Tractor Supply Company Fundamental Analysis
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Tractor Supply Company
Last Updated: 5 July 2023
NASDAQ: TSCO
GICS Sector: Consumer Cyclical
Sub-Industry: Specialty Retail
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Table of Contents
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Management
CEO: Hal Lawton
Tenure: 3.5 years
Tractor Supply Company's management team has an average tenure of 4.9 years. It is considered experienced.
Source of Revenue
Tractor Supply Company operates as a rural lifestyle retailer in the United States focusing on supplying the needs of recreational farmers, ranchers, and all those who enjoy living the rural lifestyle (which the company refers to as the “Out Here” lifestyle). By focusing its product assortment on these core customers, the company believes that they are differentiated from general merchandise, home centre, and other speciality retailers.
Tractor Supply Company operates retail stores under the names Tractor Supply Company, Petsense by Tractor Supply, and Orscheln Farm and Home. Their stores are located primarily in towns outlying major metropolitan markets and rural communities. They also offer an expanded assortment of products through the Tractor Supply mobile application and online at TractorSupply.com and Petsense.com.
The company has one reportable industry segment which is the retail sale of products that support the rural lifestyle. On 31 December 2022, Tractor Supply Company operated 2,333 retail stores in 49 states (2,066 Tractor Supply retail stores, 186 Petsense by Tractor Supply retail stores, and 81 Orscheln Farm and Home retail stores).
Its online selling websites and its mobile application offer an extended assortment of products beyond those offered in-store and drive traffic into its stores through its buy online and pickup in-store and ship-to-store programs.
The company offers an extensive assortment of products but no single product accounted for more than 10% of its sales during fiscal 2022. Tractor Supply Company’s comprehensive selection of merchandise is comprised of the following major product categories:
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Equine, livestock, pet, and small animal products, including items necessary for their health, care, growth, and containment (i.e., fencing)
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Hardware, truck, towing, and tool products
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Seasonal products, including heating, lawn and garden items, power equipment, gifts, and toys
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Work/recreational clothing and footwear
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Maintenance products for agricultural and rural use
Tractor Supply Company Product Category Revenue FY2022
In addition to selling products that bear nationally-known manufacturer brands, Tractor Supply Company also sells products manufactured under several exclusive brands that the company considers to be important. These exclusive brands are manufactured for Tractor Supply Company by a number of vendors and provide an alternative to the national brands. Excluding Orscheln Farm and Home, these exclusive brands represented approximately 30% of its total sales in fiscal 2022. These exclusive brands include:
Tractor Supply Company Exclusive Brands
Tractor Supply Company Economic Moat
Tractor Supply Company Economic Moat
Performance Checklist
Is Tractor Supply Company’s revenue growing YoY for the past 5 years consistently? Yes.
Is the net income growing YoY for the past 5 years consistently? Yes.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Yes.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Yes.
Is the EPS growing for the past 5 years? Yes.
Tractor Supply Company Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Is the free cash flow per share growing for the past 5 years? Inconsistent.
Tractor Supply Company FCF per Share
Management Effectiveness
Is Tractor Supply Company’s ROE consistently at 12%-15% YoY for the past 5 years? Yes.
Tractor Supply Company Return on Equity
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Yes.
Tractor Supply Company Return on Invested Capital vs Weighted Average Cost of Capital
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
Tractor Supply Company Shares Outstanding (Million Shares)
Tractor Supply Company Financial Health
Tractor Supply Company Financial Health (USD Million)
Current Ratio: 1.47 (pass my requirement of >1.0)
Debt-to-EBITDA: 2.62 (pass my requirement of <3.0)
Interest Coverage: 39.6 (pass my requirement of >3.0)
Debt Servicing Ratio: 2.28% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 1.9%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
Tractor Supply Company’s dividend payments are reasonably covered by its earnings but not its cash flows.
Tractor Supply Company Stock Performance
The following graph compares the cumulative total stockholder return on Tractor Supply Company common stock from 30 December 2017 to 31 December 2022, with the cumulative total returns of the S&P 500 Index and the S&P Retail Index over the same period. The comparison assumes that $100 was invested on 30 December 2017, in Tractor Supply Company common stock and in each of the foregoing indices and in each case assumes reinvestment of dividends. The historical stock price performance shown on this graph is not indicative of future performance.
