Mary Winn Pilkington:

Thank you, Victoria. Good morning, everyone. Thanks for taking the time to join us today. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we have made a supplemental slide presentation available on our website to accompany today's earnings release. Now let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable it can give no assurance that such expectations, or any of its forward-looking statements will prove to be correct and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. Information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Given the number of people in the Q&A, we would like to ask that you please limit yourself to one question and please get back in the queue if you have any additional questions. I appreciate your cooperation. We will be available after the call for follow-ups. Now it's my pleasure to turn the call over to Hal.

Kurt Barton:

Thank you, Hal, and good morning to everyone on the call. In many ways, our second quarter topline results were consistent with our results in the first quarter, with solid seasonal growth and exceptional big ticket sales, while our year around discretionary categories remain pressured. As we expected, CUE performance was slightly below the chain average given the retail price deflation and moderating pet category trends the industry is experiencing. Retail price deflation, which was just over 1% was in line with our expectations. The vast majority of this deflation came from our CUE categories. As Hal mentioned, we are pleased with our unit movement in CUE as we successfully managed through the impact of deflation this quarter. Our comp sales growth was relatively consistent across all regions of the chain within a range of down 2% to up 2%. The strongest regional performance was in the Northeast and Commonwealth due to easier compares and better overall weather compared to last year. This strength was offset by pressure in the Far West and Texas, Oklahoma for the exact opposite reasons, as they had tougher compares and less than ideal weather conditions this quarter. As to the cadence of the quarter, all months were also in a relatively tight band of essentially plus or minus 1%. As Hal mentioned, we believe April was negatively impacted by the pull forward of Easter into the first quarter as well as a slow start to the spring season. Moving down our income statement, our gross margin increased 43 basis points to last year. We continue to be very pleased with these results, which were driven primarily by ongoing lower transportation costs along with disciplined product cost management and the continued execution of an everyday low price strategy. These improvements were partially offset by the mix impact from strong growth in big ticket categories, which have below chain average margins. As a percentage of net sales, SG&A expenses increased 58 basis points to 23.4%. This increase was primarily attributable to our planned growth investments, which included the onboarding of a new distribution center and higher depreciation amortization, as well as modest deleverage of our fixed costs given the decline in comparable store sales. These factors were partially offset by productivity improvements and strong cost-control. During the quarter, our ongoing sale leaseback strategy benefited SG&A by approximately $5 million net of transaction and repair costs from the sale of two Tractor Supply locations. This transaction and the related benefit represent timing shift out of the third quarter and into Q2. For the quarter, operating profit margin was 13.2%. We had strong cost control as evidenced by our underlying operating profit margin that was essentially flat with prior year. Diluted EPS was $3.93 compared to $3.83 last year. Turning now to our balance sheet, merchandise inventories were $3.0 billion at the end of the second quarter, representing an increase of 10.2% in average inventory per store as we improved our in-stock position in CUE and invested in big-ticket given its strength. Our in-stocks are up nearly four points to our best level since before the pandemic. We are pleased with the quality of our inventory as we enter the second half of the year. With strong annualized cash flows, we continue to maintain a healthy balance sheet with a leverage ratio of around two times. Year-to-date, we've