Tractor Supply continues to dominate as more Americans move out of cities

As the pandemic ushered in increased levels of homeownership and pet adoption, as well as the exodus of some U.S. consumers from bigger cities, Tractor Supply was one of the biggest beneficiaries.  This quarter some of its strongest performing categories include dry dog food and poultry, among others. Though analysts said Tractor Supply’s growth is beginning to normalize, executives said the company is poised to continue profiting from these trends.

“As the market leader we are well-positioned to continue to benefit from these structural trends,” Tractor Supply CEO Hal Lawton said during a call with investors and analysts. Lawton said the company’s Life Out Here strategic initiative in particular is experiencing increasing momentum. Its Life Out Here strategy includes plans to digitize business processes and further omnichannel capabilities, as well as expand Tractor Supply’s customer base.

Benefiting from the city exodus

Tractor Supply has capitalized on several trends in the U.S. in recent years, including consumers migrating to more rural areas. This includes younger consumers, who’ve left bigger cities. Lawton spoke, on numerous occasions, about how the company has benefitted from millennials owning their first homes. 

“Two years on, we’re seeing people having permanently changed their locations,” said Ethan Chernofsky, vp of marketing at Placer.ai. “That opportunity is really significant because when you move into the suburbs, you have added space and you have all of this first-time demand for home improvement. And that’s the way we think is going to catalyze a lot of growth.”

While Tractor Supply has serviced farmers and ranchers for years, the company has recently set its eyes on pet parents. Tractor Supply early last year began offering pet prescription services online, allowing customers to receive professional veterinary advice on demand through its app.

Chernofsky said that for many retailers that have a professional and do-it-yourself customer base — such as Tractor Supply, Lowe’s and Home Depot — satisfying both these customer bases is a delicate balance. For home improvement retailers Lowe’s and Home Depot, their growth were driven by DIY customers during the first half of the pandemic. But as the pandemic continued, professional contractors boosted their sales.  

Executives said Tractor Supply has captured a record 24.8 million members in the quarter for its Neighbor’s Club Loyalty Program. The company has been revamping its loyalty program last year, adding perks like two free same-day delivery and full-day trailer rental per quarter for Preferred Plus Neighbors.

Over the last two years, Tractor Supply has also been upping its investments in digital, said Julie Gillespie, head of market research at TipRanks. In the early days of the pandemic, when consumers dramatically shopped more online, Tractor Supply launched its first mobile app and redesigned its website. 

“I think that’s kind of a sign of the times and especially this past couple of years, how much everything has moved online,” Gillespie said. “It was well-timed with the pandemic where they really got into this digital focus and capitalized on that trend.”

Tractor Supply’s e-commerce sales saw double-digit percentage increases for the 39th consecutive quarter, according to its recent earnings report. The Tractor Supply app also crossed 3 million downloads this quarter, executives said.

Speed bumps ahead

Despite its upbeat earnings, Tractor Supply’s full-year guidance was lower than expected, said Charles Lewis Sizemore, chief investment officer of Sizemore Capital. Historically, he said, Tractor Supply had not been impacted by recessions due to its focus on farming.

“Whether we’re in a recession or not, you still have demand for farmers,” Sizemore said “Now as Tractor Supply has, of course, has transitioned away from being a pure farming supply company to more of a lifestyle company, it does increase its sensitivity to the economic cycle.”

The company reiterated its guidance for the fiscal year 2022. It expects net sales to be in the $13.6 billion to $13.8 billion range, with comp-store sales growth of 3% to 4.5%. 

Its gross margin also decreased to 34.9% from 35.2% in the previous year’s first quarter, driven by economic pressures like product cost inflation and an increase in transportation costs. 

“Despite those headwinds, though, they fared quite well,” said TipRanks’ Gillespie. “We’re seeing some effects there but nothing too catastrophic at this time.”