Tractor Supply (TSCO, Financial) provided a business update for its third quarter on Wednesday and announced its participation in the Goldman Sachs 23rd Annual Global Retailing Conference. The company is expected to report its fiscal quarter ending in September on Oct. 19.
(Tractor Supply, Company Website)
In the update Tractor Supply said it expects 4.2% to 5% sales growth of between $1.54 billion and $1.55 billion. Contrary to the positive sales growth expectation, the retailer expects -1% in its comparable sales. Tractor Supply had 2.9% comparable sales growth in the same period last year.
In addition to the forecasts, Tractor Supply also revised its fiscal 2016 guidance as shown in the edited image below:
(Updated Fiscal 2016 Guidance (1), Company Website)
Based on these values, Tractor Supply seemed to suffer most in its comparable store (2) sales (about 55% reduction from the previous year). The retailer also expects a net income per diluted share for the third quarter to be in the range of 65 cents to 67 cents. Although the expected diluted profit per share indicated a 3% growth from last year’s figure, Tractor Supply shares collapsed by 16.9% at market close.
(Analysts Downgrades Tractor Supply, Financial Visualizations)
In addition to this announcement, several analysts downgraded the company’s shares. This happened all in one day. CNBC reported that the price collapse was Tractor Supply’s worst day in 16 years.
Tractor Supply highlighted three main factors that caused the company to have weaker results in the current quarter:
1. Energy-producing regions are experiencing a decline in comparable store sales and transaction count.
2. Sales and transaction counts are being negatively impacted in those communities that are more dependent on the agricultural industry.
3. The company is experiencing lower demand for preseason heating-related products such as wood stoves and heating fuel.
(Read: Complete Tractor Supply Update)
"While the retail environment has become more challenging over the past several months, the most pronounced decreases in our traffic and sales are in energy and agricultural communities. With our customers generally being fiscally conservative, we believe many of them have responded to the economic uncertainty by reducing their purchasing patterns in some of our key geographic regions.
"The continued strength in sales in the Southeast and West regions and in everyday basic categories such as Livestock and Pet indicate to us that the weaker-than-expected sales in the third quarter are more related to the challenging economic headwinds than our overall merchandise assortment. In this current environment, our teams are focused on sales and traffic driving initiatives in our stores. Over the short term, we are allocating inventory based on sales trends and enhancing our marketing programs while critically analyzing and managing expenses. From a longer-term perspective, our strategies are focused on driving sustained, profitable growth, meeting our customer needs while increasing value for our shareholders." –Â Greg Sandfort, Tractor Supply chief executive officer
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(Tractor Supply, Annual Filing)
Tractor Supply
Tractor Supply is the largest rural lifestyle retail store chain in the U.S. Tractor Supply was founded as a mail order tractor parts business in 1938.
The first Tractor Supply retail store was founded in 1939 in Minot, North Dakota. As of June 25, Tractor Supply had 1,542 stores in 49 states. The retailer also has its ecommerce website TractorSupply.com. The company's headquarters is in Brentwood, Tennessee.
Among its business strategies, Tractor Supply serves a specialized market niche and targeted customers. In its filing, the retailer supplies the lifestyle needs of recreational farmers and ranchers and others who enjoy the rural lifestyle as well as tradesmen and small businesses. Also, Tractor Supply customers are mostly home, land, pet and livestock owners who generally have above-average income and below-average cost of living.
Tractor Supply divides its sales by five product categories: Livestock and Pet (44% of total sales in fiscal year 2015); Hardware, Tools, Truck and Towing (23%); Seasonal, Gift and Toy Products (20%); Clothing and Footwear (8%); and Agriculture (5%).
The retailer also has several patents and trademarks, such as the TSC®, Tractor Supply Co.®, TSC Tractor Supply Co.® and the trapezium design for its retail store services. Also, Tractor Supply’s exclusive brands represented approximately 31% of its total sales for the past three fiscal years (2013 to 2015).
