Slowing Growth Leads Tractor Supply Co. Off Track; BofA Downgrades

After reporting weak full-year guidance following a fourth-quarter earnings beat, Bank of America Merrill Lynch is taking a more cautious stance on Tractor Supply Company (NASDAQ: TSCO).

The Analyst 

Bank of America analyst Elizabeth Suzuki downgraded Tractor Supply Co. from Buy to Underperform rating with a price target dropped from $84 to $69.

The Thesis

Tractor Supply outlined the company’s expectation for operating margin compression and slower store growth in 2018, which led to Suzuki’s downgrade, she said. (See the analyst's track record here.) 

“After the impressive 53-percent runup in TSCO’s stock since the trough in July ’17, we are taking a more cautious stance given less attractive valuation relative to growth." 

The more tepid growth can be attributed to a slower pace of new store openings tha previously expected and margin headwinds, largely due to the company’s investments in its OneTractor initiatives, Suzuki said. 

Tractor Supply is making moves that may reduce margins in the short-term to fuel future growth, the analyst said: the company announced that half of the margin compression in 2018 would be attributable to investments in labor, supply chain and omnichannel initiatives.

Tractor Supply is expected to open 80 new stores and 20 new Petsense stores in 2018, implying a slowing store growth trajectory, according to BofA. 

If growth is slowing, the valuation is no longer compelling, Suzuki said. 

Price Action

Shares of the company were down 5 percent Friday at $67.87 at the close. 

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