of the 7.0% increase over fiscal 2016 net sales. Sales from stores opened less than one year, including acquired Petsense stores, were $378.9 million in fiscal 2016, which represented 6.1 percentage points of the 8.9% increase over fiscal 2015 net sales.


30

Index

The following table summarizes our store growth during fiscal 2017 and 2016:
 
 
Fiscal Year
 
 
Store Count Information:
 
2017

2016
Tractor Supply
 
 
 
 
Beginning of period
 
1,595

 
1,488

New stores opened
 
101

 
113

Stores closed
 
(11
)
 
(6
)
End of period
 
1,685

 
1,595

Petsense
 
 
 
 
Beginning of period
 
143

 

Stores acquired
 

 
136

New stores opened
 
25

 
8

Stores closed
 

 
(1
)
End of period
 
168

 
143

Consolidated end of period
 
1,853

 
1,738

 
 
 
 
 
Stores relocated
 
3

 
3


The following table indicates the percentage of net sales represented by each of our major product categories during fiscal 2017 and 2016:
 
 
Percent of Net Sales
 
 
Fiscal Year
Product Category:
 
2017
 
2016
Livestock and Pet
 
47
%
 
46
%
Hardware, Tools and Truck
 
22

 
22

Seasonal, Gift and Toy Products
 
19

 
19

Clothing and Footwear
 
8

 
8

Agriculture
 
4

 
5

Total
 
100
%
 
100
%

Gross profit increased 7.2% to $2.49 billion in fiscal 2017 compared to $2.33 billion in fiscal 2016.  As a percent of net sales, gross margin remained flat to prior year at 34.3%.  Gross margin percentage was negatively impacted by higher markdowns on cold weather merchandise and targeted promotional activity in the first quarter, as well as a higher freight expense throughout the year due to higher carrier costs, increased average fuel costs and a shift in product mix towards more freight intensive products. These declines in gross margin were offset by strong sell-through rates and solid price and inventory management, particularly in the back half of the year.

SG&A expenses, including depreciation and amortization, for fiscal 2017 increased 10.7% to $1.81 billion from $1.63 billion in fiscal 2016.  SG&A expenses, as a percent of net sales, increased 80 basis points to 24.9% in fiscal 2017, from 24.1% in fiscal 2016.  The increase in SG&A as a percent of net sales was primarily attributable to higher store payroll from wage inflation and our continued effort to enhance customer service, increased incentive compensation at the store level from the strong year-over-year growth in comparable store sales, the deleverage of occupancy and other fixed costs resulting from the integration of Petsense expenses and the 53rd week of sales in fiscal 2016, that did not reoccur in fiscal 2017, and investments in infrastructure and technology to support our strategic long-term growth initiatives.

Our effective tax rate increased to 37.2% for fiscal 2017 compared to 36.5% in fiscal 2016. As a result of the TCJA, we made a reasonable estimate of the effects of the tax legislation on our existing deferred tax balances as of December 30, 2017, and recognized a one-time, non-cash charge of $4.9 million, which is included as a component of income tax expense from continuing operations in fiscal 2017. Excluding the impacts of the TCJA, our effective income tax rate in fiscal 2017 would have been 36.4%.

For fiscal 2017, net income was $422.6 million, or $3.30 per diluted share, compared to $437.1 million, or $3.27 per diluted share, in fiscal 2016. Excluding the impact of the revaluation of the Company’s net deferred tax asset in fiscal 2017 resulting in a one-time, non-cash charge of approximately $4.9 million, or $0.03 per diluted share, adjusted net income for fiscal 2017, was $427.5

31

Index

million, or $3.33 per diluted share. Adjusted net income is a non-GAAP measure which has been provided in order to enhance comparability for the periods presented.

During fiscal 2017, we repurchased approximately 5.9 million shares of the Company’s common stock at a total cost of $369.4 million as part of our $3 billion share repurchase program.  In fiscal 2016, we repurchased approximately 4.4 million shares at a total cost of $331.7 million.

Liquidity and Capital Resources
 
In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, remodeling and relocation programs, distribution facility capacity and improvements, information technology, inventory purchases, repayment of
existing borrowings under our debt facilities, share repurchases, cash dividends, and selective acquisitions as opportunities arise.  

