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(Exact Name of Registrant as Specified in Its Charter)
Delaware
13-3139732
(State or Other Jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Powell Place, Brentwood, Tennessee
37027
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (615) 440-4000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
(check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act.)
YES o NO þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the
latest practicable date.
Property and equipment, net of accumulated depreciation
363,895
362,033
357,151
Goodwill
10,258
10,258
10,258
Deferred income taxes
15,895
13,727
17,665
Other assets
5,093
5,977
6,012
Total assets
$
1,171,511
$
1,075,997
$
1,169,201
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
294,776
$
286,828
$
394,014
Other accrued expenses
109,535
113,465
101,310
Current portion of capital lease obligations
476
550
629
Income taxes currently payable
32,673
—
25,520
Total current liabilities
437,460
400,843
521,473
Revolving credit loan
—
—
—
Capital lease obligations, less current maturities
1,599
1,797
2,093
Straight line rent liability
42,212
38,016
34,619
Other long-term liabilities
25,827
25,211
23,844
Total liabilities
507,098
465,867
582,029
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; 41,010,891 shares issued and 35,894,967
shares outstanding at June 27, 2009, 40,875,886
shares issued and 36,061,585 shares outstanding at
December 27, 2008 and 40,798,404 shares issued and
36,766,824 shares outstanding at June 28, 2008
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation:
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States and the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have been included. These
statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year
ended December 27, 2008. The results of operations for the fiscal three-month and six-month
periods are not necessarily indicative of results for the full fiscal year.
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 adverse 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
each year for purchases of seasonal products in anticipation of the spring selling season and again
during the third fiscal quarter in anticipation of the winter selling season.
Note 2 — Reclassifications:
Certain amounts in previously issued financial statements have been reclassified to conform to the
fiscal 2009 presentation. Amounts related to voucher receivables ($0.2 million and $0.3 million at
December 27, 2008 and June 28, 2008, respectively) have been reclassified 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) previously classified in prepaid expenses and other
current assets have been reclassified to other assets to reflect their long-term status. These
changes have affected our December 27, 2008 and June 28, 2008 Consolidated Balance Sheets and the
Consolidated Statement of Cash Flows for the fiscal six months ended June 28, 2008.
Note 3 — 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. Book overdrafts are offset against cash deposits held at the same financial
institution. At June 27, 2009the Company maintained $102.4 million of its excess available cash
in an account at the same financial institution as its disbursement accounts. This excess
available cash offset all $99.9 million of book overdrafts, and the remaining net $2.5 million was
included in cash at June 27, 2009. After the offset of excess available cash, $79.4 million and
$98.6 million of net book overdrafts were included in accounts payable at December 27, 2008 and
June 28, 2008, respectively.
Note 4 — Fair Value of Financial Instruments:
Our financial instruments consist of cash and cash equivalents, short-term receivables and payables
and long-term debt instruments, including capital leases. The carrying values of cash and cash
equivalents, receivables and trade payables equal current fair value. We had no borrowings under
the revolving credit loan at June 27, 2009, December 27, 2008 or June 28, 2008.
Inventories are stated using the lower of last-in, first-out (LIFO) cost or market. Inventories are
not in excess of market value. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the fiscal year, sales for the year and
the expected rate of inflation/deflation for the year. If the first-in, first-out (FIFO) method of
accounting for inventory had been used, inventories would have been approximately $74.8 million,
$68.3 million and $37.4 million higher than reported at June 27, 2009, December 27, 2008 and
June 28, 2008, respectively.
Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payments”
(“SFAS 123(R)”), we recognize compensation expense for share-based payments based on the fair value
of the awards. Share-based payments include stock option and restricted stock unit grants and
certain transactions under our Employee Stock Purchase Plan (the “ESPP”). SFAS 123(R) requires
share-based compensation expense to be based on the following: a) grant date fair value estimated
in accordance with the original provisions of SFAS 123 for unvested options granted prior to the
adoption of SFAS 123(R); b) grant date fair value estimated in accordance with the provisions of
SFAS 123(R) for all share-based payments granted subsequent to adoption; and c) the discount on
shares sold to employees subsequent to adoption, which represents the difference between the grant
date fair value and the employee purchase price. Share-based compensation expense lowered pre-tax
income by $2.9 million and $3.0 million for the second quarter of fiscal 2009 and 2008,
respectively, and $6.1 million and $6.2 million for the first six months of fiscal 2009 and 2008,
respectively. The benefits of tax deductions in excess of recognized compensation expense are
reported as a financing cash flow.
Under SFAS 123(R), forfeitures are estimated at the time of valuation and reduce expense ratably
over the vesting period. This estimate is adjusted periodically based on the extent to which actual
forfeitures differ, or are expected to differ, from the previous estimate.
Stock Incentive Plan
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 the terms of the 2009 Stock Incentive Plan
3,100,000 shares are available for grant as stock options or other awards.
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.
The fair value of each option grant is separately estimated for each vesting date. The fair value
of each option is recognized as compensation expense ratably over the vesting period. We have
estimated the fair value of all stock option awards as of the date of the grant by applying a
Black-Scholes pricing valuation model. The application of this valuation model involves
assumptions that are judgmental and highly sensitive in the determination of compensation expense,
including expected stock price volatility.
The following summarizes information concerning stock option grants during fiscal 2009 and 2008:
The weighted average key assumptions used in determining the fair value of options granted in
the three and six months ended June 27, 2009 and June 28, 2008 are as follows:
As of June 27, 2009, total unrecognized compensation expense related to non-vested stock
options and restricted stock units was $17,719,948 with a weighted average expense recognition
period of 1.66 years.
Restricted Stock Units
During the first six months of 2009 and 2008, we issued 149,151 and 77,796 restricted stock units
which vest over an approximate three-year term and had a grant date weighted average fair value of
$34.63 and $38.27, respectively.
Employee Stock Purchase Plan
The ESPP provides our employees the opportunity to purchase, through payroll deductions, shares of
our common stock at a 15% discount. Pursuant to the terms of the ESPP, we issued 26,434 and 28,815
shares of our common stock during the first six months of fiscal 2009 and 2008, respectively.
Total stock compensation expense related to the ESPP was approximately $229,000 and $256,000 during
the first six months of 2009 and 2008, respectively. At June 27, 2009, there were 3,211,621 shares
of common stock reserved for future issuance under the ESPP.
There were no significant modifications to our share-based compensation plans during the six months
ended June 27, 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).
Note 8 — Net Income Per Share:
We present both basic and diluted earnings per share (“EPS”) on the face of the consolidated
statements of income. As provided by SFAS 128 “Earnings per Share”, basic EPS is calculated as
income available to common stockholders divided by the weighted average number of shares
outstanding during the period. Diluted EPS is calculated using the weighted average outstanding
common shares and the treasury stock method for options and restricted stock units.
Dilutive stock options and
restricted stock units
outstanding
—
615
(0.03
)
—
624
(0.02
)
Diluted net income per share:
Net income
$
55,234
36,533
$
1.51
$
41,348
37,978
$
1.09
Note 9 — 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. Borrowings bear interest at
either the bank’s base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per
annum, adjusted quarterly based on our performance (0.50% at June 27, 2009 and June 28, 2008). We
are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for unused capacity
(0.10% at June 27, 2009 and June 28, 2008). The agreement requires quarterly compliance with
respect to fixed charge coverage and leverage ratios. As of June 27, 2009, we were in compliance
with all debt covenants.
