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 26, 2015 (our fiscal years 2015, 2014 and 2013). 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 (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. As of December 26, 2015, we operated 1,488 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 omni-channel enhancements, tying together our website product content, social media and online shopping experience, and (6) expand through selective acquisitions, 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 1,001 stores at the end of 2010 to 1,488 stores at the end of fiscal 2015, and in sales, with a compounded annual growth rate of approximately 11.3%. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in existing and new markets. We have developed a proven method for selecting store sites and have identified approximately 1,000 additional opportunities for new Tractor Supply stores.

Executive Summary

We opened 114 new stores in 2015 and 107 new stores in 2014, a selling square footage increase of approximately 8.0% in fiscal 2015 and approximately 8.3% in fiscal 2014. During 2015, we opened stores in 33 states and completed construction of a new distribution center in Casa Grande, Arizona to support our continued expansion into the western states. Also in 2015, we completed construction of two smaller cross-dock facilities (“mixing centers”) in Texas to improve distribution of certain high-volume bulk products.

Net sales increased 9.0% to $6.23 billion in fiscal 2015 from $5.71 billion in fiscal 2014. Comparable store sales increased 3.1% in fiscal 2015 versus a 3.8% increase in fiscal 2014. Gross profit increased 9.9% to $2.14 billion in fiscal 2015 from $1.95 billion in fiscal 2014, and gross margin increased 30 basis points to 34.4% of sales in fiscal 2015 from 34.1% of sales in fiscal 2014. Operating income increased 10 basis points to 10.4% of net sales in fiscal 2015 from 10.3% of net sales in fiscal 2014. In fiscal 2015, diluted earnings per share grew 12.8%, to $3.00 compared to $2.66 in fiscal 2014.

We ended the year with $63.8 million in cash and outstanding debt of $150.0 million, after returning $395.8 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 as of December 26, 2015, would have affected net income by approximately $0.4 million in fiscal 2015.

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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 as of December 26, 2015, would have affected net income by approximately $1.2 million in fiscal 2015.
Vendor Funding
We receive funding from substantially all of our significant merchandise vendors, in support of our business initiatives, through a variety of programs and arrangements, including vendor support funds (“vendor support”) and volume-based rebate funds (“volume rebates”). The amounts received are subject to terms of vendor agreements, most of which are “evergreen”, reflecting the on-going relationship with our significant merchandise vendors. Certain of our agreements, primarily volume rebates, are renegotiated annually, based on expected annual purchases of the vendor’s product. Vendor funding is initially deferred as a reduction of the purchase price of inventory and then recognized as a reduction of cost of merchandise as the related inventory is sold. During interim periods, the amount of vendor support is estimated based upon initial commitments and anticipated purchase levels with applicable vendors.		The estimated purchase volume (and related vendor funding) is based on our current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations. Although we believe we can reasonably estimate purchase volume and related volume rebates at interim periods, it is possible that actual year-end results could be different from previously estimated amounts. Our allocation methodology contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding customer demand, purchasing activity, target thresholds, vendor attrition and collectability.		We have not made any material changes in the accounting methodology used to establish our vendor 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 collectability risk related to vendor support amounts due us at the end of fiscal 2015. If a 10% reserve had been applied against our outstanding vendor support due as of December 26, 2015, net income would have been affected by approximately $1.7 million in fiscal 2015. 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 26, 2015, net income would have been affected by approximately $6.6 million in fiscal 2015.

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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 as of December 26, 2015, would have affected net income by approximately $3.2 million in fiscal 2015.
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 as of December 26, 2015, would have affected net income by approximately $0.8 million in fiscal 2015.

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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 as of December 26, 2015 would have affected net income by approximately $0.2 million in fiscal 2015.

