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Why Is Tractor Supply (TSCO) Down 13.1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Tractor Supply (TSCO). Shares have lost about 13.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Tractor Supply due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Tractor Supply Q2 Earnings Miss, Updates ’19 View

Tractor Supply reported mixed second-quarter 2019 financial numbers, wherein earnings fell short of the Zacks Consensus Estimate but revenues surpassed the same. Notably, the company reported a bottom-line miss after four consecutive beats, while sales retained the beat trend for five straight quarters. Both the metrics improved on a year-over-year basis. Furthermore, management updated its outlook for 2019.

Q2 Highlights

Tractor Supply’s earnings came in at $1.80 per share, which grew 6.5% but fell short of the Zacks Consensus Estimate by a penny.

Net sales grew 6.3% to $2,353.8 million and outshined the Zacks Consensus Estimate of $2,347 million. This year-over-year improvement was driven by rise in comps, led by a respective growth of 1% and 2.2% in comparable store transaction count and average ticket. Comps improved 3.2%, down from 5.6% in the year-ago period.

Furthermore, traffic and sales growth were aided by the company’s ongoing efforts to build customer loyalty and enhance digital capabilities. Also, comps gained from improvement across all geographic regions as well as strength in everyday merchandise, which includes consumable, usable and edible products. Higher demand for spring and summer seasonal products too drove comps.

Margins & Costs

Gross profit rose 6.7% year over year to $820.7 million, with gross margin expansion of 11 basis points (bps) to 34.9%. This uptick was backed by favorable product mix and strength in the company’s price management program. Moreover, freight costs were minimal in the quarter.

Selling, general and administrative (SG&A) expenses including depreciation and amortization, as a percentage of sales, grew 24 bps to 22.7%. Higher costs related to a new distribution facility in Frankfort, N.Y. along with a slight impact from investment in store team member wages led to the upside. These expenses were somewhat offset by lower occupancy and other costs.

Financial Position

Tractor Supply ended the quarter with cash and cash equivalents of $104 million, long-term debt of $466.3 million, and total stockholders’ equity of $1,544.9 million.

Year to date through the second quarter, the company returned a total of $414 million via share repurchases worth $334.2 million and dividends of $79.7 million. Additionally, it incurred capital expenditure of $83.5 million and generated cash flow from operating activities of about $348.9 million.

For 2019, the company continues to expect capital expenditure of $225-$250 million.

Store Update

In the first six months of 2019, Tractor Supply opened 25 namesake stores and two Petsense stores. As of Jun 29, 2019, the company operated 1,790 Tractor Supply stores across 49 states and 177 Petsense stores.

For 2019, management continues to expect opening of 80 namesake stores and 10-15 Petsense stores.  

Outlook

Depending on the company’s year-to-date performance, management updated its guidance for 2019. Tractor Supply now projects net sales of $8.40-$8.46 billion, with comps growth of 3-4%. Earlier, it anticipated net sales of $8.31-$8.46 billion, with comps growth of 2-4%. Operating margin is still estimated to be 8.9-9%.

Further, the company envisions net income of $562-$575 million for 2019 compared with $555-$575 million projected earlier. The company estimates earnings per share range of $4.65-$4.75 for 2019. However, the projected range depicts growth from $4.31 earned in 2018. Earlier, management estimated earnings per share of $4.60-$4.75.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Tractor Supply has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Tractor Supply has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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