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

The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended December 27, 2014 (our fiscal years 2014, 2013 and 2012). This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements. See “Forward-Looking Statements” and “Risk Factors” included elsewhere in this report.

Overview

Tractor Supply Company is the largest operator of rural lifestyle retail stores in the United States. The Company is focused on supplying the needs of recreational farmers and ranchers and others who enjoy the rural lifestyle, as well as tradesmen and small businesses. As of December 27, 2014, we operated 1,382 retail stores in 49 states under the names Tractor Supply Company, Del’s Feed & Farm Supply and HomeTown Pet. We also operate a website under the name TractorSupply.com. Our stores are located primarily in towns outlying major metropolitan markets and in rural communities, and they offer the following comprehensive selection of merchandise:

•	Equine, livestock, pet and small animal products, including items necessary for their health, care, growth and containment;

•	Hardware, truck, towing and tool products;

•	Seasonal products, including heating, lawn and garden items, power equipment, gifts and toys;

•	Work/recreational clothing and footwear; and

•	Maintenance products for agricultural and rural use.

Our current and long-term growth strategy is to: (1) expand domestic geographic market presence through opening new retail stores, (2) enhance financial performance through comparable store sales growth achieved through targeted merchandising and marketing programs with an “everyday value price” philosophy supported by strong customer service, (3) enhance product margin through strategic product sourcing, inventory and markdown management, a strong exclusive brand offering, and optimization of product pricing and transportation costs, (4) leverage operating costs by focusing on opportunities for continuous improvement and elimination of waste in all of our processes, (5) expand market opportunities via e-commerce and internet-supported sales by improving our website product content and enhancing the online experience, and (6) expand through selective acquisition, as such opportunities arise, to enhance penetration into new and existing markets to complement organic growth.

Over the past five years we have experienced considerable growth in stores, growing from 930 stores at the end of 2009 to 1,382 stores at the end of fiscal 2014, and in sales, with a compounded annual growth rate of approximately 12.2%. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in existing and new markets. We have developed a proven method for selecting store sites and have identified over 700 additional markets for new Tractor Supply stores.

Executive Summary

We opened 107 new stores in 2014 and 102 new stores in 2013, a selling square footage increase of approximately 8.3% in both fiscal 2014 and 2013. During 2014, we opened stores in 31 states, including our first store in Utah, and in 2015 we expect to continue our expansion into the western states.

Net sales increased 10.6% to $5.71 billion in fiscal 2014 from $5.16 billion in fiscal 2013. Comparable store sales increased 3.8% in fiscal 2014 versus a 4.8% increase in fiscal 2013. Gross profit increased 11.2% to $1.95 billion in fiscal 2014 from $1.75 billion in fiscal 2013, and gross margin increased 10 basis points to 34.1% of sales in fiscal 2014 from 34.0% of sales in fiscal 2013. Operating profit increased 30 basis points to 10.3% of sales in fiscal 2014 from 10.0% of sales in fiscal 2013. In fiscal 2014, diluted earnings per share grew 14.7%, to $2.66 compared to $2.32 in fiscal 2013.

We ended the year with $51.1 million in cash, after returning $382.6 million to our stockholders through stock repurchases and dividends.

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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.

Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Inventory Valuation:
Inventory Impairment
We identify potentially excess and slow-moving inventory by evaluating turn rates, historical and expected future sales trends, age of merchandise, overall inventory levels, current cost of inventory and other benchmarks. We have established an inventory valuation reserve to recognize the estimated impairment in value (i.e., an inability to realize the full carrying value) based on our aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies.		We do not believe our merchandise inventories are subject to significant risk of obsolescence in the near term. However, changes in market conditions or consumer purchasing patterns could result in the need for additional reserves. Our impairment reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding forecasted customer demand and the promotional environment.		We have not made any material changes in the accounting methodology used to recognize inventory impairment reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate impairment. However, if assumptions regarding consumer demand or clearance potential for certain products are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our impairment reserve at December 27, 2014, would have affected net income by approximately $0.5 million in fiscal 2014.

