Building on its success in the first quarter, the big box retailer Tractor supply (NASDAQ: TSCO) paved the way for continued growth by beating analyst estimates both up and down during the second quarter.
The company received a spring boost with favorable weather conditions leading customers to purchase gardening and outdoor supplies and equipment, and kept the momentum going through early summer, topping off its results with an improved 2021 fiscal forecast. Although the stock market reacted to the report by lowering its stock price on Monday, Tractor Supply’s results appear bullish.
Here are three main points from the results report that deserve a closer look.
1. Tractor Supply generates a lot of growth
Strong sales and rising revenues continue to result from Tractor Supply’s operations. Revenue of $ 3.6 billion represents 13.4% year-over-year revenue, while ultimately adjusted earnings per share (EPS) climbed 10% to 3.19 $. Comparable store sales, or comps, increased 10.5%. Tractor Supply returned a portion of that bonus in cash to its shareholders, both through a quarterly dividend of $ 0.52 per share (up 48.6% from last year) and through the repurchase of 1.1 million shares, increasing the value of the remaining outstanding shares.
Tractor Supply executives were encouraged by the strong growth to raise their guidance for its performance for fiscal 2021. Annual revenue forecast from $ 11.4 billion to $ 11.7 billion has been revised upward. from $ 12.1 billion to $ 12.3 billion, while earnings expectations fell from annual EPS of between $ 7.05 and $ 7.40 to between $ 7.70 and $ 8. The company estimates that it will increase its Tractor Supply locations by an additional 80 stores this year, while its Petsense stores are expected to increase by 10 net openings.
The company’s finances also appear healthy, with its $ 1.4 billion in cash and cash equivalents exceeding its $ 985.3 million in long-term debt. Tractor Supply appears to be running at full speed for sales and profit growth, has sufficient cash flow and looks set to continue on the same upward path in the medium to long term.
2. Tractor Supply has a loyal customer base
Tractor Supply appears to be successful in gaining and retaining customers, with membership in its Neighbor’s Club rewards program enjoying even greater success following a recent switch to a points-based system. On the second quarter earnings conference call, CEO Hal Lawton noted that an additional 5 million customers have joined the program. Just under a third of new customers choose to join the Neighbor’s Club.
About 65% of revenue now comes from Club member purchases, and those customers are also buying more, according to Lawton, “spending about three times the rate of non-members.” He noted that the company has “grown our high value customer base in the program by around 15% year-to-date,” with a retention rate of 95% of “high-value” members, although Lawton did not specify what percentage of the total membership is “high value.”
According to research from Harvard Business Review, the effectiveness of the loyalty program depends on long-term customer retention with increasing benefits over time rather than being preloaded, allowing for quick no-go. Tractor Supply’s points system has a simple mechanism that gives customers better rewards the longer they shop, with the level of spending in the calendar year determining whether they get 1 point, 1.5 points, or 2 points per dollar spent. . Those who spend more during the year will receive up to twice the rewards, providing direct feedback that encourages loyalty.
The CEO also provided details on the age of members, with millennials joining at a rapidly increasing pace. Some research points to the same characteristics of loyalty programs that deliver positive customer growth across generations, with Gen Z and middle-generation shoppers almost as supportive of companies with programs like Baby Boomers. Since the same characteristics tend to attract customers of all generations, this provides further proof that Tractor Supply’s program is well designed to attract buyers and will continue to build loyalty and grow sales.
3. Bigger items sell well
With the strength of zero-turn mowers, safes, utility vehicles and trailers, CFO Kurt Barton says, the company’s “big-ticket categories” outperform other product categories in the chain. . According to statements made on the company’s first quarter earnings call, it considers big-ticket items one of its top three “buckets” of inventory, which it tries to keep full. With strong sales already visible in the category at the end of the first quarter, the significant success of the second quarter shows that Tractor Supply is effectively managing its inventory, ensuring that there is enough merchandise in stock to encourage large purchases.
Bigger items are useful to Tractor Supply in part because they help improve operating margins. It is more profitable for the company’s business model to sell more bulky, high-margin products like trailers or mowers than cheaper items with lower margins. The continued strength of this profitable and efficient category is likely reflected in Tractor Supply’s revised operating margin forecast for fiscal 2021. Instead of an operating margin of 9.4% to 9.7%, it now forecasts 9.7% to 9.9% for the year.
All in all, with continued strong growth for many consecutive quarters, a loyal and growing customer base served by a seemingly attractive loyalty program, and increasing sales in its most profitable ‘big ticket’ business both boosting revenue. and margin, Tractor Supply looks very bullish for those investing in retail stocks, despite a decline in stock prices after the release likely due to profit taking.
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