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