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Tractor Supply Stock Surges 51% on Solid Growth Initiatives

Zacks Equity Research

Tractor Supply Company TSCO remains an investors’ favorite, thanks to its robust store-growth and omni-channel efforts. Additionally, its ONETractor initiative that is aimed at connecting store and online shopping is commendable. The company is also benefiting from its continuous efforts to build customer loyalty and enhance digital capabilities.

Backed by the afore-mentioned factors, shares of the company have surged 51.1% in a year, comfortably outperforming the industry’s 27% rally. This impressive performance can also be attributed to its superb surprise history, having outpaced earnings and sales estimates in five of the trailing six quarters.



Deeper Analysis of Growth Efforts

Tractor Supply is committed toward expansion of store base and incorporation of technological advancements to induce traffic and drive the top line. Also, the company has been improving marketing and merchandising initiatives as well as its supply chain efficiencies to boost profitability. In 2018, Tractor Supply opened about 80 namesake and 18 Petsense stores apart from closing 11 Petsense stores. In the current year, the company plans to open about 80 namesake and 10-15 Petsense stores. These endeavors make us confident about the company’s accomplishment of domestic store-growth target of 2,500 in the long term.

Meanwhile, Tractor Supply remains focused on integrating the physical and digital operations to offer consumers a seamless shopping experience through its "ONETractor" initiative. Apparently, the company is reaping significant benefits from its Buy Online Pick Up in Store program. This is quite evident from robust double-digit e-commerce sales growth for 26 straight quarters, reported in fourth-quarter 2018. Moreover, it continues to expand the Neighbor’s Club loyalty program, surpassing its target of membership growth in 2018.

Furthermore, the company has completed system and process integration of the Petsense acquisition during 2018 by applying the best practices from Tractor Supply to Petsense. In 2016, Tractor Supply acquired Petsense LLC — a leading specialty retailer of pet supplies and services — to reinforce its foothold in the flourishing pet specialty space. The company is now focused on expanding the Petsense format in certain geographic markets. Additionally, the Petsense stores remain focused on building long-term customer loyalty by using digital marketing methods to engage customers, revamping the website and enhancing customer rewards program.

Although Tractor Supply remains committed to strengthen its business through the afore-mentioned initiatives, higher cost of investments toward infrastructure and technology remain a concern. Escalated freight costs and negative mix are added deterrents. Consequently, the gross margin contracted 66 basis points (bps) in the most recent quarter. Further, increased clearance of the Petsense inventory from store closures and inventory rationalization slightly dented the gross margin. Also, the operating margin fell 90 bps due to higher SG&A expenses on increased incentive compensation and investments to support growth initiatives.

Nevertheless, management anticipates operating margin expansion in the second half of 2019, benefiting from easing of transportation costs pressures by mid-year 2019 and as the profit improvement initiatives began yielding results.

Further, Tractor Supply has a VGM Score of B and an expected long-term earnings growth rate of 11.2%.

3 Better-Ranked Retail Stocks

Abercrombie & Fitch Co. ANF has delivered average positive earnings surprise of 88.3% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Canada Goose Holdings Inc. GOOS delivered average positive earnings surprise of 82.7% in the trailing four quarters. The company currently carries a Zacks Rank #2 (Buy).

Nordstrom, Inc. JWN, also a Zacks Rank #2 stock, delivered average trailing four-quarter earnings surprise of 11.2%.

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