Why Tractor Supply Was a Surprise Pandemic Winner

Tractor Supply (TSCO 2.76%) has been an under-the-radar retail winner , and one reason for that is its strength in pet products. Though that may not be what investors associate it with, the chain is a popular destination for pet food and supplies in rural areas.

In this episode of "Upgrade or Topgrade" recorded on Oct. 15, Fool contributor Jeremy Bowman and Millionacres Editor Deidre Woollard discuss the strengths of Tractor Supply and how it fits in with the broader pet products industry.

Deidre Woollard: For the next one I want to talk about that relates to Chewy in some ways is Tractor Supply Company. I don't know why I love this company, but I really do. They've been trading around a $194, the stock is up a 190 percent in the past five years, up 28 percent in the past year, and up nearly 40 percent year-to-date. Net sales of $3.6 billion, but what I like about Tractor Supply, and Tractor Supply is interesting because if you live in the city, I lived in Los Angeles for like years. I'd never knew where Tractor Supply was. I moved to Virginia, all of a sudden I see Tractor Supply, I'm like, what's this? I started digging into the company, I'm like, wow, this is a really solid company. It's one that benefited from two trends in the pandemic. The pet boom, but also the exurban trend; the idea of people moving to places a little further away from the city.

They had a strong Q2. Their net sales were $3.6 billion, up 13.4 percent. Their pet sales alone were up 25 percent and that's an area of really solid growth for them. But what's interesting with them too is they have 21 million members in what they call their Neighbor's Club, which is their loyalty program. They recently relaunched that, it's going really well. Their revenue was up to 27.2 percent year-over-year to $10.6 billion. What I really like too, is that they're comparable store sales were up 23 percent. This is a company that's having really benefiting from a lot of different trends. They're also facing the same problems that every single company is. I think we're going to talk about that in retail or e-commerce or anything which hass higher freight costs, supply chain difficulties, things like that, dragging them down a little bit. But overall, this is one that is really growing.

The reason I want to talk about it because it's doing a couple of different things that I find interesting. It's taking a little bit of energy from a couple of different spaces. They are trying to be the one-stop shop for hobbies, home, and pets. They're increasing their home and garden, their outside space. Coming after maybe those a little bit, maybe some of the hardware, but also coming after the pet sector and becoming one of the largest pet retailers in the US. But what's interesting too, is it much different than just cats and dogs because this is also like chickens. We talked about the COVID dogs, people got COVID chickens.

They sold 11 million chickens last year. A lot of that chicken sales was people who never had a chicken before. All of us who got really bored in the pandemic, some of us baked bread, some of us learned to net, some of us got into chickens and learned all about chicken. [laughs] I think that's really interesting is that, you think of Tractor Supply, I've always thought of it as this maybe a little bit boring, rural, outdated thing. But the numbers on this company are interesting. This exurban, rural trend interest me. Have you guys looked at this one at all?

Jeremy Bowman: A bit, yeah. I think Tractor Supply too, it's one of those things. Like you said, it's a rural company, so it doesn't get a lot of attention in Wall Street or, in the financial media more broadly. But it's one of those retailers that they put up consistently great numbers and you can see why it's out performing. They have a unique business model too. I think it's one, like you said, if you're living in that part of the country and you need chicken feed and you're living on acres and you're doing your gardening and all that stuff, that's probably your destination. You're actually going to be one of those members at the Neighbor's Club. I can see how it's a sustainable brick-and-mortar retail model.

Woollard: Yeah, I think with this one thing that I find the most challenging is that idea of attracting the newer customer. They talked a lot about it in their earnings too, about really for them, the pet may end up being the gateway to other things. Because once they get them in the stores then they can start showcasing other things. They said that they've had growth in their millennial consumers. Part of that is the same way that we've seen growth in millennial consumers at places like Home Depot and Lowe's, because we're in this stage where the millennials are now entering the homeownership years and the settled down years. It's natural to expect that to increase. But I think the challenge for them is they really play into that rural branding. If you've ever been in their stores, there's not a lot of store design going on in there, which is part of the charm.

But also I think that there is work to be done. It's such a solid brand, it's such a solid company. Yet I also think that it's a company that needs to start thinking a little bit more about the modern consumer to some extent.

Bowman: Yeah, I think as far as marketing and maybe even just their name. I mean, it took me a while to learn that Tractor Supply is [laughs] more than just like tractors. It's a much more broadline retailer than it sounds.

Woollard: Well, they're trying to do the thing with the initials now. It's like the Kentucky fried chicken move. It's like no no, we've got these cool ready stores. It's not about tractors, [laughs] which I think is interesting. They're trying to do some different things. They are doing this thing called Project Fusion. Focusing on pads, focusing on work wear, focusing on even beauty up. Really? But apparently, yes. I think they're trying to get with the times, but it's one that I like. I haven't invested in this one yet, but I do like to watch this one.