Note 10 — 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 20,639 and 738,368 shares under the share repurchase program during the second
quarter of 2009 and 2008, respectively. The total cost of the share repurchases was $0.7 million
and $25.0 million during the second quarter of 2009 and 2008, respectively. We repurchased 301,623
and 815,393 shares under the share repurchase program during the first six months of 2009 and 2008,
respectively. The total cost of the share repurchases was $9.9 million and $27.8 million during
the first six months of 2009 and 2008, respectively. As of June 27, 2009, we had
remaining authorization under the share repurchase program of $186.4 million exclusive of any fees,
commissions, or other expenses.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised
2007), Business Combinations (“SFAS 141R”), which replaces SFAS No. 141, Business Combinations
(“SFAS 141”) issued in 2001. Whereas its predecessor applied only to business combinations in which
control was obtained by transferring consideration, the revised standard applies to all
transactions or other events in which one entity obtains control over another. SFAS 141R 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. SFAS 141R requires the acquirer to
recognize assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at
their respective fair values as of the acquisition date. The revised standard changes the treatment
of acquisition-related costs, restructuring costs related to an acquisition that the acquirer
expects but is not obligated to incur, contingent consideration associated with the purchase price
and preacquisition contingencies associated with acquired assets and liabilities. SFAS 141R retains
the guidance in SFAS 141 for identifying and recognizing intangible assets apart from goodwill. The
revised standard applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or after December 15,2008. We adopted SFAS 141R effective December 28, 2008 (fiscal 2009). Thus we are required to apply
the provisions of SFAS 141R to any business acquisition which occurs on or after December 28, 2008,
but this standard had no effect on prior acquisitions.
In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination of the
Useful Life of Intangible Assets”, which amends the 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 under SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS
142”). The FSP 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 under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141. We
adopted the FSP effective December 28, 2008 (fiscal 2009), and the guidance for determining the
useful life of a recognized intangible asset is applied prospectively to intangible assets acquired
after the effective date. The FSP did not have an impact on our financial condition, results of
operations or cash flow.
On April 9, 2009, the FASB released FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments” (“FSP No. FAS 107-1”). FSP No. FAS 107-1 extends the disclosure
requirements of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to
interim financial statements of publicly traded companies as defined in APB Opinion No. 28, Interim
Financial Reporting. We adopted FSP No. FAS 107-1 effective June 27, 2009. The adoption of this
FSP did not have a significant impact on our financial condition, results of operations or cash
flow.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued and requires entities to disclose the date through
which they have evaluated subsequent events. We adopted SFAS 165 effective June 27, 2009. The
adoption of SFAS 165 changed certain financial statement disclosures but did not have an impact on
our financial condition, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). SFAS 168 will become 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. SFAS 168 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. SFAS 168 will be effective for financial
statements issued for reporting periods that end after September 15, 2009. This will have an
impact on the Company’s notes to financial statements since all future references to authoritative
accounting literature will be references in accordance with SFAS 168.
We had commitments for new store construction projects totaling approximately $3.8 million at
June 27, 2009.
Litigation
We are involved in various litigation matters arising in the ordinary course of business. We
expect these matters will be resolved without material adverse effect on our consolidated financial
position or results of operations. Any estimated loss related to such matters has been adequately
provided in accrued liabilities to the extent probable and reasonably estimable. It is possible,
however, that future results of operations for any particular quarterly or annual period could be
affected by changes in circumstances relating to these proceedings.
Note 13 — Subsequent Events:
We
evaluated all events or transactions that occurred after June 27, 2009 up through August 4,2009, which represents the date these financial statements were filed with the Securities and
Exchange Commission.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
General
The following discussion and analysis should be read in conjunction with our Annual Report on Form
10-K for the fiscal year ended December 27, 2008. The following discussion and analysis also
contains certain historical and forward-looking information. The forward-looking statements
included herein are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the “Act”). All statements, other than statements of historical
facts, which address activities, events or developments that we expect or anticipate will or may
occur in the future, including such things as estimated results of operations in future periods,
future capital expenditures (including their amount and nature), business strategy, expansion and
growth of our business operations and other such matters are forward-looking statements. These
forward-looking statements may be affected by certain risks and uncertainties, any one, or a
combination of which could materially affect the results of our operations. To take advantage of
the safe harbor provided by the Act, we are identifying certain factors that could cause actual
results to differ materially from those expressed in any forward-looking statements, whether oral
or written.
