Tractor Supply Earnings: Execution Holds as Weaker Spending and Unusual Weather Persist

Wide-moat Tractor Supply TSCO delivered resilient third-quarter results, which fell largely within our expectations. Despite declines in big ticket (down a mid-single-digit percentage) and seasonal purchases due to waning discretionary spending and unseasonably warm weather, comparable sales were essentially flat, just shy of our 1% forecast. We believe Tractor Supply’s higher-income consumer base, promotional capabilities, and needs-based consumable, usable, and edible fare make the firm less susceptible than some peers to broader macroeconomic woes and weather volatility. As evidence, even with the mix shift away from higher-margin big ticket items, its gross margin improved by 110 basis points to 36.7% (near our 36.2% estimate) from 35.6% thanks to expanded distribution capabilities and lower transportation costs. Further, a 10% operating margin fell in line with our assumption, as the firm prudently managed costs during a period of heightened investment and cost deleverage.

That said, management cautiously opted to nudge down its fiscal 2023 guidance, as consumers remain judicious with their wallets, while a warmer winter could further pressure its fourth-quarter results. Tractor Supply now anticipates flat comparable sales growth (from 1.3%-2.5% prior) and $10.00-$10.10 in EPS (from $10.20-$10.40). We intend to lower our respective 1.7% and $10.36 forecasts to be closer to the guided range to account for economic uncertainty and a 200-basis-point comparable sales growth benefit from severe winter weather and a 53rd week in fiscal 2022. Also, since we suspect discretionary spending will remain under pressure, we intend to push down our 4% fiscal 2024 comparable sales forecast. As such, we plan to lower our $220 fair value estimate by a mid-single-digit percentage, mirroring the market’s reaction on Oct. 26. Longer term, we continue to expect comparable sales to grow by 4% per year, bolstered by expanded adjacent opportunities such as the addition of garden centers.