Although the S&P 500 is down 1.3% over the past six months, Tractor Supply’s stock price has fallen further to $45.93, losing shareholders 18.7% of their capital. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Tractor Supply, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Tractor Supply Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons you should be careful with TSCO and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Tractor Supply grew its sales at a sluggish 3% compounded annual growth rate. This fell short of our benchmark for the consumer retail sector.
2. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Tractor Supply’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
3. Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.
Tractor Supply has bad unit economics for a retailer, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 36.3% gross margin over the last two years. Said differently, Tractor Supply had to pay a chunky $63.66 to its suppliers for every $100 in revenue. 
Final Judgment
Tractor Supply’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 20.9× forward P/E (or $45.93 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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