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 severe weather conditions is somewhat mitigated by the
geographic dispersion of our stores.
We experience our highest inventory and accounts payable balances during our first fiscal quarter
each year for purchases of seasonal products in anticipation of the spring selling season and again
during our third fiscal quarter in anticipation of the winter selling season.
As with any business, many aspects of our operations are subject to influences outside our control.
These factors include general economic conditions affecting consumer spending, the timing and
acceptance of new products in the stores, the mix of goods sold, purchase price volatility
(including inflationary and deflationary pressures), the ability to increase sales at existing
stores, the ability to manage growth and identify suitable locations and negotiate favorable lease
agreements on new and relocated stores, the continued availability of favorable credit sources,
capital market conditions in general, failure to open new stores in the manner currently
contemplated, the impact of new stores on our business, competition, weather conditions, the
seasonal nature of our business, effective merchandising initiatives and marketing emphasis, the
ability to retain vendors, reliance on foreign suppliers, the ability to attract, train and retain
qualified employees, product liability and other claims in the ordinary course of business,
potential legal proceedings, management of our information systems, effective tax rate changes and
results of examination by taxing authorities, and the ability to maintain an effective system of
internal control over financial reporting. We
discuss in greater detail risk factors relating to our business in Item 1A of our
Annual Report on Form 10-K for the fiscal year ended December 27, 2008. Forward-looking statements
are based on our knowledge of our business and the environment in which we operate, but because of
the factors listed above or other factors, actual results could differ materially from those
reflected by any forward-looking statements. Consequently, all of the forward-looking statements
made are qualified by these cautionary statements and there can be no assurance that the actual
results or developments anticipated will be realized or, even if substantially realized, that they
will have the expected consequences to or effects on our business and operations. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date hereof. We undertake no obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
Net sales increased 5.4% to $946.5 million for the second quarter of 2009 from $898.3 million for
the second quarter of 2008. Net sales increased 8.3% to $1.60 billion for the first six months of
fiscal 2009 from $1.47 billion for the first six months of fiscal 2008. The net sales increase for
the second quarter resulted primarily from the addition of new stores, partially offset by a
same-store sales decrease of 2.7%. The net sales increase for the first six months of fiscal 2009
was primarily the result of new store openings as same-store sales remained flat. Our second
quarter same-store sales decline was primarily driven by softness in sales of seasonal big ticket
and discretionary merchandise, partially offset by continued strong results in core consumable
categories, including animal and pet-related products. Additionally, same-store sales were
negatively impacted by approximately 100 basis points due to one less selling day related to the
shift of the Easter holiday from March into April.
We opened 13 new stores during the second quarter of 2009 compared to 23 new store openings during
the prior year’s second quarter. During the first six months of 2009, we opened 41 new stores with
one relocation, compared to 50 new store openings and no relocations during the first six months of
2008. We closed one store during the first six months of 2009. We operated 895 stores at June 27,2009, compared to 814 stores at June 28, 2008.
