Tractor Supply Co. ( TSCO )
reported yet another encouraging quarter with earnings surging
nearly 19% to 69 cents per share in the third quarter of 2012,
beating the Zacks Consensus Estimate of 67 cents. The company's
results benefited mainly from strong top-line performance and
improved operating margin.
Quarter in Detail
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 − mainly
for pet food and animal feed − acted as a catalyst for a 2.9%
increase in same-store sales on top of an 11.5% rise in the
During the recession, Tractor Supply had suffered setbacks since
the buyers avoided big-ticket purchases, such as mowers, but recent
quarters have seen a reversal of these trends. The company's
impressive merchandising improvement strategy resulted in high
single-digit top-line growth.
Net sales in the quarter improved 9% to $1.066 billion from
$0.978 billion in the comparable prior-year quarter. However, total
revenue missed the Zacks Consensus Estimate of $1.069 billion.
Gross profit during the quarter increased 9% to $0.357 billion
compared with $0.328 billion in the prior-year quarter. However,
gross margin remains flat year over year at 33.5%, as the benefit
from improved sales of big ticket seasonal items and positive
impact from lower sales of low-margin products were fully offset by
increased transportation costs and adverse impact from the shift in
sales mix to freight-intensive C.U.E products.
Better cost containment related to store personnel and lower
incentive compensation expenses resulted in a 30-basis point (bp)
improvement in selling, general and administrative expenses, as a
percentage of sales, which came in at 26.2% versus 26.5% in the
prior-year quarter. Consequently, operating margin during the
quarter improved 30 bps to 7.3% versus 7.0% in the prior-year
Tractor Supply ended the quarter with cash and cash equivalents,
including restricted cash of $0.078 billion compared with $0.118
billion at the end of the year-ago quarter. Stockholders' equity
came in at $1.054 billion compared with $0.937 billion at the end
of the third quarter of 2011.
Long-term debt as of September 29, 2012 stood at $0.040 billion
versus $0.035 billion. At the end of third quarter, the company's
long-term-debt-to-capitalization ratio remains flat year over year
at just 3.7%.
In the quarter under review, Tractor Supply opened 17 new stores
and closed one, compared with 12 new store openings and 1 closure
in the year-ago quarter. As of September 29, 2012, the company
operated as many as 1,151 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 third-quarter
operating performance, the company raised and narrowed its 2012
earnings guidance range to $3.61−$3.65 per share compared with its
earlier forecast of $3.58−$3.66 per share.
Moreover, looking at the favorable weather conditions, the
company anticipates better fourth quarter winter sales. Tractor
Supply has also raised and narrowed its net sales and comps
guidance range for full-year 2012.
The company now expects net sales to be in between $4.61 billion
and $4.65 billion compared with $4.58−$4.65 billion forecasted
earlier. Similarly, comps are expected to grow in the range of
4%−5% instead of the previously forecasted range of 3.5%−5.0%.
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 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, sluggish economic recovery along with the risk of
unfavorable weather conditions affecting farmers' business
operations are matters for concern. Moreover, due to intense
competition from larger retailers such as The Home Depot
Inc. ( HD ) and Lowe's Companies Inc.
), Tractor Supply may find it difficult to execute and implement
new business strategies, which in turn, may impact its operations
Currently, the company has a Zacks #2 Rank implying a short-term
Buy rating. However, we remain slightly cautious on the stock and
uphold our long-term Neutral recommendation, waiting for further
catalysts before becoming more positive on the stock.HOME DEPOT (HD): Free Stock Analysis ReportLOWES COS (LOW): Free Stock Analysis ReportTRACTOR SUPPLY (TSCO): Free Stock Analysis
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