Tractor Supply Co.
) reported yet another encouraging quarter with earnings surging
nearly 18% to $1.45 per share in the second quarter of 2012,
surpassing the Zacks Consensus Estimate of $1.39. Tractor Supply's
second-quarter results benefited mainly from strong top-line
performance and improved margins.
Tractor Supply has been witnessing increasing trends in
same-store sales. The reported quarter was no exception as robust
performance in core consumable, usable and edible products − for
instance, pet food and animal feed − acted as a catalyst for an
increase of 3.2% in same-store sales.
During the recession, Tractor Supply had suffered setbacks as
buyers avoided big-ticket purchases, such as mowers, but recent
quarters have seen an uptick in results. The company's impressive
merchandising improvement strategy along with solid same-store
sales trend resulted in high single-digit top-line growth in
Net sales in the quarter surged 9.6% to $1,291.9 million from
$1,178.4 million in the prior-year quarter. However, total revenue
missed the Zacks Consensus Estimate of $1,302 million. The company
witnessed an approximately $38 million of sales increase in the
first quarter of 2011 that was carried forward from the second
quarter because of an early spring. The increase was at the high
end of management's projection.
Gross profit during the quarter surged 12.2% to $451.5 million
compared with $402.5 million in the prior-year quarter. Moreover,
gross margin expanded 80 basis points (bps) to 34.9%, as the
company benefited from improved big ticket seasonal and emergency
products along with positive impact from lower sales of low margin
Better cost containment related to store personnel and other
operating expenses resulted in a 10 bps improvement in selling,
general and administrative expenses, as a percentage of sales,
which came in at 21.8% versus 21.9% in the prior-year quarter.
Consequently, operating margin during the quarter improved 90 bps
to 13.1% versus 12.2% in the prior-year quarter.
Tractor Supply ended the quarter with cash and cash equivalents,
including restricted cash of $187.9 million compared with $207.4
million at the end of the prior-year quarter. Stockholders' equity
came in at $1,067.1 million compared with $940.7 million at the end
of the second quarter of 2011.
In the quarter under review, Tractor Supply opened 18 new stores
compared with 16 new stores opened in the prior-year period. The
company currently runs as many as 1,135 stores in 45 states.
Looking into 2012, the company expects its profits to grow
continually, given the right mix of products and marketing plans to
maintain customer footfall. Encouraged by strong second-quarter
operating performance, the company raised its 2012 earnings
guidance range to $3.58 to $3.66 per share compared with its
earlier forecast of $3.52 to $3.60 per share. The Zacks Consensus
Estimate for full-year 2012 stands at $3.68, well above the
higher-end of the company's revised fiscal year guidance.
However, looking at the unfavorable weather condition, the
company anticipates weak third quarter summer sales. Therefore,
Tractor Supply has lowered its net sales and comps guidance range
for full-year 2012. The company now expects net sales to be in
between $4.58 billion and $4.65 billion compared with $4.61 - $4.68
billion forecasted earlier. Similarly, comps are expected to grow
in the range of 3.5% - 5% instead of the previous forecasted range
of 4% - 5.5%. Further, the company has planned to open 90 to 95 new
stores during fiscal 2012.
We believe that Tractor Supply has successfully tweaked
merchandise assortment across its stores, which is in line with the
prolonged economic downturn. The company has increased the
proportion of less discretionary items, such as animal and
pet-related products, while reducing shelf space for certain
big-ticket merchandise, such as outdoor power equipment.
Moreover, in an effort to boost margins, Tractor Supply is
expanding its portfolio of private label brands and is also
focusing on direct sourcing. The company has set a long-term target
of generating 25% of sales from private label brands and 13% from
strategic direct sourcing. This provides a strong upside potential
to the company.
However, the company operates in a highly fragmented industry
and faces intense competition from larger retailers, such as
The Home Depot Inc.
Lowe's Companies Inc.
) as well as from independently-owned retail farm and ranch stores,
privately-held regional farm store chains as well as cooperatives.
Being in such a high competitive industry, Tractor Supply may find
it difficult to execute and implement new business strategies,
which in turn, may impact its operations adversely.
Currently, we are maintaining a long-term 'Outperform'
recommendation on Tractor Supply. However, the company has Zacks #3
Rank implying a short-term Hold rating on the stock.
HOME DEPOT (HD): Free Stock Analysis Report
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TRACTOR SUPPLY (TSCO): Free Stock Analysis
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