EUR 850.00 For Business Accounts Only

Morningstar | Cooperative Weather and Solid Merchandising Boost Tractor Supply’s Profit and Brand Intangible Asset

Tractor Supply is the largest consumer farm specialty retailer in the U.S., with more than $7 billion in annual sales. The firm has differentiated itself through its products and customer demographics, which provide underlying support to its brand intangible assets and a narrow economic moat. The store base has grown about 40% over the past five years, to about 1,750 locations (1,929 including Petsense), driving sales and earnings per share CAGR over the past three years of 8% each. We forecast that the firm will grow to nearly 2,900 stores over the next decade as it populates big-box centers in the western half of the U.S., with Petsense accounting for about 485 locations.The firm competes with big-box retailers like PetSmart and Lowe's, which also have solid pricing power because of scale and distribution advantages across numerous categories. That said, we believe Tractor Supply derives its success from its customer-centric store layout, which makes it a destination store for many of its customers. In addition, since Tractor Supply focuses on an active do-it-yourself rural consumer, many of its products are higher-end than those found in retailers that focus on a casual consumer. We believe Tractor Supply is positioned to reach critical mass in its consumer segment over the next decade, but that consistent operating margin expansion depends on corporate development across arenas, including better customer attribution data, better bargaining positions with suppliers, and more sophisticated logistics. These types of projects can increase operating margins meaningfully—and have benefited both Home Depot and Lowe’s over the last decade. With the New York distribution center open in 2018, lower shipping costs and better local vendor purchasing power should prevail over time, but investments to improve the firm's offerings, perception and relevance will weigh on near-term operating margin expansion. Over time, improved gross margin results from strong private-label penetration and better merchandising could be offset by SG&A growth leading to operating margins that rise about 20 basis points on average, annually (in 2019 and beyond), from an estimated 9% in 2018.