The hardware-store space is dominated by two brands, Home Depot and Lowe's Companies. It's hard for smaller companies to compete, and yet Tractor Supply (TSCO 3.26%) has been doing just that for a long time. Here's why this rural-lifestyle retailer is succeeding and is worth a closer look, particularly if the market should start to rally anew.
1. Tractor Supply has a good niche
Tractor Supply is, at its core, a hardware store. It doesn't really compete with the Home Depot model because it's focused on serving farmers -- or at least, hobby farmers. But this has created a bit of a niche for the brand that Home Depot and Lowe's lack.
This also has allowed Tractor Supply to open smaller stores in more rural areas. Sure, you can buy baby chickens at the store, but you can also buy a hammer. Why bother driving the extra distance to a big box store where you won't get to see cute livestock as a side benefit? And if you do actually farm, you can find things at Tractor Supply that you wouldn't be able to get at Home Depot or Lowe's.
Image source: Getty Images.
It's important to keep the store concept in mind as you consider Tractor Supply. Customers like convenience, but they also like a good story. And Tractor Supply has a very good story that its bigger peers will likely never be able to match.
2. Tractor Supply has been growing in a big way
At the end of 2012, Tractor Supply had 1,176 stores. By the end of 2022, the company had 2,333 retail stores. Basically, the retailer almost doubled its store footprint in a decade.
That's pretty impressive growth and has resulted in huge revenue and earnings growth, as well. But growth doesn't happen by accident. There's strong execution going on here, and that's incredibly appealing.
TSCO Revenue (Annual) data by YCharts.
3. More growth is in store for Tractor Supply
That said, Tractor Supply isn't done opening stores. Management believes it can expand the store count to at least 3,000, with an annual pace of around 90 stores a year by 2025. That suggests at least another five years or so of solid growth ahead.
But this growth isn't limited to Tractor Supply stores because the company also operates pet stores under the Petsense by Tractor Supply nameplate. That keeps the branding but expands the company's reach into a new, or at least adjacent, segment.
4. Money is a limiting factor but not a big deal
It costs money to open new stores. A weak stock market and rising interest rates make raising capital more costly. That said, Tractor Supply has been leaning into sale/leaseback transactions with net lease companies.
Essentially, it sells a property it owns and then agrees to lease it back under a long-term deal that requires Tractor Supply to pay for property-level operating costs. This leads to great outcomes because the retailer can monetize assets while still maintaining control of the properties. The cash raised gets used to invest in new openings.
That's an extra avenue for funding growth that's valuable to have right now. But if there's a bull market, and Tractor Supply's shares rise back toward their recent high-water mark, the company could issue stock.
In other words, Tractor Supply has found a way to keep growing during hard times, and when good times return, it will have an expanded set of funding levers to pull. That solidifies the growth plans here in a way that increases the chances of long-term positive outcomes.
Down but not out
Shares of Tractor Supply are roughly 20% below their recent high-water mark. That's a fairly typical drawdown for this stock and, perhaps, offers growth-minded investors a strong entry point. Indeed, the 2% or so dividend yield is near the highest levels in the company's history. That dividend, meanwhile, has been increased annually for 14 years and at a huge 20%-plus annualized clip over the past decade.
If you can handle a little near-term turbulence, the company's successful history of geographic expansion suggests the long term remains very bright. And a bull market would only make funding this unique retailer's expansion easier.
