Tractor Supply's (NASDAQ:TSCO) epic stock price rally is about to be tested. The rural lifestyle retailer will announce updated earnings results in a few days that should show whether it can keep boosting sales and profit margins as the pandemic threat fades.

Let's look at the key trends to watch in that report, slated for the morning of July 19.

Horses graze in front of a farm.

Image source: Getty Images.

A high bar to meet

Tractor Supply has a high bar to meet in trying to improve the business compared to last year. The second quarter runs through late June, which captured some of the biggest pandemic-related demand spikes of 2020. Sales rose 30% in that period and jumped by over 100% in the e-commerce segment.

Investors aren't expecting much of a growth hangover this time out. Sales should rise by about 6% on top of last year's surge despite a return to more-normal consumer shopping behavior as virus cases plummeted in the U.S.

Other sales metrics like market share, average spending, and e-commerce should reflect faster growth than the 3% annual increase that shareholders saw before the pandemic. Keep an eye on shopper traffic in both its online and brick-and-mortar segments for signs that most of its new customers are remaining engaged.

How high can margins go?

Tractor Supply is benefiting from a demand shift toward premium products in animal care, land care, and home maintenance. Its digital fulfilment platform is providing value that shoppers are happily paying for, too. Together, these factors helped push first-quarter gross profit margin up to 35% of sales from 33.5% a year ago. National retailing peer Target, which sells a bigger proportion of essentials like groceries, is sitting around 30%.

TSCO Gross Profit Margin Chart

TSCO Gross Profit Margin data by YCharts.

Investors are looking for another uptick this quarter, which would mark Tractor Supply's 10th consecutive quarter of improving profitability. That's a major element supporting the stock's rally over the past year.

Looking ahead

CEO Hal Lawton and his team took the rare step of raising their fiscal-year outlook following the first-quarter results. They currently see sales rising by between 5% and 8% following last year's 23% surge.

This report might feature another big update to that forecast, especially since much of the spring selling season has passed. If Tractor Supply stocked the right mix of merchandise in that period, while giving its new shoppers more reasons to visit, then its short-term growth forecast might rise again.

In any case, Tractor Supply has a good chance of crossing $11 billion of annual sales compared to $8.4 billion in 2019. Its operating margin might even touch 10% of sales despite rising costs and extra spending on areas like the digital selling platform.

Most of that good news is reflected in the surging stock price, which raises the risk of a slump if the company underperforms even slightly in this upcoming report. But a drop might just create an opportunity to buy a high-quality business at a bit of a discount. Tractor Supply has a bright long-term outlook as it expands its store base over the next few years, and so investors shouldn't let some earnings volatility scare them away from a strong business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.