Excuse me for not exactly remembering the year, but it was around 2002-2003 that I first sold product to Tractor Supply Company (NASDAQ:TSCO). I clearly remember a small sign in their lobby in Brentwood Tennessee, that had their store count. It was in those little white letters used on little black boards you see outside conference halls and in schools, or maybe at church on a Sunday. It said 459 stores. After my meeting with the buyer, on my way through the lobby, I met a gentleman named Joe Fell. I'm not sure what his title was back then but now he is the Director of Merchandising. He handed me a free book - called "Work Hard, Play Hard" - the TSC story. It had all the history of the company and was a great read. Truly a great growth story.
I ended up selling them a John Deere Piston key chain and it was an $80,000 sale, the biggest my little garage company had ever had at the time. I should have invested my profits back into the stock. Fast forward a decade or so, and TSC was one of the hottest and best performing stocks in the Nasdaq. Stores grew at a steady clip (passing 1600) and Same Store Sales, continued to rise.
So, what happened? In this article, I'd like to discuss the concept of Same Store Sales and why it is so vital to the valuation of growth retail stocks. There is no other metric that is more important to the stock price of a regional to national growth story.
Same Store Sales, or "comparable sales" are the sales growth for locations that have been open for one year. The idea is that it gives a practical number for how each store, that has been open for one year or more, is performing in sales against the same period the year before. It is an important metric because it shows the pure health of the retail concept by removing sales growth from just opening new stores.
It doesn't make good sense for a company to continue to rapidly expand store count when core store sales are declining year over year. When management begins to blame the weather, I begin to raise an eyebrow. Growth engine stories on a regional to national basis need rising Same Store Sales. It proves their concept can apply to a greater demographic and that it has a solid retail strategy.
So back to our beloved, piston key chain buying, Tractor Supply Company. Same Store Sales last quarter were a very spooky -2.2% versus a year ago +4.9%. That's a big change. That has the growth investors hitting the panic button. There can be a long distance between growth investors and value investors. TSCO is in that zone now (TSCO conference call). Stocks are driven by large, institutional investors. They have specific investment themes. Some are value investors, some are growth and momentum, others are special situations. When one large class of investors pulls out of a stock, it can be a long way down before a different type of investor enters to fill the void. A further negative sentiment is the concern of the 800 pound gorilla Amazon (NASDAQ:AMZN) continuing to pepper specialty retail. Amazon seems to be going aisle by aisle through traditional retail stores and defining strategies to take market share. These fears may be overblown for a company like TSCO, but it is a further negative overhang.
Here is a more extreme example. Fossil (NASDAQ:FOSL). Same store sales declined from +3.1% in 2012 to -5% in 2016. Things haven't gotten much better in 2017 as that drop is now -11%.
That's Fossil falling from $130 to $9. All this pain could have been avoided if you sold in 2013 when Same Store Sales turned flat at .2%. Nothing scares away the momentum money more than the potential of a broken growth stock, especially in retail.
So, what now? Well, TSCO management has been some of the best in the business for a long time. I would be tempted to give them the benefit of the doubt, but history is not on their side. I would pay special attention to the next quarter and see if their initiatives to revive Same Store Sales take hold. If so, I'd get right back in the stock, missing the bottom, but avoiding a potential value trap if things do not get better.
Let's not end on a sour note - Lets look at what can happen when management focuses on existing store metrics. The Home Depot (NYSE:HD), declared in late 2014 that they were freezing new store openings to concentrate on increasing their square footage sales and thus, their Same Store Sales. Their initiatives were a success and the growth story was back - after a brief sideways period, the stock recovered and rallied on to new highs. This is what I will be looking for in TSCO's next few quarters. Was this really a one off or indicative of a future problem with the growth thesis? If not a one off, can management refocus on their core business and move from a mindset of new store openings to one of concentrating on their current stores? Let's hope so. I would remain cautious for now in the stock. If Same Store Sales continue to deteriorate, I would put a $35 target price on the shares. We'll check back in next quarter. For a beginner or a refresher explanation on same store sales, I have attached a hypothetical example in the attachments this article.
Supporting Documents
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I no longer have any business relationship with Tractor Supply since 2005.