returned nearly $500 million of capital to our shareholders through our share repurchases and dividends. Now let me turn to our updated fiscal 2024 financial outlook. Given our performance in the first half of the year and our forecast for the balance of the year, we believe it's now appropriate to narrow our guidance range. For the year, we now anticipate net sales in the range of $14.8 billion to $15 billion with comp store sales in the range of down 0.5 point to up 1%. Our operating margin rate is expected to be in the range of 9.8% to 10.1% with net income of $1.08 billion to $1.12 billion. Diluted EPS is forecast to be $10 to $10.40. As to the calendarization between the third and fourth quarter, let me share with you a bit more of how we are thinking about the various scenarios. We are approaching the back half with balanced optimism. We are forecasting comp sales in the third quarter to be within a tight band of scenarios and generally similar to the first half of the year. The shift of the season doesn't occur until late in the third quarter and we don't begin to lap the deflationary effect of feed until the fourth quarter. The only meaningful swing factor-in Q3 tends to be weather, particularly large storms, which produce emergency response activity. We see the fourth quarter having a wider range of potential outcomes. For our base case, we do anticipate stronger growth in the fourth quarter given the easier compares, while acknowledging that we could see more volatility in consumer spending. On the high end of our outlook range, in addition to the easing compares, factors we considered include a more normalized start to winter, lapping net deflation, which began in the fourth quarter of 2023 and the potential for greater emergency response activity. Now on the low end of the range, dynamics we contemplated include moderation in big ticket trends, potential consumer uncertainty due to the Federal election and a shorter holiday selling season with five less selling days between Thanksgiving and Christmas. As for the retail price, our plans continue to reflect a headwind from deflation in the third quarter with a moderation towards neutral in the fourth quarter as we start to lap the lower cost, which began in late Q3 of last year. Our guidance reflects ongoing gross margin expansion in the second half of the year. The third quarter is expected to have our best gross margin expansion as we anticipate transportation costs will remain favorable. In the fourth quarter, we'll be lapping our most difficult comparison with 129 basis-points of expansion in the prior year, where we began to see the benefits from lower transportation costs and our product cost management initiative. As a result, we are forecasting our fourth quarter gross margin rate consistent with the prior year. I view our gross margin performance as strong in this current environment. Moving on to SG&A, for the second half of the year, there are a couple of items I would highlight for our expectations, especially for the third quarter. First, please keep in mind that we are lapping last year's depreciation benefit of 35 basis points or $0.08 per share in the third quarter. Second, given our comp sales outlook specific to the third quarter, we anticipate modest fixed cost deleverage. And third, we will continue to see pressure from the startup cost of the new distribution center in both the third quarter and fourth quarter. Thus our SG&A performance will be the softest in the third quarter with more modest deleverage in the fourth quarter. In total, we remain on track for the benefits of our sale leasebacks to be relatively consistent with last year's, albeit with a slight variation by quarter due to the timing shift of two stores into the second quarter. We continue to forecast the return of capital to shareholders in the range of $1 billion, reflecting the strength of our cash flow and the confidence we have in the long term. At Tractor Supply, we believe in playing offense. This is a team that will stay on offense and continue to invest for the long term. We are excited about our Life Out Here strategy progress, our leadership position in the industry and our ability to build-on our track record of long term value creation for our shareholders. Now I'll turn the call over to Hal to wrap up.

