Building on top of its first-quarter success, big-box retailer Tractor Supply (NASDAQ:TSCO) blazed a trail for ongoing growth by beating analyst estimates at both the top and bottom lines during the second quarter.
The company benefitted from a spring boost with favorable weather that had customers buying gardening and outdoor supplies and equipment, and kept up the momentum into early summer, crowning its results with improved fiscal 2021 guidance. Though the stock market responded to the report by bidding its stock price down on Monday, Tractor Supply's results look bullish.
Here are three major points in the earnings report that are worth a closer look.
1. Tractor Supply is generating plenty of growth
Flourishing sales and rising revenue continue to result from Tractor Supply's operations. The $3.6 billion in revenue is a 13.4% year-over-year top-line pop, while on the bottom line, adjusted earnings per share (EPS) climbed 10% to $3.19. Comparable store sales, or comps, rose by 10.5%. Tractor Supply returned some of this bounty of cash to its shareholders, both through a quarterly dividend payment of $0.52 per share (up 48.6% from last year) and through the repurchase of 1.1 million shares, increasing the value of the remaining outstanding shares.
Tractor Supply's executives were encouraged by this strong growth to raise their guidance for its full-year fiscal 2021 performance. Annual revenue guidance of $11.4 billion to $11.7 billion was revised upward to $12.1 to $12.3 billion, while bottom-line expectations went from an annual EPS between $7.05 and $7.40 to between $7.70 and $8 instead. The company estimates it will increase its Tractor Supply locations by 80 additional stores this year, while its Petsense stores should rise by 10 net openings.
The company's finances also look healthy, with its $1.4 billion in cash and cash equivalents outweighing its $985.3 million in long-term debt. Tractor Supply appears to be firing on all cylinders for both sales and earnings growth, has ample cash on hand, and looks ready to continue on the same bullish trajectory into the medium or long term.
2. Tractor Supply has a loyal customer base
Tractor Supply seems to be successful at winning and maintaining customer loyalty, with membership in its Neighbor's Club rewards program seeing even greater success after a recent pivot to a points-based system. During the Q2 earnings conference call, CEO Hal Lawton pointed out that 5 million more customers had joined the program. Slightly less than a third of new customers opt to join the Neighbor's Club.
About 65% of revenue now comes from Club member purchases, and these customers also buy more, according to Lawton, "spending about three times the rate of non-members." He noted the company has "grown our high-value customer base in the program by about 15% year to date," with a 95% retention rate of "high-value" members, though Lawton did not say what percentage of overall members is "high-value."
According to Harvard Business Review research, loyalty program effectiveness depends on keeping customers long-term with benefits increasing over time rather than being front-loaded, enabling quick defection. Tractor Supply's points system has a straightforward mechanism giving customers better rewards the longer they continue to shop, with the level of calendar year spending determining if they get 1 point, 1.5 points, or 2 points per dollar spent. Those who spend more over the year will get up to twice as many rewards, providing direct feedback encouraging loyalty.
The CEO also provided some detail about member age, with millennials joining at a rapidly increasing rate. Some research points to the same features of loyalty programs providing positive customer growth across all generations, with Gen Z purchasers and intervening generations nearly as favorable to companies offering such programs as baby boomers. Since the same features tend to draw in customers of all generations, this provides some additional evidence Tractor Supply's program is well designed to appeal to shoppers and will continue to build loyalty and sales.
3. Big-ticket items are selling well
With strength in zero-turn mowers, safes, utility vehicles, and trailers, according to CFO Kurt Barton, the company's "big-ticket categories" are outperforming other product categories at the chain. According to statements during the company's Q1 earnings call, it views big-ticket items as one of its three main inventory "buckets," which it attempts to keep filled. With robust sales already visible in the category at the end of Q1, Q2's big-ticket success shows Tractor Supply is handling its inventory effectively, ensuring there is enough merchandise on hand to encourage large purchases.
Big-ticket items are helpful to Tractor Supply in part because they help improve operating margins. It is more profitable to the company's business model to sell more large, high-margin products like trailers or mowers than cheaper items with lower margins. The ongoing vigor of this profitable, efficient category is likely reflected in Tractor Supply's revised operating margin guidance for fiscal 2021. Instead of a 9.4% to 9.7% operating margin, it now forecasts 9.7% to 9.9% for the year.
Overall, with growth continuing strong for many consecutive quarters, a loyal and growing customer base served by an apparently attractive loyalty program, and rising sales in its most profitable "big ticket" sector improving both revenue and margin, Tractor Supply looks very bullish for those investing in retail stocks, despite a post-report stock price dip likely resulting from profit-taking.