February 20, 2015 Tractor Supply Company Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 08/07/2012 Current Price (02/19/15) $85.57 Target Price $90.00 52-Week High $85.57 52-Week Low $57.15 One-Year Return (%) 31.15 Beta 1.08 Average Daily Volume (sh) 1,013,595 Shares Outstanding (mil) 136 Market Capitalization ($mil) $11,632 Short Interest Ratio (days) 6.03 Institutional Ownership (%) 93 Insider Ownership (%) 1 SUMMARY Risk Level * (TSCO-NASDAQ) Backed by improved traffic and ticket, Tractor Supply ended 2014 on a solid note with better-than-expected top and bottom-line results for the fourth quarter and full-year 2014. Thereafter, the company issued a favorable guidance for full-year 2015 which triggered an uptrend in the estimates for 2015. Tractor Supply is progressing well with its growth plans, including the expansion of store base and incorporation of technological advancements to serve clients better. Going forward, the company will remain focused on managing inventories, shipment timings and marketing strategies, with an aim to induce traffic and drive sales. However, we remain cautious due to the sluggish economic recovery and challenges posed by rising material costs. Also, the company s business being seasonal in nature, may impact its financial condition and operational results. Hence, we maintain our longterm Neutral recommendation on the stock. Average, Type of Stock Large-Growth Industry Retail-Misc/Div Zacks Industry Rank * 73 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $0.64 Dividend Yield (%) 0.75 5-Yr. Historical Growth Rates Sales (%) 12.2 Earnings Per Share (%) 26.1 Dividend (%) 45.8 using TTM EPS 32.2 using 2015 Estimate 28.1 using 2016 Estimate 24.4 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page 2013 1,086 A 1,456 A 1,208 A 1,415 A 5,165 A 2014 1,184 A 1,584 A 1,360 A 1,584 A 5,712 A 2015 1,317 E 1,752 E 1,483 E 1,732 E 6,283 E 2016 6,877 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.31 A $0.88 A $0.46 A $0.68 A $2.32 A 2014 $0.35 A $0.95 A $0.55 A $0.81 A $2.66 A 2015 $0.41 E $1.10 E $0.63 E $0.90 E $3.04 E 2016 $3.51 E Projected EPS Growth - Next 5 Years % 19 (Note: Qtly. fig. may not add up to annual fig. due to rounding off.) 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in Brentwood, TN, Tractor Supply Company is the largest retail farm and ranch store chain in the U.S. The company operates in 49 states in the U.S. through 1,382 retail stores and employs more than 13,000 team members. Tractor Supply focuses on recreational farmers and ranchers as well as tradesmen and small businesses. The company offers a wide array of merchandise such as livestock, pet and animal products, maintenance products for agricultural and rural use, hardware and tools, lawn and garden power equipment, truck and towing products, and work apparel. Stores of Tractor Supply are primarily located in rural areas and the suburbs of major cities, which have inside selling space of 15,000 19,000 square feet with a similar area of outside space, used to demonstrate agricultural fencing, livestock equipment and horse stalls. Tractor Supply s broad assortment of products is tailored to meet the regional and geographic needs of its markets. Moreover, the retailer s full line of product offerings is supported by a strong in-stock inventory position with an average of 16,000 19,500 unique products per store. Apart from selling nationally recognized branded merchandise, the company also markets an increasing list of products under its private-label programs. The latter include Masterhand and Job Smart (tools and tool chests), Dumor and Producers Pride (livestock feed) and Retriever and Paws n Claws (pet foods). REASONS TO BUY Estimates Rising on Strong Q4 and 2014 Results: Tractor Supply delivered solid fourth-quarter and full-year 2014 results as both top and bottom lines surged from the year-ago quarter and beat estimates. Results benefited mainly from improvement in both traffic and ticket which led to solid increase in sales, operating margin and earnings. Consequently, management issued a favorable guidance for full-year 2015, following which, the company s earnings estimates for the year has displayed an uptrend over the past 30 days. Growth Initiatives Bode Well for the Company: Tractor Supply s growth initiatives are well on track. These include expansion of its store base and incorporation of technological advancements to serve clients better, with an aim to induce traffic and in turn drive top line. Most recently, the company declared plans to introduce a new store in Eunice, LA and construct a distribution center in Casa Grande, AZ. The latter is likely to generate supply chain efficiencies by lowering commuting costs, apart from extending its operations to the Western regions. Prior to this, the company had announced its expansion to Utah, after which it has operations across all U.S. states except Alaska. The company leverages an extensive network of stores to penetrate into target markets, which in turn, enables it to generate healthy sales and gain market share. In keeping with this strategy, it has added 107 new stores in 2014. As of Dec 27, 2014, Tractor Supply operated 1,382 stores in 49 states, with plans to open about 110 115 new stores in 2015. Better Product Assortments: Tractor Supply has successfully modified the merchandise assortment across its stores, in line with the prolonged economic downturn. The company has increased the proportion of less discretionary items such as animal and pet-related products, while reducing shelf space for certain big-ticket merchandise such as outdoor power equipment. We believe that the company s sustained focus on expanding its core business in key markets is a significant growth driver. Equity Research TSCO Page 2
