This Is The Most Virus-Resistant Retail Stock On The Market?

And The Winner Is?

When it comes to the market and who wins and who doesn’t the only votes that count are dollars. Looking at the market and using percentage gain as the measure there is a clear winner when it comes to the pandemic. Up nearly 50% from its pre-correction levels, Tractor Supply Co. (TSCO) just announced some news that has the stock even higher in today’s action. The company is expecting record-setting sales in the current quarter and for that strength to carry through into the future.

If you think about it for a minute it makes sense. In terms of businesses that stayed open Tractor Supply Co is not only essential but well-positioned to benefit from stay-at-home/home-improvement trends. If you are unaware there is a trend in home improvement just look at results from Home Depot (HD) and Lowe’s (LOW). Neither of them has seen much negative impact from the pandemic, far from it.

In terms of its “essentialness”, Tractor Supply Co. is a leading provider of tools, supplies, and equipment for our nation’s farmers. While the food system is largely corporate operated, much of the original product comes from localized sources who rely on Tractor Supply Co. for day to day operational needs. And then there is the whole farm-to-table, locally grown, organic, farmer’s market crowd. The bottom line, Tractor Supply Co. is coming into its forte and there is no reason to think strength will not continue long into the future.

What, Exactly, Did Tractor Supply Co. Say?

In a press release this morning, Tractor Supply issued newly updated guidance for the fiscal second quarter. The company says it is expecting record-breaking sales and earnings with comps in the range of 20% to 25%.

Revenue growth is expected in the range of 25% to 29% with a more-than commensurate increase in bottom-line results. Gross margin expansion is expected to occur in the quarter but increases in costs related to COVID-19 will eat into the bottom-line figure. Oh well.

The costs related to COVID-19 include raises for front-line staff, added benefits for part-time staff, and appreciation bonuses. Today’s news includes updates to those policies including an extension of bonuses eligibility periods and the decision to make raises for front-line employees permanent.

“Our outlook for record-breaking sales and earnings in the second quarter demonstrates the potential for Tractor Supply to emerge stronger than before as we continue to gain market share and build our business for the future,” said Hal Lawton, Tractor Supply’s President and Chief Executive Officer.

An eCommerce Play, But There’s A Risk … And A Dividend

It should also be no surprise that much of Tractor Supply Co.’s strength can be attributed to its eCommerce sales channels. Merchandise can be ordered for delivery but the more popular option seems to be online order/curbside pickup. Other retailers, notably the aforementioned Home Depot and Lowe’s, are also having great success with this model.

The risk is that future comps won’t be so good. While it is expected Tractor Supply’s strength will continue, it should also be expected that comp sales will cool off a bit over the next year. That said, a 25% increase in comps this year offset by a -5% or even -10% decline next year is still a double-digit gain over the two-year period.

The mitigating factor, in my eyes anyway, is the dividend. The yield is not that great at today’s prices but the payment is safe and there is a high expectation for aggressive growth. The company’s five-year distribution CAGR is running at 17.25% with 9 years of increases under its belt.

It should be noted, management chose not to raise the payout with the last declaration. The last declaration, for the fiscal 1st quarter, was just a few weeks ago, but that doesn’t mean they won’t increase the distribution again. The payout ratio before today’s update was a cool 28%. The ratio after today’s update is more like 14.25%. Simply increasing the distribution to match the old pay-out ratio puts the dividend at $0.68. That’s a gain of nearly 100% so there is room in the budget and reason in the outlook to expect one, and possibly soon.

The Technical Outlook: A Bullish Break Out Is In-Play

The technical action in Tractor Supply Co. has been bullish over the past two months and looks like it is going to stay that way. The stock began its rebound based on valuation, yield, and positioning and the rebound has only gained strength since. Now, the stock is breaking above its previous all-time high and firing a very-bullish continuation signal.

The stochastic is already firing a trend-following bullish crossover and that will be confirmed by the MACD after today’s action. Assuming prices remain above the old high, that is. If that happens there may be a chance to scoop up this gem in the $100 to $105 range, but I wouldn’t hold my breath waiting for it.