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Shares of Tractor Supply Co. were knocked lower Tuesday, after the retailer of farm and ranch products was downgraded two days before it reports quarterly results, as BofA Securities’ Jason Haas warned investors that they’ll likely be disappointing.
Haas cut his rating on the stock
TSCO,
to neutral, after being at buy for the past 13 months. He slashed his price target by 16%, to $226 from $270.
“We expect [Tractor Supply] to report an earnings miss and cut guidance given a fading tailwind from inflation and worsening demand for discretionary categories,” Haas wrote in a note to clients.
The stock dropped as much as 2.8% in intraday trading, before paring losses to be down 0.8% in midday trading.
The Tennessee-based company is slated to report second-quarter results on Thursday, before the opening bell. The FactSet consensus for earnings per share is $3.92, and the company’s latest full-year EPS guidance is for $10.30 to $10.60.
Haas estimates that one-third of Tractor Supply’s revenue comes from animal and pet food — which makes corn, soy and chicken prices a strong leading indicator for the inflation component of the company’s same-store sales (comp) growth.
“These commodities saw strong inflation over the pandemic and [Tractor Supply’s] comps benefited, but prices flipped negative [year-over-year] at the start of this year, so we expect a lessening tailwind through 2023 and headwind by [the first-quarter of 2024],” Haas wrote in a note to clients.
During a time of similar commodities deflation in 2014, Haas noted that Tractor Supply’s comps were pressured and the stock tumbled more than 25%.
In the company’s first quarter, same-store sales rose 2.1%, as the average ticket price increased 2.8% and the average transaction count fell 0.7%.
Haas said recent talks with a Tractor Supply competitor indicated that demand for discretionary categories has worsened since April, leading the industry to run more promotions and markdowns on both discretionary and consumable, usable and edible products.
“A cold spring, drought in the Midwest and forest fire smoke across the eastern U.S. also likely weighed on comps in 2Q,” Haas wrote.
The stock has slumped 12.9% over the past three months, while the SPDR S&P Retail exchange-traded fund
XRT,
has gained 9.4% and the S&P 500 index
SPX,
has advanced 12.2%.
