Tractor Supply: Growth Story + Amazon-Resistant
In the retail war against Amazon (AMZN), one potent weapon is to focus on merchandise that can’t be easily targeted by Amazon Prime shipping—like apple trees, say, or baby chicks.
Tractor Supply Company (TSCO), with nearly 1,200 farm and ranch stores in the rural stretches of places like Texas, Ohio and New York, caters to hobbyists: the exurban folks with a job in town, a few dozen acres at home and a handful of cattle. It sells fencing and welding equipment, horse tack, pet and livestock food, and a smattering of Wrangler jeans and Carhartt shirts for those who want to dress the part of the rural lifestyle, which the retailer calls “Out Here.”
Steady expansion and savvy merchandising are driving gains in Tractor Supply’s stock price and net income, as this stock chart shows:
With shares up 34% so far this year, some analysts are questioning whether there is further room to run. After Tractor Supply reported second-quarter earnings last week that beat expectations, Piper Jaffray downgraded the stock, saying its valuation, with a PE ratio approaching 30, had grown too rich.
But Tractor Supply has little direct competition and a smart growth strategy, factors that could make it a long-term winner against Amazon, which YCharts proclaimed the Suicide Bomber of Retail (it trashes other companies’ profits, as well as its own). YCharts has extensively covered the competitive retail landscape and how Amazon has altered it, relying on research that measures other retailers’ product overlaps with Amazon, and price differences between Amazon and others.
TJX (TJX) sidesteps Amazon by stocking goods the online giant doesn’t have. We’ve written recently about Amazon’s threat to Staples (SPLS); how some Amazon-resistant stocks are crushing the market; eBay’s (EBAY) competition with Amazon; and Ulta’s (ULTA) vulnerability to Amazon.
Tractor Supply is relatively immune to Amazon, according to research by William Blair & Co. analysts. While Amazon continues to expand its selection, it doesn’t stock the majority of Tractor Supply’s merchandise. A sampling of Tractor Supply items by William Blair found that Amazon carried 42% of them, up from 33% in a year-earlier survey. But only 25% of those items are eligible for Prime shipping, limiting the Amazon advantage.
And Tractor Supply narrowed the pricing gap: Amazon was an average of 7.5% cheaper per item, down from 9.2% in the previous survey. The average dollar savings per item was relatively low, the analysts noted.
Tractor Supply sells a lot of bulky items; giant bags of pet food and animal feed, for example, are driving increased traffic to its stores. The company says shipping costs on such merchandise can pressure its margins, so it charges more on its website than it does at its own stores—an average of 13% more per item, according to the William Blair analysts. Its online shoppers are willing to pay that premium for the convenience of not having to lug around bags of feed. And shoppers who drive to stores save money compared with shopping on Amazon.
That strategy helps protect Tractor Supply’s profit margins, as this chart shows:
Tractor Supply increasingly is stocking merchandise that Amazon can’t duplicate, hosting events such as “Chick Day,” when stores sell live birds. Three years ago, Tractor Supply also started testing sales of vegetables, herbs and fruit-bearing trees, and now these perishable items are in about 500 stores.
The retailer is targeting 2,100 stores across the US, with about 100 openings planned for this year. Tractor Supply produces a high rate of return on invested capital, compared with peers such as Cabela’s (CAB) and Big Five Sporting Goods (BGFV):
One factor Tractor Supply can’t control is whether it continues to benefit from sky-high farmland prices, which could be pressured by rising interest rates. But its shrewd positioning against Amazon is a competitive cushion.
Amy Merrick, a contributing editor at YCharts, is a former staff reporter for the Wall Street Journal, where she spent 11 years writing about the Midwest economy, state and municipal finances, and the retail and banking industries. Her work has been published in the Poynter Institute’s Best Newspaper Writing series. She can be reached at email@example.com. You can also request a demonstration of YCharts Platinum.