Tractor Supply (TSCO 3.26%) carved a profitable niche for itself by serving the needs of the rural lifestyle. Over the last five years, the stock has soundly beaten the S&P 500 index by a wide margin, returning nearly 200% to shareholders.
But it hasn't been smooth sailing. Tractor Supply reported lower-than-expected comparable sales growth in the last quarter. It's also wrestling with higher cost inflation, which made earnings results a bit bumpy.
Still, there is one important reason investors should consider this retail stock a solid long-term investment option.
Inflation hurting sales growth
Tractor Supply posted consistent sales growth but could be doing better. Total sales grew 9% year over year in the first quarter, reaching $3.3 billion. But comparable store sales decelerated to 2.1% year over year, down from 5.2% in the year-ago quarter.
The deceleration in comp sales was driven by lower customer transactions, which trended down over the last year, with the exception of the fourth quarter. This reflects a customer base that is being "judicious" with spending, as management noted on the earnings call.
This is not a recession-proof business. A weakening economy is a risk to watch, especially considering that the Federal Reserve sees the possibility of a recession this year following the recent bank failures.
Another growth-limiting factor for Tractor Supply is finding new stores to open. Tractor Supply is the largest rural retailer with over 2,100 stores in 49 states. Orscheln Farm extends its footprint throughout the Midwest with 81 stores. It's not clear how many more stores the company can open, which is something to keep in mind when buying the stock, But there should be plenty more opportunities, as we'll see in a minute.
The stock's return will be capped by how fast it can grow revenue over the long term. Over the last decade, Tractor Supply's stock climbed in lockstep with revenue, as you can see in the chart.
Data by YCharts
Revenue grew by just under 12% per year. Given recent trends, investors shouldn't expect much more than 10% per year from here. At those rates of growth, the stock won't continue to rise as fast as it did over the last few years, but it could still deliver satisfactory returns.
Nonetheless, there's one quality about Tractor Supply that makes it a solid stock worth considering.
Selling everyday essentials leads to predictable sales
Tractor Supply sells products across several categories, such as seasonal merchandise, gifts, toys, hardware, and various farming tools. But livestock and pet products make up a growing percentage of the company's total sales, reaching 50% of the business in 2022. The second largest category is seasonal, gifts, and toys at 21% of sales.
The high percentage of sales coming from livestock and pets is important because customers are typically going to keep spending to care for their animals no matter what is happening in the economy. This leads to repeat purchases, which provides a stable base of sales to grow over time. From this perspective, you could say about half of Tractor Supply's business is recession-resistant.
The company has built a leading brand serving the rural customer, and it continues to gain market share as it expands into new product categories -- most recently finding success in women's workwear.
While it's not clear how many stores the market can support over the long term, it's possible Tractor Supply could still double its store base from here. For example, Walmart has over 4,000 stores open in the U.S., which cover cities and rural areas. But Walmart's stores are more than five times larger than Tractor Supply's. Accounting for the difference in store size, Tractor Supply can still find plenty of areas to fill out its footprint.
The good news is that investors are not being asked to pay a lot for growth. The stock trades at a forward price-to-earnings (P/E) ratio of 20.4, which is a discount to the S&P 500's earnings multiple of 24 and toward the lower end of Tractor Supply's P/E range in recent years.
Investors looking for a dependable retail stock to buy and hold for the long term would be hard-pressed to find one with a longer operating history than Tractor Supply. The business has been around for 85 years and could be around for many more decades delivering returns to shareholders.
