Tractor Supply Beats Again

Zacks Equity Research

Tractor Supply Co. (NasdaqGS:TSCO - News), a leading retail firm and ranch store brand, recorded yet another encouraging quarter. Earnings per share in the fourth quarter of fiscal 2011 came in at 96 cents, surpassing the Zacks Consensus Estimate of 92 cents as well as prior-year earnings of 67 cents per share. Tractor Supply earned $70.5 million in the quarter, exceeding the prior-year quarter’s net income of $50.2 million.

Tractor Supply has been witnessing increasing trends in same-store sales. The reported quarter was no exception as robust performance in core consumable, usable and edible products − for instance, pet food and animal feed − acted as a catalyst for an increase of 7.6% in same-store sales.

During the recession, Tractor Supply had suffered setbacks as buyers avoided big-ticket purchases, such as mowers, but recent quarters have seen an uptick in results. The company’s impressive merchandising improvement strategy along with solid same-store sales trend resulted in double-digit top-line growth in revenues. Net sales in the quarter surged 20.1% to $1,240.0 million from $1,032.6 million in the prior-year quarter. The percentage growth includes a 6.6% benefit from an extra week during the quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $1,220.0 million.

Gross profit during the quarter surged 19.7% to $403.2 million compared with $336.9 million in the prior-year quarter. However, gross margin contracted 10 basis points to 32.5%, as benefits from improved inventory management, strategic sourcing, private branding and pricing were partially offset by higher transportation costs and product mix.

Strong same-store sales coupled with cost containment related to store operating and marketing expenses resulted in a 150 basis point improvement in selling, general and administrative expenses, as a percentage of sales, which came in at 23.5% versus 25% in the prior-year quarter. Consequently, operating margin during the quarter improved 140 basis points to 9% versus 7.6% in the prior-year quarter.

For full fiscal 2011, earnings grew 33.8% to $3.01 per share from the prior-year earnings of $2.25, outpacing the Zacks Consensus Estimate of $2.99. The company’s net sales were $4.23 billion, registering a growth of 16.3% from previous year’s $3.64 billion, on the heels of 8.2% growth in same-store sales. Revenue of Tractor Supply beats the Zacks Consensus Estimate of $4.21 billion.

Financial Position

Tractor Supply’s balance sheet had cash and cash equivalents of $177.0 million at the end of the year compared with $257.3 million at the end of the prior-year. Stockholders’ equity came in at $1,008.3 million compared with $933.2 million at the end of fiscal 2010. During fiscal 2011, the company generated $254.1 million of cash from operating activities compared with $222.6 million in the prior-year period.

Store Update

In the quarter under review, Tractor Supply opened 31 new stores and relocated 1 store compared with 27 new stores and 2 store closures in the prior-year period. The company currently runs as many as 1,085 stores in 44 states.

Management Guidance

Tractor is well positioned to capitalize on positive long-term trends. The company expects sales for fiscal 2012 to range between $4.56 billion and $4.66 billion backed by expectation of same-store sales increase of 3% to 5%. The company has planned to open 90 to 95 new stores during fiscal 2012.

On the back of perked-up results and brighter sales trends, Tractor Supply expects earnings for fiscal 2012 in the range of $3.38 – $3.46 per share. The current Zacks Consensus Estimate for fiscal 2012 stands at $3.42 per share, which is at the middle of the company’s guidance range.

Our Take

Tractor Supply is the largest operator of farm and ranch stores in the U.S., a unique market niche that serves the lifestyle needs of recreational farmers and ranchers The company’s stores are strategically located in small towns, close to its target customers, which provides a competitive edge over its rivals, such as The Home Depot Inc. (NYSE:HD - News) and Lowe’s Companies Inc. (NYSE:LOW - News).

Moreover, in an effort to boost margins, Tractor Supply is expanding its portfolio of private label brands and is also focusing on direct sourcing. The company has set a long-term target of generating 25% of sales from private label brands and 13% from strategic direct sourcing. This provides a strong upside potential for the company.

However, heavy job losses coupled with reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.

Tractor Supply’s shares maintain a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation. Our long-term recommendation on the stock remains ‘Neutral’.

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