Tractor Supply Company can plow its way to new highs in 2024

Key Points

• Tractor Supply Company had a solid quarter, but results were as expected, and the guidance was tepid. 
• Cash flow and capital returns remain robust and will continue to pay shareholders and reduce the share count in 2024. 
• Analysts support the stock but may not provide a catalyst until later in the year. 

Tractor Supply Company NASDAQ: TSCO can plow new heights in 2024, but it may be a tough slog for share prices and shareholders. While the fundamental picture is solid and the outlook for capital returns robust, the headline results may weigh on the price action. The company issued a tepid outlook for the year, expecting only mild top-line growth and a steady margin, which is not a catalyst for a rally in most cases. 

Margin, cash flow, the balance sheet and capital returns will drive this market.

Tractor Supply Company harvests earnings quality 

Tractor Supply Company has benefited from the dual tailwind of pandemic-related spending and a CEO-led turnaround for years. Now, with COVID-affected spending habits normalizing or normalized, the story is grounded in the efforts of CEO Hal Lawton, who continues to pay off for this retail stock. The Q4 results reflect the impact of receding demand and the company's strengths, including cost-effective operations, consumer loyalty and margin quality. 

Tractor Supply Company reported $3.66 billion in revenue, a decline of 8.7% compared to last year and as expected. However, the decline is partly due to one less week in the operating period, worth 560 basis points, and the comp to last year is tough. 

The Q4 revenue in F2022 was a record $4.01 billion, up 20% from the prior year's record, leaving this year's take the second-highest Q4 on record. In this light, a little giveback is nothing for investors to worry about. Comps are down, but traffic remains solid with an increasing store count to provide leverage. The company added 22 new net stores in Q4 for a year-over-year (YOY) gain of 0.8%, and expansion should continue in 2024. 

Margin news is good. The company lowered its gross margin and SG&A expenses compared to last year, strengthening the bottom line. The gross margin improved by 130 basis points, and SG&A fell by 400 bps but increased as a percentage of revenue to leave the GAAP earnings at $2.28 — six cents, or 260 bps, better than the MarketBeat.com consensus estimate, and plays into the capital return outlook. 

Guidance for next year is slightly below consensus but calls for modest top-line growth and steady earnings, sufficient to sustain the robust capital return outlook.

Tractor Supply Company builds shareholder value 

Tractor Supply Company is building value by growing the business and repurchasing shares. Repurchases in F2023 were enough to decrease the diluted share count by 2.2% YOY, including share-based compensation and share sales. The Q4 repurchases more than doubled the dividend yield, solid at 1.8%. Guidance for the year includes an expectation for repurchases to be steady in 2024 compared to 2023, with a dividend hike to compound it. 

Tractor Supply is a solid distribution growth stock on track to reach Dividend Aristocrat status. The company has increased for 14 consecutive years and pays less than 40% of its earnings, with growth expected over the long term. The balance sheet has low leverage, a growing cash pile and shareholder equity. Equity is up 5% YOY after rising 20% in F2022. 

The technical outlook: Tractor Supply Company is range-bound

Tractor Supply Company has been range-bound for three years and is unlikely to break out of it now. The post-release action has the market moving lower and may soon retest support at the range's middle. That is the critical target, and short-sellers are in the mix. Short interest was over 10% at the last report and may not fall much now. 

A move below the midpoint range could take the stock down to the low end near $190, but if support is confirmed, a move to the high end should be expected. Among the potential catalysts for a new high is the dividend. The next distribution increase is expected soon and may be large. The company is running a 30% CAGR, but recent increases have been closer to 10%, which is likely now.