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Can Growth Plans Aid Tractor Supply (TSCO) Amid Inflation?

·5-min read

Tractor Supply Company TSCO has been gaining from healthy demand for its product categories and strength in the Life Out Here Strategy. Its e-commerce business and Neighbor's Club loyalty program bode well.

This led to impressive second-quarter 2022 results, wherein the top line surpassed the Zacks Consensus Estimate, while the bottom line was in line. Net sales jumped 8.4% year over year, driven by an increase of 5.5% in comps, led by growth of 7.5% in comparable average ticket, which offset a 2% decline in comparable average transaction count. Also, a sturdy demand for everyday merchandise, including consumable, usable and edible products, as well as year-round products, contributed to comps growth. Adjusted earnings of $3.53 per share improved 10.7% year over year.

Consequently, management raised its 2022 view on the continued momentum in sales, cost-control measures and better inventory. The company expects net sales of $13.95-$14.05 billion, up from the prior mentioned $13.6-$13.8 billion. Comps are likely to grow 5.2-5.8%, up from the earlier stated 3-4.5% growth.

The operating margin is anticipated to be 10.2% compared with the previously stated 10.1-10.3%. Earnings per share are likely to be $9.48-$9.60, up from the earlier mentioned $9.20-$9.50. The view does not include the impacts of the Orscheln Farm acquisition as it is currently subjected to customary closing conditions.

Other Key Drivers

The company has been progressing well with its Life Out Here Strategy, which is based on five key pillars — customers, digitization, execution, team members and total shareholder return. Earlier, TSCO launched the Field Activity Support Team, and implemented various technology and service enhancements across the enterprise.

Tractor Supply is also on track with Project Fusion remodels and Side Lot transformation to remain nationally strong and locally relevant by bringing the latest merchandising strategies to life. Management anticipates transforming the side lots in 100 locations in 2022. These have been significant investments in stores. These are expected to boost productivity across the existing and new stores.

As part of the above-mentioned efforts, management revised the long-term financial growth targets for 2022-2026. It envisions achieving net sales growth of 6-7% for the aforementioned period, while comps are expected to grow 4-5%. The operating margin is expected to be 10.1-10.6%, up from the earlier mentioned 9-9.5%. Earnings per share are likely to grow 8-11%, up from the previously stated 8-10%.

Tractor Supply has been on track with its store-opening initiatives to induce traffic and drive the top line. It plans to open 75-80 Tractor Supply stores and 10 Petsense stores in 2022. Given the changing consumer trends, the company remains focused on integrating its physical and digital operations to offer consumers a seamless shopping experience. It is on track with the ‘ONETractor’ strategy, aimed at connecting store and online shopping.

The company’s omni-channel investments include curbside pickup, same-day and next-day delivery, a re-launched website, and a new mobile app. Its e-commerce business grew 7% year over year, driven by double-digit sales for May and June. The mobile app witnessed double-digit growth, accounting for 15% of the total e-commerce sales in the second quarter. Tractor Supply exited the second quarter with 26 million Neighbor's Club members. Its Neighbor's Club loyalty program remains sturdy. Management is likely to reach more than $2 billion in sales by 2026.

Similarly, some notable retailers, which boast a solid online show, are Best Buy Company BBY, Costco Wholesale Corporation COST and Sally Beauty Holdings SBH.

In the first quarter of fiscal 2023, Best Buy’s online sales as a percentage of domestic sales were 31%, twice as high as the pre-pandemic period. In addition, revenues from virtual phone and chat interactions remained solid.

Going forward, BBY is focused on improving its digital capabilities, including boosting its omni-channel services, such as buy online, pickup in store services. Best Buy is making significant investments in fundamental technology capabilities, such as data and analytics, as well as cloud migration to drive scale, efficiency and effectiveness.

Costco Wholesale’s comparable e-commerce sales rose 7.4% year over year in third-quarter fiscal 2022. The company has been gradually expanding its e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.

COST is also on the path to gradually providing a curbside pickup facility to customers. Costco expects an average rise of 11% in comparable e-commerce sales between fiscal 2022 and 2024.

Sally Beauty’s global e-commerce sales in second-quarter fiscal 2022 increased 12% to $81 million. The upside reflects the company’s ability to scale digital capabilities, while utilizing new tools and resources to fuel customer engagement.

SBH’s e-commerce sales penetration continued to increase to reach 8.9% of sales on BSG's e-commerce sales growth of 37%. Sally Beauty expects the e-commerce business to reach 15% or more of the total sales in the next few years.

Headwinds to Overcome

TSCO continues to reel under cost inflation, higher transportation costs and an unfavorable product mix. Increased wage rates and investments in strategic efforts are other concerns. These factors dented margins in the second quarter.

Tractor Supply’s gross margin contracted 24 basis points (bps) to 35.5% in the second quarter. Also, the operating margin contracted 4 bps to 13.5%. In dollar terms, SG&A expenses, including depreciation and amortization, rose 7.4% year over year.

Conclusion

Online strength, solid demand and well-chalked-out endeavors are likely to help the stock sustain its momentum. Topping it, a long-term earnings growth rate of 10.1% reflects its inherent strength.


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