Efficient Inventory Management: Over the years, Tractor Supply has been focused on efficiently managing its inventories to minimize the impact of weather on its business. This evolution on the inventory front was noticeable in the recent quarterly results of the company, wherein inventory turnover ratio improved to 3.32 times. With its inventories at a controlled level, the company is all set to capitalize on seasonal demands. REASONS TO SELL Competitive Threat: The company s business is highly competitive, primarily based on customer services, price, store location and assortment of merchandise. The company faces stiff competition from local, regional and international players. Being in such a highly competitive industry, Tractor Supply may find it difficult to execute and implement new business strategies, which could consequently impact its operations adversely. Impact of Macroeconomic Factors: The company s customers are sensitive to macroeconomic factors including increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company s growth and profitability. Seasonality Risk: Tractor Supply's business is highly seasonal, with sales and profits soaring in the spring and winter selling seasons on the back of seasonal demand for its merchandise offering. Unseasonable weather, heavy precipitation, drought conditions and early or late frosts may have a material impact on the company s financial condition and its operational results. RECENT NEWS Tractor Supply Goes the Extra Mile with 1,400th Store Feb 17, 2015 Tractor Supply appears on track with its expansion plans as it announced that it will soon open its 1,400th store in Eunice, LA. The new store, which will start operating on Feb 21, will mark a milestone in the company s growth trajectory. Tractor Supply currently operates across all of the U.S. states except Alaska. We believe that the company continues to progress well with its growth initiatives, which include expanding its store base and incorporating technological advancements to serve clients better. The company leverages an extensive network of stores to penetrate into target markets, which in turn, enables it to generate healthy sales and gain market share. In addition to widening its store base, the company furthered the expansion plans with the construction of a distribution center in Casa Grande, AZ. The facility, with an expected size of 650,000 square feet, is anticipated to begin operations in the fourth quarter of 2015. Further, the company implemented significant changes in its store operations to make them simpler and customer-friendly. We believe these initiatives will lead to traffic growth in its stores and also boost the top line. Equity Research TSCO Page 3
Tractor Supply Beats on Q4 Earnings, Initiates 2015 View Jan 28, 2015 Tractor Supply reported better-than-expected earnings results for the fourth quarter as well as for fullyear 2014. The company s earnings per share of $0.81 for the fourth quarter were 19.1% higher than the prior-year quarter and ahead of the Zacks Consensus Estimate of $0.76. For full-year 2014, earnings of $2.66 per share surged 14.7% from $2.32 per share reported in 2013 and also surpassed the Zacks Consensus Estimate of $2.61. Results benefited mainly from strong sales, driven by improved comparable-store sales (comps), increase in operating margin and lower expenses as a percentage of sales. Revenue Tractor Supply reported fourth-quarter sales of $1,584.3 million, marking a 12% rise from $1,415.1 million in the prior-year quarter and beating the Zacks Consensus Estimate of $1,574 million. Comps improved 5.3%, against a 3.5% increase registered in the fourth quarter of 2013, aided by increased traffic and ticket. Comps also gained from sustained strength in consumable, usable and edible (C.U.E.), and big ticket products, along with strong sales of winter-related goods. During the quarter, comparable store transaction count was up 3.0%, while average ticket rose 2.3%. For full-year 2014, the company reported net sales of $5,711.7 million, up 10.6% from $5,164.8 million in the prior year, backed by a 3.8% increase in comps. Net sales for the 2014 also surpassed the Zacks Consensus Estimate of $5,698 million. Quarter in Detail The company s gross margin increased 10 basis points (bps) to 34%, benefiting from better