(Tractor Supply Exclusive Brands, Annual Filing)
Comparable Store Sales
(Tractor Supply Comparable Sales, Annual Filing and Recent Update)
For the past decade, Tractor Supply’s comparable store sales had observably been on a decline since its peak in 2011. I averaged the company’s guidance of 1% to 1.7% to arrive at the fiscal year 2016 figure.
Sales and profits
In first half of 2016, Tractor Supply reported growth in all segments year on year except for its Seasonal, Gift and Toy Products segment at -2.8% change to $664 million. Overall, the retailer delivered a sales growth of 6.96% to $3.32 billion and a 6% profit growth to $224 million for the first half of this year.
In a five-year average, Tractor Supply had sales and profit growth of 11.3% and 19.6%.
Cash, debt and book value
Tractor Supply had $151.1 million in cash as of June 25. The retailer also had total debt and capital lease obligations of $218.8 million giving it a debt-equity ratio of 0.15. The company also had a book value of $1.5 billion.
Cash flow
(Tractor Supply Cash Flow, Annual Filing)
In fiscal 2015, Tractor Supply grew its cash flow from operations by 4.89% to $429.2 million. Despite this, the company had increased reduction in its excess tax benefit of stock options exercised and prepaid expenses.
The retailer allocated $236.5 million in capital expenditures last fiscal year leaving it with $192.7 million in free cash flow. Tractor Supply also took in $680 million in borrowings under revolving credit agreement while reducing its overall debt, including revolving credits and principal payments under capital lease obligations, by $530.5 million.
In addition to the financing activities above, Tractor Supply returned $395.8 million to its shareholders through share repurchase and dividends. There are two observations that I want to highlight.
- Tractor Supply remarkably grew its share repurchase and dividends in fiscal year 2014 by 93% compared to 2013, but the net shareholder return (3) growth slowed to an overall 3% in fiscal year 2015.
- The company paid out 205% of its free cash flow in fiscal year 2015 and had an average free cash flow payout of 177% in the past three fiscal years.
As of June 25, Tractor Supply had a remaining authorization under the share repurchase program of $463.8 million.
(Tractor Supply, Annual Filing)
Market performance
According to Dividend Channel, Tractor Supply shares provided an average annual total return of 29% while the broader Standard & Poor's 500 provided 12.47% since 2010. This overall return despite the company returning a disappointing -18.9% year to date.
Valuations
According to GuruFocus data, Tractor Supply’s price-earnings (P/E) multiple of 22 times (industry median of 19), price-book (P/B) value multiple of 6 times (industry median 1.57) and price-sales (P/S) ratio of 1.45 times (industry median 0.62). The retailer also had a trailing 12-month dividend yield of 1.05% with a payout ratio of 27%. The company also had a share buyback ratio of 1.2%.
Conclusion
Several of the objective findings above, such as declining comparable sales, modified fiscal year 2016 outlook, increased debt uptake, high free cash flow payout and high valuations all point out to an "easy pass" investment decision.
(Tractor Supply Company Market Price, Google Finance)
But for aggressive and speculative investors, a P/E multiple of 22 times was a good entry point in the past two years.
The recent revised fiscal year figures will still demonstrate a positive growth year on year in terms of gross sales and profit numbers absent any share repurchases. Also, the company can continue being a good steward of its shareholders because of its healthy balance sheet. Tractor Supply is capable of maintaining its shareholder return through dividends and share repurchases even in the ongoing cyclical challenges.
Running a five-year historical earnings multiple with Tractor Supply's trailing earnings would give a value of $86 per share. Using a 20% margin of safety, though, would indicate a value of $69 per share, just a dime up from Wednesday's closing price.
Nonetheless, for me, Tractor Supply is a buy.
Notes
(1) Emphases such as arrow pointing down were mine.
(2) Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Beginning in fiscal 2015, stores closed during the year are removed from our comparable store metrics calculations. This change in the calculation methodology did not have a material impact on the comparable store metrics reported in prior periods presented due to the minimal number of stores closed in those periods. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. (Tractor Supply, Quarterly Filing)
(3) Dividends plus share buybacks.
Disclosure: I am long TSCO.
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