With it being a fairly slow news day, we want to shine a spotlight
on a name that has been quietly moving to new 52-week highs in recent sessions:
Tractor Supply (TSCO), the largest rural lifestyle retail chain in the US. Urbanites
might not be well-acquainted with this retailer; as a one-stop shop for
recreational farmers, ranchers, and people who prefer the rural lifestyle, it
tends to find its market niche beyond the city limits. It has been around for
more than 80 years.
TSCO offers an extensive mix of products necessary to care for home, land, pets, and animals, with a focus on product localization and exclusive brands offered at everyday low prices. TSCO currently operates nearly 1,800 stores. It also owns Petsense, a small-box pet specialty supply retailer focused on pet owners in small and mid-size communities.
While other retailers have been struggling somewhat, Tractor Supply has been showing resilience. In Q4, it posted same store comps of +5.7%, which is quite a robust mark. For all of 2018, same store comps were +5.1%. The guidance for 2019 is in the +2-4% range.
A natural question to ask might be how TSCO is continuing to do so well despite the impact of tariffs on some crops and with headlines that farm bankruptcies are starting to rise. At a recent investor conference, TSCO explained that it does not cater to a production farmer. When the company started out in the late 1930's, its business was 100% commercial, and it did then cater to the production farmer. However, over the years, TSCO has changed that demographic completely, and today that segment forms a very small percentage of the business.
Bankruptcies are generally confined to a tight geographic area. Also, TSCO sees a potential benefit from this matter because the subdivision of a 1,000-acre farm into 10- and 25-acre plots may lead to larger populations of people living rural lifestyles, creating more potential customers for TSCO. So TSCO actually sees a benefit when large parcels get divided up into smaller parcels.
Looking ahead to 2019, TSCO expects to open about 80 new Tractor Supply stores and 10 to 15 new Petsense locations in a similar cadence to 2018 new-store openings. Also, the company has an expectation for modest gross margin improvement in 2019. However, investors should be aware that SG&A will be negatively impacted in 1H19 by the start-up of its new distribution center, which did not begin shipping until the later part of March and which is expected to ramp up throughout the year. This development is expected to pressure on earnings in Q1 and Q2, with Q1, as the company’s smallest quarter for sales and profitability, absorbing more significant impact.
Tractor Supply strikes us as one of those solid companies with good and steady growth characteristics. It is good at serving customers within a niche market. Its looks prepared to follow up impressive comparable sales growth from 2018 and 2019 with another good year. We would be cautious about the upcoming Q1 report in late April, as the company’s new distribution center will impact EPS. However, the outlook for 2019 sounds pretty positive.
- OUR VIEW
- LEARNING CENTER