Tractor Supply (TSCO -1.68%) and Floor & Decor (FND -1.16%) are two retailers with big growth plans. Although they touch different niches and don't directly compete with each other, there are some broad similarities in that one is, essentially, a hardware store and the other serves the home improvement and construction markets. If you're looking for a growing retailer with a hardware angle to it, you'll probably want to compare these two companies. Here's a quick look at which one might be more attractive to you.
1. There's a slightly different focus
Although already noted, it bears repeating. Tractor Supply has a farm theme, but it is, basically, a hardware store at its core. Yes, you can buy baby chickens and electric fences. But there are also many of the same basics you would find at a Home Depot (HD -0.58%). That said, the farm angle has given Tractor Supply an interesting draw for consumers far beyond the farm community and has allowed it to compete quite well with larger hardware store peers.
Image source: Getty Images.
Floor & Decor is focused exclusively on flooring. You can find such products at Home Depot, as well. But what you won't find at a traditional hardware store is the same number of options that Floor & Decor's massive stores allow it to provide. That increased scale gives it pricing power with suppliers and, thus, allows it to sell at attractive prices. So good prices and more options, which easily explains how it can compete with the giant hardware chains.
There isn't really a winner on this point, though it is likely that Floor & Decor will feel a greater impact from the ups and downs in the housing market.
2. Growth is the big story
Both Tractor Supply and Floor & Decor are heavily focused on opening new stores as they look to grow their respective businesses. Tractor Supply ended the third quarter of 2023 with 2,198 stores. It has a goal of getting to 3,000, with a targeted level of 90 store openings per year by 2025. It's also venturing into adjacent areas, like pet supply stores, which could extend its growth runway even further over time.
Floor & Decor has a smaller store footprint, with roughly 212 locations (adding both warehouse stores and design stores) at the end of the third quarter. It's on track to open 32 new stores in 2023; through the first nine months of the year it had opened 17 locations and closed one. That's a far more rapid pace than Tractor Supply, given the smaller store base. Its goal is to get to around 500 stores.
Given the size difference in the current store counts, Floor & Decor probably has more growth opportunity ahead because it is working off of a smaller base. Indeed, if it hits its mark, the retailer will basically more than double in size.
3. Dividends for one, but not for all
While Floor & Decor probably has more growth potential in its plans, it doesn't pay a dividend. So income-focused investors will probably not find it attractive. Tractor Supply's dividend yield is around 2.1% today. That's not huge, but the dividend has been increased annually for 14 years. The annualized rate of increase over the past decade, meanwhile, is over 20%. Couple that with the ongoing expansion plans, and dividend growth investors will probably find Tractor Supply quite attractive.
4. Neither stock is cheap
Valuation is another area where differences start to show up. As the following chart shows, Home Depot has a price-to-earnings ratio of around 18. Tractor Supply's P/E is slightly higher, at a touch over 19. It would be hard to call that cheap, though the P/E is lower than it has been in the past, given the five-year average P/E ratio of 23. Floor & Decor's P/E is 31, which is pretty lofty. But, to be fair, that's also below historical levels, with the five-year average P/E sitting at just under 38.
TSCO PE Ratio data by YCharts
If you're a value-conscious investor, you probably won't like either of these retailers. Yet Tractor Supply is the cheaper of the two looking at P/E.
5. Dealing with a tough patch
Those P/E ratios have come down because both Tractor Supply and Floor & Decor are dealing with a business slowdown. Investors have sold the stocks. While new store openings will probably continue to push sales and earnings higher, same-store sales have been weak.
In the third quarter, Tractor Supply reported a 0.4% sales drop at stores open at least 12 months. That's not a great figure, and the company is projecting same-store sales for all of 2023 to come in roughly flat versus 2022. Notably, that is down from a previous expectation of 1.3% to 2.5% same-store-sales growth. Clearly, the retailer is dealing with some headwinds.
By comparison, Floor & Decor's same-store sales in the third quarter fell 9.3%. The company is expecting same-store sales to drop between 7.8% and 8.5% for the full year. That's worse than the previous guidance range of down 5.5% to 7%. Given the upheaval in the housing market caused by rising interest rates, this isn't a shocking outcome, but it does highlight that the company is probably more volatile than Tractor Supply, where stores have a broader appeal.
Who wins the matchup?
While there's no clear winner here, there are a few easy takeaways. If you're a dividend growth investor, Tractor Supply is the only option in this matchup, and it's a good one given the historical dividend growth rate. If you're simply looking for a growing retailer, both come out fairly well. But Tractor Supply is probably the lower-risk option, while the higher risk from Floor & Decor might be worth it given the greater growth prospects. You'll just need to have an ironclad stomach to deal with Floor & Decor's more volatile business. And if you care about value, you'll probably not be too happy with either stock, though Tractor Supply is the "cheaper" of the two. In all, from a risk/reward standpoint, Tractor Supply probably inches ahead for most investors.
