A month has gone by since the last earnings report for Tractor Supply (TSCO Quick QuoteTSCO - Free Report) . Shares have lost about 5.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Tractor Supply due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Tractor Supply Posts Q3 Earnings Beat, Sales Up Y/Y

Tractor Supply reported third-quarter 2020 results, wherein the top and the bottom lines improved year-on-year and also surpassed the Zacks Consensus Estimate. The company also provided its view for the fourth quarter.

Tractor Supply’s earnings came in at of $1.62 per share, which surpassed the Zacks Consensus Estimate of $1.38. Moreover, the bottom line improved 58.8% from the prior-year quarter’s figure.

Net sales increased 31.4% year over year to $ 2,606.6 million and beat the Zacks Consensus Estimate of $2,398 million. The improvement was driven by comparable store sales (comps) increase of 26.8%, led by growth of 12.5% in comparable average ticket and 14.3% in comparable average transaction count.

Comps growth was backed by strength in demand for summer seasonal categories as well as everyday merchandise, including consumable, usable and edible products. Further, robust comps growth at all of the company’s geographic regions aided results. Additionally, the company witnessed triple-digit sales growth in the e-commerce business.

Margins & Costs

Gross profit rose 36.6% year over year to $948 million, while gross margin expanded 138 basis points (bps) to 36.4%. Gross margin gained from lower depth and frequency of sales promotions, lower clearance activity, and reduced transportation costs as a percent of net sales.

Selling, general and administrative (SG&A) expenses — including depreciation and amortization — as a percentage of sales declined 14 bps to 26.7%. SG&A expenses benefited from leverage in occupancy, personnel as well as other operating costs due to higher comps, partly offset by incremental costs related to the pandemic. In dollar terms, SG&A expenses, including depreciation and amortization, rose 30.7% to $695.8 million.

Driven by higher sales and gross margin, operating income rose 55.9% to $ 252.2 million in the third quarter. Operating margin expanded 152 bps to 9.7%.

Strategic Initiatives

The company provided details regarding its new ‘Life Out Here Strategy’. The strategy is essentially based on five key pillars which includes customers, digitization, execution, team members as well as total shareholder return.  Some of the key initiatives undertaken to support the strategy include boosting space productivity, enhancing omni channel initiatives, evolution of Neighbor’s Club loyalty program as well as augmenting in-store merchandising execution.

As part of the Life Out Here Strategy, the company also provided long term financial growth targets for the upcoming three to five years. Accordingly management envisions achieving net sales growth in the bracket of 6-7%, while comps are expected to grow between 4-5%. Further, operating margin is expected in the range of 9-9.5% and earnings per share are expected to grow in the bracket of 8-10%.

Financial Position

Tractor Supply ended the quarter with cash and cash equivalents of $1,112 million, long-term debt of $529.3 million and total stockholders’ equity of $1,875.9 million. Further, it has no amounts drawn on its $500 million revolving credit facility as of Sep 26, 2020. This provides ample financial flexibility to the company to steer through the pandemic.

In the first nine months of 2020, it incurred capital expenditure of $161.3 million and generated cash flow from operating activities of $1,005 million. For 2020, it continues expects capital expenditure of $300-$325 million.

Store Update

In the quarter under review, Tractor Supply opened 23 Tractor Supply stores and three Petsense stores. As of Sep 26, the company operated 1,904 Tractor Supply stores across 49 states and 183 Petsense stores in 25 states. Going ahead, management remains on track with its store-opening initiatives. It plans to open 80 new Tractor Supply stores and 10 Petsense stores in 2020.

Q4 Outlook

Tractor Supply continues to remain uncertain regarding the magnitude of the pandemics impact upon the company performance in 2020. Nevertheless, it has provided guidance for the fourth quarter. The company expects net sales in the range of $2.6-$2.7 billion for the fourth quarter, with comps growth of 15-20%. Moreover, net income is likely to be $163-$175 million, while earnings per share are expected in the bracket of $1.37-$1.47.

However, the company expects costs related to COVID-19 to hurt its business by $17-$20 million in the fourth quarter. Additionally, costs related to the aforementioned Life Out Here Strategy is likely to be in the range of $12-$15 million during the fourth quarter. The company also expects to incur wage and benefit changes related costs of nearly $13 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Tractor Supply has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Tractor Supply has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.