When investors think of stocks that have tripled in just the last five years, they're likely thinking of hot trends like artificial intelligence (AI) and digital advertising. They're less likely to think of brick-and-mortar retail chains such as Tractor Supply Company (TSCO -1.68%). But Tractor Supply stock has indeed tripled over just five years.
Indeed, Tractor Supply is a magnificent company and its quality has resulted in strong long-term stock performance. And that strong stock performance has brought it to a place of wanting a stock split.
On Dec. 5, Tractor Supply's management announced a 5-for-1 stock split, allowing it to join the ranks of previous stock-splits stocks such as Tesla, Nvidia, Chipotle Mexican Grill, and more. According to management, it's splitting its stock to make the price more accessible.
Tractor Supply stock trades close to $300 per share. After the split, it will trade closer to $60 per share. If you're a shareholder, however, don't panic. Supposing someone held 100 shares prior to the split, they'll own 500 shares after the split.
This is a crucial thing to understand with stock splits: They don't create shareholder value. The value stays the same, they're just more shares at lower prices.
However, Tractor Supply didn't only announce a stock split on Dec. 5. Management also laid out some long-term goals. For investors excited about the stock split, I believe it's important to remain calm considering splits don't create value. But when it comes to creating long-term value, there's plenty to get excited about from management's vision.
Here's why Tractor Supply is a great company
An investment thesis for any brick-and-mortar retail business needs to explain why people will shop there instead of at another retailer or online. This is easily explained with Tractor Supply. For starters, the company sells a lot of animal feed and large agricultural implements. These are sales that its unlikely to lose to an e-commerce platform due to their size.
Moreover, Tractor Supply has nearly 2,300 locations, making it the largest chain in its niche. While it's possible that some big-box retailers could sell some of the same products, Tractor Supply tends to be located in more rural communities. These communities want and need these products but a big-box retailer is more inclined to locate in places with denser populations.
Of course, I'm speaking broadly here. But the point is that Tractor Supply has a defensible position in the market.
Furthermore, Tractor Supply sells things that could be considered as non-discretionary items. Over half of its sales are for pets and livestock. And even in hard times, people will pay to take care of their furry friends.
Over the last ten years, Tractor Supply has profitable grown its sales by opening new locations and growing same-store sales. But it's also used its profits to pay a dividend that's gone up every year for over a decade and it's reduced its share count, sending earnings per share (EPS) higher. This is exactly what investors want to see and it shows that this is a magnificent company.
TSCO Average Diluted Shares Outstanding (Quarterly) data by YCharts
Here's what Tractor Supply is aiming for next
There are too many nitty gritty details to mention everything highlighted by management. But at a high level, Tractor Supply's management expects 6% to 8% annual net-sales growth through 2030 as well as 8% to 11% annual EPS growth. The guidance for EPS growth in particular could be enough to lift the stock to strong returns through the end of the decade.
Tractor Supply has several initiatives to grew sales. For starters, the company plans to get more into the pet pharmacy business, which is logical considering how large of a player it already is in the pet space. This isn't necessarily news considering the company acquired a pet pharmacy business just last month. But it's one thing that can lift sales.
Another way Tractor Supply can grow sales is through retail media. In short, it has millions of customers and many interact with the brand digitally. In its digital platforms, the company can sell advertising slots to boost revenue. This is similar to what retail giants such as Walmart and Costco have focused on and it certainly can work.
Furthermore, Tractor Supply hopes to boost profits by growing sales of its private brands. This is a strategy that's worked for retailers such as Boot Barn and is worth watching.
The point is that many, if not most, investors will focus on Tractor Supply's upcoming stock split as reason for excitement. But investors would do far better to focus on this business with a magnificent history of strong shareholder returns. Management has just laid out a credible plan to grow EPS by double digits over the next several years. And that could allow Tractor Supply stock to outperform the S&P 500 over the next years or more.