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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 2015 and 2014 are shown below (in thousands, except per share amounts):

2015		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
Net sales		$	1,331,352			$	1,772,900			$	1,475,645			$	1,646,610			$	6,226,507
Gross profit		444,605				625,320				512,248				561,001				2,143,174
Operating income		92,847				245,165				139,208				173,288				650,508
Net income		58,040				153,331				87,312				111,712				410,395
Net income per share:
Basic		$	0.43			$	1.13			$	0.64			$	0.83			$	3.03
Diluted		$	0.42			$	1.12			$	0.64			$	0.82			$	3.00
Comparable store sales increase (decrease) (a)		5.7		%		5.6		%		2.9		%		(1.4		)%		3.1		%

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:
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 (a)		2.2		%		1.9		%		5.6		%		5.3		%		3.8		%

(a) Comparable store metrics are calculated using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Beginning in fiscal 2015, stores closed during the year are removed from our comparable store metrics calculations. This change in the calculation methodology did not have a material impact on the comparable store metrics reported in prior periods presented due to the minimal number of stores closed in those periods. Stores relocated during the periods being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations.

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.

	2015			2014			2013
Net sales	100.0	%		100.0	%		100.0	%
Cost of merchandise sold (a)	65.6			65.9			66.0
Gross margin (a)	34.4			34.1			34.0
Selling, general and administrative expenses(a)	22.0			21.8			22.1
Depreciation and amortization	2.0			2.0			1.9
Income before income taxes	10.4			10.3			10.0
Income tax provision	3.8			3.8			3.6
Net income	6.6	%		6.5	%		6.4	%

(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 2015 Compared to Fiscal 2014

Net sales increased 9.0% to $6.23 billion in fiscal 2015 from $5.71 billion in fiscal 2014. Comparable store sales for fiscal 2015 were $5.89 billion, a 3.1% increase over fiscal 2014. This compares to a 3.8% comparable store sales increase in the prior year. The comparable store transaction count increased 3.3%, while comparable store average ticket decreased (0.2)% for fiscal 2015.

Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Beginning in fiscal 2015, stores closed during the year are removed from our comparable store metrics calculations. This change in the calculation methodology did not have a material impact on the comparable store metrics reported in prior periods due to the minimal number of stores closed in those periods. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations.

The comparable store sales increase was driven by an increase in traffic counts and the year-round strength of consumable, usable, edible ("C.U.E.") products, principally animal- and pet-related merchandise. Hardline products such as fencing, trailers and towing also performed well throughout the year. The full year sales performance was negatively impacted by fourth quarter weakness in the key cold weather seasonal categories of heating (stoves and fuel) and insulated outerwear along with softness in seasonal big ticket items such as snow blowers, log splitters and generators.

In addition to comparable store sales growth in fiscal 2015, sales from stores opened less than one year were $351.0 million in fiscal 2015, which represented 6.1 percentage points of the 9.0% increase over fiscal 2014 net sales. 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.

The following chart summarizes our store growth during fiscal 2015 and 2014:

	2015			2014
Store Count, Beginning of Period	1,382			1,276
New Stores Opened	114			107
Stores Closed	(8	)		(1	)
Store Count, End of Period	1,488			1,382
Stores Relocated	6			2

The following chart indicates the percentage of sales represented by each of our major product categories during fiscal 2015 and 2014:

	Percent of Sales
Product Category:	2015			2014
Livestock and Pet	44	%		44	%
Hardware, Tools, Truck and Towing	23			22
Seasonal, Gift and Toy Products	20			20
Clothing and Footwear	8			9
Agriculture	5			5
Total	100	%		100	%

Gross profit increased 9.9% to $2.14 billion in fiscal 2015 compared to $1.95 billion in fiscal 2014. As a percent of sales, gross margin increased 30 basis points to 34.4% for fiscal 2015 compared to 34.1% for fiscal 2014. This increase in gross margin principally reflects improved direct product margin. Direct product margin increased as a result of strong execution 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, increased 20 basis points to 24.0% in fiscal 2015 from 23.8% in fiscal 2014. This increase in SG&A as a percent of sales was mainly related to deleverage in rent and other occupancy

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costs at the stores and incremental costs associated with our two new mixing centers and our new distribution facility in Casa Grande, Arizona. Total SG&A expenses, including depreciation and amortization, for fiscal 2015 increased 9.7% to $1.49 billion from $1.36 billion in fiscal 2014. The increase in SG&A expenses primarily reflects new store growth and variable costs associated with our comparable store sales growth.

Our effective tax rate decreased to 36.6% for fiscal 2015 compared to 36.9% in fiscal 2014 predominantly as a result of the reversal of various reserves for uncertain tax positions.

