Consumer Alert

During the upcoming earnings season, I plan to be very focused on the health of the consumer. As I’ve discussed in previous posts, I’m noticing increasing signs of a weakening consumer and I want to determine if a new trend is being established. Last week, Tractor Supply (TSCO) had some interesting comments I thought were worth highlighting. Tractor Supply is a retailer focused on recreational farmers, ranchers, and rural communities. The company operates 1,542 stores in 49 states.

On September 8, Tractor Supply preannounced lower than expected third quarter operating results. Same store comps are now expected to be flat to -1%. Tractor Supply’s stock declined 17% on the news. Even after its decline, Tractor Supply’s stock trades at 22x earnings and 14x EV/EBIT — another sign of the times.

A day after the preannouncement, the company presented at a Goldman Sachs conference. I thought some of their comments were helpful in better understanding current business trends. Management communicated that some of the headwinds they’re facing have accelerated and that there are three areas of weakness.

The first area of weakness was in energy-producing regions, which shouldn’t be a surprise. However, what was surprising, at least to me, is the slowdown has accelerated. Energy prices have been under pressure since the end of 2014. Why now? Management said, “While there has been an impact to some of the energy-centric stores for the past several quarters, it is no longer just in the energy-related categories and appears to be more impactful throughout the region.” In other words, the weakness is spreading. I think this is important as I would have expected comparisons in energy-producing regions to get easier. The fact that the weakness has accelerated and spread is an important data point, in my opinion.

The second area of weakness was in the agricultural regions. Similar to energy, management noted the weakness caused by lower agriculture incomes is spreading. Management stated, “Our core customer is generally not the commercial farmer and our business has not been strongly correlated to agricultural economy. However, we do have stores in many of these areas and we believe that three consecutive years of declining farm income and increasing uncertainty in ag communities maybe having a broader impact on the overall spending in these areas. It’s sort of a ripple effect or a halo, if you will.

Lastly, management noted warm winter weather impacted heating-related products, like wood burning stoves and log splitters. I’m not sure there’s much useful data to derive from these comments except when the weather is warm and heating oil is cheap, there’s less need to burn wood.

Management had positive comments as well and stated, “…we are seeing solid sale trends in the West and the Southeast regions where there is less exposure to the energy and agricultural markets. In addition, we continue to see strong demand for many basic items such as Livestock and Pet, which are comping up mid-single digits company-wide quarter-to-date.”

In the Q&A session, management provided additional detail on the consumer saying, “Well, when we look at the consumer, we talked a little bit in the prepared remarks about really the center of the country and driven mostly by energy production as well as the farming income. And seeing that those economies are soft, it appears to us that the consumer is taking a little bit of a breather. And so that obviously impacts our perspective on the back half of the year. It’s difficult right now to assess how long that will be, maybe there’s anxiousness over the political environment. People are just pausing a little bit to say, hey, what’s going to happen next year? And take a little bit of time.”

Tractor Supply’s comments and results are similar to what many other consumer companies are reporting. Cracker Barrel (CBRL) is a good example. Today, Cracker Barrel reported weaker than expected 2017 guidance and negative traffic trends. In the Q&A session management commented on the consumer saying, “In terms of the consumer, our – it’s a difficult subject to get any strong conviction about where it’s going. If I had to say overall, it just feels like many consumers – it’s an uncertain environment. The source of uncertainty seems to differ, depending on who you are and your situation. So for some, it may be the political rhetoric, for others, it may be their personal employment situation, for some, it may be healthcare costs, for some, it may be figuring out how to save for retirement. But overall, it does feel like despite the fact that there certainly are signs, some signs that would suggest that consumer is stronger, but it does feel like it’s very uncertain and that they’re holding back at least in their spending in the restaurant sector.

Tomorrow the government releases August retail sales data. I’ll read the report, but I remain more interested in what consumer companies are experiencing and what their customers are doing. Regardless of whether tomorrow’s retail sales report is weak or strong, my opinion on the consumer won’t change. In my opinion, bottom-up data continues to be more timely and accurate. As it relates to the consumer, the data is getting more convincing that the consumer is slowing, but I’ll save my judgement until after this earnings season. I expect to learn a lot more soon.