Tractor Supply In The Red: Can Strategies Aid Turnaround?

Tractor Supply Company (NASDAQ:TSCO) seems to be in the soup at the moment due to challenging economic backdrop at the agricultural and energy sectors. This has been taking a toll on consumer spending and been weighing on Tractor Supply’s top-line performance for a while now.

The company’s stock performance has been impacted tremendously by this turn of events. Evidently, shares of Tractor Supply have declined 24.8% year to date, while the Zacks categorized Retail – Miscellaneous industry has dipped 3.3%.

Further, this Zacks Rank #4 (Sell) company’s estimates have witnessed a downtrend. The Zacks Consensus Estimate for 2017 fell by 9 cents to $3.42 per share in the last 60 days, while estimates for 2018 declined by 3 cents to $3.78 per share in the last 30 days.

More on the Slump

Tractor Supply posted in-line earnings in first-quarter 2017 after beating the same in the preceding two quarters. While the company’s revenues came marginally ahead of estimate in first-quarter 2017, comps declined owing to a fall in comparable transaction count and average ticket. Further, comps were hurt by soft seasonal merchandise sales, along with deflationary pressure.

Moreover, the company’s margins continued to be pressured with gross margin contracting 60 basis points (bps) and operating margin falling 120 bps. Gross margins were hampered by increased markdowns on cold weather merchandise, higher promotional activities as well as due to rise in freight expense for consumable, usable and edible (C.U.E.) products. Apart from lower gross margin, increased selling, general and administrative (SG&A) expenses impacted operating margins.

Additionally, stiff competition from other players and seasonal nature of the company’s business remain threats.

Is this Temporary?

However, Tractor Supply remains well poised for growth given its smooth progress on store expansion and technological advancements. The company remains on track with initiatives, which enable it to generate healthy sales and gain market share.

Management believes that given the seasonal nature of its business, the company should rather be measured by its half-yearly than the quarterly performance. While the first quarter was challenging, the company remains hopeful of the spring selling season, wherein it anticipates seasonal merchandise sales to witness some improvement. The company’s upcoming merchandise strategies and constant implementation of its cross-network consumer-centric growth plans further reflect its spring season prospects.

Further, this was reconfirmed with the company’s expansion of Neighbor's Club and Buy Online Pick Up In Store programs. Meanwhile, it had earlier announced the conclusion of the national rollout of Neighbor’s Club loyalty program, which commenced in Oct 2015.

Additionally, the company expects to continue returning value to shareholders in the form of share buybacks. In 2017, the company anticipates debt position at year-end to range within $400–$450 million.

Bottom Line

While the company’s growth prospects and optimism for the spring season are noteworthy, we cannot ignore the current trends in the agricultural sector and its dependence on seasons. Thus, we would prefer to wait for more positive news on the stock before becoming optimistic.

Stocks to Consider

Better-ranked stocks in the same industry include Big 5 Sporting Goods Inc. (NASDAQ:BGFV) , Build-A-Bear Workshop Inc. (NYSE:BBW) , both sporting a Zacks Rank #1 (Strong Buy), and Office Depot Inc. (NASDAQ:ODP) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big 5 Sporting has an average positive earnings surprise of 94.5% in the trailing four quarters. The stock has a long-term growth rate of 12%.

Build-A-Bear Workshop has a long-term EPS growth rate of 22.5%. Further, the company has to its credit a spectacular earnings surprise history with an average beat of 67.5% recorded in the trailing four quarters.

Office Depot, with a long-term earnings growth rate of 11.4%, has advanced nearly 24.4% year to date.

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