Country Crafty Tractor Supply Surprises Wall Street

Edibles and animals kept Tractor Supply Co. earnings strong in the third quarter but comparable store sales flagged due circumstances that, for once, didn’t revolve around the recession.

Net sales for the third quarter gained about two percent to $748 million, but comparable store sales decreased by five percent. In contrast, net income in the third quarter increased by almost 39 percent to $22 million, or 60 cents per diluted share, compared to $16 million, or 43 cents per diluted share, in the year earlier period.

Wedbush Morgan analyst Joan Storms pointed out that profits were at the high end of an Oct. 8 company pre-announcement for third quarter earnings per share of 58 to 60 cents, and well above her forecast of 48 cents and a consensus of 46 cents. Those forecasts reflect the view from before the company’s Oct. 8 statement, when Tractor Supply also raised its full-year profit guidance. Yet, it still managed to beat a revised consensus of 59 cents per share.

The softness in the company’s comparable store sales versus last year’s was primarily due to sluggish movement of seasonal big-ticket items, Tractor Supply asserted, and difficult comparisons because of strong hurricane-related merchandise and seasonal heating products sales in last year’s quarter. The latest comps were off the trend for the year. For the first six months, they were flat even as net income rose to $1.51 a share versus $1.09. Tractor Supply doesn’t have any large direct competitors, so choosing to generate cash rather than drive comparable store sales isn’t necessarily going to cost it competitively and the dollars can be put to other purposes.

In balance, the company expects high-margin items to improve in the fourth quarter. Gregory Sandfort, Tractor Supply’s president and chief merchandising officer, said in a conference call as transcribed by SeekingAlpha, that the trend toward consumers purchasing practical gifts in the holiday time frame had been a bonus for the company in 2008, and one it expects to capitalize on in this year’s fourth quarter. He noted:

I would tell you that we have…repositioned the location in the store where this product is going to be found. It is now down the center court where a year ago it was up in the left hand corner in what we call the seasonal area. This year, that positioning is for all heating and for what we call warm wear products. So we are feeling very good about how the fourth quarter should translate to sale on seasonal products.

Even in the third quarter, the company maintained, the evidence is that stores were proving more attractive to customers who visit them for everything from tools to animal feed, even if they weren’t buying quite what they were last year. Tractor Supply CFO Anthony Crudele noted that the number of transactions in stores open for more than a year increased almost six percent in the third quarter, and he added, “We continue to gain customers and our customers are continuing to shop more frequently primarily for essentials that support their rural lifestyle.”

Margin expansion helped boost Tractor Supply’s results in the third quarter, but deflation in animal foods may pressure margins in the current period.

Obviously, the product mix at Tractor Supply is a bit different than consumers finds at Macy’s or even Walmart. It supplies products for livestock as well as those for pets. While big ranchers might not count on it for their major requirements, people who keep a horse, a few head of cattle or a chicken coop can rely on the retailer for their needs. Even the pet food customers it relies on aren’t serving up – or as likely to be trading up – to keeping fat cats and Pomeranians happy. Tractor Supply’s customers tend to be a little more serious about how and what they spend on the animals they are paying to keep. So, animal edibles are a practical order for the retailer, although one that provides a cheery outlook.

CEO Jim Wright said in the conference call:

Our pet food, which is a high frequency business, and our large animal feed have grown now for several years at a rate exceeding that of the overall chain, yet when we look at our relative market share, it’s lower. We’re pleased with our growth. Our market share is frankly rather de minimis compared with our opportunity, and we are confident that we can continue to grow those businesses.

One advantage of generating profits in the recession is the ability to continue opening stores when many other retailers are locking doors. That means better real estate terms and the ability to select locations that provide the best demographic surroundings. And Tractor Suppy has been opening stores, in fact 17 in the third quarter, which is only three fewer than it did in the period last year. All told, the company plans to inaugurate about 75 new locations in 2009. And that ain’t hay.