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Tractor Supply: Early Disappoint Concerning

Jaime M. Katz, CFA

Narrow-moat Tractor Supply (TSCO) released preliminary first-quarter results that place the company on a bit of a weaker earnings growth trajectory than we originally anticipated in 2017. This is the fourth of the past five quarters the company has disappointed investors early, and we are increasingly concerned that the focus on improved analytics is not matching the speed of changing weather patterns that the company is competing against. However, we will hold off judgment until we capture a complete picture covering the first half of the year, indicating whether normalized weather patterns in the second quarter can keep the company on an improved earnings growth trajectory over the remainder of the year, which could lead to restored confidence in the investor base.

For the first quarter, the company reported sales growth of 6.6% to $1.56 billion, tracking about 30 basis points behind the cadence implied in our model. Comparable-store sales contracted 2.2%, hindered by a comparable transaction count decline of 1.4% and average ticket decrease of 0.9% as mismatched weather patterns deflected sales of seasonal merchandise and deflation (which acts as a headwind to comps) affected overall performance. First-quarter earnings per share, now expected to be $0.45-$0.46, fell short of the consensus estimate of $0.53. Given that our full-year estimate (at $3.44) was at the low end of management’s guidance for $3.44-$3.52 and the first half of our model anticipated only modestly positive comp growth (1%-2%), we don’t expect to make a material change to our $80 fair value estimate, and we view the shares as undervalued.

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