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Tractor Supply Company (TSCO - Analyst Report), a leading retail firm and ranch store brand, is scheduled to report its second-quarter 2012 financial results after the market closes on July 25, 2012. The current Zacks Consensus Estimate, for the quarter, is $1.39 per share and revenue is expected to be $1,302 million.

First-quarter 2012, a Synopsis

Tractor Supply's first-quarter 2012 earnings came in at 55 cents, surpassing the Zacks Consensus Estimate of 54 cents as well as the prior-year earnings of 24 cents per share.

Tractor Supply’s first-quarter results benefited mainly from the structural improvements made over the years. This enabled the company to adjust its offerings to suit customer demand and to promptly respond to events, such as the early onset of spring in March 2012.

During the recession, Tractor Supply had suffered setbacks as buyers avoided big-ticket purchases, such as mowers, but recent quarters have seen an uptick in results. The company’s impressive merchandising improvement strategy along with solid same-store sales trend resulted in double-digit top-line growth in revenues. Net sales in the quarter surged 22% to $1,020.4 million from $836.6 million in the prior-year quarter. Moreover, total revenue surpassed the Zacks Consensus Estimate of $1,002 million.

Guidance for 2012

Encouraged by strong first-quarter results, the company raised its 2012 earnings guidance range to $3.52 to $3.60 per share compared with its earlier forecast of $3.38 to $3.46 per share.

Moreover, net sales forecast for 2012 has also been raised to $4.61 – $4.68 billion versus the previous guidance of $4.56 – $4.66 billion. In 2012, same store sales are expected to register an increase of 4.0% to 5.5%, up from its prior forecast of 3% to 5%. Further, the company has planned to open 90 to 95 new stores during 2012.

Zacks Consensus                                                                                  

The analyst covered by Zacks expects Tractor Supply to post second-quarter 2012 earnings of $1.39 a share, higher than $1.23 delivered in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between earnings of $1.33 and $1.46 a share.

For 2012, the Zacks Consensus Estimate stood at $3.68 per share, higher than its previous fiscal earnings of $3.01 per share. The current Zacks estimate ranges between $3.58 and $3.75 per share.

Estimate Revisions Trend

Agreement

We do not see any major estimate revisions at this point. Among the 19 estimates, one estimate for the second quarter revised upward while one moved in the opposite direction in the last 30 days. In the last 7 days, one estimates moved downward while none moved in the opposite direction.

For full-year 2012, 1 out of 21 estimates was revised downward while none moved in the opposite direction in the last 7 and 30 days.

Magnitude

The Zacks Consensus Estimate for the upcoming quarter inched down by a penny over the last 30 days. Some of the analysts believe that the company’s second-quarter financial performance may disappoint due to drought and moderate consumer spending.

However, for 2012, most of the analysts remained constructive on the stock based on the company’s growth prospects and kept their estimates intact, in the absence of any major news having a direct or an indirect impact on the estimates.

Surprise History

With respect to earnings surprises, Tractor Supply has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.9% to 11.5%. The average surprise over the last four quarter remained at positive 5.1%.

Our Recommendation

Tractor Supply is the largest operator of farm and ranch stores in the U.S., a unique market niche that serves the lifestyle needs of recreational farmers and ranchers. The company's stores are strategically located in small towns, close to its target customers, providing it with a competitive edge over its rivals.

We believe that Tractor Supply has successfully tweaked merchandise assortment across its stores, which is in line with the prolonged economic downturn. The company has increased the proportion of less discretionary items, such as animal and pet-related products, while reducing shelf space for certain big-ticket merchandise, such as outdoor power equipment.

Moreover, in an effort to boost margins, Tractor Supply is expanding its portfolio of private label brands and is also focusing on direct sourcing. The company has set a long-term target of generating 25% of sales from private label brands and 13% from strategic direct sourcing. This provides a strong upside potential to the company.

However, the company operates in a highly fragmented industry and faces intense competition from larger retailers, such as The Home Depot Inc. (HD - Analyst Report) and Lowe’s Companies Inc. (LOW - Analyst Report) as well as from independently-owned retail farm and ranch stores, privately-held regional farm store chains as well as cooperatives. Being in such a high competitive industry, Tractor Supply may find it difficult to execute and implement new business strategies, which in turn, may impact its operations adversely.

Currently, we are maintaining a long-term ‘Outperform’ recommendation on Tractor Supply. However, the company has Zacks #3 Rank implying a short-term Hold rating on the stock.

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