Tractor Supply (TSCO) reported solid 2Q results with comparable store sales up 5.6%. Traffic was up 4.2% and ticket was up 1.3%. Margins increased in 2Q This is a good sign after Tractor Supply suffered some margin contraction in 1Q when it had to cut prices to clear high inventory. Total revenue increased 11.9% which beat consensus. Net income grew 14.9%, and EPS increased 17.9%, in-line with consensus.
Tractor Supply did increase guidance for comps, total revenue and earnings for the full year 2015. Comps are expected to increase 3.5-4.5%. Comp growth will be lower in the second half due to tougher year-over-year comparisons. Margins are expected to continue to expand by 10-20 bps in the second half. Low energy costs will be a tailwind to both COGS and revenues.
Revenue growth in 3Q and 4Q is expected to slow to the 9-10% area, and EPS growth is expected to be in the 11-13% area. Tractor supply has no exposure to a strengthening USD. Tractor Supply could benefit from the stronger USD through cheaper imports and a lower price of oil. I also like the fact that Tractor Supply does not have any direct competitors in their target geographies and products.
Tractor Supply has guided 2015 capital expenditures to be $220 - $230 million, up from $161 million in 2014. I see FCF of $278 million in 2015 and $336 million in 2016 (assuming 2016 capex of $332). Relative to a $13.1 billion market cap, this FCF isn't very impressive.
I took a look at Home Depot (HD) and Lowe's (LOW) for a comparison. Tractor Supply has the highest revenue growth rate by a wide margin, 12.2% versus 6.3% and 6.0% over the past 12 months. The forward revenue growth expectations are 8.6%, 4.3% and 4.3%. I see EPS growth of 11.4%, 8.5% and 20.2% over the next 12 months. Lowe's guided to more margin expansion and share repurchases than Tractor Supply and that's how I got the higher earnings growth rate at Lowe's.
All 3 have gross margins in the 34-35% area, but when looking at EBITDA & operating margins, the dispersion is a bit larger at 11-15% and 8-13%. Home Depot has the highest margins based on my numbers. All 3 are benefiting from margin expansion.
The valuation is where the differences become much greater. I see the multiples to forward FCF at 40.2x, 25.7x and 17.6x. Looking at EPS, the valuation is less dispersed, 29.1x, 21.0x and 19.1x.
Tractor Supply has the highest ROIC at 26.3% versus 24.3% and 13.7%. Home Depot and Lowe's both use some financial leverage, 1.1x & 1.5x debt-to-EBITDA, while Tractor Supply has essentially a flat net cash position. Both Lowe's and Home Depot appear to manage working capital more efficiently than Tractor Supply, and both hold a lower number of days of inventory.
To sum it all up, Tractor Supply looks expensive, particularly relative to Lowe's. Of all the above metrics, I think revenue growth is the most important. I also believe Tractor Supply management has some room to improve margins and working capital and inventory. , and I think the revenue growth at Tractor Supply is worth paying up for.
Michael Grove, CFA