Tractor Supply Will Sustain Growth Into 2021
Tractor Supply Company (NASDAQ:TSCO) was one of the hottest names among the stay-at-home/play-at-home winnerslast year. The company is a modern-day general store for outdoor enthusiasts of all variety from hobby urban gardeners all the way through full-blown agricultural operators. The company’s sales were boosted first by the rush to stock up on items for the shut-down, later accelerated by the stimulus, and then again supported by social distancing, the flight-to-the-suburbs, and management’s own efforts.
Tractor Supply Company installed a new CEO not long before the pandemic struck and he’d already been turning the company around. His efforts included re-merchandising the stores, improving their appeal, building out an already-established eCommerce portal, and honing internal operations. His efforts are working, his name is Hal Lawton. If that sounds familiar it’s because he spent many years working for Home Depot and Macy’s in c-suite positions that set him up as the perfect CEO for this company.
Tractor Supply, What’s Not To Love About The Q4 Results?
Tractor Supply Company delivered the kind of earnings report the market was looking. Aside from some unexpected weakness in the GAAP earnings, there is nothing not to like. The company not only produced a robust 31.5% increase in the top-line revenue but it also beat the consensus by nearly 600 basis points. The revenue strength was driven by a 27.3% increase in comp-store sales that was bolstered by an increasing store count. The company opened 19 new Tractor Supply Company’s during the quarter and 3 new Petsense bringing the total count to +79 and +2 on a YOY basis.
The comp sales themselves are driven by a 14% increase in the number of transactions coupled with a 13% increase in transaction size. Every geographic region showed strong gains with the most robust performance of all in the digital channels. eCommerce sales grew triple digits for the 3rd consecutive quarter and are not expected to slow anytime soon.
Moving down the report, the company’s sales strength has resulted in leaner inventory and leverage to earnings. The gross margin increased 75 basis points over the last year and is attributable to fewer sales, less depth of sales, and an overall higher price-realization for the company’s merchandise. Sadly, costs related to the pandemic and the decision to refocus the Petsense expansion cut into the GAAP earnings but not enough to hurt the company. On a GAAP basis the $1.15 in reported earnings missed the consensus by $0.38 but the adjusted $1.64 beat by $0.13.
Tractor Supply Company Raises The Dividend 30%
We were expecting a sizeable dividend increase from Tractor Supply Company but not quite as big as what we got. The company’s board of directors saw fit to increase the distribution by 30% because of the revenue and earnings strength and there is still room for more. At this level, the payout ratio is still running in the low 30% range and there is ample free cash flow. The company’s balance sheet is showing some debt but not enough to worry about, coverage is running above 40X FCF, and leverage is below 1X. Based on the near-20% CAGR and the 11-year history of increases there should be an equally generous increase next year as well.
The Technical Outlook: Tractor Supply Company Is About To Change Trend
Shares of Tractor Supply Company have been in a trading range since the end of last summer but that may be about to change. The Q4 results and outlook for 2021 are robust and point to continued success for this company. Add to that a healthy dividend outlook and it’s a win-win scenario for dividend-growth investors.
Although the price action in TSCO was indifferent at best following the release the signal it’s giving is bullish. The market saw a little volatility that resulted in a moderately long-legged doji confirming support at a previously significant level. This level, near $149, is consistent with a previous signal that led to the current trading range. Assuming this level holds as support the next move should take TSCO back up to retest the recent highs, and probably set new highs as well.
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