Index

Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Shrinkage
We perform physical inventories at each store at least once a year, and we have established a reserve for estimating inventory shrinkage between physical inventory counts. The reserve is established by assessing the chain-wide average shrinkage experience rate, applied to the related periods’ sales volumes. Such assessments are updated on a regular basis for the most recent individual store experiences.		The estimated store inventory shrink rate is based on historical experience. We believe historical rates are a reasonably accurate reflection of future trends. Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding future shrinkage trends, the effect of loss prevention measures and new merchandising strategies.		We have not made any material changes in the accounting methodology used to recognize shrinkage in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our shrinkage reserve. However, if our estimates regarding inventory losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our shrinkage reserve at December 27, 2014, would have affected net income by approximately $1.1 million in fiscal 2014.
Vendor Funding
We receive funding from substantially all of our significant merchandise vendors, in support of our business initiatives, through a variety of programs and arrangements, including guaranteed vendor support funds (“vendor support”) and volume-based rebate funds (“volume rebates”). The amounts received are subject to terms of vendor agreements, most of which are “evergreen”, reflecting the on-going relationship with our significant merchandise vendors. Certain of our agreements, primarily volume rebates, are renegotiated annually, based on expected annual purchases of the vendor’s product. Vendor funding is initially deferred as a reduction of the purchase price of inventory and then recognized as a reduction of cost of merchandise as the related inventory is sold. During interim periods, the amount of vendor support is known; however, volume rebates are estimated during interim periods based upon initial commitments and anticipated purchase levels with applicable vendors.		The estimated purchase volume (and related vendor funding through volume rebates) is based on our current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations. Although we believe we can reasonably estimate purchase volume and related volume rebates at interim periods, it is possible that actual year-end results could be different from previously estimated amounts. Our allocation methodology contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding customer demand, purchasing activity, target thresholds, vendor attrition and collectibility.		We have not made any material changes in the accounting methodology used to establish our vendor support reserves in the financial periods presented. At the end of each fiscal year, a significant portion of the actual purchase activity is known. Thus, we do not believe there is a reasonable likelihood that there will be a material change in the amounts recorded as vendor support. We do not believe there is a significant collectibility risk related to vendor support amounts due us at the end of fiscal 2014. If a 10% reserve had been applied against our outstanding vendor support due as of December 27, 2014, net income would have been affected by approximately $1.1 million in fiscal 2014. 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.		We have not made any material changes in the accounting methodology used to establish our capitalized freight balance or freight allocation in the financial periods presented. If a 10% increase or decrease had been applied against our current inventory capitalized freight balance as of December 27, 2014, net income would have been affected by approximately $5.7 million in fiscal 2014.

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Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Self-Insurance Reserves:
We self-insure a significant portion of our employee medical insurance, workers’ compensation and general liability insurance plans. We have stop-loss insurance policies to protect from individual losses over specified dollar values. Provisions for losses related to our self-insured liabilities are based upon periodic independent actuarially determined estimates that consider a number of factors including historical claims experience, demographic factors and severity factors.		The full extent of certain claims, especially workers’ compensation and general liability claims, may not become fully determined for several years. Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date based upon historical data and experience, including actuarial calculations.		We have not made any material changes in the accounting methodology used to establish our self-insurance reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate insurance reserves. However, if we experience a significant increase in the number of claims or the cost associated with these claims, we may be exposed to losses that could be material. A 10% change in our self-insurance reserves at December 27, 2014, would have affected net income by approximately $3.0 million in fiscal 2014.
Sales Tax Audit Reserve:
A portion of our sales are to tax-exempt customers, predominantly agricultural-based. 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 accuracy of our sales tax compliance. When establishing our sales tax audit reserve, we review our past audit experience and assessments with applicable states to continually determine if we have potential exposure for non-compliance. Any estimated liability is based on an initial assessment of compliance risk as well as our historical experience with each respective state.		We continually reassess the exposure based on historical audit results, changes in policies, preliminary and final assessments made by state sales tax auditors, and 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 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 to our sales tax audit assessment methodology in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate the sales tax liability reserve. 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 audit reserve at December 27, 2014, would have affected net income by approximately $0.7 million in fiscal 2014.

