Tractor Supply Maintains Margins While Funding Growth

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David Kretzmann, The Motley Fool

Wed, Mar 5, 2025, 6:12 AM 4 min read

Tractor Supply Company (NASDAQ: TSCO) held its fourth-quarter and fiscal-year 2024 earnings call on January 30, 2025. The company delivered record financial results and outlined its strategic growth initiatives. Management expressed confidence in its "Life Out Here 2030" strategy, which expands the company's total addressable market to $225 billion. For long-term investors, three key developments particularly stand out for understanding the company's future growth trajectory.

Strong Customer Engagement Metrics Reaching Record Levels

Tractor Supply's impressive customer metrics demonstrate strong loyalty and engagement despite challenging retail conditions, suggesting its differentiated rural lifestyle focus continues to resonate.

Front-line team member attrition is at a record low. Total active customer accounts are at record highs. High-value customer retention is at record levels. Customer service scores continue to hit all-time highs. Our Neighbor's Club, one of the largest loyalty programs in retail, continues to attract record levels of new customers, and we're exiting 2024 with all-time highs in both retention rates and retained customer counts.

Neighbor's Club membership now exceeds 38 million and represents a record 80% of sales. The program continues to drive deeper customer relationships and increased cross-shopping, with its Petsense shoppers cross-shopping Tractor Supply at "an impressive rate of 50%, an increase of nearly 3 points year-over-year."

Strategic Growth Through Pet Category Expansion with Allivet Acquisition

The Allivet acquisition represents a significant push into the pet medication space, providing entry into a $15 billion market that complements Tractor Supply's existing pet business.

The acquisition of Allivet expands our total addressable market by $15 billion to $225 billion. Allivet has a proven platform to make pet ownership easier by providing convenient access to brand-name medications, expert pharmacy advice, and convenient reordering with its AutoShip program.

This strategic acquisition not only expands Tractor Supply's total addressable market but is expected to contribute more than $100 million to net sales in 2025 and be accretive to earnings. Management sees long-term potential for Allivet to match or exceed Tractor Supply's operating margins as the integration progresses.

Investing in New Growth Initiatives While Maintaining Margins

Tractor Supply is strategically investing in new growth initiatives while offsetting these costs through gross margin expansion, allowing the company to maintain consistent operating margins.

We forecast the gross margin expansion to be offset by SG&A deleverage due to a couple of primary factors. First, depreciation and amortization is anticipated to increase about 10% with a higher growth rate in the first half as compared to the second half of the year. ... Second, we're investing in our Life Out Here 2030 strategic initiatives. In order to launch our direct sales and final-mile initiatives, we're planning a net investment of about 15 to 20 basis points of operating margin into these exciting opportunities for growth.

The company expects modest gross margin expansion of 20 to 40 basis points in 2025, driven by supply chain efficiencies and effective cost management. However, this improvement will be balanced against increased SG&A costs for strategic initiatives, resulting in an operating margin forecast of 9.6% to 10%, centered around 2024's performance.

Looking Ahead

With new store growth accelerating to 90 locations in 2025, the Allivet acquisition expanding the addressable market, and strategic investments in direct sales and final-mile delivery, Tractor Supply appears well-positioned to continue executing on its long-term growth strategy. Management is particularly focused on supply chain optimization, enhancing localization capabilities, integrating Allivet's pet medication business for Neighbor's Club members, and launching both direct sales and final-mile delivery initiatives.

As CFO Kurt Barton emphasized, "We have a long track record of successfully managing through diverse market conditions. The needs-based nature of our business, combined with our deep understanding of these dynamics, allows us to proactively adapt to the market conditions."

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David Kretzmann has positions in Tractor Supply. The Motley Fool has positions in and recommends Tractor Supply. The Motley Fool has a disclosure policy.

Tractor Supply Maintains Margins While Funding Growth was originally published by The Motley Fool

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