Tractor Supply Company’s TSCO business is highly seasonal, with sales and profits usually soaring in the spring and winter selling seasons on the back of demand for its merchandise offering. Unseasonable weather, heavy precipitation, drought conditions and early or late frosts may have a material impact on the company’s financial condition and operational results.
Well, this was the story behind Tractor Supply’s soft sales performance in the second quarter of 2016, which along with a dismal outlook for the year, worried investors. These concerns were reflected in this farm and ranch store retailer’s share price movement. The stock tumbled 7.4% in the after-market trading session yesterday, following the preliminary update provided on the company’s second-quarter performance.
Q2 Sales & Comps Crushed by Seasonal Business
While net sales in the quarter advanced 4.5% year over year to $1.85 billion, comparable store sales (comps) witnessed a slowdown, dropping 0.5% against a 5.6% rise recorded in the year-ago period. As mentioned above, the company’s seasonal business played foul, being the main culprit behind the weak comps. Nonetheless, comparable store transaction count marked its 33rd consecutive quarter of growth, rising 1.5% in the second quarter.
Throwing further light on the sales performance, second-quarter comps were mainly impacted by weaker-than-anticipated sales of spring season categories due to unseasonably cold weather in many parts of the country, offset by ongoing strength in the Livestock and Pet categories. These categories witnessed mid-single digits comps growth in each month of the quarter, which was not enough to make up for the soft seasonal products’ sales.
Weakness in sales of seasonal categories included products related to riding lawn mowers, live goods and rubber footwear, which suffered tough year-over-year comparisons owing to robust performance witnessed last year. Apart from this, outdoor recreation, power equipment and accessories such as tillers, mowers, mower parts and attachments, as well as lawn and garden categories also adversely impacted comps.
Further, comps were greatly impacted by weak sales of big ticket items, which declined 8.5%, against an above-average performance delivered in the same period last year. The big ticket items’ sales were mainly hurt by riding lawn mowers and other power equipment categories, which in turn caused a 1.9% fall in comparable average ticket.
Going region-wise, the Western and Southeastern regions continued to perform well, thanks to the normalized weather conditions. However, weather trends remained challenging in the North and Midwest regions, which experienced unusually cold weather.
The Road Ahead is Bumpy
Though the second quarter was marked by an unexpected cool winter, management stated that the weather conditions started to normalize in June. The month witnessed sturdy sales performance, driven by the Memorial Day weekend and reversal of warm weather. However, Tractor Supply is not very optimistic about the sales shift to the third quarter. Considering this uncertainty and a disappointing second quarter, management lowered its sales and earnings outlook for 2016.
For 2016, management now envisions sales to range from $6.8 billion−$6.9 billion, compared with $6.9 billion−$7.0 billion expected earlier. Comps are now expected to increase by 2.5%−3.5%, down from the previous forecast of 3.5%−5.0% growth.
Further, Tractor Supply anticipates gross margin to contract by 25–30 basis points from last year, as benefits from its gross margin initiatives are likely to be more than offset by an unfavorable product mix and increased transport expenses. Also, owing to the drab comps view, the company expects selling, general and administrative expenses, as a percentage of sales, to escalate.
Consequently, earnings per share for 2016 are now projected in a range of $3.35−$3.40, down from the previous forecast of $3.40−$3.48. The current Zacks Consensus Estimate for earnings per share is $3.49.
Tractor Supply currently carries a Zacks Rank #3 (Hold). Also, the stock was up 1.1%, closing at $95.17 on Jun 29.
Key Picks
Better-ranked stocks in the same industry include Cabela's Incorporated CAB and ULTA Salon, Cosmetics & Fragrance, Inc. ULTA, each with a Zacks Rank #2 (Buy). Another well-ranked stock in the related food industry is Post Holdings, Inc. POST, with a Zacks Rank #1 (Strong Buy).
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