There is no assurance that our merchandising initiatives and marketing emphasis will 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. There is no assurance that we will be successful, or that new initiatives will be executed in a timely manner to satisfy our customers’ needs or expectations. Failure to execute and promote such initiatives in a timely manner could harm our ability to grow the business and could have a material adverse effect on our results of operations and financial condition. Additionally, our success depends on our ability to anticipate and respond in a timely manner to changing customer demand and preferences for merchandise. If we misjudge the market, we may significantly overstock unpopular products and be forced to take significant inventory markdowns. Shortages of key items could also have a materially adverse impact on operating results.
We face risks associated with vendors from whom our products are sourced.
The products we sell are sourced from a variety of domestic and international vendors. All ofAs a general rule, we have agreements with our vendors mustin which the vendors agree to comply with applicable laws, including labor and environmental laws, and otherwise be certified as meeting requiredto indemnify us against certain liabilities and costs. Our ability to recover liabilities and costs under these vendor standardsagreements is dependent upon the financial condition and integrity of conduct. the vendors.
We rely on foreign manufacturers for various products that we sell. In addition, many of our domestic suppliers purchase a portion of their products from foreign sources. We rely on long-term relationships with our suppliers but have no long-term contracts with such suppliers. Our future success will depend in large measure upon our ability to maintain our existing supplier relationships or to develop new ones. This reliance increases the risk of inadequate and untimely supplies of various products due to local political, economic, social, or environmental conditions, transportation delays, restrictive actions by foreign governments, or changes in United States laws and regulations affecting imports or domestic distribution. Our vendors may be forced to reduce their production, shutshu t down their operations or file for bankruptcy protection, which in some cases would make it difficult for us to serve the market’s needs and could have a material adverse effect on our business.
As an importer, our business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, economic disruptions, delays in shipments, transportation capacity and costs, currency exchange rates and changes in political or economic conditions in countries from which we purchase products. If any such factors were to render the conduct of business in particular countries undesirable or impractical or if additional United States quotas, duties, taxes or other charges or restrictions were imposed upon the importation of our products in the future, our financial condition and results of operations could be materially adversely affected.
Our failure to attract and retain qualified team members could adversely affect our financial performance.
Our ability to continue expanding operations depends on our ability to attract and retain a large and growing number of qualified team members. Our ability to meet labor needs while controlling wage and related labor costs is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force, unemployment levels, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. If we are unable to locate, attract or retain qualified personnel, or if costs of labor or related costs increase significantly, our financial performance could be adversely affected.
We may be subject to product liability and other claims in the ordinary course of business.
Our business involves a risk of product liability and other claims in the ordinary course of business. We maintain general liability insurance with a deductible for each occurrence and a $33,000,000$36,000,000 aggregate retention applicable to all general liability and workers compensation claims. We also maintain umbrella limits above the primary general liability and product liability cover. In many cases, we have indemnification rights against the manufacturers of the products and their products liability insurance. Our ability to recover under such insurance or indemnification arrangements is subject to the financial viability of the insurers and manufacturers and the specific allegations of a claim. No assurance can be given that our insurance coverage or the manufacturers’ indemnityindemni ty will be available or sufficient in any claims brought against us.
Legal proceedings could materially impact our results.
From time to time, we are party to legal proceedings including matters involving personnel and employment issues, personal injury, intellectual property, and other proceedings arising in the ordinary course of business. Our results could be materially impacted by the decisions and expenses related to pending or future proceedings.
If we experience difficulties with our management information systems, our financial performance may be adversely affected.
We depend on management information systems for many aspects of our business. We could be materially adversely affected if our management information systems are disrupted or if we are unable to improve, upgrade, maintain and expand systems, particularly in light of the contemplated continued store growth. Many of our information systems contain confidential customer, Company or employee data. If we fail to adequately restrict access to this information, our financial performanceresults of operations could be adversely affected.
Effective tax rate changes and results of examinations by taxing authorities could materially impact our results.
Our future effective tax rates could be adversely affected by the earnings mix being lower than historical results in states where we have lower statutory rates and higher than historical results in states where we have higher statutory rates, by changes in the measurement of our deferred tax assets and liabilities, or by changes in tax laws or interpretations thereof. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service (“IRS”("IRS") and other state and local taxing authorities. 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.
Failure to maintain an effective system of internal control over financial reporting could materially impact our business and results.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment, inventories, lease obligations, self-insurance, tax matters and litigation, are highly complex and involve many subjective assumptions, estimates or judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial performance or financial condition.
None.
PART II
| | |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Tractor Supply Company’s common stock trades on The Nasdaq Global Select Market under the symbol “TSCO”.
The table below sets forth the high and low sales prices of our common stock as reported by The Nasdaq Global Select market for each fiscal quarter of the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | | Price Range | | | Price Range (split adjusted) | |
| | | 2009 | | 2008 | | | 2010 | | | 2009 | |
| | | High | | Low | | High | | Low | | | High | | | Low | | | High | | | Low | |
| First Quarter | | $ | 37.97 | | $ | 28.67 | | $ | 43.25 | | $ | 28.01 | | | $ | 30.29 | | | $ | 24.56 | | | $ | 18.99 | | | $ | 14.34 | |
| Second Quarter | | $ | 43.72 | | $ | 34.17 | | $ | 42.07 | | $ | 28.38 | | | $ | 35.93 | | | $ | 28.91 | | | $ | 21.86 | | | $ | 17.09 | |
| Third Quarter | | $ | 48.99 | | $ | 39.68 | | $ | 47.50 | | $ | 26.70 | | | $ | 39.14 | | | $ | 29.55 | | | $ | 24.50 | | | $ | 19.84 | |
| Fourth Quarter | | $ | 54.50 | | $ | 44.33 | | $ | 45.40 | | $ | 31.69 | | | $ | 48.79 | | | $ | 38.35 | | | $ | 27.25 | | | $ | 22.17 | |
As of January 31, 2010,2011, the approximate number of record holders of our common stock was 130120 (excluding individual participants in nominee security position listings), and the estimated number of beneficial holders of our common stock was 30,000.37,000.
Issuer Purchases of Equity Securities
We have a Board-approved share repurchase program which provides for the repurchase of up to $400 million of our outstanding common stock, exclusive of any fees, commissions, or other expenses related to such repurchases, through December 2011. Stock repurchase activity during fiscal 20092010 is set forth in the table below:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Maximum Dollar | |
| | | | | | | | | | | Total Number of | | | Value of Shares | |
| | | Total | | | | | | | Shares Purchased | | | That May Yet Be | |
| | | Number of | | | Average | | | as Part of Publicly | | | Purchased Under | |
| | | Shares | | | Price Paid | | | Announced Plans | | | the Plans or | |
| Period | | Purchased | | | Per Share | | | or Programs | | | Programs | |
| First Quarter | | | 280,984 | | | $ | 32.45 | | | | 280,984 | | | $ | 187,120,351 | |
| Second Quarter | | | 20,639 | | | | 35.97 | | | | 20,639 | | | | 186,378,522 | |
| Third Quarter | | | 19,407 | | | | 47.13 | | | | 19,407 | | | | 185,464,444 | |
| | | | | | | | | | | | | | | | | |
| Fourth Quarter: | | | | | | | | | | | | | | | | |
| 9/27/09 – 10/24/09 | | | 5,804 | | | | 47.38 | | | | 5,804 | | | | 185,189,616 | |
| 10/25/09 – 11/21/09 | | | 87,700 | | | | 45.91 | | | | 87,700 | | | | 181,166,127 | |
| 11/22/09 – 12/26/09 | | | 4,500 | | | | 47.43 | | | | 4,500 | | | | 180,952,848 | |
| | | | | | | | | | | | | | | |
| | | | 98,004 | | | | 46.06 | | | | 98,004 | | | | 180,952,848 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| As of December 26, 2009 | | | 419,034 | | | $ | 36.49 | | | | 419,034 | | | $ | 180,952,848 | |
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased(a) | | | Average Price Paid Per Share(a) | | | 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 (b) | | | 172,182 | | | $ | 25.90 | | | | 146,200 | | | $ | 177,152,538 | |
| Second Quarter | | | 298,622 | | | | 33.13 | | | | 298,622 | | | | 167,264,053 | |
| Third Quarter | | | 273,400 | | | | 33.64 | | | | 273,400 | | | | 158,071,329 | |
| | | | | | | | | | | | | | | | | |
| Fourth Quarter: | | | | | | | | | | | | | | | | |
9/26/10 – 10/23/10 | | | -- | | | | -- | | | | -- | | | | 158,071,329 | |
10/24/10 – 11/20/10 (b) | | | 292,999 | | | | 40.52 | | | | 290,000 | | | | 146,324,048 | |
11/21/10 – 12/25/10 | | | 83,800 | | | | 42.04 | | | | 83,800 | | | | 142,800,349 | |
| | | | 376,799 | | | | 40.89 | | | | 373,800 | | | | 142,800,349 | |
| | | | | | | | | | | | | | | | | |
| As of December 25, 2010 | | | 1,121,003 | | | $ | 34.75 | | | | 1,092,022 | | | $ | 142,800,349 | |
(a) The number of shares purchased and the average price paid per share shown in the table above have been adjusted to reflect the effect of a two-for-one stock split for all shares purchased prior to the stock split record date. Actual shares of 73,100, 149,311, and 230,100 were added to treasury in the first, second and third quarters of fiscal 2010, respectively, as the number of shares held in treasury was not adjusted for the two-for-one stock split as stated in Note 1 – Significant Accounting Policies in Part II Item 8 of this Form 10-K. |
(b) We withheld 25,982 (split adjusted) shares during the first quarter and 2,999 shares during the fourth quarter to satisfy employee tax obligations on the vesting of restricted stock units in the amounts of $0.7 million in the first quarter and $0.1 million in the fourth quarter at an average price of $25.30 and $42.00, respectively. For further discussion, see Note 2 – Share-Based Compensation in Part II, Item 8 of this Form 10-K. |
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.
We have not declared The timing and amount of any cash dividends duringshares repurchased under the two most recent fiscal years. Our Board of Directors authorizedprogram will depend on a share repurchase strategy, subject to a numbervariety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions.
Any future declaration of dividends or additional share repurchase programs will be subject to the discretion of our Board of Directors and subject to our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. The program may be limited or terminated at any time without prior notice.
12
Common Stock Dividends
During 2010, the Board of Directors declared the following dividends:
| Date Declared | | Dividend Amount Per Share (split adjusted) | | Stockholders of Record Date | Date Paid |
| March 1, 2010 | | $ | 0.07 | | March 15, 2010 | March 29, 2010 |
| May 3, 2010 | | | 0.07 | | May 17, 2010 | June 2, 2010 |
| July 29, 2010 | | | 0.07 | | August 16, 2010 | August 31, 2010 |
| October 28, 2010 | | | 0.07 | | November 15, 2010 | November 30, 2010 |
It is the present intention of the Board of Directors to continue to pay this quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition, and capital needs of the Company and other factors which the Board of Directors deems relevant. There were no dividends declared during fiscal 2009.
On February 4, 2011, we announced that our Board of Directors declared a quarterly cash dividend of $0.07 per share of the Company’s common stock. The dividend will be paid on March 8, 2011 to stockholders of record as of the close of business on February 22, 2011.
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 25, 200431, 2005 to December 26, 200925, 2010 (the Company’sCompany'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 25, 200431, 2005 in our Common Stock and in each of the foregoing indices. The historical stock price performance shown on this graph is not necessarily indicative of future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/25/04 | | | 12/31/05 | | | 12/30/06 | | | 12/29/07 | | | 12/27/08 | | | 12/26/09 | |
| Tractor Supply Company | | $ | 100.00 | | | $ | 147.34 | | | $ | 124.44 | | | $ | 98.41 | | | $ | 96.08 | | | $ | 150.38 | |
| S&P 500 | | $ | 100.00 | | | $ | 103.15 | | | $ | 117.20 | | | $ | 122.18 | | | $ | 72.12 | | | $ | 93.09 | |
| S&P Retail Index | | $ | 100.00 | | | $ | 100.44 | | | $ | 109.84 | | | $ | 90.24 | | | $ | 59.71 | | | $ | 91.88 | |
13
| | | 12/31/05 | | | 12/30/06 | | | 12/29/07 | | | 12/27/08 | | | 12/26/09 | | | 12/25/10 | |
| Tractor Supply Company | | $ | 100.00 | | | $ | 84.45 | | | $ | 66.79 | | | $ | 65.21 | | | $ | 102.06 | | | $ | 182.85 | |
| S&P 500 | | $ | 100.00 | | | $ | 113.62 | | | $ | 118.44 | | | $ | 69.92 | | | $ | 90.24 | | | $ | 100.68 | |
| S&P Retail Index | | $ | 100.00 | | | $ | 109.36 | | | $ | 89.85 | | | $ | 59.45 | | | $ | 91.47 | | | $ | 112.13 | |
Item 6.Selected Financial Data
FIVE YEAR SELECTED FINANCIAL AND OPERATING HIGHLIGHTS
The following selected financial data are derived from the consolidated financial statements of Tractor Supply Company. Our fiscal year includes 52 or 53 weeks and ends on the last Saturday of the calendar year. References to fiscal year mean the year in which that fiscal year ended. Fiscal year 2005 consists of 53 weeks while all otherAll fiscal years presented below consist of 52 weeks.
Effective December 25, 2010, the Company elected to change its method of accounting for inventories from the lower of cost, as determined by the last-in, first-out (“LIFO”) method, or market to the lower of cost, as determined by average cost method, or market. The following table provides summary historical financial information adjusted for the change in accounting for inventory for the periods ended and as of the dates indicated (in thousands, except per share amounts and selected operating data):
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
Operating Results: | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 3,206,937 | | | $ | 3,007,949 | | | $ | 2,703,212 | | | $ | 2,369,612 | | | $ | 2,067,979 | |
| Gross margin | | | 1,034,957 | | | | 912,261 | | | | 852,708 | | | | 746,146 | | | | 636,631 | |
| Selling, general and administrative expenses | | | 784,066 | | | | 715,961 | | | | 641,603 | | | | 555,834 | | | | 466,167 | |
| Depreciation and amortization | | | 66,258 | | | | 60,731 | | | | 51,064 | | | | 42,292 | | | | 34,020 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | 184,633 | | | | 135,569 | | | | 160,041 | | | | 148,020 | | | | 136,444 | |
| Interest expense, net | | | 1,644 | | | | 2,133 | | | | 5,037 | | | | 2,688 | | | | 1,632 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Income before income taxes(a) | | | 182,989 | | | | 133,436 | | | | 155,004 | | | | 145,332 | | | | 134,812 | |
| Income tax provision | | | 67,523 | | | | 51,506 | | | | 58,763 | | | | 54,324 | | | | 49,143 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net income(a) | | $ | 115,466 | | | $ | 81,930 | | | $ | 96,241 | | | $ | 91,008 | | | $ | 85,669 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net income per share – basic(b) | | $ | 3.21 | | | $ | 2.22 | | | $ | 2.45 | | | $ | 2.27 | | | $ | 2.19 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net income per share – assuming dilution(b) | | $ | 3.15 | | | $ | 2.19 | | | $ | 2.40 | | | $ | 2.22 | | | $ | 2.09 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Adjusted weighted average shares for dilutive earnings per share | | | 36,649 | | | | 37,464 | | | | 40,100 | | | | 41,060 | | | | 40,980 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Operating Data (percent of net sales): | | | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 32.3 | % | | | 30.3 | % | | | 31.5 | % | | | 31.5 | % | | | 30.8 | % |
| Selling, general and administrative expenses | | | 24.4 | % | | | 23.8 | % | | | 23.7 | % | | | 23.5 | % | | | 22.6 | % |
| Operating income | | | 5.8 | % | | | 4.5 | % | | | 5.9 | % | | | 6.2 | % | | | 6.6 | % |
| Net income | | | 3.6 | % | | | 2.7 | % | | | 3.6 | % | | | 3.8 | % | | | 4.1 | % |
| | | | | | | | | | | | | | | | | | | | | |
Number of Stores: | | | | | | | | | | | | | | | | | | | | |
| Beginning of year | | | 855 | | | | 764 | | | | 676 | | | | 595 | | | | 515 | |
| New stores opened | | | 76 | | | | 91 | | | | 89 | | | | 82 | | | | 65 | |
| New stores acquired | | | — | | | | — | | | | — | | | | — | | | | 16 | |
| Closed/sold stores | | | (1 | ) | | | — | | | | (1 | ) | | | (1 | ) | | | (1 | ) |
| | | | | | | | | | | | | | | | |
| End of year | | | 930 | | | | 855 | | | | 764 | | | | 676 | | | | 595 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Number of stores relocated during year | | | 2 | | | | 1 | | | | 12 | | | | 15 | | | | 18 | |
Number of stores remodeled(c) | | | 6 | | | | 3 | | | | 1 | | | | 3 | | | | — | |
Capital expenditures(d) | | $ | 73,974 | | | $ | 91,759 | | | $ | 83,986 | | | $ | 90,565 | | | $ | 78,835 | |
Same-store sales increase (decrease)(e) | | | (1.1 | %) | | | 1.4 | % | | | 3.4 | % | | | 1.6 | % | | | 5.7 | % |
Average sales per store (000’s)(f) | | $ | 3,586 | | | $ | 3,703 | | | $ | 3,762 | | | $ | 3,699 | | | $ | 3,772 | |
| Average transaction value | | $ | 42.06 | | | $ | 44.55 | | | $ | 43.60 | | | $ | 43.12 | | | $ | 42.03 | |
| Average number of daily transactions per store | | | 236 | | | | 230 | | | | 239 | | | | 238 | | | | 245 | |
| Total team members | | | 13,300 | | | | 12,800 | | | | 11,600 | | | | 9,800 | | | | 8,700 | |
| | | | | | | | | | | | | | | | | | | | | |
Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 415,749 | | | $ | 283,159 | | | $ | 312,068 | | | $ | 316,104 | | | $ | 240,732 | |
| Total assets | | | 1,230,845 | | | | 1,075,997 | | | | 1,057,971 | | | | 998,258 | | | | 803,176 | |
Long-term debt, less current portion(g) | | | 1,407 | | | | 1,797 | | | | 57,351 | | | | 2,808 | | | | 10,739 | |
| Stockholders’ equity | | | 733,203 | | | | 610,130 | | | | 565,337 | | | | 598,904 | | | | 477,698 | |
14
| | | 2010 | | | 2009 (a) | | | 2008 (a) | | | 2007 (a) | | | 2006 (a) | |
| Operating Results: | | | | | | | | | | | | | | | |
| Net sales | | $ | 3,638,336 | | | $ | 3,206,937 | | | $ | 3,007,949 | | | $ | 2,703,212 | | | $ | 2,369,612 | |
| Gross margin | | | 1,203,665 | | | | 1,041,889 | | | | 955,055 | | | | 857,940 | | | | 752,237 | |
| Selling, general and administrative expenses | | | 867,644 | | | | 784,066 | | | | 715,961 | | | | 641,603 | | | | 555,834 | |
| Depreciation and amortization | | | 69,797 | | | | 66,258 | | | | 60,731 | | | | 51,064 | | | | 42,292 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income | | | 266,224 | | | | 191,565 | | | | 178,363 | | | | 165,273 | | | | 154,111 | |
| Interest expense, net | | | 1,284 | | | | 1,644 | | | | 2,133 | | | | 5,037 | | | | 2,688 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income before income taxes | | | 264,940 | | | | 189,921 | | | | 176,230 | | | | 160,236 | | | | 151,423 | |
| Income tax provision | | | 96,968 | | | | 70,176 | | | | 68,237 | | | | 60,777 | | | | 56,677 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 167,972 | | | $ | 119,745 | | | $ | 107,993 | | | $ | 99,459 | | | $ | 94,746 | |
| | | | | | | | | | | | | | | | | | | | | |
Net income per share – basic (b) (c) | | $ | 2.31 | | | $ | 1.66 | | | $ | 1.47 | | | $ | 1.27 | | | $ | 1.18 | |
| | | | | | | | | | | | | | | | | | | | | |
Net income per share – assuming dilution (b) (c) | | $ | 2.25 | | | $ | 1.63 | | | $ | 1.44 | | | $ | 1.24 | | | $ | 1.15 | |
| | | | | | | | | | | | | | | | | | | | | |
Adjusted weighted average shares for dilutive earnings per share (c) | | | 74,686 | | | | 73,297 | | | | 74,927 | | | | 80,200 | | | | 82,119 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating Data (percent of net sales): | | | | | | | | | | | | | | | | | | | | |
| Gross margin | | | 33.1 | % | | | 32.5 | % | | | 31.8 | % | | | 31.7 | % | | | 31.7 | % |
| Selling, general and administrative expenses | | | 23.9 | % | | | 24.4 | % | | | 23.8 | % | | | 23.7 | % | | | 23.5 | % |
| Operating income | | | 7.3 | % | | | 6.0 | % | | | 5.9 | % | | | 6.1 | % | | | 6.5 | % |
| Net income | | | 4.6 | % | | | 3.7 | % | | | 3.6 | % | | | 3.7 | % | | | 4.0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Number of Stores: | | | | | | | | | | | | | | | | | | | | |
| Beginning of year | | | 930 | | | | 855 | | | | 764 | | | | 676 | | | | 595 | |
| New stores opened | | | 74 | | | | 76 | | | | 91 | | | | 89 | | | | 82 | |
| Closed/sold stores | | | (3 | ) | | | (1 | ) | | | -- | | | | (1 | ) | | | (1 | ) |
| End of year | | | 1,001 | | | | 930 | | | | 855 | | | | 764 | | | | 676 | |
| | | | | | | | | | | | | | | | | | | | | |
| Number of stores relocated during year | | | -- | | | | 2 | | | | 1 | | | | 12 | | | | 15 | |
Number of stores remodeled (d) | | | 1 | | | | 6 | | | | 3 | | | | 1 | | | | 3 | |
Capital expenditures (e) | | $ | 96,511 | | | $ | 73,974 | | | $ | 91,759 | | | $ | 83,986 | | | $ | 90,565 | |
Same-store sales increase (decrease) (f) | | | 7.0 | % | | | (1.1 | %) | | | 1.4 | % | | | 3.4 | % | | | 1.6 | % |
Average sales per store (000’s) (g) | | $ | 3,781 | | | $ | 3,586 | | | $ | 3,703 | | | $ | 3,762 | | | $ | 3,699 | |
| Average transaction value | | $ | 42.07 | | | $ | 42.06 | | | $ | 44.55 | | | $ | 43.60 | | | $ | 43.12 | |
| Average number of daily transactions per store | | | 249 | | | | 236 | | | | 230 | | | | 239 | | | | 238 | |
| Total team members | | | 14,700 | | | | 13,300 | | | | 12,800 | | | | 11,600 | | | | 9,800 | |
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 617,153 | | | $ | 475,847 | | | $ | 337,225 | | | $ | 340,405 | | | $ | 340,522 | |
| Total assets | | | 1,463,474 | | | | 1,276,580 | | | | 1,143,301 | | | | 1,083,185 | | | | 1,010,639 | |
Long-term debt, less current portion (h) | | | 1,316 | | | | 1,407 | | | | 1,797 | | | | 2,351 | | | | 2,808 | |
| Stockholders’ equity | | | 933,242 | | | | 779,151 | | | | 651,799 | | | | 580,943 | | | | 611,292 | |
_______________________
| | |
| (a) | | InAs discussed in Note 1 – Significant Accounting Policies in Part II Item 8 of this Form 10-K regarding our change in accounting for inventories from last-in, first-out (LIFO) method to the average cost method, selected financial data has been retrospectively adjusted. Retrospective adjustments relating to fiscal 2006, we adopted new accounting guidance for share-based compensation which lowered income before income taxes by $12.1 million, $12.3 million, $10.6 million2009 and $9.7 million for 2009, 2008 2007 and 2006, respectively. Net income was lowered by $7.7 million, $7.5 million, $6.6 million and $6.1 million for 2009, 2008, 2007 and 2006, respectively.have been provided in Note 1 – Significant Accounting Policies in Part II Item 8 of this Form 10-K: |
| | | | | 2007 | | | 2006 | |
| | | | | | | As Previously Reported | | | As Adjusted | | | As Previously Reported | | | As Adjusted | |
Operating Results: | | | | | | | | | | | | | | | | |
Net sales | | | | | | | | $ | 2,703,212 | | | $ | 2,703,212 | | | $ | 2,369,612 | | | $ | 2,369,612 | |
Gross margin | | | | | | | | | 852,708 | | | | 857,940 | | | | 746,146 | | | | 752,237 | |
Selling, general and administrative expenses | | | | | | | | | 641,603 | | | | 641,603 | | | | 555,834 | | | | 555,834 | |
Depreciation and amortization | | | | | | | | | 51,064 | | | | 51,064 | | | | 42,292 | | | | 42,292 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | | | | | | | 160,041 | | | | 165,273 | | | | 148,020 | | | | 154,111 | |
Interest expense, net | | | | | | | | | 5,037 | | | | 5,037 | | | | 2,688 | | | | 2,688 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | 155,004 | | | | 160,236 | | | | 145,332 | | | | 151,423 | |
Income tax provision | | | | | | | | | 58,763 | | | | 60,777 | | | | 54,324 | | | | 56,677 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | $ | 96,241 | | | $ | 99,459 | | | $ | 91,008 | | | $ | 94,746 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income per share – basic (b) (c) | | | | | | | | $ | 1.23 | | | $ | 1.27 | | | $ | 1.14 | | | $ | 1.18 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income per share – assuming dilution (b) (c) | | | | | | | | $ | 1.20 | | | $ | 1.24 | | | $ | 1.11 | | | $ | 1.15 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Adjusted weighted average shares for dilutive earnings per share (c) | | | | | | | | | 80,200 | | | | 80,200 | | | | 82,119 | | | | 82,119 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Operating Data (percent of net sales): | | | | | | | | | | | | | | | | | | | | | | |
Gross margin | | | | | | | | | 31.5 | % | | | 31.7 | % | | | 31.5 | % | | | 31.7 | % |
Selling, general and administrative expenses | | | | | | | | | 23.7 | % | | | 23.7 | % | | | 23.5 | % | | | 23.5 | % |
Operating income | | | | | | | | | 5.9 | % | | | 6.1 | % | | | 6.2 | % | | | 6.5 | % |
Net income | | | | | | | | | 3.6 | % | | | 3.7 | % | | | 3.8 | % | | | 4.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | | 2007 | | | 2006 | |
| | As Previously Reported | | As Adjusted | | | As Previously Reported | | | As Adjusted | | | As Previously Reported | | | As Adjusted | |
Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | | | | | |
Working capital | $ | 295,518 | | $ | 337,225 | | | $ | 324,799 | | | $ | 340,405 | | | $ | 328,134 | | | $ | 340,522 | |
Total assets | | 1,075,997 | | | 1,143,301 | | | | 1,057,971 | | | | 1,083,185 | | | | 998,258 | | | | 1,010,639 | |
Long-term debt, less current portion (h) | | 1,797 | | | 1,797 | | | | 57,351 | | | | 57,351 | | | | 2,808 | | | | 2,808 | |
Stockholders’ equity | | 610,130 | | | 651,799 | | | | 565,337 | | | | 580,943 | | | | 598,904 | | | | 611,292 | |
|
| (b) | | Basic net income per share is calculated based on the weighted average number of common shares outstanding applied to net income. Diluted net income per share is calculated using the treasury stock method for stock options and warrants.restricted stock units. |
| (c) | Adjusted to reflect two-for-one stock split that was effective September 2, 2010. |
(c) | (d) | Reflects remodelings costing more than $150,000. |
|
(d) | (e) | Includes assets acquired through capital leases. |
|
(e) | (f) | Same-store sales increases (decreases) are calculated on an annual basis, including relocations in 2010, 2009 and 2008 and excluding relocations in 2007 2006 and 2005,2006, using all stores open at least one year. |
|
(f) | (g) | Average sales per store is calculated based on total sales divided by the weighted average number of daysstores open in the applicable period.year. |
|
(g) | (h) | Long-term debt includes borrowings under the Company’sCompany's revolving credit agreement and amounts outstanding under its capital lease obligations, excluding the current portion. |
15
13
| | |
Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Tractor Supply Company is the largest operator of retail farm and ranch stores in the United States and is focused on supplying the lifestyle needs of recreational farmers and ranchers and of those who enjoy the rural lifestyle, as well as tradesmen and small businesses. We operate retail stores under the namesTractor Supply CompanyandDel’s Farm Supplyand operate a website under the nameTractorSupply.com. Our stores are located in towns outlying major metropolitan markets and in rural communities, and they offer the following comprehensive selection of merchandise:
Equine, pet and small animal products, including items necessary for their health, care, growth and containment;
Hardware and seasonal products, including lawn and garden power equipment;
| · | Equine, pet and small animal products, including items necessary for their health, care, growth and containment; |
Truck, towing and tool products;
| · | Hardware, truck, towing and tool products; |
Work/recreational clothing and footwear for the entire family;
| · | Seasonal products, including lawn and garden items, power equipment, gifts and toys; |
Maintenance products for agricultural and rural use; and
| · | Maintenance products for agricultural and rural use; and |
| · | Work/recreational clothing and footwear. |
Home décor, candy, snack food and toys.
