A Wall Street perspective

Baird analysts make it their business to know farm-and-ranch retailing inside and out. Not only do they keep close tabs on the publicly traded shares of Tractor Supply, they make the effort to understand the smaller players through its quarterly “Baird Farm and Ranch Supply Retailer Survey,” results of which are highlighted in this section.

Managing director Peter Benedict spoke to HCN.

HCN: What are the common traits of the best farm-and-ranch retailers?

Peter Benedict: From our perspective, it’s about striking the appropriate blend of consumables, soft goods and hard goods in the store, and really having a focused assortment. It really is about positioning yourself as the needs-based retailer for the customer who lives that rural farm-and-ranch lifestyle.

HCN: Tractor Supply had record sales in its latest quarter. The next day the stock dropped 5%. What happened?

Benedict: Their traffic was very strong — transaction count was up 5% year over year; that’s a very impressive number. But their average ticket was down 1.5%. Part of that was deflation set in — on animal feed, in one case. But the result was their comp-store sales grew 3.5%, and Wall Street expectations were somewhat higher than that.

Also, their initial earnings guidance for 2014 was below where Wall Street estimates were at the time of their report. While we think there is a healthy dose of conservatism in their outlook, that’s something that weighed on the stock.

And then the third point would be that the stock market in general and retailer consumer stocks in particular have been very weak so far this year.

HCN: We think there are about 5,000 farm-and-ranch stores in the United States. Is that low?

Benedict: I think it depends on your definition. Tractor Supply has about 1,280. By our count, the next 15 largest farm-and-ranch retailers probably have 650 or so. But certainly if you included the independent feed dealer networks out there, you would take the number probably to 10,000 or so.

HCN: How closely does the farm-and-ranch retail sector ride on the success of American agriculture?

Benedict: I think it’s fair to say, a good ag economy is preferable to a bad ag economy. But that being said, these farm- and-ranch retailers, I think, in particular Tractor Supply, are not really serving the professional farmer or grower. At Tractor Supply, fewer than 10% of their customers cite farming as their source of income. Also, look at where these stores are located. Tractor Supply has more stores in the Northeast than they do in the Midwest.

HCN: Tractor Supply took its time entering e-commerce. But now they seem to be out in front. How do you see it?

Benedict: They view online and e-commerce holistically. It’s both commerce and community. They certainly want to have a functional store online, but their website is also a kind of a social meeting point for their customers, and an online forum.

You can use the example of someone raising a certain type of horse in New Hampshire, and if they’re looking for advice, then someone from Arizona can easily chime in. That makes it a community center as well as a commercial site.

HCN: Is the farm-and-ranch sector better insulated from Amazon.com than most other retailers?

Benedict: It would be on the less exposed part of the spectrum, but I would not for a minute say it’s not exposed. There are items and pieces of businesses that could certainly go online.

Nobody is immune — there will be more e-commerce done in this space five years from now than there is today. I’m pretty confident about that. That’s why I think what’s critically important for farm-and-ranch retailers is to ensure that their mix of product in the store is really laser-focused on meeting the needs of the customer.