Tractor Supply Earnings: Brand Investments Strengthen Execution and Boost Traffic

Wide-moat Tractor Supply drove sturdy first-quarter results in line with our expectations, bucking softer spending by lower-income consumers and benefiting from steadier weather conditions. Comparable sales increased 1.1%, aligning with our estimate, driven by positive traffic (up 1.3%) that was partially offset by a 0.2% decline in average basket size despite modest product cost deflation. Sales were buoyed by higher spending on big-ticket and seasonal categories amid stable weather. Aiding traffic, Tractor Supply tapped its arsenal of 34 million loyalty members (constituting 75% of sales) by accelerating reward redemptions and providing more personalized offers, showcasing its ability to engage consumers through its strong brand. Despite tactical marketing and investment in key initiatives, operating margin improved 40 basis points to 7.8%, near our 7.6% outlook, thanks to solid productivity and cost management. With management maintaining its fiscal 2024 outlook for a 1% decline to 1.5% rise in comparable sales and a 9.7%-10.1% operating margin, we see no reason to materially alter our $214 fair value estimate. We view the shares as rich.