There's More to Tractor Supply Than Just Tractors

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As summer rolls around, it's that time of year when the lawn needs to be cut and farmers tend to their crops. The one specialty retailer that is growing more popular with both farmers and homeowners is Tractor Supply (NASDAQ: TSCO). But Tractor Supply sells more than just tractors--the retailer aims to serve the needs of farmers and the weekend handyman everywhere. The company sells lawnmowers, clothes, pet-need items, power equipment, fencing, generators and other outdoor products.

An attractive niche

Tractor Supply has catered to farmers and rural communities since 1938. Over the last few years, farming has undergone a renaissance as crop and land prices have risen. Farmers have made money and have been spending to upgrade their equipment. Business has been good for farmers, and that has helped Tractor Supply.

Tractor Supply has 1,197 stores in 45 states. The retailer also sells its products online and has a strong delivery business. The company has been a great performer, with revenue rising from $2.7 billion in 2007 to $4.7 billion last year. The stock has been very rewarding for shareholders as it has risen from a low of $15 in 2007 to a high this month of almost $118.

In the first quarter of this year, sales grew 6.4% to $1.1 billion, and net income grew 9% to $44 million. Comparable-store sales increased 0.5% compared to last year's robust 11.5% increase. The colder weather impacted comparable-store sales this year, and last year had a very mild winter and early spring. Tractor Supply is affected by the weather just as farmers are.

Tractor Supply's strong pet food and animal feed businesses offset some of the weather-related issues. The company repurchased $49.9 million in stock during the first quarter.

In looking forward, the company forecasts comparable-store sales to grow 3% to 5% for the rest of the year. It has already opened 22 new stores so far this year and plans to open a total of 100 to 105 by the end of the year.

Tractor Supply has also done a great job with its product mix. The company has exclusive brands that are only sold in Tractor Supply stores. One of these brands is 4health dog food. By having products such as 4health that are only available at Tractor Supply, it creates customer loyalty and drives foot traffic to purchase other items.

Tractor Supply has also made major improvements to its online business. The company now has the infrastructure in place to accommodate drop-ship orders from its distribution centers in Georgia and Kentucky. I see the company benefiting from increased web traffic and online sales.

The company is in a great position financially for the rest of the year. There's $57 million in cash on the balance sheet and only $106 million in debt. The annual dividend is $1.04 per share for a yield of 0.9%. The dividend payout ratio is only 21%. Tractor Supply has the resources and the ability to increase dividends to shareholders going forward.

The competition

Tractor Supply's primary competitors are Home Depot (NYSE: HD) and Lowe's (NYSE: LOW). Both companies continue to grow and have very large lawn and garden businesses. Both cater though more to home builders and contractors than farmers and ranchers. Both are more dependent on the housing recovery than Tractor Supply. Luckily for both Home Depot and Lowe's, housing has been recovering and that has helped boost business.

Home Depot is positioned to benefit further from a recovering housing market. The company is very aggressive in targeting the pro customer or contractor. The company wants that business and has made several changes to get that business. A big part of this is the ability for the pro customer to order online and then go pick up at a Home Depot store. The focus is on speed and convenience to get the pro in and out the door as fast as possible. Home Depot has dedicated cashiers and loading zones for the pro customer.

On Home Depot's earnings call for the first quarter of this year, executive chairman and CEO Frank Blake said

For the first time in the last several years the growth rate in our pro customer segment outpaced the growth rate in the consumer segment. We've been tracking the relative growth rates of our pro and consumer segment, as one indicator of the housing recovery.

As the growth rate for the pro-customer segment outpaces the consumer segment, this should drive the top- and bottom-line performance for Home Depot in 2013 with the housing recovery.

Lowe's has recently lagged behind Home Depot, but is making changes to reverse that trend. The company is forecasting total sales this year to increase 4% and comparable-store sales to increase 3.5%. The company plans to open 10 new stores.

To drive growth, Lowe's is making an aggressive bid to buy the bankrupt Orchard Supply chain. This is the hardware division that was spun-off from Sears. This will give Lowe's key locations in the California market where it has a small presence.

What I really like about this move is that it could give Lowe's the inroad to offering Craftsmen and Kenmore products in its stores. So far, Lowe's has indicated it will keep Orchard Supply as is, but the potential to get those products into Lowe's stores would be a huge win against Home Depot. Craftsmen and Kenmore are two of the most popular brands for the home and garden.

Foolish assessment

I like the business model for Tractor Supply. There's plenty of room for growth going forward and the company has carved out a unique niche to differentiate and compete with Home Depot and Lowe's. As the economy continues to recover and as long as crop prices remain strong, I see further gains for Tractor Supply going forward.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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