Beating The Odds, Crushing The Estimates
It is no doubt that Tractor Supply Company (NASDAQ: TSCO) was expected to post a strong quarter. The company is at a nexus of trends driven by the COVID-19 pandemic that have consumer staying at home, improving their homes, and turning to outdoor activities like gardening and small-scale farming. The best evidence, other than Tractor Supply Company’s own results, can be seen in recent search trends on Google.
According to research released by Baird, online searches for Tractor Supply Company are up 54% YOY while searches for saws, chicken feed, and patio furniture are up 72% to 85%. If you go into a Tractor Supply Company store or visit the website, you will find all three of these categories well-represented. Yet another tailwind for the company is the rural population, a population that often has fewer choices than those living close to urban centers.
Better Than Even The Company Was Expecting
About a month ago Tractor Supply let it be known company execs were expecting comps and YOY revenue to run in the range of 25%. That 25% is an impressive number and easily believed in light of post-pandemic trends but falls short of reality. In reality, Tractor Supply Company saw revenue jump 35.3% on a 30.5% increase in comps, product mix, and higher pricing power. The strength in revenue carries through to the bottom line in spades, the GAAP EPS of $2.90 beating consensus by $0.30 or nearly 1,000%.
Within the report, the company says it saw double-digit gains across all categories with a notable outlier. The eCommerce channels, my absolute favorite winner from the COVID-19 pandemic, saw revenue increase triple-digits over the last year proving not only that eCommerce is working, but that rural America is embracing it.
“As we attract new customers and gain market share, now is the time for us to build on Tractor Supply’s Out Here lifestyle assortment and convenient shopping format. Over the last few months, we have successfully rolled out new technology and services such as curbside pickup, same day/next day delivery and our first-ever mobile app.” says CEO Hal Lawton.
Tractor Supply Company - Don’t Expect These Gains To Evaporate
While it is expected that once the pandemic peaks the push to stay-at-home will slow but don’t expect Tractor Supply Company to give up its gains. Looking forward, the company is already executing on plans to enhance and sustain growth for the foreseeable future. Part of that plan is to develop eCommerce (working), revamp existing/mature stores to capitalize on lessons learned since March, and to grow the company’s footprint. Over the last quarter, the company opened 18 new Tractor Supply Companies and 3 new Petsense stores.
As a side note, the pet industry is an often-overlooked industry that is growing by mid-single digits, seeing the dollar-spent-per-pet ratio going up, and benefiting from eCommerce. Companies like Chewy (NYSE: CHWY) and Freshpet (NASDAQ: FRPT) are among the winners in this group and Tractor Supply is right to pursue it. Pet care fits right into its operation.
Tractor Supply Company supplied 3rd quarter guidance but I don’t buy it. Execs are calling for comps in the range of 12% to 18%, about half what we’ve been seeing. If Tractor Supply Company doesn’t increase its guidance or provide some kind of positive update over the next quarter I will eat my hat.
Tractor Supply Company Dividend, You Have To Love It
The dividend is low, only about 1.0% with share prices near $1.46, but there is nothing else not to like about it. The payout ratio was running at a super-low 24% before the 2nd quarter release, now its running below 20% for the year and comes with a very high expectation of increase.
The company opted not to increase the payout as expected last quarter, a wise move but unnecessary, but that doesn’t mean we won’t see one later this fiscal year. Why? Net income is up 54.5% and EPS 61.1% assuring there is plenty of room on the balance sheet/cash-flow statement to raise the payout. The 5-year CAGR is over 17% so I would expect the next distribution increase to be at least that much.
Tractor Supply Company Technical Outlook: This Is What A Great Growth Stock Looks Like
The chart for Tractor Supply Company is impressive, very impressive. The stock corrected in February along with the rest of the market and has since rebounded in a way I can only compare with Clorox (NYSE: CLX). Clorox is the #1 winner in the market post-pandemic. The TSCO chart shows a clear, steady, unwavering, unrelenting uptrend that is supported by the indicators. Today’s news caused a pop that sent shares up to a new all-time high and I see no reason not to expect this trend to continue.
In the near-term, price action may enter a consolidation at this point, price action did gap higher in premarket action so at least an intraday pull-back should be expected. In that case, I posit that this chart will form a nice bullish consolidation/bullish flag pattern. In that scenario, using the weekly chart as a base, this stock could easily see its share price advance another $70 to $80 over the coming 12 months. That’s a gain of 50%.
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