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Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
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 a liability for uncertain tax positions taken or expected to be taken in a tax return. 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 recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, the statute of limitations expires for the relevant tax authority to examine the tax position or when more information becomes available.		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.		We have not made any material changes in the accounting methodology used to establish our tax contingencies in the financial periods presented. 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 uncertain tax position reserve at December 27, 2014 would have affected net income by approximately $0.2 million in fiscal 2014.

Index

Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
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 future cash flows (undiscounted and without interest charges). The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level. The significant assumptions used to determine estimated undiscounted cash flows include cash inflows and outflows directly resulting from the use of those assets in operations, including margin on net sales, payroll and related items, occupancy costs, insurance allocations and other costs to operate a store. If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on an estimated future cash flow model. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of that asset.		Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, 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.

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Quarterly Financial Data

Our unaudited quarterly operating results for each fiscal quarter of 2014 and 2013 are shown below (in thousands, except per share amounts):

2014		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
Net sales		$	1,183,680			$	1,583,831			$	1,359,950			$	1,584,254			$	5,711,715
Gross profit		396,219				550,532				464,069				539,595				1,950,415
Operating income		78,729				211,029				122,013				177,701				589,472
Net income		48,809				133,411				76,603				112,062				370,885
Net income per share: (a)
Basic		$	0.35			$	0.96			$	0.56			$	0.82			$	2.69
Diluted		$	0.35			$	0.95			$	0.55			$	0.81			$	2.66
Comparable store sales increase		2.2		%		1.9		%		5.6		%		5.3		%		3.8		%

2013		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
Net sales		$	1,085,838			$	1,455,767			$	1,208,090			$	1,415,089			$	5,164,784
Gross profit		352,091				506,140				415,666				479,712				1,753,609
Operating income		67,923				197,979				101,670				147,078				514,650
Net income		44,006				123,580				64,767				95,881				328,234
Net income per share: (a)
Basic		$	0.32			$	0.89			$	0.46			$	0.69			$	2.35
Diluted		$	0.31			$	0.87			$	0.46			$	0.68			$	2.32
Comparable store sales increase		0.5		%		7.2		%		7.5		%		3.5		%		4.8		%

(a) Due to the nature of interim net income per share calculations, the sum of quarterly net income per share amounts may not equal the reported net income per share for the year.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our Consolidated Statements of Income expressed as a percentage of net sales.

	2014			2013			2012
Net sales	100.0	%		100.0	%		100.0	%
Cost of merchandise sold (a)	65.9			66.0			66.4
Gross margin (a)	34.1			34.0			33.6
Selling, general and administrative expenses(a)	21.8			22.1			22.3
Depreciation and amortization	2.0			1.9			1.9
Income before income taxes	10.3			10.0			9.4
Income tax provision	3.8			3.6			3.4
Net income	6.5	%		6.4	%		6.0	%

(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 our Company) 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.

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Fiscal 2014 Compared to Fiscal 2013

Net sales increased 10.6% to $5.71 billion in fiscal 2014 from $5.16 billion in fiscal 2013. Comparable store sales for fiscal 2014 were $5.37 billion, a 3.8% increase over fiscal 2013. This compares to a 4.8% comparable store sales increase in the prior year. The comparable store transaction count increased 3.2%, while comparable store average ticket increased 0.6% for fiscal 2014.

Comparable store sales are calculated on an annual basis using sales generated from all stores open at least one year and all online sales and exclude certain adjustments to net sales. Stores closed or relocated during either of the years being compared are not removed from our comparable store sales metrics calculations. If the effect of closed and/or relocated stores on our comparable store sales metrics calculations becomes material, we would remove closed and/or relocated stores from the calculations.

