We reiterate our long-term ‘Outperform’ recommendation on Tractor Supply Company (TSCO) with a target price of $56.00 per share. 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, thus lending a competitive edge over its rivals.
Moreover, Tractor Supply has successfully tweaked merchandise assortment across its stores in line with the prolonged economic downturn. The company has increased the proportion of less discretionary items such as animal and pet-related products, while reducing shelf space for certain big-ticket merchandise such as outdoor power equipment.
Furthermore, 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.
Tractor Supply’s concerted efforts, even in a constrained economy, have yielded positive results. The company recorded strong operating performance in the fourth quarter of 2010 with earnings per share growing by an impressive 28.8% to 67 cents from 52 cents per share in the year-ago period. The upside was driven by higher sales, favorable merchandise mix, improved inventory management and initiatives to control costs. Management expects earnings in fiscal 2011 to continue to benefit from the above factors.
Tractor Supply ended fiscal year 2010 with cash and cash equivalents of $273.2 million while its long-term debt was a mere $103.8 million, which comes to a debt-capitalization ratio of 10.2%. This offers the company financial leverage to pursue future growth.
Having said this, it is worth noting that the company operates in a highly fragmented industry and competes in niches with larger specialty retailers like The Home Depot Inc. (HD). Tractor Supply also runs into competition with independently owned retail farm and ranch stores, privately held regional farm store chains and cooperatives.
Tractor Supply holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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