Tractor Supply’s Strong Brand, Competitive Positioning Dig Moat

We are raising our economic moat rating for Tractor Supply TSCO to wide from narrow thanks to investments that enhance its differentiated one-stop-shop model, giving us greater confidence in the strength of its brand intangible asset.

First, Tractor Supply’s unique product mix, critical to its rural consumers, has expanded with the addition of PetVet Clinics, garden centers, exclusive products, and more, allowing the firm to capture a greater share of wallet and deepen entrenchment with its core customers. Simultaneously, higher-margin private-label sales have risen to 30% of total sales from 21% in 2010, tying consumers to Tractor Supply’s well-priced internal brands.

Second, we believe investments in omnichannel, loyalty initiatives, footprint, and customer service have strengthened Tractor’s brand and deepened the divide between the firm and its regional competitors. With 28 million loyalty members, over 2,300 total boxes, and stellar service metrics, we believe Tractor Supply benefits from superior customer attribution data, visibility, and topnotch retention rates, limiting the appeal for competitors to challenge the firm’s positioning as a first mover in national outdoor retail. We surmise entry would require significant capital investment to attract talent and obtain or construct strategically located distribution facilities and stores, while constraints in real estate availability and forging vendor relationships limit its appeal. As such, Tractor Supply has delivered consistent economic profits (ROIC five-year historical average of 14%, above our 9% WACC), which we expect to persist over the 20-year horizon implied by our wide moat rating.

With the rating change, our fair value estimate rises to $210 per share from $190, attributable to a generation of economic rents for a longer period. Our long-term forecast otherwise remains intact. We expect Tractor Supply to average 4% comparable growth and 80 basis points of operating margin expansion through 2032.