The following chart indicates the average percentage of sales represented by each of our major
product categories during the second quarter and first six months of fiscal 2009 and 2008:
Three months ended
Six months ended
June 27,
June 28,
June 27,
June 28,
Product Category:
2009
2008
2009
2008
Livestock and Pet
37
%
34
%
40
%
37
%
Seasonal Products
27
29
23
25
Hardware and Tools
13
13
14
14
Clothing and Footwear
5
6
7
7
Truck, Trailer and Towing
9
9
8
9
Agricultural
9
9
8
8
Total
100
%
100
%
100
%
100
%
Gross margin for the second quarter and the first six months of fiscal 2009 was $302.2 million and
$503.2 million, respectively. This represents an increase of 10.5% and 12.1%, respectively, over
the comparable periods of the prior year. As a percent of sales, gross margin increased 150 basis
points to 31.9% for the second quarter of fiscal 2009 compared to 30.4% for the comparable period
in fiscal 2008. The improvement in gross margin percentage for the quarter resulted primarily from
reduced transportation costs and a more favorable LIFO provision compared to last year. The
reduced transportation costs resulted primarily from lower fuel costs and to a lesser extent
improved transportation efficiencies. The decrease in the LIFO charge is primarily attributable to
lower inflation, and less clearance merchandise, contributing to a more favorable product mix. The
LIFO provision is dependent upon a combination of expected year-end inventory levels and mix, as
well as the expected year-end inflation rate for the various product categories. We continue to
project a LIFO charge for the full year, despite various cost reductions in several key product
categories, because we anticipate a net increase in aggregate total inventory. The increase is
driven by our mix, which continues to shift to fresh, faster turning goods, as well as our store
base expansion. As a
result, we are adding merchandise that has higher inflation indices than the existing Company
averages, and this creates a LIFO provision even as inflation moderates and inventory per store
declines.
For the first six months of fiscal 2009, the gross margin rate was 31.5% compared to 30.5% for the
first six months of fiscal 2008, primarily from reduced transportation costs and a decrease in the
LIFO charge.
Selling, general and administrative (“SG&A”) expenses increased 10 basis points to 20.9% of sales
in the second quarter of fiscal 2009 from 20.8% of sales in the second quarter of fiscal 2008. The
second quarter increase as a percent to sales was primarily attributable to lower than anticipated
sales and was substantially offset by reduced marketing costs due to the elimination of television
advertising spending. SG&A expenses for the first six months of fiscal 2009 increased 10 basis
points to 23.9% of sales from 23.8% in the first six months of fiscal 2008, primarily due to less
sales leverage, partially offset by reduced marketing spend.
Depreciation and amortization expense was consistent at 1.7% of sales in the second quarter of
fiscal 2009 and 2008. As a percent of sales, depreciation and amortization expense was consistent
at 2.0% in the first six months of fiscal 2009 and 2008.
Interest expense for the second quarter of 2009 was $0.3 million compared to $0.6 million in the
prior year second quarter. For the first six months of fiscal 2009, interest expense decreased to
$0.7 million compared to $1.8 million for the comparable period in fiscal 2008 due to a lower
average outstanding balance on our credit facility and a lower weighted-average interest rate. Our
effective income tax rate decreased to 37.8% in the second quarter and first six months of fiscal
2009 compared with 38.6% for the second quarter and first six months of fiscal 2008 largely due to
certain federal tax credits and the estimated favorable impact of other permanent tax differences
on the revised full year taxable income.
As a result of the foregoing factors, net income for the second quarter of fiscal 2009 increased
26.3% to $54.8 million compared to $43.4 million in the second quarter of fiscal 2008. Net income
for the first six months of fiscal 2009 increased 33.6% to $55.2 million from $41.3 million in the
first six months of the prior year. Net income, as a percent of sales, increased 100 basis points
to 5.8% for the second quarter of fiscal 2009 compared to 4.8% in the second quarter of fiscal
2008. For the first six months of fiscal 2009, net income as a percent of sales increased 70 basis
points to 3.5%, compared to 2.8% for the first six months of fiscal 2008. Net income per diluted
share for the second quarter of fiscal 2008 increased to $1.50 from $1.15 and, for the first six
months of fiscal 2009, increased to $1.51 from $1.09. Outstanding shares were reduced as a result
of repurchases under the Share Repurchase Program. See Note 10 of the Notes to the Consolidated
Financial Statements included herein for further discussion regarding our Share Repurchase Program.
Liquidity and Capital Resources
In addition to normal operating expenses, our primary ongoing cash requirements are for store
expansion and remodeling programs, including inventory purchases and technology upgrades. Our
primary ongoing sources of liquidity are funds provided from operations, commitments available
under our revolving credit agreement and normal trade credit.
