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Petsense Acquisition Makes Sense for Narrow-Moat Tractor Supply

Although the deal is small, it's a good fit for the undervalued retailer.

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Narrow-moat-rated  Tractor Supply (TSCO) announced the acquisition of 136 Petsense stores for $116 million, net of acquired forward tax benefits of $29 million. The firm financed the transaction with cash and management noted that it does not expect it to have a material impact on its earnings per share for fiscal 2016. Overall, we think the acquisition is a good fit for Tractor Supply but think that, due to scale, Petsense will have little noticeable impact in the near term. We plan to maintain our $84 fair value estimate at this time, as Tractor Supply held its 2016 EPS outlook firm ($3.22-$3.26), and view shares as undervalued trading at a nearly 20% discount.

Petsense's 136 stores will join Tractor Supply’s 1,542 locations. While on a store basis, Petsense's 136 locations represent 9% of total stores, they represent only about 3% of selling square footage by our calculation, so much of the growth over the next few years will continue to stem from Tractor Supply-branded location. Petsense locations have about 5,500 selling square feet whereas Tractor Supply checks in around 16,000 inside selling square feet.

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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