- New stores and increased spending at established stores contributed to robust fundamental expansion.
- Tractor Supply’s balance sheet remains in decent shape.
- Tractor Supply maintains a small but sustainable dividend.
- Tractor Supply shows no sign of letting up.
On Jan. 28, "rural lifestyle retail store chain" Tractor Supply (NASDAQ: NASDAQ:TSCO) came out with its FY 2014 earnings announcement. The company had an excellent and robust FY 2014. Let's take a closer look.
Excellent revenue and profitability expansion
In 2014, Tractor Supply saw its revenue, net income and free cash flow increase 11%, 13% and 115% respectively. A good, balanced combination of increased sales at its established stores and the opening of new stores contributed to this robust expansion in its fundamentals. Tractor Supply's same store sales expanded 3.8% with transaction counts increasing 3.2% year-over-year. This means customers are coming back and spending more at its stores. This also gives indication that the company knows how to engage its customers.
Revenue expansion outpaced the growth in expenses serving as the catalyst behind its double digit net income increase. Tractor Supply's FY 2014 operating margins clocked in at 10.3% vs. 10% the same time last year. Its profit margin came in at 6.5% at the end of 2014 vs. 6.4% at the end of FY 2013.
Tractor Supply's explosion in free cash flow came from the net income increase and favorable changes in assets and liabilities, especially accounts payable and accruals. Moreover, the company eased up a little bit on its expansion in distribution infrastructure sending capital expenditures down 26% year-over-year.
Balance sheet okay
Tractor Supply possesses an okay balance sheet. However, its cash position is a little lighter than last year. Its $51 million in cash equates to a tiny 4% of stockholders' equity vs. 11% last year. I like to see companies with cash amounting to 20% or more of stockholders' equity. However, the company also possesses no long-term debt, which is impressive considering it increased store count by 106 locations during FY 2014.
Dividend is sustainable
Tractor Supply pays a small but sustainable dividend. I always compare how much a company pays out in dividends vs. the true measure of profitability - free cash flow. I like to see companies pay out less than 50% of their free cash flow in dividends and retain the rest for other uses. In FY 2014, Tractor Supply paid out 34% of its free cash flow in dividends. Currently, the company pays its shareholders $0.64 per share per year and yields a modest 0.8% annually.
Company management plans to forge ahead with new store openings and investments in its distribution infrastructure to support them. Tractor Supply expects to open 110 to 115 new stores in its FY 2015. The company also expects same store sales to increase between 2.5% and 4.0% in its FY 2015. Tractor Supply's fundamentals should continue to expand at a respectable pace as long as it can maintain sales growth momentum at its established stores balanced with the rate of new store openings.
Currently, Tractor Supply is richly valued at 32 times earnings vs. 19 for the S&P 500 and 26 for the company's five-year average. However, the company trades at a more reasonable forward P/E ratio of 23 vs. 17 for the S&P 500. Investors may want to take a small position while buying more on dips.
This article was written by
Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.