How to harvest cash crops amid a retail drought
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jeffrey Goldfarb
NEW YORK, Oct 23 (Reuters Breakingviews) -This century’s 10 best large U.S. stocks predictably include Nvidia, Netflix and Apple. Unexpectedly squeezed among the titans of technology, however, is a bricks-and-mortar purveyor of chicken feed, wheelbarrows and coveralls: Tennessee-based Tractor Supply TSCO.O. Its success exemplifies the growing American taste for rural life, and scatters seeds for other retailers to sow.
The $32 billion company, which in 1938 started taking tractor-part orders by mail, now operates nearly 2,300 stores. Best described as a mashup of Home Depot HD.N, Petco Health and Wellness WOOF.O, and L.L. Bean, it is on pace this year to sell $15 billion of products best suited for the countryside. Since 2000, it has delivered shareholders a 26% annualized return, including reinvested dividends, putting it in the S&P 500 Index .SPX elite. Robust expectations also help it command a valuation of 26 times expected earnings over the next 12 months, a premium to the benchmark, many peers and even digital standouts such as Mark Zuckerberg’s Meta Platforms.
Tractor Supply’s success partly owes to an idiosyncratic demographic change. Boss Hal Lawton, an alum of Macy’s, eBay and Home Depot, is benefiting from the trend of crop and animal cultivation becoming more of a hobby than a business. The professionals – or anyone producing and selling at least $1,000 of U.S. agrarian goods a year – are doing more with less, thanks to technological advances. The value of agricultural yields jumped 40% between 2017 and 2022, before adjusting for inflation, but the number of U.S. farms declined by nearly 142,000, or 7%, representing roughly 2% less acreage over the same span, according to the most recent official five-year tally.
At the same time, Americans are moving away from metropolitan centers, giving them more land to grow vegetables, install chicken coops, plant flowers and adopt dogs. The pandemic helped reverse a decade of population decline in rural areas, while the fastest-growing domestic migration is to places more than 20 miles from a City Hall, overtaking the growth in closer suburbs, per the U.S. Census Bureau. “These customers want convenience just as much as if they’re in downtown New York or Chicago,” Tractor Supply’s technology and strategy chief, Rob Mills, said last month at an event hosted by investment bank Piper Sandler.
Few retailers are as well-positioned to take advantage of the shift as Tractor Supply. Its five-year sales through 2023 grew at a compound annual rate of almost 12%, more than three times faster than for general merchandise vendors nationwide. Analysts expect the pace to slow to 5% through 2028, according to estimates gathered by Visible Alpha, but the company managed to retain its Covid-19-related gains while many other retailers lost them. There are some fresh prospects for growth following the company’s decision to roll out extra space to hawk seeds, plants and landscaping tools at two-thirds of its stores. Nearly 7%, or more than $10 billion, of Home Depot’s sales last year were outdoor-garden related.
Others are eyeing the opportunities. Amazon.com AMZN.O, for one, is trying to muscle further into the market, with plans to provide one- to two-day delivery in less densely populated U.S. areas, according to the Wall Street Journal. Buyout firms are also taking an interest. Nolan Capital, for example, acquired 20-location Coastal Farm & Ranch and last year combined it with C-A-L Ranch Stores. Smaller, local outlets are Tractor Supply’s biggest competition, but they typically cannot offer the same one-stop shop or online service. A rollup strategy to create a formidable regional or nationwide challenger would take time and significant capital outlays.
There are ways for bumbling shopping-emporia operators to capitalize on Tractor Supply’s prosperity without going rustic, however. It may be a quaint notion that evokes old country stores, but catering to staffers and customers tends to make shareholders happy, too. Other U.S. retailers replaced about 18% of their store managers in 2022, per consultancy Korn Ferry, while Tractor Supply touts a much lower 12% rate of turnover. In 2020, it started giving them restricted stock worth at least $7,500 annually, a practice Walmart WMT.N embraced this year.
Lawton is also finding ways to keep shoppers from straying. Pet-washing stations and mobile veterinary clinics help lure them into stores, where they’re apt to buy more. Tractor Supply also generates about half its revenue from frequently repurchased items such as pet food and propane gas. Moreover, a third of all sales are from its own private-label brands, which tend to be more profitable and engender allegiance, compared to just 1% at Amazon. Members of its revamped Neighbors Club loyalty program account for nearly 80% of the top line, a bigger proportion than from those enrolled in the Starbucks Rewards app.
Tractor Supply has things it can learn from retailing peers, too. For example, it only generates 7% of sales online, less than half the 16% estimated rate nationally. And as much as the company is gaining from shifts in U.S. migration, its business is also more tethered to weather conditions, affected by warmer oceans. Unseasonably cold or hot temperatures make inventory management tougher while hurricanes and ice storms threaten to shutter stores and disrupt shipments for long stretches, in turn frustrating customers.
There’s also the danger of chasing growth too quickly. Although more stores theoretically will translate into new customers and stronger negotiating power with vendors, the retail industry is littered with stories of costly overexpansion that led to excess debt, weaker performance and degradation of the brand. Getting bigger also attracts unwanted attention, as Tractor Supply recently learned. A conservative social media campaign this year prompted the company to withdraw its stated goals in diversity, equity and inclusion, and carbon emissions, only to provoke backlash from Black farmers, LGBTQ advocates and climate groups.
It isn’t deterring Lawton, who plans to open roughly 90 new stores a year. Its premium valuation multiple, which is well above its long-term average, implies an impressive run ahead, whether that’s from boosting sales, the 10% operating margin or a combination of the two. Other retailers enduring or preparing for a drought would do well to pick some ideas from Tractor Supply’s abundant harvest.
Follow @jgfarb on X
CONTEXT NEWS
Tractor Supply, a self-described rural lifestyle retailer, plans to release its third-quarter financial results on Oct. 24.
Tractor Supply investors have feasted this century https://reut.rs/3A8m5HP
US retail bankruptcies are trending up again https://reut.rs/48f83Rp
Editing by Liam Proud and Pranav Kiran
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