Tractor Supply Company (TSCO Quick QuoteTSCO - Free Report) has posted second-quarter 2023 results, wherein the top and bottom lines missed the Zacks Consensus Estimate but improved year over year. Results have been hurt by seasonal underperformance, particularly in June. Management expects consumer spending to remain muted throughout the remainder of the year.

Shares of the Zacks Rank #4 (Sell) company have lost 10.3% in the past three months compared with the industry’s 8.1% decline.

Q2 Highlights

Tractor Supply’s earnings of $3.83 per share were up 8.5% year over year but missed the Zacks Consensus Estimate of $3.91.

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Net sales advanced 7.2% year over year to $4,184.7 million, driven by contributions from the acquisition of Orscheln Farm and Home, store openings and comparable store sales growth. However, the metric missed the Zacks Consensus Estimate of $4,274 million.

Comps improved 2.5% year over year but lagged our estimate of 5.3% growth. The company’s comparable average transaction count improved 1.8% while comparable average ticket grew 0.6%. Sturdy demand for core year-round merchandise, including consumable, usable and edible products, contributed to comp growth. This was partly offset by a decline in seasonal goods and big-ticket items.

Costs and Margins

The gross profit rose 9.3% year over year to $1,514.8 million but lagged our estimate of $1,542.6 million. Meanwhile, the gross margin expanded 69 basis points (bps) to 36.2%. The execution of everyday low-price strategy, reduced transportation costs and efficiencies from a new distribution center aided margins, partly offset by cost inflation and the unfavorable product mix.

Selling, general and administrative (SG&A) expenses, including depreciation and amortization, as a percentage of sales, expanded 77 bps year over year to 22.8%. In dollar terms, SG&A expenses, including depreciation and amortization, rose 10.9% year over year to $955.4 million and beat our estimate of $867.9 million. Higher SG&A expenses resulted from higher depreciation and amortization, the opening of a distribution center, and the impacts of higher medical claims.

The operating income was up 6.5% year over year at $559.3 million in the second quarter but missed our estimate of $574.6 million. Meanwhile, the operating margin contracted 8 bps to 13.4%.

Financial Position

Tractor Supply ended second-quarter 2023 with cash and cash equivalents of $620 million, long-term debt of $1,727.5 million, and total stockholders’ equity of $2,087.2 million. It also provided cash flow from operating activities of $782.3 million in the six months ending Jul 1, 2023.

In second-quarter 2023, the company incurred a capital expenditure of $191.7 million. For 2023, capital expenditure is expected to be $800-$850 million, up from the previously mentioned $700-$775 million.

In the second quarter, Tractor Supply returned $266.7 million to its shareholders, including $153.9 million to repurchase 0.7 million shares, and $112.8 million as quarterly cash dividends.

Store Update

In the quarter under review, the company opened 17 Tractor Supply stores and three Petsense by Tractor Supply stores. As of Jul 1, 2023, it operated 2,181 Tractor Supply stores across 49 states, including 81 Orscheln Farm and Home acquired in 2022. It also operated 192 Petsense stores in 23 states as of Jul 1, 2023.

Management intends to continue its store-opening initiatives in 2023. It plans to open 70 Tractor Supply stores and 10-15 Petsense stores in 2023.

The company announced an update to its long-term store plan and several new real estate programs that will strengthen its balance sheet and real estate portfolio. As part of this, Tractor Supply has set a target of 3,000 Tractor Supply stores in the United States, up 200 locations from its prior guidance. Also, it anticipates accelerating its annual new store growth to 90 per year in 2025 and 80 stores in 2024.

2023 Outlook

Management revised its guidance to include the positive impacts of the updates to the real estate portfolio strategy.  The company expects net sales of $14.8-$14.9 billion, down from the earlier mentioned $15-$15.3 billion.

Meanwhile, comps are likely to grow 1.3-2.5%, down from the prior stated 3.5-5.5% growth. The operating margin is anticipated to be 10.2-10.3% compared with the 10.1-10.3% mentioned earlier. Earnings per share are expected to be $10.20-$10.40, down from the previously communicated $10.30-$10.60.

Stocks to Consider

Some better-ranked companies are Abercrombie & Fitch (ANF Quick QuoteANF - Free Report) , Urban Outfitters (URBN Quick QuoteURBN - Free Report) and Walmart (WMT Quick QuoteWMT - Free Report) .

Abercrombie & Fitch, a specialty retailer of premium, high-quality casual apparel for men, women, and kids, currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for ANF’s 2024 sales and EPS indicates increases of 3.4% and 732%, respectively, from the year-ago period’s reported levels. The company has a trailing four-quarter earnings surprise of 480.6%, on average.

Urban Outfitters, which engages in the retail and wholesale of general consumer products, currently sports a Zacks Rank #1. The expected EPS growth rate for three to five years is 18%.

The Zacks Consensus Estimate for Urban Outfitters’ current fiscal-year earnings suggests growth of 57.1% from the year-ago reported number. URBN has a trailing four-quarter earnings surprise of 12.2%, on average.

Walmart, which operates a chain of hypermarkets, discount department stores and grocery stores, currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 5.5%.

The Zacks Consensus Estimate for Walmart’s current financial-year sales suggests growth of 4.2% from the year-ago period’s actual. WMT has a trailing four-quarter earnings surprise of 12%, on average.