A Closer Look at Tractor Supply

Some day, $TSCO, you will be mine

(1) Tractor Supply Co. is both exactly — and nothing — what it sounds like. Created in 1938 as a mail order catalog for tractor parts, Tractor Supply remains a leader in the farm equipment game nearly a century later. So, when I first set foot inside a local Tractor Supply, I figured this was one place that did exactly what it said on the tin and nothing more. Wrong.

(2) This company dreams big. Whether you need a new tool chest to organize the garage, a fire pit for moonlit nights under the stars, a tent or hiking boots to explore the great outdoors, artwork to spruce up a bare wall, pet food for your furry friends, flowers to add a little curb appeal, or, yes, even parts for your tractor, this retailer’s got you covered. Think a mashup of Home Depot, PetSmart, and HomeGoods with a friendly, rural twist.

(3) It’s also ambitious. Tractor Supply sees its potential customer base as all farmers, pet owners, gardeners, and homeowners. That’s called casting your net pretty wide. And Covid is only making it bigger.

(4) Over the past two years, lots of Americans fled the close quarters of urban life for the (relatively) wide open spaces of suburbia. Smack dab in Tractor Supply’s geographic footprint. Plus, after being cooped up inside for so long, people are taking up more home improvement projects than ever, adopting pets at an increasing rate, and even dabbling in self-sustainable hobbies like raising chickens or beekeeping. The more that America embraces outdoor living, the better for Tractor Supply.

(5) $TSCO’s latest earnings report backs that up. In late January, the company reported double digit growth on all fronts, from net sales to operating profit to earnings per share. Plus, $1.14 billion in full-year free cash flow for good measure.

(6) Tractor Supply also opened its 2,000th store in 2021, with plans for another 75-80 in the coming year. Long term, the company is shooting for 2,500-2,700 stores in the United States. Even better, new TS stores are profitable in year one. Add in consistent same-store sales growth and these expansion plans look like a major profit driver.

(7) Same-store sales growth deserves a little extra attention. Any company can juice revenue numbers by building new stores, even if the existing ones are bleeding red ink. That’s why same-store sales is so important when evaluating retailers. And why Tractor Supply’s run of seven consecutive quarters of same-store sales growth is so impressive. Mix this type of growth with TS’s expansion plans and you get a profit-soaring virtuous cycle.

(8) Tractor Supply is also hard at work on spreading the good word about itself. In 2021, thanks to effective advertising, unaided brand awareness of the company increased by 21%. Part of the ad blitz’s success comes from a serendipitous synergy with some of television’s most-talked-about shows. Namely, Yellowstone and its prequel, 1883. I guess there’s a pretty solid crossover between prestige Western fans and potential Tractor Supply customers.

(9) Fueling this growth story even further, over 55% of new customers returned to the retailer for future purchases. And the amount of so-called whales (those spending more than $1,000 per year at the store) also grew by more than 50% since 2019.

(10) Capital expenditures ($650 million) are also slanted towards growth: Project Fusion, a multi-year remodel program that will improve store layouts and add enhanced experiences like pet washes and animal wellness clinics; and the Side Lot Initiative, which will transform existing outdoor side lots into garden centers.

(11) There are a lot of green flags here. Particularly the recently-announced 77% dividend increase. Unfortunately, $TSCO currently trades at a pricy 25x earnings. Only five years ago, that valuation was a much more reasonable 15x earnings. And so it will be again (some day). For now, patience is the watchword.

(12) Remember: the future returns of any investment depend on the purchase price. Jump in too high and your money could be tied up for years as the stock spins its wheels and burns off over-valuation. Sorry, not interested in that. Not even for a wonderful company like Tractor Supply.

(13) Alas, such is the life of a value investor. Discovering a heart-throb company that, unfortunately, trades at too high a price and having to walk away. Not forever, but for now.

Disclaimer: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.