As a result of the foregoing factors, net income for fiscal 2015 increased 10.7% to $410.4 million, or $3.00 per diluted share, as compared to net income of $370.9 million, or $2.66 per diluted share, in fiscal 2014.

During fiscal 2015, we repurchased approximately 3.4 million shares of the Company’s common stock at a total cost of $292.7 million as part of our $2 billion share repurchase program. In fiscal 2014, we repurchased approximately 4.7 million shares at a total cost of $298.5 million.

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.

The comparable store sales increase was driven by continued strong results in key 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 opened in fiscal 2014.

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	%

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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.

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.

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 facilities capacity and improvements, information technology, inventory purchases, share repurchases and cash dividends. Our primary ongoing sources of liquidity are existing cash balances, cash provided from operations, funds available under our credit facility (as discussed in Note 3 to the Consolidated Financial Statements), 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 26, 2015, the Company had working capital of $814.1 million, which increased $143.2 million from December 27, 2014. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

	2015				2014				Variance
Current assets:
Cash and cash equivalents	$	63.8			$	51.1			$	12.7
Inventories	1,284.4				1,115.5				168.9
Prepaid expenses and other current assets	87.5				66.4				21.1
Income taxes receivable	3.7				—				3.7
Deferred income taxes	46.0				41.0				5.0
Total current assets	1,485.4				1,274.0				211.4
Current liabilities:
Accounts payable	427.2				370.8				56.4
Accrued employee compensation	42.7				37.1				5.6
Other accrued expenses	195.0				182.6				12.4
Current portion of capital lease obligation	0.9				0.2				0.7
Income taxes payable	5.5				12.4				(6.9		)
Total current liabilities	671.3				603.1				68.2
Working capital	$	814.1			$	670.9			$	143.2

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In comparison to December 27, 2014, working capital as of December 26, 2015 was impacted most significantly by changes in our inventory and accounts payable.

•

We actively manage our inventory balances and in-stock levels at our stores. The increase in inventory was due to new store growth and an increase in average inventory per store of 9.0% compared to the prior year. The increase in average inventory per store is principally related to a carry-over of cold-weather merchandise, additional investment in C.U.E. products and early receipt of certain spring seasonal items.

•	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 Facility

During the period of October 24, 2011 through February 19, 2016, the Company was party to a senior credit facility (the “2011 Senior Credit Facility”), which provided for borrowings up to $400 million (with a sublimit of $30 million for swingline loans) as of December 26, 2015 and December 27, 2014. The 2011 Senior Credit Facility was unsecured and would have matured on October 24, 2016.

On February 19, 2016, the Company replaced the 2011 Senior Credit Facility by entering into a new senior credit facility (the “2016 Senior Credit Facility”) consisting of a $200 million term loan and a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans). This agreement is unsecured and matures in February 2021, with proceeds available to be used for working capital, capital expenditures, dividends, share repurchases, and other matters. As a result of the maturity date in the new agreement, the Company has presented any outstanding borrowings under the 2011 Senior Credit Facility as of December 26, 2015 as a non-current liability in the Consolidated Balance Sheet in accordance with the applicable accounting guidance.

2011 Senior Credit Facility

At December 26, 2015 there were $150.0 million in outstanding borrowings under the 2011 Senior Credit Facility and no outstanding borrowings at December 27, 2014. There were $48.7 million and $40.7 million outstanding letters of credit under the 2011 Senior Credit Facility as of December 26, 2015 and December 27, 2014, respectively. Borrowings bore interest at either the bank’s base rate (3.50% at December 26, 2015) or the London Inter-Bank Offer Rate (“LIBOR”) (0.42% at December 26, 2015) plus an additional amount ranging from 0.40% to 1.00% per annum (0.50% at December 26, 2015), adjusted quarterly based on our leverage ratio. The Company was 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 26, 2015), adjusted quarterly based on the Company’s leverage ratio. There were no compensating balance requirements associated with the 2011 Senior Credit Facility.

The 2011 Senior Credit Facility required quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. The fixed charge coverage ratio compared 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 compared total debt plus rental expense (excluding any straight-line rent adjustments) multiplied by a factor of six to consolidated EBITDAR. The 2011 Senior Credit Facility also contained 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. The Company was in compliance with all covenants at December 26, 2015.

