Tractor Supply Co. (TSCO), a leading retail farm and ranch store brand, reported yet another encouraging quarter, achieving $1 billion milestone for first quarter sales ever in the company’s history. Earnings per share in the first quarter of fiscal 2012 came in at 55 cents, surpassing the Zacks Consensus Estimate of 54 cents as well as prior-year earnings of 24 cents per share. Tractor Supply earned $40.3 million in the quarter, exceeding the prior-year quarter’s net income of $18.3 million.

Tractor Supply’s first-quarter results benefited mainly from the structural improvements made over the years. This enabled the company to adjust its offerings to suit customer demand and to promptly respond to events, such as the early onset of spring in March 2012.

Tractor Supply has been witnessing increasing trends in same-store sales. The reported quarter was no exception as robust performance in core consumable, usable and edible products – for instance, pet food and animal feed and an early spring weather – acted as a catalyst for an increase of 11.5% in same-store sales.

During the recession, Tractor Supply had suffered setbacks as buyers avoided big-ticket purchases, such as mowers, but recent quarters have seen an uptick in results. The company’s impressive merchandising improvement strategy along with solid same-store sales trend resulted in double-digit top-line growth in revenues. Net sales in the quarter surged 22% to $1,020.4 million from $836.6 million in the prior-year quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $1,002 million.

Gross profit during the quarter surged 21.6% to $332.8 million compared with $273.6 million in the prior-year quarter. However, gross margin contracted 10 basis points to 32.6%, as benefits from improved inventory management was partially offset by higher transportation costs, product mix and unfavorable weather, leading to markdown of winter seasonal merchandise.

Strong same-store sales coupled with cost containment related to store operating and marketing expenses resulted in a 300 basis point improvement in selling, general and administrative expenses, as a percentage of sales, which came in at 26.3% versus 29.3% in the prior-year quarter. Consequently, operating margin during the quarter improved 290 basis points to 6.3% versus 3.4% in the prior-year quarter.

Financial Position

Tractor Supply ended the quarter with cash and cash equivalents, including restricted cash of $148.6 million compared with $140.4 million at the end of the prior year. Stockholders’ equity came in at $1,055.2 million compared with $912.1 million at the end of the first quarter of fiscal 2011.

Store Update

In the quarter under review, Tractor Supply opened 33 new stores and closed 1 store compared with 26 new stores opened in the prior-year period. The company currently runs as many as 1,117 stores in 44 states.

Management Guidance

Looking into 2012, the company expects its profits to grow continually, given the right mix of products and marketing plans to maintain customer footfall.

Encouraged by strong first-quarter results, the company raised its fiscal 2012 earnings guidance range to $3.52 to $3.60 per share compared with its earlier forecast of $3.38 to $3.46 per share. Moreover, net income for the year is estimated to reach $260 – $265 million, above the prior estimate of $246 – $253 million. The Zacks Consensus Estimate for fiscal 2012 stands at $3.65, well above the higher-end of the company’s revised fiscal year guidance.

Net sales forecast for fiscal 2012 has also been raised to $4.61 – $4.68 billion versus the previous guidance of $4.56 – $4.66 billion. In fiscal 2012, same store sales are expected to register an increase of 4.0% to 5.5%, up from its prior forecast of 3% to 5%. Further, the company has planned to open 90 to 95 new stores during fiscal 2012.

Our Take

Tractor Supply is the largest operator of farm and ranch stores in the U.S., a unique market niche that serves the lifestyle needs of recreational farmers and ranchers The company’s stores are strategically located in small towns, close to its target customers, which provides a competitive edge over its rivals, such asThe Home Depot Inc. (HD) and Lowe’s Companies Inc. (LOW).

Moreover, in an effort to boost margins, Tractor Supply is expanding its portfolio of private label brands and is also focusing on direct sourcing. The company has set a long-term target of generating 25% of sales from private label brands and 13% from strategic direct sourcing. This provides a strong upside potential for the company.

However, heavy job losses coupled with reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. Although the economy is showing signs of revival, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.

Tractor Supply’s shares maintain a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ recommendation. Our long-term recommendation on the stock remains ‘Outperform’.

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