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Tractor Supply Company (TSCO) is a leading rural lifestyle retailer with revenues of $14.88 billion in 2024. It offers the following merchandise from its 2,502 stores and online (Refer to 2024 10K PDF pages 34 and 39 for more details):
Livestock, Equine, & Agriculture (26% of Net Sales)
Companion Animal (25%)
Seasonal & Recreation (23%)
Truck, Tool, & Hardware (16%)
Clothing, Gift, & Decor (10%)
It's a pretty well-diversified set of offerings, and it's non-seasonal, too. Also, TSCO has executed well post-COVID and has been a wonderful stock to own.
Source: TSCO’s 2024 10K
During the recent earnings call in February, TSCO’s CEO went on and on about how he expects the macro environment to improve in 2025.
... we remain confident in our long-term targets and expect to return to them when market conditions return to neutral.
I was more than a little confused as to what he was seeing versus what I was gleaning from the data and ground checks for two reasons:
The agri sector is in the dumps. After all, rural mostly means agri.
Consumer sentiment is bad across all categories.
To be fair, Lawton did go on to explain the headwinds that TSCO has been facing and that he expects those issues to abate over 2025.
Those three factors that I'd highlight would be the in PCE, the reversion from goods to services spend, the second would be underlying deflation in our commodity-related items. And then the third would be stabilization of the pet category.
A few days after the earnings call, the consumer confidence report for February came out, and it was anything but rosy.
The Conference Board Consumer Confidence Index® declined by 7.0 points in February to 98.3 (1985=100).
The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—fell 3.4 points to 136.5.
The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—dropped 9.3 points to 72.9.
For the first time since June 2024, the Expectations Index was below the threshold of 80 that usually signals a recession ahead.
The hammer came down this morning as Yahoo Finance reported comments made by Walmart executives at Citi’s consumer conference.
As per Walmart’s internal survey of 250,000 customers:
There has been a significant decline in consumer sentiment.
Consumers expressed concerns about their purchasing power.
The decline in confidence was across cohorts, regions, and political affiliations.
The bad news didn’t end there. Walmart’s competitors have already raised food prices due to tariff worries. Interestingly, competitors have increased the price of avocados by 15%.
Now, TSCO is impacted indirectly by the increases in food prices, but it is not immune to inflation in grains and steel. During the earnings call, TSCO confidently said that they were not concerned about tariffs or any of their impact. I want to say something here, but I will hold that thought.
We are differentiated as we only have about 12% or so of our sales that are direct imports and have a large key business that is domestically sourced.
This background sets us up nicely to look at TSCO’s numbers, guidance, and valuation.
Financials
TSCO’s Income Statement Highlights
If I just looked at this table, I would have quipped, “The stock must have taken a beating the last few years.” Well, as we saw earlier, TSCO is one of the best-performing retail stocks in the last 5 years. So, what are the observations?
Revenue growth has fallen consistently.
SG&A is increasing. I will get into why soon.
Goes without saying that due to the effects of #1 and #2, operating margins have fallen, and there is no net income growth.
The one bright item is that Gross Margins have held, and Gross Profit growth is higher than revenue growth.
Gross Margin
The reason gross margin improved was due to (refer to pdf page 9 of Q4 2024 earnings call presentation slides):
Low transportation costs
Disciplined product cost management
Ongoing execution of everyday low price strategy
Offset by mix of big ticket growth
Fair enough. Now, who wants to take a guess on whether TSCO can repeat this? History would suggest TSCO can. I will just leave it out here with no further comments on gross margin.
SG&A
So, what caused SG&A to move higher?
This increase was primarily attributable to our planned growth investments, including higher depreciation and the onboarding of a new distribution center, and modest deleverage of our fixed costs, given the level of comparable store sales growth. These factors were partially offset by the team's disciplined focus on productivity and our ongoing emphasis on cost control. We did have a modest benefit from our ongoing sale-leaseback strategy.
All that is fair, but it seems they have lost control over their costs over the last two years despite the commentary.
Goldman Sachs analyst Kate McShane wondered about the lower range of the 9.6% to 10% operating margin guidance for 2025. Here was the response:
... we estimate and forecast that our 2025 operating margin would be more in line and center pointed around the 2024 operating margin. To your second part of your question, the operating margin range that we gave is more concurrent and proportional with the comp sales range of 1% to 3%. So allowing for the appropriate flow-through under the low-end and high-end scenarios on the comp sales range, the 9.6% to 10% operating margin reflects that. We've got a significant opportunity for growth in this business as we've talked about the 2030 initiatives.
Well played. 2030 looks so nice from here, doesn’t it? On the other hand, one should applaud a management with a long-term focus. That brings us to the valuation of TSCO.
Valuation
Let’s start with the guidance for 2025.
For fiscal 2025, we are forecasting net sales growth of 5% to 7% to $15.6 billion to $15.9 billion. Approximately four points of this growth is driven by new stores and Allivet.
In 2024, TSCO opened 80 new stores and had barely any growth. In 2025, TSCO plans to open 90 new stores, and all the CAPEX related to a new distribution center remains, just like the one they opened last year, including all the other “For Life Out Here” programs TSCO is undergoing. Also, Allivet is a pet pharmacy TSCO acquired for $135 million last year and has just started integrating it.
It just doesn’t add up. That extra four points from these two items just doesn’t square. Hence, I would cut the growth guidance to 2% from the mid-point of 6%.
Without doing too many gymnastics with valuation models, I would keep it real simple. Divide the current price by three. That would give a fair value of 53/3 = 17.67. Blasphemy, you say? OK. With their moat and the dream of 2030, let’s divide it by two. 53/2 = 26.5. At the end of the day, it is just my opinion. We can agree to disagree nicely.
All that said, TSCO is a great company and is not going anywhere. However, like everything else in life, given the current situation and what I have discussed here, one does need to reevaluate the valuation attributed to TSCO.
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