Lackluster Results Provide An Opportunity In Tractor Supply Company

Tractor Supply Company Plows Ahead With Growth 

Tractor Supply Company (NASDAQ: TSCO) reported better than expected Q2 results and raised the guidance and yet shares fell because of it. Shares fell because the results and guidance, while favorable, are lackluster in regard to the analyst's estimate. While this is a shortcoming for the company it is not, however, a sign of impending doom and has the stock set up for its next move higher. The takeaways from the report are that Tractor Supply Company is not only supported by a shift to a rural lifestyle but it also has pricing power. Pricing power enough to offset the pace of inflation and keep the oh-so-safe 1.85% dividend on track for future growth. Oh yes, and the company reported a gain in market share versus names like Target (NYSE: TGT), Walmart (NYSE: WMT), and Costco (NASDAQ: COST). 

Tractor Supply Company Falls On Strong Results 

Tractor Supply Company may have produced tepid results in regard to the analyst’s estimates but that does not mean it didn’t have a stellar quarter. The company produced $3.9 billion in net revenue for a gain of 8.3% over last year and a company record. To put this in perspective, this is the 5th consecutive year of YOY revenue growth in the 2nd quarter and it is on top of a 13% gain last year and a 34% gain the year before. As for the analysts and their estimate, the revenue beat the consensus by a slim 25 basis point margin that tells us the growth was priced in already. On a comp basis, comp sales rose by 5.5% on a 7.5% increase in ticket average offset by a 2% decline in ticket count. The company also says sales were underpinned by everyday items, consumables, and year-round merchandise which suggests to us the gains are sticky. 

Moving down to the margin and income, the news is equally mixed if biased in favor of the bulls. The company reported a 24 decline in gross margin that was offset by a 19 basis point improvement in SG&A as a percent of revenue. The margins were impacted by rising costs and increased wages offset by higher price realization and leveraging of fixed costs. This left the operating income up 8.1% versus last year and the GAAP EPS at $3.53. The GAAP EPS is up 10.65% over last year and beat the consensus by a slim $0.01. 

And the guidance is mixed as well with the company raising the outlook for both revenue and earnings but earnings are only in-line with the consensus. The company is expecting revenue in the range of $13.95 to $14.05 billion versus the consensus $13.79 but the earnings guidance is weak. The EPS is expected in a range of $9.48 to $9.60 compared to the consensus of $9.58, a consensus that is expecting inflationary pressures to ease. 

“Given the strong performance in the first half of the year, ongoing consistency of our sales performance, visibility into our cost structure and quality of our inventory, we are raising our financial outlook for the full year. We believe Tractor Supply is uniquely positioned for growth with a resilient, domestic business model that has stood the test of time, despite our outlook for a highly inflationary and volatile environment,” said CEO Hal Lawton. 

The Technical Outlook: Tractor Supply Company Confirms Support

Tractor Supply Company fell more than 5.0% in the wake of the earnings report but that is the end of the bad news. The price action touched our support target at $192.50 and bounced higher confirming support at this level. The candle formed is a strong Hammer Doji that suggests not only has a bottom been hit but that a rebound could ensure. Based on the analyst's consensus rating and the trend in sentiment, we think the rebound could take the stock up to the recent highs near $240 for a gain of 25%.