For the second consecutive quarter, Tractor Supply (TSCO 3.26%) has surprised investors by announcing weaker-than-expected sales trends. The rural lifestyle retailer in late October announced positive revenue and earnings growth, but at rates that failed to meet management's short-term forecast -- again.
This spotty track record has investors worried that consumer spending shifts will hurt the business into late 2023 and through 2024. It has contributed to a tough year for shareholders, with the stock down 16% through late October.
Let's dive into those weaker operating trends and what they might mean for the business and its investors.
Fool me once
Back in late July, Tractor Supply blamed the surprising growth slowdown on weaker consumer spending and falling demand for seasonal products. Management reduced its full-year outlook as part of that report, pushing its projection for comparable-store sales growth down to a range of 1.3% and 2.5% from a prior 3.5% to 5.5%.
This time around the factors didn't change, but the growth outlook did. "Our sales performance was softer than our expectations," CEO Hal Lawton told investors in late October while citing weak consumer spending patterns and low demand for its seasonal merchandise. Tractor Supply now sees comps coming in roughly flat for the full 2023 year. Most Wall Street pros currently expect revenue to land at about $14.5 billion, down from Tractor Supply's initial prediction of over $15 billion of annual sales.
It isn't that bad
It's important not to overreact to the tough news, which is ultimately affecting all of Tractor Supply's peers as well. The company is still gaining market share even as its core niches shrink. And its operating profit margin is holding steady at 10% of sales, which is roughly even with management's initial forecast and near the profitability level that investors saw back before the pandemic.
TSCO Operating Margin (TTM) data by YCharts
The retailer isn't approaching any kind of cash crunch, either. It generated $937 million of operating cash through the first nine months of 2023, up from $626 million a year earlier. These wins give management valuable flexibility to continue investing in growth initiatives. Tractor Supply is steadily boosting its store count, for example, helping lay the groundwork for much higher annual sales once the current spending pullback passes.
Price check
The biggest risk to buying the stock is that Tractor Supply's sales trends could continue to worsen, potentially for several quarters to come. That concern is amplified by the fact that management has been surprised by weak demand in a way that hasn't happened with other consumer discretionary businesses like Home Depot.
In exchange for that higher risk, though, you can own Tractor Supply at a solid discount. Shares are trading for just 18 times earnings today, its lowest valuation since the pandemic started. While that weak valuation reflects some serious concerns about sales trends into 2024, this business is highly likely to recover and go on to set more revenue records over the long term.
In the meantime, Tractor Supply remains profitable, is generating positive cash flow, and continues to win market share in an attractive retailing niche. As a result, investors might want to keep this stock high up on their watch lists.
