Don't Put Tractor Supply Out to Pasture

 | Oct 23, 2012 | 10:30 AM EDT
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I last mentioned Tractor Supply (TSCO) on Sept. 29, 2011 and, as of yesterday, the stock is up about 42%. I wanted to take another look, since the company is set to report on Wednesday. Are there more profits to farm from this name or is it time to put it out to pasture?

To me, Tractor Supply is one of the more interesting mid-cap retailers. The company is the largest operator of retail farm and ranch stores in the U.S. If it needs planting, picking, feeding or fixing, Tractor Supply has it. The company serves a unique niche in the marketplace that has little direct competition. Tractor Supply locates its stores near farms and ranches and focuses on the "rural lifestyle." The company operates more than 1,085 stores in 44 states. It believes it can double the number of stores over the next few years. The big opportunity is out west, where it has just 29 stores. The company believes it can easily add another 300 stores to states like Arizona, Nevada, New Mexico, Utah, Colorado, Idaho, and Wyoming. Management believes it can increase the store base to 2,100 stores within the next several years.

To succeed, retailers need a niche, store growth and strong margins. Tractor Supply has all of those elements. The company has been able to improve its operating margin from 6.1% in fiscal 2007 to 8.3% in 2011. By stocking more branded products, the company believes it can get to a 9.5% operating margin, which would be better than most retailers. Earnings per share (EPS) have grown at a six-year compounded annualized rate of 19.2%. During that time, TSCO has a return on invested capital of 26.7%.

Tractor Supply is scheduled to report its third-quarter earnings results on Wednesday. The Street consensus is expecting earnings per share of $0.67 on $1.06 billon in revenue. Tractor Supply missed expectations for the second quarter. Although EPS were $0.06 ahead, revenue was less than expected. Second-quarter revenue grew just 9.3% to $1.39 billion. The weakness seems to be related to lackluster same-store sales. Second-quarter same-store sales increased 3.2% vs. a 4.6% increase in the prior year. On the conference call, management cut fiscal 2012 guidance from $3.67 to a mid point of $3.62, which translates to $4.58 billion to $4.65 billion in revenue. The company was also cautious forecasting same-store sales. Same-store sales for the year are now expected to increase 3.5% to 5% compared to the prior expectation for an increase of 4.0% to 5.5%.

Although the second quarter was tough, rising grain and seed prices are expected to boost same-store sales in the back half of the year. If TSCO can get its same-store sales back on track, the stock should easily tack on another 10% or so over the next few months. One day, Tractor Supply will fall off its high horse, but now isn't the time.

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