2023-11-07 04:58:04 ET
Summary
- Tractor Supply is being hampered by weather and a weaker consumer.
- That said, these issues look transitory in nature, and there appear to be no underlying issues with the company.
- The stock's valuation remains near historic valuations and would be more attractive on a further price dip.
Back in July , I wrote that while Tractor Supply Company (TSCO) tends to be a steady performer, I thought the stock wasn't not cheap and that investors would be better off waiting for a dip to buy the stock. The stock is down -10% since then. Let's catch up on the company, which recently reported its Q3 results.
Company Profile
As a refresher, TSCO is a rural lifestyle retailer that sells supplies to help meet the needs of recreational farmers, ranchers, and people that live a rural lifestyle. About half its sales come from the livestock & pet category, while seasonal products are about 21%, hardware & tools 19%, apparel 7%, and agricultural at 3%. Within livestock & pet, over half of its sales are for companion animals like dogs, with the rest for livestock and equine.
Q3 Results
For Q3, TSCO grew its revenue by 4.3% to $3.41 billion, helped by its acquisition of Orscheln Farm and Home, as well as new store openings. That missed analyst estimates of $3.35 billion.
Same-store sales fell -0.4% versus a 5.7% increase a year ago. Average ticket dropped -0.3%, while average transaction count was relatively flat. The company blame poor weather for its performance, noting periods of extreme heat, drought, and heavy rainfall across various regions. E-commerce sales were up high single digits.
The company said 77% of its sales in the quarter came from members of its loyalty program.
The company opened 17 new Tractor Supply stores in the quarter and ended with 2,198 compared with 2,027 a year ago. It opened 4 new Petsense stores, while closing 1 to finish the quarter with 195 versus a 180 a year ago.
Gross margin came in at 36.65%, 101 basis points better than 35.64% a year ago. The company credited lower transportation costs for the improvement. Exclusive brands were 29.3% of sales, compared to 29.9% a year ago.
Adjusted EPS came in a $2.25, missing the analyst consensus by 4 cents.
Turning to the balance sheet, the company had $1.73 billion in debt and $422 million in cash and equivalents. Its leverage was around 2x. It had $2.83 billion in inventory. Average inventory per store was $1.114 million versus $1.110 million a year ago, while inventory turns were 3.34 versus 3.53 a year ago.
TSCO said over 35% of its stores now have its Project Fusion layout. As a reminder, the new layout adds more space towards higher productivity categories, such as pets, while taking it away space from lesser categories such as apparel. It has also added a Garden Center to over 420 of its locations.
Looking ahead, TSCO lowered its guidance for the full year. It now expects revenue of between $14.5-14.6 billion, down from a prior outlook of $14.8-14.9 billion. Analysts were looking for sales of $14.86 billion at the time. It is projecting flat same-store sales compared to a previous forecast of +1.3-2.5%.
It is now projecting net income of between $1.10-1.11 billion, or $10.00-10.10 per share, versus an earlier outlook of $1.12-1.15 billion, or $10.20-1.10 per share. The consensus at the time was for EPS of $10.25.
For Q4, the company is looking for comparable store sales to decrease in the low to mid-single digit range. The company said it is facing tough weather comps as well as a more discerning consumer. As a result, it is expecting some weakness in its seasonal and discretionary categories.
Looking towards 2024, on its Q3 call , CFO Kurt Barton said:
"Let's start with the fact that we're a needs-based, demand-driven business with a long history of positive comps. Additionally, as we see 2024 today, we expect we'll have less benefit from inflation, but we're 18 months into cycling big ticket softness. And the weather hopefully cannot be worse than it was this year, but we do anticipate that the operating environment will continue to be challenging with a higher-than-normal degree of uncertainty and ongoing pressure on consumer confidence and household budgets. As we've shared over the last couple of years, we've always planned that 2023 would be our peak capital investment level. With that as a backdrop, we plan to prudently invest in our strategic priorities in 2024 with next year's net capital spending in the 600s, which will relieve some depreciation expense. We remain excited about the progress on our Life Out Here strategy and are very pleased with our initiatives. Our tenth distribution center will open during the second quarter of 2024. Much like our distribution center opening this year, this new DC benefits gross margin, but will pressure our SG&A as the facility ramps up. The gross margin benefits typically lack the opening by about 1 quarter. Similar to 2023, we anticipate executing approximately 15 existing store sale-leaseback transaction in 2024 to fund the own development new store program. And we anticipate the opening of 80 new Tractor Supply stores and 10 to 15 Petsense locations."
Overall, TSCO's quarter was a little light, and its guidance a bit disappointing, with an expected drop in Q4 same-store sales. But beyond that, there doesn't appear to be anything that should really linger. Inventory looks to be in good share, as are gross margins. At the same time, leverage is reasonable, allowing the company to execute its remodeling and new store expansion plans.
Overall, I see the issues that TSCO is experiencing as being mostly transitory. With 85% of its sales coming from more non-discretionary items and a loyal customer base, this appears to be a minor set-back in what overall remains a solid story.
Valuation
TSCO stock currently trades around 14x the 2023 consensus EBITDA of $1.87 billion and 13.4x the 2024 consensus of $1.96 billion.
From an EBIITDAR perspective, it trades at about 10.7x 2024 estimates.
It trades at a forward P/E of 19x the 2024 consensus of $10.47.
The company is projected to grow revenue 3% in 2023 to $14.6 billion and 4% in 2024 to $15.1 billion.
The company pays out a $1.03 quarterly dividend, which it's increased every year for the past 13 years. Its current yield is around 2.1%.
While it doesn't have any great comps, the stock trades at a similar level to Home Depot ( HD ) and a bit of a premium to Lowe's ( LOW ).
The stock has an average EV/EBITDA multiple of 15.1x over the past five years. The stock is currently trading just below this range.
Conclusion
TSCO has a pretty steady business that is marked by 85% of its sales coming from more staple categories. However, the current macro environment and weather are impacting sales, and even a retailer as steady as TSCO is not completely immune to a more stressed consumer.
Nonetheless, the company's longer term growth drivers remain in place. It is still in the process of remodeling stores and building out new Tractor Supply and Petsense locations. Both of these initiatives should drive growth in the coming years.
While its stock price has come down, its valuation multiple has not, as the stock has just re-rated based on lower estimates. As such, I would still prefer to be a new money buyer around a 12x multiple 2024 EBITDA, which based on lower estimates would now be $175. As such, the stock remains a "Hold."
For further details see:
Tractor Supply: Stock Is Down, But Still Not Quite A Buy