Our Tractor Supply stores typically range in size from 15,500 square feet to 18,500 square feet of inside selling space and additional outside selling space. We use a standard 15,500 square foot prototype for new purpose-built locations. For new stores located in existing buildings, one of several layout formats is utilized.
Our wholly-owned subsidiary, Del’s, which operated 2726 stores as of December 26, 200925, 2010 in Washington, Oregon, Idaho and Hawaii, offers a wide selection of products (primarily in the equine, pet and animal category) tailored to those who enjoy the rural lifestyle.Hawaii. Del’s stores currently range in size from approximately 2,000 to 6,000 square feet of inside selling space plus additional outside and covered/sheltered selling space.
Our current and long-term growth strategy is toto: (1) expand geographic market presence through opening new retail stores, (2) enhance financial performance through same-store sales increases, achieved through targeted merchandising programs with an “everyday value prices” philosophy and supported by strong customer service, (3) enhance product margin through assortment management, vendor management, sourcing and optimization of transportation and distribution costs, (4) leverage operating costs, especially advertising, distribution and corporate overhead, (5) expand market opportunities via internet sales, and (6) expand through selective acquisition, as such opportunities arise, to enhance penetration into new and existing markets as a complimentary strategy to organic growth.
We have experienced considerable sales growth over the lastpast five years, with a compounded annual growth rate of approximately 13.0%12.0%. We project an increase of 7080 to 8085 new stores in 2010,2011, an increase of approximately 8%. We opened 74 new stores in 2010 and 76 new stores in 2009, and 91 new stores in 2008, an increase of approximately 9%8% and 12%9%, respectively.
We operated 9301,001 retail farm and ranch stores in 44 states as of December 26, 2009 and have plans to open 70 to 80 stores in fiscal25, 2010. We have developed a proven method for selecting store sites and have identified over 850800 potential additional markets for new Tractor Supply stores (excluding Del’s) in the United States. The acquisition of Del’s enabled us to establish an initial presence in the Pacific Northwest, primarily in Washington, along with three stores in Hawaii. We have slowed the growth of Del’s as we refine the concept, and we do not plan to open any additional Del’s stores in fiscal 2010.
The average cash investment for new leased stores opened in 20092010 was $1.3$1.2 million for retrofit stores and $1.0$0.9 million for prototype stores. A majority of the cash outlay was for initial acquisition of inventory and capital expenditures (principally leasehold improvements, fixtures and equipment), and approximately $102,000$92,000 for pre-opening costs.
We have placed significant emphasis on our merchandising programs, evaluating the sales and profitability of our products through detailed line reviews, review of vendor performance measures and modification of the overall product offerings. We believe these efforts, coupled with a strong marketing program and in-depth product knowledge training of our store team members, have enhanced our sales and financial performance.
16
Change in Accounting Method
Effective December 25, 2010, the Company elected to change its method of accounting for inventories from the lower of cost, as determined by the last-in, first-out (“LIFO”) method, or market to the lower of cost, as determined by the average cost method, or market. The Company believes the change is preferable as the average cost method better reflects the current value of inventory on the consolidated balance sheets, provides a better reflection of periodic income and improves comparability with our peers.
The Company has applied this change in method of inventory costing retrospectively to all prior periods presented herein in accordance with accounting principles relating to accounting changes. All financial information in Item 8 of this 10-K has been retrospectively adjusted. See Note 1, Significant Accounting Policies, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our change in accounting method.
Stock Split
On July 29, 2010, our Board of Directors announced a two-for-one split of our outstanding shares of common stock to be effected in the form of a stock dividend. On September 2, 2010, stockholders of record at the close of business on August 19, 2010, were issued one additional share of common stock for each share owned by such stockholder. The stock split increased the number of shares of common stock outstanding from approximately 36.3 million to approximately 72.7 million. Share and per-share amounts (including stock options and restricted stock units) shown in this Form 10-K reflect the split. The total number of authorized common shares and the par value thereof was not changed by the split. The number of shares held in treasury was not adjusted for the split.
Seasonality and Weather
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters of each year due to the sale of seasonal products. Unseasonable weather, excessive precipitation, drought, and early or late frosts may also affect our sales. We believe, however, that the impact of extreme weather conditions is somewhat mitigated by the geographic dispersion of our stores.
We experience our highest inventory and accounts payable levels during our first fiscal quarter each year for purchases of seasonal product in anticipation of the spring selling season and again during our third fiscal quarter in anticipation of the winter selling season.
Purchase Price Volatility
Although we cannot determine the full effect of inflation and deflation on our operations, we believe our sales and results of operations are affected by both. We are subject to market risk with respect to the pricing of certain products and services, which include, among other items, steel, grain, petroleum, corn, soybean and other commodities as well as transportation services. Therefore, we may experience both inflationary and deflationary pressure on product cost, which may impact consumer demand and, as a result, sales and gross margin. Additionally, significant inflationary pressures could have an adverse affect on our last-in, first-out (LIFO) inventory provision, which would negatively impact 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 competitivecompetiti ve vendors without sacrificing quality. Due to the competitive environment, such conditions have and may continue to adversely impact our financial performance.
Significant Accounting Policies and Estimates
Management’s discussion and analysis of our financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Our significant accounting policies are disclosed in Note 1 to our Consolidated Financial Statements. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
17
| Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions |
| | | |
| | | | Effect if Actual Results Differ From |
Description | | JudgmentsRevenue Recognition and Uncertainties | | Assumptions |
| | Sales Returns: | | |
Revenue Recognition and Sales Returns:
| | | | |
We recognize revenue at the time the customer takes possession of merchandise or receives services. If we receive payment before the customer has taken possession of the merchandise (as per our special order and layaway programs), the revenue is deferred until the sale is complete. Revenues from the sale of gift cards are deferred and recognized when: (i)when the gift card or merchandise return card is redeemed by the customer; (ii)customer. Income is recognized when the likelihood of the gift card or merchandise return card being redeemed by the customer is remote (referred to as “breakage”); or (iii) the unredeemed merchandise returns cards expire (one year from issuance). | | We estimate a liability for sales returns based on a one-year rolling average of historical return trends, and we believe that our estimate for sales returns is an accurate reflection of future returns associated with past sales. Our estimation methodologies have been consistently applied from year to year; however, as with any estimate, refund activity may vary from estimated amounts.
The gift card and merchandise return card breakage rate is based upon historical redemption patterns and a benefit is recognized for estimated unredeemed gift cards and merchandise return cards in proportion to those historical redemption patterns. | | We have not made any material changes in the accounting methodology used to recognize sales returns or breakage in the financial periods presented.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate sales returns or gift card and merchandise return card breakage. However, if actual consumer return or gift card and merchandise return card redemption patterns are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 50 basis point change in our sales return rate at December 26, 2009,25, 2010, would have affected net earningsincome by approximately $170,000 in fiscal 2009.2010.
A 50 basis point change in our gift card and merchandise return card breakage rate would have affected net earningsincome by approximately $250,000$340,000 in fiscal 2009. 2010. |
| | | |
| Inventory Valuation: | | |
Inventory Valuation:Impairment Risk | | | | |
Impairment Risk | | | | |
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. The estimated inventory valuation reserve to recognize any impairment in value (i.e., an inability to realize the full carrying value) is based on our aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies. | | We do not believe our merchandise inventories are subject to significant risk of obsolescence in the near term. However, changes in market conditions or consumer purchasing patterns could result in the need for additional reserves.
Our impairment reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding forecasted customer demand, and the promotional environment. | | We have not made any material changes in the accounting methodology used to recognize inventory impairment reserves in the financial periods presented.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate impairment. However, if assumptions regarding consumer demand or clearance potential for certain products are inaccurate, we may be exposed to losses or gains that could be material.
A 10% change in our impairment reserve at December 26, 2009,25, 2010, would have affected net earningsincome by approximately $545,000$490,000 in fiscal 2009.2010. |
| | |
| Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions |
| | | | | |
18
| | Shrinkage | | |
| | | | Effect if ActualResults Differ From |
Description | | Judgments and Uncertainties | | Assumptions |
| | | | |
Shrinkage | | | | |
We perform physical inventories at each store at least once a year, and we have established reserves 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’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 and the effect of loss prevention measures and new merchandising strategies. | | We have not made any material changes in the methodology used to recognize shrinkage in the financial periods presented.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our shrinkage reserve. However, if our estimates regarding inventory losses are inaccurate, we may be exposed to losses or gains that could be material.
A 10% change in our shrinkage reserve at December 26, 2009,25, 2010, would have affected net earningsincome by approximately $835,000$815,000 in fiscal 2009.2010. |
| | | | | |
Vendor Support | | | | |
We receive funding from substantially all of our significant merchandise vendors for the promotion of our brand as well as the sale of their products through a variety of programs and arrangements, including guaranteed funding and volume rebate programs. The amounts received are subject to terms of vendor agreements, which have varying expiration dates ranging in duration from several months to a few years. Many agreements are negotiated annually and are 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 the interim periods, the amount of expectede xpected funding is estimated based upon initial guaranteed commitments, as well as anticipated purchase levels with applicable vendors. | | The estimated purchase volume and related vendor funding is based on our current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations. Although we believe we can reasonably estimate purchase volume and related vendor funding at interim periods, it is possible that actual year-end results could significantly differ 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 collectibility. | | 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 support.
We do not believe there is a significant collectibility risk related to vendor support amounts due us at the end of fiscal 2009.
2010. If a 10% reserve had been applied against our outstanding vendor support due as of December 26, 2009,25, 2010, net earningsincome would have been affected by approximately $1.1$1.6 million.
Although it is unlikely that there will be any significant reduction in historical levels of vendor support, 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. | | If a 10% increase or decrease had been applied against our current inventory capitalized freight balance, net earningsincome would have been affected by approximately $2.9$3.4 million. |
19
| | | | |
| | | | Effect if ActualResults Differ From |
Description | | Judgments and Uncertainties | | Assumptions |
| | Share-Based Compensation: | | |
Share-Based Compensation:
| | | | |
We have share-based compensation plans, which includesinclude incentive and non-qualified stock options, restricted stock units, and an employee stock purchase plan. See Note 1, Significant Accounting Policies, and Note 2, Share-Based Compensation, to the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K, for a complete discussion of our share-based compensation programs.
We estimate the fair value of our stock option awards at the date of grant utilizing a Black-Scholes option pricing model. We estimate the fair value of our market-based restricted stock units at the date of grant utilizing average market price of our stock on the date of the related award. | | Option-pricing models and generally accepted valuation techniques require management to make subjective assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the future volatility of our stock price, expected dividend yield, future employee turnover rates and future employee stock option exercise behaviors. In addition to the key assumptions used to estimate the fair value, the estimated forfeiture rate of the awarded options is a critical assumption, as it reduces expense ratably over the vesting period. Changes in these assumptions can materially affect the fair value estimate.estimate and the amount of share-based compensation recognized. | | While we update our assumptions annually, we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine share-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-based compensation expense that could be material. The reported share-based compensation expense may not be representative of the actual economic cost of the share-based compensation.
A 10% change in our stock-basedshare-based compensation expense for the year ended December 26, 2009,25, 2010, would have affected net earningsincome by approximately $765,000.$750,000. |
| | | | | |
Self-Insurance Reserves:
| | | | |
| 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’workers' compensation and general liability insurance plans. We have stop-loss insurance policies to protect from individual losses over specified dollar values.
When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, demographic factors and severity factors. | | The full extent of certain claims, especially workers’workers' compensation and general liability claims, may not become fully determined for several years.
Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. | | We have not made any material changes in the accounting methodology used to establish our self-insurance reserves in the financial periods presented.
We do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate insurance reserves. However, if we experience a significant increase in the number of claims or the cost associated with these claims, we may be exposed to losses that could be material.
A 10% change in our self-insurance reserves at December 26, 2009,25, 2010, would have affected net earningsincome by approximately $1.5$1.8 million in fiscal 2009.2010. |
20
| | | | |
| | | | Effect if ActualResults Differ From |
Description | | Judgments and Uncertainties | | Assumptions |
| | Sales Tax Audit Reserve: | | |
Sales Tax Audit Reserve:
| | | | |
A portion of our sales are to tax-exempt customers. We obtain exemption information as a necessary part of each tax-exempt transaction. Many of the states in which we conduct business will perform audits to verify our compliance with applicable sales tax laws. The business activities of our customers and the intended use of the unique products sold by us create a challenging and complex compliance environment. These circumstances also create some risk that we could be challenged as to the propriety of our sales tax compliance.
While we believe we reasonably enforce sales tax compliance with our customers and endeavor to fully comply with all applicable sales tax regulations, there can be no assurance that we, upon final completion of such audits, would not have a significant liability for disallowed exemptions. | | We review our past audit experience and assessments with applicable states to determine if we have potential exposure for non-compliance. Any estimated liability is based on an initial assessment of compliance risk and our to-date experience with each audit. As each audit progresses, we quantify the exposure based on preliminary assessments made by the state auditors, adjusted for additional documentation that may be provided to reduce the assessment.
Our sales tax audit reserve contains uncertainties because management is required to make assumptions and to apply judgment regarding the regulatory support for the complexity of agricultural-based exemptions, the ambiguity in state tax regulations, the number of ongoing audits, and the length of time required to settle with the state taxing authorities. | | We have not made any material changes in the methodology used to establish the sales tax audit reserve in the financial periods presented.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate the sales tax liability reserve for current audits. However, if our estimates regarding the ultimate sales tax liability are inaccurate, we may be exposed to losses or gains that could be material.
A 10% change in our sales tax liability reserve at December 26, 2009,25, 2010, would have affected net earningsincome by approximately $330,000$470,000 in fiscal 2009.2010. |
| | | |
| Tax Contingencies: | | |
Tax Contingencies:
| | | | |
Our income tax returns are periodically audited by U.S. federal and state tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record reserves for probable exposures. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved or clarified. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, the statutest atute of limitations expires for the relevant tax authority to examine the tax position or when more information becomes available.
We recognize a liability for certain tax benefits that do not meet the minimum requirements for recognition in the financial statements. | | Our tax contingencies reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions and whether or not the minimum requirements for recognition of tax benefits have been met.
Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits. | | We do not believe there is a reasonable likelihood that there will be a material change in the reserves established for tax benefits not recognized.
Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.
To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.
A 10% change in our unrecognized tax benefit reserve at December 26, 200925, 2010 would have affected net earningsincome by approximately $290,000$370,000 in fiscal 2009.2010. |
21
| | | |
| Description | Judgments and Uncertainties | | | Effect if ActualResults Differ From Assumptions |
Description | | Judgments and Uncertainties | | Assumptions |
| | | | |
Goodwill: | | | | |
Goodwill and intangible assets with indefinite lives are not amortized. We evaluate goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We complete our impairment evaluation by performing internal valuation analyses, considering other publicly available market information and using an independent valuation firm, as appropriate. All goodwill at At December 26, 2009 and December 27, 2008 isall goodwill was associated with the Del’s business and, for purposes of the fiscal 2009 impairment testing, Del’s iswas considered the reporting unit.
The test In October 2010, we reevaluated the Del’s reporting unit and concluded that since Del’s has become closely aligned in terms of management, infrastructure, philosophy and performance, we now have only one reporting unit for goodwill impairment evaluation. All goodwill at December 25, 2010 is a two step process. The first step of the goodwill impairment test, used to identify the potential for impairment, compares the fair value of a reporting unitassociated with the carrying value of its net assets, including goodwill. If the fair value of the reporting unit is less than the carrying value of the reporting unit, the second step of the goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any. The second step, if required, would compare the implied fair value of goodwill with the current carrying amount of goodwill. If the implied fair value of goodwill is less than the carrying value, an impairment charge would be recordedCompany as a charge to our operations.
whole. In the fourth quarter of fiscal 2009,2010, we completed our annual impairment testing of goodwill, using the methodology described herein, and determined there was no impairment. We determined that the fair value of the Del’s reporting unit (including goodwill) was in excess of the carrying value of the reporting unit and as such, the second step was not necessary.unit. In reaching this conclusion, the fair value of the Del’s reporting unit was determined based on a weighting of income and market approaches. Under the income approach, the fair value of the Del’s reporting unit is calculated as the present value of estimated future cash flows.approach. Under the market approach, the fair value is based on observed market multiples for comparable businesses and guideline transactions.prices. | | We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. Estimates include revenues, gross margins, operating costs and cash flows. We considered historical and estimated future results, economic and market conditions and the impact of planned business and operational strategies in deriving these estimates. | | We have not made any material changes in our impairment loss assessment methodology in the financial periods presented.
