Tractor Supply Up on Q3 Earnings Beat, Revises Outlook

Tractor Supply Company (TSCO reported third-quarter 2015 earnings of 64 cents per share, marking an increase of 16.4% from 55 cents earned in the year-ago quarter. Earnings also exceeded the Zacks Consensus Estimate by a couple of cents. Shares of the company jumped 4.4% in the after-market trading session following the earnings announcement.

The bottom line primarily gained from efficient merchandise and inventory management that boosted sales and margins.

The top line advanced 8.5% year over year to $1,475.6 million on the back of splendid comparable-store sales (comps). However, sales were somewhat impacted by unfavorable weather in early fall, and missed the Zacks Consensus Estimate of $1,481 million.

Comps grew 2.9%, driven by a rise in comparable store average transaction count. Comps also gained from improved sales of seasonal items and strength in consumable, usable and edible (C.U.E.) in several categories, partially offset by unfavorable weather.

Quarter in Detail

The company's gross profit jumped 10.4% to $512.2 million, while gross margin expanded 60 basis points (bps) to 34.7%. The improvement in gross margin was driven by strong pricing and efficient markdown management, coupled with lower energy prices, partly countered by expenses related to store expansion in the West.

Selling, general and administrative (SG&A) expenses, including depreciation and amortization, as a percentage of sales, escalated 10 bps to 25.3% owing to rent and occupancy cost deleverage, along with additional costs related to new mixing centers, and the new distribution facility in Arizona.

In dollar terms, SG&A expenses, including depreciation and amortization, increased 9.1% to $373 million.

Operating income margin expanded 50 bps to 9.4% in third-quarter 2015. Also, operating income, in dollar terms, grew 14.1% to $139.2 million.

Financial Position

Tractor Supply ended the quarter with cash and cash equivalents of $51.4 million and total stockholders' equity standing at $1,337.3 million, as of Sep 26, 2015.

Store Update

During the third quarter of 2015, Tractor Supply opened 30 stores and closed 3 stores, compared with the addition of 30 stores and no closures in the third quarter of 2014. Consequently, the company ended the reported quarter with 1,465 stores.

Guidance

Encouraged by the company's performance so far in 2015, management is optimistic about its 2015 results. The company is confident of its marketing and merchandising actions as well as ongoing strategic investments.

As a result, Tractor Supply updated its financial projections for 2015, wherein it raised the lower end of its sales and earnings outlook range. Management now expects sales in the range of $6.28–$6.33 billion in 2015, compared to $6.25–$6.33 billion projected earlier. Comps are anticipated to increase about 4%–4.5%, against growth of 3.5%–4.5%, expected earlier.

The company also revised its full-year earnings guidance accordingly and expects earnings of $3.02–$3.08 per share. Earlier, the company had projected earnings in a band of $3.00–$3.08 per share.

Simultaneously, this Zacks Rank #3 (Hold) company reiterated its capital spending target for 2015, in a range of $220–$230 million. This capital expenditure will support the company's goal of opening about 114 new stores in 2015 and the construction of a new Southwest distribution center in Casa Grande, AZ.

Stocks to Consider

Better-ranked stocks in the same industry worth considering include Build-A-Bear Workshop Inc. BBW, with a Zacks Rank #1 (Strong Buy) and ULTA Salon, Cosmetics & Fragrance Inc. ULTA, carrying a Zacks Rank #2 (Buy). Another stock worth considering in the related industry is Diamond Foods, Inc. DMND, with a Zacks Rank #2. 

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