Tractor Supply Co., a retailer specializing in farm and ranch products, saw a decline in its stock on Tuesday as it received a downgrade just two days before its quarterly earnings report. BofA Securities analyst, Jason Haas, cautioned investors that the results were likely to be underwhelming.
After maintaining a “buy” rating for the past 13 months, Haas downgraded the stock (TSCO, -0.76%) to neutral. He also reduced the price target from $270 to $226, marking a 16% decrease.
Haas explained his decision in a note to clients, stating, “We expect Tractor Supply to report an earnings miss and cut guidance given a fading tailwind from inflation and worsening demand for discretionary categories.”
The stock initially experienced a 2.8% drop in intraday trading but later recovered slightly to be down 0.8% during midday trading.
Tractor Supply Co., headquartered in Tennessee, is scheduled to release its second-quarter results on Thursday before the opening bell. According to FactSet, the consensus estimate for earnings per share is $3.92, while the company’s latest full-year EPS guidance ranges from $10.30 to $10.60.
Haas also highlighted that approximately one-third of Tractor Supply’s revenue comes from sales of animal and pet food, making corn, soy, and chicken prices significant factors affecting the company’s same-store sales growth in terms of inflation.
Tractor Supply Faces Challenges as Commodity Prices Shift
Inflation in certain commodities provided a boost to Tractor Supply’s performance during the pandemic. However, the situation has taken a turn this year. According to Haas, an industry expert, prices have started to decline, which will likely have a negative impact on Tractor Supply’s results. The downward trend is expected to continue through 2023, and by the first quarter of 2024, it could become a significant headwind for the company.
Tractor Supply faced a similar situation in 2014 when commodities experienced deflation. As a result, the company’s performance suffered, leading to a significant drop in its stock value of over 25%.
During the first quarter of this year, Tractor Supply reported a 2.1% increase in same-store sales. The rise was driven by a 2.8% increase in the average ticket price. However, the average transaction count decreased by 0.7%.
Haas also mentioned recent discussions with a competitor of Tractor Supply, which revealed that the demand for discretionary categories has worsened since April. As a consequence, the industry has resorted to running more promotions and markdowns on both discretionary and essential products.
Various factors, such as a cold spring, drought in the Midwest, and forest fire smoke across the eastern U.S., likely had an additional negative impact on Tractor Supply’s sales in the second quarter.
In the past three months, Tractor Supply’s stock has experienced a decline of 12.9%. In contrast, the SPDR S&P Retail exchange-traded fund has seen an increase of 9.4%, while the S&P 500 index has advanced by 12.2%.