2016 Senior Credit Facility

The 2016 Senior Credit Facility contains a $200 million term loan which requires quarterly payments totaling $10 million a year in years one and two and $20 million a year in years three through five, with the remaining balance due in full on the maturity date of February 19, 2021. The 2016 Senior Credit Facility also contains a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans).

Borrowings for both the term loan and the revolving credit facility bear interest at either the bank’s base rate or LIBOR plus an additional amount ranging from 0.500% to 1.125% per annum, adjusted quarterly based on our leverage ratio. The Company is also required to pay, quarterly in arrears, a commitment fee for unused capacity ranging from 0.075% to 0.200% per annum, adjusted quarterly based on the Company’s leverage ratio.

Proceeds from the 2016 Senior Credit Facility are available to be used for working capital, capital expenditures, dividends, share repurchases, and other matters. There are no compensating balance requirements associated with the 2016 Senior Credit Facility.

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The 2016 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 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 2016 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.

Sources and Uses of Cash

Our primary source of liquidity is cash provided by operations and funds available under our credit facility (as discussed in Note 3 to the Consolidated Financial Statements). Principal uses of cash for investing activities are capital expenditures, while principal uses of cash for financing activities are repurchase of the Company’s common stock and cash dividends paid to stockholders. The following table presents a summary of cash flows provided by or used in operating, investing and financing activities for the last three fiscal years (in millions):

	2015				2014				2013
Net cash provided by operating activities	$	429.2			$	409.2			$	333.7
Net cash used in investing activities	(235.9		)		(160.3		)		(209.3		)
Net cash used in financing activities	(180.6		)		(340.5		)		(120.3		)
Net increase (decrease) in cash and cash equivalents	$	12.7			$	(91.6	)		$	4.1

Operating Activities

Operating activities provided net cash of $429.2 million, $409.2 million and $333.7 million in fiscal 2015, 2014 and 2013, respectively. The $20.0 million increase in net cash provided by operating activities in fiscal 2015 compared to fiscal 2014 was primarily due to changes in the following operating activities (in millions):

	2015				2014				Variance
Net income	$	410.4			$	370.9			$	39.5
Depreciation and amortization	123.6				114.6				9.0
Share-based compensation expense	19.4				16.2				3.2
Excess tax benefit of stock options exercised	(27.0		)		(18.8		)		(8.2		)
Deferred income taxes	(5.5		)		(19.8		)		14.3
Inventories and accounts payable	(112.5		)		(81.8		)		(30.7		)
Prepaid expenses and other current assets	(21.1		)		(9.1		)		(12.0		)
Accrued expenses	16.9				6.8				10.1
Income taxes	16.3				21.9				(5.6		)
Other, net	8.7				8.3				0.4
Net cash provided by operations	$	429.2			$	409.2			$	20.0

The $20.0 million increase in net cash provided by operating activities in fiscal 2015 compared with fiscal 2014 primarily reflects earnings growth and a favorable impact from the timing of deferred taxes partially offset by a net increase in inventories and accounts payable. Inventory increased due to store growth, the carry-over of cold-weather merchandise, additional investment in C.U.E. products and the timing of spring seasonal receipts while accounts payable grew at a lower rate due mainly to the timing of payments.

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The $75.5 million increase in net cash provided by operations in fiscal 2014 over 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 facility capacity and corporate infrastructure.

Investing Activities

Investing activities used cash of $235.9 million, $160.3 million and $209.3 million in fiscal 2015, 2014 and 2013, respectively. The changes in cash used for investing activities primarily reflects changes in capital expenditures. Capital expenditures for fiscal 2015, 2014 and 2013 were as follows (in millions):

	2015				2014				2013
New and relocated stores and stores not yet opened	$	96.7			$	80.8			$	69.1
Distribution center capacity and improvements	80.2				9.2				44.9
Information technology	35.8				22.7				29.8
Existing stores	23.1				20.0				22.3
Corporate and other	0.7				27.9				40.7
Purchase of previously leased stores	—				—				11.4
Total capital expenditures	$	236.5			$	160.6			$	218.2

The above table reflects 114 new stores and six relocations during fiscal 2015, 107 new stores and two relocations during fiscal 2014 and 102 new stores and three relocations during fiscal 2013. The increase in spending on distribution center capacity and improvements in fiscal 2015 is primarily due to the construction of two mixing centers in Texas which opened during the third quarter and our new southwest distribution center in Casa Grande, Arizona which began shipping merchandise to stores in the fourth quarter. The increase in spending on information technology in fiscal 2015 represents continued improvements in data security and enhanced customer relationship management.