At June 27, 2009, we had working capital of $338.9 million, which was a $55.7 million increase and
an $82.3 million increase compared to December 27, 2008 and June 28, 2008, respectively. The
shifts in working capital were primarily attributable to changes in the following components of
current assets and current liabilities (in millions):
In comparison to prior year end, working capital increased as a result of inventory and cash
balances rising more quickly than payables. The increase in inventories resulted primarily from
the purchase of additional inventory for new stores. The increase in cash resulted from strong
earnings in the first six months of 2009.
The increase in working capital as compared to the second quarter of 2008 was the result of an
increase in cash and a decline in payables, partially offset by a decline in inventories. Cash has
increased as a result of strong earnings in 2009 while payables have declined primarily related to
the classification of book overdrafts. At June 27, 2009the Company maintained $102.4 million of
its excess available cash in an account at the same financial institution as its disbursement
accounts. This excess available cash offset all $99.9 million of book overdrafts, and the
remaining net $2.5 million was included in cash at June 27, 2009. In comparison, after the offset
of excess available cash, $79.4 million and $98.6 million of net book overdrafts were included in
accounts payable at December 27, 2008 and June 28, 2008, respectively.
We have aggressively managed inventory and reduced our average inventory per store. There was a
slight decrease in financed inventory from 55.4% at the end of second quarter 2008 to 53.4% at the
end of the current quarter, as we have been more aggressive in working with our vendors in
capturing payment discounts. (The calculated financed inventory assumes FIFO inventory, excludes
inventory in-transit, and includes gross book overdrafts in accounts payable.)
Operations provided net cash of $96.5 million and $184.1 million in the first six months of fiscal
2009 and fiscal 2008, respectively. The $87.6 million decrease in net cash provided in 2009 over
2008 is primarily due to changes in the following operating activities (in millions):
The decline in net cash provided by operations in the first six months of fiscal 2009 compared with
the first six months of fiscal 2008 primarily relates to the book overdrafts compared to the prior
year. As discussed previously, $102.4 million of excess available cash offset all $99.9 million of
book overdrafts at June 27, 2009. In comparison, after the offset of cash, $98.6 million of net
book overdrafts were included in accounts payable at June 28, 2008.
Investing activities used $34.1 million and $53.2 million in the first six months of fiscal 2009
and fiscal 2008, respectively. The majority of this cash requirement relates to our capital
expenditures.
Capital expenditures for the first six months of fiscal 2009 and fiscal 2008 were as follows (in
millions):
The above table reflects 41 new stores in the first six months of fiscal 2009, compared to 50 new
stores during the first six months of fiscal 2008.
Financing activities used $7.5 million and $81.3 million in the first six months of fiscal 2009 and
fiscal 2008, respectively. This decrease in net cash used is largely due to a lower level of
repayments under the Senior Credit Facility and reduced share repurchases.
We are party to a Senior Credit Facility with Bank of America, N.A., as agent for a lender group,
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). We had approximately $322.0
million available for future borrowings, net of outstanding letters of credit, under our Credit
Agreement at June 27, 2009.
The Credit Agreement is unsecured and matures in February 2012, with proceeds expected to be used
for working capital, capital expenditures and share repurchases. Borrowings bear interest at
either the bank’s base rate or LIBOR plus an additional amount ranging from 0.35% to 0.90% per
annum, adjusted quarterly based on our performance (0.50% at June 27, 2009 and June 28, 2008). We
are also required to pay a commitment fee ranging from 0.06% to 0.18% per annum for unused capacity
(0.10% at June 27, 2009 and June 28, 2008). As of June 27, 2009, we were in compliance with all
debt covenants.
We believe that our cash flow from operations, borrowings available under our Credit Agreement, and
normal trade credit will be sufficient to fund our operations and capital expenditure needs,
including store openings and renovations, over the next several years.
