The Ratings Game: Rural economies recovering more quickly from COVID than other areas to Tractor Supply’s benefit


Tractor Supply Co.’s

first-quarter results got a lift from its core customers in rural areas, which, the company says, weren’t as affected by the pandemic and are recovering more quickly than other geographies.

“The fastest growth customer segment is our core farm and ranch,” said Hal Lawton, chief executive of the retailer, during the first-quarter earnings call, according to a FactSet transcript.

“This segment is very healthy as rural economies, for the most part, were less impacted by the pandemic and are recovering at a steeper and more robust rate.”

Tractor Supply reported what Lawton called a “record performance” in the first quarter. Lawton attributed the results to a few other factors as well, including a 400-basis point shift to a younger demographic between the ages of 18 and 45 years old. This group, which had been slow to purchase homes, were “shocked” by the pandemic and began to do so.

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“There continues to be a net migration out of urban areas, largely driven by the millennial segment,” Lawton said on the call.

“The most robust homeownership growth is in the millennial cohort, with the growth coming in suburban and rural areas. We believe the growth in this customer segment has staying power, and could be (a) structural game-changer for us.”

Pet owners are also a strong demographic for Tractor Supply, and pet ownership soared during the pandemic. For Tractor Supply, that means sales of things like pet food and shampoo also increased.

“[W]e sold 11 million birds last year and half of those birds went to new customers,” Lawton said.

“And it just shows you a category like poultry, which we’re far and away the market share leader in … went through a renaissance last year and it’s continuing this year in our stores.”

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Raymond James analysts said Tractor Supply is on a long-term path to shareholder returns due to its rural focus as well.

“We expect Tractor Supply to continue to exhibit brand strength… with the growing importance of land and home care, increasing consumer adoption of DIY projects… and rising pet ownership,” analysts wrote.

Raymond James rates Tractor Supply shares at strong buy and raised their stock price target to $215 from $175.

UBS analysts highlighted the 20 million members of Tractor Supply’s Neighbor’s Club loyalty program.

“While undoubtedly Tractor Supply has picked up customers in suburban and exurban areas, its membership base equates to ~75% of all rural households (assuming 20% of US households live in rural areas),” analysts wrote.

UBS rates Tractor Supply stock at neutral and raised its price target, to $190 from $180.

Wedbush pointed out that this success comes at a cost.

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“Tractor Supply’s supply chain strength has enabled the company to capitalize on the strong demand and do a good job meeting customer expectations,” analysts said.

“That said, it is incurring some additional costs related to this effort, including freight/logistics, and labor. These costs are real (and most are not transitory) and limit flow-through on higher sales near term.”

Wedbush rates Tractor Supply stock at neutral, and raised its price target to $190 from $180.

Tractor Supply stock is up 34.2% for the year to date while the S&P 500 index

is up 11.7% for the period.

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