In developing the key judgments and assumptions used to assess impairment, we consider economic, operational and market conditions that could impact the fair value of the Del’s reporting unit. These estimates and the judgments and assumptions upon which the estimates are based may differ in some respects from actual results. Should a significant or prolonged deterioration in economic conditions persist, then key judgments and assumptions may be impacted. At December 26, 2009,25, 2010, the fair value of the Del’s reporting unit exceeded the carrying value of its net assets by approximately $100,000. Thus,a significant amount. However, if actual results are not consistent with our current estimates or assumptions, we may be exposed to an impairment charge that could be material. |
22
| | | | |
| | | | Effect if ActualResults Differ From |
Description | | Judgments and Uncertainties | | Assumptions |
| | Long-Lived Assets: | | |
Long-Lived Assets:
| | | | |
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the 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 useful life of that asset. | | Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. | | We have not made any material changes in our impairment loss assessment methodology in the financial periods presented.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. None of these estimates and assumptions are significantly sensitive, and a 10% change in any of these estimates would not have a material impact on our analysis. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. |
23
Quarterly Financial Data
Our unaudited quarterly operating results for each fiscal quarter of 20092010 and 20082009 are shown below (dollars in(in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter(2) | |
| | | First | | Second | | Third | | Fourth | | | | |
| | | Quarter | | Quarter | | Quarter | | Quarter | | Total | | |
2009 | | |
2010 (1) | | | As Previously Reported | | | As Adjusted | | | As Previously Reported | | | As Adjusted | | | As Previously Reported | | | As Adjusted | | | | | | As Reported | |
| Net sales | | $ | 650,171 | | $ | 946,504 | | $ | 747,730 | | $ | 862,532 | | $ | 3,206,937 | | | $ | 710,917 | | | $ | 710,917 | | | $ | 1,065,656 | | | $ | 1,065,656 | | | $ | 829,114 | | | $ | 829,114 | | | | | | $ | 1,032,649 | |
| Gross margin | | 201,036 | | 302,198 | | 246,038 | | 285,685 | | 1,034,957 | | | | 228,884 | | | | 230,931 | | | | 358,803 | | | | 360,129 | | | | 279,139 | | | | 275,688 | | | | | | | 336,917 | |
| Operating income | | 1,185 | | 88,294 | | 35,797 | | 59,357 | | 184,633 | | | | 14,420 | | | | 16,467 | | | | 122,322 | | | | 123,648 | | | | 50,858 | | | | 47,407 | | | | | | | 78,702 | |
| Net income | | 470 | | 54,764 | | 21,979 | | 38,253 | | 115,466 | | | | 9,308 | | | | 10,582 | | | | 76,487 | | | | 77,318 | | | | 32,017 | | | | 29,863 | | | | | | | 50,209 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share:(1) | | |
Net income per share:(3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | $ | 0.13 | | | $ | 0.15 | | | $ | 1.05 | | | $ | 1.06 | | | $ | 0.44 | | | $ | 0.41 | | | | | | $ | 0.69 | |
Diluted | | | $ | 0.13 | | | $ | 0.14 | | | $ | 1.02 | | | $ | 1.04 | | | $ | 0.43 | | | $ | 0.40 | | | | | | $ | 0.67 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Same-store sales increase | | | | 2.8 | % | | | 2.8 | % | | | 6.1 | % | | | 6.1 | % | | | 5.0 | % | | | 5.0 | % | | | | | | 13.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | |
2009 (1) | | | As Previously Reported | | | As Adjusted | | | As Previously Reported | | | As Adjusted | | | As Previously Reported | | | As Adjusted | | | As Previously Reported | | | As Adjusted | |
| Net sales | | | $ | 650,171 | | | $ | 650,171 | | | $ | 946,504 | | | $ | 946,504 | | | $ | 747,730 | | | $ | 747,730 | | | $ | 862,532 | | | $ | 862,532 | |
| Gross margin | | | | 201,036 | | | | 203,870 | | | | 302,198 | | | | 305,901 | | | | 246,038 | | | | 247,934 | | | | 285,685 | | | | 284,184 | |
| Operating income | | | | 1,185 | | | | 4,019 | | | | 88,294 | | | | 91,997 | | | | 35,797 | | | | 37,693 | | | | 59,357 | | | | 57,856 | |
| Net income | | | | 470 | | | | 2,199 | | | | 54,764 | | | | 57,097 | | | | 21,979 | | | | 23,175 | | | | 38,253 | | | | 37,274 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share:(3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.01 | | $ | 1.53 | | $ | 0.61 | | $ | 1.06 | | $ | 3.21 | | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.76 | | | $ | 0.80 | | | $ | 0.30 | | | $ | 0.32 | | | $ | 0.53 | | | $ | 0.52 | |
| Diluted | | $ | 0.01 | | $ | 1.50 | | $ | 0.60 | | $ | 1.04 | | $ | 3.15 | | | $ | 0.01 | | | $ | 0.03 | | | $ | 0.75 | | | $ | 0.78 | | | $ | 0.30 | | | $ | 0.32 | | | $ | 0.52 | | | $ | 0.51 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Same-store sales increase (decrease) | | | 4.2 | % | | | (2.7 | %) | | | (5.1 | %) | | | 0.7 | % | | | (1.1 | %) | | | 4.2 | % | | | 4.2 | % | | | (2.7 | %) | | | (2.7 | %) | | | (5.1 | %) | | | (5.1 | %) | | | 0.7 | % | | | 0.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2008 | | |
| Net sales | | $ | 576,208 | | $ | 898,327 | | $ | 733,918 | | $ | 799,496 | | $ | 3,007,949 | | |
| Gross margin | | 175,516 | | 273,509 | | 218,196 | | 245,040 | | 912,261 | | |
| Operating income (loss) | | | (2,041 | ) | | 71,158 | | 26,077 | | 40,375 | | 135,569 | | |
| Net income (loss) | | | (2,004 | ) | | 43,352 | | 15,870 | | 24,712 | | 81,930 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) per share:(1) | | |
| Basic | | $ | (0.05 | ) | | $ | 1.17 | | $ | 0.44 | | $ | 0.68 | | $ | 2.22 | | |
| Diluted | | $ | (0.05 | ) | | $ | 1.15 | | $ | 0.43 | | $ | 0.67 | | $ | 2.19 | | |
| | | |
| Same-store sales increase (decrease) | | | (6.5 | %) | | | 3.4 | % | | | 6.2 | % | | | 1.3 | % | | | 1.4 | % | |
| (1) | | Amounts have been adjusted for the change in inventory accounting method from LIFO to average cost. |
(1)(2) | The fiscal fourth quarter does not require an adjustment for the change in inventory accounting method as this change occurred during this period. |
| (3) | Due to the nature of interim earnings per share calculations, the sum of quarterly earnings per share amounts may not equal the reported earnings per share for the year. |
24
Results of Operations
Our fiscal year includes 52 or 53 weeks and ends on the last Saturday of the calendar year. References to fiscal year mean the year in which that fiscal year ended. The fiscal years ended December 25, 2010, December 26, 2009 and December 27, 2008 and December 29, 2007 contain 52 weeks. All amounts have been adjusted to reflect the Company’s election to change its method of accounting for inventories from the last-in, first-out (LIFO) method to the average cost method.
The following table sets forth, for the periods indicated, certain items in our Consolidated Statements of Income expressed as a percentage of net sales.
| | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | 2010 | | | 2009 | | | 2008 | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost of merchandise sold(a) | | 67.7 | | 69.7 | | 68.5 | | | | 66.9 | | | | 67.5 | | | | 68.2 | |
| | | | | | | | | |
Gross margin(a) | | 32.3 | | 30.3 | | 31.5 | | | | 33.1 | | | | 32.5 | | | | 31.8 | |
Selling, general and administrative expenses(a) | | 24.4 | | 23.8 | | 23.7 | | | | 23.9 | | | | 24.4 | | | | 23.8 | |
| Depreciation and amortization | | 2.1 | | 2.0 | | 1.9 | | | | 1.9 | | | | 2.1 | | | | 2.0 | |
| | | | | | | | | |
| Operating income | | 5.8 | | 4.5 | | 5.9 | | | | 7.3 | | | | 6.0 | | | | 6.0 | |
| Interest expense, net | | 0.1 | | 0.1 | | 0.2 | | | | -- | | | | 0.1 | | | | 0.1 | |
| | | | | | | | | |
| Income before income taxes | | 5.7 | | 4.4 | | 5.7 | | | | 7.3 | | | | 5.9 | | | | 5.9 | |
| Income tax provision | | 2.1 | | 1.7 | | 2.1 | | | | 2.7 | | | | 2.2 | | | | 2.3 | |
| | | | | | | | | |
| Net income | | | 3.6 | % | | | 2.7 | % | | | 3.6 | % | | | 4.6 | % | | | 3.7 | % | | | 3.6 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
(a)Our gross margin amounts may not be comparable to those of other retailers since some retailers include all of the costs related to their distribution network in cost of merchandise sold and others like us exclude a portion of these distribution network costs from gross margin and instead include them in selling, general and administrative (“SG&A”) expenses; refer to Note 1 – Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. | | (a)Our gross margin amounts may not be comparable to those of other retailers since some retailers include all of the costs related to their distribution network in cost of merchandise sold and others like us exclude a portion of these distribution network costs from gross margin and instead include them in selling, general and administrative (“SG&A”) expenses; refer to Note 1 – Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. | |
Fiscal 2010 Compared to Fiscal 2009
| | |
(a) | | Our gross margin amounts may not be comparable to those of other retailers since some retailers include all of the costs related to their distribution network in cost of merchandise sold and others like us exclude a portion of these distribution network costs from gross margin and instead include them in selling, general and administrative (“SG&A”) expenses; refer to Note 1 – Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. |
Net sales increased 13.5% to $3.64 billion in fiscal 2010 from $3.21 billion in fiscal 2009. This increase resulted from the opening of new stores and a 7.0% increase in same-store sales. The same-store average daily transaction count increased 7.4%, while same-store transaction value decreased 0.3% for fiscal 2010.
Same-store sales increased 7.0% compared with a same-store sales decrease of 1.1% in the prior year. This same-store sales increase was broad-based and driven by strong results in core consumable categories, principally animal and pet-related products, as well as seasonal products, including heating, insulated outerwear and outdoor power equipment.
In fiscal 2010, we opened 74 new stores (compared to 76 new stores in fiscal 2009), relocated no stores (compared to two in fiscal 2009) and closed three stores (compared to one store in fiscal 2009).
Gross margin increased 15.5% to $1.20 billion compared to $1.04 billion in 2009. As a percent of sales, gross margin increased to 33.1% for fiscal 2010 compared to 32.5% for fiscal 2009. The improvement in gross margin is primarily due to expanded direct product margin and a decrease in shrink, partially offset by increased transportation costs. The direct product margin improvement resulted from continued progress on margin driving initiatives which include strategic sourcing, inventory management, and more effective pricing.
As a percent of sales, SG&A expenses including depreciation and amortization improved 70 basis points to 25.8% in fiscal 2010 from 26.5% in fiscal 2009. The improvement as a percent to sales was primarily attributable to the leverage of strong same-store sales and expense management, partially offset by an increase in incentive compensation expense.
Net interest expense decreased 21.9% to $1.3 million in fiscal 2010 from $1.6 million in fiscal 2009. This decrease is directly related to lower average borrowings and a decline in interest charges associated with sales tax audits.
Our effective tax rate decreased to 36.6% for fiscal 2010 compared to 36.9% in fiscal 2009. This reduction in the tax resulted from a greater tax benefit received on the disqualified disposition of incentive stock options during fiscal 2010 compared to fiscal 2009.
As a result of the foregoing factors, net income for fiscal 2010 increased 40.3% to $168.0 million, or $2.25 per diluted share, as compared to net income of $119.7 million, or $1.63 per diluted share, in fiscal 2009.
During 2010, we repurchased approximately 0.8 million shares of stock for $38.2 million as part of our previously announced $400 million share repurchase program. In 2009, we repurchased approximately 0.4 million shares at a total cost of $15.3 million. As mentioned in Note 1 – Significant Accounting Policies in Part II of this Form 10-K, the shares added to treasury were not adjusted for the stock split.
Fiscal 2009 Compared to Fiscal 2008
Net sales increased 6.6% to $3.21 billion in fiscal 2009 from $3.01 billion in fiscal 2008. This increase resulted from the opening of new stores partially offset by a 1.1% decrease in same-store sales. The same-store average daily transaction count increased 5.3%, while same-store transaction value decreased 6.0% for fiscal 2009.
Same-store sales decreased 1.1% compared with a same-store sales increase of 1.4% in the prior year. This same-store sales decline was primarily driven by softness in sales of seasonal big ticket (merchandise priced $350 or greater) and discretionary merchandise, partially offset by continued strong results in core consumable categories, including animal and pet-related products.
In fiscal 2009, we opened 76 new stores (compared to 91 new stores in fiscal 2008), relocated two stores (compared to one in fiscal 2008) and closed one store (compared to no stores in fiscal 2008).
Gross margin increased 13.4%9.1% to $1,035.0$1,041.9 million compared to $912.3$955.1 million in 2008. As a percent of sales, gross margin increased to 32.3%32.5% for fiscal 2009 compared to 30.3%31.8% for fiscal 2008. The increase in gross margin resulted primarily from a substantial decrease in the LIFO provision and lower transportation costs.
The LIFO charge decreased by $35.9 million to $6.9 million in fiscal 2009 compared to $42.8 million in fiscal 2008. The decrease is due to an overall decline in the rate of inflation and cost reductions in certain product categories. Even as inflation moderates and inventory per store declines, we continue to generate a LIFO charge as we add merchandise that has higher inflation indices than the existing Company average.
As a percent of sales, SG&A expenses increased 60 basis points to 24.4% in fiscal 2009 from 23.8% in fiscal 2008. This increase as a percent of sales was primarily attributable to the deleveraging related to the same-store sales decrease and higher incentive compensation and occupancy costs, partially offset by reduced marketing costs. Depreciation and amortization expense increased 10 basis points as a percent of sales in fiscal 2009 over fiscal 2008 due mainly to costs associated with new stores.
25
Net interest expense decreased 22.9% to $1.6 million in fiscal 2009 from $2.1 million in fiscal 2008; however, net interest expense remained consistent as a percent of sales. This decrease is directly related to lower average borrowings partially offset by higher interest charges associated with sales tax audits.
Our effective tax rate decreased to 36.9% for fiscal 2009 compared to 38.6%38.7% in fiscal 2008. This reduction in the tax resulted from the favorable impact of certain federal tax credits and a lower percentage of unfavorable permanent tax differences relative to income before taxes.
As a result of the foregoing factors, net income for fiscal 2009 increased 40.9%10.9% to $115.5$119.7 million, or $3.15$1.63 per diluted share, as compared to net income of $81.9$108.0 million, or $2.19$1.44 per diluted share, in fiscal 2008.
During 2009, we repurchased approximately 0.4 million shares of stock for $15.3 million as part of our previously announced $400 million share repurchase program. In 2008, we repurchased approximately 1.6 million shares at a total cost of $53.9 million. As mentioned in Note 1 – Significant Accounting Policies in Part II of this Form 10-K, the shares added to treasury were not adjusted for the stock split.
Fiscal 2008 Compared to Fiscal 2007
Net sales increased 11.3% to $3,007.9 million in fiscal 2008 from $2,703.2 million in fiscal 2007. This increase resulted from the opening of new stores as well as a same-store sales improvement of 1.4%. The same-store average daily transaction count increased 0.1%, while same-store transaction value increased 1.3% for fiscal 2008.
Same-store sales improvements of 1.4% compared to 3.4% in the prior year were strongest in core consumable categories including animal and pet-related products, clothing and footwear.
In fiscal 2008, we opened 91 new stores (compared to 89 new stores in fiscal 2007), relocated one store (compared to 12 in fiscal 2007) and closed no stores (compared to selling our only Del’s store located in Canada in fiscal 2007).
Gross margin increased 7.0% to $912.3 million compared to $852.7 million in 2007. As a percent of sales, gross margin decreased to 30.3% for fiscal 2008 compared to 31.5% for fiscal 2007. The decrease in gross margin resulted primarily from a substantial increase in the LIFO provision. The LIFO provision increased by $37.6 million to $42.8 million in fiscal 2008 compared to $5.2 million in fiscal 2007. The increase is due to significant inflation (increases in costs for certain commodities, petroleum-based products and steel), a shift in the product mix towards higher turning, higher inflationary items and clearance activity.
As a percent of sales, SG&A expenses increased 10 basis points to 23.8% in fiscal 2008 from 23.7% in fiscal 2007. This increase was due largely to occupancy and payroll expenses relating to new stores, which generally have higher costs in relation to sales volume than the chain average, offset by an aggressive expense management program. Depreciation and amortization expense increased 18.9% in fiscal 2008 over fiscal 2007 due mainly to costs associated with new stores.
Net interest expense decreased 10 basis points as a percent of sales to $2.1 million in fiscal 2008 from $5.0 million in fiscal 2007. This decrease is directly related to a lower average debt balance primarily due to a reduction in stock repurchase activity in 2008, as compared to 2007.
Our effective tax rate increased to 38.6% for fiscal 2008 compared to 37.9% in fiscal 2007, resulting primarily from increases in state tax rates.
As a result of the foregoing factors, net income for fiscal 2008 decreased 14.9% to $81.9 million, or $2.19 per diluted share, as compared to net income of $96.2 million, or $2.40 per diluted share, in fiscal 2007.
During 2008, we repurchased approximately 1.6 million shares of stock for $53.9 million as part of our previously announced $400 million share repurchase program. In 2007, we repurchased approximately 3.2 million shares at a total cost of $150.0 million.
26
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for expansion, remodeling and relocation programs, including inventory purchases and capital expenditures. Our primary ongoing sources of liquidity are existing cash balances, funds provided from operations, commitments available under our revolving credit agreement, capital and operating leases and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters in anticipation of the spring and winter selling seasons, respectively.
Financial markets experienced extreme volatility in 2008 and 2009 amid negative developments in housing and mortgage-related activities, weakness of major financial institutions, governmental actions, and negative economic developments. These conditions have resultedthe past few years, resulting in disruptions in credit and lending activities.
Disruptions Further, disruptions in the capital and credit markets could adversely affect the ability of the banks to meet their commitments. Our access to funds under the credit facility 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. We have experienced no inability by our banks to meet borrowing requests. We have a diversified banking group which we believe should help mitigate any potential disruptions, if one occurs.
Working Capital
At December 26, 2009,25, 2010, we had working capital of $415.7$617.1 million, a $132.5$141.2 million increase from December 27, 2008.26, 2009. This increase was primarily attributable to changes in the following components of current assets and current liabilities (in millions):
| | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | Variance | | | 2010 | | | 2009 | | | Variance | |
Current assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 172.9 | | $ | 37.0 | | $ | 135.9 | | | $ | 257.3 | | | $ | 172.9 | | | $ | 84.4 | |
Short-term investments | | | | 15.9 | | | | -- | | | | 15.9 | |
| Inventories | | 601.2 | | 603.4 | | | (2.2 | ) | | | 736.5 | | | | 676.5 | | | | 60.0 | |
| Prepaid expenses and other current assets | | 42.3 | | 41.9 | | 0.4 | | | | 34.0 | | | | 30.7 | | | | 3.3 | |
| | | | | 1,043.7 | | | | 880.1 | | | | 163.6 | |
| Current liabilities: | | | | | | | | | | | | | |
Accounts payable | | | $ | 247.4 | | | $ | 261.6 | | | $ | (14.2 | ) |
Accrued employee compensation | | | | 34.6 | | | | 22.7 | | | | 11.9 | |
Other accrued expenses | | | | 127.4 | | | | 100.7 | | | | 26.7 | |
Current portion of capital lease obligation | | | | 0.1 | | | | 0.4 | | | | (0.3 | ) |
Income taxes payable | | | | 8.3 | | | | 7.3 | | | | 1.0 | |
| Deferred income taxes | | 17.9 | | 1.7 | | 16.2 | | | | 8.8 | | | | 11.5 | | | | (2.7 | ) |
| | | | | | | | | | | 426.6 | | | | 404.2 | | | | 22.4 | |
| | | 834.3 | | 684.0 | | 150.3 | | | | | | | | | | | | | |
| | | | | | | | | |
Current liabilities: | | |
| Accounts payable | | $ | 273.2 | | $ | 286.8 | | $ | (13.6 | ) | |
| Accrued expenses | | 137.4 | | 113.5 | | 23.9 | | |
| Income taxes payable | | 7.6 | | — | | 7.6 | | |
| Current portion of capital lease obligation | | 0.4 | | 0.5 | | | (0.1 | ) | |
| | | | | | | | | |
| | | 418.6 | | 400.8 | | 17.8 | | |
| | | | | | | | | |
| | | |
Working capital | | $ | 415.7 | | $ | 283.2 | | $ | 132.5 | | | $ | 617.1 | | | $ | 475.9 | | | $ | 141.2 | |
| | | | | | | | | |
In comparison to prior year end, working capital increased primarily as a result of an increase in cash.cash and inventory. The increase in cash resulted principally from stronger earnings, a decreaseearnings. The increase in net repayments under the revolving credit agreement, reduced share repurchase activity, and a decline in averageinventory was primarily due to new store growth. Average inventory per store and capital expenditure activity.remained nearly flat at $709,000 for fiscal 2010 compared to $707,000 for fiscal 2009. This was partially offset by increasedan increase in accrued expenses principally as a result of timing of payments and higher incentive compensation accruals over the prior year.
We have aggressively managed inventory and reduced our average inventory per store due to planned inventory management initiatives while improving our in stock levels.
Accounts payable has also declined as a result of an increase in cash held in our bank concentration account, which nets against accounts payable, as well as more timely payments on accounts payable in order to capture payment discounts offered by our vendors. Trade credit arises from our vendors granting payment terms for inventory purchases. Payment terms generally vary from 30 days to 180 days depending on the inventory product. Certain vendors offer payment discounts for payments made within a shorter period, typically within 10 to 15 days.
Borrowings and Credit Facilities
We are party to a Senior Credit Facility with Bank of America, N.A., as agent for a lender group (the “Credit Agreement”), which provides for borrowings up to $350 million (with sublimits of $75 million and $20 million for letters of credit and swingline loans, respectively). The Credit Agreement has an Increase Option for $150 million (subject to additional lender group commitments). The Credit Agreement is unsecured and matures in February 2012, with proceeds expected to be used for working capital, capital expenditures and share repurchases.
27
At December 26, 200925, 2010 and December 27, 2008,26, 2009, there were no outstanding borrowings under the Credit Agreement. There were $35.2$27.4 million and $25.1$35.2 million outstanding letters of credit as of December 26, 200925, 2010 and December 27, 2008,26, 2009, respectively. Borrowings bear interest at either the bank’s base rate (3.25% at December 26, 2009)25, 2010) or the London Inter-Bank Offer Rate (“LIBOR”) (0.23%(0.26% at December 26, 2009)25, 2010) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50%(0.40% at December 26, 2009)25, 2010). We are also required to pay, quarterly in arrears, a commitment fee ranging from 0.06% to 0.18% per annum and adjusted quarterly based on our performance, for unused capacity (0.10%(0.075% at December 26, 2009)25, 2010). There are no compensatingcom pensating balance requirements associated with the Credit Agreement.
The Credit Agreement requires quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. The fixed charge coverage ratio principally compares earnings before interest, taxes, depreciation, amortization, stock compensation and rent expense (“consolidated EBITDAR”) to the sum of interest paid and rental expense (excluding straight-line rent). The leverage ratio principally compares total debt plus rental expense (excluding straight-line rent) multiplied by a factor of six to consolidated EBITDAR. The Credit Agreement also contains certain other restrictions regarding additional indebtedness, capital expenditures, business operations, guarantees, investments, mergers, consolidations and sales of assets, transactions with subsidiariessubsidiar ies or affiliates, and liens. We were in compliance with all covenants at December 26, 2009.25, 2010.
Sources and Uses of Cash
Our primary source of liquidity is cash provided by operations. Principal uses of cash for investing activities are capital expenditures and financing activities are payments on debt, and repurchase of the Company’s common stock.stock, and payment of common stock dividends. The following table presents a summary of cash flows from operating, investing and financing activities for the last three fiscal years (in millions):
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Net cash provided by operating activities | | $ | 215.3 | | | $ | 217.7 | | | $ | 154.8 | |
| Net cash used in investing activities | | | (73.8 | ) | | | (88.4 | ) | | | (82.6 | ) |
| Net cash used in financing activities | | | (5.6 | ) | | | (105.5 | ) | | | (85.1 | ) |
| | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 135.9 | | | $ | 23.8 | | | $ | (12.9 | ) |
| | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| Net cash provided by operating activities | | $ | 222.6 | | | $ | 215.3 | | | $ | 217.7 | |
| Net cash used in investing activities | | | (112.1 | ) | | | (73.8 | ) | | | (88.4 | ) |
| Net cash used in financing activities | | | (26.0 | ) | | | (5.6 | ) | | | (105.5 | ) |
Net increase in cash and cash equivalents | | $ | 84.5 | | | $ | 135.9 | | | $ | 23.8 | |
Operating Activities
The $7.3 million increase in net cash provided by operations in fiscal 2010 over fiscal 2009 is primarily due to changes in the following operating activities (in millions):
| | | 2010 | | | 2009 | | | Variance | |
| Net income | | $ | 168.0 | | | $ | 119.7 | | | $ | 48.3 | |
| Depreciation and amortization | | | 69.8 | | | | 66.3 | | | | 3.5 | |
| Stock compensation expense | | | 11.8 | | | | 12.1 | | | | (0.3 | ) |
| Deferred income taxes | | | 2.7 | | | | (11.1 | ) | | | 13.8 | |
| Inventories and accounts payable | | | (74.3 | ) | | | (29.9 | ) | | | (44.4 | ) |
| Prepaid expenses and other current assets | | | (3.2 | ) | | | 11.2 | | | | (14.4 | ) |
| Accrued expenses | | | 38.5 | | | | 22.3 | | | | 16.2 | |
| Income taxes payable | | | 1.0 | | | | 7.8 | | | | (6.8 | ) |
| Other, net | | | 8.3 | | | | 16.9 | | | | (8.6 | ) |
Net cash provided by operations | | $ | 222.6 | | | $ | 215.3 | | | $ | 7.3 | |
Cash flow from operating activities continues to provide the primary source of our liquidity. The increase in net cash provided by operations in fiscal 2010 compared with fiscal 2009 was primarily due to stronger net income and an increase in accrued expenses partially offset by an increase in inventory, net of accounts payable, and an increase in prepaids and other current assets. Continued store growth has resulted in increased inventory balances. Accounts payable levels have decreased as a result of more timely payments in order to capture payment discounts offered by vendors and also as a result of an increase in cash held in our bank concentration account. The bank concentration account nets against the related book overdraft included in accounts payable. Accrued expenses increased as a result of timing of pa yments as well as incentive compensation earned in fiscal 2010 but not paid until fiscal 2011.
