Key Tractor Supply Metrics
Tractor Supply’s third-quarter update was notable for several reasons, as the company gave us a glimpse on how Hurricane Ian may have impacted the home improvement sector while the company’s acquisition of Orscheln offers some indicators on how regulatory bodies may approach the Kroger/Albertsons merger. While overall visitation trends have declined on a year-over-year basis – not surprising given that most home-related retailers are lapping two strong years of demand – Tractor Supply remains one of the more resilient retail stories in the U.S. from a visitation market share and visit frequency standpoint and should continue to benefit from migration patterns benefiting smaller and more rural markets as well as new retail formats and other operating strategies.
- Visitation/market share. Management called out "tens of millions of new customers" that have begun to shop at Tractor Supply the past several years (noting that the majority of these customers become active members of its Neighbor's Club loyalty program). This is evident in the chain’s visits per location trends, which remain solidly ahead of pre-pandemic levels even under less-than-ideal operating conditions this past quarter (below).
With the level of growth the retailer has seen in visits per location, it’s not surprising that Tractor Supply continued to take share of visits from its most direct peers. We’ve discussed the retailer’s visitation share gains versus its peers in the past, but we saw these trends continue in 3Q22. From 2017 to 2022 YTD, Tractor Supply has gained more than 2 points of visitation share compared to its closest peers (below).
- Comps down YoY due to weather-related factors, but consumable product trends portend repeat visits in the future. For 3Q22, Tractor Supply's comparable-store sales increased +5.7%. driven by strong ticket growth of 7% partially offset by a transaction count decline of 1.3%. According to management, retail price inflation contributed about 12 points to our comparable store sales as the company navigates ongoing cost pressures across the supply chain but was partly offset by a decline in big ticket sales like generators, zero-turn mowers, and trailers (partly tied to severe heat--more on that below) and a decline in units per transaction. From a category perspective, Tractor Supply saw its consumable, usable and edible (CUE) products outperform overall comp sales results for the sixth straight quarter (roughly three times the rate of the company's overall comp sales performance) and has been key from a visitor acquisition standpoint.
- Geographic trends. Tractor Supply gave us one our first looks at how Hurricane Ian might impact retail results for home improvement retailers (which will likely straddle 3Q22 and 4Q22 as preparation for the storm came at the tail end of the quarter). According to management, the South Atlantic and Mid-Atlantic (areas where storm preparation trends were elevated) were the chain’s best performing regions, while the Far West and Texas/Oklahoma regions lagged the company average due to severe heat and drought conditions (the company pointed out that July was the second hottest in 30-plus years and during August, about 40% of the US was under extreme drought conditions). Placer.ai’s data confirms this data, as states like Florida and South Carolina were the strongest from a visitation perspective during the quarter (save for Midwest states in earlier stages of unit expansion trends), while Texas, Oklahoma, Arizona, and California (areas impacted by drought-like conditions) saw some of the steepest declines.
- Orscheln Farm and Home acquisition update. The company announced that it has closed on its acquisition of Orscheln Farm and Home, with plans to rebrand 81 Orscheln locations across the Midwest to Tractor Supply locations over the next 18 months. Tractor Supply will acquire all 166 Orscheln stores for $320M (before working capital adjustments), but then divest 85 stores to two buyers approved by the FTC (Bomgaars Supply will purchase 73 stores and Buchheit Enterprises will purchase 12 stores (proceeds of the store divestitures will be approximately $72 million). In addition, Tractor Supply has agreed to sell the Orscheln Farm and Home corporate headquarters and distribution center to Bomgaars for approximately $10 million within 15 months after the closing of the transaction. According to management, the Orscheln locations generate roughly half of the revenue per square foot as a Tractor Supply store, suggesting meaningful room for improvement. Tractor Supply management noted that "agreeing to the remedy with the SEC took longer than anticipated", which indicates that Kroger/Albertsons may also face a long road ahead.