Investors can't use the past to predict the future, but they can use it to make reasonable assumptions about the future. And that's what I want to do here when looking at rural lifestyle retail company Tractor Supply Company (TSCO 3.26%).
Here's Tractor Supply's business in a nutshell and what investors can expect over the next five years.
What to know about Tractor Supply
Tractor Supply is primarily a company for those who own livestock or pets. In 2022, the livestock-and-pet category accounted for 50% of its sales, which was pretty close to what it's been in past years. The rest of the top line came from seasonal, gift, and toy products (21%); hardware, tools, and truck items (19%); clothing and footwear (7%); and agriculture products (3%).
Tractor Supply's supply chain can handle massive volume -- including 8 billion pounds of feed in 2022 -- because its a massive company. It has nearly 2,200 locations around the country and nearly 200 locations for its pet brand, Petsense. It's building its 10th distribution center now, and is on track for nearly $15 billion in net sales this year. Up from $14.2 billion in fiscal 2022 and $12.73 billion in the prior year.
Tractor Supply also has a portfolio of exclusive brands, which can be a great strategy for boosting profit margins. In 2022, the company's sales of exclusive brands accounted for 30% of total net sales, up from 29% in 2021.
When it comes to profits, Tractor Supply is amazingly consistent. Its revenue has steadily climbed over the past decade and is at an all-time high right now. And its operating margin during this season of growth has consistently hovered between roughly 9% and 10%, as the chart below shows.
TSCO Operating Margin (TTM) data by YCharts
Three things to watch
Considering it's already such a large retail chain, Tractor Supply's growth-by-expansion strategy is slowing down. It expects to be able to have 3,000 stores long term and plans to open about 80 to 90 new locations annually until it reaches that goal. This would only represent about 4% growth annually, which is nothing to write home about.
Therefore, I submit that these things will be more meaningful over the next five years for Tractor Supply.
1. Same-store sales
Sales at stores that have been open for at least one year are measured with a metric called same-store sales. For Tractor Supply, same-stores sales have been up most years and are on track for growth in 2023 as well.
When same-store sales fall, retail chains often lose operating leverage and profits go down. Tractor Supply needs to keep its sales climbing at existing stores to prevent that from happening.
2. Operating margin
This point goes back to same-store sales, but it's more than that. Sales for Tractor Supply's exclusive brands will also play an important part in keeping its operating margin close to 10%.
Crime is hurting profit margins for other retail chains, and it's important to point out that Tractor Supply is an outlier. CFO Kurt Barton has said that inventory shrink related to theft is actually down in 2023 as a percentage of sales, which is encouraging.
3. Capital return
Tractor Supply will invest some money in growth, but the company has reached the stage where it needs to return capital to shareholders. Which is what it's been doing. Share repurchases and dividend payments are two big ways that it uses profits to enrich shareholders.
TSCO Average Diluted Shares Outstanding (Quarterly) data by YCharts
Tractor Supply has done well for shareholders by reducing its share count by 10% over the last five years and more than tripling its dividend. And if it can take care of the first two things I pointed out, this third consideration will likely remain favorable for the next five years.
Adding it all up
I'll reiterate that investors can't use Tractor Supply's past successes to guarantee results in the future. But its past consistency does suggest that many of these trends can continue in its favor from here.
By opening new stores and growing same-store sales, I believe it's reasonable to hope for around 50% top-line growth over the next five years for Tractor Supply. If its operating margin can hold steady, then its operating profit would grow by about the same amount.
That would provide plenty of breathing room for Tractor Supply to repurchase more shares and keep increasing its dividend. It could potentially reduce its share count by another 10% over the next five years. And with higher profits and a lower share count, it could have room to double its dividend.
Between profit growth and a lower share count, shareholders could easily be looking at market-beating returns from Tractor Supply stock. And reinvesting dividends would only increase the odds of outperformance. That's why Tractor Supply is a stock to buy in my view.