The comparable store sales increase was driven by continued strong results in key consumable, usable, edible (“C.U.E.”) products, principally animal- and pet-related merchandise, and an increase in traffic counts. This was a result of continued investment in C.U.E. inventory, expanded product assortments and improved localized product offerings. Seasonal merchandise, predominantly heating and outdoor power equipment, performed well during the year. We also estimate that comparable store sales were unfavorably impacted by approximately 85 basis points due to deflation, principally in livestock feed and bird feeding products.

In addition to comparable store sales growth in fiscal 2014, sales from stores opened less than one year were $353.4 million in fiscal 2014, which represented 6.8 percentage points of the 10.6% increase over fiscal 2013 net sales. Sales from stores opened less than one year were $281.2 million in fiscal 2013, which represented 6.0 percentage points of the 10.7% increase over fiscal 2012 net sales.

The following chart summarizes our store growth during fiscal 2014 and 2013:

	2014			2013
Store Count, Beginning of Period	1,276			1,176
New Stores Opened (a)	107			102
Stores Closed	(1	)		(2	)
Store Count, End of Period	1,382			1,276
Stores Relocated	2			3

(a) Includes the Company’s two HomeTown Pet stores.

The following chart indicates the percentage of sales represented by each of our major product categories during fiscal 2014 and 2013:

	Percent of Sales
Product Category:	2014			2013
Livestock and Pet	44	%		43	%
Hardware, Tools,Truck and Towing	22			23
Seasonal, Gift and Toy Products	20			20
Clothing and Footwear	9			9
Agriculture	5			5
Total	100	%		100	%

Gross profit increased 11.2% to $1.95 billion in fiscal 2014 compared to $1.75 billion in fiscal 2013. As a percent of sales, gross margin increased 10 basis points to 34.1% for fiscal 2014 compared to 34.0% for fiscal 2013. This improvement in gross margin reflects improved direct product margin partially offset by higher transportation costs, primarily due to our continued western store expansion. Direct product margin increased as a result of continued focus on our four strategic margin initiatives which include inventory and markdown management, strategic sourcing, exclusive branding and retail price management.

As a percent of sales, SG&A expenses, including depreciation and amortization, improved 20 basis points to 23.8% in fiscal 2014 from 24.0% in fiscal 2013. The SG&A improvement as a percent of sales was primarily attributable to the leverage of comparable store sales growth and lower year-over-year incentive compensation expense. Total SG&A expenses, including depreciation and amortization, for fiscal 2014 increased 9.8% to $1.36 billion from $1.24 billion in fiscal 2013. The increase in SG&A primarily reflects new store growth and variable costs associated with our comparable store sales growth.

Index

Our effective tax rate increased to 36.9% for fiscal 2014 compared to 36.2% in fiscal 2013 as the prior year was favorably impacted by the reversal of various reserves for uncertain tax positions.

As a result of the foregoing factors, net income for fiscal 2014 increased 13.0% to $370.9 million, or $2.66 per diluted share, as compared to net income of $328.2 million, or $2.32 per diluted share, in fiscal 2013.

During fiscal 2014, we repurchased approximately 4.7 million shares of the Company’s common stock at a total cost of $298.5 million as part of our previously announced $2 billion share repurchase program. In fiscal 2013, we repurchased approximately 2.3 million shares at a total cost of $129.4 million.

Fiscal 2013 Compared to Fiscal 2012

Net sales increased 10.7% to $5.16 billion in fiscal 2013 from $4.66 billion in fiscal 2012. Comparable store sales for fiscal 2013 were $4.89 billion, a 4.8% increase over fiscal 2012. This compares to a 5.3% comparable store sales increase in the prior year. The comparable store transaction count increased 4.7%, while comparable store average ticket remained flat for fiscal 2013, principally as a result of big ticket sales being less of the sales mix.

