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Tractor Supply Finds Sweet Spot as Recluses Itch to Get Out

Crystal Kim

(Bloomberg) -- Tractor Supply Co., a retailer focused on the rural lifestyle that sells everything from hoes to blackberry bushes to dog food, is resonating with a Covid-rattled, stir crazy population embracing the joys of backyard vegetable patches and time outside.

Shares last week hit an all-time high after the company forecast record profit in the current quarter and comps growth of as much as 25%. Several factors dovetailed to fuel demand: spending by restless Covid-shut ins, competitors’ shuttered stores and stimulus cash.

“More people are staying at home, gardening. And you don’t stop feeding your pets,” Telsey analyst Joseph Feldman said. “Tractor Supply sells a lot of grease, but 40% to 45% of their business is selling the basic stuff that people buy every week. It’s like going to the grocery store.”

Tractor Supply’s base is made up of recreational farmers, ranchers, gardeners and others who like to get outside and try their hand at backyard poultry, raising goats and even beekeeping. About half of the $8 billion in sales last year came from livestock and pet supplies, with hardware and tools chipping in 21%, and seasonal items, clothing and agriculture making up the rest.

In January, 45-year-old Hal Lawton took over as chief executive officer, bringing with him skills at harvesting online sales from previous stints at Macy’s, Home Depot and eBay. The timing was fortunate. Since March, the company rolled out curb-side pick up across roughly 1,800 stores and revamped its website with geo-location tracking capabilities -- both aimed at enhancing the customer experience. And early data show an influx of new customers buying up goods online and picking up in-store, according to the company.

While these digital efforts were years in the making under a strategy called “One Tractor,” the company sped things up as it braced for changing customer needs amid the pandemic, said chief technology officer Rob Mills.

When coronavirus hit, the company pulled together a cross-functional team and put a plan in motion after analyzing procedures, trends and local regulations. The effort took roughly 10 to 14 days from “moment of decision to rollout,” he said. Next up: a mobile app with enhanced product description and imagery, and an “ask an expert” function.

The forecast in late May drew a chorus of praise from analysts, with more than half holding a buy-equivalent rating. “The farm economy is open,” Quo Vadis Capital’s John Zolidis wrote. “In general, rural economies and rural consumer psychologies have been less impacted by the Corona-Crisis than others.” At Raymond James, analyst Matthew McClintock wrote that Tractor Supply is perfectly aligned with the “idea of nesting and increasing consumer adoption of DIY projects and acquiring pets.”

The sole sell rating on the Brentwood, Tennessee-based company comes from Morningstar’s Jaime Katz. Her fair-value estimate of the company of $102 per share -- the Street-low -- is nearly 20% below where shares are trading, which pulled the rating into “sell” territory. She otherwise said Tractor Supply is a good business that has “taken its lumps” in the past.

“No one loved it for a while, especially in the 2016 and 2017 period,” Katz said. “They were impacted by wonky weather patterns, which appears to be the biggest volatility factor for them.” If it’s too warm, and cold weather gear is out on the floor, there’s sometimes a mismatch, Katz explained.

Gone Country

One possible helpful trend that some analysts touched on last month is a shift of urban residents going more country. A Piper Sandler-conducted survey found that roughly 40% of urban residents were “likely” or “very likely” to move in the next 12 months to a more suburban or rural area, where Tractor Supply stores tend to be located. “We believe this population migration over the next year will be favorable for TSCO,” Piper analyst Peter Keith wrote.

Katz thinks the trend may have legs. “The idea that there is a movement from urban to more suburban and rural areas is legitimate, but TBD,” Katz said.

Meanwhile, Goldman analyst Kate McShane stepped away from her bull rating last week, saying the recent comp lift may be temporary as once shuttered competitors come back, states re-open, stimulus checks fade, “and the reality of a tougher economic backdrop sets in.”

McShane suspects part of the online surge was gained from Amazon’s shift to focusing entirely on essentials in recent months, driving dollars to other retailers. After the recent share run-up, she sees the stock as likely fully valued.

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