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Tractor Supply (TSCO) Q4 Earnings Top, Issues 2018 View

Tractor Supply CompanyTSCO delivered better-than-expected results in fourth-quarter 2017, wherein both the top and bottom line topped estimates and surged year over year. Further, the company provided initial guidance for 2018.

Shares of this farm and ranch store retailer have increased 27.8% in the last three months, outperforming the industry 's growth of 17.1%. The upside can be mainly attributed to growth initiatives.

Q4 Highlights

Tractor Supply posted earnings of 91 cents per share that outpaced the Zacks Consensus Estimate of 87 cents, alongside increasing 3.2% year over year.

Tractor Supply Company Price, Consensus and EPS Surprise

Tractor Supply Company Price, Consensus and EPS Surprise | Tractor Supply Company Quote

The company's top-line advanced 1.9% to $1,952.8 million and surpassed the Zacks Consensus Estimate of $1,947.4 million. Sales for the quarter included a nearly 6.7 percentage point negative impact due to an additional 53rd week in the prior-year quarter. Comparable-store sales (comps) improved 4%, compared with an increase of 3.1% in the year-ago period. On adjusting the 53rd week in 2016, comps would have increased 3.6% in the prior-year quarter.

Comps gained from increases in both comparable store transaction count and average ticket. Comparable store transaction count grew 2.7% and average ticket rose 1.3%. Further, traffic and sales growth were aided by the company's ongoing efforts to build customer loyalty and enhance digital capabilities. Additionally, comps gained from improvement across all geographic regions as well as major product categories. During the quarter, the company witnessed strength in everyday basic products across the consumable, usable and edible categories as well as winter and other seasonal products.

Margins & Costs

Gross profit rose 3.5% year over year to $668.6 million with gross margin expanding 50 basis points (bps) to 34.2%. The upside was driven by lesser promotional activities and improved sell-through rates for seasonal products, somewhat offset by higher mix of freight intensive products and increased transportation costs due to a rise in carrier rates and diesel fuel expenses.

Additionally, selling, general and administrative (SG&A) expenses, including depreciation and amortization, as a percentage of sales, grew 120 bps to 24.8%. This increase was primarily due to higher occupancy and other fixed costs, greater incentive compensation, increased store payroll expenses and investments in infrastructure and technology to support the strategic long-term growth initiatives.

Financial Position

Tractor Supply ended 2017 with cash and cash equivalents of $109.1 million, long-term debt of $401.1 million and total stockholders' equity of $1,418.7 million.

The company repurchased 694,000 shares for $42.8 million in the quarter. With this, Tractor Supply bought back about 5.9 million shares for $369 million in 2017. The company had $870 million remaining under its current share repurchase authorization at the end of 2017. In all, the company returned about $503.2 million of capital to shareholders in 2017 through share buybacks and dividend payments.

In 2017, this Zacks Rank #2 (Buy) company incurred capital expenditures of $250 million, of which nearly 40% was spent for maintenance and the remaining 60% was slated for growth-oriented projects including new stores, investments to enhance digital capabilities and developing supply chain infrastructure. Further, it generated cash flow from operating activities of about $631.5 million.

Going forward, management expects capital expenditures of $260-$300 million in 2018, directed toward construction costs related to a new distribution center, ONETractor investments and new store growth. Nearly 75% of this spending will be allocated towards initiatives to support long-term growth. Moreover, it anticipates share repurchases for the year to be at the high-end of its target to reduce share outstanding by 2.5-3.5%.

Store Update

During the fourth quarter, Tractor Supply opened 27 namesake stores and closed seven Del's store. Also, it opened six new Petsense stores. In 2017, the company has opened a total of 101 namesake stores, converted two Hometown Pet Stores to Petsense stores and closed nine Del's stores. Further, it opened 25 new Petsense stores in the year, including the aforementioned two conversions. This marks comfortably reaching its target of opening 100 flagship stores and 25 Petsense stores in 2017.

As of Dec 30, 2017, the company operated 1,685 Tractor Supply stores in 49 states and 168 Petsense stores across 26 states.

Guidance

Going into 2018, Tractor Supply expects to balance investments between new store growth and ONETractor strategic initiative, alongside investing in everyday businesses to provide a seamless experience to customers. This will provide significant growth opportunities as the company will gain market share and leverage its physical stores and grow digital capabilities.

Further, the company provided guidance for the first quarter and full-year 2018. The company projects net sales in the band of $7.69-$7.77 billion reflecting 6-7% growth year over year. Comps growth is anticipated in a range of 2-3%.

Coming to costs and margins, the company anticipates continued cost pressures from rising freight rates due to a shortage of drivers and higher diesel fuel prices, as well as inflationary wage pressures across retail locations and the supply chain. Further, the company is working to strike a balance between initiatives and investments in stores and distribution centers with strict cost disciplines and operational efficiencies.

The company's investments to grow business and the aforementioned headwinds are likely to keep operating margin for 2018 under pressure. Consequently, operating margin is anticipated to be nearly 8.8%, the mid-point of the company's guidance range. Higher freight costs, wage investments for employees at stores and distribution centers, pre-opening expenses and incremental operating expenses to ramp up a new distribution center in Upstate New York are among some factors that are expected to impact operating margin in 2018.

The company expects distribution center costs to impact results in the second half of 2018, particularly the fourth quarter. Gross margin is anticipated to be flat to marginally down in 2018, with significant impact on SG&A expense.

Consequently, Tractor Supply envisions earnings per share in a band of $3.95-$4.15. Moreover, the company anticipates stronger comps and earnings per share in the first half of the year compared with the second half. Hence, the company forecasts comps for the first half at or above the guidance range for 2018, while the second half comps are likely to be below the range.

Further, the company revealed that the first quarter will include one extra comp day as its stores were open for the first time on New Year's Day. This extra day is likely to add about 60-70 bps to comps for the first quarter and 10-15 bps to full year comps. Additionally, the company projects highest comps growth and lowest operating margin compression in the first quarter.

Moreover, the company expects the recent Tax Cuts and Jobs Act, enacted in December 2017, to aid effective tax rate. Effective tax rate for 2018 is expected to be in the range of 23-23.5% for 2018, significantly below the current rate of nearly 36.7%.

Interested in Retail? Check These 3 Trending Stocks

Some better-ranked stocks in the same industry include Five Below, Inc. FIVE , Hibbett Sports, Inc. HIBB and MarineMax, Inc. HZO , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Five Below, with a long-term earnings growth rate of 26.7%, has delivered an average positive earnings surprise of 15.5% in the trailing four quarters.

Hibbett has surged a whopping 74.6% in the last three months. Moreover, it has pulled off an impressive average positive earnings surprise of 25.6% in the last four quarters.

MarineMax, with a long-term earnings growth rate of 30%, has escalated 19.2% in the last three months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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