The comparable store sales increase was driven by continued strong results in key C.U.E. products, principally animal- and pet-related merchandise. This was a result of continued investment in C.U.E inventory, expanded product assortments and improved localized product offerings. Winter seasonal merchandise, predominantly heating and insulated outerwear, also performed well during the first part of fiscal 2013 and the end of fiscal 2013 due to the colder than average weather. We also estimate that comparable store sales were favorably impacted by approximately 70 basis points due to inflation, principally in pet food and livestock feed.

In addition to comparable store sales growth in fiscal 2013, sales from stores opened less than one year were $281.2 million in fiscal 2013, which represented 6.0 percentage points of the 10.7% increase over fiscal 2012 net sales. Sales from stores opened less than one year were $276.2 million in fiscal 2012, which represented 6.5 percentage points of the 10.2% increase over fiscal 2011 net sales.

The following chart summarizes our store growth during fiscal 2013 and 2012:

	2013			2012
Store Count, Beginning of Period	1,176			1,085
New Stores Opened	102			93
Stores Closed	(2	)		(2	)
Store Count, End of Period	1,276			1,176
Stores Relocated	3			1

The following chart indicates the percentage of sales represented by each of our major product categories during fiscal 2013 and 2012:

	Percent of Sales
Product Category:	2013			2012
Livestock and Pet	43	%		42	%
Hardware, Tools, Truck and Towing	23			23
Seasonal, Gift and Toy Products	20			20
Clothing and Footwear	9			9
Agriculture	5			6
Total	100	%		100	%

Index

Gross profit increased 12.0% to $1.75 billion in fiscal 2013 compared to $1.57 billion in fiscal 2012. As a percent of sales, gross margin increased 40 basis points to 34.0% for fiscal 2013 compared to 33.6% for fiscal 2012. This improvement in gross margin reflects improved direct product margin. Direct product margin increased as a result of continued progress on our four strategic margin initiatives which include inventory and markdown management, strategic sourcing, exclusive branding and retail price management.

As a percent of sales, SG&A expenses, including depreciation and amortization, improved 20 basis points to 24.0% in fiscal 2013 from 24.2% in fiscal 2012. The SG&A improvement as a percent of sales was primarily attributable to the leverage of continued solid comparable store sales growth, expense control related to store operating costs and lower year-over-year incentive compensation expense, partially offset by costs related to the new and expanded Southeast distribution center and relocation of our corporate data center. Total SG&A expenses for fiscal 2013 increased 9.7% to $1.24 billion from $1.13 billion in fiscal 2012. The increase in SG&A primarily reflects new store growth and variable costs associated with our comparable store sales growth as well as operating costs relating to our new and expanded Southeast distribution center and corporate data center.

Our effective tax rate decreased to 36.2% for fiscal 2013 compared to 36.6% in fiscal 2012. The reduction in the tax rate resulted primarily from the favorable impact of the reversal of various reserves for uncertain tax positions.

As a result of the foregoing factors, net income for fiscal 2013 increased 18.7% to $328.2 million, or $2.32 per diluted share, as compared to net income of $276.5 million, or $1.90 per diluted share, in fiscal 2012.

During fiscal 2013, we repurchased approximately 2.3 million shares of the Company’s common stock at a total cost of $129.4 million as part of our previously announced $2 billion share repurchase program. In fiscal 2012, we repurchased approximately 6.1 million shares at a total cost of $271.8 million.

Liquidity and Capital Resources

In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, remodeling and relocation programs, distribution center and Store Support Center capacity and improvements, information technology, inventory purchases, share repurchases and cash dividends. Our primary ongoing sources of liquidity are existing cash balances, funds provided from operations, borrowings available under our Senior Credit Facility, capital and operating leases and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters to support the higher sales volume of the spring and cold-weather selling seasons, respectively.

