As the market sell-off continues, Tractor Supply's (TSCO 0.11%) stock is faring better than the S&P 500, with its shares bouncing back from its year-to-date low against the backdrop of an uncertain market.
Year-to-date chart through Wednesday, March 25th. TSCO data by YCharts
Its retail stores remain open with limited hours to serve farmers and ranchers with essential needs such as food for livestock, farm maintenance products, and animal medicines. With the market focused on COVID-19 and the efforts to fight the virus, would now be a good time to pick up shares of this niche retailer?
Let's take a look at the business, its growth levers, and its recession-resistant traits to see if this stock could be a safe harbor for investors during this stormy market.
The business of serving the rural lifestyle
Tractor Supply has been serving "recreational farmers, ranchers, and all those who enjoy living the rural lifestyle" since 1938. By hiring people who appreciate the "out here" lifestyle and who have backgrounds in farming and ranching, its knowledgeable sales staff is encouraged to build personal relationships with customers. The company also offers a solid training program for its employees.
Image source: Getty Images.
Stores are positioned to be one-stop-shops for ranchers carrying 15,500 to 20,000 items, including livestock and pet supplies, hardware for trucks and tools, and work clothing and footwear. Its online presence compliments its stores with buy online and pickup-in-store capabilities and an "endless aisle" of over 125,000 products.
The company is profitable, has consistently grown its top and bottom lines, and has healthy comparable-store growth numbers.
|
Metric |
2017 |
2018 |
2019 |
|---|---|---|---|
|
Revenue |
$7.3 billion |
$7.9 billion |
$8.4 billion |
|
Revenue YOY growth |
7% |
9% |
5.6% |
|
Net income per share (diluted) |
$3.30 |
$4.31 |
$4.66 |
|
Net income per share year-over-year growth |
0.9% |
30.6% |
8.1% |
|
Stores at end of year |
1,853 |
1,940 |
2,024 |
|
Comparable store growth |
2.7% |
5.1% |
2.7% |
Data source: Tractor Supply's 10-K. Table by author. YOY = year-over-year.
Even still, the company is working to ensure that its best years are yet to come.
Multiple growth levers provide optionality
The primary growth engine is adding new stores. With only 2,024 stores across the U.S., Tractor Supply can still add stores for years to come, with a long-term goal of 2,500. It's also continuing to drive same-store sales growth through new services such as drive-through item pick up, pet vet clinic, and trailer rental.
It's driving additional wallet share with a "neighbors club" loyalty program and a branded credit card. Loyalty members number over 12 million strong, account for more than 50% of sales, and spend more than non-members overall as well as per trip. The company is extending its loyalty program to include a branded credit card that will offer a 5% discount to cardholders. Card-carrying customers purchase 30% more on average, more often choose to add profitable extended warranties, and have higher than average tickets.
Not to be outdone by Amazon, Tractor Supply has fully embraced selling its goods online. Its "ONETractor" initiative is serving customers however they shop, allowing farmers to buy online and pick up in stores (or without leaving their trucks), and enhancing its supply chain to provide seasonally and locally relevant products. The effort has been amazingly successful, with 30 quarters in a row of double-digit e-commerce growth.
Growth engines are important for long-term viability, but when the economy slows down, investors want to own companies with the ability to persevere.
Is this niche retailer recession-resistant?
Looking at the balance sheet, with $84 million in cash and $366 million in long-term debt, doesn't really give investors the warm fuzzies, but Tractor Supply has operational efficiencies that provide ongoing cash. Over the course of 2019, its business model realized $811 million in operating cash flow, which is enabling it to pay its bills during this coronavirus outbreak, even if shelter-in-place orders are extended for several months.
This niche retailer has a loyal customer base that provides resiliency even when the economy is not at its best. A look back at the 2008-2009 financial crisis provides an eye-opening glimpse of the strength of this brand.
Over the two-year period from January 1, 2007 through the end of 2009, the company grew its trailing-12-month revenue over 18%, and its stock responded, outperforming the S&P 500 by an amazing 71 percentage points. Most investors would say that's pretty recession-proof.
If you aren't convinced, there's one more thing
Single-digit top-line gains aren't going to attract growth investors to this stock, but this niche retailer just might be a perfect fit for dividend lovers. Tractor Supply began paying dividends in March 2010, and it has raised the dividend every year since. Over the last five years, the company has paid out a solid $5.29 per share. It sports a dividend yield of 1.75% and a payout ratio of only 29%, giving shareholders plenty of confidence that dividend payments are safe.
Even with a weak start to 2020, Tractor Supply has plenty of growth levers to pull and a proven resiliency that should secure market-beating returns for shareholders. With shares trading down over 30% off their all-time high, Tractor Supply looks like a stock you can buy today with confidence.
