Why Is Tractor Supply (TSCO) Up 17.6% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Tractor Supply (TSCO). Shares have added about 17.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Tractor Supply due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Tractor Supply Q1 Earnings Beat Estimates, Sales Match

Tractor Supply reported first-quarter 2020 results, wherein the bottom line surpassed the Zacks Consensus Estimate, while sales came in line. The company also noted that the second quarter has started on a solid note.

However, management withdrew its 2020 guidance on account of uncertain COVID-19 impacts. The company further anticipates incurring operating costs of $30-$50 million during the second quarter.

Q1 Highlights

Tractor Supply’s adjusted earnings were 71 cents per share, which exceeded the Zacks Consensus Estimate of 70 cents. Moreover, the bottom line improved 12.7% from the prior-year quarter. However, the company has incurred additional costs of roughly $7 million related to COVID-19, including bonus payments to frontline team members, medical and sick leave coverage, and sanitation and safety supplies. 

Net sales grew 7.5% to $1,959.2 million and were in line with the Zacks Consensus Estimate of $1,960 million. The year-over-year improvement was driven by comparable store sales increase of 4.3%, led by growth of 5.4% in average ticket. Meanwhile, comparable store transaction count declined 1.1%.

The solid comparable store sales performance was backed by strength in the consumable, usable and edible categories. Also, healthy demand in spring seasonal products also contributed to comparable store sales growth. However, adverse weather and softness in certain seasonal merchandise and discretionary categories acted as deterrents.

Margins & Costs

Gross profit rose 7.5% year over year to $661.2 million, with gross margin expansion remaining flat at 33.8%. This was mainly due to lower transportation costs as a percent of sales, which was somewhat offset by sturdy sales in consumable merchandise and higher markdowns of winter merchandise.

Selling, general and administrative (SG&A) expenses, including depreciation and amortization, as a percentage of sales declined 7 bps to 28%. Occupancy and other fixed costs leverage stemming from comps growth, along with gains from a legal settlement led to the improvement.

Financial Position

Tractor Supply ended the quarter with cash and cash equivalents of $461.5 million, long-term debt of $989.1 million and total stockholders’ equity of $1,353.7 million.

The company repurchased roughly 2.9 million shares for $263.2 million and paid out dividends of $40.9 million in the reported quarter. Additionally, it incurred capital expenditure of $29.6 million and generated cash flow from operating activities of $83.9 million. However, management suspended its share repurchase program from Mar 12. Moreover, the company continues to expect capital expenditure of $225-$275 million for 2020.

Further, the company has drawn $200 million from the revolving credit facility to strengthen its financial position. However, it does not intend to suspend or lower its cash dividend.

Store Update

In the quarter under review, Tractor Supply opened 20 namesake stores and shuttered one Del’s outlet. As of Mar 28, the company operated 1,863 Tractor Supply stores across 49 states and 180 Petsense stores in 26 states. Management remains on track with its store opening initiatives. However, some store openings might be delayed owing to government restrictions stemming from the COVID-19 crisis.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Tractor Supply has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Tractor Supply has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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