Working Capital

At December 27, 2014, the Company had working capital of $670.9 million, which decreased $6.2 million from December 28, 2013. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

	2014				2013				Variance
Current assets:
Cash and cash equivalents	$	51.1			$	142.7			$	(91.6	)
Inventories	1,115.5				979.3				136.2
Prepaid expenses and other current assets	66.4				57.4				9.0
Deferred income taxes	41.0				29.8				11.2
Total current assets	1,274.0				1,209.2				64.8
Current liabilities:
Accounts payable	370.8				316.5				54.3
Accrued employee compensation	37.1				50.6				(13.5		)
Other accrued expenses	182.6				155.6				27.0
Current portion of capital lease obligation	0.2				—				0.2
Income taxes payable	12.4				9.4				3.0
Total current liabilities	603.1				532.1				71.0
Working capital	$	670.9			$	677.1			$	(6.2	)

Index

In comparison to December 28, 2013, working capital as of December 27, 2014 was impacted most significantly by changes in our cash, inventory and accounts payable.

•	The decrease in cash is primarily attributable to incremental common stock repurchases offset in part by earnings from operations. Common stock repurchases increased $169.1 million from $129.4 million in fiscal 2013 to $298.5 million in fiscal 2014.

•	We actively manage our inventory balances and in-stock levels at our stores. The increase in inventory was primarily due to new store growth. Average inventory per store increased 4.0% compared to the prior year. The increase in average inventory per store is principally related to a better in-stock position on key winter goods compared to prior year.

•	Accounts payable increased primarily as a result of new store growth and higher average inventory per store along with timing of payments to vendors.

Borrowings and Credit Facilities

On May 16, 2014, the Company exercised the option to increase the availability under the Senior Credit Facility by $150 million, which increased the aggregate principle amount available thereunder from $250 million to $400 million. The sublimit for swingline loans was also increased from $20 million to $30 million. This agreement is unsecured and matures in October 2016, with proceeds available to be used for working capital, capital expenditures, dividends, share repurchases and other matters.

At December 27, 2014 and December 28, 2013, there were no outstanding borrowings under the Senior Credit Facility. There were $40.7 million and $38.2 million outstanding letters of credit under the Senior Credit Facility as of December 27, 2014 and December 28, 2013, respectively. Borrowings bear interest at either the bank’s base rate (3.25% at December 27, 2014) or the London Inter-Bank Offer Rate (“LIBOR”) (0.17% at December 27, 2014) plus an additional amount ranging from 0.40% to 1.00% per annum (0.50% at December 27, 2014), adjusted quarterly based on our leverage ratio. We are also required to pay, quarterly in arrears, a commitment fee for unused capacity ranging from 0.08% to 0.20% per annum (0.10% at December 27, 2014), adjusted quarterly based on our leverage ratio. There are no compensating balance requirements associated with the Senior Credit Facility.

The Senior Credit Facility requires quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. The fixed charge coverage ratio compares earnings before interest, taxes, depreciation, amortization, stock compensation and rent expense (“consolidated EBITDAR”) to the sum of interest paid and rental expense (excluding any straight-line rent adjustments). The leverage ratio compares total debt plus rental expense (excluding any straight-line rent adjustments) multiplied by a factor of six to consolidated EBITDAR. The Senior Credit Facility 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 27, 2014.

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, while uses of cash for financing activities are repurchase of the Company’s common stock and cash dividends paid to stockholders. The following table presents a summary of cash flows from operating, investing and financing activities for the last three fiscal years (in millions):

	2014				2013				2012
Net cash provided by operating activities	$	409.2			$	333.7			$	378.3
Net cash used in investing activities	(160.3		)		(209.3		)		(139.1		)
Net cash used in financing activities	(340.5		)		(120.3		)		(277.5		)
Net (decrease) increase in cash and cash equivalents	$	(91.6	)		$	4.1			$	(38.3	)

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Operating Activities

Operating activities provided net cash of $409.2 million, $333.7 million and $378.3 million in fiscal 2014, 2013 and 2012, respectively. The $75.5 million increase in net cash provided by operating activities in fiscal 2014 compared to fiscal 2013 was primarily due to changes in the following operating activities (in millions):