The $2.4 million decrease in net cash provided by operations in fiscal 2009 over fiscal 2008 is primarily due to changes in the following operating activities (in millions):
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | Variance | |
| Net income | | $ | 115.5 | | | $ | 81.9 | | | $ | 33.6 | |
| Depreciation and amortization | | | 66.3 | | | | 60.7 | | | | 5.6 | |
| Stock compensation expense | | | 12.1 | | | | 12.3 | | | | (0.2 | ) |
| Deferred income taxes | | | (13.6 | ) | | | 1.6 | | | | (15.2 | ) |
| Inventories and accounts payable | | | (11.4 | ) | | | 61.0 | | | | (72.4 | ) |
| Accrued expenses | | | 23.9 | | | | (2.1 | ) | | | 26.0 | |
| Income taxes currently payable | | | 7.6 | | | | (5.9 | ) | | | 13.5 | |
| Other, net | | | 14.9 | | | | 8.2 | | | | 6.7 | |
| | | | | | | | | | |
| Net cash provided by operations | | $ | 215.3 | | | $ | 217.7 | | | $ | (2.4 | ) |
| | | | | | | | | | |
Cash flow from operating activities continues to provide the primary source| | | 2009 | | | 2008 | | | Variance | |
| Net income | | $ | 119.7 | | | $ | 108.0 | | | $ | 11.7 | |
| Depreciation and amortization | | | 66.3 | | | | 60.7 | | | | 5.6 | |
| Stock compensation expense | | | 12.1 | | | | 12.3 | | | | (0.2 | ) |
| Deferred income taxes | | | (11.1 | ) | | | 18.5 | | | | (29.6 | ) |
| Inventories and accounts payable | | | (29.9 | ) | | | 18.2 | | | | (48.1 | ) |
| Prepaid expenses and other current assets | | | 11.2 | | | | 1.0 | | | | 10.2 | |
| Accrued expenses | | | 22.3 | | | | (1.8 | ) | | | 24.1 | |
| Income taxes payable | | | 7.8 | | | | (6.3 | ) | | | 14.1 | |
| Other, net | | | 16.9 | | | | 7.1 | | | | 9.8 | |
Net cash provided by operations | | $ | 215.3 | | | $ | 217.7 | | | $ | (2.4 | ) |
The decrease in net cash provided by operations in fiscal 2009 compared with fiscal 2008 was primarily due to changes in inventory levels and the timing of payments.payments, partially offset by higher net income and an increase in accrued expenses. Inventory levels decreasedremained nearly flat in 2009 compared to 2008 due to a continued focus on inventory management in 2009. Accounts payable levels have decreased at a greater ratesubstantially as a result of more timely payments to capture payment discounts offered by vendors.
The $62.9 million increase in net cash provided by operations Accrued expenses increased as a result of timing of payments as well as incentive compensation earned in fiscal 2008 over2009 but not paid until fiscal 2007 is primarily due to changes in the following operating activities (in millions):2010.
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | Variance | |
| Net income | | $ | 81.9 | | | $ | 96.2 | | | $ | (14.3 | ) |
| Depreciation and amortization | | | 60.7 | | | | 51.1 | | | | 9.6 | |
| Stock compensation expense | | | 12.3 | | | | 10.6 | | | | 1.7 | |
| Deferred income taxes | | | 1.6 | | | | 7.0 | | | | (5.4 | ) |
| Inventories and accounts payable | | | 61.0 | | | | (11.9 | ) | | | 72.9 | |
| Accrued expenses | | | (2.1 | ) | | | 4.3 | | | | (6.4 | ) |
| Income taxes currently payable | | | (5.9 | ) | | | (6.5 | ) | | | 0.6 | |
| Other, net | | | 8.2 | | | | 4.0 | | | | 4.2 | |
| | | | | | | | | | |
| Net cash provided by operations | | $ | 217.7 | | | $ | 154.8 | | | $ | 62.9 | |
| | | | | | | | | | |
28
The improvement in net cash provided by operations in fiscal 2008 compared with fiscal 2007 was primarily due to changes in inventory levels and the timing of payments. Inventory levels decreased in 2008 compared to 2007, due to an increased focus on inventory management.
Investing Activities
Investing activities used $112.1 million, $73.8 million $88.4 million and $82.6$88.4 million in fiscal 2010, 2009 2008 and 2007,2008, respectively. The majority of this cash requirement relates to our capital expenditures.
Our significant store expansion, coupled with required investment in infrastructure, resulted in the following capital expenditures, including capital leases (in millions):
| | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | 2010 | | | 2009 | | | 2008 | |
| New and relocated stores and stores not yet opened | | $ | 31.7 | | $ | 39.8 | | $ | 38.1 | | | $ | 28.6 | | | $ | 31.7 | | | $ | 39.8 | |
| Existing store properties acquired from lessor | | — | | 8.5 | | 6.8 | | |
| Distribution center capacity and improvements | | | | 18.1 | | | | 4.3 | | | | 16.2 | |
| Existing stores | | 18.4 | | 10.0 | | 18.3 | | | | 17.6 | | | | 18.4 | | | | 10.0 | |
| Distribution center capacity and improvements | | 4.3 | | 16.2 | | 3.3 | | |
| Information technology | | 17.6 | | 17.2 | | 17.4 | | | | 14.9 | | | | 17.6 | | | | 17.2 | |
| Purchase of previously leased stores | | | | 11.6 | | | | -- | | | | 8.5 | |
| Corporate and other | | 2.0 | | 0.1 | | 0.1 | | | | 5.7 | | | | 2.0 | | | | 0.1 | |
| | | | | | | | | | $ | 96.5 | | | $ | 74.0 | | | $ | 91.8 | |
| | | $ | 74.0 | | $ | 91.8 | | $ | 84.0 | | |
| | | | | | | | | |
Our long-term growth strategy anticipates continued geographic market expansion and further concentration within existing markets. This growth will also require continuing investment in information technology. The costs reflected above are typically building improvements, as we lease the majority of our facilities. We currently estimate that capital expenditures will range between $90$150 million and $100$160 million in fiscal 2010.2011. While we plan to open approximately the same number ofonly a few more stores in 20102011 compared to 2009,2010, we expect to have additional capital expenditures next year includingas we construct a new distribution center and implement a comprehensive warehouse management system designed to improve throughput and efficiencies in the distribution center network, andalong with other efficiency-driving system enhancements in 2010.2011.
Financing Activities
Financing activities used $26.0 million, $5.6 million, $105.5 million, and $85.1$105.5 million in fiscal 2010, 2009 2008 and 2007,2008, respectively. The cash used by financing activities in fiscal 20092010 is mainly the result of share repurchase activityquarterly cash dividends paid to stockholders and borrowings and repayments under the Credit Agreement.repurchases of common stock, partially offset by increased net proceeds from issuance of common stock related to share-based compensation.
We have a Board-approved share repurchase program which provides for repurchase of up to $400 million of common stock, exclusive of any fees, commissions, or other expenses related to such repurchases, through December 2011. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares will be held in treasury. The program may be limited or terminated at any time without prior notice. As of December 26, 2009, we had remaining authorization
We repurchased approximately 0.8 million, 0.4 million and 1.6 million shares under the share repurchase program of $181.0 million exclusive of any fees, commissions, or other expenses.
We repurchased approximately 0.4 million, 1.6 million and 3.2 million shares for a total cost of $38.2 million, $15.3 million $53.9 million and $150.0$53.9 million in fiscal 2010, 2009 and 2008, and 2007, respectively. As mentioned in Note 1 – Significant Accounting Policies in Part II of this Form 10-K, the shares added to treasury were not adjusted for the stock split. Repurchased shares are accounted for at cost and will be held in treasury for future issuance. As of December 25, 2010, we had remaining authorization under the share repurchase program of $142.8 million exclusive of any fees, commissions, or other expenses.
We believe that our existing cash balances, expected cash flow from future operations, borrowings available under the Credit Agreement, and normal trade credit will be sufficient to fund our operations and our capital expenditure needs, including store openings, relocations and renovations, over the next several years.
29
Significant Contractual Obligations and Commercial Commitments
The following table reflects our future obligations and commitments as of December 26, 200925, 2010 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period | |
| | | Total | | | | | | | | | | | | | | | |
| | | Contractual | | | Less than | | | | | | | | | | | More than | |
| | | Obligations | | | 1 year | | | 1-3 years | | | 4-5 years | | | 5 years | |
| Operating leases | | $ | 1,484,979 | | | $ | 161,214 | | | $ | 311,229 | | | $ | 280,260 | | | $ | 732,276 | |
Capital leases(1) | | | 3,242 | | | | 526 | | | | 352 | | | | 292 | | | | 2,072 | |
Purchase obligations(2) | | | 2,683 | | | | 2,683 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
| | | $ | 1,490,904 | | | $ | 164,423 | | | $ | 311,581 | | | $ | 280,552 | | | $ | 734,348 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Payment Due by Period | |
| | | Total Contractual Obligations | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | More than 5 years | |
| Operating leases | | $ | 1,545,028 | | | $ | 174,846 | | | $ | 335,140 | | | $ | 297,282 | | | $ | 737,760 | |
| Capital leases (1) | | | 2,716 | | | | 206 | | | | 292 | | | | 292 | | | | 1,926 | |
| Purchase obligations (2) | | | 32,242 | | | | 32,242 | | | | -- | | | | -- | | | | -- | |
| | | $ | 1,579,986 | | | $ | 207,294 | | | $ | 335,432 | | | $ | 297,574 | | | $ | 739,686 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| (1) | | Capital lease obligations include related interest. |
| |
| (2) | | The amounts for purchase obligations include commitments for construction of stores and a distribution center expected to be opened in fiscal 2010.2011. |
| | |
The Company had outstanding letters of credit of $35.2$27.4 million as of December 26, 2009.25, 2010.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of operating leases and outstanding letters of credit. The balances for these arrangements are discussed above. We typically lease buildings for retail stores and offices rather than acquiring these assets which allows us to utilize financial capital to operate the business rather than invest in fixed assets. Letters of credit allow us to purchase inventory, primarily sourced overseas, and support certain risk management programs in a timely manner.
Recent Accounting Pronouncements
In December 2007,June 2009, the Financial Accounting Standards Board (“FASB”) modified FASBissued Accounting Standards Codification (“ASC”) 805, Business CombinationsTopic 810 (originally issued as Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. (“Topic 805”FIN”) 46(R)”). Previous guidance applied onlyAmong other items, ASC 810 responds to business combinations in which control was obtained by transferring consideration;concerns about an enterprise’s application of certain key provisions of FIN 46(R), including those regarding the revised guidance applies to all transactions or other events in which one entity obtains control over another. Topic 805 now defines the acquirer as the entity that obtains control over one or more other businesses and defines the acquisition date as the date the acquirer achieves control. It also requires the acquirer to recognize assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their respective fair values astransparency of the acquisition date. The revised guidance changes the treatment of acquisition-related costs, restructuring costs related to an acquisition that the acquirer expects butenterprise’s involvement with variable interest entities. ASC 810 is not obligated to incur, contingent consideration associated with the purchase price and preacquisition contingencies associated with acquired assets and liabilities. Topic 805 retains the guidanceeffective for identifying and recognizing intangible assets apart from goodwill. The revised guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period beginning on or after December 15, 2008. We adopted this revised guidance effective December 28, 2008 (fiscal 2009). Thus we are required to apply the revised guidance to any business acquisition which occurs on or after December 28, 2008, but this modification had no effect on prior acquisitions.
In April 2008, the FASB modified FASB ASC 350, Intangibles – Goodwill and Other, and FASB ASC 275, Risks and Uncertainties, for factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset.period. The modification requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. WeCompany adopted the guidancestandard for determining the useful life of a recognized intangible asset effective December 28, 2008 (fiscal 2009), and the guidance is applied prospectively to intangible assets acquired after the effective date. The guidance did not have aninterim period ended March 27, 2010. There was no impact on ourthe C ompany’s financial condition,position, results of operations, cash flows, or cash flow.disclosures.
On April 9, 2009,
In February 2010, the FASB modified FASB ASC 825, Financial Instruments,issued Accounting Standards Update No. 2010-09 (ASU No. 2010-09), “Subsequent Events (Topic 855): Amendments to Certain Recognition and FASB ASC 270, Interim Reporting,Disclosure Requirements.” The amendments remove the requirements for an SEC filer to extend the disclosure requirements related to the fair value of financial instruments to interimdisclose a date, in both issued and revised financial statements, of publicly traded companies. We adopted this guidance effective June 27, 2009. This guidance did notthrough which subsequent events have a significant impact on our financial condition, results of operations or cash flow.
30
In May 2009, the FASB modified FASB ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but beforebeen reviewed. Revised financial statements are issued and requires entities to disclose the date through which they have evaluated subsequent events. We adopted this guidanceinclude financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. ASU No. 2010-09 was effective June 27, 2009.upon issuance. The adoption of this guidance did not have an impact on our financial condition, results of operations or cash flows.
In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-01 Topic 105, Generally Accepted Accounting Principles, which establishes the FASB ASC. The FASB ASC is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. The FASB ASC reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. We adopted ASU No. 2009-01 effective September 26, 2009. This impacted the Company’s notes to financial statements since all references to authoritative accounting literature are referenced in accordance with the FASB ASC.
Item 7A.7A.Quantitative and Qualitative Disclosures About Market Risk
We aremay be exposed to changes in interest rates primarily from the Credit Agreement. The Credit Agreement bears interest at either the bank’s base rate (3.25% at both December 26, 200925, 2010 and December 27, 2008)26, 2009) or LIBOR (0.23%(0.26% and 0.46%0.23% at December 26, 200925, 2010 and December 27, 2008,26, 2009, respectively) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly, based on our performance (0.50%(0.40% and 0.50% at bothDecember 25, 2010 and December 26, 2009, and December 27, 2008)respectively). We are also required to pay (quarterly in arrears) a commitment fee ranging from 0.06% to 0.18% based on the daily average unused portion of the credit line (0.10%(0.075% at bothDecember 25, 2010 and 0.10% December 26, 2009 and December 27, 2008)2009). A hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would result in approximately $111,000
Item 8.Financial Statements and Supplementary Data INDEX
INDEX
TRACTOR SUPPLY COMPANY
32
The Board of Directors and Stockholders of
Tractor Supply Company
We have audited Tractor Supply Company’s internal control over financial reporting as of December 26, 2009,25, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Tractor Supply Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations ofo f management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Tractor Supply Company maintained, in all material respects, effective internal control over financial reporting as of December 26, 2009,25, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tractor Supply Company as of December 26, 200925, 2010 and December 27, 200826, 2009 and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 26, 200925, 2010 and our report dated February 24, 201023, 2011 expressed an unqualified opinion thereon.
Nashville, Tennessee
February 24, 201023, 2011
33
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Tractor Supply Company
We have audited the accompanying consolidated balance sheets of Tractor Supply Company as of December 26, 200925, 2010 and December 27, 2008,26, 2009, and the related consolidated statements of income, stockholders’stockholders' equity, and cash flows for each of the three years in the period ended December 26, 2009.25, 2010. These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tractor Supply Company at December 26, 200925, 2010 and December 27, 2008,26, 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 26, 2009,25, 2010, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company has elected to change its method of accounting for inventory from the lower of cost, as determined by the last-in first-out (LIFO) method, or market, to the lower of cost, as determined by the average cost method, or market, effective December 25, 2010.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Tractor Supply Company’sCompany's internal control over financial reporting as of December 26, 2009,25, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 201023, 2011 expressed an unqualified opinion thereon.
Nashville, Tennessee
February 24, 201023, 2011
34
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
Net sales | | $ | 3,206,937 | | | $ | 3,007,949 | | | $ | 2,703,212 | |
| | | | | | | | | | | | | |
| Cost of merchandise sold | | | 2,171,980 | | | | 2,095,688 | | | | 1,850,504 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Gross margin | | | 1,034,957 | | | | 912,261 | | | | 852,708 | |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 784,066 | | | | 715,961 | | | | 641,603 | |
| Depreciation and amortization | | | 66,258 | | | | 60,731 | | | | 51,064 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Operating income | | | 184,633 | | | | 135,569 | | | | 160,041 | |
| | | | | | | | | | | | | |
| Interest expense, net | | | 1,644 | | | | 2,133 | | | | 5,037 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Income before income taxes | | | 182,989 | | | | 133,436 | | | | 155,004 | |
| | | | | | | | | | | | | |
| Income tax expense | | | 67,523 | | | | 51,506 | | | | 58,763 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | | $ | 115,466 | | | $ | 81,930 | | | $ | 96,241 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net income per share — basic | | $ | 3.21 | | | $ | 2.22 | | | $ | 2.45 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net income per share — assuming dilution | | $ | 3.15 | | | $ | 2.19 | | | $ | 2.40 | |
| | | | | | | | | | |
The accompanying notes are an integral part
| | | Fiscal Year | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Net sales | | $ | 3,638,336 | | | $ | 3,206,937 | | | $ | 3,007,949 | |
| | | | | | | | | | | | | |
| Cost of merchandise sold | | | 2,434,671 | | | | 2,165,048 | | | | 2,052,894 | |
| | | | | | | | | | | | | |
Gross margin | | | 1,203,665 | | | | 1,041,889 | | | | 955,055 | |
| | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 867,644 | | | | 784,066 | | | | 715,961 | |
| Depreciation and amortization | | | 69,797 | | | | 66,258 | | | | 60,731 | |
| | | | | | | | | | | | | |
Operating income | | | 266,224 | | | | 191,565 | | | | 178,363 | |
| | | | | | | | | | | | | |
| Interest expense, net | | | 1,284 | | | | 1,644 | | | | 2,133 | |
| | | | | | | | | | | | | |
| Income before income taxes | | | 264,940 | | | | 189,921 | | | | 176,230 | |
| | | | | | | | | | | | | |
| Income tax expense | | | 96,968 | | | | 70,176 | | | | 68,237 | |
| | | | | | | | | | | | | |
| Net income | | $ | 167,972 | | | $ | 119,745 | | | $ | 107,993 | |
| | | | | | | | | | | | | |
Net income per share – basic(a) | | $ | 2.31 | | | $ | 1.66 | | | $ | 1.47 | |
| | | | | | | | | | | | | |
Net income per share – assuming dilution(a) | | $ | 2.25 | | | $ | 1.63 | | | $ | 1.44 | |
| | | | | | | | | | | | | |
Weighted average shares outstanding:(a) | | | | | | | | | | | | |
Basic | | | 72,597 | | | | 71,981 | | | | 73,661 | |
Diluted | | | 74,686 | | | | 73,297 | | | | 74,927 | |
| | | | | | | | | | | | | |
Dividends declared per common share outstanding (a) | | $ | 0.28 | | | $ | -- | | | $ | -- | |
| (a) | All share and per share information has been adjusted to reflect the two-for-one stock split as discussed in Note 1. |
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| | | | | | | | | |
| | | Dec. 26, | | | Dec. 27, | |
| | | 2009 | | | 2008 | |
ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 172,851 | | | $ | 36,989 | |
| Inventories | | | 601,249 | | | | 603,435 | |
| Prepaid expenses and other current assets | | | 42,320 | | | | 41,902 | |
| Deferred income taxes | | | 17,909 | | | | 1,676 | |
| | | | | | | |
| Total current assets | | | 834,329 | | | | 684,002 | |
| | | | | | | |
| | | | | | | | | |
| Property and Equipment: | | | | | | | | |
| Land | | | 27,646 | | | | 25,410 | |
| Buildings and improvements | | | 350,505 | | | | 325,081 | |
| Furniture, fixtures and equipment | | | 226,967 | | | | 198,881 | |
| Computer software and hardware | | | 88,700 | | | | 74,589 | |
| Construction in progress | | | 11,562 | | | | 12,615 | |
| | | | | | | |
| | | | 705,380 | | | | 636,576 | |
| Accumulated depreciation and amortization | | | (335,135 | ) | | | (274,543 | ) |
| | | | | | | |
| Property and equipment, net | | | 370,245 | | | | 362,033 | |
| | | | | | | | | |
| Goodwill | | | 10,258 | | | | 10,258 | |
| Deferred income taxes | | | 11,091 | | | | 13,727 | |
| Other assets | | | 4,922 | | | | 5,977 | |
| | | | | | | |
| | | | | | | | | |
| Total assets | | $ | 1,230,845 | | | $ | 1,075,997 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 273,208 | | | $ | 286,828 | |
| Other accrued expenses | | | 137,375 | | | | 113,465 | |
| Current portion of capital lease obligations | | | 392 | | | | 550 | |
| Income taxes payable | | | 7,605 | | | | — | |
| | | | | | | |
| Total current liabilities | | | 418,580 | | | | 400,843 | |
| | | | | | | | | |
| Revolving credit loan | | | — | | | | — | |
| Capital lease obligations, less current maturities | | | 1,407 | | | | 1,797 | |
| Straight-line rent liability | | | 45,515 | | | | 38,016 | |
| Other long-term liabilities | | | 32,140 | | | | 25,211 | |
| | | | | | | |
| Total liabilities | | | 497,642 | | | | 465,867 | |
| | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred Stock, 40,000 shares authorized; $1.00 par value; no shares issued | | | — | | | | — | |
| Common Stock, 100,000,000 shares authorized, $.008 par value; 41,309,743 shares issued and 36,076,408 shares outstanding at December 26, 2009 and 40,875,886 shares issued and 36,061,585 shares outstanding at December 27, 2008 | | | 330 | | | | 327 | |
| Additional paid-in capital | | | 190,938 | | | | 168,045 | |
| Treasury stock, at cost, 5,233,335 shares at December 26, 2009 and 4,814,301 shares at December 27, 2008 | | | (219,204 | ) | | | (203,915 | ) |
| Retained earnings | | | 761,139 | | | | 645,673 | |
| | | | | | | |
| Total stockholders’ equity | | | 733,203 | | | | 610,130 | |
| | | | | | | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 1,230,845 | | | $ | 1,075,997 | |
| | | | | | | |
The accompanying notes are an integral part| | | December 25, 2010 | | | December 26, 2009 | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
Cash and cash equivalents | | $ | 257,339 | | | $ | 172,851 | |
Short-term investments | | | 15,913 | | | | -- | |
Inventories | | | 736,520 | | | | 676,466 | |
Prepaid expenses and other current assets | | | 33,945 | | | | 30,747 | |
Total current assets | | | 1,043,717 | | | | 880,064 | |
| | | | | | | | | |
| Property and Equipment: | | | | | | | | |
Land | | | 30,350 | | | | 27,646 | |
Buildings and improvements | | | 380,228 | | | | 350,505 | |
Furniture, fixtures and equipment | | | 256,369 | | | | 226,967 | |
Computer software and hardware | | | 94,878 | | | | 88,700 | |
Construction in progress | | | 20,961 | | | | 11,562 | |
| | | | 782,786 | | | | 705,380 | |
Accumulated depreciation and amortization | | | (386,997 | ) | | | (335,135 | ) |
Property and equipment, net | | | 395,789 | | | | 370,245 | |
| | | | | | | | | |
| Goodwill | | | 10,258 | | | | 10,258 | |
| Deferred income taxes | | | 5,750 | | | | 11,091 | |
| Other assets | | | 7,960 | | | | 4,922 | |
| | | | | | | | | |
Total assets | | $ | 1,463,474 | | | $ | 1,276,580 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
Accounts payable | | $ | 247,388 | | | $ | 261,635 | |
Accrued employee compensation | | | 34,576 | | | | 22,725 | |
Other accrued expenses | | | 127,386 | | | | 100,695 | |
Current portion of capital lease obligations | | | 91 | | | | 392 | |
Income taxes payable | | | 8,269 | | | | 7,265 | |
Deferred income taxes | | | 8,854 | | | | 11,505 | |
Total current liabilities | | | 426,564 | | | | 404,217 | |
| | | | | | | | | |
| Revolving credit loan | | | -- | | | | -- | |
| Capital lease obligations, less current maturities | | | 1,316 | | | | 1,407 | |
| Deferred rent | | | 70,697 | | | | 63,470 | |
| Other long-term liabilities | | | 31,655 | | | | 28,335 | |
Total liabilities | | | 530,232 | | | | 497,429 | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
Preferred Stock, 40,000 shares authorized; $1.00 par value; no shares issued | | | -- | | | | -- | |
Common Stock, 100,000,000 shares authorized, $.008 par value; 78,835,508 shares issued and 72,775,862 shares outstanding at December 25, 2010 and 77,386,151 shares issued and 72,152,816 shares outstanding at December 26, 2009 | | | 631 | | | | 619 | |
Additional paid-in capital | | | 235,283 | | | | 190,649 | |
Treasury stock, at cost, 6,059,646 shares at December 25, 2010 and 5,233,335 shares at December 26, 2009 | | | (257,376 | ) | | | (219,204 | ) |
Retained earnings | | | 954,704 | | | | 807,087 | |
Total stockholders’ equity | | | 933,242 | | | | 779,151 | |
| | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 1,463,474 | | | $ | 1,276,580 | |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | Additional | | | | | | | | | | | Other | | | Total | |
| | | Common | | | Paid-in | | | Treasury | | | Retained | | | Comprehensive | | | Stockholders’ | |
| | | Stock | | | Capital | | | Stock | | | Earnings | | | Income (Loss) | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders’ equity at December 30, 2006 | | $ | 322 | | | $ | 129,249 | | | $ | — | | | $ | 469,355 | | | $ | (22 | ) | | $ | 598,904 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative effect of change in accounting principle (Note 9) | | | | | | | | | | | | | | | (1,853 | ) | | | | | | | (1,853 | ) |
| Issuance of common stock under employee stock purchase plan (46,654 shares) | | | 1 | | | | 1,844 | | | | | | | | | | | | | | | | 1,845 | |
| Exercise of stock options (371,823 shares) | | | 3 | | | | 5,586 | | | | | | | | | | | | | | | | 5,589 | |
| Stock compensation | | | | | | | 10,620 | | | | | | | | | | | | | | | | 10,620 | |
| Tax benefit of stock options exercised | | | | | | | 4,018 | | | | | | | | | | | | | | | | 4,018 | |
| Repurchase of common stock (3,216,187 shares) | | | | | | | | | | | (150,049 | ) | | | | | | | | | | | (150,049 | ) |
| Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 22 | | | | 22 | |
| Net income | | | | | | | | | | | | | | | 96,241 | | | | | | | | 96,241 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders’ equity at December 29, 2007 | | | 326 | | | | 151,317 | | | | (150,049 | ) | | | 563,743 | | | | — | | | | 565,337 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock under employee stock purchase plan (61,348 shares) | | | | | | | 1,680 | | | | | | | | | | | | | | | | 1,680 | |
| Exercise of stock options (114,329 shares) | | | 1 | | | | 1,469 | | | | | | | | | | | | | | | | 1,470 | |
| Stock compensation | | | | | | | 12,257 | | | | | | | | | | | | | | | | 12,257 | |
| Tax benefit of stock options exercised | | | | | | | 1,322 | | | | | | | | | | | | | | | | 1,322 | |
| Repurchase of common stock (1,598,114 shares) | | | | | | | | | | | (53,866 | ) | | | | | | | | | | | (53,866 | ) |
| Net income | | | | | | | | | | | | | | | 81,930 | | | | | | | | 81,930 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders’ equity at December 27, 2008 | | | 327 | | | | 168,045 | | | | (203,915 | ) | | | 645,673 | | | | — | | | | 610,130 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock under employee stock purchase plan (50,735 shares) | | | | | | | 1,631 | | | | | | | | | | | | | | | | 1,631 | |
| Exercise of stock options (383,122 shares) | | | 3 | | | | 4,345 | | | | | | | | | | | | | | | | 4,348 | |
| Stock compensation | | | | | | | 12,130 | | | | | | | | | | | | | | | | 12,130 | |
| Tax benefit of stock options exercised | | | | | | | 4,787 | | | | | | | | | | | | | | | | 4,787 | |
| Repurchase of common stock (419,034 shares) | | | | | | | | | | | (15,289 | ) | | | | | | | | | | | (15,289 | ) |
| Net income | | | | | | | | | | | | | | | 115,466 | | | | | | | | 115,466 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholders’ equity at December 26, 2009 | | $ | 330 | | | $ | 190,938 | | | $ | (219,204 | ) | | $ | 761,139 | | | $ | — | | | $ | 733,203 | |
| | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part
| | | Common Stock (a) | | | Additional Paid-in Capital (a) | | | Treasury Stock | | | Retained Earnings | | | Total Stockholders’ Equity | |
| | | | | | | | | | | | | | | | |
| Stockholders’ equity at December 29, 2007 | | $ | 625 | | | $ | 151,018 | | | $ | (150,049 | ) | | $ | 563,743 | | | $ | 565,337 | |
| | | | | | | | | | | | | | | | | | | | | |
Cumulative effect of change in accounting method in prior years(b) | | | | | | | | | | | | | | | 15,606 | | | | 15,606 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity at December 29, 2007 | | | 625 | | | | 151,018 | | | | (150,049 | ) | | | 579,349 | | | | 580,943 | |
| | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock under employee stock purchase plan (122,696 shares)(a) | | | 1 | | | | 1,679 | | | | | | | | | | | | 1,680 | |
Exercise of stock options (226,638 shares) and restricted stock units (2,020 shares)(a) | | | 2 | | | | 1,468 | | | | | | | | | | | | 1,470 | |
| Stock compensation | | | | | | | 12,257 | | | | | | | | | | | | 12,257 | |
| Tax benefit of stock options exercised | | | | | | | 1,322 | | | | | | | | | | | | 1,322 | |
Repurchase of common stock (1,598,114 shares)(a) | | | (13 | ) | | | 13 | | | | (53,866 | ) | | | | | | | (53,866 | ) |
Net income, as adjusted(b) | | | | | | | | | | | | | | | 107,993 | | | | 107,993 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity at December 27, 2008 | | | 615 | | | | 167,757 | | | | (203,915 | ) | | | 687,342 | | | | 651,799 | |
| | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock under employee stock purchase plan (101,470 shares)(a) | | | 1 | | | | 1,630 | | | | | | | | | | | | 1,631 | |
Exercise of stock options (755,348 shares) and restricted stock units (10,896 shares)(a) | | | 6 | | | | 4,342 | | | | | | | | | | | | 4,348 | |
| Stock compensation | | | | | | | 12,130 | | | | | | | | | | | | 12,130 | |
| Tax benefit of stock options exercised | | | | | | | 4,787 | | | | | | | | | | | | 4,787 | |
Repurchase of common stock (419,034 shares)(a) | | | (3 | ) | | | 3 | | | | (15,289 | ) | | | | | | | (15,289 | ) |
Net income, as adjusted(b) | | | | | | | | | | | | | | | 119,745 | | | | 119,745 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity at December 26, 2009 | | | 619 | | | | 190,649 | | | | (219,204 | ) | | | 807,087 | | | | 779,151 | |
| | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock under employee stock purchase plan (74,788 shares)(a) | | | 1 | | | | 1,739 | | | | | | | | | | | | 1,740 | |
Exercise of stock options (1,550,077 shares) and restricted stock units (90,203 shares)(a) | | | 13 | | | | 22,125 | | | | | | | | | | | | 22,138 | |
| Stock compensation | | | | | | | 11,771 | | | | | | | | | | | | 11,771 | |
| Tax benefit of stock options exercised | | | | | | | 9,780 | | | | | | | | | | | | 9,780 | |
| Restricted stock units withheld for taxes | | | | | | | (783 | ) | | | | | | | | | | | (783 | ) |
Repurchase of common stock (826,311 shares)(a) | | | (2 | ) | | | 2 | | | | (38,172 | ) | | | | | | | (38,172 | ) |
| Dividends paid | | | | | | | | | | | | | | | (20,355 | ) | | | (20,355 | ) |
| Net income | | | | | | | | | | | | | | | 167,972 | | | | 167,972 | |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity at December 25, 2010 | | $ | 631 | | | $ | 235,283 | | | $ | (257,376 | ) | | $ | 954,704 | | | $ | 933,242 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| (a) | All share and per share information has been adjusted to reflect the two-for-one stock split, except for repurchase of common stock as the number of shares held in treasury was not adjusted for the split. See Note 1 for more information. | |
| (b) | Net income and retained earnings for all periods prior to 2010 have been adjusted to reflect the change in accounting for inventory. See Note 1 for more information. | |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2009 | | | 2008 | | | 2007 | |
Cash flows from operating activities: | | | | | | | | | | | | |
| Net income | | $ | 115,466 | | | $ | 81,930 | | | $ | 96,241 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 66,258 | | | | 60,731 | | | | 51,064 | |
| (Gain) loss on disposition of property and equipment | | | 213 | | | | (425 | ) | | | 30 | |
| Stock compensation expense | | | 12,130 | | | | 12,257 | | | | 10,620 | |
| Deferred income taxes | | | (13,597 | ) | | | 1,566 | | | | 7,047 | |
| Change in assets and liabilities: | | | | | | | | | | | | |
| Inventories | | | 2,186 | | | | 32,553 | | | | (41,137 | ) |
| Prepaid expenses and other current assets | | | (409 | ) | | | 1,007 | | | | (4,802 | ) |
| Accounts payable | | | (13,620 | ) | | | 28,482 | | | | 29,175 | |
| Accrued expenses | | | 23,910 | | | | (2,136 | ) | | | 4,339 | |
| Income taxes payable | | | 7,605 | | | | (5,928 | ) | | | (6,488 | ) |
| Other | | | 15,175 | | | | 7,689 | | | | 8,687 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net cash provided by operating activities | | | 215,317 | | | | 217,726 | | | | 154,776 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
| Capital expenditures | | | (73,974 | ) | | | (91,759 | ) | | | (83,547 | ) |
| Proceeds from sale of property and equipment | | | 97 | | | | 3,324 | | | | 974 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net cash used in investing activities | | | (73,877 | ) | | | (88,435 | ) | | | (82,573 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
| Borrowings under revolving credit agreement | | | 274,033 | | | | 853,903 | | | | 1,050,931 | |
| Repayments under revolving credit agreement | | | (274,033 | ) | | | (908,903 | ) | | | (995,931 | ) |
| Excess tax benefit of stock options exercised | | | 4,280 | | | | 1,085 | | | | 3,149 | |
| Principal payments under capital lease obligations | | | (548 | ) | | | (851 | ) | | | (675 | ) |
| Repurchase of common stock | | | (15,289 | ) | | | (53,866 | ) | | | (150,049 | ) |
| Net proceeds from issuance of common stock | | | 5,979 | | | | 3,150 | | | | 7,434 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Net cash used in financing activities | | | (5,578 | ) | | | (105,482 | ) | | | (85,141 | ) |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Net increase (decrease) in cash | | | 135,862 | | | | 23,809 | | | | (12,938 | ) |
| | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of year | | | 36,989 | | | | 13,180 | | | | 26,118 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 172,851 | | | $ | 36,989 | | | $ | 13,180 | |
| | | | | | | | | | |
| | | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | | | |
| Interest | | $ | 838 | | | $ | 3,890 | | | $ | 3,953 | |
| Income taxes | | | 66,888 | | | | 55,476 | | | | 54,939 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of non-cash activities: | | | | | | | | | | | | |
| Equipment acquired through capital leases | | $ | — | | | $ | — | | | $ | 439 | |
The accompanying notes are an integral part| | | Fiscal Year | |
| | | 2010 | | | 2009 | | | 2008 | |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 167,972 | | | $ | 119,745 | | | $ | 107,993 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 69,797 | | | | 66,258 | | | | 60,731 | |
Net loss (gain) on disposition of property and equipment | | | 1,062 | | | | 213 | | | | (425 | ) |
Stock compensation expense | | | 11,771 | | | | 12,130 | | | | 12,257 | |
Deferred income taxes | | | 2,690 | | | | (11,139 | ) | | | 18,531 | |
Change in assets and liabilities: | | | | | | | | | | | | |
Inventories | | | (60,054 | ) | | | (4,745 | ) | | | (10,241 | ) |
Prepaid expenses and other current assets | | | (3,201 | ) | | | 11,164 | | | | 1,007 | |
Accounts payable | | | (14,247 | ) | | | (25,193 | ) | | | 28,482 | |
Accrued employee compensation | | | 11,851 | | | | 12,476 | | | | (590 | ) |
Other accrued expenses | | | 26,691 | | | | 9,838 | | | | (1,174 | ) |
Income taxes payable | | | 1,004 | | | | 7,801 | | | | (6,359 | ) |
Other | | | 7,272 | | | | 16,769 | | | | 7,514 | |
| | | | | | | | | | | | | |
Net cash provided by operating activities | | | 222,608 | | | | 215,317 | | | | 217,726 | |
| | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Capital expenditures | | | (96,511 | ) | | | (73,974 | ) | | | (91,759 | ) |
| Proceeds from sale of property and equipment | | | 313 | | | | 97 | | | | 3,324 | |
Purchases of short-term investments | | | (15,913 | ) | | | -- | | | | -- | |
| | | | | | | | | | | | | |
Net cash used in investing activities | | | (112,111 | ) | | | (73,877 | ) | | | (88,435 | ) |
| | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Borrowings under revolving credit agreement | | | -- | | | | 274,033 | | | | 853,903 | |
Repayments under revolving credit agreement | | | -- | | | | (274,033 | ) | | | (908,903 | ) |
Excess tax benefit of stock options exercised | | | 9,815 | | | | 4,280 | | | | 1,085 | |
Principal payments under capital lease obligations | | | (392 | ) | | | (548 | ) | | | (851 | ) |
Restricted stock units withheld to satisfy tax obligations | | | (783 | ) | | | -- | | | | -- | |
Repurchase of common stock | | | (38,172 | ) | | | (15,289 | ) | | | (53,866 | ) |
Net proceeds from issuance of common stock | | | 23,878 | | | | 5,979 | | | | 3,150 | |
Cash dividends paid to stockholders | | | (20,355 | ) | | | -- | | | | -- | |
| | | | | | | | | | | | | |
Net cash used in financing activities | | | (26,009 | ) | | | (5,578 | ) | | | (105,482 | ) |
| | | | | | | | | | | | | |
| Net increase in cash | | | 84,488 | | | | 135,862 | | | | 23,809 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of year | | | 172,851 | | | | 36,989 | | | | 13,180 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 257,339 | | | $ | 172,851 | | | $ | 36,989 | |
| | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
| Cash paid during the year for: | | | | | | | | | | | | |
Interest | | $ | 305 | | | $ | 838 | | | $ | 3,890 | |
Income taxes | | | 82,821 | | | | 66,888 | | | | 55,476 | |
Nature of Business
Tractor Supply Company (the “Company”, “we”, “us” and/or “our”) is the largest operator of retail farm and ranch stores in the United States. We are focused on supplying the lifestyle needs of recreational farmers and ranchers and those who enjoy the rural lifestyle, as well as tradesmen and small businesses. Stores are located in towns outlying major metropolitan markets and in rural communities. Our wholly-owned subsidiary, Del’s Farm Supply, LLC (“Del’s”) operated 2726 stores as of December 26, 2009.25, 2010. At December 26, 2009,25, 2010, we operated a total of 9301,001 retail farm and ranch stores (including Del’s) in 44 states and also offered a number of products online atTractorSupply.com.
Fiscal Year
Our fiscal year ends on the last Saturday of the calendar year and includes 52 or 53 weeks. The fiscal years ended December 25, 2010, December 26, 2009 and December 27, 2008 and December 29, 2007 consist of 52 weeks.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.
Change in Accounting Method
Effective December 25, 2010, the Company elected to change its method of accounting for inventories from lower of cost, as determined by the LIFO method, or market, to lower of cost, as determined by the average cost method, or market. The Company believes the change is preferable as the average cost method better reflects the current value of inventory on the consolidated balance sheets, provides a better reflection of periodic income and improves comparability with our peers.
The Company has applied this change in method of inventory costing retrospectively to all prior periods presented herein in accordance with accounting principles relating to accounting changes. As a result of the retrospective change in accounting principle, opening retained earnings as of December 29, 2007 increased by $15.6 million. The effect of the change in method on previously reported consolidated operating results for fiscal 2009 and 2008 was to increase net income by $4.3 million ($0.05 per dilutive share), and $26.1 million ($0.35 per dilutive share), respectively. The effect on the consolidated balance sheet at December 26, 2009 was to increase inventory, tax liabilities and retained earnings by $75.2 million, $29.3 million and $45.9 million, respectively.
Certain components of the Company’s financial statements affected by the change in costing methodology as originally reported under the LIFO method and as adjusted for the change to the average cost method are as follows (in thousands, except per share data):
| | | Fiscal 2009 | | | Fiscal 2008 | |
| | | As Previously | | | Effect of | | | As | | | As Previously | | | Effect of | | | As | |
| | | Reported | | | Change | | | Adjusted | | | Reported | | | Change | | | Adjusted | |
| Consolidated Statements of Income | | | | | | | | | | | | | | | | | | |
| Cost of merchandise sold | | $ | 2,171,980 | | | $ | (6,932 | ) | | $ | 2,165,048 | | | $ | 2,095,688 | | | $ | (42,794 | ) | | $ | 2,052,894 | |
| Gross margin | | | 1,034,957 | | | | 6,932 | | | | 1,041,889 | | | | 912,261 | | | | 42,794 | | | | 955,055 | |
| Operating income | | | 184,633 | | | | 6,932 | | | | 191,565 | | | | 135,569 | | | | 42,794 | | | | 178,363 | |
| Income before income taxes | | | 182,989 | | | | 6,932 | | | | 189,921 | | | | 133,436 | | | | 42,794 | | | | 176,230 | |
| Income tax expense | | | 67,523 | | | | 2,653 | | | | 70,176 | | | | 51,506 | | | | 16,731 | | | | 68,237 | |
| Net income | | $ | 115,466 | | | $ | 4,279 | | | $ | 119,745 | | | $ | 81,930 | | | $ | 26,063 | | | $ | 107,993 | |
| Net income per share – basic | | $ | 1.60 | | | $ | 0.06 | | | $ | 1.66 | | | $ | 1.11 | | | $ | 0.36 | | | $ | 1.47 | |
| Net income per share – assuming dilution | | $ | 1.58 | | | $ | 0.05 | | | $ | 1.63 | | | $ | 1.09 | | | $ | 0.35 | | | $ | 1.44 | |
| | | Fiscal 2009 | |
| | | As Previously | | | Effect of | | | As | |
| | | Reported * | | | Change | | | Adjusted | |
| Consolidated Balance Sheets | | | | | | | | | |
| Inventories | | $ | 601,249 | | | $ | 75,217 | | | $ | 676,466 | |
| Deferred income taxes (current asset) | | | 17,909 | | | | (17,909 | ) | | | -- | |
| Total current assets | | | 822,756 | | | | 57,308 | | | | 880,064 | |
| Deferred income taxes | | | 11,091 | | | | -- | | | | 11,091 | |
| Total assets | | | 1,219,272 | | | | 57,308 | | | | 1,276,580 | |
| Income taxes payable | | | 7,605 | | | | (340 | ) | | | 7,265 | |
| Deferred income taxes (current liability) | | | -- | | | | 11,505 | | | | 11,505 | |
| Total current liabilities | | | 393,052 | | | | 11,165 | | | | 404,217 | |
| Other long-term liabilities | | | 28,140 | | | | 195 | | | | 28,335 | |
| Total liabilities | | | 486,069 | | | | 11,360 | | | | 497,429 | |
| Retained earnings | | | 761,139 | | | | 45,948 | | | | 807,087 | |
| Total stockholders’ equity | | | 733,203 | | | | 45,948 | | | | 779,151 | |
| Total liabilities and stockholders’ equity | | | 1,219,272 | | | | 57,308 | | | | 1,276,580 | |
| | | | | | | | | | | | | |
| * As described below, certain other amounts in the previously issued balance sheet have been reclassified to conform to the fiscal 2010 presentation. | |
| | Fiscal 2009 | | | Fiscal 2008 | |
| | | As Previously | | | Effect of | | | As | | | As Previously | | | Effect of | | | As | |
| | | Reported | | | Change | | | Adjusted | | | Reported | | | Change | | | Adjusted | |
| Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 115,466 | | | $ | 4,279 | | | $ | 119,745 | | | $ | 81,930 | | | $ | 26,063 | | | $ | 107,993 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Deferred income taxes | | | (13,597 | ) | | | 2,458 | | | | (11,139 | ) | | | 1,566 | | | | 16,965 | | | | 18,531 | |
| Inventories | | | 2,186 | | | | (6,931 | ) | | | (4,745 | ) | | | 32,553 | | | | (42,794 | ) | | | (10,241 | ) |
| Income taxes payable | | | 7,605 | | | | 196 | | | | 7,801 | | | | (5,928 | ) | | | (431 | ) | | | (6,359 | ) |
| Other | | | 16,771 | | | | (2 | ) | | | 16,769 | | | | 7,317 | | | | 197 | | | | 7,514 | |
| Net cash provided by operating activities | | $ | 215,317 | | | $ | -- | | | $ | 215,317 | | | $ | 217,726 | | | $ | -- | | | $ | 217,726 | |
Stock Split
On July 29, 2010, our Board of Directors announced a two-for-one split of our outstanding shares of common stock to be effected in the form of a stock dividend. On September 2, 2010, stockholders of record at the close of business on August 19, 2010, were issued one additional share of common stock for each share owned by such stockholder. The stock split increased the number of shares of common stock outstanding from approximately 36.3 million to approximately 72.7 million. Share and per-share amounts (including stock options and restricted stock units) shown in the consolidated financial statements and related notes reflect the split. The total number of authorized common shares and the par value thereof was not changed by the split. The number of shares held in treasury was not adjusted for the split .
Reclassifications
Certain amounts in previously issued financial statements have been reclassified to conform to the fiscal 20092010 presentation. Amounts related to voucherMarketing support fund receivables ($0.2 million and $0.5 million at December 27, 2008 and December 29, 2007, respectively) have been reclassifieddue from cash and cash equivalents to prepaid expenses and other current assets. Also, amounts related to prepaid fixtures ($0.3 million at December 27, 2008)vendors previously classified in prepaid expenses and other current assets have been reclassified to reduce vendor accounts payable ($11.6 million at December 26, 2009). Amounts related to accrued employee compensation ($22.7 million at December 26, 2009) have been reclassified from other assetsaccrued expenses to accrued employee compensation. A portion of the liabilities related to self-insured workers’ compensation and general liability claims ($14.0 million at December 26, 2009) previously classified in other accrued expenses have been reclassified to other long-term liabilities to reflect their long-term status. ThoseAlso amou nts related to tenant improvement allowances ($18.0 million at December 26, 2009) previously classified in other long-term liabilities and amounts related to straight-line rent ($45.5 million at December 26, 2009) previously classified as straight-line rent liability have been reclassified as deferred rent to conform to the December 25, 2010 presentation.
These changes have affected our December 27, 200826, 2009 Consolidated Balance Sheet and the Consolidated Statements of Cash Flows for the fiscal years ended December 27, 200826, 2009 and December 29, 2007.27, 2008.
Segment Information
Tractor Supply Company has one reportable industry segment which is the operation of farm and ranch retail stores. We also offer a number of products online atTractorSupply.com.
Management Estimates
Our preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States inherently requires estimates and assumptions by us that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. Actual results could differ from those estimates.
Significant estimates and assumptions by management primarily impact the following key financial statement areas:
Revenue Recognition and Sales Returns
We recognize revenue at the time the customer takes possession of merchandise or receives services.merchandise. If we receive payment before the customer has taken possession of the merchandise (as per our special order and layaway programs), the revenue is deferred until the sale is complete.
We are required to collect certain taxes and fees from customers on behalf of government agencies and remit such collections to the applicable governmental entity on a periodic basis. These taxes are collected from customers at the time of purchase, but are not included in net sales. We record a liability upon collection from the customer and relieve the liability when payments are remitted to the applicable governmental agency.
We estimate a liability for sales returns based on a one-year rolling average of historical return trends, and we believe that our estimate for sales returns is an accurate reflection of future returns associated with past sales. Our estimation methodologies have been consistently applied from year to year; however, as with any estimate, refund activity may vary from estimated amounts. At December 26, 200925, 2010 we had a liability of $3.1$3.0 million reserved for sales returns, compared to $3.2$3.1 million at December 27, 2008.26, 2009.
39
We recognize revenue when a benefit for gift cards when: (i) the gift card or merchandise return card is redeemed by the customer; (ii)customer and recognize income when the likelihood of the gift card or merchandise return card being redeemed by the customer is remote (referred to as “breakage”); or (iii) the unredeemed merchandise returns cards expire (one year from issuance). The gift card and merchandise return card breakage rate is based upon historical redemption patterns and a benefitincome is recognized for unredeemed gift card and merchandise return cards in proportion to those historical redemption patterns. We recognized a benefitincome of $1.6 million, $1.1 million $1.4 million and $1.2$1.4 million in fiscal 2010, 2009 2008 and 2007,2008, respectively.
Inventory Valuation
Inventory Impairment Risk
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. The estimated inventory valuation reserve to recognize any impairment in value (i.e. an inability to realize the full carrying value) is based on our aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies. We do not believe our merchandise inventories are subject to significant risk of obsolescence in the near term. However, changes in market conditions or consumer purchasing patterns could result in the need for additional reserves.
Shrinkage
We perform physical inventories at each store at least once a year, and we have established reserves 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.
Vendor Support
We receive funding from substantially all of our significant merchandise vendors for the promotion of our brand as well as the sale of their products through a variety of programs and arrangements, including guaranteed funding and volume rebate programs. The amounts received are subject to terms of vendor agreements, which have varying expiration dates ranging in duration from several months to a few years. Many agreements are negotiated annually and are 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 the interim periods, the amount of expected funding is estimated based upon initial guaranteed commitments, as well as anticipated purchase levels with applicable vendors. The estimated purchase volume and related vendor funding is based on our current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations. Although we believe we have the ability tocan reasonably estimate purchase volume and related vendor funding at interim periods, it is possible that actual year-end results could differ significantly differ from the previously estimated amounts.
