Wall Street seems to love Walmart (WMT 0.04%) stock. Shares currently trade at more than 35 times earnings. This is quite a high premium for a stock with a mature business. Sure, the superstore company's fourth-quarter revenue rose an impressive 7.3% year over year, but management is guiding for full-year sales to increase just 2.5% to 3% year over year when adjusted to exclude the effect of expected foreign exchange rates.
Sure, Walmart's resilient business model and its scaled operations may justify a high valuation. But there may be better ideas for investors looking to own a growing, profitable, and durable retailer. One company to consider is Tractor Supply (TSCO 2.33%), the dominant retailer for the rural lifestyle. Not only is this significantly smaller retailer still in its early innings, but it's extremely profitable and it pays a nice dividend. Best of all, its price-to-earnings ratio is currently less than 25.
Here's a closer look at this underrated retailer.
Strong growth
Tractor Supply's recent growth has been so impressive that you could call the company a growth stock. Total sales in 2020 rose by 11.6% year over year to $14.2 billion. That's on top of 19.9% growth in 2021 and 27.2% growth in 2020.
Sure, some of the company's growth in 2020 and 2021 was fueled by some positive short-term trends sparked by the COVID-19 pandemic. But the fact that Tractor Supply was able to grow nicely in 2022, despite its incredibly tough comparisons, is a testament to the company's underlying momentum.
Tractor Supply's strong momentum has carried into 2023, with first-quarter sales rising 9.1% year over year. This growth has been driven by a combination of new store openings and comparable store sales growth of 2.1%. Even better, management is confident that its full-year comparable store sales growth rate will be even stronger than it was in Q1; the company guided for full-year comparable store sales growth between 3.5% and 5.5%. Tractor Supply's total sales growth should be meaningfully higher than this, assuming the company achieves its comparable store sales growth target range.
A resilient business
This resilient growth, even during uncertain times, is in part due to the type of products the company sells. Tractor Supply has been focusing on growing its sales of needs-based merchandise. Management often refers to these categories as C.U.E., which stands for consumable, usable, and edible.
"Examples of C.U.E. product categories include, but are not limited to, livestock feed and bedding, pet food, bird seed, lubricants, propane, and various seasonal products, such as fertilizer, weed control, mulch, pest control, and twine," the company explained in its 2022 annual report.
These products keep many customers coming back habitually. Even more, products like these tend to be products that need to be purchased during both good and bad times, making Tractor Supply's business model resilient.
Considering that 50% of Tractor Supply's 2022 sales came from livestock and pet sales, 19% came from its hardware, tools, and truck segment, and 3% came from its agriculture business, it's fair to say that a large portion of Tractor Supply's business is made up of needs-based, C.U.E. products.
"Tractor Supply's needs-based, demand-driven business model has stood the test of time with consistent and sustainable growth," said Tractor Supply CEO Hal Lawton in the company's first-quarter earnings release.
A robust dividend
To top it all off, Tractor Supply pays a nice dividend. Its dividend yield today is 1.7% -- a hair ahead of Walmart's. But Tractor Supply will likely reward shareholders with more dividend growth over time, as it's only paying out 39% of its earnings in dividends while Walmart has a payout ratio of 52%. In addition, Tractor Supply's sales and earnings are growing faster, providing more support for dividend growth.
Overall, Tractor Supply seems to have both a more attractive business and stock than Walmart. So next time you're considering investing in retail, take a closer look at this rural lifestyle retailer -- one that often goes overlooked.
