Tractor Supply Earnings: Plan to Expand Footprint Offsets Near-Term Consumer Spending Woes

Weakening discretionary spending and unseasonal weather pinched wide-moat Tractor Supply’s TSCO second-quarter results, which were a touch behind our expectations. Comparable store sales rose 2.5%, shy of our 5% estimate, but sales growth of 7.2% to $4.2 billion was near our $4.3 billion estimate. Declines in big ticket and impulse purchases fueled lighter performance, as wallet-stretched consumers continue to combat diminishing savings and persistent inflation. That said, Tractor Supply’s needs-based consumable, usable, and edible (C.U.E.) category outpaced the firm’s average and contributed to a 1.8% bump in comparable store transactions. Even with the mix shift away from higher-margin big-ticket items, gross margin rose 69 basis points to 36.2%, near our 35.9% assumption, thanks to lower transportation costs. Despite heightened integration costs around Orscheln, a 13.4% operating margin was in line with our 13.3% estimate.

As a result of first-half results and current conditions, management lowered its 2023 comparable sales growth and EPS guidance to 1.3%-2.5% from 3.5%-5.5% and $10.20-$10.40 from $10.30-$10.60, respectively. We intend to lower our respective $15.3 billion and $10.56 estimates given an uncertain macroeconomic environment. Offsetting this pressure is a higher annual store growth outlook that includes 80 new stores in 2024 and 90 openings per year thereafter, as the firm’s new long-term location target was lifted to 3,000 (200 incremental stores). Our longer-term store growth trajectory is modestly slower than the firm expects, bound by our concern about Tractor Supply’s ability to locate optimal real estate opportunities at competitive prices. Moreover, startup costs could lead to expense deleverage and inefficiencies as the distribution network grows to accommodate more stores. With all these factors considered, we don’t plan any material change to our $214 fair value estimate and view shares as fairly valued.