Operator:

[Operator Instructions] Our first question comes from the line of Scot Ciccarelli with Truist. Your line is now open.

Hal Lawton:

Hi, Scot, good morning. To your first question on the wet spring, it was a -- in the normally west spring, particularly in the South -- in the Southwest, Texas, in particular was wet almost the entire quarter. We had hoped that might lead to an elongated spring, particularly in the month of June and into July, it actually be favorable for us given comparison to last year. That's not how it played out. As we all know, the month of June was one of the hottest, if not the hottest month on record ever. And so we went from pretty much a wet -- wet spring to an immediately hot summer. And we did not see, as we called out ag fencing as an example, that's a big category, for us in general and in particularly in Texas. And as an example, we did not see that category recover in June like we had some aspirations for. That said, it's a wet week this week and we are hopeful that, that can pay some dividends as we turn the corner into August and into the fall. And as it relates to Q3, yes, it's basically kind of right down the middle of fairway for us in terms of our guidance range and kind of consistent with the comments Kurt gave at this point. And the one thing I would call out is July is our toughest compares of the three months. It's -- we get sequentially -- sequentially easier and compares to the tune of like a point or two points each of the next two months. So anyway, thanks, Scott, for the question.

Operator:

Thank you for your question. Our next question comes from the line of Michael Lasser with UBS. Your line is now open.

Hal Lawton:

Hi, Michael.

Hal Lawton:

Yes. Hi, Michael, and thanks for the question. I'd start out by saying, obviously, it was a difficult situation that played out in a public arena, that's unfortunately is becoming increasingly common in business and the divisive sentiment that we have in our country. And we've got over 50,000 team members and 30-plus million customers and we certainly heard a range of feedback. We learned from others who had gone before us on this and moved fast to try to remove the perceived political and social agendas from our policies. And all that said, we have no evidence that it had a measurable impact on our business. And we continue to look to monitor the situation and look at a variety of datasets, but we do have no evidence at this point that it's had a measurable impact on our business and our results. And if I just step-back, we have a very special culture at Tractor Supply. It's firmly grounded in our well-established mission and values. And while we did withdraw our carbon emissions goals and retired our D&I goals, we did not retire our commitment to treating people fairly with respect, to inclusion, to being a good corporate citizen and certainly not to be stewards of -- and certainly did not retire -- are committed to being stewards of Life Out Here. And Tractor Supply, again, credible culture. We never lose sight of our obligations to be great stewards of our business over the long term. Thanks. Thanks, Michael, for the question.

Operator:

Thank you for your question. Our next question comes from the line of Steven Zaccone with Citigroup. Your line is now open.

Hal Lawton:

Yes, Hi, Steven. Let's start out by saying the first half played out very much in-line kind of right down the middle of our kind of base-case center point of our guidance. I would say most things in the first half were very much in-line with our expectations. I mean, maybe big ticket was a little stronger, and maybe some of the things like ag fencing and dog containment and such were a little bit weaker. But everything else, I would say, animal feed, pet food, our CUE products in general, seasonal. Even the discretionary business, we expected them to be reasonably negative. All those played out very much in line with what we expected. I kind of think about it as a down the middle of fairway based on our expectations first half. As it relates to the second half, we have a similar thesis to the second half right down the middle of fairway. I think Kurt tried to call that out in the prepared remarks. Q3, I think would be much of the continuation of the first half of the year with Q4 being really where there's a higher rate -- a broader range of outcomes. I think Kurt tried to really bring that to life in his prepared remarks to say there's one version of Q4 that could be -- could be strong and start that trend back towards our long term algorithm and there's a some favorable compares there and -- which create a nice setup and we've got a number of activities also going into that -- into the market during that time. On the flip side, there is a kind of a kind of more unfavorable potential outcome in Q4, where if we didn't see some good winter weather and the federal election created a lot of distraction and you've got a shorter holiday season that could lead to a lesser performance in Q4. So really tried to lay out the range of those two, and that's really what drives the Q4 variation, is really what drives the -- really the range of our comp guidance for the balance of the year with a pretty tight range of outcome forecast in Q3. But I would say from the start of the year, the business is really right in the middle of what we expected it could be. And to your kind of kind of question at the end, there's really sitting at this point in time, nothing that we see in the back half that's much different than what we saw at the beginning of the year. It's a pretty, pretty straightforward at this point in terms of our outlook.

Operator:

Thank you for your question. Our next question comes from the line of Peter Benedict with Baird. Your line is now open.

Kurt Barton:

Yes, I'll actually let Seth -- Peter give you more of the details on that, and I'll make one reference. We are cycling last year. In Q2, we called out that we were down 1.7% in inventory last year. We knew we needed and wanted more inventory in CUE and even some of the big ticket rec. And so we're very pleased with where we're at. And I think, Seth, why don't you explain further some of where the--

Kurt Barton:

--increase is at and the position on inventory for today and even the back half.

Peter Benedict:

Great. Thanks so much.

