The Secret Is Out On Tractor Supply

By Ryan C. Fuhrmann | July 25, 2011 AAA

Tractor Supply Co. (Nasdaq:TSCO) caters to a rural consumer base made up primarily of farm and ranch customers. This focus has lended itself to a unique growth opportunity, which the company has fully exploited in recent years. Its second quarter results reflected its strong growth trajectory, as did increases in its full-year sales and profit outlook. Unfortunately, Tractor Supply's prospects are no longer a secret, and this is making future returns for shareholders less of a certainty.

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Second Quarter Recap
Sales advanced 10.6% to $1.2 billion on the back of a 4.6% increase in same-store sales and the opening of 16 new stores during the quarter. Management cited strength in consumable products, such as the sale of animal and pet-related food.

Lower product costs helped boost gross margins by 11.8% to $402.5 million, or 34.1% of sales. Management also kept SG&A cost growth of 9.2% below the sales growth rate, which allowed for a 16.7% jump in operating income to $144.3 million. Interest expense declined to help boost net income by 16% to $91.2 million, and share repurchases further boosted earnings by 18.3% to $1.23 per fully diluted share.

Outlook
Management currently projects full-year sales of around $4.1 billion and earnings in a range of $2.75 to $2.82 per diluted share. This would represent year-over-year growth of approximately 20%, the last of which assumes Tractor Supply hits the high end of its profit guidance targets.

The Bottom Line
With 1,043 stores in 44 states as of the end of June, Tractor Supply should have plenty of remaining expansion room across the country. Management sees the potential for 1,800 domestic stores, or roughly 80% ahead of the current store count. A rural focus similar to convenience store operator Casey's General Stores (Nasdaq:CASY) also keeps it out of the clutches of larger and more diversified retailers, including CVS (NYSE:CVS) and Wal-Mart (NYSE:WMT). This helps it maintain margins and cater to a more underserved consumer market.

But even with the latest share price pullback, the forward P/E remains rather lofty at close to 21. Profits are up 22% annually over the last three fiscal years, but the stock is up 40.3% annually over this period, suggesting the stock has moved ahead of the fundamentals and is at risk of a further pullback should growth not turn out as currently predicted. (These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet. Check out Using Porter's 5 Forces To Analyze Stocks.)

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