	2014				2013				Variance
Net income	$	370.9			$	328.2			$	42.7
Depreciation and amortization	114.6				100.0				14.6
Stock compensation expense	16.2				13.9				2.3
Excess tax benefit of stock options exercised	(18.8		)		(43.5		)		24.7
Deferred income taxes	(19.8		)		(8.3		)		(11.5		)
Inventories and accounts payable	(81.8		)		(75.1		)		(6.7		)
Prepaid expenses and other current assets	(9.1		)		(5.5		)		(3.6		)
Accrued expenses	6.8				12.1				(5.3		)
Income taxes payable	21.9				9.6				12.3
Other, net	8.3				2.3				6.0
Net cash provided by operations	$	409.2			$	333.7			$	75.5

The $75.5 million increase in net cash provided by operating activities in fiscal 2014 compared with fiscal 2013 primarily reflects earnings growth, the favorable impacts related to the timing of tax benefits and income tax payments, and increased depreciation and amortization expense due to capital expenditures for store growth, distribution center capacity and corporate infrastructure.

The $44.6 million decrease in net cash provided by operations in fiscal 2013 over fiscal 2012 was primarily due to changes in the following operating activities (in millions):

	2013				2012				Variance
Net income	$	328.2			$	276.5			$	51.7
Depreciation and amortization	100.0				89.0				11.0
Stock compensation expense	13.9				17.6				(3.7		)
Excess tax benefit of stock options exercised	(43.5		)		(25.8		)		(17.7		)
Deferred income taxes	(8.3		)		(26.6		)		18.3
Inventories and accounts payable	(75.1		)		(23.3		)		(51.8		)
Prepaid expenses and other current assets	(5.5		)		(0.1		)		(5.4		)
Accrued expenses	12.1				9.0				3.1
Income taxes payable	9.6				57.3				(47.7		)
Other, net	2.3				4.7				(2.4		)
Net cash provided by operations	$	333.7			$	378.3			$	(44.6	)

The $44.6 million decrease in net cash provided by operating activities in fiscal 2013 compared with fiscal 2012 primarily related to increased inventory levels, a reduction in accounts payable and timing of estimated tax payments, partially offset by an increase in net earnings. Inventory increased in proportion to store growth as expected, but the accounts payable balance declined year over year. The timing of receipt of seasonal goods was much earlier in the fourth quarter in 2013 compared to 2012 and imports made up a larger percentage of fourth quarter receipts, requiring payment on trade credit prior to year end. These factors drove the decline in accounts payable. Income taxes payable declined due to the timing of estimated tax payments resulting from changes in allowable deductions for depreciation expense.

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Investing Activities

Investing activities used cash of $160.3 million, $209.3 million and $139.1 million in fiscal 2014, 2013 and 2012, respectively. The changes in cash used for investing activities primarily reflects changes in capital expenditures. Capital expenditures for fiscal 2014, 2013 and 2012 were as follows (in millions):

	2014				2013				2012
New and relocated stores and stores not yet opened	$	80.8			$	69.1			$	60.4
Corporate and other	27.9				40.7				13.8
Information technology	22.7				29.8				28.2
Existing stores	20.0				22.3				22.2
Distribution center capacity and improvements	9.2				44.9				16.4
Purchase of previously leased stores	—				11.4				11.9
Total capital expenditures	$	160.6			$	218.2			$	152.9

The above table reflects 107 new stores and two relocations during fiscal 2014, 102 new stores and three relocations during fiscal 2013 and 93 new stores and one relocation during fiscal 2012. The majority of the corporate and other category for fiscal 2014, 2013 and 2012 relates to construction of our new Store Support Center in Brentwood, Tennessee with the greatest portion of the spend in fiscal 2013. The higher capital expenditures in fiscal 2013 for distribution center capacity and improvements was primarily due to construction of our Macon, Georgia distribution center, which was the relocation of our former leased Southeast distribution center in Braselton, Georgia. We did not purchase any leased stores during fiscal 2014 compared to having purchased three leased stores in fiscal 2013 and five leased stores in fiscal 2012.

