Analyst Note| Jaime M. Katz, CFA |
Narrow-moat Tractor Supply’s stellar performance continued into its second quarter, with total sales up 13.4% to $3.6 billion (ahead of our expected $3.4 billion) and comps up 10.5% thanks to 4.5% transaction and 6% average ticket growth. Strength in the business was broad-based, across every region and consistent throughout the quarter, despite lapping a 30.5% comp in the year-ago quarter. Gross margin contracted 67 basis points to 35.7%, hindered by higher freight costs and Neighbors Club loyalty program relaunch costs. Regardless, EPS increased 10% to $3.19, well ahead of our $2.75 estimate. Building on this momentum, management raised full-year guidance, now projecting full-year sales of $12.1 billion-$12.3 billion (from $11.4 billion-$11.7 billion and compared with our $11.9 billion estimate), operating margins of 9.7%-9.9% (9.4%-9.7% and 9.3%-9.6%), and EPS of $7.70-$8 ($7.05-$7.40 and $7.28). We expect to raise our $130 fair value estimate by a high-single-digit rate but still view shares as overvalued, despite a 7% dip at print.