Tractor Supply (TSCO 3.26%) is an expert in rural life, selling a vast selection of products to recreational farmers, ranchers, and homeowners. And that's resulted in earnings and share price growth in recent years, especially as the pandemic drove more and more people to spend time at home and even move from cities to the countryside.
In recent times, though, higher inflation has hurt those customers' wallets -- and that decrease in spending is weighing on Tractor Supply's earnings. The company has even lowered its sales and profit guidance for the full year. Of course, the good news is tough economic times don't last forever, so this headwind should let up moving forward.
Meanwhile, Tractor Supply is working on extracting as much value as possible from its business through the way it handles its real estate. Could one particular move on the horizon boost the company's growth? Let's find out.
Image source: Tractor Supply Co.
A goal of 3,000 stores
Tractor Supply operates more than 2,100 stores in 49 states. That may already seem like quite a lot, but the biggest rural-life retailer in the U.S. aims to expand that number to a whopping 3,000. The company didn't reach that number randomly. Instead, it completed a market analysis, including using a machine learning model and input from members of the loyalty program, Neighbor's Club.
Tractor Supply aims to open 70 new stores this year, 80 next year, and 90 in 2025 -- and the idea is to then continue opening 90 each year.
Now, here's the key move I hinted about earlier. To support its new real estate projects, Tractor Supply is launching a sale-leaseback program for its 117 owned stores -- and the company says the benefits will far surpass the future rent expense.
So, here's what this means financially. Sale-leaseback operations are starting this year with 10 to 15 stores, and they should result in an after-tax benefit of 20 cents of diluted earnings per share in the second half. These operations should continue to produce an after-tax benefit at around the same level annually over the next few years.
Tractor Supply expects the sale of these company-owned stores to offer the company a decade-long cash runway and boost cash flow. Today, free cash flow has slipped from its billion-dollar 2020 highs, but it has still progressively climbed over the years.
TSCO Free Cash Flow data by YCharts.
The peak investment year
Though Tractor Supply increased its forecast for capital spending this year due to the store growth plan, the sale-leaseback of owned stores will compensate -- and neither operation will significantly impact the company's cash position. Importantly, the company says this is the peak investment year, and that should then lead to margin expansion moving forward.
Finally, the sale-leaseback project also supports Tractor Supply's goal of maintaining an asset-light business -- these sorts of companies can be more flexible over time because they don't have to invest excessive cash in infrastructure and capital equipment.
Could Tractor Supply's sale-leaseback plan boost growth? I'm confident that it will, making it a great long-term move, even if it requires an increase in investment today.
All this means, as an investor, I wouldn't worry too much about short-term headwinds -- like today's economic situation holding back earnings. Instead, I would focus on the bigger picture of Tractor Supply's earnings track record and that it's generated returns from past investments.
TSCO Net Income (Annual) data by YCharts.
This shows the company's strengths when it comes to strategy so far. And the new real estate plan looks like another winning strategy because it takes value that's just been sitting there -- the value of the owned stores -- and puts it to work for growth.
So, this market leader's growth story is far from over, making it a great long-term buy for investors right now.