We currently estimate that capital expenditures will range between $240 million and $250 million in fiscal 2015.

•	We plan to open between 110 to 115 stores in fiscal 2015. Additionally, we plan to relocate five stores as well as increase our investment in existing store renovations.

•

We plan to invest in our distribution center network in fiscal 2015, principally for development of a new Southwest distribution center, expansion of our existing Northeast distribution center, and development of two smaller cross-dock facilities (“mixing centers”) in our Texas region to handle certain high-volume bulk products. We estimate that our capital expenditures relating to the distribution network will range between $75 million and $85 million in fiscal 2015.

•	We also plan to invest in information technology upgrades at our stores and Store Support Center, which will include additional omni-channel capabilities, improved inventory allocation system, continued improvements in data security and enhanced customer relationship management.

Financing Activities

Financing activities used cash of $340.5 million, $120.3 million, and $277.5 million in fiscal 2014, 2013 and 2012, respectively. The net cash used in financing activities in fiscal 2014 was mainly the result of repurchases of common stock and quarterly cash dividends paid to stockholders, partially offset by net proceeds from issuance of common stock related to share-based compensation and excess tax benefits recognized on stock options exercised. The increase in net cash used in financing activities is largely due to an increase of $169.1 million in common stock repurchases made in fiscal 2014 compared to fiscal 2013.

On February 24, 2014, the Company’s Board of Directors authorized a $1 billion increase to the existing share repurchase program, bringing the total amount authorized to date under the program to an aggregate of $2 billion of common stock, exclusive of any fees, commissions, or other expenses related to such repurchases, through December 2017. 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 are accounted for at cost and will be held in treasury for future issuance. The program may be limited or terminated at any time without prior notice.

We repurchased approximately 4.7 million, 2.3 million and 6.1 million shares of common stock under the share repurchase program at a total cost of $298.5 million, $129.4 million and $271.8 million in fiscal 2014, 2013 and 2012, respectively. As of December 27, 2014, we had remaining authorization under the share repurchase program of $863.3 million, exclusive of any fees, commissions, or other expenses.

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In the second quarter of fiscal 2014, we increased our quarterly dividend from $0.13 per share to $0.16 per share and, in the second quarter of fiscal 2013, we increased our quarterly dividend from $0.10 per share to $0.13 per share. We paid dividends totaling $84.1 million, $68.5 million and $51.3 million in fiscal 2014, 2013 and 2012, respectively.

We believe that our existing cash balances, expected cash flow from future operations, borrowings available under the Senior Credit Facility, operating and capital leases and normal trade credit will be sufficient to fund our operations and our capital expenditure needs, including new store openings, store acquisitions, relocations and renovations and distribution center capacity, through the end of fiscal 2015.

Significant Contractual Obligations and Commercial Commitments

The following table reflects our future obligations and commitments as of December 27, 2014 (in thousands):

		Payment Due by Period
		Total				2015				2016-2017				2018-2019				Thereafter
Operating leases		$	2,076,057			$	243,864			$	462,347			$	417,289			$	952,557
Capital leases(a)		8,049				537				1,074				1,074				5,364
Construction commitments(b)		58,795				54,412				4,383				—				—
		$	2,142,901			$	298,813			$	467,804			$	418,363			$	957,921

(a) Capital lease obligations include related interest.

(b) Reflects $17.8 million for the land and construction of stores expected to be opened and $41.0 million for the construction of our new distribution center located in Casa Grande, Arizona.

At December 27, 2014, there were $40.7 million outstanding letters of credit under the Senior Credit Facility and an $18.3 million outstanding letter of credit at a financial institution outside of the Senior Credit Facility.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. The balances for these arrangements are previously discussed. We typically lease buildings for retail stores rather than acquiring these assets through purchases. Letters of credit allow us to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 will have on our Condensed Consolidated Financial Statements and related disclosures, including which transition method it will adopt.

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