price management and fewer markdowns of seasonal products due to strong demand for winter goods, partly offset by increased transportation costs. In dollar terms, gross profit escalated 12.5% to $539.6 million compared with $479.7 million in the prior-year quarter. Selling, general and administrative expenses (SG&A), including depreciation and amortization, as a percentage of sales, fell 70 bps to 22.8% due to lower store operating costs that resulted from strong comps growth and lesser incentive compensation expense. On a stand-alone basis, SG&A expenses rose 8.5% to $331.8 million, in dollar terms, while depreciation & amortization expense came in at $30.1 million, 11.5% higher than the year-ago quarter. Operating income for the quarter rose nearly 21% to $177.7 million. Operating margin expanded 80 bps to 11.2%, as against 10.4% in the prior-year period. Financial Position Tractor Supply ended the quarter with cash and cash equivalents of $51.1 million, compared with $142.7 million at prior-year quarter end. As of Dec 27, 2014, stockholders equity was $1,293.6 million, compared with $1,246.9 million as of Dec 28, 2013. Store Update In the fourth quarter of 2014, Tractor Supply opened 22 new stores and closed one store, compared with the addition of 31 stores and no closures in fourth-quarter 2013. Hence, during 2014, the company Equity Research TSCO Page 4
opened 107 new stores, while closing only one. As of Dec 27 2014, Tractor Supply operated 1,382 stores in 49 states. Guidance Following a remarkable end to 2014, the company provided its initial forecast for full-year 2015. The company expects sales in the range of $6.2 $6.3 billion in 2015, with comps growth of 2.5% 4.0%. Earnings are expected in the range of $2.95 $3.05 per share. Tractor supply anticipates capital spending for 2015 in the $190 $200 million range that will support the company s store opening plans and the construction of a new Southwest distribution center in Casa Grande, AZ, slated to open this year. Also, the company intends to open about 110 115 new stores in 2015. Tractor Supply's Arizona Distribution Center to Fuel Growth Nov 18, 2014 Tractor Supply declared plans to construct a distribution center in Casa Grande, AZ. The facility, with an expected size of 650,000 square feet, is anticipated to begin operations in the fourth quarter of 2015. The construction of this facility is a major step taken by the company toward its expansion in the western region of the country. This is because Arizona is located in southwestern U.S. and hence, is close to the company s western stores. Consequently, this addition is most likely to benefit Tractor Supply by curtailing commuting costs and facilitating seamless and faster product deliveries. Casa Grande already has many industrial, commercial and agricultural businesses operating in the city which has an outstanding workforce. The addition of Tractor Supply s distribution center to this community is expected to enhance its sustained efforts toward building an organized infrastructure to support long-term growth. Further, this is expected to help create a pleasant business environment. Also, this distribution center has the capacity to generate over 250 local jobs, which will significantly benefit the community, strengthening its employment position. Further, this facility is expected to be capable enough to serve nearly 250 stores in the southwestern chunk of the country. Executives of the company and local government officials also celebrated the groundbreaking event of this distribution center recently, at its site located in the Central Arizona Commerce Park. Equity Research TSCO Page 5
VALUATION Tractor Supply s current trailing 12-month earnings multiple is 32.2, compared with the 25.7x industry average and 19.3x for the S&P 500. Over the last 5 years, Tractor Supply s shares have traded in a range of 15.5x to 33.4x trailing 12-month earnings. Moreover, the stock is trading at a premium to the industry average based on forward earnings estimates. Our target price of $90.00, 29.6x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Tractor Supply Company (TSCO) 28.1 24.4 16.8 23.8 32.2 33.4 15.5 Industry Average 22.5 21.8 15.0 19.6 25.7 74.2 14.1 S&P 500 16.7 15.6 10.7 15.3 19.3 19.4 12.0 Barnes & Noble, Inc. (BKS) 88.2 48.8 N/A 6.8 N/A 68.9 17.0 Dick's Sporting Goods Inc. (DKS) 17.2 15.2 13.1 13.9 20.2 26.2 15.9 Sally Beauty Holdings Inc. (SBH) 20.2 17.7 12.3 15.6 21.9 21.6 11.9 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow Tractor Supply Company (TSCO) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 8.5 8.7 2.5 29.7 0.0 0.8 16.3 Industry Average 4.1 4.1 4.1 7.4-4.1 0.5 11.6 S&P 500 5.3 9.8 3.2 25.5 N/A 2.1 N/A Equity Research TSCO Page 6
Earnings Surprise and Estimate Revision History Equity Research TSCO Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of TSCO. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1130 companies covered: Outperform - 16.0%, Neutral - 77.7%, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research TSCO Page 8