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Here's Why Tractor Supply (TSCO) is Marching Ahead of Industry

Tractor Supply Company TSCO has been gaining from continued market share growth, strength in the Life Out Here Strategy and healthy demand for its product categories. This led to a year-over-year improvement in the third-quarter 2022 results. Also, the bottom line surpassed the Zacks Consensus Estimate, while the top line lagged the same.

In the said quarter, adjusted earnings of $2.10 per share improved 7.7% year over year. Net sales jumped 8.4% year over year to $3,270.8 million, driven by an increase of 5.7% in comps, led by growth of 7% in comparable average tickets, which offset a 1.3% decline in comparable average transaction count.

Compared to the pre-pandemic levels, the top line surged 65%, while comps advanced 46%. Also, a sturdy demand for everyday merchandise, including consumable, usable and edible products, as well as year-round products, contributed to comps growth.

The company is on track to build up on Tractor Supply’s Out Here lifestyle assortment and convenient shopping format to gain customers and market share. The strategy is based on five key pillars, including customers, digitization, execution, team members and total shareholder return.

As part of the plan, it revised the long-term financial growth targets for 2022-2026. Management envisions net sales growth of 6-7%, while comps are expected to grow 4-5%. The operating margin is expected to be 10.1-10.6%, up from the earlier mentioned 9-9.5%. Earnings per share are likely to grow 8-11%, up from the previously stated 8-10%. Notably, the company earlier launched the Field Activity Support Team (“FAST”), and implemented various technology and service enhancements across the enterprise.

Tractor Supply is in the initial phase of transforming its side lots and mature stores to improve space productivity, bringing the latest merchandising strategies to life and advancing efforts to remain nationally strong and locally relevant. Management anticipates transforming the side lots in 100 locations in 2022. These have been significant investments in stores. These are expected to boost productivity across the company’s existing and new stores.

Given the changing consumer trends, Tractor Supply is focused on integrating its physical and digital operations to offer consumers a seamless shopping experience. Incidentally, the company is on track with the ‘ONETractor’ strategy aimed at connecting store and online shopping. TSCO’s omni-channel investments include curbside pickup, same-day and next-day delivery, a re-launched website, and a new mobile app. Its e-commerce business witnessed year-over-year growth in the high-single digits.

In the third quarter, TSCO added app features such as My Pet and upgraded its in-store mode. Tractor Supply exited the third quarter with 27 million Neighbor's Club members accounting for 75% of the total quarterly sales. The company also expanded the program to include Petsense by Tractor Supply stores. The move will enable it to gain pet customers for both banners. The mobile app has also been performing well. Management expects more than $2 billion in sales by 2026.

Its store-expansion initiatives bode well. The company is well-positioned to expand its store base, remaining on track to increase its domestic store to 2,500 in the long term. In the third quarter, the company opened 11 Tractor Supply stores and two Petsense stores. Management is on track with its store-opening initiatives. It plans to open 60-70 Tractor Supply stores and 10 Petsense stores in 2022.

Driven by these factors, management raised its guidance for 2022. The view reflects the recent acquisition of Orscheln Farm and Home, which is likely to contribute $75 million to sales in the fourth quarter and 2022. The company expects net sales of $14.06-$14.12 billion, up from the prior mentioned $13.95-$14.05 billion. Comps are likely to grow 5.4-5.8%, up from earlier stated 5.2-5.8% growth.

The operating margin for the same period is anticipated to be 10.1-10.15% compared with the previously stated 10.2%. Earnings per share are likely to be $9.55-$9.63, up from the earlier mentioned $9.48-$9.60. The view includes gains from the 53rd week in 2022, which is expected to contribute 1.5 percentage points to the top line and 15 cents to the bottom line.

 

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Zacks Investment Research


Image Source: Zacks Investment Research

 

Consequently, this Zacks Rank #3 (Hold) stock has gained 20.1% in the past three months compared with the industry's 14.6% growth.

However, the company has been reeling under cost inflation and higher transportation costs. Tractor Supply has also been witnessing elevated costs in the commodity inputs in its product categories. Higher labor wages and transportation costs have been adversely impacting its vendor partners. Management expects rising inflation to persist throughout 2023, with some normalization in the back half of 2023.

Conclusion

All said, online strength, solid demand and well-chalked-out endeavors are likely to help the stock sustain its momentum. Notably, the Zacks Consensus Estimate for the company’s current financial year’s sales and earnings suggests growth of 10.5% and 11.6%, respectively, from the year-ago period’s reported numbers. Topping it, TSCO's earnings estimates for 2022 have moved up 0.3% in the past 60 days. Also, a long-term earnings growth rate of 10.3% reflects its inherent strength.

Stocks to Consider

Here are three better-ranked stocks to consider, namely Wingstop WING, Ross Stores ROST and Chipotle Mexican Grill CMG.

Wingstop currently sports a Zacks Rank #1 (Strong Buy). WING has a long-term earnings growth rate of 11%. Shares of WING have declined 9.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the year-ago period’s reported levels.

Ross Stores, an off-price retailer of apparel and home accessories in the United States, currently sports a Zacks Rank #1. ROST has an expected EPS growth rate of 10.5% for three to five years.

The Zacks Consensus Estimate for Ross Stores’ current-year sales and EPS suggests declines of 1.6% and 11.7%, respectively, from the year-ago period’s reported figures. ROST has a trailing four-quarter earnings surprise of 10.5%, on average.

Chipotle Mexican Grill, an operator of fast-casual restaurants, currently carries a Zacks Rank of 2 (Buy). CMG’s expected EPS growth rate for three to five years is 23.4%.

The Zacks Consensus Estimate for Chipotle Mexican Grill’s current financial-year revenues and EPS suggests growth of 15.2% and 30.8%, respectively, from the year-ago reported figures. CMG has a trailing four-quarter earnings surprise of 4.1%, on average.

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Wingstop Inc. (WING) : Free Stock Analysis Report

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