Why Tractor Supply's rural footprint is an asset: Investor

There are a lot of retailers competing for customers' dollars. Investors are looking for those that are winning that battle. In the latest Good Buy or Goodbye, Washington Crossing Advisors Senior Portfolio Manager Chad Morganlander says Tractor Supply (TSCO) is worth adding to your portfolio, but Macy's (M) is a skip.

Morganlander gives three reasons why Tractor Supply is a buy: its rising dividend, the high return on capital for its business model, and its unique positioning as a retailer that caters to farmers and more rural shoppers.

Morganlander is less of a fan of Macy's. He doesn't like the retailer's debt situation, describing it as an "anchor" for the company. Morganlander also points to Macy's revenue saying the company is "trying to rationalize their footprint and it's like a battleship trying to make a U-turn in a closet," adding that Macy's is struggling to find relevance in a crowded retail space. He also points to an overall slowdown in consumer spending that Macy's may be more vulnerable to than other retailers.

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This post was written by Stephanie Mikulich.

Video Transcript

It's a big noise.

The universe of stocks out there.

Welcome to goodbye or goodbye.

Our goal.

To help cut through that noise to navigate the best moves for your portfolio.

Today we're coming through the balancing act that is debt in the retail landscape.

I you Chad Morgan Lander, Washington Crossing advisor, senior portfolio manager.

Great to see Chad.

Thanks for coming in.

Thanks for having me.

And first we have up a stock for the gentleman farmer for the cottage for among us.

Track your supply the stocks of like 27 28% over the past year.

So it's done pretty well.

But let's go through why you still like it.

Here.

The dividends are rising and the company is growing.

Yes, this company has had a long history of having a wonderful balance sheet.

Steady eddy cash flow stream.

So it's growing.

It's profitable.

Very little debt, and it's a rising dividend company.

Are you a tractor supply customer?

I'm curious.

No, but I've been in a bunch of them.

I don't know if you're a gardener.

I don't know.

Um, high return on capital business model.

Talk to me about because the company has been putting a lot of capital into its stores.

Absolutely, they have over 2400 stores.

Uh, just keep in mind that their footprint is in rural America.

So it's a low type of rental or ownership type of, uh, business model.

And there's not a lot of capital investment that they need to put forth to get a higher return on that invested capital.

Uh, it's a very steady, Eddie sturdy business model, and they've been able to grow in a very efficient manner.

And we've seen also the growth as people have been moving to some extent, right, moving to more rural, especially during the pandemic.

Right?

So it's it is people who farm for living.

But it's also people who farm or do yard work or whatever for fun, right?

So during covid, they got that shot in the arm as people moved away from the city life to more urban life.

You would have thought that that perhaps that would have scaled back, but in fact, it didn't.

Uh, they have roughly about 50% of their revenues come from feed of feeding not only farm animals, but pet food.

Uh, so it's a steady any more predictable revenue stream, and we believe over the long run that that will continue.

They're not as economically sensitive as the next one.

Got you.

All right, but let's talk about a potential risk, as we like to do here and goodbye or goodbye.

And that is if we do see that shift.

Like what if all those people who moved out moved back to cities?

Oh, absolutely.

And we believe that that will happen to a certain extent.

We have modelled that out, but we think that over the course of the next 3 to 5 years, the growth rate is gonna be between three and 6% on the top line.

We're not expecting, nor do we need to make this company and this stock, uh, attractive.

A robust growth rate on the go on a go forward basis.

Got you and you do own shares of tractor.

Yes, our family does own shares.

OK, let's get to the stock that you do not like this one also in retail, and it's Macy's now.

This stock is also up.

Over the past year, about 19% or so.

There's been a lot going on in terms of activism, et cetera, but you say they still have too much debt.

So Washington Crossing Advisors, uh, Shies away from companies that have a lot of leverage on their on their balance sheet.

They've got roughly about 2.7 billion of debt and then 2.5 billion or so of actual leases.

Uh, that is a problem.

We think that that's more of an anchor, which is a real issue over the long run in a very competitive retail environment.

And that's at the same time that the company not growing in terms of revenue.

Let's take a look at the revenue chart here because what you see here are the you know, these various things are kind of holiday seasons, right, But they're descending, and then the non holiday times are also so so in other words, they're they're just not growing as much.

They're trying to rationalise their footprint, and it's like a battleship trying to make a U turn in a closet.

Uh, it's very difficult, Uh, in doing that, it's gonna contract their top line.

But the issue really has to do with such a competitive environment.

Uh, they really have to find their way.

And that's part of the problem.

They have online retailers that are price competitive, and then they have the higher end retailers.

It's a tough business.

So being in the middle is a tough is a tough place to be a tough place.

Yeah, and so they're exposed to those sort of consumption trends.

You know, we just saw retail sales this week, for example, that were not fantastic.

Yes.

And in your previous, uh, uh, episode that you just did they were talking about slowing of the consumer.

Uh, as consumption patterns decelerate as covid relief spend down continues, it's going to affect the lower income as well as the middle income consumer.

Macy's hat may be more exposed to that than you one would like.

Uh, hence the reason why if you have a lot of debt and you have a contracting top line, uh, any type of economic impulse on downside could have deleterious effects on this.

So what could have good effects?

As always, You know, we look at the other side of this.

Maybe they de deliver the balance sheet.

What would that even look like?

Well, they would have to Dele.

It, uh, quite a bit.

Uh, they do have some very interesting properties that a private equity firm may be more attracted to.

They may have to take a company like this private, clean it up over a decade to then bring it back, uh, out there in into the market.

But this is a very tough business to be in.

And when you have a lot of leverage, a lot of debt and you don't have pricing, that's very, uh, that that's very that's very sensitive to our side competition.

Then you're really setting yourself up for a tough go.

Got you OK, and you do not have a position in Macy's.

So again, you're recommending folks.

Take a look at tractor supply.

Avoid Macy's in this environment.

Thanks, Chad.

Appreciate it.

Have a great weekend and thank you for watching goodbye or goodbye.

We'll be bringing you new episodes next week at 3:30 p.m. Eastern