Remote work appears to be here to stay. Many affluent Americans are migrating from crowded metropolitan areas to exurbs and rural areas boosting the prospects of companies catering to their needs.
Introduction
Tractor Supply Company was founded in 1938 by Charles E. Schmidt as a mail order business distributing machinery and parts to farmers. Late in his life, Mr. Schmidt told a reporter that, as a “city boy” from Chicago, he knew nothing about tractors and had never even set foot on a farm.1 But this did not stop him from identifying a promising business opportunity at the age of 26 in the midst of the Great Depression.
In the 1930s, farmers were hard pressed for cash and were rarely in a position to purchase expensive new equipment. However, they had no choice but to buy replacement parts for their aging tractors if they wanted to stay in business. Mr. Schmidt’s strategy was to run a low-overhead operation supplying non-discretionary parts and to pass the savings to customers.2 In the company’s first year of operations, it sold $50,000 of merchandise through a 24-page catalog listing 2,000 products.3
In 1939, Tractor Supply opened its first retail location in Minot, North Dakota, a rural town fifty miles south of the Canadian border. This store performed well and led Mr. Schmidt to successfully replicate the same model in additional locations. At this point, over ninety percent of sales were to farmers. However, after World War II, farm consolidations caused the company to move its locations closer to cities, change its retail brand name to TSC, and distance itself from its farm and ranch roots.4
Tractor Supply posted $10 million of sales in 1959 and went public with Mr. Schmidt retaining a controlling interest. By 1964, the company had 100 locations.5 Five years later, in the midst of the 1960s era of conglomeration, Mr. Schmidt sold the company to National Industries. This proved to be a negative event for Tractor Supply which lost its focus, and the company’s profitability was entirely extinguished by 1980.3
In 1980, Tom Hennesy became CEO and succeeded in returning the company to its roots. Management’s renewed focus on serving the farm and ranch niche market led to break-even results in 1982 and Mr. Hennesy led a management buyout in 1983. After a decade of progress returning the company to its profitable growth trajectory, Mr. Hennesy took Tractor Supply public for the second time in 1994.2
Although Tractor Supply might sound boring, the business has performed remarkably well since its public offering, and this has been reflected in its stock price. A dollar invested in Tractor Supply at the time of its public offering in 1994 is now worth ~$143, making it a rare “100+ bagger”. In addition, the company has paid a total of $12.53 in dividends since initiating a quarterly payout in 2010. There is nothing boring about a company that has compounded at over 19% for nearly three decades!6
In 2021, Tractor Supply recorded $12.7 billion of sales through its network of 2,181 locations in 49 states. In addition to 2,003 Tractor Supply stores, the company operates 178 Petsense locations. A Tractor Supply store is relatively small at between 15,000 to 20,000 square feet and is typically located in an exurban or rural setting rather than in major metropolitan areas. The square footage of a Tractor Supply store is well under twenty percent of an average Home Depot or Lowes.7
Tractor Supply defines its customer base as those who enjoy the “Out Here” lifestyle. The company’s marketing message emphasizes a pioneering spirit catering to the lifestyle needs of recreational farmers and ranchers. This is a demographic group that typically has above average incomes and does not usually rely on farming or ranching for their primary income. Instead, most customers simply enjoy living in less crowded, rural settings and value the convenience, targeted assortment of products, and superior customer service that Tractor Supply offers.8
This article evaluates Tractor Supply’s business model, recent operating history, capital allocation, future prospects, and potential risks. However, since Tractor Supply has been positively impacted by the COVID-19 pandemic, it is useful to first spend some time examining measures that were initially taken due to government-mandated lockdowns but now have become deeply entrenched in society.
Pandemic Tailwinds
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- Financier Charles Smith Dies at 83 by Neil Santaniello and Lori Crouch, May 3, 1996 (South Florida Sun-Sentinel) [↩]
- Tractor Supply: A Portrait of a Compounder as a Young Company by Matt Franz, August 7, 2020 (Eagle Point Capital) [↩] [↩]
- A 360-Degree View of Tractor Supply Company by Sara Logel, May 27, 2015. (Hardware Retailing) [↩] [↩]
- Ibid. [↩]
- Company History, Retrieved on July 8, 2022 (Tractor Supply Company) [↩]
- According to Yahoo! Finance, Tractor Supply stock closed at a split-adjusted $1.42 on February 18, 1994. The closing price of the stock on July 7, 2022 was $203.44. In addition, the company has paid $12.53 of dividends since initiating a dividend payout in 2010. Stock price annualized return (excluding dividends): (203.44/1.42)^(1/28.4) – 1 = 19.1%. Also see Tractor Supply’s Investment Calculator and Dividend History pages. [↩]
- The average Home Depot location has 104,000 square feet of indoor space and 24,000 square feet of outdoor selling space, while the average Lowes store has 112,000 square feet of indoor space and 32,000 square feet of outdoor selling space. Sources: Home Depot 10-K for the fiscal year ended January 30, 2022. Lowes 10-K for the fiscal year ended January 28, 2022. [↩]
- In the early 2000s, I lived in a rural community thirty miles east of Sacramento that precisely matches Tractor Supply’s target market. I would have welcomed a “one-stop shop”, but I was not familiar with the Tractor Supply chain. I purchased supplies from a variety of businesses, from mom-and-pop stores to Home Depot. I first became aware of Tractor Supply in 2010 when I researched the company as a potential investment. This was many years after I relocated to a large city for work-related reasons. [↩]