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3 Surprises in Tractor Supply's Earnings

By Demitri Kalogeropoulos – Oct 21, 2021 at 3:08PM

Key Points

  • Tractor Supply kept growing quickly through the summer.
  • Cost trends didn't stall its earnings momentum.
  • Investors stand to receive much higher cash returns from the business over time.

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This week, the retailer raised its outlook for a third consecutive time.

Tractor Supply's (TSCO -1.28%) business is still accelerating. The rural retailing giant said on Thursday that sales expanded at a double-digit rate for the fiscal third quarter, and earnings grew even faster through late September.

The management team took the opportunity to raise its outlook for a third consecutive time, and Tractor Supply is now on track to reach nearly $13 billion of annual sales this year compared to $8 billion in 2019.

Let's take a closer look at the latest results and discuss further at least three surprises to come out of this latest report.

A farm during summertime.

Image source: Getty Images.

1. Tractor Supply is winning more market share

There was no sign of a demand slowdown due to COVID-19-related spending shifts. Instead, comparable-store sales rose 13% on top of the 27% increase the company achieved a year ago. That boost combined with an expanding store base to push revenue up 16% to $3.02 billion. Most investors who follow the stock were looking for roughly $2.8 billion of sales.

Tractor Supply continued to gain share in key niches like home maintenance, gardening, and pet food and supplies. The e-commerce segment was another standout, achieving its 37th consecutive quarter of double-digit growth.

Management said the overall trends were stronger than predicted even after the raising of the 2021 outlook back in July. "Our growth continues to be robust," CEO Hal Lawton said in a press release. "Our customer trends remain structurally sound."

2. Tractor Supply is managing supply chain issues well

The supply chain challenges didn't hurt earnings by much, either. While gross profit margin slipped due to rising costs, Tractor Supply offset these pressures by cutting costs and raising prices. It also helped that demand continued to shift toward some of its more premium products.

Overall, operating income grew to $297 million, or 9.9% of sales, compared to $252 million, or 9.7% of sales, a year ago. Through the first three quarters of 2021, operating margin has edged up to nearly 11% of sales from 10% of sales a year earlier. It's a testament to the efficiency of the business that these gains are happening during spikes in transportation and supply chain costs. Tractor Supply is also finding plenty of room to reinvest in the business thanks to these efficiency gains.

3. Latest raised outlook points to even more sales, profit

Tractor Supply normally updates its annual outlook just once a year, but 2021 isn't following normal patterns. Instead, this week, executives raised their forecast for a third consecutive time.

Sales are now on track to rise by at least 16% compared to the previous (upgraded) outlook, which called for increases between 11% and 13%. The profit picture was also lifted so that operating margin is now likely to cross 10% of sales rather than landing just below that double-digit mark.

As a result, the chain is now targeting annual earnings of about $8.50 per share compared to the $6.87 it posted in 2020. That growth spike is happening despite higher spending on stock buybacks and more aggressive reinvestments in the business. It also implies another significant dividend increase on the way when Tractor Supply announces its fourth-quarter results in late January. The retailer boosted the dividend by 30% in the year-ago quarter, yet its earnings are expanding nearly as quickly in 2021, too.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.

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