Profits to Be Made in Llama Feed

 | Sep 29, 2011 | 10:00 AM EDT  | Comments
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Stock quotes in this article:

tsco

,

petm

At the beginning of the month I wrote about PetSmart (PETM), a specialty retailer that's yielding big returns. Another retailer that almost nobody talks about, and is growing like crazy, is Tractor Supply (TSCO). Shares of the company, which presented Wednesday at Dana Telsey's fall retail conference, have returned some 1,400% in the last decade.

Tractor Supply is the largest operator of retail farm and ranch stores in the U.S., supplying the needs of recreational farmers and ranchers through 1,043 stores in 44 states. The stores are located in rural communities and near agricultural centers, selling equine, pet and small animal products (39% of revenue); hardware (23%); work clothing (10%); and a wide variety of agricultural products. If you need it for your llama farm, Tractor Supply sells it.

Judging from the company's results, it appears the economy is so bad in parts of America that people must be growing their own food. Tractor Supply's first-half sales were up 13.4% this year on a 7.9% jump in the number of new stores. Same-store sales rose 7% vs. a 4.7% climb last year.

In 2010 sales advanced 13%, and most analysts are expecting 14% bump in 2011. Revenue growth is being driven by the addition of 80 to 85 new stores, as well as increasing same-store sales of 6%. (Historically the company isn't a great comps story. Same-store sales usually grow between 2% and 3%.) The Street expects earnings per share to jump 25% to $2.82 this year, and another 14.5% to $3.23 in 2012.

Conclusion

Tractor Supply is another interesting midcap specialty retailer. The company is able to expand gross and operating margins almost at will, since the vast majority of products it sells are not sold by the competition. (There are not too many places where you can get shampoo for your llamas.) In the most recent quarter, the company was able to post operating margins of 7.72%. Management believes it can easily achieve 8.5% in the near future as it takes action to make the company more profitable.

Furthermore, management believes it can add 73% more stores and has set a long-term goal of 1,800 stores. In the western part of the country, the company only has 26 locations -- and that includes big farm states like California. It has plans to double the number of stores in the Midwest and add 50% more stores to the Northeast. At 23x 2011 EPS estimates, this isn't the stock's first rodeo. It's pricy for a retailer. Personally, I would be more comfortable adding a position in the mid-$50s, which would be closer to 19x estimates. But whether you are looking for a growing midcap retailer or llama feed, Tractor Supply has the goods.

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