Tractor Supply Touts Strong Growth Opportunities, While Nimbly Navigating Cost Pressures

We plan to lift our $176 fair value estimate by a low-single-digit percent for narrow-moat Tractor Supply after incorporating third-quarter results into our model. Despite unfavorable weather, net and comparable store sales ticked up by 8.4% and 5.7%, respectively (near our 9.3% and 5.5% respective forecasts), driven by comparable average ticket growth of 7%, which more than offset a 1.3% transaction volume decline. We believe the firm’s ability to deliver significant comparable growth without discounting amid unfavorable weather has improved over time via inventory optimization, reducing the risk of gross margin pressure. Indeed, the firm delivered a 35.6% gross margin (down 40 basis points), despite higher costs from freight, labor, and a higher proportion of lower margin consumable, usable, and edible sales (C.U.E.). Still, with C.U.E. comparable sales that were 3 times the overall sales growth rate, we think the differentiated category offerings are a key factor driving in-store trips and adjacent purchases.