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Why Is Tractor Supply (TSCO) Down 12.5% Since the Last Earnings Report?

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A month has gone by since the last earnings report for Tractor Supply Company (TSCO - Free Report) . Shares have lost about 12.5% in that time frame, underperforming the market.

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

Tractor Supply Reports In-Line Earnings, Down Y/Y

Tractor Supply posted in-line earnings in first-quarter 2017 after beating the same in the preceding two quarters. Meanwhile, the company’s revenues marginally came ahead of the estimate and grew year over year.

The company’s earnings of $0.46 per share came in line with the Zacks Consensus Estimate but decreased 8% year over year.

The top line grew 6.6% year over year to $1,564.1 million, and marginally came ahead of the the Zacks Consensus Estimate of $1,556 million. However, comps fell 2.2%, compared with a 4.9% rise witnessed in the year-ago period. The unfavorable comparison with first-quarter 2016 reflects the advantage of an additional 53rd week in the prior year. Consequently, each quarter in 2017 started a week later than the prior-year. On adjusting for this weekly shift, comps decreased 2.6%.

The fall in comps is attributable to a 1.4% and 0.9% dip in comparable transaction count and average ticket, respectively. Further, comps were primarily hurt by soft seasonal merchandise sales, along with deflationary pressure. This was somewhat compensated by favorable comps across the company’s Livestock and Pet categories. Region wise, unfavorable weather had maximum impact on the Northern areas, where sales were most strained.

Margins & Costs

The company’s gross profit rose 4.8% year over year to $518.2 million, while gross margin declined 60 basis points (bps) to 33.1%. Gross margins were hampered by increased markdowns on cold weather merchandise, higher promotional activities as well as due to rise in freight expense for consumable, usable and edible (C.U.E.) products.

Selling, general and administrative (SG&A) expenses, including depreciation and amortization, as a percentage of sales, increased 70 bps to 27%. This increase was primarily due to deleveraging of store personnel as well as occupancy expenditures owing to fall in comparable store sales. In dollar terms, SG&A expenses (including depreciation and amortization) escalated 9.2% to $421.8 million.

Operating income margin contracted 120 bps to 6.2% in first-quarter 2017. However, operating income, in dollar terms, declined 10.9% to nearly $96.4 million.

Financial Position

Tractor Supply ended the quarter with cash and cash equivalents of $72.7 million, long-term debt of $598.9 million, and total stockholders’ equity of $1,379.5 million.

Further, the company incurred capital expenditure of $34.9 million in the reported quarter, while it used cash flow from operating activities of about $141.7 million.

Store Update

During the first quarter, Tractor Supply opened 24 stores and transformed two Hometown Pet stores to Petsense stores, compared with the addition of 36 stores and three store closures – all of which were Del’s stores, in first-quarter 2016. Further, the company opened nine Petsense LLC stores during the reported quarter. This brings the total Petsense store count to 152 at the end of the first quarter.

As of Apr 1, 2017, the company operated 1,617 Tractor Supply stores in 49 states.

Guidance

Management believes that given the seasonal nature of its business, the company should rather be measured by its half-yearly than the quarterly performance. While the first quarter remained challenging, management is quite hopeful about spring season prospects, thus anticipating seasonal merchandise sales to show some improvement in the spring selling season.

Tractor Supply’s solid spring season prospects are also reflected by management’s enthusiasm about upcoming merchandise strategies and constant implementation of cross-network consumer-centric growth plans. Further, this was also reconfirmed with the company’s expansion of Neighbor's Club and Buy Online Pick Up In Store programs. Meanwhile, it had earlier announced the conclusion of the national rollout of Neighbor’s Club loyalty program, which commenced in Oct 2015.

The company expects to continue returning value to shareholders in the form of share buybacks. The company anticipates its debt position to range within $400–$450 million at the end of 2017.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been five downward revisions for the current quarter.

VGM Scores

At this time, Tractor Supply's stock has a subpar Growth Score of 'D', however its Momentum is doing a lot better with an 'A'. Charting a somewhat similar path, the stock was allocated also a grade of 'B' on the value side, putting it in the second quintile 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.

Zacks' style scores indicate that the stock is suitable for momentum and value investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #4 (Sell). We are looking for a below average return from the stock in the next few months.


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