Tractor Supply Company (TSCO) reported second-quarter 2014 earnings per share of 95 cents, which was 9.2% higher than the prior-year quarter and in line with the Zacks Consensus Estimate. Results benefited mainly from improvement in the top line, offset by higher transportation and promotion costs as well as SG&A expenses.
Tractor Supply reported second-quarter sales of $1,583.8 million, marking an 8.8% rise from $1,455.8 million in the prior-year quarter and almost in line with the Zacks Consensus Estimate of $1,586 million. Comparable store sales (Comps) improved 1.9%, against a 7.2% increase registered in the second quarter of fiscal 2013, on the back of sustained strength of consumable, usable and edible products (C.U.E.) and solid traffic.
However, the company’s sales results were impacted by weaker-than-anticipated sales of some seasonal merchandise especially in the Northern regions, as well as soft sales results in the safe category and also by deflation effects. Nevertheless, the company stated that sales picked up in the second half of the quarter, partly offsetting the impact of unfavorable weather in the first half.
Morever, the company recognized the efforts of its staff across the chain, who took charge of the challenging situation and helped in efficient inventory management.
Quarter in Detail
As recently anticipated in the preliminary results, the company’s gross margin remained flat at 34.8% as the benefits of the gross margin enhancing initiatives and deflation were fully offset by a rise in transportation costs, product mix and higher promotional activity to drive sales. However, in dollar terms, gross profit escalated 8.8% to $550.5 million compared with $506.1 million in the prior-year quarter.
Selling, general and administrative expenses (SG&A), including depreciation and amortization, as a percentage of sales, rose 30 basis points (bps) to 21.5% due to lower-than-anticipated comps and elevated employee benefit costs, offset by lower incentive compensation expense.
On a stand-alone basis, SG&A expenses rose 9.7% to $311.6 million, in dollar terms, while depreciation & amortization expense came in at $27.9 million, 15.3% higher than last year.
Operating income for the quarter rose 6.6% to $211.0 million. However, operating margin contracted 30 bps to 13.3%, as against 13.6% in the prior-year period due to a flat gross margin as well as a rise in SG&A expenses as a percentage of sales.
Tractor Supply ended the quarter with cash and cash equivalents of $56.0 million, compared with $55.7 million at the end of the prior-year quarter. As of Jun 28, 2014, stockholders’ equity was $1,265.9 million, compared with $1,143.7 million as of Jun 29, 2013.
In the second quarter of fiscal 2014, Tractor Supply opened 23 new stores compared with the addition of 26 stores in the prior-year period. Including these, the total stores opened in the first half of fiscal 2014 were 55 against a total of 48 stores opened in the first half of fiscal 2013.
As a result of weakness in the second quarter results the company leaned toward the lower end of its previously stated guidance ranges for fiscal 2014. Previously, the company projected sales of about $5.62–$5.70 billion, comps in the 2.5%−4.0% range and earnings in the range of $2.54—$2.62 per share.
However, with sales trends now improving, the company remains confident of its performance in the second half of the fiscal year.
The company lowered its capital spending guidance for fiscal 2014 by $20 million to range between $240 and $250 million. The company retained its store growth plan targeting to open about 102 to 106 new stores in fiscal 2014. Moreover, based on the share repurchases made so far in the year the company anticipates about 140 million shares to be outstanding at year-end. Effective tax rate is estimated to be 36.9% compared with 37% projected earlier.
Additionally, the company projects deflation rate to go over the initial forecasts in the second half of the year as corn prices, which is a directional indicator, remains low. Deflation is now anticipated to be in the 50–100 bps range in the second half as projections for the third quarter remain at the higher end of the range while a slight moderation is projected for the fourth quarter.
The company also anticipates further troubles for the safe category in the year ahead. However, the company’s merchant remains prepared for the worse with a solid plan to drive sales in the second half. Gross margin is expected to be flat to slightly up in the second-half of the year. While the company expects SG&A expense leverage for the third quarter to be closer to flat due to the inclusion of the store support center transition cost, it projected leveraged SG&A expense for the second half primarily by managing expense in the fourth quarter.
Other Stocks to Consider
Tractor Supply currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the related industry include Barnes & Noble Inc. (BKS), Five Below Inc. (FIVE) and Marinemax Inc. (HZO), all carrying a Zacks Rank #2 (Buy).
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