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Tractor Supply (TSCO) Buys Petsense, Enhances Pets Business

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Leading rural lifestyle retailer, Tractor Supply Company (TSCO - Free Report) took a step to fortify its presence in the pet specialty space, as the industry offers significant opportunities. Constituting a market of roughly $60 billion, the pet industry remains poised to grow thanks to the solid pet ownership fashion and owners’ growing kindness toward them.

In order to tap this opportunity, the company that operates over 1500 stores, acquired 100% stake in the leading specialty retailer of pet supplies and services, Petsense LLC. This all-cash deal worth $116 million (after adjusting for future tax benefits of $29 million), was sponsored through cash in hand along with revolver debt.

Tractor Supply will gain from the addition of more than 136 Petsense stores across 25 markets, as the latter will now operate as a subsidiary of the former. Operating from its existing base in Scottsdale, AZ, Petsense will continue to be supervised by its senior management team.

Prior to this acquisition, Tractor Supply was operating HomeTown Pet stores, which provided it considerable experience in the pets industry. Hence, in the face of growing pet supplies demand, the buyout of a well-established and renowned name like Petsense, was a strategic step. Tractor Supply is likely to benefit from Petsense’s impressive growth history and network, alongside leveraging its own knowledge of the pets business.

On the other hand, Tractor Supply’s expansion plans should work well for Petsense, as the former intends to increase Petsense’s store count by 15%−20%, on an annual basis. This also seems to be in line with Tractor Supply’s target of increasing its long-term domestic store count to 2,500. Moreover, the company is on track to convert its two current HomeTown Pet stores to Petsense stores. This move, along with Tractor Supply’s resource strength and popularity, is likely to enhance Petsense’s existing presence to several uncovered markets.

Further, Tractor Supply and Petsense’s similar exposure to rural areas is likely to shield both from stiff competition from players like Petsmart and Petco. Also, sources revealed that instead of cannibalizing Tractor Supply’s sales in its existing markets, Petsense’s differentiated product mix should draw new customers, and in turn augment the top line.

Hence, we believe that this acquisition is most likely to be in the best interests of both the companies, given their solid complementary fit. However, the deal (including transaction and integration expenses) will not have any material impact on Tractor Supply’s net bottom line for 2016. So, it looks like the company still envisions 2016 earnings per share in the band of $3.22–$3.26.

Zacks Rank & Key Picks

Tractor Supply currently carries a Zacks Rank #5 (Strong Sell), as it has been bearing the brunt of the challenging economic backdrop, which is taking a toll on consumer spending and weighing on the agricultural and energy sectors. Falling prey to these trends, the company recently issued a bleak third-quarter outlook, alongside lowering its full-year 2016 earnings view (discussed above).

However, investors can count on better-ranked stocks in the same industry such as Dick's Sporting Goods Inc. (DKS - Free Report) , ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA - Free Report) and Marinemax Inc. (HZO - Free Report) , with a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dick's Sporting has a long-term EPS growth rate of 12.3%, and has seen positive estimate revisions for 2016, over the past 30 days.

ULTA Salon has to its credit a spectacular earnings trend as the company hasn’t delivered a negative earnings surprise even once over the past four quarters. Moreover, its long-term EPS growth rate of 19.5% and positive estimate revisions over the past 30 days help it stand strong against the industry.

Marinemax, with a solid long-term EPS growth rate of 30%, has outperformed earnings estimates consistently in the last four quarters, with an average beat of nearly 79%. Further, estimates for the current fiscal have witnessed an uptrend in the last 90 days.

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