The majority of the corporate and other category for fiscal 2014 and 2013 relates to construction of our Store Support Center in Brentwood, Tennessee with the greatest portion of the spend in fiscal 2013. The higher capital expenditures for distribution facility capacity and improvements in fiscal 2013 compared to fiscal 2014 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 2015 or fiscal 2014 compared to having purchased three leased stores in fiscal 2013.

We currently estimate that capital expenditures will range between $230 million and $250 million in fiscal 2016.

•	We plan to open approximately 115 to 120 stores in fiscal 2016. Additionally, we plan to relocate five stores as well as increase our investment in existing store renovations.

•	We plan to invest in our ongoing sustainability efforts by beginning to retrofit our stores with LED lighting in fiscal 2016.

•	We also plan to invest in information technology for improvements in security and compliance and continued support of our growth strategy and other strategic investments.

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Financing Activities

Financing activities used cash of $180.6 million, $340.5 million, and $120.3 million in fiscal 2015, 2014 and 2013, respectively. The net cash used in financing activities in fiscal 2015 was mainly the result of repurchases of common stock and quarterly cash dividends paid to stockholders, partially offset by borrowings under the 2011 Senior Credit Facility, net proceeds from issuance of common stock related to share-based compensation, and excess tax benefits recognized on stock options exercised. The decrease in net cash used in financing activities in fiscal 2015 compared to fiscal 2014 is largely due to $150 million of net borrowings under the 2011 Senior Credit Facility.

The Company’s Board of Directors has authorized common stock repurchases under the share repurchase program up to $2 billion, 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 3.4 million, 4.7 million and 2.3 million shares of common stock under the share repurchase program at a total cost of $292.7 million, $298.5 million and $129.4 million in fiscal 2015, 2014 and 2013, respectively. As of December 26, 2015, we had remaining authorization under the share repurchase program of $570.7 million, exclusive of any fees, commissions, or other expenses.

In the second quarter of fiscal 2015, we increased our quarterly dividend from $0.16 per share to $0.20 per share and, in the second quarter of fiscal 2014, we increased our quarterly dividend from $0.13 per share to $0.16 per share. We paid dividends totaling $103.1 million, $84.1 million and $68.5 million in fiscal 2015, 2014 and 2013, respectively.

We believe that our existing cash balances, expected cash flow from future operations, funds available under our 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 facility capacity, through the end of fiscal 2016.

Significant Contractual Obligations and Commercial Commitments

The following table reflects our future obligations and commitments as of December 26, 2015 (in thousands):

		Payment Due by Period
		Total				2016				2017-2018				2019-2020				Thereafter
Operating leases		$	2,299,493			$	265,327			$	507,611			$	455,560			$	1,070,995
Capital leases(a)		26,093				1,876				3,752				3,752				16,713
Revolving credit loan		150,000				—				—				—				150,000
		$	2,475,586			$	267,203			$	511,363			$	459,312			$	1,237,708

(a) Capital lease obligations include related interest.

At December 26, 2015, there were $48.7 million outstanding letters of credit under the 2011 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.

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New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” which implemented a one-year deferral of ASU 2014-09. As a result of the deferral, the amendments in ASU 2014-09 are effective for reporting periods beginning after December 15, 2017. 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 Consolidated Financial Statements and related disclosures, including which transition method it will adopt.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). This update requires that debt issuance costs related to a recognized debt liability be presented in the consolidated balance sheet as a direct reduction from the carrying amount of that debt liability. ASU 2015-03 requires retrospective application and is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" (“ASU 2015-11”). This update requires an entity that determines the cost of inventory by methods other than last-in, first-out and the retail inventory method to measure inventory at the lower of cost and net realizable value. ASU 2015-11 requires prospective application and is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). This update requires that deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the updated guidance will affect the presentation of the deferred tax liabilities and assets within the Company’s Consolidated Balance Sheet; however, the updated guidance will not affect the accounting for deferred tax liabilities and assets. Other than the change in presentation, the Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.

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