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Tractor Supply Grapples With High Costs: Is Revival Likely?

Zacks Equity Research

Tractor Supply Company TSCO stock is losing sheen of late, thanks to higher cost of investments in infrastructure and technology. Higher freight costs coupled with negative product mix remain added deterrents. All these factors negatively impacted the company’s margins, which remain soft for a while now.

Consequently, shares of this Zacks Rank #4 (Sell) company have lost 17.9% in the past three months, wider than the industry’s 11.8% decline. A Momentum Score of F further mirrors the stock’s dismal run on the bourses and raises concern among investors. Let’s delve deep.

Headwinds

Although Tractor Supply remains committed toward strengthening its business via store-growth and omni-channel initiatives, higher investments in infrastructure and technology are concerning. In second-quarter 2019, operating margin contracted 13 basis points (bps) owing to higher SG&A expenses that grew 7.1%.

Notably, SG&A expenses including depreciation and amortization, as a percentage of sales, rose 24 bps. The increase can be attributed to higher costs related to a new distribution facility in Frankfort, N.Y., as well as adverse impact of investment in store team member wages.



These expenses are weighing on Tractor Supply’s operating margin. Consequently, the company’s bottom line lagged the Zacks Consensus Estimate in the second quarter, after registering four straight quarters of beat.

For the second half of 2019, management continues to expect SG&A deleverage but to a lesser extent. Higher costs coupled with SG&A deleverage might persistently hurt the company’s margins and overall profitability. The company projects operating margin in the band of 8.9-9% for 2019. Moreover, it issued soft comparable store sales (comps) growth projection for the current year. Comps are likely to grow in the range of 3-4%, down from a comps rise of 5.1% witnessed last year.

Stiff industry competition and volatility in raw material prices are added concerns. Tractor Supply’s business deals in the purchase of commodities like grain, steel, petroleum, corn and cotton, among various other raw materials with fluctuating prices. Prices of these products are quite prone to inflationary and deflationary pressures, which in turn, can hurt the company’s performance.

Will ONETractor & Other Initiatives Offset Hurdles?

Tractor Supply remains focused on integrating its physical and digital operations to offer consumers a seamless shopping experience through its ‘ONETractor’ strategy. The strategy is aimed at building customer-centric engagement, offering suitable products and services, and reinforcing core infrastructure capabilities to deliver growth.

Moreover, Tractor Supply is reaping benefits from its mobile point-of-sale and Buy Online Pick Up in Store capabilities. The company is also consistently expanding its Neighbor’s Club loyalty program, which has surpassed its targeted membership growth goals last year. Its steady efforts to expand its Stockyard kiosk initiatives also appear encouraging. In second-quarter 2019, the company reported double-digit e-commerce sales growth for the 28th straight quarter.

Coming to store-growth efforts, Tractor Supply remains on track with its growth target of reaching to 2,500 domestic stores in the long term. For the current year, the company expects to open about 80 namesake and 10-15 Petsense stores. Management expects all these factors to play a major role in enhancing the company’s omni-channel network and keep sales momentum alive throughout 2019 and beyond.

With the Petsense buyout, Tractor Supply has fortified its presence in the flourishing pet specialty space. Currently, the company is focused on expanding the Petsense format in certain geographic markets. Petsense stores have been delivering positive comparable-store sales (comps), which continued in the second quarter and were in line with the company’s average. Petsense stores remain focused on building long-term customer loyalty by using digital marketing methods to engage customers, revamping the website and bolstering customer rewards program.

Wrapping up, we expect the company’s strategic growth endeavors to offset the aforementioned headwinds going forward.

3 Better-Ranked Stocks in the Retail Space

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Regis Corporation RGS has delivered average positive earnings surprise of 222.3% in the trailing four quarters. The company presently sports a Zacks Rank #1.

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