TSCO Tractor Supply Company

We are maintaining our long-term Neutral recommendation on Tractor Supply Company (TSCO).

Tractor Supply is the largest operator of farm and ranch stores in the U.S., a unique market niche that serve the lifestyle needs of recreational farmers and ranchers. The company’s stores are strategically located in small towns, close to its target customers, which provide a competitive edge over its rivals.  

Tractor Supply has successfully tweaked merchandise assortment across its stores in line with the prolonged economic downturn. The company has increased the proportion of less discretionary items such as animal and pet-related products, while reducing shelf space for certain big-ticket merchandise such as outdoor power equipment.

Moreover, in an effort to boost margins, Tractor Supply is expanding its portfolio of private label brands and is also focusing on direct sourcing. The company has set a long-term target of generating 25% of sales from private label brands and 13% from strategic direct sourcing. This provides a strong upside potential for the company.

Additionally, Tractor Supply recorded a strong operating performance in the first quarter of 2011. The company’s earnings per share grew by an impressive 71.4% to 24 cents from 14  cents in the year-ago period, primarily driven by higher sales, favorable merchandise mix, improved inventory management and initiatives to control expenses. Management expects earnings in full fiscal 2011 to benefit from the above factors as well.

Tractor Supply ended the first-quarter 2011 with cash and equivalents of $140.4 million, while the long-term debt of the company was merely $104.8 million. That comes to a debt-capitalization ratio of 10.3%. This offers the company financial flexibility to drive future growth.

On the flip side, Tractor Supply's business is highly seasonal, with sales and profits highest in the winter and spring selling seasons due to the nature of its merchandise offering. Unseasonable weather, heavy precipitation, drought conditions, and early or late frosts may have a material effect on the company’s financial condition and operation results.

Moreover, the company operates in a highly fragmented industry and faces competition from larger retailers, such as Home Depot Inc. (HD) and Lowe's Companies Inc. (LOW), as well as from independently owned retail farm and ranch stores, privately held regional farm store chains and cooperatives. Given the highly competitive industry, Tractor Supply may find it difficult to execute and implement new business strategies, which, in turn, will impact its operations adversely.

Furthermore, heavy job losses and reduced access to credit have led to a sharp drop in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer spending rebounds.

Tractor Supply shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

 
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