Shares traded down slightly as Tractor Supply Company (TSCO -2.27%) reported fourth quarter 2019 earnings that were softer than expectations. The primary concern was weak year-over-year revenue growth of 2.7%. That was down from growth of 5.4% in the third quarter. Management attributed this weakness to the fact the U.S. experienced its sixth warmest winter in 125 years.
It's true it was a warm winter, and it's true that revenue growth slowed. But finicky weather patterns are a normal part of a Tractor Supply investment, and there are more important things to focus on with this company.
A word on the weather
Tractor Supply is affected by fluctuations in the weather more than other retailers. Since its products are primarily used in agriculture, things that affect agriculture (drought, flooding, natural disasters, etc.) also affect agricultural spending. A warm winter like the one the U.S. just experienced leads to lower sales of winter equipment stocked in anticipation of the season.
This is fairly normal for Tractor Supply. In the third quarter, the company cited dry and drought conditions in some parts of the country. But don't forget that weather patterns go both ways. At times, the company gets a boost from Mother Nature. For example, in the fourth quarter of 2018 and first quarter of 2019, Tractor Supply notched better-than-expected comparable-sales gains thanks to a long winter in parts of the country.
It's impossible to control the weather, but the effects balance out over time. The real game for Tractor Supply is managing and adapting its inventory to ensure it sells through. To that end, the company is effective. A glance at the balance sheet shows that inventories are up less than 1% over the past year, even though it had 4% unit growth when accounting for both Tractor Supply Company and Petsense locations. In other words, inventory per location is actually down year over year.
Guidance for 2020
In evaluating a company's performance, it's helpful to go back and look at past guidance and see how actual results stacked up. Here are some key parts of Tractor Supply's guidance provided in the fourth quarter 2018 earnings call, measured against its 2019 results.
|2019||Net sales||Comp-sales growth||Net income||Earnings per share|
|Guidance||$8.31 billion to $8.46 billion||2% to 4%||$555 million to $575 million||$4.60 to $4.75|
|Results||$8.35 billion||2.7%||$562.4 million||$4.66|
These 2019 results are all within guidance, albeit on the low end. But it still gives management credibility for the guidance it has issued for 2020.
For this year, the company is guiding for $8.75 billion to $8.90 billion in net sales, which is about 6% annual growth at the midpoint. Net sales will be higher due to new store openings (80 Tractor Supply and 10 to 15 Petsense) and a 1.5% to 3.0% comparable-sales gain. Net income is slated to grow about 2% to 6% year over year, and earnings per share should grow faster at about 5% to 9% thanks to share repurchases.
Nothing is certain, but it's reasonable to assume Tractor Supply can hit this guidance based on past execution. That means it currently trades at 1.3 times forward sales and 19 times forward earnings estimates. As you can see in the chart below, these valuation multiples are right in line with the company's historical range, indicating the stock is trading at a fair price for value investors.
Investing looks further ahead than just one year though. A great thing about Tractor Supply Company is that it's one of the few retailers that demonstrates staying power in an increasingly digital world. That's due to the fact that many agricultural products (think generators and 50-pound bags of chicken feed) aren't the greatest candidates for next-day delivery. Given its safe retail niche and reliable past results, this could be a low-risk option for building a balanced portfolio.
It's not likely to wow investors with annual results, but the company stands to consistently notch modest gains over time. Besides growing revenue through new locations and comparable-sales gains, Tractor Supply returns a lot of earnings to shareholders. For 2020, it plans to buy back $450 million to $550 million of shares, in line with what it repurchased in 2019. Additionally, the company pays a small dividend (yield is 1.5% as of this writing), but it has increased the payout for nine consecutive years. I expect capital to be returned to shareholders like this for years to come.