Tractor Supply Company's (TSCO 0.08%) fiscal fourth-quarter 2019 earnings scorecard, released Thursday, elicited a shrug from market participants, as shares were trading flat at mid-day. A tepid outlook for 2020 is partly to blame for investors' indifferent response, and indifference is perhaps a theme surrounding this company as of late. Over the last trailing 12-month period, Tractor Supply shares have appreciated just 5%, against a 23% advance in the S&P 500 index. Let's review the current quarter's results and full-year guidance, and discuss one prominent thing the markets are missing in evaluating Tractor Supply.
Note that all comparative numbers are presented against those of the prior year's quarter.
Tractor Supply: The headline numbers
|Metric||Q4 Fiscal 2019||Q4 Fiscal 2018||Change|
|Revenue||$2.19 billion||$2.13 billion||2.8%|
|Net income||$144.2 million||$136.9 million||5.3%|
|Diluted earnings per share||$1.21||$1.12||8%|
Essential details from the report
- Comparable sales rose just 0.1% against a difficult comparison with the prior-year quarter, in which comps advanced nearly 6%.
- Consumable, edible, and usable merchandise categories performed according to management's expectations, but an unseasonably warm winter hit cold-weather category sales such as insulated outerwear and heating equipment. Management pointed out that the U.S. saw the sixth warmest December in 125 years at the end of the quarter. The impact from the weather offset revenue strength and resulted in the flattish comp sales.
- The company noted two other headwinds against its top line: the cycling of prior-year emergency equipment sales due to hurricanes, and six fewer selling days in 2019 between Thanksgiving and Christmas in comparison to the prior-year period.
- Gross margin improved by 26 basis points to 33.8%. Management attributed the progress to lower freight expense and active control of direct product margins.
- Tractor Supply opened 30 new branded stores and four new Petsense stores (net of one closure) during the quarter.
The 2020 outlook and what the market is missing
Tractor Supply presented fiscal 2020 targets on Thursday, including a revenue projection of $8.75 billion to $8.90 billion. At the midpoint of this range, the company will achieve a 5.7% improvement over the $8.35 billion in revenue generated in fiscal 2019.
Comparable sales are expected to land between 1.5% and 3%, against comps growth of 2.7% in 2019. As for earnings, Tractor Supply anticipates booking diluted earnings per share (EPS) of $4.90 to $5.10 this year. At the midpoint, the company will exceed 2019 diluted EPS of $4.31 by a credible 16%.
Investors likely see these numbers as a bit lackluster, and objectively, low single-digit comps expansion doesn't typically result in shareholder celebration. The market's skepticism over the last 12 months is a function of Tractor Supply's middling growth, but it's also informed by a skeptical view that as the economy moderates, the organization's expansion could easily come to a standstill.
In this regard, the market has overlooked a significant point: Even though Tractor Supply's sales are somewhat dependent on healthy economic growth and consumer spending, its position as a regional, niche retailer with a loyal customer base may make it more resilient than larger lifestyle and do-it-yourself (DIY) competitors like Home Depot and Lowe's in a curbed growth environment.
These rivals have a wider exposure to a broad economic decline, as they rely more heavily on big-ticket items such as appliances and lumber compared to Tractor Supply. The consumer staples concern has branched out into a wide array of smaller-ticket lifestyle merchandise which includes clothing and children's toys in addition to the pet merchandise sold at its 180 Petsense locations. If U.S. consumer spending contracts, Tractor Supply may feel less of a pinch than competing big-box retailers.
The company's store-opening pace provides another potential antidote to a macroeconomic headwind. Tractor Supply is aiming to expand its branded store base by 80 stores this year, which equates to roughly 4.3% of its store base. This brisk pipeline execution can help absorb the impact of declining comps. Management may also find it useful to increase store openings during a slight U.S. recession, should one occur, in order to reap the rewards when consumer spending rebounds.
At present, Tractor Supply trades for 17.9 times forward earnings, versus a forward PE ratio of 23 for Home Depot and 20.9 for Lowe's. In other words, Tractor Supply trades at discounts of 23% and 14% to Home Depot and Lowe's, respectively, based on forward estimated earnings. This gap may increase (at least initially) if U.S. gross domestic product tapers off this year, creating a buying opportunity for patient, value-seeking investors.