Our primary ongoing sources of liquidity are existing cash balances, cash provided from operations, remaining funds available under our debt facilities, capital and operating leases, and normal trade credit.  Our inventory and accounts payable levels typically build in the first and third fiscal quarters to support the higher sales volume of the spring and cold-weather selling seasons, respectively.

We believe that our existing cash balances, expected cash flow from future operations, funds available under our debt facilities, operating and capital leases, and normal trade credit will be sufficient to fund our operations and our capital expenditure needs, including new store openings, store acquisitions, relocations and renovations, and distribution facility capacity, through the end of fiscal 2019.

Working Capital

At December 29, 2018, the Company had working capital of $856.3 million, which increased $50.1 million from December 30, 2017.  The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):
 
December 29, 2018
 
December 30, 2017
 
Variance
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
86.3

 
$
109.1

 
$
(22.8
)
Inventories
1,589.5

 
1,453.2

 
136.3

Prepaid expenses and other current assets
114.5

 
88.3

 
26.2

Income taxes receivable
4.1

 
4.8

 
(0.7
)
Total current assets
1,794.4

 
1,655.4

 
139.0

Current liabilities:
 

 
 

 
 

Accounts payable
620.0

 
576.6

 
43.4

Accrued employee compensation
54.0

 
31.6

 
22.4

Other accrued expenses
232.4

 
201.7

 
30.7

Current portion of long-term debt
26.3

 
25.0

 
1.3

Current portion of capital lease obligations
3.6

 
3.5

 
0.1

Income taxes payable
1.8

 
10.8

 
(9.0
)
Total current liabilities
938.1

 
849.2

 
88.9

Working capital
$
856.3

 
$
806.2

 
$
50.1


In comparison to December 30, 2017, working capital as of December 29, 2018 was impacted most significantly by changes in our inventory, accounts payable and other accrued expenses.

The increase in inventory is principally due to new store growth and the investment in additional inventory to support the new northeast distribution center in Frankfort, New York, which began receiving merchandise in the fourth quarter of fiscal 2018, and is expected to begin shipping merchandise to our stores in the first quarter of fiscal 2019. To a lesser extent, the increase in inventory was also impacted by commodity inflation. We actively manage our inventory balances and in-stock levels at our stores.
Accounts payable increased primarily as a result of the increase in inventory and new store growth.
The increase in other accrued expenses is a result of Company growth and the timing of payments.

32

Index


As discussed in Note 15 to the Consolidated Financial Statements, the Company will adopt new guidance related to lease accounting in the first quarter of fiscal 2019 which will result in the Company recognizing a right-of-use asset and a corresponding lease liability on its balance sheet. The Company expects the adoption of this new guidance to have a negative impact to working capital of approximately $250 million to $300 million due to the recognition of a current portion of operating lease obligations. The guidance will be adopted on a prospective basis in fiscal 2019 so prior periods will no longer be comparable.

Debt

The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):
 
 
December 29,
2018
 
December 30,
2017
Senior Notes
 
$
150.0

 
$
150.0

Senior Credit Facility:
 
 
 
 
February 2016 Term Loan
 
165.0

 
180.0

June 2017 Term Loan
 
93.8

 
97.5

Revolving credit loans
 

 

Total outstanding borrowings
 
408.8

 
427.5

Less: unamortized debt issuance costs
 
(1.4
)
 
(1.4
)
Total debt
 
407.4

 
426.1

Less: current portion of long-term debt
 
(26.3
)
 
(25.0
)
Long-term debt
 
$
381.1

 
$
401.1

 
 
 
 
 
Outstanding letters of credit
 
$
33.5

 
$
39.6


For additional information about the Company’s debt and credit facilities, refer to Note 5 to the Consolidated Financial Statements. As further described in Note 6 to the Consolidated Financial Statements, the Company has entered into interest rate swap agreements in order to hedge our exposure to variable rate interest payments associated with each of the term loans under the Senior Credit Facility.

Sources and Uses of Cash

Our primary source of liquidity is cash provided by operations and funds available under our debt facilities.  Principal uses of cash for investing activities are capital expenditures and selective acquisitions, while principal uses of cash for financing activities are repurchase of the Company’s common stock and cash dividends paid to stockholders.  

