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Tractor Supply Earnings: Brace for a Slowdown?

By Demitri Kalogeropoulos - Jan 23, 2021 at 7:48AM

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Investors have some big questions heading into next Thursday's report.

Investors had good reasons to be bullish on Tractor Supply (TSCO -12.52%) stock in 2020. The rural lifestyle retailer didn't take even a temporary hit from COVID-19 closures, and its business has been surging since the early days of the pandemic as people spend more on home and pet care.

Tractor Supply is expected to say that this positive momentum extended through its fourth quarter when it announces those results on January 28. But CEO Hal Lawton and his team might pair that good news with a conservative outlook for the year ahead.

Let's take a closer look.

A tractor clears snow on a farm.

Image source: Getty Images.

Sales gains

Management in late October predicted that comparable-store sales would rise by between 15% and 20% this quarter. That result would mark a slowdown from the 27% spike Tractor Supply posted in Q3 and the 31% boost from Q2. Hitting that number would also put the retailer at about 25% growth for the year, far faster than the chain's initial target of around 2%.

On Thursday, investors will be looking for confirmation that Tractor Supply capitalized on all the new interest in its category by keeping its stores well stocked and tightly integrating its online and in-person shopping experiences. Success in these areas would show up in high comps, rising traffic, and soaring e-commerce growth.

Costs and cash flow

Investors are also looking for signs that Tractor Supply is gaining earning power. That's been the case for most of 2020, with gross profit margin improving by nearly a full percentage point to 36% of sales. Expenses were stable over that period, too, leading to a significant boost in operating margin.

TSCO Operating Margin (TTM) Chart

TSCO Operating Margin (TTM) data by YCharts

Lawton told shareholders to brace for a weaker profitability outing in the fourth quarter thanks to elevated spending in areas like labor and COVID-19 safety measures. Earnings should still land between $1.37 per share and $1.47 per share compared to $1.21 per share a year ago.

Keep an eye on cash flow, since that's the biggest factor supporting investments in growth and direct shareholder returns. Tractor Supply has reported a sharp spike here of over 50% through the first three quarters of 2020.

Looking ahead

The highly seasonal nature of Tractor Supply's business means management usually doesn't have a clear window into its sales outlook until after the spring quarter. But the company will still likely issue an initial 2021 forecast this week. Investors are heading into the report expecting to see a sharp slowdown from the past year's pandemic-influenced spike, with sales just barely staying in positive territory compared to the prior 25% spike.

It will be a testament to Tractor Supply's strong connection with customers, and its robust multichannel selling platform, if it can maintain positive sales momentum even in comparison to this past year's surge.

Still, Wall Street might be disappointed if it doesn't hear a bullish prediction from Lawton and his team, given the stock's rally since the pandemic first struck. But volatility is going to be a drawback to owning this retailer's shares -- at least until we have a better idea of where growth will settle in late 2021 and into 2022.

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Tractor Supply Company Stock Quote
Tractor Supply Company
TSCO
$181.63 (-12.52%) $-25.99

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