Tractor Supply (TSCO 0.09%) didn't impress investors with its recently announced fourth quarter earnings results. That report showed a third consecutive growth slowdown as customer traffic rates turned negative.
Executives said in the fourth quarter press release that unusually warm winter weather was to blame for the slump, yet their outlook for the new fiscal year also left the door open for another year of near zero traffic gains.
In a conference call with Wall Street analysts, Greg Sandfort, who recently retired as CEO but is still serving as a strategic advisor, provided more detail around those weather challenges, while describing the trends they see driving the growth picture for 2020.
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Managing through a tough season
"I'm very proud of how this team reacted to and effectively managed our fourth quarter business."
-- Sandfort
Tractor Supply's growth rate was significantly below executives' targets, in part because management underestimated the negative impact of having six fewer shopping days between Thanksgiving and Christmas this year. But the bigger factor was warm weather, which dampened demand for seasonal items like outerwear and space heaters.
"The Tractor Supply customer is a need based, demand driven shopper," Sandfort explained, "and there is relatively little that will influence the customers' purchasing decision if that need doesn't exist."
On the bright side, the retailer did a good job managing inventory and pricing in order to minimize the financial impact of the weaker customer traffic. "We delivered operating profit margin expansion for both the quarter and the year," Sandfort noted.
A good inventory position
"We believe our inventory is in good shape and we are very comfortable with its quality. As we enter the year, we're well positioned to wrap up the winter months and transition into the coming spring season."
-- CFO Kurt Barton
The spring selling season is a critical period for Tractor Supply, and tends to set the tone for the broader fiscal year. That's one reason why the company only issues regular updates to its annual outlook following its fiscal second quarter.
Its effective merchandising execution this past quarter has left the retailer in a flexible position heading into that period, with average inventory levels falling slightly through 2019, even as sales increased.
They're just as excited about new and expanded partnerships with rural lifestyle brands like Toro, Cub Cadet, and Troy-Bilt. "These brands will help solidify our position as a premier destination in the lawn and garden category," Barton explained.
A split-up sales year
"The first quarter of 2020 is forecasted to have the lowest comp performance of the year and correspondingly the most pressure on operating profit."
-- Barton
Tractor Supply's 2020 outlook predicts another year of modest sales growth and impressive financial wins in areas including profitability and cash flow. However, investors will have to wait until the early spring before getting concrete data that might support management's rebound prediction.
While executives expressed confidence that weather-related demand slumps always erase themselves when the temperatures return to normal, they are still forecasting an especially weak fiscal first quarter ahead in terms of sales and profits.
As a result, it likely won't be until the retailer's second-quarter report in late July that shareholders will know whether the recent growth slowdown was just a temporary blip, or part of a longer-term demand challenge.