Share Repurchase Program
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 20,639 and 738,368 shares under the share repurchase program during the second
quarter of 2009 and 2008, respectively. The total cost of the share repurchases was $0.7 million
and $25.0 million during the second quarter of 2009 and 2008, respectively. We repurchased 301,623
and 815,393 shares under the share repurchase program during the first six months of 2009 and 2008,
respectively. The total cost of the share repurchases was $9.9 million and $27.8 million during
the first six months of 2009 and 2008, respectively. As of June 27, 2009, we had remaining
authorization under the share repurchase program of $186.4 million exclusive of any fees,
commissions, or other expenses.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are limited to operating leases and outstanding letters of
credit. Leasing buildings and equipment for retail stores and offices rather than acquiring these
significant assets allows us to utilize financial capital to operate the business rather than
maintain assets. Letters of credit allow us to purchase inventory in a timely manner.
We had outstanding letters of credit of $28.0 million at June 27, 2009.
Significant Contractual Obligations and Commercial Commitments
We had commitments for new store construction projects totaling approximately $3.8 million at
June 27, 2009. There has been no material change in our contractual obligations and commercial
commitments other than in the ordinary course of business since the end of fiscal 2008.
Significant Accounting Policies and Estimates
Our 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 accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us 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.
Significant accounting policies, including areas of critical management judgments and estimates,
have primary impact on the following financial statement areas:
•
Revenue recognition and sales returns
•
Inventory valuation (including LIFO)
•
Share-based payments
•
Self-insurance reserves
•
Sales tax audit reserve
•
Tax contingencies
•
Goodwill
•
Long-lived assets
See the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended December 27, 2008 for a discussion of our critical accounting policies. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates primarily from the Credit Agreement. The Credit
Agreement bears interest at either the bank’s base rate (3.25% and 5.00% at June 27, 2009 and
June 28, 2008, respectively) or LIBOR (0.31% and 2.48% at June 27, 2009 and June 28, 2008,
respectively) plus an additional amount ranging from 0.35% to 0.90% per annum, adjusted quarterly,
based on our performance (0.50% at June 27, 2009 and June 28, 2008). 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 Agreement (0.10% at June 27, 2009 and June 28, 2008). See Note 9 of
the Notes to the Consolidated Financial Statements included herein for further discussion regarding
the Credit Agreement.
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. Our strategy is to reduce or mitigate the effects of purchase
price volatility principally by taking advantage of vendor incentive programs, economies of scale
from increased volume of purchases, adjusting retail prices and selectively buying from the most
competitive vendors without sacrificing quality. Due to the competitive environment, such
conditions have and may continue to adversely impact our financial performance.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934
Act”), under the supervision and with the participation of our principal executive officer and
principal financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of
June 27, 2009. Based on this evaluation, our principal executive officer and principal financial
officer concluded that, as of June 27, 2009, our disclosure controls and procedures were effective
to ensure that information required to be disclosed by us in the reports that we file or submit
under the 1934 Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the second
fiscal quarter of 2009 that have materially affected or are reasonably likely to materially affect
our internal control over financial reporting.
We are involved in various litigation matters arising in the ordinary course of business. We
expect these matters will be resolved without material adverse effect on our consolidated financial
position or results of operations. Any estimated loss related to such matters has been adequately
provided in accrued liabilities to the extent probable and reasonably estimable. It is possible,
however, that future results of operations for any particular quarterly or annual period could be
affected by changes in circumstances relating to these proceedings.
Item 1A. Risk Factors
There have been no material changes to our risk factors as previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended December 27, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
We have a share repurchase program which provides for repurchase of up to $400 million of our
outstanding common stock through December 2011. Stock repurchase activity during the second
quarter of fiscal 2009 was as follows:
We expect to implement the balance of the repurchase program through purchases made from time to
time either in the open market or through private transactions, in accordance with regulations of
the Securities and Exchange Commission.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a)
Our Annual Meeting of Stockholders was held on May 7, 2009 at our corporate headquarters in
Brentwood, Tennessee.
(b)
The stockholders elected, for a one-year term, the directors set forth below.
Pursuant to the requirements 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.