Sunday, August 15, 2010

Company Focus: Tractor Supply Company

The term, “gentleman farmer”, evokes for me an image of the English countryside. I see tidy villages and thatch roofs. Closer to home, I see the retail farm and ranch stores operated by Tractor Supply Company (Nasdaq: TSCO). Tractor Supply is the largest retail farm and ranch store chain in the United States. The Company operates more than 900 retail stores in 44 states in town’s outlying metropolitan markets and rural communities. It also sells through a website.
Tractor Supply is a niche retail operation. Its stores compete with the big-box home centers Home Depot and Lowes but provide a more specialized experience and product line. The Company sells equine, pet and small animal products, including health-related products and feed, among others; hardware and seasonal products including lawn and garden supplies and equipment; clothing for the entire family; and, maintenance products for the farm.
For FY10, the Company anticipates net sales to range from $3.49 billion to $3.53 billion and EPS to range from $4.00 to $4.10. Analyst estimates range from $4.03 to $4.23. The consensus forecast is for FY10 EPS of $4.11. It seems the analysts are a bit more optimistic than the Company. In 2Q10, net sales increased 12.6% to $1.07 billion from $946.5 million in the prior year second quarter. For the first six months of 2010, net sales increased 11.3% to $1.78 billion from $1.60 billion in the first six months of 2009.
In the second quarter, net income was $76.5 million, or $2.05 per diluted share, compared to $54.8 million, or $1.50 per diluted share in the prior year period. The first half of FY10 saw net income growth. Net income during the first six months of 2010 was $85.8 million or $2.31 per diluted share compared to net income of $55.2 million or $1.51 per diluted share for the first six months of 2009.
We are seeing growth in the top line sales and in diluted EPS. We also see expansion of gross margins. Gross margin increased in 2Q10 to $358.8 million or 33.7% of sales, compared to $301.2 million or 31.9% of sales in the prior year quarter. For the trailing twelve month period ending 6/2010, gross margin is 33.1%; higher than any prior fiscal year back to 2005. Similarly, the operating margin of 6.8% was higher than in previous years.
The Company reports very high levels of efficiency. Return on equity is 19.6% and return on assets is 11.3%. The current ratio is a healthy 2.1X the liabilities to assets ratio is a moderate 40.1%. The Company reports a nominal $1.2 million in long term debt. TSCO has cash flow of $2.41 per share and free cash flow of $2.78 per share. Tractor Supply is funding organic growth through the prudent use of cash flow. During the first six months of 2010, Tractor Supply opened 38 new stores and closed one store.
The Company declared a quarterly cash dividend of $0.14 per share and the board of directors approved a two-for-one stock split. Annualized, the dividend is $0.28 per share and represents a payout ratio of 7.0%. The dividend yield is approximately 0.8%.
With a TTM price-earnings ratio of 17.4X and a forward PE of 16.7X, TSCO is trading at a premium to the market. The long-term average PE is about 20X so TSCO is selling at a discount to its historical average. The EV/EBITDA ratio is about 7.75X; a relatively modest ratio.
Disclosure: Author has a long position with TSCO.
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