Retailing is a tough business with little in the way of competitive advantages. In fact, one can easily make a list of competitive disadvantages. First, there are no significant barriers to entry. Competition is intense in retailing. Second, there is no pricing power for the most part. Luxury goods retailers may be the only exception in this regard. Third, there are no trade secrets in retailing. One needs to only visit a store to see what makes a retailer tick.
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Despite the disadvantages noted above, there are exceptions like Wal-Mart (NYSE:WMT). Wal-Mart has the advantage of significant scale and pricing power. Wal-Mart's sheer size gives it an edge that no retailer can match. It can offer prices that are hard to beat, due to its sheer size and buying power. In fact, it's because of Wal-Mart that many other retailers have lost whatever competitive advantages they had to begin with. Target (NYSE:TGT) has become enormously successful because it has positioned itself as the everyday department store to the higher income bracket.
A Niche Retailer
Despite all the above considerations, Tractor Supply (Nasdaq:TSCO) remains a wonderful retailing business that looks to dominant in its space. If Home Depot (NYSE:HD) and AutoZone (NYSE:AZO) are the go-to retailers for the home improvement and auto repair industries, Tractor Supply is the only major retailer devoted to the farmer or rancher. Tractor Supply sells everything that a farmer or rancher may need, like equine supplies, garden equipment, hardware and the like.
The company operates under 1,000 stores. While the rural segment may never get as big as home improvement or auto parts, Tractor Supply has plenty of room to grow. AutoZone has over 4,000 alone, not to mention the thousands of other auto parts retailers run by its competitors. Similarly, Home Depot and Lowe's (NYSE:LOW) together have over 4,000 stores. Tractor Supply benefits from being the only retailer with any scale with a specific focus on the rural lifestyle. The company has a respectable net margin of nearly 4%, and that likely will improve over time as more stores continue to drive efficiency. And with no major debt on the balance sheet, the company's stores have been able to generate cash flow in a short amount of time.
The Bottom Line
Despite trading for a seemingly rich 20-times earnings, Tractor Supply is a young growing specialty retailer that has a tremendous growth footprint in its future. That growth holds future value and should be considered. (To analyze retail stocks, investors need to be aware of the most common metrics used. To learn more, see Analyzing Retail Stocks.)
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