Down 17% in 2022, is tractor stock a buy now?

tractor supply (TSCO -0.36%) investors have been kept out of the recent stock market rally. Shares of the lifestyle retailer fell in July even as the broader market jumped 8%. The drop came even as the company reported strong sales and earnings trends through the end of June.

Let’s see why these results point to strong returns for this stock, which is lagging the market so far in 2022.

Keep customers happy

Tractor Supply is doing whatever it takes to continue to grow its business despite the wild swings in consumer demand. Same-store sales were up 6% last quarter, even from the surge in results a year ago.

This boost met expectations and even convinced management to raise its full-year 2022 outlook. Management cited “the continued consistency of our sales performance” as one of the main reasons for why she’s so optimistic about revenue trends today.

The stock fell further in July, mainly on concerns about weakness in the broader retail market. walmart is a key competitor and on July 25 the company lowered its earnings outlook while indicating the need for further price cuts. Meanwhile, Target has also cut its earnings forecast in recent months, due to abrupt changes in consumer habits.

There are good reasons to believe that Tractor Supply will also be affected by these negative trends, but perhaps not to the same extent. The company sells fewer home furnishings and discretionary items. After all, pet and livestock care products are not so exposed to rapidly changing consumer preferences. As a result, I would expect the chain to outperform peers like Walmart, even as consumers become more cautious when shopping.

Good profit prospects

Tractor Supply in late July reported a sharp increase in inventory, which can often be a red flag for retail inventory. Walmart, Target and many other companies have had to increase promotions to reduce inventory in certain categories lately, for example. This level of inventory is worth watching, but shouldn’t worry investors too much.

Executives said they currently have the right mix of products. This confidence was evident as Tractor Supply just raised its sales growth outlook to between 5.2% and 5.8% gains from the previous forecast of between 3% and 4.5%. Higher inventory shouldn’t be a problem unless it happens at the same time as a surprising slowdown in demand.

Look forward

Another great reason to love this stock is Tractor Supply’s long track of expanding its footprint. The company is expected to open at least 70 new stores this year, up from 80 locations in 2021. Combine that growing square footage with increased spending and customer traffic in existing locations, and you have all the key elements for a successful growth stock. .

Of course, the earnings picture has become a little murkier due to inflation and the possibility of an ongoing recession. But these risks are always present in the retail sector. Investors should try to move past those worries and focus on Tractor Supply’s prospects of making $14 billion in annual sales this year, up from $8.3 billion in 2019.

Operating profit is also expected to reach 10% of sales, compared to 9% at the time. Continued gains on these aggregate metrics should provide excellent returns for investors who simply hold the growth stocks for the long term.

Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool has posts and recommends Walmart Inc. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.