Rural lifestyle retailer Tractor Supply (NASDAQ:TSCO) issued fourth-quarter results this week that edged past management's targets on both the top and bottom lines. The company paired that good operating performance with news that expenses will rise as it spends more aggressively on its digital sales channel.

More on those spending plans in a moment. First, here's a look at how the headline results compared with the prior-year period:

 Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$1.95 billion

$1.92 billion

2%

Net income

$110 million

$124 million

(11%)

EPS

$0.87

$0.94

(7%)

Data source: Tractor Supply.

What happened this quarter

Tractor Supply's headline numbers were negatively impacted by the fact that the prior-year period included an extra week of sales. After adjusting for that calendar shift, though, underlying trends showed that demand stayed healthy through the quarter.

A tractor at work in a field.

Image source: Getty Images.

Highlights of the fourth quarter include:

  • Comparable-store sales slowed to 4% growth after having accelerated for three straight quarters, including 12% last quarter.
  • The expansion rate still beat management's forecast and full-year comps landed at 2.7%, compared to the retailer's late October prediction range of between 1.7% and 2.2%.
  • Growth was positive across all geographic regions and in each of Tractor Supply's major product categories. The gains were powered by a healthy mix of rising customer traffic and increased average spending per visit.
  • Gross profit margin improved to 34.2% of sales from 33.7% as the retailer scaled back on price cuts.
  • Expenses outpaced revenue growth, which executives attributed to higher wages and the extra sales week in the prior-year period. This negative trend combined with rising interest payments to reduce bottom-line profitability as net margin dipped to 5.6% of sales from 6.4%.
  • Tractor Supply added 27 stores, bringing its total openings for the year to 101. Its retail footprint now sits at 1,685 locations.
  • Spending on improving its e-commerce capabilities jumped to $33 million to help that investment category double for the year to $82 million.

What management had to say

Executives were happy with the overall results. "Tractor Supply had a strong fourth quarter," CEO Greg Sandfort said in a press release, "which included increases in both comparable store transaction count and average ticket." He continued, "I am very pleased with the foundation we have established to build customer loyalty and to significantly enhance our digital capabilities."

Management indicated that it plans to continue spending aggressively on improving both its in-store and digital shopping experiences, and that these investments will reduce profit growth over the short term. "In 2018, we anticipate balancing investments between new store growth and our [multichannel] strategic initiative, while also investing in the day-to-day business to provide our customers with a seamless shopping experience anytime, anywhere and in any way they choose," Sandfort explained. These moves should translate into increased market share, according to management, even if their costs partially offset financial gains provided by recent changes to U.S. tax law.

Looking forward

Thanks to tax law changes, Tractor Supply believes its effective tax rate will dive to 23% in 2018 from 36.7% in the year that just closed. Management aims to use a significant chunk of those savings to boost investments in the business as capital expenditures rise to between $260 million and $300 million, from $250 million last year. Still, net income is predicted to rise for the year.

The company's initial 2018 growth outlook predicts steady comps gains that range from 2% to 3%. As usual, that target will be subject to a potentially large revision in about six months, following fiscal second-quarter results. At that time, management will have a much better reading on how demand trends are shaping up for its peak spring selling period.

 

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.