Please ensure Javascript is enabled for purposes of website accessibility

Tractor Supply's Shopper Trends Turn Negative

By Demitri Kalogeropoulos - Jan 31, 2020 at 11:39AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The retailer blamed unusually warm winter weather for a sharp growth slowdown over the holiday season.

Investors had been taking a cautious approach to Tractor Supply's (TSCO -0.87%) stock in recent months after the business reported two consecutive quarters of slowing growth. On the bright side, some of that slowdown sting was neutralized by the fact that the retailer was still posting positive customer traffic and rising profitability.

This week, the rural lifestyle giant announced fourth-quarter results that continued the encouraging earnings trends. However, there was even worse news for investors to parse on the growth side of the business.

Let's dive right in.

A tractor plowing snow in a wooded setting

Image source: Getty Images.

Disappointing revenue

Sales rose 2.7%, but only because the company added over 30 new stores to its base. Revenue trends at existing locations were unusually weak, with comparable-store sales gains slipping to 0.1% compared to 2.9% last quarter. That flat result reflected higher average spending but also a significant decline in customer traffic.

Executives painted the slump as a temporary problem driven by one of the warmest December months on record. The weather affected demand for cold-weather seasonal equipment such as heaters and outwear, management said. Yet the challenge for investors is separating that seasonal challenge from any potentially larger demand problem. Tractor Supply's customer traffic gains had been cut in half -- to below 1% -- through the first three quarters of the year, after all.

Making the best of a bad situation

Management focused its comments on the company's solid financial performance in a weakening selling environment. "Despite the sales trends in the quarter," retiring CEO Greg Sandfort said in a press release, "the team executed well, controlling what we could control."

That universe of factors included pricing and merchandising, which combined to push gross profit margin up slightly. Tractor Supply also held the line on expenses so that the operating margin inched up. As a result, the company achieved its 2019 financial targets even though growth stalled in the year's final quarter.

The 2020 outlook

Incoming CEO Hal Lawton, who stepped in less than two weeks ago, said the chain is "well-positioned to build on our strengths" heading into fiscal 2020. The management team issued a wide range of sales predictions, though, that spans comps growth projections of 1.5% to 3%. Landing at the low end of that figure would imply a tough year of almost zero customer traffic growth, while the high end would mark a slight acceleration from 2019.

Investors will have to wait until after the second quarter for Tractor Supply to provide a more concrete update on that outlook. In the meantime, there's much less uncertainty around the retailer's earnings trends. Operating margin is set to land at about 9% for a third straight year, which should translate into earnings growth of about 7% in 2020.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tractor Supply Company Stock Quote
Tractor Supply Company
TSCO
$193.85 (-0.87%) $-1.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.