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Overview
Tractor Supply Company is the largest operator of retail farm and ranch stores in the United States and is focused on supplying the lifestyle needs of recreational farmers and ranchers and those who enjoy the rural lifestyle, as well as tradesmen and small businesses. We operate retail stores under the names Tractor Supply Company and Del’s Farm Supply and operate a website under the name TractorSupply.com. Our stores are located in towns outlying major metropolitan markets and in rural communities, and they offer the following comprehensive selection of merchandise:
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Equine, pet and small animal products, including items necessary for their health, care, growth and containment;
Hardware, truck, towing and tool products;
Seasonal products, including lawn and garden items, power equipment, gifts and toys;
Maintenance products for agricultural and rural use; and
Work/recreational clothing and footwear.
Our Tractor Supply stores typically range in size from 15,500 to 18,500 square feet of inside selling space and additional outside selling space. We use a standard 15,500 square foot prototype for most new purpose-built locations. For new stores located in existing buildings, one of several layout formats is utilized.
Our wholly-owned subsidiary, Del’s Farm Supply, LLC (“Del’s”), operated 26 stores as of December 25, 2010 in Washington, Oregon, Idaho and 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.
Tractor Supply Company has one reportable industry segment – farm and ranch retail sales, both at our retail locations and online.
At December 25, 2010, we operated 1,001 retail farm and ranch stores in 44 states.
Seasonality and Weather
Our business is highly seasonal. Historically, our sales and profits have been the highest in the second and fourth fiscal quarters 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 balances during the first fiscal quarter for purchases of seasonal products in anticipation of the spring selling season and again during the third fiscal quarter in anticipation of the winter selling season.
Business Strategy
We believe our sales and earnings growth is a result of executing our business strategy, which includes the following key components:
Market Niche
We have identified a specialized market niche: supplying the lifestyle needs of recreational farmers and ranchers and those who enjoy the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. By focusing our product mix on these core customers, we believe we are differentiated from general merchandise, home center and other specialty retailers.
Customer Service
We are committed to providing our customers a high level of in-store service through our motivated, well-trained store team members. We believe the ability of our store team members to provide friendly, responsive and seasoned advice helps to promote strong customer loyalty and repeat shopping. As such, we seek to provide our store team members with decision-making authority, product knowledge and training to enable them to meet our customers’ needs.
We endeavor to staff our stores with courteous, highly motivated team members and devote considerable resources to training store team members, often in cooperation with our vendors. Our training programs include (i) a full management training program which covers all aspects of our operations, (ii) product knowledge modules produced in conjunction with key vendors, (iii) frequent management skills training classes, (iv) semi-annual store manager meetings with vendor product presentations, (v) vendor sponsored in-store training programs and (vi) ongoing product information updates from our management headquarters, the Store Support Center. We seek to hire and train store team members with farming and ranching backgrounds, with particular emphasis on general maintenance, equine and welding.
Our online shopping site is TractorSupply.com. The availability of certain of our products online provides our customers the ability to purchase products and have them shipped to one of our retail stores, their homes or offices. We believe this capability further enhances customer service and extends our market to areas where our retail stores are not currently located.
We offer proprietary, private label credit cards for individuals and business customers. In addition, we accept cash, checks, debit cards, Visa, MasterCard, American Express and Discover credit cards and gift cards.
Store Environment
Our stores are designed and managed to make shopping an enjoyable experience and to maximize sales and operating efficiencies. Stores utilize several layouts, designed to provide an open environment, optimal product placement and visual display locations. In addition, these layouts allow for departmental space to be easily reallocated and visual displays to be easily changed for seasonal products and promotions. Display and product placement information is sent to stores weekly to ensure quality and uniformity among the stores. Informative signs are located throughout each store to assist customers with purchasing decisions and merchandise location. These signs provide customers with a comparison of product qualities, clear pricing and useful information regarding product benefits and suggestions for
appropriate accessories. The general uniformity of our store layouts and visual displays afford our customers a feeling of familiarity and enhances the shopping experience. To further enhance the shopping experience, all of our store team members wear highly visible red vests, aprons or smocks and nametags, and our customer service and checkout counters are conveniently located.
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Merchandising
We offer a differentiated assortment of products for our customers. Our broad product assortment is tailored to meet the regional and geographic needs of our markets, as well as the physical store size. Our full line of product offerings is supported by a strong in-stock inventory position with an average of 15,500 to 19,000 unique products per store. No one product accounted for more than 10% of our sales during 2010.
