A month has gone by since the last earnings report for Tractor Supply (TSCO). Shares have added about 5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Tractor Supply due for a pullback? 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 Beats Q2 Earnings & Sales Estimates
Tractor Supply reported second-quarter 2020 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. The company also provided the view for the third quarter. Tractor Supply’s adjusted earnings of $2.90 per share surpassed the Zacks Consensus Estimate of $2.62. Moreover, the bottom line improved 61.1% from the prior-year quarter.
Net sales grew 35% year over year to $3,176.3 million and beat the Zacks Consensus Estimate of $3,007 million. The improvement was driven by comparable store sales (comps) increase of 30.5%, led by growth of 15.8% in comparable average ticket and 14.6% in comparable transaction count.
Comps growth was backed by strength in demand for spring and summer seasonal categories as well as robust growth in everyday merchandise, including consumable, usable and edible products. Further, robust comps growth at all of the company’s geographic regions aided results. Additionally, the company witnessed triple-digit sales growth in the e-commerce business. Meanwhile, the top line was partly hurt by significant impacts of the coronavirus outbreak on consumer demand across all major product categories as customers were focused on the care of their homes, land and animals.
Gross profit rose 41% year over year to $1,156.8 million, while gross margin expanded 155 basis points (bps) to 36.4%. Gross margin gained from lower depth and frequency of sales promotions, favorable product mix, and reduced transportation costs, as a percent of net sales.
Selling, general and administrative (SG&A) expenses — including depreciation and amortization — as a percentage of sales declined 33 bps to 22.3%. SG&A expenses benefited from leverage in occupancy and other fixed costs due to higher comps, partly offset by incremental costs related to the pandemic and increased incentive compensation. In dollar terms, SG&A expenses, including depreciation and amortization, rose 33% to $709.1 million. Driven by higher gross margin and SG&A leverage, operating income rose 55.7% to $447.8 million in the second quarter. Operating margin expanded 188 bps to 14.1%.
Over the past few months, the company has rolled out technology and services like curbside pickup, same day/next day delivery and its first-ever mobile app to attract customers. Further, it is on track to build up on Tractor Supply’s Out Here lifestyle assortment and convenient shopping format to gain new customers and market share. Additionally, the company launched the Field Activity Support Team (“FAST”) and is implementing various technology and service enhancements across the enterprise. It is also in the initial phase of transforming its side lots and mature stores to improve space productivity, bringing the latest merchandising strategies to life and advancing efforts to remain nationally strong and locally relevant.
Tractor Supply ended the quarter with cash and cash equivalents of 1,206.4 million, long-term debt of $536.1 million and total stockholders’ equity of $1,695.7 million. Further, it has no amounts drawn on its $500 million revolving credit facility as of July 22, 2020. This provides ample financial flexibility to the company to steer through the pandemic.
In the first half of 2020, it incurred capital expenditure of $86.6 million and generated cash flow from operating activities of $993.1 million. For 2020, it now expects capital expenditure of $300-$325 million compared with $225-$275 million mentioned earlier. The increased capital spending guidance relates to investments to support the company’s strategic growth initiatives.
In the quarter under review, Tractor Supply opened 18 namesake stores and three Petsense stores. Moreover, it shuttered three Petsense stores. As of Jun 27, the company operated 1,881 Tractor Supply stores across 49 states and 180 Petsense stores in 25 states. Moreover, management remains on track with its store-opening initiatives. It now plans to open 75 to 80 new Tractor Supply stores in 2020. Further, it expects to inaugurate 10 Petsense stores compared with 10-15 stores mentioned earlier. However, the company notes that the timing of store openings may be delayed in some areas due to the pandemic.
While Tractor Supply expects its results through the rest of 2020 to be dependent on the magnitude of the virus outbreak’s impacts in various regions, it provided the view for the third quarter. The company expects net sales of $2.30-$2.40 billion for the third quarter, with comps growth of 12-18%. Moreover, net income is likely to be $136-$162 million, reflecting earnings per share of $1.15-$1.35. However, the company expects costs related to the coronavirus outbreak to hurt its business by $15-$20 million in the third quarter.
Additionally, the aforementioned strategic growth initiatives will hurt the cost structure by an estimated $15 million in the third quarter. Moreover, the company earlier announced permanent wage and benefit changes, which are likely to results in costs of $13 million in the third quarter.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 11.85% due to these changes.
Currently, Tractor Supply has a great Growth Score of A, a grade with the same score on the momentum front. 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.
Estimates have been trending upward for the stock, and the magnitude of these revisions 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.