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.
Share-Based Compensation
We have share-based compensation plans, which includesinclude incentive and non-qualified stock options, restricted stock units, and an employee stock purchase plan, covering certain members of management and non-employee directors.
We estimate the fair value of our stock option awards onat the date of grant utilizing aBlack-Scholes option pricing model. TheBlack-Scholesoption valuation model was developed for use in estimating the fair value of short-term traded options that have no vesting restrictions and are fully transferable. However, key assumptions used in theBlack-Scholesmodel are adjusted to incorporate the unique characteristics of our stock option awards. Option pricing models and generally accepted valuation modelstechniques require the input ofmanagement to make subjective assumptions including expected stock price volatility, expected dividend yield, risk-free interest rate and expected life. We rely on historical volatility trends to estimate future volatility assumptions. The risk-free interest rates used were actual U.S. Treasury Constant Maturity rates for bonds matching the expected term of the option on the date of grant. The expected life of the option on the date of grant was estimated based on our historical experience for similar options.
40
In addition to the key assumptions used in theBlack-Scholesmodel, the estimated forfeiture rate at the time of valuation (which is based on historical experience for similar options) is a critical assumption, as it reduces expense ratably over the vesting period. We adjust this estimate periodically, based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
We believe our estimates are reasonable in the context of historical experience. Future results will depend on, among other matters, levels of share-based compensation granted in the future, actual forfeiture rates and the timing of option exercises.
Self-Insurance Reserves
We self-insure a significant portion of our employee medical insurance, workers’ compensation and general liability insurance plans. We have stop-loss insurance policies to protect from individual losses over specified dollar values. The full extent of certain claims, especially workers’ compensation and general liability claims, may not become fully determined for several years. Therefore, we estimate potential obligations for liabilities that have been incurred but not yet reported based upon historical data and experience. Although we believe the reserves established for these obligations are reasonably estimated, any significant increase in the number of claims or costs associated with claims made under these plans could have a material adverse effect on our financial results. At December 26, 2009,25, 2010 , we had recorded net insurance reserves of $23.7$29.0 million compared to $22.6$23.7 million at December 27, 2008.26, 2009.
Sales Tax Audit Reserve
A portion of our sales are to tax-exempt customers. We obtain exemption information as a necessary part of each tax-exempt transaction. Many of the states in which we conduct business will perform audits to verify our compliance with applicable sales tax laws. The business activities of our customers and the intended use of the unique products sold by us create a challenging and complex compliance environment. These circumstances also create some risk that we could be challenged as to the propriety of our sales tax compliance. While we believe we reasonably enforce sales tax compliance with our customers and endeavor to fully comply with all applicable sales tax regulations, there can be no assurance that we, upon final completion of such audits, will not have a significant liabilityliabil ity for disallowed exemptions.
We review our past audit experience and assessments with applicable states to determine if we have potential exposure for non-compliance. Any estimated liability is based on an initial assessment of compliance risk and our to-date experience with each audit. As each audit progresses, we quantify the exposure based on preliminary assessments made by the state auditors, adjusted for additional documentation that may be provided to reduce the assessment. The reserve for these tax audits can fluctuate depending on numerous factors, including the complexity of agricultural-based exemptions, ambiguity in state tax regulations, the number of ongoing audits and the length of time required to settle with the state taxing authorities.
Tax Contingencies
Our income tax returns are periodically audited by U.S. federal and state tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record reserves for probable exposures. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved or clarified. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, the statute of limitations expires for the relevant taxta x authority to examine the tax position or when more information becomes available.
We recognize a liability for certain tax benefits that do not meet the minimum requirements for recognition in the financial statements.
Our tax contingencies reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions and whether or not the minimum requirements for recognition of tax benefits have been met.
41
Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits.
Credit Cards/Accounts Receivable
Sales generated through our private label credit cards are not reflected as accounts receivable. Under an agreement with Citi Cards, a division of Citigroup (“Citigroup”), consumer and business credit is extended directly to customers by Citigroup. All credit program and related services are performed and controlled directly by Citigroup.
Pre-opening Costs
Non-capital expenditures incurred in connection with opening new store and distribution centers, primarily payroll and rent, are expensed as incurred. Preopening costs were approximately $7.1 million, $7.5 million and $8.7 million in 2010, 2009 and $9.4 million in 2009, 2008, and 2007, respectively.
Store Closing Costs
We regularly evaluate the performance of our stores and periodically close those that are under-performing. We record a liability for a cost associated with an exit or disposal activity when the liability is incurred, usually in the period the store closes. Store closing costs were not significant to results of operations for any of the fiscal years presented.
Cash and Cash Equivalents
Temporary cash investments, with a maturity of three months or less when purchased, are considered to be cash equivalents. The majority of payments due from banks for customer credit card transactions process within 24-48 hours and are accordingly classified as cash and cash equivalents.
Fair Value of
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Financial Instruments Not Carried at Fair Value
Our financial instruments consist of cash and cash equivalents, short-term investments, short-term receivables, andtrade payables and long-term debt instruments, including capital leases.instruments. The carrying values of cash and cash equivalents, short-term receivables and trade payables equalapproximate current fair value. We had no borrowings under the Credit Agreementrevolving credit facility at December 25, 2010 and December 26, 2009.
Our short-term investment in a U.S. Treasury note is classified as Level 1 as these types of investments trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. The U.S. Treasury note is held as collateral for a standby letter of credit and is expected to be held to maturity. The fair value of short-term investments at December 25, 2010 was $15.9 million. We had no short-term investments at December 26, 2009 or December 27, 2008.2009.
Inventories
Inventories are stated usingat the lower of LIFO cost, as determined by the average cost method, or market. Quarterly inventory determinations under LIFO are based on assumptions as to projected inventory levels at the endInventory cost consists of the fiscal year, sales for the yeardirect cost of merchandise including freight. Inventories are net of shrinkage, obsolescence, other valuations and the expected rate of inflation/deflation for the year. If the FIFO method of accounting for inventory had been used, inventories would have been approximately $75.2 million and $68.3 million higher than reported at December 26, 2009 and December 27, 2008, respectively.vendor allowances.
Vendor Concentration
Approximately 250 vendors accounted for 90% of our purchases for fiscal 2009,2010, with no one vendor representing more than 10% of purchases during the year.
Cost of Merchandise Sold
Cost of Merchandisemerchandise sold includes the total cost of products sold; freight expenses associated with moving merchandise inventories from our vendors to our distribution centers; from our distribution centers to our retail stores; and from one distribution center to another; vendor support; damaged, junked or defective product; cash discounts from payments to merchandise vendors; and adjustments for shrinkage (physical inventory losses), lower of cost or market valuation, slow moving product and excess inventory quantities and the LIFO inventory valuation.quantities.
42
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) include payroll and benefit costs for retail, distribution center and corporate employees; occupancy costs of retail, distribution center and corporate facilities; advertising; tender costs, including bank charges and costs associated with credit and debit card interchange fees; outside service fees; and other administrative costs, such as computer maintenance, supplies, travel and lodging.
Warehousing and Distribution Costs
Costs incurred at our distribution centers for receiving, warehousing and preparing product for delivery are expensed as incurred and are included in SG&A expenses in the Consolidated Statements of Income. Because the Company does not include these costs in cost of sales, the Company’s gross margin may not be comparable to other retailers that include these costs in the calculation of gross margin. Distribution Centercenter costs for fiscal 2010, 2009 2008 and 20072008 were approximately $64.4 million, $59.0 million $52.8 million and $49.9$52.8 million, respectively.
Property and Equipment
Property and equipment are carried at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Improvements to leased premises are amortized using the straight-line method over the initial term of the lease or the useful life of the improvement, whichever is less. Leasehold improvements added late in the lease term are amortized over the term of the lease (including the first renewal option, if the renewal is reasonably assured) or the useful life of the improvement, whichever is less. The following estimated useful lives are generally applied:
| | | | | |
| | Life | |
| Buildings | | 30 – 35 years |
| Leasehold and building improvements | | 5 – 1535 years |
| Furniture, fixtures and equipment | | 5 – 10 years |
| Computer software and hardware | | 3 – 5 years |
Depreciation and Amortization
Depreciation includes expenses related to all retail, distribution center and corporate assets. Amortization includes expenses related to definite-lived intangible assets.
Capitalized Software Costs
The Company capitalizes certain costs related to the acquisition and development of software and amortizes these costs using the straight-line method over the estimated useful life of the software, which is three to five years. These costs are included in Computercomputer software and hardware in the accompanying Consolidated Balance Sheets. Certain software costs not meeting the criteria for capitalization are expensed as incurred.
Leases
Assets under capital leases are amortized in accordance with our normal depreciation policy for owned assets or over the lease term, if shorter, and the related charge to operations is included in depreciation expense in the Consolidated Statements of Income.
Certain leases include rent increases during the initial lease term. For these leases, we recognize the related rental expense on a straight-line basis over the term of the lease (which includes the pre-opening period of construction, renovation, fixturing and merchandise placement) and record the difference between the expense charged to operations and amounts paid as a deferred rent liability.
We occasionally receive reimbursements from landlords to be used towards improving the related store to be leased. Reimbursements are primarily for the purpose of performing work required to divide a much larger location into smaller segments, one of which we will use for our store. This work could include the addition of demising walls, separation of plumbing, utilities, electric work, entrances (front and back) and other work as required. Leasehold improvements are recorded at their gross costs including items reimbursed by landlords. Related reimbursements are amortized on a straight-line basis as a reduction of rent expense over the initial lease term.
43
Impairment of Long-Lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated undiscounted future cash flows. The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level. The significant assumptions used to determine estimated undiscounted cash flows include cash inflows and outflows directly resulting from the use of those assets in operations, including margin on net sales, payroll and related items, occupancy costs, insurance allocations and other costs to operate a store. If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’sass et’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 useful life of that asset.
In fiscal 2010, the company recognized impairment charges of $1.1 million related to the write-off of certain capitalized software development costs. These assets were not expected to provide any future benefit to the Company and were determined to have no significant fair value. During fiscal year 2009 impairment charges of $0.8 million were recorded representing the amount required to write-down the carrying value of certain leasehold improvements to the assets’ estimated fair value. Impairment charges are included in SG&A expenses in the Consolidated Statement of Income. No significant impairment charges were recognized in fiscal years 2008 and 2007.2008.
Goodwill
Goodwill and intangible assets with indefinite lives are not amortized. We evaluate goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of the goodwill may not be recoverable. We complete our impairment evaluation by performing internal valuation analyses, considering other publicly available market information and using an independent valuation firm, as appropriate. All goodwill at December 25, 2010 is associated with the Company as a whole. At December 26, 2009 and December 27, 2008 isall goodwill was associated with the Del’s business and, for purposes of the fiscal 2009 impairment testing, Del’s iswas considered the reporting unit. In October 2010, we reevaluated the Del’s reporting unit and concluded that since Del’s has be come closely aligned in terms of management, infrastructure, philosophy and performance, we now have only one reporting unit for goodwill impairment evaluation.
The test for goodwill impairment is a two step process. The first step of the goodwill impairment test, used to identify the potential for impairment, compares the fair value of a reporting unit with the carrying value of its net assets, including goodwill. If the fair value of the reporting unit is less than the carrying value of the reporting unit, the second step of the goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any. The second step, if required, would compare the implied fair value of goodwill with the current carrying amount of goodwill. If the implied fair value of goodwill is less than the carrying value, an impairment charge would be recorded as a charge to our operations.
In the fourth quarter of fiscal 2009,2010, we completed our annual impairment testing of goodwill and determined there was no impairment. We determined that the fair value of the Del’s reporting unit (including goodwill) was in excess of the carrying value of the reporting unit and as such, the second step was not necessary. In reaching this conclusion, the fair value of the Del’s reporting unit was determined based on a weighting of income and market approaches. Under the income approach, the fair value of the Del’s reporting unit is calculated as the present value of estimated future cash flows.approach. Under the market approach, the fair value is based on observed market multiples for comparable businesses and guideline transactions. Both of these approaches involve the use of significant estimates as to revenues, gross margin, operating costs and cash flows. We considered historical and estimated future results, economic and market conditions and the impact of planned business and operational strategies in deriving these estimates.prices.
Advertising Costs
Advertising costs consist of expenses incurred in connection with newspaper circulars, television and radio, as well as direct mail, newspaper advertisements and other promotions. Costs are expensed when incurred with the exception of television advertising and circular and direct mail promotions, which are expensed upon first showing. Advertising expenses for fiscal 2010, 2009 2008 and 20072008 were approximately $48.6 million, $45.7 million $58.0 million and $58.6$58.0 million, respectively. Prepaid advertising costs were approximately $0.2$0.1 million and $0.4$0.2 million at December 25, 2010 and December 26, 2009, and December 27, 2008, respectively.
44
Income Taxes
We account for income taxes using the liability method, whereby deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be recovered or settled.
Net Income Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by dividing net income by the weighted average diluted shares outstanding. Diluted shares are computed using the treasury stock method for options.options and restricted stock units.
Foreign Currency Translation
Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive loss in stockholders’ equity. The assets and liabilities of our store in British Columbia, which was sold in fiscal 2007, were translated into United States dollars at year-end rates of exchange, while revenues and expense items were translated at average rates for the period.
Note 2 —- Share-Based Compensation:
We recognize share-based compensation expense based on the fair value of the awards.
Share-based compensation includes stock option and restricted stock unit grantsawards and certain transactions under our Employee Stock Purchase Plan (the “ESPP”). Share-based compensation expense is recognized based on grant date fair value of all options and therestricted stock unit awards plus a discount on shares sold topurchased by employees whichas a part of the ESPP. The discount under the ESPP represents the difference between the grant date fairmarket value and the employeeemployee’s purchase price.
Share-based compensation expense including reductions in expense for modifications of awards lowered pre-tax income bywas $11.8 million, $12.1 million $12.3 million and $10.6$12.3 million for fiscal 2010, 2009 and 2008, and 2007, respectively.
Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Effective May 7, 2009, the Company adopted the 2009 Stock Incentive Plan replacing the 2006 Stock Incentive Plan. Following the adoption of the 2009 Stock Incentive Plan, no further grants may be made under the 2006 Stock Incentive Plan.
Under our 2009 Stock Incentive Plan, options may be granted to officers, non-employee directors and other employees. The per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than ten years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $100,000. Vesting of options commences at various anniversary dates following the dates of grant.
Under the terms of the 2009 Stock Incentive Plan, a maximum of 3,100,0006,200,000 shares are available for grant as stock options or other awards. At December 26, 2009,25, 2010, we had 3,082,0605,146,530 shares available for future equity awards under the Company’s 2009 Stock Incentive Plan.
45
The fair value of each option grant is separately estimated for each vesting date. The fair value of each option is recognized as compensation expense ratably over the vesting period. We have estimated the fair value of all stock option awards as of the date of the grant by applying aBlack-Scholespricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense. The weighted averages for key assumptions used in determining the fair value of options granted during fiscal 2010, 2009 2008 and 2007,2008, as well as a summary of the methodology applied to develop each assumption, are as follows:
| | | | | | | |
| | | Fiscal Year |
| | | 2009 | | 2008 | | 2007 |
| Expected price volatility | | 39.3 – 54.0% | | 37.6 – 39.7% | | 38.1 – 41.7% |
| Risk-free interest rate | | 0.6 – 2.5% | | 1.6 – 3.5% | | 4.1 – 5.0% |
| Weighted average expected lives (in years) | | 4.7 – 5.6 | | 4.4 – 5.5 | | 4.1 – 5.4 |
| Forfeiture rate | | 1.4 – 8.0% | | 1.4 – 7.1% | | 1.4 – 8.0% |
| Dividend yield | | 0.0% | | 0.0% | | 0.0% |
Expected Price Volatility —This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. We use actual historical changes in the market value of the stock to calculate expected price volatility because we believe that this is the best indicator of future volatility. We calculate daily market value changes from the date of grant over a past period generally representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.
Risk-Free Interest Rate —This is the U.S. Treasury Constant Maturity rate over a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.| | | Fiscal Year | |
| | | 2010 | | | 2009 | | | 2008 | |
| Expected price volatility | | | 38.5 – 38.9 | % | | | 39.3 – 54.0 | % | | | 37.6 – 39.7 | % |
| Risk-free interest rate | | | 1.0 – 2.7 | % | | | 0.6 – 2.5 | % | | | 1.6 – 3.5 | % |
| Weighted average expected lives (in years) | | | 4.8 – 5.8 | | | | 4.7 – 5.6 | | | | 4.4 – 5.5 | |
| Forfeiture rate | | | 5.4 – 7.7 | % | | | 1.4 – 8.0 | % | | | 1.4 – 7.1 | % |
| Dividend yield | | | 0.0 – 1.0 | % | | | 0.0 | % | | | 0.0 | % |
Weighted Average Expected Lives —This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options granted generally have a maximum term of ten years. An increase in the expected life will increase compensation expense.
Forfeiture Rate —This is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested. This estimate is based on historical experience. | Expected Price Volatility —This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. We use actual historical changes in the market value of the stock to calculate expected price volatility because we believe that this is the best indicator of future volatility. We calculate daily market value changes from the date of grant over a past period generally representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase in the forfeiture rate will decrease compensation expense. |
Dividend Yield —We have not made any dividend payments. An increase in the dividend yield will decrease compensation expense. | Risk-Free Interest Rate — This is the U.S. Treasury Constant Maturity rate over a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense. |
| Weighted Average Expected Lives — This is the period of time over which the options granted are expected to remain outstanding and is based on historical experience. Options granted generally have a maximum term of ten years. An increase in the expected life will increase compensation expense. |
| Forfeiture Rate — This is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested. This estimate is based on historical experience. An increase in the forfeiture rate will decrease compensation expense. |
| Dividend Yield —This is the estimated dividend yield for the weighted average expected life of the option granted. An increase in the dividend yield will decrease compensation expense. |
Stock Options
We issue new shares for options when exercised. A summary of stock option activity is as follows:
| | | | | | | | | | | | | | | | | | |
| | | Weighted | | Weighted Average | | Aggregate | | |
| | | Average Exercise | | Remaining | | Intrinsic Value | | |
| | | Options | | Price | | Contractual Term | | (in thousands) | | |
| Outstanding December 30, 2006 | | 2,391,361 | | $ | 29.32 | | 6.5 | | $ | 45,301 | | |
| Granted | | 579,666 | | 46.78 | | |
| Exercised | | | (371,823 | ) | | 15.03 | | |
| Canceled | | | (310,878 | ) | | 49.62 | | |
| | | | | | | |
| | | | Options | | | Weighted Average Exercise Price | | | Weighted Average Fair Value | | | Weighted Average Remaining Contractual Term | | | Aggregate Intrinsic Value (in thousands) | |
| Outstanding December 29, 2007 | | 2,288,326 | | $ | 33.31 | | 6.4 | | $ | 22,485 | | | | 4,576,652 | | | $ | 16.66 | | | | | | | 6.4 | | | $ | 22,485 | |
| Granted | | 653,350 | | 38.34 | | | | 1,306,700 | | | | 19.17 | | | $ | 7.27 | | | | | | | | | |
| Exercised | | | (113,319 | ) | | 12.98 | | | | (226,638 | ) | | | 6.49 | | | | | | | | | | | | | |
| Canceled | | | (274,350 | ) | | 45.99 | | | | (548,700 | ) | | | 23.00 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Outstanding December 27, 2008 | | 2,554,007 | | $ | 34.14 | | 6.2 | | $ | 19,296 | | | | 5,108,014 | | | $ | 17.07 | | | | | | | | 6.2 | | | $ | 19,296 | |
| Granted | | 563,066 | | 34.56 | | | | 1,126,132 | | | | 17.28 | | | $ | 6.48 | | | | | | | | | |
| Exercised | | | (377,674 | ) | | 11.66 | | | | (755,348 | ) | | | 5.83 | | | | | | | | | | | | | |
| Canceled | | | (88,977 | ) | | 46.02 | | | | (177,954 | ) | | | 23.01 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding December 26, 2009 | | | | 5,300,844 | | | $ | 18.53 | | | | | | | | 6.4 | | | $ | 47,413 | |
Granted | | | | 908,728 | | | | 26.70 | | | $ | 10.32 | | | | | | | | | |
Exercised | | | | (1,550,077 | ) | | | 14.28 | | | | | | | | | | | | | |
Canceled | | | | (144,638 | ) | | | 21.82 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Outstanding December 26, 2009 | | 2,650,422 | | $ | 37.05 | | 6.4 | | $ | 47,413 | | |
| Outstanding December 25, 2010 | | | | 4,514,857 | | | $ | 21.52 | | | | | | | | 6.7 | | | $ | 121,350 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Exercisable at December 26, 2009 | | 1,566,916 | | $ | 36.97 | | 5.1 | | $ | 29,144 | | |
| | | | | | | | | |
| Exercisable at December 25, 2010 | | | | 2,631,276 | | | $ | 21.18 | | | | | | | | 5.5 | | | $ | 71,618 | |
The aggregate intrinsic values in the table above represents the total difference between our closing stock price at each year-end and the option exercise price, multiplied by the number of in-the-money options at each year-end. As of December 26, 2009,25, 2010, total unrecognized compensation expense related to non-vested stock options is $8,841,000$9,156,000 with a weighted average expense recognition period of 1.31.4 years.
46
The following summarizes information concerning stock option grants during fiscal 2009, 2008 and 2007:
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Options granted with exercise price equal to market value: | | | | | | | | | | | | |
| Weighted average exercise price | | $ | 34.56 | | | $ | 38.34 | | | $ | 46.15 | |
| Weighted average fair value | | $ | 12.96 | | | $ | 14.54 | | | $ | 19.39 | |
| Stock options granted | | | 563,066 | | | | 653,350 | | | | 473,748 | |
During fiscal 2007, certain options were modified to immediately vest and extend the related exercise period, effectively resulting in a cancellation of existing options and grant of new options (thereThere were no material modifications to options in 20082010, 2009 or 2009). The options retained the original exercise price and, as a result, the modified options had exercise prices both above and below the modification date fair market value. The following summarizes the activity related to these modifications:2008.
| | | | | |
| | | 2007 | |
| Options granted with exercise price greater than market value: | | | | |
| Weighted average exercise price | | $ | 58.87 | |
| Weighted average fair value | | $ | 0.93 | |
| Stock options granted | | | 55,668 | |
| | | | | |
| Options granted with exercise price less than market value: | | | | |
| Weighted average exercise price | | $ | 39.11 | |
| Weighted average fair value | | $ | 2.16 | |
| Stock options granted | | | 50,250 | |
Other information relative to option activity during fiscal 2010, 2009 2008 and 20072008 is as follows (in thousands, except per share amounts)thousands):
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Weighted average grant date fair value of stock options granted | | $ | 12.96 | | | $ | 14.54 | | | $ | 16.15 | |
| Total fair value of stock options vested | | $ | 10,225 | | | $ | 9,192 | | | $ | 10,748 | |
| Total intrinsic value of stock options exercised | | $ | 12,742 | | | $ | 2,561 | | | $ | 12,075 | |
| | | 2010 | | | 2009 | | | 2008 | |
| Total fair value of stock options vested | | $ | 8,417 | | | $ | 10,225 | | | $ | 9,192 | |
| Total intrinsic value of stock options exercised | | $ | 31,388 | | | $ | 12,742 | | | $ | 2,561 | |
Restricted Stock Units
We issue shares for restricted stock unit awards once vesting occurs and related restrictions lapse. The units vest over a one to three-year term. The status of restricted stock units is presented below:
| | | | | | | | | | |
| | | Weighted | | |
| | | Average | | |
| | | Grant Date | | |
| Restricted Stock Units | | Shares | | Fair Value | | | Shares | | | Weighted Average Grant Date Fair Value | |
| Restricted at December 30, 2006 | | 2,480 | | $ | 64.45 | | |
| Granted | | 68,889 | | 46.01 | | |
| Exercised | | — | | — | | |
| Forfeited | | | (7,500 | ) | | 46.17 | | |
| | | | | | | |
| | | |
| Restricted at December 29, 2007 | | 63,869 | | 46.71 | | | | 127,738 | | | $ | 23.36 | |
| Granted | | 89,958 | | 38.33 | | | | 179,916 | | | | 19.17 | |
| Exercised | | | (1,010 | ) | | 59.37 | | | | (2,020 | ) | | | 29.69 | |
| Forfeited | | | (14,114 | ) | | 42.00 | | | | (28,228 | ) | | | 21.00 | |
| | | | | | | |
| | | | | | | | | | |
| Restricted at December 27, 2008 | | 138,703 | | 41.66 | | | | 277,406 | | | $ | 20.83 | |
| Granted | | 154,051 | | 34.99 | | | | 308,102 | | | | 17.50 | |
| Exercised | | | (5,448 | ) | | 38.06 | | | | (10,896 | ) | | | 19.03 | |
| Forfeited | | | (7,914 | ) | | 40.73 | | | | (15,828 | ) | | | 20.37 | |
| | | | | | | | | | | | | | |
| Restricted at December 26, 2009 | | | | 558,784 | | | $ | 19.04 | |
| Granted | | | | 148,862 | | | | 27.37 | |
| Exercised | | | | (119,184 | ) | | | 22.10 | |
| Forfeited | | | | (38,284 | ) | | | 19.28 | |
| | | | | | | | | | |
| Restricted at December 26, 2009 | | 279,392 | | $ | 38.08 | | |
| | | | | | | |
| Restricted at December 25, 2010 | | | | 550,178 | | | $ | 20.61 | |
Other information relative to restricted unit activity during fiscal 2010, 2009 and 2008 is as follows (in thousands):
| | | 2010 | | | 2009 | | | 2008 | |
| Total grant date fair value of restricted units vested and exercised | | $ | 2,634 | | | $ | 207 | | | $ | 60 | |
| Total intrinsic value of restricted units vested and exercised | | $ | 3,329 | | | $ | 180 | | | $ | 40 | |
| | | | | | | | | | | | | |
For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory tax withholding requirements that we pay on behalf of our employees. We issued 90,203, 10,896, and 2,020 shares as a result of vested restricted stock units during fiscal 2010, 2009 and 2008, respectively. The 2010 amount is net of 28,981 shares, withheld to satisfy $0.8 million of employees’ tax obligations. Although shares withheld are not issued, they are treated similar to common stock repurchases as they reduce the number of shares that would have been issued upon vesting.
