Analysis: Tractor Supply turns in ‘exceptional’ performance
As a stand-alone set of results, today’s numbers from Tractor Supply Company are very strong. However, when set against the robust trading from last year – when net sales rose by 11.6% and comparables by 6.6% – this is an exceptional performance. The bottom line result was also pleasing, with net income rising by a very solid 27.1%.
There is no doubt that Tractor Supply is being aided by the stronger economy. Demand from outdoor hobbyists and consumers with smallholdings is up sharply, as is demand from the professional segment of the market. The weather also played ball with good summer conditions helping to fuel outdoor activity and therefore purchasing. However, in our view, it would be unfair to attribute the entirety of the firm’s success to prevailing macroeconomic or climatic conditions – Tractor Supply has done a lot to engineer good numbers.
One of the clear success stories has been the investment put into the online proposition and the supporting supply chain. With an easier to use website and mobile site, online has become a key channel for both research and placing orders – both things that help busy customers save on time. The addition of simple solutions, like being able to register to make tax-free purchases are smart functions that appeal to the outdoor business community.
Pleasingly, just over 70% of online orders are fulfilled in Tractor Supply stores. This is convenient for the customer, is cost effective for the company, and helps to drive incremental purchasing. It also demonstrates the importance of physical shops in the rural lifestyle segment – something that online-only competitors will struggle to imitate.
Tractor Supply has also used online functionality to increase the appeal of its stores by introducing kiosks which offer the full range of 100,000 products (the average store holds 15,000 to 20,000 items). This has helped to improve both conversion rates and customer satisfaction. It also allows Tractor Store to optimize ranges and better capitalize on sudden changes in weather – which often occur during the overlap between seasons.
Away from online and stores, Tractor Supply has been busy building up its Neighbor’s Club loyalty program. This is on track to reach some 10 million members by the end of this year. In our opinion, this is impressive growth given that the scheme is just over a year old. Significantly, spend among members is high and there is also a strong engagement rate. Again, this is something that allows Tractor Supply to forge close links with its customer base, making it the destination of choice for outdoor products.
Finally, it is worth noting some of the positive changes made on the merchandise front. Here, increased penetration of own label in feedstuffs has helped margins; selective expansion of popular lines like Wrangler work clothing has boosted sales; and, a strong assortment across areas like winter heating products shows a determined attempt to maximize seasonal opportunities.
In summary, we believe Tractor Supply is very much on the front foot and is increasing its appeal in the rural lifestyle niche.
Tractor Supply rides strong in Q3
Tractor Supply Company beat third-quarter sales and earnings estimates amid healthy results across all merchandise categories and regions.
The Brentwood, Tenn.-based, rural lifestyle retailer posted net income of $116.8 million for the quarter ended Sept. 28, up more than 27% from net income of $91.9 million in the year-ago period.
Net sales increased 9.3% to $1.88 billion from $1.72 billion in the third quarter of 2017. Same-store sales rose 5.1%, with a 3.6% increase in the average ticket and 1.4% increase in comp transaction count.
The retailer said that its comp store sales were driven by broad-based strength in everyday merchandise, along with robust growth across spring and summer seasonal categories. All merchandise categories delivered increased comparable store sales, as did all geographic regions.
“Our 5.1% comparable store sales growth increase in the quarter was driven by continued execution of our ONETractor strategy that drove both average ticket and transaction count increases for the quarter,” said Greg Sandfort, CEO of Tractor Supply. “The team did a great job managing our product assortment, marketing events and store experience as we cycled a strong comparable store sales increase of 6.6% in the prior year’s third quarter.
Tractor Supply Company’s effective income tax rate was 21.5% for the quarter, compared to 36.4% in the prior year’s third quarter. The decrease was primarily related to the U.S. Tax Cuts and Jobs Act, the company said.
During the quarter, Tractor Supply opened 23 new stores and seven new Petsense stores. For the first nine months of the year, Tractor Supply has opened 63 new stores, 14 new Petsense stores, and closed one Petsense location.
As of the end of September, Tractor Supply operated more than 1,748 stores in 49 states, along with 181 Petsense stores.
Moody’s turns positive on the retail industry
Moody’s is bullish on retail, upping both its operating income and sales growth forecasts.
Moody’s Investor Services said Thursday that its outlook for the U.S. retail industry has turned positive for the first time since mid-2015. In a new report, Moody’s said retailers are finally starting to reap the benefits of investments aimed at cost efficiencies, enhancing their e-commerce capabilities and customers’ in-store experience. This, coupled with a strong economy, will result in higher profits, according to the report.
Moody’s upped its 2018 forecast for the industry’s operating income growth to 4.0% – 5.0% from 3.5% – 4.5% and its sales growth forecast for the year to 4.5%-5.5% from 3.5%-4.5%. Moody’s also forecasts holiday sales growth to be a healthy 5%-6% this year.
Discounters and warehouse clubs, dollar stores, auto parts, online and off-price stores are all expected to perform well this year. The improvement will accelerate next year when department store declines begin to taper and higher growth at specialty retailers, supermarkets, apparel and footwear and drug stores provides a lift to overall operating profit.
“The positive outlook for the U.S. retail industry reflects increasing topline growth and operating profits as companies’ investments to improve both the online and in-store shopping experience continue to gain traction,” said Mickey Chadha, Moody’s VP and senior credit officer. “The improvement has been spurred by a very strong macro-economic environment, with improving consumer confidence and low unemployment.”
Growth in online sales will continue to outpace overall retail growth, according to the report, which forecasts that online sales will grow to about 20% of total sales during the next five years. Amazon will continue to dominate in e-commerce, but brick and mortar companies will gain more of the online market share as they set up their own platforms.
The report, titled “US Retail: Going positive as investments start bearing fruit and economy boosts growth,” also pointed out the downside risks for the retail industry, which include a tighter labor market and increasing freight costs. In addition, a significant and prolonged escalation of the ongoing trade dispute between the U.S. and China would negatively affect U.S. retailers that import a meaningful portion of their products from China.
Moody’s industry sector outlooks represent the agency’s expectations for the fundamental business conditions in a given industry over the next 12-18 months.