EUR 850.00 For Business Accounts Only

Morningstar | Healthy Comp Print Into Spring Increases Confidence in Tractor Supply's 2019 Profitability Outlook

Tractor Supply is the largest consumer farm specialty retailer in the United States, with around $8 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 1,775 locations (1,951 including Petsense), driving sales and EPS compound annual growth rates over the past three years of 8% and 12%, respectively. 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 450 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 that 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, as it utilizes better customer attribution data, better bargaining with vendors, 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 now fully operational, lower freight costs and better local vendor purchasing power should prevail, 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, from 9% in 2018.