Tractor Supply (TSCO 2.76%) is a retailer that investors can easily overlook. Its primarily rural locations may mean it does not get the attention of investors in urban areas. Nonetheless, the Brentwood, Tennessee-based rural lifestyle retailer has positioned itself to benefit from some unique and unexpected tailwinds that are unlikely to help most of its peers to the same degree.
With these advantages, Tractor Supply has given investors three compelling reasons to consider this retail stock. Let's take a closer look.
Image source: Getty Images.
1. Strategic direction
Tractor Supply has existed for more than 80 years, operating almost 2,000 stores across every U.S. state except Alaska. Nonetheless, it could see a degree of progress unparalleled in its history. The retailer has capitalized on this footprint to serve farmers and ranchers as well as customers who operate hobby farms.
Moreover, with the acquisition of Petsense, it has gone into pet care. Not only does it offer pet supplies, but it can also deliver added benefits such as grooming services, a factor that could drive customers into its 177 stores. Also, Petsense operates in only 23 states, leaving ample room for expansion.
Despite its "rural" image, the company also uses the latest technology. Tractor Supply partners with Microsoft to maintain its cloud infrastructure. This technology supports an omnichannel presence, allowing customers to shop online in conjunction with stores that are well within reach of most non-city dwellers in the U.S.
2. Secular tailwinds
Additionally, the size of the non-urban population is rising. An increase in remote work means that many formerly urban workers can now perform their duties farther away from central cities. Thus, many of these workers have moved to more rural areas, helping to drive the number of loyalty members to nearly 24 million.
This group of high-value customers accounts for 70% of total sales. It has also dramatically improved Tractor Supply's overall performance. Comparable-store sales grew in the low to mid-single digits before COVID-19. Since the beginning of the pandemic, that metric has risen to 23% in 2020 and 17% in 2021.
The company also benefits from a burgeoning bull market in agriculture. This includes such sectors such as the legal cannabis industry, which Grand View Research predicts will grow at a 27% compound annual rate globally through 2028. Tractor Supply has not actively pursued this customer base. Nonetheless, since the largest hydroponics retailer, GrowGeneration (GRWG -6.38%), operates only 63 stores, Tractor Supply could serve as a logical alternative for some supplies.
Food trends in general have been good to Tractor Supply. Food prices increased 6% in 2021, according to the U.S. Department of Agriculture. Consumers continue also to show growing interest in organic foods (and the Mayo Clinic sees "a growing body of evidence" as to their health benefits). Such dynamics could spur these newer rural residents to take an interest in growing more crops, prompting customers to visit the store more often.
3. Company financials
This growth has also bolstered Tractor Supply's financials. In fiscal 2021, net sales totaled $12.7 billion, a 20% increase over the prior year, and earnings came in at $1 billion, 33% higher than year-ago levels. The company increased net income by slowing operating expense growth to 17%.
Such growth has also helped the shares. As of Jan. 31, Tractor Supply's stock price has seen a 12-month increase of 51%, well ahead of a 22% surge in the S&P 500. Clearly, investors have taken notice of the company's strengths.
The price-to-earnings (P/E) ratio now stands at 25, up from approximately 20 three years ago and slightly below GrowGeneration's earnings multiple of 28. Still, Tractor Supply holds up well compared to Costco's P/E ratio of 43 or Walmart's 48 earnings multiple, indicating its valuation could continue to expand.
Tractor Supply moving forward
Given its image and longtime focus on farmers and ranchers, urban investors could easily overlook Tractor Supply. Nonetheless, the company uses location and technology to serve a diverse customer base. Industry tailwinds in agriculture and pet supplies also continue to drive massive sales growth. Although it has gradually become a more expensive stock, it could still continue to deliver double-digit growth for the foreseeable future.
