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Scale and Efficiency Fortify Tractor Supply's Narrow Moat

Wider national penetration should lead to higher margins and ROICs.

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 Tractor Supply (TSCO) is in a unique competitive position. Its loyal following of recreational farmers, ranchers, and outdoor lifestyle enthusiasts, built through brand and product mix, has earned the company a narrow economic moat. The company's niche product offerings insulate it from competitors; currently, there are few peers with a similar mix of goods that could compete directly, allowing consumers to fill needs across multiple outdoor categories. Over time, we believe product mix, adjacencies, acquisitions, and the lack of meaningful competition will improve Tractor Supply's competitive position and allow the company to expand its footprint across North America. This should also drive improved store productivity metrics and increased bargaining power with suppliers, resulting in increased scale and higher operating margins. If Tractor Supply can implement lean supply chain initiatives along its growth path, we see it capturing higher operating margins and returns on invested capital, possibly leading to a wide economic moat rating and higher fair value estimate. The shares are fairly valued at present, but we would only require a modest margin of safety to our fair value estimate before taking a position in this uniquely positioned player in the retail category.

Brand Intangible Assets Support Narrow Moat
Niche product offerings place Tractor Supply in a unique competitive position, insulated from peers that focus on one segment of the market. Tractor Supply's breadth--including livestock and pet (44% of sales); hardware, truck, towing, and tool products (22%); seasonal products (20%); work/recreational clothing and footwear (9%); and agriculture (5%)--provides a one-stop solution for those looking to fill multiple needs in a number of outdoor categories. While consumers are able to acquire similar merchandise at peers like Home Depot (HD) and Lowe's (LOW), most are willing to pay premium prices at Tractor Supply in order to meet all of their outdoor lifestyle product needs at one location.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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