Tractor Supply Company (NASDAQ: TSCO) is still a good buy because of its growth, increased leverage, and cash flow used to pay shareholders. The company’s Q3 results failed to support the price action but aren’t bad news for investors, merely weaker than expected in a world with macroeconomic headwinds and a tepid retail environment. The takeaway is that this dividend achiever is on track to sustain growth in 2025 despite the headwinds and is growing its addressable market quarterly. The pullback in share prices is a chance to load up on more stock at a discounted price.
The latest news includes the acquisition of Allivet in an all-cash deal. Allivet is an online pet pharmacy and aligns with the Tractor Supply Company portfolio. To invigorate growth, it plans to market Allivet to its 37 million loyalty club members while building on the Allivet brand to grow it organically. The move is a natural progression because Allivet has already partnered to deliver services to Tractor Supply customers and is forecasted to be accretive to shareholders within the first year. Analysts estimate the acquisition is worth $15 billion of the addressable market, roughly 100% of the 2025 consensus.
Tractor Supply Company Improves Quality in a Tepid Environment
Tractor Supply Company had a tepid quarter but not a bad one, with revenue growing only 1.8% and results aligning with analysts' estimates. The critical detail is that growth was sustained due to the increased store count, which is expected to grow in 2025. Comp sales were down by 0.2%, but weakness was expected, and the 0.3% increase in ticket count suggests improved traffic despite the decline in ticket average.
Margin news is also good, with gross margin improving in Q3 due to cost management and reduced transportation expenses. Operating costs rose, offsetting the gains, but one-offs are involved, including increased depreciation and amortization related to the sale-leaseback strategy. That strategy is lightning the asset base while providing cash and improved operating leverage. Although earnings are down compared to the prior year, the $2.24 in GAAP EPS was better than expected and sufficient to sustain the fortress balance sheet and capital return outlook.
The guidance is favorable but less than the market had hoped, providing little support for the price action immediately after the release. However, the guidance range was narrowed, with the low end rising, aligning the mid-point with the consensus, an increase from the prior year. Growth is expected to accelerate for this retailer in 2025 and be sustained by a tailwind driven by store count growth, deepening penetration, and the falling interest rate environment.
Tractor Supply Company Is Worth the Higher Valuation
Tractor Supply Company tends to trade at a higher-than-average valuation relative to the S&P 500 but is worth the price. The company produces solid cash flow and is able to sustain its balance sheet, capital returns, and acquisitions such as Allivet. Highlights at the end of Q3 include an 8% increase in equity and long-term debt leverage of less than 1x equity, including the impact of dividends and share repurchases. The dividend is worth $4.40 annually, about 1.5%, with shares trading near $275 and above the broad market average despite the higher valuation. Repurchases benefit shareholders, reducing the count by 1.5% YoY on average in Q3.
The price action in TSCO fell more than 5% following the release but may not move much lower. It is approaching the 150-day exponential moving average, which has provided solid support in the past. The likely scenario is that the market will again support the price action at that level because of the operational quality and capital return outlook. If not, TSCO stock could pull back as far as $250 or lower. In that case, the stock of this high-quality retailer would provide a deep value and high yield relative to its historical norms.