The following table presents a summary of cash flows provided by or used in operating, investing and financing activities for fiscal years 2018, 2017, and 2016 (in millions):
 
Fiscal Year
 
2018
 
2017
 
2016(a)
 
(52 weeks)
 
(52 weeks)
 
(53 weeks)
Net cash provided by operating activities
$
694.4

 
$
631.5

 
$
650.7

Net cash used in investing activities
(276.3
)
 
(238.0
)
 
(369.3
)
Net cash used in financing activities
(440.9
)
 
(338.3
)
 
(291.3
)
Net (decrease) increase in cash and cash equivalents
$
(22.8
)
 
$
55.2

 
$
(9.9
)
(a) As a result of the adoption of ASU 2016-09, excess tax benefits on stock options exercised are no longer presented as a separate line item in the Consolidated Statements of Cash Flows. The presentation of fiscal 2016 has been adjusted to conform to the current presentation.

33

Index


Operating Activities

Operating activities provided net cash of $694.4 million, $631.5 million, and $650.7 million in fiscal 2018, 2017, and 2016, respectively. The $62.9 million increase in net cash provided by operating activities in fiscal 2018, compared to fiscal 2017, was due to changes in the following (in millions):
 
Fiscal Year
 
Variance
 
 
 
2018
 
2017
 
 
(52 weeks)
 
(52 weeks)
 
Net income
$
532.4

 
$
422.6

 
$
109.8

Depreciation and amortization
177.4

 
165.8

 
11.6

Share-based compensation expense
28.9

 
29.2

 
(0.3
)
Deferred income taxes
11.9

 
26.7

 
(14.8
)
Inventories and accounts payable
(92.9
)
 
(26.5
)
 
(66.4
)
Prepaid expenses and other current assets
(26.2
)
 
2.3

 
(28.5
)
Accrued expenses
58.8

 
(3.9
)
 
62.7

Income taxes
(8.4
)
 
4.2

 
(12.6
)
Other, net
12.5

 
11.1

 
1.4

Net cash provided by operating activities
$
694.4


$
631.5

 
$
62.9


The $62.9 million increase in net cash provided by operating activities in fiscal 2018, compared to fiscal 2017, primarily reflects incremental profitability, partially offset by the increase in inventory, net of accounts payable, to support new store growth and the net impact of changes in our operating assets and liabilities which fluctuated due primarily to new store growth and the timing of payments.

The $19.2 million decrease in net cash provided by operating activities in fiscal 2017, as compared to fiscal 2016, was due to changes in the following (in millions):
 
Fiscal Year
 
Variance
 
 
 
2017
 
2016(a)
 
 
(52 weeks)
 
(53 weeks)
 
Net income
$
422.6

 
$
437.1

 
$
(14.5
)
Depreciation and amortization
165.8

 
143.0

 
22.8

Share-based compensation expense
29.2

 
23.6

 
5.6

Deferred income taxes
26.7

 
10.0

 
16.7

Inventories and accounts payable
(26.5
)
 
14.8

 
(41.3
)
Prepaid expenses and other current assets
2.3

 
1.8

 
0.5

Accrued expenses
(3.9
)
 
2.1

 
(6.0
)
Income taxes
4.2

 
11.8

 
(7.6
)
Other, net
11.1

 
6.5

 
4.6

Net cash provided by operating activities
$
631.5

 
$
650.7

 
$
(19.2
)
(a) As a result of the adoption of ASU 2016-09, excess tax benefits on stock options exercised are no longer presented as a separate line item in the Consolidated Statements of Cash Flows. The presentation of fiscal 2016 has been adjusted to conform to the current presentation.

The $19.2 million decrease in net cash provided by operating activities in fiscal 2017, compared with fiscal 2016, primarily reflects the timing of receipts and payments in relation to inventory and accounts payable partially offset by increased depreciation and amortization due to new store growth and investments in information technology and infrastructure.








