How to harvest cash crops amid a retail drought

Tractor Supply Co

23/10/2024 11:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Jeffrey Goldfarb
       NEW YORK, Oct 23 (Reuters Breakingviews) - This
century’s 10 best large U.S. stocks predictably include Nvidia,
Netflix and Apple. Unexpectedly squeezed among the titans of
technology, however, is a bricks-and-mortar purveyor of chicken
feed, wheelbarrows and coveralls: Tennessee-based Tractor Supply
 TSCO.O . Its success exemplifies the growing American taste for
rural life, and scatters seeds for other retailers to sow.
    The $32 billion company, which in 1938 started taking
tractor-part orders by mail, now operates nearly 2,300 stores.
Best described as a mashup of Home Depot  HD.N , Petco Health
and Wellness  WOOF.O , and L.L. Bean, it is on pace this year to
sell $15 billion of products best suited for the countryside.
Since 2000, it has delivered shareholders a 26% annualized
return, including reinvested dividends, putting it in the S&P
500 Index  .SPX  elite. Robust expectations also help it command
a valuation of 26 times expected earnings over the next 12
months, a premium to the benchmark, many peers and even digital
standouts such as Mark Zuckerberg’s Meta Platforms.
    Tractor Supply’s success partly owes to an idiosyncratic
demographic change. Boss Hal Lawton, an alum of Macy’s, eBay and
Home Depot, is benefiting from the trend of crop and animal
cultivation becoming more of a hobby than a business. The
professionals – or anyone producing and selling at least $1,000
of U.S. agrarian goods a year – are doing more with less, thanks
to technological advances. The value of agricultural yields
jumped 40% between 2017 and 2022, before adjusting for
inflation, but the number of U.S. farms declined by nearly
142,000, or 7%, representing roughly 2% less acreage over the
same span, according to the most recent official five-year
tally.
    At the same time, Americans are moving away from
metropolitan centers, giving them more land to grow vegetables,
install chicken coops, plant flowers and adopt dogs. The
pandemic helped reverse a decade of population decline in rural
areas, while the fastest-growing domestic migration is to places
more than 20 miles from a City Hall, overtaking the growth in
closer suburbs, per the U.S. Census Bureau. “These customers
want convenience just as much as if they’re in downtown New York
or Chicago,” Tractor Supply’s technology and strategy chief, Rob
Mills, said last month at an event hosted by investment bank
Piper Sandler.
    Few retailers are as well-positioned to take advantage of
the shift as Tractor Supply. Its five-year sales through 2023
grew at a compound annual rate of almost 12%, more than three
times faster than for general merchandise vendors nationwide.
Analysts expect the pace to slow to 5% through 2028, according
to estimates gathered by Visible Alpha, but the company managed
to retain its Covid-19-related gains while many other retailers
lost them. There are some fresh prospects for growth following
the company’s decision to roll out extra space to hawk seeds,
plants and landscaping tools at two-thirds of its stores. Nearly
7%, or more than $10 billion, of Home Depot’s sales last year
were outdoor-garden related.
    Others are eyeing the opportunities. Amazon.com  AMZN.O ,
for one, is trying to muscle further into the market, with plans
to provide one- to two-day delivery in less densely populated
U.S. areas, according to the Wall Street Journal. Buyout firms
are also taking an interest. Nolan Capital, for example,
acquired 20-location Coastal Farm & Ranch and last year combined
it with C-A-L Ranch Stores. Smaller, local outlets are Tractor
Supply’s biggest competition, but they typically cannot offer
the same one-stop shop or online service. A rollup strategy to
create a formidable regional or nationwide challenger would take
time and significant capital outlays.
    There are ways for bumbling shopping-emporia operators to
capitalize on Tractor Supply’s prosperity without going rustic,
however. It may be a quaint notion that evokes old country
stores, but catering to staffers and customers tends to make
shareholders happy, too. Other U.S. retailers replaced about 18%
of their store managers in 2022, per consultancy Korn Ferry,
while Tractor Supply touts a much lower 12% rate of turnover. In
2020, it started giving them restricted stock worth at least
$7,500 annually, a practice Walmart  WMT.N  embraced this year.
    Lawton is also finding ways to keep shoppers from straying.
Pet-washing stations and mobile veterinary clinics help lure
them into stores, where they’re apt to buy more. Tractor Supply
also generates about half its revenue from frequently
repurchased items such as pet food and propane gas. Moreover, a
third of all sales are from its own private-label brands, which
tend to be more profitable and engender allegiance, compared to
just 1% at Amazon. Members of its revamped Neighbors Club
loyalty program account for nearly 80% of the top line, a bigger
proportion than from those enrolled in the Starbucks Rewards
app.
    Tractor Supply has things it can learn from retailing peers,
too. For example, it only generates 7% of sales online, less
than half the 16% estimated rate nationally. And as much as the
company is gaining from shifts in U.S. migration, its business
is also more tethered to weather conditions, affected by warmer
oceans. Unseasonably cold or hot temperatures make inventory
management tougher while hurricanes and ice storms threaten to
shutter stores and disrupt shipments for long stretches, in turn
frustrating customers.
    There’s also the danger of chasing growth too quickly.
Although more stores theoretically will translate into new
customers and stronger negotiating power with vendors, the
retail industry is littered with stories of costly overexpansion
that led to excess debt, weaker performance and degradation of
the brand. Getting bigger also attracts unwanted attention, as
Tractor Supply recently learned. A conservative social media
campaign this year prompted the company to withdraw its stated
goals in diversity, equity and inclusion, and carbon emissions,
only to provoke backlash from Black farmers, LGBTQ advocates and
climate groups.
    It isn’t deterring Lawton, who plans to open roughly 90 new
stores a year. Its premium valuation multiple, which is well
above its long-term average, implies an impressive run ahead,
whether that’s from boosting sales, the 10% operating margin or
a combination of the two. Other retailers enduring or preparing
for a drought would do well to pick some ideas from Tractor
Supply’s abundant harvest.
    
    Follow @jgfarb on X
    
    CONTEXT NEWS
    Tractor Supply, a self-described rural lifestyle retailer,
plans to release its third-quarter financial results on Oct. 24.

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Tractor Supply investors have feasted this century    https://reut.rs/3A8m5HP
US retail bankruptcies are trending up again    https://reut.rs/48f83Rp
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 (Editing by Liam Proud and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  GOLDFARB/ 
jeffrey.goldfarb@thomsonreuters.com))