Chuck Grom:

Hi, thanks. Good morning. Thanks a lot. Hope you guys are well. Just get back to the comp discussion, how -- the past few quarters, comps have been running close to flat. You've got a long term guide of about 4% to 5%. Clearly, the macro has not been your friend, but can you help us think about the building blocks to get back to that level and maybe a potential timeline you see to get there as well? Thank you.

Chuck Grom:

Great. Thanks, Hal.

Kate McShane:

Hi, good morning. Thanks for taking our question. We wanted to talk about the big ticket strength. We know this is something that you saw in the first quarter. Can you remind us how much of sales this represents? And how does big ticket needs change in the second half? What falls into that category for the cooler and winter months versus what you saw in the first half of the year?

Kate McShane:

Thank you.

Brian Nagel:

Good morning. Hi, good morning. Thanks for taking my question. So my question, I just want to follow-up a bit on inventory. And I know you discussed this already, but just to be clear, so inventories gets us on face value where you did see coming out of the quarter higher than usual. So is it your expectation then that, over the next, whatever, couple of quarters, your inventory levels will moderate kind of naturally or is there some type of more aggressive action you have to take to get inventories back in line with sales?

Brian Nagel:

No, thanks, I appreciate all the color.

Steven Forbes:

Good morning. How -- it's probably imperfect, but it looks like it's been about a year now where sales per member trends are down significantly. So curious if there's anything notable in terms of learning from the trends within the customer cohorts as we think about explaining away the spread between comp trends or CUE trends versus member trends? And maybe in that -- in that regard, as you think about potential, like how would you speak to the opportunity ahead given where the member base and the member share sits today?

Steven Forbes:

Thank you.

Operator:

Thank you for your question. Our next question comes from the line of Oliver Wintermantel with Evercore. Your line is now open.

Hal Lawton:

Hi, Oliver, how are you today? Thanks for the question. I would -- the main driver of the variation for the second half in the range of outcomes for our comp is really what the driver of our range for the first-half was, is transactions. As we've been, I think pretty transparent, we have great insight to average ticket, great insight into our average unit retail. Pending some mix we know exactly what our pricing for our seasonal products are already going to be for the year. We know what our CUE trends are. We obviously have a perspective on how we're going to be pricing CUE into the back half of the year. So we have very good forward-looking view as to our average unit retail. And so I feel like there's probably less variability in ticket and expect that to be reasonably flat throughout the year, although there's some modestly easier compares on average unit retail as you get into the fourth quarter. So a little bit of upside there. But the main driver of our range of outcomes is going to be transactions. And particularly in the fourth quarter and really we think it's all around consumer sentiment and also drivers of need. And if there's some weather events, that will drive need. And depending on the federal election and the shortened holiday season, I think that will drive sentiment. Those two things will come together to drive our transactions. And so anyway, back to your point, I think the variability for the back half of the year is really primarily transactions with maybe a very modest range of outcomes on AUR.

Hal Lawton:

Yes. Thanks, Oliver.

Zachary Fadem:

Hi, good morning. Kurt, you mentioned the election as a potential second half headwind. So first, are there performance callouts during prior elections? And then second, is there any evidence to suggest that your business may perform differently based on the outcome of the election?

Zachary Fadem:

Got it. Thanks for the time.

Christopher Horvers:

Thank you. I'm French now. So Mike, my question is on the commodity side. So corn has come down a lot since the start of the year and even where it was at the end of the first quarter. Historically, you've talked about corn being one of the biggest commodities to watch. So I guess to what extent have you thought about that in terms of affecting your sequential reflation expectations? And does that quickly turn into the sort of the feed category? And then on the pet food side, are you seeing price investment from the big pet food brands? And what are the early reads on that being enough to turn those -- the pet food category, enough elasticity to get that growing more quickly?

