TSCO Tractor Supply Company

Tractor Supply Co. (TSCO), a leading retail firm and ranch store brand, recorded yet another encouraging quarter. Earnings per share in the third quarter of fiscal 2011 came in at 58 cents, surpassing the Zacks Consensus Estimate of 52 cents as well as the prior-year earnings of 40 cents per share. Tractor Supply earned $42.7 million in the quarter, exceeding the prior-year quarter net income of $29.9 million.

Robust performance in core consumable, usable and edible products − for instance, pet food and animal feed − acted as a catalyst for an increase of 11.5% in same-store sales compared with a rise of 5.0% 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 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 17.9% to $977.8 million from $829.1 million in the prior-year quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $934.0 million.

Better direct product margin was partially offset by higher transportation costs and product mix. The resultant gross profit surged 18.8% to $327.6 million compared with $275.7 million in the prior-year quarter. Gross margin expanded 30 basis points to 33.5% in the quarter, primarily due to improved inventory management, strategic sourcing, private branding and pricing.

Strong same-store sales coupled with cost containment in relation to store operating expenses resulted in a 100 basis point improvement in selling, general and administrative expenses, as a percentage of sales, which came in at 26.5% versus 27.5% in the prior-year quarter.

Financial Position

Tractor Supply’s balance sheet had cash and cash equivalents of $96.6 million at the end of the quarter compared with $170.9 million at the end of the prior-year period. Stockholders’ equity came in at $936.9 million compared with $892.2 million in the third quarter of fiscal 2010. In the first nine months of fiscal 2011, the company generated $111.3 million of cash from its operating activities compared with $94.5 million in the prior-year period.

Store Update

In the quarter under review, Tractor Supply opened 12 new stores, relocated 1 store and closed 1 store. The company currently runs as many as 1,054 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 $4.15 billion and $4.17 billion backed by expectation of same-store sales increase of 6.5% to 7.0%. This is higher from the previous sales and same-store sales guidance of $4.10 to $4.14 billion and 5.0% and 6.0%, respectively.

On the back of perked-up results and brighter sales trends, Tractor Supply raised its earnings expectation for 2011 in the range of $2.85 – $2.89 per share from $2.75 –$2.82 per share.

Competition

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

Tractor Supply’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Our long-term recommendation on the stock remains ‘Neutral’.

 
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