Tractor Supply (TSCO) Q3 Earnings Beat, Sales Lag Estimates
Shares of Tractor Supply Company TSCO fell more than 6% before the trading session on Oct 26, following the third-quarter 2023 results, wherein the bottom line beat the Zacks Consensus Estimate while sales lagged the same. Both metrics improved year over year. Results have gained from consistent market share expansion and positive customer trends.
The company also reached a milestone in its Life Out Here Strategic plan by completing more than 420 Garden Centers and 35% of the chain in Project Fusion Layout. However, management remains cautious of unfavorable seasonal category performances and muted consumer spending.
Shares of TSCO have lost 11% in the past three months compared with the industry’s 17.1% decline.
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Q3 Highlights
Tractor Supply’s earnings of $2.33 per share were up 11% year over year and surpassed the Zacks Consensus Estimate of $2.27.
Net sales advanced 4.3% year over year to $3,412 million, driven by contributions from the acquisition of Orscheln Farm and Home, as well as store openings. However, the metric missed the Zacks Consensus Estimate of $4,274 million.
Comps edged down 0.4% year over year but lagged our estimate of 2.8% growth. The company’s comparable average transaction count remained flat year over year, while the comparable average ticket fell 0.3%. This was due to a decline in seasonal goods and big-ticket items, more than offset by sturdy demand for core year-round merchandise, including consumable, usable and edible products.
Costs and Margins
The gross profit rose 7.3% year over year to $1,250.5 million but lagged our estimate of $1,252 million. Meanwhile, the gross margin expanded 101 basis points (bps) to 36.7%. The execution of everyday low-price strategy, gains from the Neighbor’s Club loyalty program, reduced transportation costs and efficiencies from a new distribution center aided margins, partly offset by an unfavorable product mix.
Selling, general and administrative (SG&A) expenses, including depreciation and amortization, as a percentage of sales, expanded 38 bps year over year to 26.7%. In dollar terms, SG&A expenses, including depreciation and amortization, rose 5.8% year over year to $909.6 million and beat our estimate of $833.1 million. Higher SG&A expenses resulted from higher depreciation and amortization, the opening of a distribution center, the impacts of higher medical claims and fixed cost deleverage.
The operating income was up 11.3% year over year at $340.9 million in the third quarter but missed our estimate of $343.5 million. Meanwhile, the operating margin expanded 62 bps to 10%.
Financial Position
This Zacks Rank #3 (Hold) company ended third-quarter 2023 with cash and cash equivalents of $421.7 million, long-term debt of $1,728.3 million, and total stockholders’ equity of $2,111.1 million. It also provided cash flow from operating activities of $937.9 million in the nine months ending Sep 30, 2023.
In third-quarter 2023, the company incurred a capital expenditure of $177.1 million. For 2023, capital expenditure is expected to be $800-$850 million.
In the third quarter, Tractor Supply returned $247.4 million to its shareholders, including $135.4 million to repurchase 0.6 million shares and $112 million as quarterly cash dividends.
Tractor Supply Company Price, Consensus and EPS Surprise
Tractor Supply Company price-consensus-eps-surprise-chart | Tractor Supply Company Quote
Store Update
In the quarter under review, the company opened 17 Tractor Supply stores and four Petsense by Tractor Supply stores. Also, it closed one Petsense by Tractor Supply store in the quarter under review. As of Sep 30, 2023, the company operated 2,198 Tractor Supply stores across 49 states, including 81 Orscheln Farm and Home acquired in 2022. It also operated 195 Petsense stores in 23 states as of Sep 30, 2023.
Management intends to continue its store-opening initiatives in 2023. The company plans to open 70 Tractor Supply stores and 10-15 Petsense stores in 2023.
2023 Outlook
Management revised its guidance to include the adverse impacts of an unfavorable seasonal category performance and muted consumer spending. The company expects net sales of $14.5-$14.6 billion, down from the earlier mentioned $14.8-$14.9 billion.
Meanwhile, comps are likely to remain flat year over year, down from previously mentioned 1.3-2.5% growth. The operating margin is anticipated to be 10.1-10.2% compared with the 10.2-10.3% mentioned earlier. Earnings per share are expected to be $10.00-$10.10, down from the previously communicated $10.20-$10.40.
Key Picks
Some better-ranked stocks are BJ's Restaurants BJRI, Ross Stores ROST and Walmart WMT.
BJ's Restaurants, which operates a chain of high-end casual dining restaurants in the United States, currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for BJRI’s 2023 sales and EPS indicates 5.6% and 405.9% growth, respectively, from the year-ago period’s reported levels. It has a trailing four-quarter earnings surprise of 121.2%, on average.
Ross Stores, which operates off-price retail apparel and home fashion stores, currently carries a Zacks Rank #2.
The Zacks Consensus Estimate for Ross Stores’ current financial-year sales and earnings indicates growth of 7.1% and 19.4%, respectively, from the year-ago reported numbers. ROST has a trailing four-quarter earnings surprise of 11.4%, on average.
Walmart, which operates a chain of hypermarkets, discount department stores and grocery stores, currently carries a Zacks Rank #2. The expected EPS growth rate for three to five years is 5.5%.
The Zacks Consensus Estimate for Walmart’s current financial-year sales implies an improvement of 4.2% from the year-ago period’s actual. WMT has a trailing four-quarter earnings surprise of 12%, on average.
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