Our stores carry a wide selection of high quality, nationally recognized, name brand merchandise. We also market a growing list of products under our “private-label programs,” i.e. products manufactured for us by a number of vendors. The trademarks in the private label brand names are owned by us. Our private label brands include:
· Producers Pride and Dumor (livestock feed)
· Retriever, Paws ‘n Claws, and 4health (pet foods)
· Huskee (outdoor power equipment)
· C.E. Schmidt (apparel and footwear)
· Countyline (livestock, farm and ranch equipment)
· Royal Wing (bird feeding supplies)
· Traveller (truck/automotive products)
· Masterhand and JobSmart (tools and tool chests)
· Groundwork (lawn and garden supplies)
· Bit & Bridle (apparel)
· Red Shed (gifts and collectibles)
We believe that the availability of high quality private label products at compelling prices provides superior value for our customers, a strategic advantage for us, and positions us as a destination store.
The following chart indicates the average percentages of sales represented by each of our major product categories during fiscal 2010, 2009 and 2008.
Percent of Sales
Product Category
2010
2009 (a)
2008 (a)
Livestock and Pet
Hardware, Tools and Truck
Seasonal, Gift and Toy Products
Clothing and Footwear
Agriculture
(a)Reclassified to conform to current year presentation.
Purchasing
We offer a differentiated assortment of products that are sourced through domestic and international vendors for those seeking to enjoy the “Out Here” lifestyle. Our business is not dependent upon any one vendor or particular group of vendors. We purchase our products from a core group of approximately 700 vendors, with no one vendor representing more than 10% of our purchases during fiscal 2010. Approximately 250 vendors accounted for approximately 90% of our purchases during fiscal 2010. We have not experienced any significant difficulty in obtaining satisfactory alternative sources of supply for our products, and we believe that adequate sources of supply exist at substantially similar costs for nearly all of our produc
ts. We have no material long-term contractual commitments with any of our vendors.
We maintain a dedicated inventory management team to focus exclusively on all forecasting and replenishment functions. This centralized direction permits our buying teams to focus more strategic attention toward vendor line reviews, assortment planning and testing of new products and programs. Through the combined efforts of these teams, we have improved our overall inventory productivity and in-stock position.
Over 98% of our purchase orders are transmitted through an electronic data interchange ("EDI") system, and approximately 95% of merchandise vendor invoices are transmitted through EDI. We are expanding the percentage of vendors who electronically transmit invoices and increasing the amount of sales history transmitted.
Distribution
We currently operate a distribution network for supplying our stores with merchandise, and in fiscal 2010 our stores received approximately 67% of our merchandise through this network. Our six distribution centers are located in Indiana, Georgia, Maryland, Texas, Nebraska, and Washington, representing total distribution capacity of 2.9 million square feet. In 2011 we have begun construction on our seventh distribution center, a new 834,000 square foot facility in Kentucky to be operational during the fourth quarter of fiscal 2011.
We manage our inbound and outbound transportation activity in-house through the use of a web-based transportation management system. We utilize several common carriers for store deliveries. We manage our transportation costs through carrier negotiations, the monitoring of transportation routes, and the scheduling of deliveries.
Marketing
We utilize an "everyday value prices" strategy to consistently offer our products at competitive prices complemented by promotions primarily implemented during peak selling seasons. We regularly monitor prices at competing stores and adjust our prices as appropriate.
To generate store traffic and position ourselves as a destination store, we promote broad selections of merchandise with newspaper circulars, customer targeted direct mail and internet offerings. Vendors frequently support these specific programs by offering temporary cost reductions, honoring coupons and funding gift card rebate programs.
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Due to the relatively small size of our stores, increased traffic in the store ensures increased exposure to our products. Our vendors are committed to helping us promote our brand and position ourselves as a destination store. Our vendors provide assistance with product presentation and rack design, brochures, point-of-purchase materials for customers’ education and product education for our team members. We also receive funding through contributions and incentives on purchases to promote new stores and earn rebates from vendors on product purchases based on volume.
Competition
We operate in a competitive retail industry. The principal competitive factors include location of stores, price and quality of merchandise, in-stock consistency, merchandise assortment and presentation, and customer service. We compete with general merchandise retailers, home center retailers and other specialty and discount retailers, as well as independently owned retail farm and ranch stores, numerous privately-held regional farm store chains and farm cooperatives. Some of these competitors are units of national or regional chains and may have substantially greater resources and financial capacities than we do. However, we believe we have successfully differentiated ourselves from these entities by focusing on our specialized market niche for customers living the rural lifestyle.