Tractor Supply Earnings: Execution Holds as Weaker Spending and Unusual Weather Persist

Wide-moat Tractor Supply delivered resilient third-quarter results, which fell largely within our expectations. Despite declines in big ticket (down a mid-single-digit percentage) and seasonal purchases due to waning discretionary spending and unseasonably warm weather, comparable sales were essentially flat, just shy of our 1% forecast. We believe Tractor Supply's higher-income consumer base, promotional capabilities, and needs-based consumable, usable, and edible fare make the firm less susceptible than some peers to broader macroeconomic woes and weather volatility. As evidence, even with the mix shift away from higher-margin big ticket items, its gross margin improved by 110 basis points to 36.7% (near our 36.2% estimate) from 35.6% thanks to expanded distribution capabilities and lower transportation costs. Further, a 10% operating margin fell in line with our assumption, as the firm prudently managed costs during a period of heightened investment and cost deleverage.