34

Index

Investing Activities

Investing activities used cash of $276.3 million, $238.0 million, and $369.3 million in fiscal 2018, 2017, and 2016, respectively. Fiscal 2016 had a significant cash outflow from investing activities related to the acquisition of Petsense.  Other than cash flows related to the acquisition of Petsense, cash flows from investing activities in the years presented are primarily composed of capital expenditures. Capital expenditures for fiscal 2018, 2017, and 2016 were as follows (in millions):
 
Fiscal Year
 
 
2018
 
2017
 
2016
 
(52 weeks)
 
(52 weeks)
 
(53 weeks)
Information technology
$
86.7

 
$
82.1

 
$
40.5

Distribution center capacity and improvements
82.0

 
45.8

 
21.0

New and relocated stores and stores not yet opened
68.0

 
79.3

 
111.2

Existing stores
41.5

 
43.0

 
53.1

Corporate and other
0.3

 
0.2

 
0.2

Total capital expenditures
$
278.5

 
$
250.4

 
$
226.0


The sustained increase in spending on information technology represents continued support of our store growth and our omni-channel platform, as well as improvements in security and compliance, enhancements to our customer relationship management program, and other long-term strategic growth initiatives.

Spending for distribution center capacity and improvements increased in fiscal 2018 and 2017 related to the construction of the new northeast distribution center in Frankfort, New York, and the expansion of our distribution center in Waverly, Nebraska. The new northeast distribution center in Frankfort, New York is nearing completion as it began receiving merchandise in the fourth fiscal quarter of 2018 and is expected to begin shipping merchandise to our stores in the first fiscal quarter of 2019. The expansion of the Waverly, Nebraska distribution center was completed during fiscal 2018.

The above table reflects an investment in 80 new Tractor Supply stores, 18 new Petsense stores, and four store relocations during fiscal 2018. In fiscal 2017, we opened 101 new Tractor Supply stores, 25 new Petsense stores, and had three store relocations. In fiscal 2016, we opened 113 new Tractor Supply stores, began operating 143 Petsense stores (including 8 new stores after acquisition), and had three store relocations.  

Spending on existing stores principally reflects routine refresh activity. Spending in fiscal 2016 was higher than spending in fiscal 2018 and 2017 due to the investment in the chain-wide LED lighting retrofit, which began in fiscal 2016 and was completed in fiscal 2017.

Our projected capital expenditures for fiscal 2019 principally include a plan to open approximately 80 new Tractor Supply stores and 10 to 15 new Petsense stores, continued improvements in technology and infrastructure at our existing stores, and ongoing investments to enhance our digital and omni-channel capabilities to better serve our customers.

Financing Activities

Financing activities used cash of $440.9 million, $338.3 million, and $291.3 million in fiscal 2018, 2017, and 2016, respectively.  
The $102.6 million increase in net cash used in financing activities in fiscal 2018, compared to fiscal 2017, was due to changes in the following (in millions):
 
Fiscal Year
 
 
 
 
 
 
2018
 
2017
 
Variance
 
(52 weeks)
 
(52 weeks)
 
Net borrowings and repayments under debt facilities
$
(18.8
)
 
$
152.5

 
$
(171.3
)
Repurchase of common stock
(349.8
)
 
(369.4
)
 
19.6

Net proceeds from issuance of common stock
79.6

 
16.3

 
63.3

Cash dividends paid to stockholders
(147.1
)
 
(133.8
)
 
(13.3
)
Other, net
(4.8
)
 
(3.9
)
 
(0.9
)
Net cash used in financing activities
$
(440.9
)
 
$
(338.3
)
 
$
(102.6
)

35

Index


The increase in net cash used in financing activities in fiscal 2018, compared to fiscal 2017, is largely due to a decrease in borrowings, net of repayments, under our debt facilities, partially offset by an increase in proceeds from the issuance of common stock associated with the exercise of share-based compensation awards.

The $47.0 million increase in net cash used in financing activities in fiscal 2017, compared to fiscal 2016, was due to changes in the following (in millions):
 
Fiscal Year
 
 
 
 
 
 
2017
 
2016(a)
 
Variance
 
(52 weeks)
 
(53 weeks)
 
Net borrowings and repayments under debt facilities
$
152.5

 
$
125.0

 
$
27.5

Repurchase of common stock
(369.4
)
 
(331.7
)
 
(37.7
)
Net proceeds from issuance of common stock
16.3

 
41.0

 
(24.7
)
Cash dividends paid to stockholders
(133.8
)