Tractor Supply Plants Seeds for Growth

Tractor Supply Company (NASDAQ: TSCO  ) , despite it's name being a slight misnomer, has consistently grown sales on both the store level and overall for more than four years now. Though it's a 75-year-old brick-and-mortar retailer, the company is in a substantial growth phase -- and the market reflects it, with a more than 20 times forward earnings multiple. In its recent earnings report, the company delivered an earnings beat, but underwhelmed the market with forward-looking guidance. Is this a product of conservative management that underpromises and overdelivers, or are things slowing down for the large-format farmer supply store?

Quick recap
In Tractor Supply's fiscal fourth quarter, the company did not experience the tepidity that many retailers felt -- mainly due to its evergreen product niche. The company grew sales 10% to $1.42 billion, same-store sales were up 3.5%, and net income was up an impressive 20.6% to $95.9 million ($0.68 per share).

If you dissect the same-store sales a bit, the picture gets even brighter, as the company's existing stores are finding greater transaction volume (up 5.1%) and on a pure sales basis, have a two-year run of 8.2%.

Tractor Supply has $142.7 million in cash, and has a capital deployment plan of a quarter of a billion dollars per year for the next several. The reason for such big spending is mainly store expansion. In the just-ended quarter, the company opened 31 stores and hit 102 new stores for the full year.

Looking ahead, there are 102 to 106 stores on the slate for 2014.

Big spending, limited growth
The market reacted mutedly to the earnings report, likely due to the tepid guidance. Comparable sales are projected to grow a maximum of 4% and as low as 2.5%.

With billions in spending slated for the next few years, hundreds of new stores, and a rich market valuation, the market wants to see projections that back up the ambitious plans. The thing is, Tractor Supply management isn't targeting short-term growth, and so measuring against 2014, 2015, or even 2016 isn't quite accurate.

The company currently has just under 1,300 locations, and will be growing that by nearly 10% annually. Its niche protects it from the greater economic tepidity, as farmers and ranchers have basic needs that fill demand while the discretionary items linger on shelves a little longer. While that might concern some investors, this short-term trend doesn't appear to be impacting margins -- it might be the opposite. EBIT and gross margins are set to grow in the coming year, and the company is only expanding its everyday value items.

One thing that investors can love about Tractor Supply is a controlled growth runway. Even with more than 100 stores coming online this year and decent comparable-store growth, management doesn't see SG&A expanding meaningfully. As a percent of sales, it's expected to be flat with the prior year. The company is also consolidating its support facilities on the corporate level, leading to lower occupancy costs.

So, the market may have wanted a little more out of Tractor Supply's 2014 guidance, but this company is looking far beyond this year. Management sounds conservative, competent, and ultimately optimistic for the long-term future of the business. The view from 30,000 feet looks favorable, too, as agricultural needs will only increase year after year. It's not a cheap stock, but Tractor Supply has planted the seeds for long-term, attractive growth.

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