Rural lifestyle retailer Tractor Supply Co. is shuttering 75 Petsense locations, just over a third of its fleet, as it joins other chains in weeding underperforming stores out of its portfolio.
Brentwood, Tennessee-based Tractor Supply on Thursday said it would close roughly six dozen of its 209 Petsense stores. The pet specialty retailer, founded in 2005, primarily serves small and mid-size communities across 23 states. It offers an assortment of pet food and supplies and services, such as grooming and training.
Tractor Supply reported that it will incur $71.7 million in impairment and other charges, including a $5.9 million inventory write-down, related to the Petsense closings. Boston-based Gordon Brothers will be handling the disposition of the leases.
With the Petsense closings, Tractor Supply becomes the latest retailer to optimize its footprint to focus on its profitable stores with growth potential. Macy's is in the process of shutting some of its namesake locations, for example. And in the most headline-making case, as part of its bankruptcy this year Saks Global, now rebranded as Exemplar Luxury Group, closed about two dozen Saks Fifth Avenue stores and Neiman Marcus stores as well as nearly its entire Saks Off 5th chain.
Tractor Supply continues to try to grab more of the pet business, expanding its selection of dog and cat food along with livestock feed and supplies at its namesake stores. But the company is reallocating capital to higher-return initiatives, prompting the targeted Petsense closings, CEO Hal Lawton said on Thursday's earnings call.
The retailer also said it is slightly scaling back its namesake store openings this year, to 85 to 90 compared with the original 100-store target.
Higher growth, higher return
"We believe these actions will improve returns, simplify the business, and allow us to direct resources towards higher growth, higher return opportunities," Lawton said. "We've also concluded that while our new stores continue to generate attractive returns, driving stronger comp sales and improving the productivity of our existing assets are critical priorities in this environment."
Investment will go toward "the elements delivering the strongest returns," including greater localization and expanded pet-wash stations at updated stores, he said.
There is a wide range in terms of performance across the Petsense fleet, according to Lawton.
"The 75 that we announced today that we're shutting down are negative four-wall cash flow," he said. "So we'll be able to use that negative four-wall cash flow once we shut those stores down and reinvest that back into the core of our business. ... After that, we think we'll have a very strong profitable Petsense business. It will work well with the broader pet ecosystem that we're building."
In the second quarter, Tractor Supply completed its acquisition of Eagle, Idaho-based VIP Petcare, a veterinary services business that operates clinics in about 2,700 retail locations, including 1,700 Tractor Supply stores. Acquisition-related costs for VIP Petcare totaled $9.5 million.
"Bringing VIP Petcare’s veterinary services capabilities in-house strengthens Tractor Supply’s existing pet health platform," Tractor Supply said in May.
Marketing the leases
Tractor Supply has retained Gordon Brothers to market the leases for the closing Petsense stores and to manage the inventory and fixture dispositions for those locations. The firm expects to have marketing materials available early next week and to share more details on the specific locations as they become available, according to Al Williams, co-head of North America real estate services for Gordon Brothers.
“We’re pleased to continue our long-standing partnership with Tractor Supply and support this thoughtful portfolio optimization effort," Williams said in an email to CoStar News on Thursday. "We look forward to sharing more information on specific locations soon.”
Tractor Supply officials said they were disappointed with the company's second-quarter results. Net sales rose 2.3% to $4.54 billion, and comparable stores sales dipped 1.5%.
Higher prices for diesel fuel, a persistent drought and cautious discretionary spending took their toll on sales in May, according to Lawton.
Tractor Supply also faces the challenge of the "rural divide" narrowing, according to Neil Saunders, a retail analyst and managing director at GlobalData. The company's edge "is being somewhat undermined by the expansion of Amazon's faster delivery into remote locations," Saunders said in a post on LinkedIn.
There's "real weakness in the domestic pet category as consumers migrate to other players that they see as being sharper on price," Saunders added.
"This is an arena in which Tractor Supply was pinning hopes of future growth, but it is way more competitive than the more specialist rural supply business, so execution needs to be sharpened," he said. "And the competitiveness may still grow further as other players, like CVS, look to get more into pet wellness."
Tractor Supply, which has 2,463 namesake stores, didn't respond to an email from CoStar News seeking comment on Saunders' remarks.