Tractor Supply Earnings: Comparable Sales Lag, but Outshine Farm and Ranch Industry; Shares Rich

Wide-moat Tractor Supply grappled with difficult trends in discretionary spending, slowing pet adoption, and deflation in retail pet category prices, resulting in a 0.5% comparable-sales decline for the second quarter, falling short of our 1% growth estimate. However, if compared with the overall mid-single-digit rate decline for the farm and ranch retail industry (firm estimate), Tractor Supply’s performance suggests market share gains, underscoring the efficacy of its everyday low pricing, one-stop-shop model, and loyalty-driving initiatives. Moreover, despite soft comparable sales and the opening of its 10th distribution center, the firm’s operating margin fell by just 20 basis points to 13.2%, above our 13% estimate, thanks to productivity gains and stringent cost controls. This solid performance led management to narrow its fiscal 2024 outlook to a 0.5% decline to a 1% climb in comparable sales and a 9.8%-10.1% operating margin from prior guidance for a 1% decline to a 1.5% increase and 9.7%-10.1%, respectively. With our estimates within the updated range, we see no reason to alter our $219 fair value estimate materially, and view shares as rich. We believe the disparity between our valuation and the market's stems from our relatively modest long-term store growth expectations due to real estate constraints within the rural landscape, as well as the market's overestimation of the persistence of pandemic-induced tailwinds.