Why Tractor Supply (TSCO) Is a Buy After Its 20% Drop

Tractor Supply (TSCO) reported disappointing fourth-quarter earnings earlier this year, missing Wall Street's expectations. Net sales grew only 3.3%, comparable-store sales were nearly flat at 0.3%, and operating income declined by 6.5%. Management cited higher promotional costs and continued weakness in consumer spending on discretionary items.

Following this report in late January, the stock price fell more than 20%, reflecting the market's broad punishment of retailers exposed to discretionary purchases. The CEO acknowledged the results were below expectations, highlighting a shift in consumer spending where essential categories remained stable but discretionary demand softened.

However, the company's full-year guidance tells a different story. Management expects net sales to grow 4% to 6% in 2024, with comparable-store sales reaccelerating to 1% to 3%. They also forecast earnings per share to increase to a range of $2.13 to $2.23, up from $2.06 in the prior year.

This confidence stems from the core of Tractor Supply's business, which is heavily weighted toward consumable, usable, and edible (C.U.E.) products like livestock feed and pet supplies. These categories account for over half of the company's total revenue and provide a dependable stream of non-discretionary sales.

The market's reaction lumps TSCO with vulnerable discretionary retailers, but its business model is fundamentally different. Over 51% of its revenue comes from C.U.E. products—necessities like animal feed that customers can't easily stop buying, even in an economic slowdown. This creates a resilient earnings floor that many retailers lack.

Beyond defense, Tractor Supply is aggressively investing for growth. The company plans to open 100 new stores this year and is expanding a direct sales initiative targeting large farm accounts, aiming to double its sales representatives. These moves widen its competitive moat in rural markets.

For income investors, the recent 4.3% dividend increase to an annualized $0.96 per share is significant. With a conservative payout ratio of just 44% of earnings, the company has ample room to continue raising the dividend, supporting its status as a dividend growth stock.

Finally, the stock's valuation of about 21 times earnings, combined with the 20% price drop, suggests the near-term risks are largely priced in. The disconnect between the stock's performance and the company's resilient, growing fundamentals is what makes this a compelling opportunity for long-term investors.