TSCO Tractor Supply Company

Tractor Supply Co. (TSCO), a leading retail firm and ranch store brand, recorded yet another quarter of good growth. Earnings per share in the second quarter of fiscal 2011 came in at $1.23, surpassing the Zacks Consensus Estimate of $1.20 as well as the prior-year earnings of $1.04 per share.

Robust performance in core consumable, usable and edible products − for instance, pet food and animal feed − acted as a catalyst for an increase of 4.6% in same-store sales compared with a rise of 6.1% in the prior-year quarter. Tractor Supply has been witnessing increasing trends in same-store sales.

During the recession, Tractor Supply had suffered setbacks as buyers avoided big-ticket purchases such as mowers, but recent quarters have positively seen an uptick in results. The company's impressive merchandising improvement strategy and solid same-store sales trend resulted in double-digit top-line growth for the company. Net sales in the quarter surged 10.6% to $1,178.4 million from $1,065.7 million in the prior-year quarter. However, total revenue fell short of the Zacks Consensus Estimate of $1,193.0 million.

Better direct product margin was partially offset by higher transportation costs. The resultant gross profit surged 11.8% to $402.5 million compared with $360.1 million in the prior-year quarter. Gross margin expanded 30 basis points to 34.1% in the quarter primarily due to improved inventory management, strategic sourcing, private branding and pricing.

Strong same-store sales coupled with cost control on advertising and store occupancy expenses resulted in a 30 basis point improvement in selling and administration expenses, as a percentage of sales, which came in at 21.9% versus 22.2% in the prior-year quarter. Tractor Supply earned $91.2 million in the quarter, exceeding the prior-year quarter net income of $77.3 million.

Financial Position

Tractor Supply's balance sheet had cash and cash equivalents of $185.5 million at the end of the quarter compared with $181.1 million at the end of the prior-year period. Stockholders' equity came in at $940.7 million compared with $864.4 million in the second quarter of fiscal 2010. In the first six months of fiscal 2011, the company generated $117.4 million of cash from its operating activities compared with $71.0 million in the prior-year period.

Store Update

In the quarter under review, Tractor Supply opened 16 new stores and relocated 1 store. The company currently runs as many as 1,043 stores in 44 states.

Management Guidance

Tractor is well positioned to capitalize on positive long-term trends. The company now expects sales for fiscal 2011 to range between $4.10 billion and $4.14 billion backed by expectation of same-store sales increase of 5% to 6.0%. This is higher from the previous sales and same-store sales guidance of $4.04 to $4.11 billion and 3.5% and 5%, respectively.

On the back of perked-up results and brighter sales trends, Tractor Supply raised its earnings expectation for 2011 to range between $2.75 and $2.82 per share from $2.62 to $2.70 per share.

Competition

The company operates in a highly fragmented industry and faces competition from larger retailers such as The Home Depot Inc. (HD).

Tractor Supply’s shares maintain a Zacks #2 Rank, which translates into a short-term 'Buy' recommendation. Our long-term recommendation on the stock remains 'Neutral'.

 
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