After Tractor Supply's (TSCO) negative business update ahead of its second-quarter results, shareholders are concerned. The stock took a hit during Thursday's session, down more than 4% at around $91, trading about four times higher than average volume.
The home improvement retail chain cited "cooler than average spring season temperatures" as the primary reason for the softness in store sales, particularly in the North and Midwest. Comparable store sales decreased 0.5% vs. a 5.6% increase in the prior year's second quarter. Based on the preliminary second-quarter results, Tractor Supply updated some of its guidance for fiscal 2016, lowering estimates for net sales, comparable store sales, net income and earnings per diluted share.
These adjustments had Real Money contributor James Gentile questioning whether the Tennessee-based company was using the poor weather in the Northeast as an excuse. "Before yesterday, Tractor Supply has been a 'Teflon' retail stock, a haven of safety in the beleaguered retail sector of the market," said Gentile.
But Tractor Supply's main competitors, Home Depot (HD) and Lowe's (LOW), could likely see a similar sales pattern.
"It should not be a surprise that HD and LOW also likely experienced spring weather-related sales pressures, particularly given the historical comp sales correlation with TSCO comp sales and category sales," said WedBush analysts in a research note Thursday.
Prior to Tractor Supply's fourth-quarter 2015 results, which were impacted by poor weather, the correlation among the three companies over the last 11 quarters was 0.78, noted the WedBush analysts. But they said the correlation over the last 13 quarters dropped to 0.55 because of Tractor Supply's rough quarter in 2015.
The analysts believe the weather-related softness at Home Depot and Lowe's is more limited, considering Tractor Supply's higher exposure to weather-sensitive categories. They anticipate more risk to both companies achieving second-quarter consensus comparable estimates of 4.8% for Home Depot and 4% for Lowe's.
WedBush analyst Seth Basham told Real Money Thursday that Home Depot has an outdoor seasonal sales mix that's approximately five percentage points lower than Lowe's, "so HD should be less impacted by unfavorable weather in 2Q." He added that due partly to this category's exposure difference and favorable weather, "LOW U.S. comps outperformed HD for the first time in years in 1Q."
Oppenheimer analyst Brian Nagel pointed out that Home Depot and Lowe's are on a different reporting schedule, telling Real Money Thursday that the month shift may affect the quarterly results.
But the WedBush analysts said the recent trends, such as better home improvement retail sales in May, which are up 5.2% from a year prior, and a rebound in weather-sensitive categories in June, are "keeping us constructive on home improvement retail." Also, with July still yet to be factored in for Home Depot and Lowe's fiscal second quarter, which historically represents 30% of home improvement retail sales, "comps may further improve for the quarter."