Tractor Supply Reports Great Quarter, Still Not Expensive

Feb. 1.08 | About: Tractor Supply (TSCO)

Tractor Supply (NASDAQ:TSCO), the niche retailer that caters to the "gentleman farmer", reported a great quarter with same store sales up 3.8% (one of the strongest I've heard for any retailer in Q4), and they grew revenues 14% for the year despite the tough retail environment. Free cash flow was way up for the year on lower inventory and capital expenditures. The stock is up 15%+ today as I write this.

Traffic trends were strong, driven by consumables, mostly pet and animal feeds and similar items. TSCO has been growing this category faster than others, and the strategy appears to be paying off. One advantage here is that people tend to feed and care for their pets and farm animals regardless of the economy! As management said, they are fortunate to have a core merchandise offering that is mostly non-discretionary, and where they are the go-to destination.

The company is forecasting 11-12% top line growth and 1-3% SSS growth for 2008. Q4 eps beat estimates by .02 - or should I say analysts missed the quarter by .02? As I said in my previous post on TSCO, this is one company where weather really does affect sales. Yet they were able to achieve excellent SSS growth with no help from a positive weather boost.

The company bought back about 8% of shares outstanding in 07, and say they expect to continue buybacks opportunistically in 08. They also expect to increase operating margin over time as direct overseas product sourcing increases. ROIC should also increase as these initiatives and continued improvement in working capital management takes hold. They have several merchandising efforts underway to further drive store productivity. I really think these guys are great operators, and their results in 07 seem to prove that out. Note that they have a tough comparison coming up this quarter vs. a strong Q1 last year.

Even with today's increase, the stock is still not expensive at around 15x next year, which I consider attractive for well-run a retailer with a defensible niche and lots of growth ahead. It typically trades at >20x.