Tractor Supply Can Weather Any Storm

A position in a niche market leads to advantages over the competition. A small market can still be a significant market.

Tractor Supply is focused on being a one-stop shop that supplies the lifestyle needs of recreational farmers. Its stores are located primarily in towns outside of major metropolitan markets and in rural communities. The company sells everything from merchandise to machinery to animal feed. It operates 1,308 stores in 48 states. Overall, there are now 3.2 million farmers operating 2.1 million farms on 914.5 million acres across the nation, creating a niche market that provides significant opportunity. 

Tractor Supply Store in Columbus, Mississippi Source: Wikimedia Commons

Weathering the storm
During the first quarter of 2014, the company experienced 125 days of store closures due to the winter storms across the nation, compared to only 25 closed store days in the same quarter last year. There was also a significant increase in the number of store days with reduced hours. 

However, its results were still impressive. Revenue increased 9% to $1.18 billion and net income grew 10.9% to $48.8 million. Gross margin increased 110 basis points to 33.5%. The company reported comparable-store transaction comp of 4.4%, which marked its 24th consecutive quarter of positive traffic growth and 18th consecutive quarter of positive comparable-store sales. This track record of growth is consistent and dependable.

Growing the e-commerce business
The company continues to make additional investments in its online platform and saw solid progress in e-commerce sales for the quarter. There are over 20,000 items on its website. Its social media and mobile presences are also growing. More of its website traffic came through mobile devices. Customers are eager to share their stories and experiences, building the brand recognition.

Movin' out west
While the company has geographically been focused on the midwestern region, it is expanding aggressively into the west. The company has a long-term goal of nearly doubling its store count to 2,100. It recently opened its 57th store in the western region. While the west offers many growth prospects, it has its challenges as well. The western region tends to have higher sales per store, but payroll is also higher in the region, and so are supply chain costs. 

The company faces competition from much bigger retailers, including Home Depot  with more than 2,200 stores and $78 billion in annual revenue, and Lowes  with more than 1,800 stores and $53 billion in annual revenue. 

Both companies have appeal in rural communities and cities, whereas a Tractor Supply store might not be a good fit in big cities. Home Depot and Lowes both aim to create a one-stop shop for home improvement needs, while Tractor Supply is focused more on power farming equipment, agriculture, and livestock products.

While Tractor Supply has been around for longer than its competitors, the company has taken more time to grow its store count, putting more emphasis building relationships with farmers and rural communities. Its typical store size is around 20,000 square feet, while both of its competitors are generally greater than 100,000 sqf. A smaller store size is more personal and manageable. But what really differentiates Tractor Supply from its competitors is its consumer, usable, and edible (C.U.E.) business. 

C.U.E. is a key growth driver
This segment contributed 43% of the company's 2013 total revenue. There are no competitors that can provide this type of focus on this business segment. In Q1 2014, management stated:

when it comes to livestock feed and some of the other categories, we go into a community, and there is a lot of people who carry what we have, but we offer a different experience. We put it all under one roof. We're open typically more hours and more days, and our customers tend to gravitate to us that way. So we think there's a variety of categories where we continue to win, and we will continue to make sure that our assortments are right, that we're priced right and that we're a dependable supplier.

The company also has its own magazine, "Out Here," which is full of stories and information about the rural lifestyle. Published four times each year, it is distributed for free to customers in all of Tractor Supply's retail stores and website.Tractor Supply pays for the publishing costs by selling ads in the magazine.

Overall, Tractor Supply is performing extremely well. Investors should be pleased that the company managed its operations efficiently during the months of severe weather. The company's track record is consistent and there is certainly room to build out its store count. The company should keep focusing on its e-commerce platform to drive sales. Its niche market agriculture products and C.U.E. business are key drivers for growth in the future.

Investors looking for a reliable company that can weather any storm should consider this one.

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