Tractor Supply Company

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Tractor Supply Company is the largest retail chain of rural lifestyle products in the U.S. It caters to farmers, ranchers, and home owners, offering a diverse selection of merchandise.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Tractor Supply Company (TSCO), founded in 1938, is the largest rural lifestyle retailer in the United States, operating over 2,314 stores across 49 states. They have positioned themselves as an essential retailer within their niche, with a robust supply chain and strategic retail store locations.

  • Target Market: TSCO’s customer base is primarily composed of farmers, ranchers, livestock and pet owners, and general home and land enthusiasts. They typically target individuals who live in rural and semi-rural areas, which is a niche market segment for their needs.
  • Product Range: The company offers a broad array of products, catering to various needs. They offer a wide variety of items from livestock equipment to animal feed, farming supplies to clothing and outerwear, power tools to home maintenance products, lawn and garden equipment to truck parts. They offer over 45,000 products. It’s important to note that consumables comprise a significant part of their sales.
  • Business Model: Tractor Supply operates a retail business that has been successful because it is located near the customers and convenient. These stores serve as a one-stop shop for their target demographic. TSCO leverages its physical stores with an online presence, allowing customers to buy online but pick up in-store.
  • Supply Chain and Distribution: The company has an expansive distribution network, that includes nine distribution centers, 1000 trucks, 3345 dedicated carriers, 4000 suppliers and distribution through 21,428 independent store employees. 95% of their stores are within 15 miles of their customers and this close proximity is a huge differentiator. This means they are very well-equipped to move product around the country and serve their customers at minimal costs.

Financial Analysis Recent financial performance suggests a robust and well-performing company. Let’s analyze the recent filings. All figures will be for the 13-week period ended September 30, 2023, unless specified otherwise.

  • Revenue Growth: The Company’s consolidated net sales for the quarter totaled $3.88 billion, marking an increase of 5.1% from the corresponding period of 2022. This growth was driven by both comp store sales growth of 1.8%, and by 17% in sales coming from the acquisition of Orscheln Farm & Home LLC, and a 3.5% contribution from new store openings. These numbers show that TSC continues to be a growing business, with sales coming from both organic and strategic avenues.
  • Gross Profit: The company recorded a gross profit of $1.33 billion, that was up 7% compared to the previous year quarter. Gross profit as a percent of sales was 34.2%, which was also higher than last year at 33.7%. The increased gross profit implies that they are able to leverage their economies of scale.
  • Net Income: Net income for the three-month period ended September 30, 2023, totaled $0.47 billion and earnings per share (EPS) was $2.33 a share. For the same time period in 2022, net income was $0.44 billion and $2.11 in EPS. The rise in earnings is encouraging as well.
  • Year-To-Date Numbers: For the fiscal nine months ended September 30, 2023, the company had revenue growth of 8%, gross profit increase of 9.1%, and net income growth of 9.2%. This has resulted in EPS of $7.02 in those nine months compared to $6.59 in the same period last year.
  • Cash Flow: Free cash flow for the fiscal nine months ended September 30, 2023 totaled $134.4 million. This is a substantial decrease from the free cash flow of $620 million the previous year period. This difference is mainly due to increased investment in inventories, property, plant and equipment, and other assets.
  • Debt: Total debt is $1.618 billion, with interest expense of $67.5 million in the nine month period. It is very well covered by their operations. Debt levels are a reasonable 10-20% of capitalization.
  • Capital Structure: Total Stockholder’s Equity is $2,186.3 million. Total assets are $8,416.6 million. Debt is under 20% of capital structure.
  • Dividends & Share Repurchases: Total dividends paid in the first three quarters of 2023 was approximately $100 million. In the same period, they spent approximately $400 million on share buybacks. This returns capital to shareholders in a meaningful way.
  • Guidance: For 2023, management expects sales of 12.3%-12.8%, EPS of $10.15-$10.25, and capital expenditures of $420 to $440 million.

Moat Analysis

TSCO benefits from several competitive advantages, but their overall moat is probably a 3.

  • Customer Switching Costs: TSCO customers tend to be very loyal. It’s often difficult for competitors to easily take them away. This is due to how localized these stores are, their convenience, and that customers have a specific relationship with their local store and workers. While customers might have a good relationship, these switching costs are not really that high compared to other moaty businesses like software, or infrastructure businesses. So this is a good competitive advantage, but not a massive one.
  • Economies of Scale and Location: TSCO’s business model is very scale-dependent. Having numerous stores within their geographic niche and a strong distribution network make it very tough for a competitor to take on. Companies have been unable to compete directly with TSCO in its markets. It also has a lot of stores within its current geographies that would make less sense for a competitor to open one beside it. It also leverages its scale to have a more efficient distribution network and obtain lower input costs.
  • Brand Recognition: While TSCO may not have a “brand” like some big consumer companies, it has a strong presence and recognition within its niche. Brand recognition often translates into higher customer loyalty and a greater willingness to pay a premium, which TSCO benefits from.
  • Limitations Unlike software or subscription businesses, there is no recurring revenue or inherent lock-in to the company. This makes it very vulnerable to competition as if a competitor does open near it, it is not that difficult for consumers to check out the prices and switch. While it’s hard to get a lot of new stores in any particular area, the underlying moat of the business is not as strong as other businesses.

Moat Rating: 3/5. TSCO possesses several competitive advantages, mostly driven by cost efficiencies, brand recognition, high switching costs, and an extensive distribution network. The scale of the operations and the fact that a new entrant will have to come up with an equivalent strategy to try to compete provide some degree of protection. However, it’s not a business with enormous recurring revenues, and competitors can easily open near a TSC and try to steal customers, so there is still competition in this niche space.

Risks and Resilience TSCO’s business is subject to some key risks that must be monitored.

  • Economic Downturns: A recession could lead to changes in discretionary spending and put downward pressure on TSCO’s revenues, since many customers purchase more when the economy does well. However, since their products are also focused on necessities for the customers, they do have more resilience than others.
  • Competition: While TSCO is dominant, it cannot stop competition entirely, or keep it from growing. If a competitor develops a strong value proposition and lower prices, TSCO will have to adjust its prices which could hurt profit margins.
  • Supply Chain Disruptions: Since the company sells physical goods, it has to rely on a functioning supply chain to continue to supply the goods. Issues could arise from transportation and delivery problems, or disruptions from suppliers. This is something that management has recognized, and made a focus.
  • Pricing Volatility: A great portion of TSCO’s inventory and sales is tied to prices of products such as commodities and feed. Volatility in these commodities could lead to less predictability in revenues and margins. While its prices are sometimes fixed for months, it can’t completely protect itself from these volatility risks, but management has been focused on this.
  • E-Commerce Growth: Online retailers like Amazon and other major players can potentially eat into TSCO’s business if they focus on its niche market. The fact that many of TSCO’s customers are rural should protect them to a certain extent, but this remains something to monitor.

In terms of resilience, TSCO has a strong brand name in its niche markets, a large store base, and management has been operating the company profitably for many decades. However, all these advantages are still subject to competition as the company has not grown to a monopoly-like position.

Understandability: 2/5

While TSCO’s business model is easy to describe—selling rural and lifestyle products—the nuances in assessing its competitive positioning, supply chain, and how its earnings vary is a bit more difficult to analyze and understand. Hence a rating of 2.

Balance Sheet Health: 4/5

TSCO has a good balance sheet with healthy cash levels, stable assets, and a fairly low level of debt compared to its total value. While its free cash flows recently are less than prior years due to more capital spending, they should quickly return to good levels due to the growth and stability in the business. Hence the 4/5.