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Steven Chen
Steven Chen
Articles (109)  | Author's Website |

Urbem's 'Wonderful Business' Series: Tractor Supply

A rare thriving brick-and-mortar retailer

December 06, 2019 | About:

Tennessee-based Tractor Supply (NASDAQ:TSCO) is the largest rural lifestyle retailer in the U.S., with a focus on supplying the needs of recreational farmers and ranchers. As of the end of 2018, the company operated 1,765 Tractor Supply and Del’s stores and 175 Petsense stores across 49 states. It also has an online presence to extend the assortment of products beyond those offered in-store and drive store traffic through the buy-online-pickup-in-store program. The retailer's three largest product categories are Livestock and Pet (47% of fiscal 2018 sales), Hardware, Tools and Truck (22% of fiscal 2018 sales), and Seasonal, Gift and Toy Products (19% of sales).

Tractor Supply is building an omnichannel one-stop-shop for home improvement, agriculture, lawn/garden maintenance and livestock and pet care, targeting an attractive niche market. Its customers are generally home, land, pet and livestock owners who have an above-average income and a below-average cost of living. Living in towns outside major metropolitan markets and in rural communities, they are often underserved by major retailers, both offline and online.

Tractor Supply is the only major player focused on the rural-life retail space. The rest of this niche market is highly fragmented and shared among local retailers. This provides a durable competitive edge for Tractor Supply, which benefits from its scale when it comes to distribution, marketing and technology investment. The most relevant competitors are Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW), but according to our analysis at Urbem, neither of them will pose any real threat to the company. Neither will larger retailers such as Walmart (NYSE:WMT) or Costco (NASDAQ:COST), at least for the foreseeable future. Tractor Supply operates stores across rural locations that are far away from city centers and less dense in population - areas that are not economically viable for retailers with a broader range of products

At the same time, the majority of the rural-life retail space is immune to digital disruption. It is just cost-ineffective for online platforms like Amazon (NASDAQ:AMZN) to ship bulky items with a limited ticket size through the infrastructure built to serve markets crowded with more customers.

We think that the economic moat was what allowed Tractor Supply to earn a consistently high retun on invested capital over the past several decades. As you can see below, the business outperformed its most direct competitors in recent years.

Furthermore, thanks to its economically stable customer base, Tractor Supply is thinly impacted by economic downturns. During both of the past two recessions, the company was able to increase its top line every year, although it sufferred a decline in operating profit in 2008.

We also noticed the company’s track record of healthy growth in recent years. The same-store sales growth rate ranged from low to mid-single digits, with an average of 3.3% over the past five years. The business has achieved more than 10 years of consecutive increases in same-store transaction counts.

The management estimates a total market potential of 2,500 store opportunities. Compared to the almost 1,800 existing stores, we see that there is still room for regional expansion. On top of this, a rapidly-growing pet economy and ongoing digitization in support of omnichannel shopping may offer additional fuel to the organic growth engine at Tractor Supply.

Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we do not own any stock mentioned in the article.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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