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Tractor Supply (NASDAQ:TSCO) Misses Q4 Sales Targets


Full Report / February 01, 2024

Rural goods retailer Tractor Supply (NASDAQ:TSCO) missed analysts' expectations in Q4 FY2023, with revenue down 8.6% year on year to $3.66 billion. The company's full-year revenue guidance of $14.9 billion at the midpoint also came in slightly below analysts' estimates. It made a GAAP profit of $2.28 per share, down from its profit of $2.43 per share in the same quarter last year.

Tractor Supply (TSCO) Q4 FY2023 Highlights:

  • Market Capitalization: $24.28 billion
  • Revenue: $3.66 billion vs analyst estimates of $3.68 billion (0.5% miss)
  • EPS: $2.28 vs analyst estimates of $2.22 (2.8% beat)
  • Management's revenue guidance for the upcoming financial year 2024 is $14.9 billion at the midpoint, missing analyst estimates by 0.9% and implying 2.4% growth (vs 3% in FY2023)
  • Free Cash Flow of $168.9 million, down 58.6% from the same quarter last year
  • Gross Margin (GAAP): 35.3%, up from 34% in the same quarter last year
  • Same-Store Sales were down 4.2% year on year
  • Store Locations: 2,414 at quarter end, increasing by 81 over the last 12 months

Started as a mail-order tractor parts business, Tractor Supply (NASDAQ:TSCO) is a retailer of general goods such as agricultural supplies, hardware, and pet food for the rural consumer.

The core customer is typically a farmer, rancher, or general rural homeowner who tends to be handy, which explains the company’s tagline of “for life out here.” These customers make their living or heavily rely on their equipment, livestock, and land. They need a dependable source for essential supplies such as trailers for trucks, animal feed, and fencing supplies, all of which can be purchased from Tractor Supply.

Tractor Supply stores can vary in size, but the average location is fairly small at 15,000 feet with outdoor display and storage space for larger products and equipment. These stores tend to be located in rural and suburban shopping centers and retail plazas. Many of these rural areas don’t have a high density of other retailers, so Tractor Supply aims to be a nearly one-stop shop for customer needs.

The company established its e-commerce platform in 2007, and today, customers can buy online for home delivery or store pickup. The site and app also feature online-only deals and a blog about rural living that includes product reviews/comparisons, animal care guides, and primers on farming and agriculture.

Specialty Retail

Some retailers try to sell everything under the sun, while others—appropriately called Specialty Retailers—focus on selling a narrow category and aiming to be exceptional at it. Whether it’s eyeglasses, sporting goods, or beauty and cosmetics, these stores win with depth of product in their category as well as in-store expertise and guidance for shoppers who need it. E-commerce competition exists and waning retail foot traffic impacts these retailers, but the magnitude of the headwinds depends on what they sell and what extra value they provide in their stores.

Competitors that offer one or more overlapping product categories include Home Depot (NYSE:HD), Lowe’s (NYSE:LOW), and Petco Health and Wellness (NASDAQ:WOOF).

Sales Growth

Tractor Supply is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's annualized revenue growth rate of 14.9% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was solid as it added more brick-and-mortar locations and increased sales at existing, established stores.

Tractor Supply Total Revenue

This quarter, Tractor Supply missed Wall Street's estimates and reported a rather uninspiring 8.6% year-on-year revenue decline, generating $3.66 billion in revenue. Looking ahead, Wall Street expects sales to grow 3% over the next 12 months, an acceleration from this quarter.

Number of Stores

When a retailer like Tractor Supply is opening new stores, it usually means it's investing for growth because demand is greater than supply. Tractor Supply's store count increased by 81 locations, or 3.5%, over the last 12 months to 2,414 total retail locations in the most recently reported quarter.

Tractor Supply Operating Retail Locations

Over the last two years, the company has opened new stores quickly and averaged 5.5% annual growth in new locations, meaningfully higher than other consumer retail businesses. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Tractor Supply's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 3.1% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Tractor Supply is reaching more customers and growing sales.

Tractor Supply Year On Year Same Store Sales Growth

In the latest quarter, Tractor Supply's same-store sales fell 4.2% year on year. This decline was a reversal from the 8.6% year-on-year increase it posted 12 months ago. We'll be keeping a close eye on the company to see if this turns into a longer-term trend.

Gross Margin & Pricing Power

We prefer higher gross margins because they make it easier to generate more operating profits.

Tractor Supply's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 35.5% gross margin over the last eight quarters. This means the company makes $0.35 for every $1 in revenue before accounting for its operating expenses. Tractor Supply Gross Margin (GAAP)

Tractor Supply produced a 35.3% gross profit margin in Q4, marking a 1.3 percentage point increase from 34% in the same quarter last year. This margin expansion is a good sign in the near term. If this trend continues, it could signal a less competitive environment where the company has better pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q4, Tractor Supply generated an operating profit margin of 9.1%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Tractor Supply Operating Margin (GAAP)

Zooming out, Tractor Supply has done a decent job managing its expenses over the last eight quarters. It's produced an average operating margin of 10%, higher than the broader consumer retail sector. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q4, Tractor Supply reported EPS at $2.28, down from $2.43 in the same quarter a year ago. This print beat Wall Street's estimates by 2.8%.

Tractor Supply EPS (GAAP)

Between FY2019 and FY2023, Tractor Supply's adjusted diluted EPS grew 116%, translating into a solid 21.3% compounded annual growth rate. If it can maintain this rate of growth, Tractor Supply will more than double its EPS in the next five years.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 2.2% year-on-year increase in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Tractor Supply's free cash flow came in at $168.9 million in Q4, down 58.6% year on year. This result represents a 4.6% margin.

Tractor Supply Free Cash Flow Margin

Over the last two years, Tractor Supply has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 3.4%, slightly better than the broader consumer retail sector. Furthermore, its margin has been flat, showing that the company's cash flows are relatively stable.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.

Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.

Tractor Supply's five-year average ROIC was 34.8%, placing it among the best retail companies. Just as you’d like your investment dollars to generate returns, Tractor Supply's invested capital has produced excellent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, Tractor Supply's ROIC has averaged a 13.3 percentage point decrease each year. Tractor Supply has historically shown the ability to generate good returns, but they have gone the wrong way recently, making us a bit conscious.

Key Takeaways from Tractor Supply's Q4 Results

It was good to see Tractor Supply beat analysts' gross margin and EPS expectations this quarter. That stood out as a positive in these results. On the other hand, its revenue slightly missed estimates as its sales volumes fell 2.7% and prices fell 1.5%. Furthermore, its full-year 2024 revenue and earnings guidance was underwhelming as it projected flattish same-store sales. Overall, the results could have been better. The stock is up 1% after reporting and currently trades at $227 per share.

Is Now The Time?

When considering an investment in Tractor Supply, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We think Tractor Supply is a solid business. First off, its revenue growth has been good over the last four years. And while its poor same-store sales performance has been a headwind, its stellar ROIC suggests it has been a well-run company historically. On top of that, its stable growth in physical locations shows it has steady demand.

Tractor Supply's price-to-earnings ratio based on the next 12 months is 21.8x. There are definitely things to like about Tractor Supply, and looking at the consumer landscape right now, it seems the company trades at a pretty interesting price.

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