Investors had high expectations heading into Tractor Supply's (NASDAQ:TSCO) second-quarter earnings report. The rural lifestyle retailer had been a huge winner from pandemic-related shifts in consumer spending habits, but Wall Street was looking for further growth and profit wins as COVID-19 cases decline in 2021.

Tractor Supply managed to blow past those optimistic forecasts, though, and management said this week that it sees an even bigger growth opportunity ahead for the rest of the year.

Let's take a closer look.

A tractor at work on a farm.

Image source: Getty Images.

Still growing

Investors were bracing for a growth slowdown in Q2 as Tractor Supply went up against some of the biggest demand spikes from the early phases of the pandemic. Yet sales were better than expected, rising 11% compared to the 6% increase Wall Street was targeting. That growth came on top of last year's 31% spike and translates into a 41% increase in the past two years.

Customer traffic was up 5% and average spending per visit increased 6%. Tractor Supply noted strength across its seasonal and staple categories, through each of its geographies, and in both the online and in-store sales channels. Executives described "ongoing market share gains" as a key factor propelling sales higher today.

Prices are rising

Tractor Supply struggled a bit with rising costs, especially transportation. But it was mostly able to pass along extra expenses by boosting prices. Operating margin fell slightly, dropping to 13.5% of sales from 14.1% a year ago.

TSCO Operating Margin (TTM) Chart

TSCO Operating Margin (TTM) data by YCharts

The picture is clearer, and brighter, when you zoom out a bit. Operating income over the first six months of the year has ticked up to 11.2% of sales compared to 10.9% a year ago. That boost is consistent with management's claim that it can boost profitability in 2021 despite rising expenses and aggressive spending on the business.  

Looking ahead

The improving prospects of the business were best captured in Tractor Supply's bold operating outlook upgrade. Management lifted both the sales and profit outlook for the second straight quarter.

Sales are now on track to jump by between 11% and 13% compared to the previous forecast range of 5% to 8%. Tractor Supply entered the year targeting flat sales following the 23% increase that shareholders saw in 2020.

That means the retailer is now looking at over $12 billion of annual revenue compared to the $11 billion figure the company had been targeting in late January. The earnings picture got a similar upgrade, with operating margin edging up to roughly 10% of sales compared to the 9.5% prior forecast.  

These wins mean Wall Street was right to send Tractor Supply's stock higher in the past year, since the chain, like Target in recent quarters, is winning market share in a growing niche while boosting profit margins. The customer traffic trends from late spring, meanwhile, suggest there might be more accelerating growth ahead in the second half of 2021.

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