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a brief analysis of TRACTOR SUPPLY COMPANY(TSCO) - is tsco A BUY, SELL OR HOLD

19/12/2021

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I want to give you more insight into why some companies are a wonderful opportunity to hedge against inflation and provides you an opportunity to build a solid portfolio. In my search for truly wonderful businesses, I look for specific qualitative and quantitative factors. What define a great business to me is:
  • One with MAOT
  • With high returns on capital relative to its peers,
  • Growth opportunities, and durable competitive advantage.

​What is more as Warren Buffet refers is management’s decisions must be intelligent, and their interests must be business oriented, because management, ultimately, is the link between business value and shareholder value. Tela advisor strive to buy shares only in high quality companies which I believe can compound in value for many years to come.
We  believe  that  Tractor  Supply  is  an  excellent  business,  with  high  returns  on  invested  capital,  intelligent management, and  strong  growth  potential.  Tractor  Supply  has consistently  grown  store  count,  and  revenues  for  over  20  years grown from $2.068B in 2005 to $12,29B in 2021.  
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Tractor  Supply  Company  is  an  excellent business  operating  in  a  dominant  position  within  the  niche marketplace. Tractor  Supply’s  product selection  is precisely  targeted to  its core-customer base, and  the company  knows its customers well.  
Sales per Business
Growing  sales  by  opening  new  stores  is  good  but  generating  higher  sales  from  existing  stores  is  even more important  for  a  retailer  as  it  is  an  indication  of  the  company’s  ongoing  relevance  to  consumers  and competitive  position.
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​We  believe  that  Tractor  Supply  Company  has  excellent  growth  opportunities  ahead.  The  company  plans  to open  over  600  new  Tractor  Supply  stores,  as  well  as  800  new  subsidiary  pet  supplies  stores  in  the  coming years.  Finally,  the  company  stands  to  continuously  expand  its  customer  base  as  more  families  migrate  to the suburban  markets  which  contain  most  of  Tractor  Supply’s  nearly  two  thousand  stores.  
Company Overview
Tractor  Supply  Company  (TSCO:  NASDAQ)  has  a  well-established  dominance  as  a  specialty  store covering  the  broad  needs  of  its  mostly  suburban  and  rural  clientele.  Products  include  farm,  ranch,  home, garden,  pet,  clothing,  livestock,  and  equine  needs  along  with,  as  the  name  suggests,  tractor  parts, accessories,  and  maintenance  needs.  “Everything  but  the  tractor”  as  one  analyst  put  it.  TSCO  thrives  in  a niche  market  of  suburban,  and  rural  areas  where  a  competitor  with  a  similar  range  of  products,  and  who  can compete on  price is nowhere to  be found. Tractor  Supply  benefits  from  repeat  business  from  its  most  loyal  customers  as  many  of  the  items  the company  sells  are  consumables. Part  of  TSCO’s  strategy  for  repeat  business  comes  from  its  loyalty  rewards  program  called  “Neighbor's Club”.  Neighbor's  Club  members  account  for  65%  of  TSCO’s  total  sales,  and  membership  continues  to grow.  Retention  rates  are  higher  than  95%  for  club .

​members,   and  new  millennial  customers  purchasing items  such  as  pet  food,  chicken  feed,  and  other  products  are  joining  the  Neighbor's  Club  at  a  rate  of  1  in  3 customers.
As  a  national  brand,  Tractor  Supply  benefits  from  scale-based  cost  advantages  in  advertising  and  has developed  a  successful  customer  loyalty  program,  which  helps  drive  repeat  business.  Repeat  customers  are extremely  valuable  to  any  business  because  they  cost  far  less  to  acquire.  Maintaining  these  customer relationships  is  an  important  task  necessary  to  protect  the  company’s  revenues.  Tractor  Supply’s  Neighbor's Club  helps  maintain  these  important  relationships  by  way  of  reward  programs,  and  additional  perks  such as  free  utility  trailer  rentals  for  qualified  customers.   In  order  to  maintain  this  competitive  advantage, Tractor Supply  is  currently  expanding  product selection, and  continuously  adding  perks  via  the  Neighbor's Club.  The  Neighbor’s  Club  now  has  over  20  million  members.

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Performance  measures  such  as  sales  per  store,  EBITDA  per  store,  net  income  per  store,  and  sales  per  square foot  show  a  positive  trend,  with  2020  showing the  strongest  year  yet. Sales  per store  have  increased 38.8% from  $3.6  million  in  2010,  to  $5m  in  2020.  Similarly,  sales  per  square  foot  have  increased  46.2%  from $225.89  in  2010  to  $330.45  in  2020.  EBITDA  per  store  has  nearly  doubled  from  $336k  in  2010  to  $666k in  2020 ​and  finally,  net  income  per  store  has  grown  from  $168k  in  2010,  to  $356k  in  2020,  representing  a 112% increase.


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Capital Allocation
Over  the  past  10  years  Tractor  Supply  Company  generated  $6.2  billion  in  cash  from  operations.  $2.3  billion was  spent  on  capital  expenditures  and  acquisitions  over  that  same  period. 
  • Net  income  grew  by  $581  million over  the  10  years. 
  • In  addition,  the  company  spent  $3.2  billion  on  stock  buybacks, 
  • Reducing  shares outstanding  by  22%  of  its  shares. 
  • Finally,  the  company  paid  $1.1  billion  in  dividends,  and  currently  yields about  1%.  
Cash dividends  paid  by Tractor Supply Company  have increased  by  more than 8-fold  from $20  million  in 2010, to $175  million  in  2020. This equates to  $1.05 per share in 2010, and $1.5 per share in 2020.
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Hal  Lawton  (CEO)  has  focused  on  better  monetizing  TSCO’s  omnichannel  presence,  which  now  accounts for  10%  total  sales  in  Q2  2021,  as  opposed  to  2%  at  year-end  2019.  Lawton  has  successfully  allocated resources  to  help  TSCO’s  ecommerce  sales  grow  by  5-fold.  We expect online and  in-app  sales  to  continue to  grow  as  a  %  of  total  sales  as  the  younger,  tech-savvy  generations  choose  to  shop  at  Tractor  Supply  more over the coming  years.

Conclusion
We  believe  that  Tractor  Supply  Company  is  a  high-quality  company.  It  earns  outstanding  returns  on  capital underpinned  by  economies  of  scale,  has  ample  room  for  growth  and  its  management  has  done  an  admirable job  of  capital  allocation. Tractor  Supply  recently  raised  company  guidance  during  the  Q2  2021 earnings  call.  Current  guidance  from  management  states  a  range  of  $12.1  billion  to  $12.3  billion  in revenues,  with  comparable  store  sales  growth  in  the  range  of  11%  to  13%  for  2021.  The  company  also expects  share  repurchases  to  range from $700  million  to  $800  million.   The company  is currently  acquiring  Orscheln  Farm &  Home,  a  retailer of farm and  ranch  supplies, which of  course,  is  in  line  with  Tractor  Supply’s  core  business.  The  acquisition  will  lead  to  an  addition of  167 Orscheln  Farm & Home  stores across 11  states, for  a price of  $297  million. Orscheln  Farm  &  Home’s potential  addition  to  TSCO’s  income  is  not  included  in  current  guidance.   
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