Rising commercial rents and e-commerce penetration (fueled in large part by Amazon's domination) are challenging many brick-and-mortar retail stores -- but not rural products merchant Tractor Supply Co. (NASDAQ:TSCO), which continues to flourish.
Why? For starters, strategically placed storefronts, lean-yet-robust inventories, knowledgeable staff members, and a rewards program that's, well, rewarding.
But merely noting that this company is thriving as retail storefronts shutter at a historic clip doesn't tell the whole story. With ever more sales moving online, retailers are left with two options: continue to focus heavily on in-store sales, or develop an e-commerce strategy that complements their brick-and-mortar operations and even elevates in-store traffic.
Thriving in the new world of retail
Tractor Supply has opted for the latter, and it's helped drive the company to new heights. Not convinced? Look no further than its 29 straight quarters of double-digit e-commerce sales growth.
That's more than seven years! Given the company's "Life Out Here" brand, which caters to rural communities -- some of which don't have reliable internet service, let alone high-speed broadband -- that's a remarkable feat.
Customers who buy online can pick up in-store, or they have the option of direct delivery. More than 70% of Tractor Supply's e-commerce orders are now fulfilled at its stores, which shows that Tractor Supply's physical locations are playing an increasingly pivotal role in the fulfillment of its e-commerce business. For a company with a footprint (and market cap) a fraction the size of powerhouses such as Lowe's (NYSE:LOW) or Home Depot (NYSE:HD), that's a sturdy indication that Tractor Supply's punching well above its weight class.
The power of rapport
How is management doing it? By building meaningful trust in a niche it's methodically carved out.
Online, Tractor Supply has enacted a slick content marketing strategy. The company's website offers tips on how to protect your animals from eagles and step-by-step tutorials on removing crabgrass, and its YouTube channel features videos on how and why to compost -- all of which is helping Tractor Supply position itself as the authority on farming, ranching, and do-it-yourself.
That online experience mirrors what customers find inside Tractor Supply stores: red-vested staffers eager to help with home repairs, livestock care, fencing options, hurricane preparation, and more.
As noted in its 2016 SEC filings, Tractor Supply tends to hire workers with farming and ranching backgrounds -- the same people coming in for help. And being able to talk through a major purchase face-to-face with an informed sales associate is one experience that can't just be supplanted by the convenience of Amazon. If you're browsing rideable lawn mowers, for instance, a little online research alone might not give you the confidence you're looking for to pull the trigger on such a big-ticket item. You may want another human to validate your purchase, even if that's their job.
Because most Tractor Supply stores are only roughly one-sixth the size of an average Home Depot, employees can get better acquainted with product lines in less time and provide customers more of the help they're looking for.
And it's all paying off in a big way. Gross profit increased 7.2%, to $2.13 billion from $1.99 billion, for the first nine months of the 2018 fiscal year.
Don't be alarmed ...
If you're concerned about external factors -- for example, seasonal effects such as those seen in early 2016, when an unexpected heat wave left the company unable to push some winter inventory -- keep in mind the 1.48% dividend yield, which has increased for eight years running. Those payouts should continue to help offset any minor dips in quarterly earnings, and they're trending in the right direction.
What about the company's search for a new CEO? Take solace in this gem from Warren Buffett: "I try to buy stock in businesses that are so wonderful that an idiot can run them ... because sooner or later, one will." I certainly don't expect Tractor Supply to bring in an incompetent CEO, but even if it did, I believe the business is so well-positioned that such a move wouldn't negate all of its great progress.
Tractor Supply has performed well over the past decade, both in-store and online. It's got exciting growth prospects against an otherwise precarious retail backdrop, and its valuation is actually very reasonable.
Tractor Supply's trailing-12-month price-to-earnings (P/E) ratio is $20.70, against an industry average of $11.29. In other words, at today's prices, investors are paying $20.70 for every $1 in prior-year profit. That seems relatively high, until you consider that earnings per share surged a stunning 31% last year -- and by 13% per year over the past five years. Given growth like that, I'd be a little surprised if its P/E ratio weren't a tad inflated.
Though Lowe's and Home Depot are often viewed as Tractor Supply's de facto competitors, the reality is that while both companies are mainstays in the home improvement space, neither really caters to a specific market. Tractor Supply is uniquely positioned to capitalize in areas that are too rural and too remote for either Lowe's or Home Depot to bother with. So while it's tempting to draw a "winner-take-all" narrative here, I think Tractor Supply will continue to coexist with these two big-box titans.
That said, at this point, Tractor Supply is operating a more advanced and cohesive omnichannel experience than either of the aforementioned companies. It's managed to form a singular customer experience across its brand by unifying sales and marketing in a way that accounts for spillover between online and in-store purchases. For that reason, Tractor Supply deserves your attention.
Tractor Supply isn't just a retail company that's biding its time; it's a recession-proof company that's setting the bar. Buy into this well-rounded, well-oiled machine -- or increase your position -- and thank yourself later.