Investors are bracing for some bad news from Tractor Supply (TSCO 0.23%) in just a few days. Sure, the rural lifestyle retailer enjoyed strong sales growth to start fiscal 2022, even compared to soaring results a year earlier. But industry trends worsened in the weeks following its mid-April earnings update. Rivals including Target and Walmart have lowered their short-term profit outlooks while noting surprisingly large shifts in consumer demand.
The big question heading into Tractor Supply's Thursday announcement is whether its business was harmed by these shifts, which could spark inventory write-downs and price cuts over the next several months. We'll also learn about management's updated outlook for the wider fiscal year.
Let's take a closer look.
Sales should be up
Tractor Supply in mid-April broke from its usual practice of waiting to update its annual outlook until after the second quarter. That's why investors have a clear expectation that sales will rise by about 8% in Q2 to stay roughly even with the prior quarter's 8.3% spike.
Many investors were shocked by Target's Q2 report that described large price cuts and inventory write-down charges as consumer demand pivoted away from many of the categories that had been booming in earlier phases of the pandemic. A key worry heading into this report is that Tractor Supply will be facing the same challenge.
The good news is that many of its sales categories, such as pet and livestock maintenance products, aren't exposed to short-term shifts in consumer preferences. As a result, Tractor Supply might avoid the forecasting stumble that hurt Target's business in fiscal Q2.
Higher costs
Tractor Supply isn't immune to the cost pressures that are reducing investors' profit expectations around the retailing world. Transportation, labor, and product prices are all rising, and it isn't clear that the company can easily pass on those increases to its customers.
TSCO Operating Margin (TTM) data by YCharts.
Watch operating margin on Thursday for signs that Tractor Supply is avoiding the type of profitability slump that investors have seen with both Target and Walmart recently. The stock's decline in 2022 reflects expectations that this metric will come down a bit from the recent high of around 10% sales. But investors might still be surprised to see a sharper drop, or one that seems like it will continue impacting the business through late 2022.
Inventory and outlook
Last quarter, CEO Hal Lawton and his team described the selling environment as "highly inflationary and volatile." These challenging trends apparently worsened over the following weeks, and so the company might be forced to lower its sales or earnings outlook for 2022.
Coming into this report, management's sales forecast calls for comparable-store sales to rise by between 3% and 4.5% while the operating profit margin remains slightly above 10% of sales. Investors are bracing for a downgrade to that outlook, especially on earnings.
Even bad news like that wouldn't threaten the long-term investing thesis for this business, considering that Tractor Supply is simply being impacted by wider industry trends. The company still has a good shot at winning market share and boosting profitability over the coming years, just as it did through earlier phases of the pandemic. Investors should focus on that bigger growth picture next week.
