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Bobby Raines's Analyst Insights

Options Analyst Writer
Bobby Raines
Author Bio

March 31, 2014 - Tractor Supply is Next in Line for Destruction at Walmart's Hands

Spring is officially here, and hopefully the weather will start to warm up soon. That typically results in a flood of people getting outside and sprucing up their homes and gardens.

A lot of those people end up spending a lot of money at home improvement stores. The flood of people into stores to stock up on fertilizer, mulch and new patio furniture has lead some analysts to refer to spring time as "Black Friday" for big-box stores like Lowes (LOW) and Home Depot (HD).

Unfortunately for those stores, the company that made the fatal stampede for discount electronics an annual rite of late autumn heard the words "Black Friday" and decided to get in on the springtime sales bonanza as well.

"Nobody does Black Friday better than Wal-Mart, and we're bringing that same philosophy to our new outdoor living, lawn and garden event," Michelle Gloeckler, senior vice president of the U.S. home division at Walmart (WMT), told CNBC recently.

That's unfortunate for Lowe's and Home Depot, but the increased competition between the giants in the home-improvement space is probably even worse for smaller players who don't have the scale to compete with Lowe's and Home Depot.

In particular, Tractor Supply (TSCO), could be hard hit by Walmart's entry into the market for gardening goods. The company is smaller and more focused than its larger rivals, with 1,300 stores, compared to 1,800 for Lowes and 2,200 for Home Depot. The company gets about 20% of its sales from seasonal items, so a big shift in customer trends could lead to a sizeable decline in the company's revenues.

While the 20% of its business that comes from sales of seasonal merchandise would be a blow, the company could also find itself on the wrong end of some recent trends in even bigger parts of its business, namely its sales to farmers. More than 40%of 2012 revenues came from livestock and pet products, and I would guess that a much greater portion of those sales were for livestock than pets.

That reliance on small farmers could be a problem going forward. Farms are getting larger, more mechanized, and more corporate. As with any other business, the larger a farm becomes, the more likely it is to get supplies from the manufacturer, or a large supplier, than it is to buy things retail.

 That Tractor Supply is so reliant on sales of seasonal goods and farm supplies also means that unlike Lowe's and Home Depot, it won't see much boost from the improvement in the housing sector, which makes it seem odd that the stock has a price-to-earnings ratio of 32, compared to 21 for Home Depot and 23 for Lowe's. Generally, companies with better growth prospects have higher P/E ratios, not the other way around.

Chart courtesy of

Investors who don't see much upside in the near future for TSCO could consider a July 75-80 bear-call credit spread. This position yields an 80-cent credit, which is a 19% return, or 62.6% on an annualized basis (for comparison purposes only. This position will be fully profitable so long as the stock is below $75 at July expiration, giving it close to 7% downside protection.

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