There were no material modifications to restricted stock units in 2010, 2009, or 2008.
As of December 26, 2009,25, 2010, total unrecognized compensation expense related to non-vested restricted stock units is $4,973,000$4,705,000 with a weighted average expense recognition period of 1.81.7 years.
47
Employee Stock Purchase Plan
The ESPP provides our employees the opportunity to purchase, through payroll deductions, shares of common stock at a 15% discount. Pursuant to the terms of the ESPP, we issued 50,735, 61,34874,788, 101,470 and 46,654122,696 shares of common stock during fiscal 2010, 2009 2008 and 2007,2008, respectively. The total cost related to the ESPP, including the compensation expense calculations, was approximately $439,000, $449,000 $485,000 and $556,000$485,000 in fiscal 2010, 2009 and 2008, and 2007, respectively. In connection with the stock split, the number of shares of our common stock that are reserved under the ESPP increased from 4,000,000 shares to 8,000,000 shares. At December 26, 2009,25, 2010, there were 3,187,3206,299,852 shares of common stock reserved for future issuance under the ESPP.
There were no significant modifications to the Company’sCompany's share-based compensation plans during fiscal 2009 (provided that, as noted above, the Company adopted its 2009 Stock Incentive Plan in replacement of its 2006 Stock Incentive Plan, effective May 7, 2009).2010.
Note 3 —- Credit Agreement:
We are party to a Senior Credit Facility with Bank of America, N.A., as agent for a lender group (the “Credit Agreement”), which provides for borrowings up to $350 million (with sublimits of $75 million and $20 million for letters of credit and swingline loans, respectively). The Credit Agreement has an Increase Option for $150 million (subject to additional lender group commitments). The Credit Agreement is unsecured and matures in February 2012, with proceeds expected to be used for working capital, capital expenditures and share repurchases.
At December 25, 2010 and December 26, 2009, and December 27, 2008, there were no outstanding borrowings under the Credit Agreement. There were $35.2$27.4 million and $25.1$35.2 million outstanding letters of credit as of December 26, 200925, 2010 and December 27, 2008,26, 2009, respectively. Borrowings bear interest at either the bank’s base rate (3.25% at December 26, 2009)25, 2010) or the London Inter-Bank Offer Rate (0.23%(0.26% at December 26, 2009)25, 2010) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly based on our performance (0.50%(0.40% at December 26, 2009)25, 2010). We are also required to pay, quarterly in arrears, a commitment fee ranging from 0.06% to 0.18% per annum and adjusted quarterly based on our performance, for unused capacity (0.10%(0.075% at December 26, 2009)25, 2010). There are no compensating balance requirements associated with the Credit Agreement.
The Credit Agreement requires quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. The fixed charge coverage ratio principally compares consolidated EBITDAR to the sum of interest paid and rental expense (excluding straight-line rent). The leverage ratio principally compares total debt plus rental expense (excluding straight-line rent) multiplied by a factor of six to consolidated EBITDAR. The Credit Agreement also contains certain other restrictions regarding additional indebtedness, capital expenditures, business operations, guarantees, investments, mergers, consolidations and sales of assets, transactions with subsidiaries or affiliates, and liens. We were in compliance with all covenants at December 26, 2009.25, 2010.
Note 4 —- Leases:
We lease the majority of our office space and retail store locations, certain distribution centers, transportation equipment and other equipment under various noncancellable operating leases. The leases have varying terms and expire at various dates through 2029 and 2025 for capital leases and operating leases, respectively. Store leases typically have initial terms of between 10 and 15 years, with two to four optional renewal periods of five years each. Some leases require the payment of contingent rent that is based upon store sales above agreed-upon sales levels for the year. The sales levels vary for each store and are established in the lease agreements. Generally, most of the leases also require that we pay associated taxes, insurance and maintenance costs.
Total rent expense for fiscal 2010, 2009 2008 and 20072008 was approximately $169.4 million, $162.2 million $144.4 million and $124.2$144.4 million, respectively. Total contingent rent expense for fiscal 2010, 2009 2008 and 20072008 was insignificant.
48
Future minimum payments, by year and in the aggregate, under leases with initial or remaining terms of one year or more consist of the following (in thousands):
| | | | | | | | | | | Capital Leases | | | Operating Leases | |
| | | Capital | | Operating | | | | | | | |
| | | Leases | | Leases | | |
| | | |
| 2010 | | $ | 526 | | $ | 161,214 | | |
| 2011 | | 206 | | 159,263 | | | $ | 206 | | | $ | 174,846 | |
| 2012 | | 146 | | 151,966 | | | | 146 | | | | 170,642 | |
| 2013 | | 146 | | 145,391 | | | | 146 | | | | 164,498 | |
| 2014 | | 146 | | 134,869 | | | | 146 | | | | 153,812 | |
| 2015 | | | | 146 | | | | 143,470 | |
| Thereafter | | 2,072 | | 732,276 | | | | 1,926 | | | | 737,760 | |
| | | | | | | |
| Total minimum lease payments | | 3,242 | | $ | 1,484,979 | | | | 2,716 | | | $ | 1,545,028 | |
| | | | | |
| Amount representing interest | | | (1,443 | ) | | | | (1,309 | ) | | | | |
| | | | | |
| Present value of minimum lease payments | | 1,799 | | | | 1,407 | | | | | |
| Less: current portion | | | (392 | ) | | | | (91 | ) | | | | |
| | | | | |
| Long-term capital lease obligations | | $ | 1,407 | | | $ | 1,316 | | | | | |
| | | | | |
Assets under capital leases were as follows (in thousands):
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Building and improvements | | $ | 1,581 | | | $ | 1,581 | |
| Computer software and hardware | | | 3,022 | | | | 3,553 | |
| Less: accumulated depreciation and amortization | | | (3,198 | ) | | | (3,068 | ) |
| | | | | | | |
| | | $ | 1,405 | | | $ | 2,066 | |
| | | | | | | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Building and improvements | | $ | 1,581 | | | $ | 1,581 | |
| Computer software and hardware | | | 2,363 | | | | 3,022 | |
| Less: accumulated depreciation and amortization | | | (2,915 | ) | | | (3,198 | ) |
| | | $ | 1,029 | | | $ | 1,405 | |
Note 5 —- Capital Stock:
The authorized capital stock of the Company consists of common stock and preferred stock. The Company is authorized to issue 100,000,000 shares of common stock. The Company is also authorized to issue 40,000 shares of Preferred Stock, with such designations, rights and preferences as may be determined from time to time by the Board of Directors.
Note 6 —- Treasury Stock:
We have a Board-approved share repurchase program which provides for repurchase of up to $400 million of common stock, exclusive of any fees, commissions, or other expenses related to such repurchases, through December 2011. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares will be held in treasury. The program may be limited or terminated at any time without prior notice.
We repurchased 0.8 million, 0.4 million 1.6 million and 3.21.6 million shares under the share repurchase program for a total cost of $38.2 million, $15.3 million $53.9 million and $150.0$53.9 million in fiscal 2010, 2009 and 2008, and 2007, respectively. As mentioned in Note 1, the shares added to treasury were not adjusted for the stock split. As of December 26, 2009,25, 2010, we had remaining authorization under the share repurchase program of $181.0$142.8 million exclusive of any fees, commissions, or other expenses.
Note 7 — Comprehensive Income:
Comprehensive income for each fiscal year is as follows (in thousands):
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Net income | | $ | 115,466 | | | $ | 81,930 | | | $ | 96,241 | |
| Foreign currency translation adjustment | | | — | | | | — | | | | 22 | |
| | | | | | | | | | |
| Comprehensive income | | $ | 115,466 | | | $ | 81,930 | | | $ | 96,263 | |
| | | | | | | | | | |
49
Note 8 —- Net Income Per Share:
Net income per share is calculated as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | |
| | | 2009 | |
| | | Net | | | | | | | Per Share | |
| | | Income | | | Shares | | | Amount | |
| Basic net income per share: | | | | | | | | | | | | |
| Net income | | $ | 115,466 | | | | 35,990 | | | $ | 3.21 | |
| Dilutive stock options and restricted stock units outstanding | | | — | | | | 659 | | | | (0.06 | ) |
| | | | | | | | | | |
| Diluted net income per share | | $ | 115,466 | | | | 36,649 | | | $ | 3.15 | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | 2010 | |
| | | | Net Income | | | Shares | | | Per Share Amount | |
| Basic net income per share: | | | | | | | | | | |
Net income | | | $ | 167,972 | | | | 72,597 | | | $ | 2.31 | |
Dilutive stock options and restricted stock units outstanding | | | | -- | | | | 2,089 | | | | (0.06 | ) |
| Diluted net income per share | | | $ | 167,972 | | | | 74,686 | | | $ | 2.25 | |
| | | 2008 | | | | |
| | | Net | | Per Share | | | 2009 | |
| | | Income | | Shares | | Amount | | | Net Income | | | Shares | | | Per Share Amount | |
| Basic net income per share: | | | | | | | | | | | | | |
| Net income | | $ | 81,930 | | 36,830 | | $ | 2.22 | | | $ | 119,745 | | | | 71,981 | | | $ | 1.66 | |
| Dilutive stock options and restricted stock units outstanding | | — | | 634 | | | (0.03 | ) | | | -- | | | | 1,316 | | | | (0.03 | ) |
| | | | | | | | | |
| Diluted net income per share | | $ | 81,930 | | 37,464 | | $ | 2.19 | | | $ | 119,745 | | | | 73,297 | | | $ | 1.63 | |
| | | | | | | | | | | |
| | | | 2008 | |
| | | | Net Income | | | Shares | | | Per Share Amount | |
| Basic net income per share: | | | | | | | | | | | | | |
Net income | | | $ | 107,993 | | | | 73,661 | | | $ | 1.47 | |
Dilutive stock options and restricted stock units outstanding | | | | -- | | | | 1,266 | | | | (0.03 | ) |
| Diluted net income per share | | | $ | 107,993 | | | | 74,927 | | | $ | 1.44 | |
| | | | | | | | | | | | | |
| | | 2007 | |
| | | Net | | | | | | | Per Share | |
| | | Income | | | Shares | | | Amount | |
| Basic net income per share: | | | | | | | | | | | | |
| Net income | | $ | 96,241 | | | | 39,220 | | | $ | 2.45 | |
| Dilutive stock options and restricted stock units outstanding | | | — | | | | 880 | | | | (0.05 | ) |
| | | | | | | | | | |
| Diluted net income per share | | $ | 96,241 | | | | 40,100 | | | $ | 2.40 | |
| | | | | | | | | | |
Anti-dilutive stock options excluded from the above calculations totaled 1,652,937, 1,637,286521,941, 3,305,874 and 1,052,6033,274,572 in 2010, 2009 2008 and 20072008, respectively.
Note 98 – Income Taxes:
All amounts in this footnote reflect the change in method of accounting for inventory as discussed in Note 1.
The provision for income taxes consists of the following (in thousands):
| | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | 2010 | | | 2009 | | | 2008 | |
| Current tax expense: | | | | | | | | | | |
| Federal | | $ | 71,640 | | $ | 46,489 | | $ | 49,395 | | | $ | 85,854 | | | $ | 72,398 | | | $ | 46,664 | |
| State | | 9,480 | | 3,995 | | 2,321 | | | | 7,444 | | | | 9,427 | | | | 3,495 | |
| | | | | | | | | |
| Total current | | 81,120 | | 50,484 | | 51,716 | | | | 93,298 | | | | 81,825 | | | | 50,159 | |
| | | | | | | | | |
| | | | | | | | | | | | | | |
| Deferred tax expense (benefit): | | | | | | | | | | | | | |
| Federal | | | (10,926 | ) | | 1,096 | | 4,449 | | | | 2,116 | | | | (9,425 | ) | | | 14,955 | |
| State | | | (2,671 | ) | | | (74 | ) | | 2,598 | | | | 1,554 | | | | (2,224 | ) | | | 3,123 | |
| | | | | | | | | |
| Total deferred | | | (13,597 | ) | | 1,022 | | 7,047 | | | | 3,670 | | | | (11,649 | ) | | | 18,078 | |
| | | | | | | | | |
| Total provision | | $ | 67,523 | | $ | 51,506 | | $ | 58,763 | | | $ | 96,968 | | | $ | 70,176 | | | $ | 68,237 | |
| | | | | | | | | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| Current tax assets: | | | | | | | | |
| Inventory valuation | | $ | 8,462 | | | $ | 8,153 | |
| Accrued employee benefit costs | | | 14,955 | | | | 7,466 | |
| Accrued sales taxes | | | 3,280 | | | | 139 | |
| Other | | | 4,651 | | | | 4,671 | |
| | | | | | | |
| | | | 31,348 | | | | 20,429 | |
| | | | | | | |
| | | | | | | | | |
| Current tax liabilities: | | | | | | | | |
| Inventory basis difference | | | (11,995 | ) | | | (17,653 | ) |
| Other | | | (1,444 | ) | | | (1,100 | ) |
| | | | | | | |
| | | | (13,439 | ) | | | (18,753 | ) |
| | | | | | | |
| Net current tax asset | | $ | 17,909 | | | $ | 1,676 | |
| | | | | | | |
| | | | | | | | | |
50
| | | 2010 | | | 2009 | |
| Current tax assets: | | | | | | |
Inventory valuation | | $ | 8,738 | | | $ | 8,463 | |
Accrued employee benefit costs | | | 21,209 | | | | 14,956 | |
Accrued sales taxes | | | 2,687 | | | | 1,810 | |
Other | | | 5,972 | | | | 6,122 | |
| | | | 38,606 | | | | 31,351 | |
| Current tax liabilities: | | | | | | | | |
Inventory basis difference | | | (45,952 | ) | | | (41,412 | ) |
Other | | | (1,508 | ) | | | (1,444 | ) |
| | | | (47,460 | ) | | | (42,856 | ) |
| Net current tax liability | | $ | (8,854 | ) | | $ | (11,505 | ) |
| | | | | | | | | |
| Non-current tax assets: | | | | | | | | |
Capital lease obligation basis difference | | $ | 1,018 | | | $ | 1,017 | |
Rent expenses in excess of cash payments required | | | 21,066 | | | | 18,677 | |
Deferred compensation | | | 13,870 | | | | 11,113 | |
Other | | | 1,933 | | | | 2,981 | |
| | | | 37,887 | | | | 33,788 | |
| Non-current tax liabilities: | | | | | | | | |
Depreciation | | | (30,696 | ) | | | (21,825 | ) |
Capital lease assets basis difference | | | (551 | ) | | | (571 | ) |
Other | | | (890 | ) | | | (301 | ) |
| | | | (32,137 | ) | | | (22,697 | ) |
| Net non-current tax asset | | $ | 5,750 | | | $ | 11,091 | |
| | | | | | | | | |
| Net deferred tax liabilities | | $ | (3,104 | ) | | $ | (414 | ) |
| | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | | | | |
| Non-current tax assets: | | | | | | | | |
| Capital lease obligation basis difference | | $ | 1,017 | | | $ | 1,013 | |
| Rent expenses in excess of cash payments required | | | 18,675 | | | | 15,720 | |
| Deferred compensation | | | 11,113 | | | | 7,086 | |
| Other | | | 2,981 | | | | 2,271 | |
| | | | | | | |
| | | | 33,786 | | | | 26,090 | |
| | | | | | | |
| | | | | | | | | |
| Non-current tax liabilities: | | | | | | | | |
| Depreciation | | | (21,823 | ) | | | (11,376 | ) |
| Capital lease assets basis difference | | | (570 | ) | | | (597 | ) |
| Other | | | (302 | ) | | | (390 | ) |
| | | | | | | |
| | | | (22,695 | ) | | | (12,363 | ) |
| | | | | | | |
| Net non-current tax asset | | $ | 11,091 | | | $ | 13,727 | |
| | | | | | | |
We have evaluated the need for a valuation allowance for all or a portion of the deferred tax assets and we believe that all of the deferred tax assets will more likely than not be realized through future earnings.
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows (in thousands):
| | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | | |
| Tax provision at statutory rate | | $ | 64,047 | | $ | 46,702 | | $ | 54,252 | | | $ | 92,729 | | | $ | 66,473 | | | $ | 61,680 | |
| Tax effect of: | | | | | | | | | | | | | |
| State income taxes, net of federal tax benefits | | 4,455 | | 2,549 | | 3,205 | | | | 5,848 | | | | 4,682 | | | | 4,302 | |
| Permanent differences | | | (979 | ) | | 2,255 | | 1,306 | | | | (1,609 | ) | | | (979 | ) | | | 2,255 | |
| | | | | | | | | | $ | 96,968 | | | $ | 70,176 | | | $ | 68,237 | |
| | | $ | 67,523 | | $ | 51,506 | | $ | 58,763 | | |
| | | | | | | | | |
The Company and its affiliates file income tax returns in the U. S.U.S. and various state and local jurisdictions. With few exceptions, we are no longer subject to federal, state and local income tax examinations by tax authorities for years before 2004.2005. Various states have completed an examination of our income tax returns for 2001 through 2007.2008.
As a result of adopting new accounting guidance for accounting for uncertainty in income taxes, we recognized a $1.9 million increase (net of applicable federal tax benefit) in the liability for unrecognized tax benefits, including interest, which was accounted for as a reduction to the December 30, 2006 balance of retained earnings.
The total amount of unrecognized tax benefits that, if recognized, would decrease the effective tax rate, is $2.9$3.7 million at December 26, 2009.25, 2010. In addition, we recognize current interest and penalties accrued related to these uncertain tax positions as interest expense, (a component of total operating expenses) and the amount is not material to the Consolidated Statements of Income. A reconciliation of the beginning and ending gross amount of unrecognized tax benefits (exclusive of interest and penalties) is as follows (in thousands):
| | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | |
| Balance at beginning of year | | $ | 3,052 | | | $ | 4,236 | | | $ | 3,558 | |
| Additions based on tax positions related to the current year | | | 1,295 | | | | 762 | | | | 812 | |
| Additions for tax positions of prior years | | | 437 | | | | — | | | | 278 | |
| Reductions for tax positions of prior years | | | (688 | ) | | | (520 | ) | | | (377 | ) |
| Reductions due to audit results | | | (207 | ) | | | (1,426 | ) | | | (35 | ) |
| | | | | | | | | | |
| Balance at end of year | | $ | 3,889 | | | $ | 3,052 | | | $ | 4,236 | |
| | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| Balance at beginning of year | | $ | 4,084 | | | $ | 3,249 | | | $ | 4,236 | |
Additions based on tax positions related to the current year | | | 1,453 | | | | 1,293 | | | | 959 | |
Additions for tax positions of prior years | | | -- | | | | 437 | | | | -- | |
Reductions for tax positions of prior years | | | (736 | ) | | | (688 | ) | | | (520 | ) |
Reductions due to audit results | | | -- | | | | (207 | ) | | | (1,426 | ) |
| Balance at end of year | | $ | 4,801 | | | $ | 4,084 | | | $ | 3,249 | |
Note 10 —9 - Retirement Benefit Plans:
We have a defined contribution benefit plan, the Tractor Supply Company 401(k) Retirement Savings Plan (the “Plan”), which provides retirement benefits for our employees. Employees become eligible on the first month following their fulfillment of the eligibility requirements. To be eligible, an employee must be at least 21 years of age, have completed 12 months of employment, and performed 1,000 hours of service in a year of service as defined by the Plan. We match (in cash) 100% of the employee’s elective contributions up to 3% of the employee’s eligible compensation plus 50% of the employee’s elective contributions from 3% to 6% of the employee’s eligible compensation. In no event shall the total Company match made on behalf of the employee exceed 4.5% of the employee’s eligible compensation. All current contributions are immediately 100% vested. Company contributions to the Plan during fiscal 2010, 2009 2008 and 2007,2008, were approximately $3.7 million, $3.2 million and $2.8 million, and $2.6 million, respectively.
51
We offer, through a deferred compensation program, the opportunity for certain qualifying employees to elect a deferral of up to 40% of their annual base salary and up to 100% of their annual incentive bonus under their respective incentive bonus programs. To be eligible for the salary deferral, each participant must contribute the maximum amount of salary to the Tractor Supply Company 401(k) Retirement Savings Plan subject to the Company’s match. Under the deferred compensation program, the participants’ salary deferral is matched by the Company, 100% on the first $3,000 of base salary contributed and 50% on the next $3,000 of base salary contributed limited to a maximum annual matching contribution of $4,500. Each participant’s account earns simple annual interest at the prime rate as in effect on January 1 each year. EachEa ch participant is fully vested in all amounts credited to their deferred compensation account. Payments under the program, which are made in cash and paid in ten annual installments or in a single lump sum payment at the election of the participant, are made within 30 days following the earlier of the participant’s (i) death, (ii) retirement, plus six months if the participant is a key employee, (iii) total and permanent disability, (iv) separation from service, plus six months if the participant is a key employee, or (v) some other date designated by the participant at the time of the initial deferral. The Company’s contributions, including accrued interest, were $0.3 million $0.3 millionin each of the fiscal years 2010, 2009 and $0.5 million for fiscal 2009, 2008 and 2007, respectively.2008.
Note 11 —10 – Commitments and Contingencies:
Construction and Real Estate Commitments
We
At December 25, 2010, we had commitments related to construction projects for new store construction projectsstores and a distribution center totaling approximately $2.7 million at December 26, 2009.$32.2 million.
Litigation
The Company received and responded to a Request for Information from the United States Environmental Protection Agency (“EPA”) relating to certain recreational vehicles and non-road spark ignition engines sold by the Company. In the first quarter of fiscal 2011, the Environmental Enforcement Section of the Department of Justice (“DOJ”), on behalf of the EPA, informed the Company that it believed the Company had violated the Clean Air Act by importing or causing the importation of certain engines not covered by certificates of conformity issued by the EPA, and that unless the DOJ and the Company were able to reach a settlement, the DOJ was prepared to commence a civil action. The Company is currently engaged in settlement discussions with the DOJ that would call for the payment of a civil penalty and c ertain injunctive relief. The engines were purchased by the Company pursuant to agreements with vendors under which the vendors represented that their products complied with all applicable laws and regulations and under which the vendors agreed to indemnify the Company for any liabilities or costs relating to, among other matters, the noncompliance or alleged noncompliance of their products. The Company has notified these vendors of the EPA’s position and expects to be reimbursed for any liabilities or costs relating to this matter. The Company does not expect the resolution of this matter to have a material adverse effect on its financial condition or results of operations.
