Tractor Supply Co. (TSCO) reported yet another encouraging quarter with earnings surging nearly 18% to $1.45 per share in the second quarter of 2012, surpassing the Zacks Consensus Estimate of $1.39. Tractor Supply’s second-quarter results benefited mainly from strong top-line performance and improved margins.
Tractor Supply has been witnessing increasing trends in same-store sales. The reported quarter was no exception as robust performance in core consumable, usable and edible products − for instance, pet food and animal feed − acted as a catalyst for an increase of 3.2% in same-store sales.
During the recession, Tractor Supply had suffered setbacks as buyers avoided big-ticket purchases, such as mowers, but recent quarters have seen an uptick in results. The company’s impressive merchandising improvement strategy along with solid same-store sales trend resulted in high single-digit top-line growth in revenues.
Net sales in the quarter surged 9.6% to $1,291.9 million from $1,178.4 million in the prior-year quarter. However, total revenue missed the Zacks Consensus Estimate of $1,302 million. The company witnessed an approximately $38 million of sales increase in the first quarter of 2011 that was carried forward from the second quarter because of an early spring. The increase was at the high end of management's projection.
Gross profit during the quarter surged 12.2% to $451.5 million compared with $402.5 million in the prior-year quarter. Moreover, gross margin expanded 80 basis points (bps) to 34.9%, as the company benefited from improved big ticket seasonal and emergency products along with positive impact from lower sales of low margin products.
Better cost containment related to store personnel and other operating expenses resulted in a 10 bps improvement in selling, general and administrative expenses, as a percentage of sales, which came in at 21.8% versus 21.9% in the prior-year quarter. Consequently, operating margin during the quarter improved 90 bps to 13.1% versus 12.2% in the prior-year quarter.
Financial Position
Tractor Supply ended the quarter with cash and cash equivalents, including restricted cash of $187.9 million compared with $207.4 million at the end of the prior-year quarter. Stockholders’ equity came in at $1,067.1 million compared with $940.7 million at the end of the second quarter of 2011.
Store Update
In the quarter under review, Tractor Supply opened 18 new stores compared with 16 new stores opened in the prior-year period. The company currently runs as many as 1,135 stores in 45 states.
Management Guidance
Looking into 2012, the company expects its profits to grow continually, given the right mix of products and marketing plans to maintain customer footfall. Encouraged by strong second-quarter operating performance, the company raised its 2012 earnings guidance range to $3.58 to $3.66 per share compared with its earlier forecast of $3.52 to $3.60 per share. The Zacks Consensus Estimate for full-year 2012 stands at $3.68, well above the higher-end of the company’s revised fiscal year guidance.
However, looking at the unfavorable weather condition, the company anticipates weak third quarter summer sales. Therefore, Tractor Supply has lowered its net sales and comps guidance range for full-year 2012. The company now expects net sales to be in between $4.58 billion and $4.65 billion compared with $4.61 – $4.68 billion forecasted earlier. Similarly, comps are expected to grow in the range of 3.5% – 5% instead of the previous forecasted range of 4% – 5.5%. Further, the company has planned to open 90 to 95 new stores during fiscal 2012.
Our Take
We believe that Tractor Supply has successfully tweaked merchandise assortment across its stores, which is in line with the prolonged economic downturn. The company has increased the proportion of less discretionary items, such as animal and pet-related products, while reducing shelf space for certain big-ticket merchandise, such as outdoor power equipment.
Moreover, in an effort to boost margins, Tractor Supply is expanding its portfolio of private label brands and is also focusing on direct sourcing. The company has set a long-term target of generating 25% of sales from private label brands and 13% from strategic direct sourcing. This provides a strong upside potential to the company.
However, the company operates in a highly fragmented industry and faces intense competition from larger retailers, such as The Home Depot Inc. (HD) and Lowe’s Companies Inc. (LOW) as well as from independently-owned retail farm and ranch stores, privately-held regional farm store chains as well as cooperatives. Being in such a high competitive industry, Tractor Supply may find it difficult to execute and implement new business strategies, which in turn, may impact its operations adversely.
Currently, we are maintaining a long-term ‘Outperform’ recommendation on Tractor Supply. However, the company has Zacks #3 Rank implying a short-term Hold rating on the stock.
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