Tractor Supply Update: Bought the Farm

 | Oct 25, 2012 | 12:44 PM EDT
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On Tuesday I wrote about Tractor Supply (TSCO). The company reported yesterday and it looks like the stock bought the farm. It's down more than 3% in midday trading. What happened?

First, the company blamed the weather. (Because that's what you do when you're a retailer.) But seriously, management told investors the dry season had a big impact on planting. The drought, which covered almost 64% of the country, depressed sales. Furthermore, the lack of a really cold September held back cold-weather products. Merchandise such as pellet stoves and cold weather hunting gear were down. Consumable, useable and edible (CUE) products remained strong since chickens and horses eat no matter how the quarter is going. Exclusive and private retail brands of feed make up about 25% of sales and were up 1%. Last year, Hurricane Irene whipped up sales so emergency response products sales were weak.

The company opened 17 new stores during the quarter, as compared with 12 new stores at the same time last year. For the nine months ended September, Tractor Supply was able to increase sales 9% to $1.07 billion and net income by 17% to $50 million. Earnings per share of $0.69 beat the consensus estimate by $0.02.

Inflation was held in check, up just 185 basis points. If you recall, last year the company faced 465 basis points of inflation, which greatly impacted profits. Gross margin was flat with last year at 33.5% as the company sold fewer higher-margin items. Sales of riding mowers, pellet stoves and the like were weak.

While the quarter was OK, guidance for the year end really hit the stock. The company guided below the Street consensus for the second time this year. Full-year sales are expected to come in between $4.61-4.65 billion. Earnings per share would likely be in the range of $3.63-3.69. 

All retailers are impacted by the weather in one way or another, but looking at the last three quarters really highlights the risk inherent in Tractor Supply, especially as it grows its square footage. While there are plenty of new stores to be built, the company is very susceptible to bad weather. Investors with a long-term investment horizon may want to use these temporary dips to add more shares. As long as Tractor Supply has little direct competition and a huge runway of potential new store openings, the sky's the limit for the stock.

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