Tractor Supply Company Stock Performance
Tractor Supply Company Intrinsic Valuation
Estimated intrinsic value: $111.24
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Average free cash flow used: USD$660M
Projected growth rate: 7% - 9%
Beta: 0.8
Discount rate: 7.0%
Margin of safety: 30% (Uncertainty: Mid)
Price range after the margin of safety: <$78.00
Date of calculation: 5 July 2023
Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.
Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.
Tractor Supply Company Intrinsic Valuation
Tractor Supply Company Relative Valuation
Tractor Supply Company EV-to-EBITDA vs its peers
Tractor Supply Company Price-Earnings Ratio vs its peers
Tractor Supply Company Historical Price-Earnings Ratio
Additional Resources
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My Top Concern
Changes in overall economic conditions can have a significant impact on the business operations of Tractor Supply Company. Factors such as lower employment levels, uncertainties in business or political conditions, higher interest rates, higher tax rates, increased fuel and energy costs, widespread health epidemics like COVID-19, and other related factors can all affect consumer spending, including discretionary spending.
If economic conditions weaken and consumer disposable income decreases, it could lead to a decline in consumer spending or a shift in spending towards competitors. This could result in several negative consequences for the company, including lower net sales, slower inventory turnover, and reduced profitability due to lower profit margins.
Inflation and deflation also affect the sales and operations of Tractor Supply Company. The company faces market risk due to fluctuations in pricing for various commodities and services. Factors such as grain, corn, steel, petroleum, cotton, duties, tariffs, fuel, and transportation costs can create both inflationary and deflationary pressures on product costs. This may impact consumer demand, sales, and gross margin.
Another concern is the company's ability to attract and retain qualified employees. Factors such as labour availability, wage rates, minimum wage laws, demographics, insurance costs, employment legislation, and labour practices can influence the company's ability to meet labour needs and control costs.
Lastly, the company sources its products from various domestic and international vendors, relying on their compliance with laws and indemnification agreements. However, Tractor Supply Company's ability to recover liabilities and costs depends on the financial condition of its vendors. The company does not have significant long-term contracts with suppliers, which makes it vulnerable to inadequate supplies due to various factors. Problems caused by vendors, such as workforce issues or security breaches, could lead to litigation and disrupt Tractor Supply Company's ability to deliver products. Additionally, reliance on foreign manufacturers exposes the company to risks related to international business, including regulations, economic disruptions, shipment delays, currency exchange rates, and political or economic changes. The uncertainty of U.S. tax and trade policies, including tariffs, also poses a potentially adverse impact on its business condition.
Summary for Tractor Supply Company
Tractor Supply Company is the leading retailer specializing in farm-related products in the United States. The company's success can be attributed to its unique range of products and its target customer base, which contribute to its strong brand reputation and economic advantage.
Tractor Supply Company enjoys advantages over its regional competitors due to its expanded product range and presence in less populated areas. The company is committed to catering to the "Out Here" lifestyle of its consumer base, which includes recreational farmers, ranchers, and rural customers, allowing the brand to deeply connect with underserved individuals. The brand continually evolves to add value for outdoor hobbyist consumers, resulting in increased awareness and customer engagement. Initiatives such as in-store pet washing centres, PetVet clinics, pet insurance, and TSC Rx (pet and livestock prescriptions) have led to higher transaction values.
Furthermore, Tractor Supply Company's strong lineup of private-label products enhances its brand reputation. The company's private-label offerings provide customers with exclusive and sought-after products at attractive prices, thanks to dynamic pricing strategies. Tractor Supply Company employs a good, better, and best approach across various product categories, allowing them to engage consumers at different price points. Products such as pet food, livestock feed, and pest control, which are regularly used and require frequent replacement purchases, are also less likely to be substituted by consumers. This reinforces the stickiness of Tractor Supply Company's private-label offerings and solidifies its brand image.
Tractor Supply Company's brand is further supported by its exceptional customer service. The company's associates possess deep knowledge of Tractor Supply Company's specialized product assortment, allowing them to provide valuable advice to customers regarding animal and property care. The commitment to delivering stellar customer service has been cultivated through internal cultural initiatives over time. Recent initiatives like Project Fusion are expected to enhance customer satisfaction by improving store layouts, displays, finishes, and expanding product selections.