We are also involved in various litigation matters arising in the ordinary course of business. Management expects these matters will be resolved without material adverse effect on our consolidated financial position or results of operations. AnyWe believe that any estimated loss related to such matters has been adequately provided in accrued liabilities to the extent probable and reasonably estimable. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in circumstances relating to these proceedings.
Note 12 —11 - Impact of Recently Issued Accounting Standards:
In December 2007,June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 810 (originally issued as Statement of Financial Accounting Standards No. 167, “Amendments to FASB modified FASB ASC 805, Business CombinationsInterpretation No. (“Topic 805”FIN”) 46(R)”). Previous guidance applied onlyAmong other items, ASC 810 responds to business combinations in which control was obtained by transferring consideration;concerns about an enterprise’s application of certain key provisions of FIN 46(R), including those regarding the revised guidance applies to all transactions or other events in which one entity obtains control over another. Topic 805 now defines the acquirer as the entity that obtains control over one or more other businesses and defines the acquisition date as the date the acquirer achieves control. It also requires the acquirer to recognize assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their respective fair values astransparency of the acquisition date. The revised guidance changes the treatment of acquisition-related costs, restructuring costs related to an acquisition that the acquirer expects butenterprise’s involvement with variable interest entities. ASC 810 is not obligated to incur, contingent consideration associated with the purchase price and preacquisition contingencies associated with acquired assets and liabilities. Topic 805 retains the guidanceeffective for identifying and recognizing intangible assets apart from goodwill. The revised guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period beginning on or after December 15, 2008. We adopted this revised guidance effective December 28, 2008 (fiscal 2009). Thus we are required to apply the revised guidance to any business acquisition which occurs on or after December 28, 2008, but this modification had no effect on prior acquisitions.
In April 2008, the FASB modified FASB ASC 350, Intangibles – Goodwill and Other, and FASB ASC 275, Risks and Uncertainties, for factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset.period. The modification requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. WeCompany adopted the guidancestandard for determining the useful life of a recognized intangible asset effective December 28, 2008 (fiscal 2009), and the guidance is applied prospectively to intangible assets acquired after the effective date. The guidance did not have aninterim period ended March 27, 2010. There was no impact on ourthe C ompany’s financial condition,position, results of operations, cash flows, or cash flow.disclosures.
52
On April 9, 2009,In February 2010, the FASB modified FASB ASC 825, Financial Instruments,issued Accounting Standards Update No. 2010-09 (ASU No. 2010-09), “Subsequent Events (Topic 855): Amendments to Certain Recognition and FASB ASC 270, Interim Reporting,Disclosure Requirements.” The amendments remove the requirements for an SEC filer to extend the disclosure requirements related to the fair value of financial instruments to interimdisclose a date, in both issued and revised financial statements, of publicly traded companies. We adopted this guidance effective June 27, 2009. This guidance did notthrough which subsequent events have a significant impact on our financial condition, results of operations or cash flow.
In May 2009, the FASB modified FASB ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but beforebeen reviewed. Revised financial statements are issued and requires entities to disclose the date through which they have evaluated subsequent events. We adopted this guidanceinclude financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. ASU No. 2010-09 was effective June 27, 2009.upon issuance. The adoption of this guidance did not have an impact on our financial condition, results of operations or cash flows.
In June 2009, the FASB issued ASU No. 2009-01 Topic 105, Generally Accepted Accounting Principles which establishes the FASB ASC. The FASB ASC is the single source
Note 12 – Subsequent Events:
On February 4, 2011, we announced that our board of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institutedirectors declared a quarterly cash dividend of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. The FASB ASC reorganizes the thousands$0.07 per share of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. We adopted ASU No. 2009-01 effective September 26, 2009. This impacted the Company’s notescommon stock. The dividend will be paid on March 8, 2011 to financial statements since all references to authoritative accounting literature are referenced in accordance withstockholders of record as of the FASB ASC.close of business on February 22, 2011.
Note 13 — Subsequent Events:
We evaluated all events or transactions that occurred after December 26, 2009 up through February 24, 2010, which represents the date these financial statements were filed with the Securities and Exchange Commission.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of December 26, 2009.25, 2010. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the 1934 Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 26, 2009,25, 2010, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the 1934 Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
53
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 26, 2009.25, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this assessment, management believes that, as of December 26, 2009,25, 2010, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm which also audited the Company’s consolidated financial statements, has issued a report on the Company’s internal control over financial reporting, which is included herein.
Change in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
None.
54
Item 10.10.Directors, Executive Officers and Corporate Governance
The information set forth under the caption “Executive"Executive Officers of the Registrant”Registrant" in Part I of this Form 10-K is incorporated herein by reference.
The information set forth under the captions “Corporate Governance – Code of Ethics,” “Item 1: Election of Directors,” “Board Meetings and Committees,” and “Section"Section 16(a) Beneficial Ownership Reporting Compliance”Compliance" in our Proxy Statement for our Annual Meeting of Stockholders to be held on April 29, 201028, 2011 is incorporated herein by reference.
The information set forth under the captions “Corporate Governance – Compensation Committee InterlockInterlocks and Insider Participation,” “Compensation of Directors”, “Executive Compensation”, “Compensation Committee Report”, “Compensation Discussion and Analysis”, “2009“2010 Summary Compensation Table”, “2009“2010 Non-Qualified Deferred Compensation”, “2009“2010 Grants of Plan-Based Awards”, “Outstanding Equity Awards At Fiscal 20092010 Year-End”, “2009“2010 Option Exercises and Stock Vested”, and “Potential Payments Upon Termination or Change in Control” in our Proxy Statement for our Annual Meeting of Stockholders to be held on April 29, 201028, 2011 is incorporated herein by reference.
Item 12.12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption “Security"Security Ownership of Certain Beneficial Owners and Management”Management" in our Proxy Statement for our Annual Meeting of Stockholders to be held on April 29, 201028, 2011 is incorporated herein by reference.
Following is a summary of our equity compensation plans as of December 26, 2009,25, 2010, under which equity securities are authorized for issuance, aggregated as follows:
| | | | | | | | | | | | | | |
| | | Number of Securities to be | | Weighted Average | | | | |
| | | Issued Upon Exercise of | | Exercise Price of | | Number of Securities | | |
| | | Outstanding Options, | | Outstanding Options, | | Remaining Available | | |
| Plan Category | | Warrants, and Rights | | Warrants and Rights | | for Future Issuance | | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights | | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | | Number of Securities Remaining Available for Future Issuance | |
| | | | | | | | | | | |
| Equity compensation plans approved by security holders: | | |
Equity compensation plans approved by security holders: | | | | | | | | | | |
| | | | | | | | | | | |
| 2009 Stock Incentive Plan | | 17,940 | | $ | 33.36 | | 3,082,060 | | | | 1,052,404 | | | $ | 22.72 | | | | 5,146,530 | |
2006 Stock Incentive Plan(1) | | 1,743,915 | | 32.78 | | — | | | | 2,720,413 | | | | 16.49 | | | | -- | |
2000 Stock Incentive Plan(1) | | 1,014,373 | | 35.68 | | — | | | | 1,133,784 | | | | 22.72 | | | | -- | |
1994 Stock Option Plan(1) | | 153,586 | | 27.70 | | — | | | | 158,434 | | | | 16.67 | | | | -- | |
Employee Stock Purchase Plan(2) | | — | | — | | 3,187,320 | | | | -- | | | | -- | | | | 6,299,852 | |
| Equity compensation plans not approved by security holders: | | — | | — | | — | | |
| | | | | | | | | |
Equity compensation plans not approved by security holders: | | | | -- | | | | -- | | | | -- | |
| | | | | | | | | | | | | | |
| Total | | 2,929,814 | | $ | 33.52 | | 6,269,380 | | | | 5,065,035 | | | $ | 19.18 | | | | 11,446,382 | |
| | | | | | | | | |
| | |
| (1) | | The 2006 Stock Incentive Plan was superseded in May 2009. The 2000 Stock Incentive Plan was superseded in May 2006. The 1994 Stock Option Plan expired in February 2004. |
| |
(2) | | Represents shares available as of December 26, 2009.25, 2010. |
The information set forth in Note 2 to the “Notes to Consolidated Financial Statements” contained in this ReportForm 10-K provides further information with respect to the material features of each plan.
55
Item 13.13. Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions “Item 1 – Election of Directors”, “Corporate Governance” and “Related-Party Transactions” in our Proxy Statement for our Annual Meeting of Stockholders to be held on April 29, 201028, 2011 is incorporated herein by reference.
Item 14.14. Principal Accountant Fees and Services
The information set forth under the caption “Item 2 – Ratification of Reappointment of Independent Registered Public Accounting Firm” in our Proxy Statement for our Annual Meeting of Stockholders to be held on April 29, 2010,28, 2011, is incorporated herein by reference.
Item 15.15.Exhibits, Financial Statement Schedules
| (a) (1) | | Financial Statements |
|
| | See Consolidated Financial Statements under Item 8 on pages 32 through 53 of this Report. |
|
See Consolidated Financial Statements under Item 8 on pages 36 through 55 of this Form 10-K.
| (a) (2) | | Financial Statement Schedules |
|
| | None |
|
| | Financial statement schedules have been omitted because they are not applicable. |
|
None
Financial statement schedules have been omitted because they are not applicable.
| (a) (3) | | Exhibits |
|
| | The exhibits listed in the Index to Exhibits, which appears on pages 58 through 61 of this Form 10-K, are incorporated herein by reference or filed as part of this Form 10-K. |
56
The exhibits listed in the Index to Exhibits, which appears on pages 60 through 63 of this Form 10-K, are incorporated herein by reference or filed as part of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | |
| TRACTOR SUPPLY COMPANY
| |
Date: February 24, 2010 23, 2011 | By: | /s/ Anthony F. Crudele | |
| | Anthony F. Crudele | |
| | Executive Vice President – Chief Financial Officer and Treasurer | |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| | | | |
| Signature | | Title | | Date |
| | | | |
/s/ Anthony F. Crudele Anthony F. Crudele | | Executive Vice President – Chief Financial Officer and Treasurer (Principal (Principal Financial and Accounting Officer) | | February 24, 2010 |
| | | | 23, 2011 |
/s/ James F. Wright James F. Wright | | Chairman of the Board, Chief Executive Officer and Director (Principal (Principal Executive Officer) | | February 24, 2010 |
| | | | 23, 2011 |
/s/ JohnJohnston C. Adams Johnston C. Adams John Adams | | Director | | February 24, 2010 |
| | | | 23, 2011 |
/s/ William Bass William Bass | | Director | | February 24, 2010 |
| | | | 23, 2011 |
/s/ Jack C. Bingleman Jack C. Bingleman | | Director | | February 24, 2010 |
| | | | |
| | Director | | February 24, 2010 |
| | | | 23, 2011 |
/s/ Richard W. Frost Richard W. Frost | | Director | | February 24, 2010 |
| | | | 23, 2011 |
/s/ Cynthia T. Jamison Cynthia T. Jamison | | Director | | February 24, 2010 |
| | | | 23, 2011 |
/s/ Gerard E. Jones Gerard E. Jones | | Director | | February 24, 2010 |
| | | | 23, 2011 |
/s/ George MacKenzie George MacKenzie | | Director | | February 24, 2010 |
| | | | 23, 2011 |
/s/ Edna K. Morris Edna K. Morris | | Director | | February 24, 201023, 2011 |
57
EXHIBIT INDEX
| | | | | |
| 3.1 | | | Restated Certificate of Incorporation, as amended, of the Company, filed with the Delaware Secretary of State on February 14, 1994 (filed as Exhibit 4.1 to Registrant’sRegistrant's Registration Statement on Form S-8, Registration No. 333-102768, filed with the Commission on January 28, 2003. and incorporated herein by reference). |
| | | | |
| | 3.2 | | | Certificate of Amendment of the Restated Certificate of Incorporation, as amended, of the Company, filed with the Delaware Secretary of State on April 28, 1995 (filed as Exhibit 4.2 to Registrant’sRegistrant's Registration Statement on Form S-8, Registration No. 333-102768, filed with the Commission on January 28, 2003, and incorporated herein by reference). |
| | | | |
| | 3.3 | | | Certificate of Amendment of the Restated Certificate of Incorporation, as amended, of the Company, filed with the Delaware Secretary of State on May 13, 1994 (filed as Exhibit 4.3 to Registrant’sRegistrant's Registration Statement on Form S-8, Registration No. 333-102768, filed with the Commission on January 28, 2003, and incorporated herein by reference). |
| | | | |
| | 3.4 | | | Certificate of Amendment of the Restated Certificate of Incorporation, as amended, of the Company (filed as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on May 3, 2005, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | |
| | 3.5 | | | Second Amended and Restated By-laws (filed as Exhibit 3(ii) to Registrant’s Current Report on Form 8-K, filed with the Commission on February 11, 2009, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | |
| | 4.1 | | | Form of Specimen Certificate representing the Company’sCompany's Common Stock, par value $.008 per share (filed as Exhibit 4.2 to Amendment No. 1 to Registrant’sRegistrant's Registration Statement on Form S-1, Registration No. 33-73028, filed with the Commission on January 31, 1994, and incorporated herein by reference). |
| | | | |
| | 10.1 | | | Tractor Supply Company 1994 Stock Option Plan (filed as Exhibit 10.28 to Registrant’s Registration Statement on Form S-1, Registration No. 33-73028, filed with the Commission on December 17, 1993, and incorporated herein by reference).+ |
| | | | |
| | 10.2 | | | Amendment to the Tractor Supply Company 1994 Stock Option Plan (filed as Exhibit 4.6 to Registrant’s Registration Statement on Form S-8, Registration No. 333-10699, filed with the Commission on June 14, 1999, and incorporated herein by reference).+ |
| | | | |
| | 10.3 | | | Second Amendment to the Tractor Supply Company 1994 Stock Option Plan (filed as Exhibit 10.44 to Registrant’s Annual Report on Form 10-K, filed with the Commission on March 24, 2000, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | |
| | 10.4 | | | Third Amendment to the Tractor Supply Company 1994 Stock Option Plan, effective February 8, 2007 (filed as Exhibit 10.36 to Registrant’s Annual Report on Form 10-K, filed with the Commission on February 28, 2007, Commission File No. 000-23314, and incorporated herein by reference.)+ |
| | | | |
| | 10.5 | | | Certificate of Insurance relating to the Medical Expense Reimbursement Plan of the Company (filed as Exhibit 10.33 to Registrant’s Registration Statement on Form S-1, Registration No. 33-73028, filed with the Commission on December 17, 1993, and incorporated herein by reference). |
| | | | |
| | 10.6 | | | Summary Plan Description of the Executive Life Insurance Plan of the Company (filed as Exhibit 10.34 to Registrant’s Registration Statement on Form S-1, Registration No. 33-73028, filed with the Commission on December 17, 1993, and incorporated herein by reference).+ |
58
| | | | | |
| | | | |
| 10.7 | | | Tractor Supply Company 1996 Associate Stock Purchase Plan (filed as Exhibit 4.4 to Registrant’s Registration Statement on Form S-8, Registration No. 333-10699, filed with the Commission on August 23, 1996, and incorporated herein by reference).+ |
| | | | |
| | 10.8 | | | Tractor Supply Company Restated 401(k) Retirement Plan (filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-3, Registration No. 333-35317, filed with the Commission on September 10, 1997, and incorporated herein by reference).+ |
| | | | |
| | 10.9 | | | First Amendment, dated December 22, 2003 to the Tractor Supply Company 401(k) Retirement Savings Plan (filed as Exhibit 10.53 to Registrant’s Annual Report on Form 10-K, filed with the Commission on March 8, 2004, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | |
| | 10.10 | | | Second Amendment to Tractor Supply Company Restated 401(k) Retirement Plan (filed as Exhibit 10.57 to Registrant’s Annual Report on Form 10-K, filed with the Commission on March 23, 2001, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | |
| | 10.11 | | | Trust Agreement (filed as Exhibit 4.2 to Registrant’s Registration Statement on Form S-3, Registration No. 333-35317, filed with the Commission on September 10, 1997, and incorporated herein by reference). |
| | | | |
| | 10.12 | | | Split-Dollar Agreement, dated January 27, 1998, between the Company and Joseph H. Scarlett, Jr., Tara Anne Scarlett and Andrew Sinclair Scarlett (filed as Exhibit 10.45 to Registrant’sRegistrant's Annual Report on Form 10-K, filed with the Commission on March 17, 1999, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | |
| | 10.13 | | | Tractor Supply Company 2000 Stock Incentive Plan (filed as Exhibit 4.5 to Registrant’sRegistrant's Registration Statement on Form S-8, Registration No. 333-102768, filed with the Commission on January 28, 2003 and incorporated herein by reference).+ |
| | | | |
| | 10.14 | | | First Amendment to the Tractor Supply Company 2000 Stock Incentive Plan, effective February 8, 2007 (filed as Exhibit 10.37 to Registrant’s Annual Report on Form 10-K, filed with the Commission on February 28, 2007, Commission File No. 000-23314, and incorporated herein by reference.) + |
| | | | |
| | 10.15 | | | First Amendment to Lease Agreement, dated as of December 18, 2000, between Tractor Supply Company and GOF Partners (filed as Exhibit 10.56 to Registrant’s Annual Report on Form 10-K, filed with the Commission on March 23, 2001, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | |
| | 10.16 | | | Transportation Management Services Agreement between UPS Logistics Group, Inc. and Tractor Supply Company dated May 10, 2001 (filed as Exhibit 10.58 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on August 14, 2001 Commission File No. 000-23314, and incorporated herein by reference). |
| | | | |
| | 10.17 | | | Tractor Supply Company Executive Deferred Compensation Plan, dated November 11, 2001 (filed as Exhibit 10.58 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on May 13, 2002, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | |
| | 10.18 | | | Transition and Separation Agreement dated February 17, 2006 between Tractor Supply Company and Calvin B. Massmann (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, Registration No. 000-23314 filed with the Commission on February 21, 2006, and incorporated herein by reference).+ |
| | | | |
| | 10.19 | | | Lease Agreement dated January 22, 2004 between Tractor Supply Company and The Prudential Insurance Company of America (filed as Exhibit 10.54 to Registrant’s Annual Report on Form 10-K, filed with the Commission on March 8, 2004, Commission File No. 000-23314, and incorporated herein by reference). |
59
| | | | | |
| 10.20 | | | Tractor Supply Co. 2004 Cash Incentive Plan, effective April 15, 2004 (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on August 4, 2004, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | |
| | 10.21 | | | Amended and Restated Employment Agreement between Tractor Supply Company and James F. Wright effective July 12, 2004 (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on August 4, 2004, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | |
| 10.22 | | | First Amendment to Employment Agreement, dated December 22, 2008, by and between Tractor Supply Company and James F. Wright (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed with the Commission on February 17,21, 2010 Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | |
| 10.23 | | | Second Amendment to Employment Agreement, dated February 11, 2010, by and between Tractor Supply Company and James F. Wright (filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K, filed with the Commission on February 17,December 22, 2010, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.24 | | 10.22 | Chairman of the Board Bonus Plan (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed with the Commission on April 27, 2005, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.25 | | 10.23 | Form of Incentive Stock Option Agreement under the 2000 Stock Incentive Plan (filed as Exhibit 10.46 to Registrant’s Annual Report on Form 10-K, filed with the Commission on March 10, 2005, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.26 | | 10.24 | Form of Incentive Stock Option Agreement under the 2000 Stock Incentive Plan (filed as Exhibit 10.44 to Registrant’s Annual Report on Form 10-K, filed with the Commission on March 16, 2006, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.27 | | 10.25 | Form of Incentive Stock Option Agreement under the 2006 Stock Incentive Plan (filed as Exhibit 10.39 to Registrant’s Annual Report on Form 10-K, filed with the Commission on February 28, 2007, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.28 | | 10.26 | Form of Incentive Stock Option Agreement under the 2006 Stock Incentive Plan (filed as Exhibit 10.45 to Registrant’s Annual Report on Form 10-K, filed with the Commission on February 27, 2008, Commission File No. 000-23314, incorporated herein by reference).+ |
| | | | | |
| 10.29 | | 10.27 | Tractor Supply Company 2006 Stock Incentive Plan (filed as Exhibit 99.1 to the Registrant’sRegistrant's Current Report on Form 8-K filed with the Commission on April 27, 2006, and incorporated herein by reference).+ |
| | | | | |
| 10.30 | | 10.28 | First Amendment, dated April 27, 2006 to the 2006 Stock Incentive Plan (filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K, filed with the Commission on April 27, 2006, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.31 | | 10.29 | Second Amendment to the Tractor Supply Company 2006 Stock Incentive Plan, effective February 8, 2007 (filed as Exhibit 10.38 to Registrant’s Annual Report on Form 10-K, filed with the Commission on February 28, 2007, Commission File No. 000-23314, and incorporated herein by reference.)+ |
| | | | | |
| 10.32 | | 10.30 | Form of Incentive Stock Option Agreement under the 2006 Stock Incentive Plan (filed as Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K, filed with the Commission on February 25, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
60
| | | | | |
| | | | |
| 10.33 | | 10.31 | Form of Change in Control Agreement for each of Anthony F. Crudele; Stanley L. Ruta; Gregory A. Sandfort; and Kimberly D. Vella (filed as Exhibit 10.42 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on August 4, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | 10.32 | | | |
| 10.34 | | | Form ofAmended and Restated Change in Control Agreement for James F. Wright (filed as Exhibit 10.4310.41 to Registrant’s QuarterlyCurrent Report on Form 10-Q,8-K, filed with the Commission on August 4, 2009,December 22, 2010, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.35 | | 10.33 | Form of Incentive Stock Option Agreement under the Tractor Supply Company 2009 Stock Incentive Plan (filed as Exhibit 10.44 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on August 4, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.36 | | 10.34 | Form of Restricted Share Unit Agreement under the Tractor Supply Company 2009 Stock Incentive Plan (filed as Exhibit 10.45 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on August 4, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.37 | | 10.35 | Form of Nonqualified Stock Option Agreement under the Tractor Supply Company 2009 Stock Incentive Plan (filed as Exhibit 10.46 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on August 4, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.38 | | 10.36 | Revolving Credit Agreement, dated as of February 22, 2007 by and among Tractor Supply Company, the banks party thereto, and Bank of America, N.A., as Administrative Agent, (filed as Exhibit 10.47 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 2, 2009, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | | |
| 10.39 | | 10.37 | First Amendment to Revolving Credit Agreement, dated as of February 25, 2008 by and among Tractor Supply Company, the banks party thereto, and Bank of America, N.A., as Administrative Agent (filed as Exhibit 10.46 to Registrant’s Annual Report on Form 10-K, filed with the Commission on February 27, 2008, Commission File No. 000-23314, and incorporated herein by reference). |
| | | | | |
| 10.40 | | 10.38 | Form of Director Restricted Stock Unit Award Agreement (filed as Exhibit 10.48 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 2, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.41 | | 10.39 | Form of Restricted Share Unit Agreement for Officers (filed as Exhibit 10.49 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 2, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.42 | | 10.40 | Form of Deferred Stock Unit Award Agreement for Directors (filed as Exhibit 10.50 to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 2, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | | | | |
| 10.43 | | 10.41 | Tractor Supply Company 2009 Stock Incentive Plan (filed as Exhibit 99.1 to Registrant’s Current Report on Form 8-K, filed with the Commission on April 14, 2009, Commission File No. 000-23314, and incorporated herein by reference).+ |
| | 18* | | | Letter re: Change in accounting principles. |
| | 23.1*21* | List of subsidiaries. |
| | 23* | Consent of Ernst & Young LLP. |
| | | | |
| | 31.1* | | | Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | 31.2* | | | Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| 32.1* | | 32* | Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. |
| | 101 | The following financial information from our Annual Report on Form 10-K for the fiscal 2010, filed with the SEC on February 23, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the consolidated balance sheets at December 25, 2010 and December 26, 2009, (ii) the consolidated statements of income for years ended December 25, 2010, December 26, 2009, and December 27, 2008 (iii) the consolidated statements of cash flows for years ended December 25, 2010 December 26, 2009, and December 27, 2008, (iv) the consolidated statements of stockholders' equity for the years ended December 25, 2010 December 26, 2009, and December 27, 2008, and (v) the Notes to Consolidated Financial Statements.(1) |
* Filed herewith
+ Management contract or compensatory plan or arrangement
* | | Filed herewith |
|
+(1) | | Management contractThe XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or compensatory planotherwise subject to liability of that section and shall not be incorporated by reference into any filing or arrangementother document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. |
61
