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Growth Wasn't the Best Part of Tractor Supply's Earnings Report

By Demitri Kalogeropoulos – Oct 26, 2021 at 3:08PM

Key Points

  • The retailer handled soaring costs better than its peers.
  • Cash flow trends imply a big dividend increase ahead in early 2022.
  • Management believes the pandemic permanently lifted demand for things like home gardening and pet ownership.

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The retailer had better news for investors last week.

Tractor Supply (TSCO 0.43%) appears to be in no danger of losing its impressive growth momentum. The rural lifestyle retailer's third-quarter report, which covered the selling period through late September, confirmed that it is winning market share and outpacing most of its peers.

But there was even better news, involving its competitive moat and finances, deeper in Tractor Supply's earnings report and in management's subsequent call with investors. Let's look at those standout metrics.

A farm at summer time.

Image source: Getty Images.

Better than its peers

While Tractor Supply's 13% sales increase kept it near the top of the industry when it comes to growth, shareholders should be just as excited about the flexibility of its supply chain. The company navigated through shortages and other bottlenecks to keep products flowing smoothly to its stores. Tractor Supply even managed to boost inventory levels year over year.

That's a good sign for the upcoming holiday shopping season and it's another way in which the retailer can stand out from rivals. "Given our scale and sophistication," CEO Hal Lawton told Wall Street analysts, "we believe that our network is a competitive advantage to being the dependable supplier for the 'Out Here' lifestyle."

Rolling with cost spikes

Tractor Supply felt a significant drag from rising costs. In fact, inflation pushed costs higher by a head-turning 7% in Q3. Yet the company was able to raise prices where necessary while maintaining low prices in many of its most popular categories.

Even better news is the fact that the shifting prices and changing pandemic threat aren't causing a swing in shopper behavior back away from rural activities like home gardening, backyard poultry, and pet ownership. Demand is still rising in these areas, which supports Tractor Supply's growth, and management thinks the gains might be enduring.

"Our customers will have been ingrained [in working from home] for over two years," by the time the return to the office happens, Lawton said. "As such, we anticipate that their behaviors are much more sustainable and structural."

Cash returns

The chain's booming earnings received plenty of attention in the recent earnings report. It's also great news for Tractor Supply's finances that operating margin will likely cross 10% of sales this year after sitting below that key milestone for several years. Take a look at cash flow, though, which is likely to pass $1 billion again in 2021.

That spike is helping management invest aggressively in the business. Tractor Supply needs to keep spending to support its supply chain and its stellar omnichannel selling platform.

The cash is also supporting record direct returns to shareholders through stock buybacks and dividend payments.

And the best news might be to come. In late January, Tractor Supply will update its dividend payout plans in what could be another huge hike. The retailer raised its payment by 30% a year earlier after earnings jumped in 2020.

Profits are on track for a similarly strong percentage gain in 2022, on a much larger revenue base. Thus, investors will likely be in for much more cash by holding Tractor Supply shares in the next year. In addition to the market-thumping sales growth, that's another great reason to like the stock today.

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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