Tractor Supply Company's brand gains are also attributed to several factors, including the improved private-label credit card, the implementation of mixing centres to optimize inventory levels, and a robust loyalty program. The enhanced private-label credit card provides valuable insights into localized purchasing patterns among different demographics, enabling the company to optimize its merchandising strategies. Tractor Supply Company's Neighbor's Club loyalty program, with over 30 million members, also provides valuable information about the behaviour of the company's most loyal customers, ensuring appropriate product availability. These factors contribute to the overall strength of Tractor Supply Company's brand and its ability to effectively cater to its customer base.
Tractor Supply Company is safeguarded against brand erosion from new competitors due to various factors. The high capital investment required for market entry discourages potential rivals. Attracting and training skilled staff to provide exceptional customer service, especially in times of labour scarcity, would pose challenges for competitors. Additionally, national competitors would need to acquire or build strategically located distribution facilities to efficiently manage inventory across a wide geographic footprint. Establishing vendor relationships at scale may also prove difficult for outsiders. Tractor Supply Company’s extensive retail presence differentiated product assortment, and superior customer service present significant hurdles for potential rivals. Consequently, the lack of significant competition strengthens Tractor Supply Company's position and minimizes the risk of brand erosion.
In conclusion, Tractor Supply Company's competitive advantages in its unique product range, target customer base, and brand reputation position it as a narrow moat company. The company's commitment to serving the "Out Here" lifestyle of its consumers, coupled with its continuous innovation and value-added initiatives, strengthens its connection with underserved individuals and increases customer engagement. The strong lineup of private-label products further enhances its brand image, offering exclusive and sought-after items at attractive prices. Exceptional customer service, supported by knowledgeable associates and cultural initiatives, adds to the company's competitive edge. The improved private-label credit card, optimized inventory levels, and robust loyalty program provide valuable insights and ensure customer satisfaction. Combined with high barriers to entry, Tractor Supply Company's extensive retail presence and superior customer service make it well-positioned to maintain its brand strength and minimize the risk of erosion.
Tractor Supply Company has showcased remarkable performance over the past five years, with consistent and impressive growth across multiple financial indicators. Notably, the company's revenue has been consistently increasing year over year, reflecting its ability to attract and retain customers. Moreover, Tractor Supply Company has also witnessed a steady rise in net income, demonstrating effective management and operational efficiency. The company's cash flow from operating activities has exhibited a positive trend, highlighting its ability to generate sufficient cash to sustain and grow its business operations. Additionally, Tractor Supply Company has maintained a positive free cash flow, which further reinforces its financial strength and ability to invest in future opportunities. The company's gross margin percentage has remained consistent over the past five years, suggesting effective cost management and potentially increased profitability.
Tractor Supply Company has demonstrated astute capital allocation practices over the past five years, consistently achieving an ROE within the range of 12% to 15% year over year. This indicates the company's ability to generate substantial returns for its shareholders relative to the amount of equity invested. The company's ROE currently surpasses the industry average, highlighting its superior performance in utilizing capital efficiently and maximizing shareholder value. Similarly, the company's ROIC has remained consistently strong and exceeds its WACC, underscoring its ability to generate returns above the cost of capital employed. This suggests that the company is effectively allocating capital to projects and investments that generate higher returns than the cost of financing.
Tractor Supply Company exhibits strong financial health, as evidenced by several key indicators. The company's current ratio, currently at 1.47, surpasses my minimum requirement of 1.0, indicating that it has sufficient short-term assets to cover its liabilities. Furthermore, Tractor Supply Company's debt-to-EBITDA suggests that the company has a manageable level of debt in relation to its earnings before interest, taxes, depreciation, and amortization EBITDA. Additionally, Tractor Supply Company boasts an impressive interest coverage ratio of 39.6, exceeding my minimum requirement of 3.0. This demonstrates the company's ability to comfortably meet its interest obligations using its operating income. Moreover, the company's debt servicing ratio indicates that Tractor Supply Company allocates a relatively small portion of its earnings towards servicing its debt, leaving ample room for reinvestment and growth.
With a solid track record of great performance, effective capital allocation, and a healthy balance sheet, Tractor Supply Company showcases its financial strength and stability. The company has consistently demonstrated impressive financial indicators, including revenue growth, net income, and cash flow, reflecting its ability to generate consistent returns for investors. While the company operates within a narrow economic moat, its past performance suggests resilience in the face of challenges. However, it is crucial to acknowledge the inherent uncertainty in investing, prompting the need for a high margin of safety of at least 30%. By exercising caution and demanding a substantial margin of safety, investors can make a more informed decision when considering Tractor Supply Company as a potential investment.
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