Seth Estep:

Yes, hi, Chris, Seth. Hi, just as the simplest answer, I would just say when you look at the back-half, we're not seeing any signaling that you're going to see like AUR compression when it comes to pet food, when we look out. Right now, AURs continue to be somewhat flat year-over-year and that's kind of what we see going forward. Relative both feed and pet food, I would say, like as you think about the current environment we're in, and if you continue to see commodities stay where they are, you'll start to see things like you've traditionally seen in the industry where more value packs, more bonus packs, things of that nature will continue to hit the market. So at this point, we see pet food pricing remaining basically stable.

Mary Winn Pilkington:

Victoria we will take one more question quickly, and then we'll wrap the call after that.

Peter Keith:

Thank you very much everyone for squeezing me in. So Hal you mentioned in the script that the channel was down negative mid-single. I guess I would agree with that based on our survey work. So it does suggest that Tractor Supply share gains accelerated in Q2 versus prior quarters. And I'm wondering, was there something specific to the quarter or do you think there's more kind of structural benefits based on your initiatives that could keep the share gains elevated in the quarters to come? Thanks.

Peter Keith:

Thank you.

Operator:

That concludes today's call. Thank you for your participation and enjoy the rest of your day.

Harry Lawton:

Thanks, Kurt. Tractor Supply has a proven business model that has been resilient over many business cycles. As a company, we have numerous levers to continue to gain market share and numerous levers to effectively control expenses. Our Life Out Here strategic priorities are on track and delivering on our expectations. We continue to see fantastic opportunities for growth ahead. In store and online, we're ready for the spring and summer season. Customers are responding positively to our new product assortments from Weber, Toro, YETI and more. We have several product test and learn initiatives in store and online, like Martha Stewart and Eddie Bauer.

Operator:

[Operator Instructions] The first question comes from the line of Seth Sigman with Barclays.

Harry Lawton:

Seth, thanks for the question. We were very pleased with our big ticket performance in Q1. I'll highlight 2 trends and then provide some examples in the context of each of those. The first one I'll highlight was in January, where we had the nice cold weather come through the country. And as a consequence of that, had some nice big ticket sales that go along with that as we often do, whether that's things like snow throwers or log splitters. And to your point, the cutoff that we use for big ticket is $350 price point. .

Simeon Gutman:

My question is also on big ticket, and Hal maybe I can put it in this way, if you look at it relative to 2019, and I think we're trying to assess whether there's like a bottoming and a turn that's happening versus seasonal. I think your comments around the March volume sounds like there may be a turn. But if we compare it to 2019 or 2020, granted it's hard to understand what baseline is normal versus not, but looking at it that perspective, and then -- and if there's anything about these big ticket trends that informs you about the cadence of the year. It doesn't sound like it, and it sounds like the cadence has always been pretty static across the quarters, but anything that you think about maybe big ticket strength continuing into the second half that maybe you didn't plan for?

Seth Basham:

I'm just trying to understand your inflation and deflation outlook a little bit more as we see a rise in oil prices here, do you think that could lead to any material inflation as we move through the year?

Kurt Barton:

Yes. And Seth, this is Kurt. Just to tie that back to our guidance. As we entered 2024, I have said that we could see and are planning for 2024 from an inflation, deflation, relatively neutral, plus or minus a point. And we expect as we're starting to lap some of those inflation quarters last year, Q2 may have a similar impact as we saw in Q1. But then if you were to play out the current environment today, it would really put us in an expectation for the year sort of that neutral standpoint. And we'll know more on how the back half looks after Q2, but still pretty much playing right in line with our guidance.

Christopher Horvers:

I wanted to expand on the big ticket commentary and focus on what's happening with spring. Can you contrast what you saw in March in markets where spring broke? Where did it break? Where it hasn't yet broken? And how you're thinking about what's April telling you about the business so far in the quarter?

Steven Forbes:

I think you noted 34 million members in the program, which is surprised to the upside here a little bit, at least as per our expectations. So I was wondering if you could maybe expand on the changes you made to the program. Is there anything sort of notable in terms of acquisition, maybe converting those non-Neighbor's Club members into members or repeat or retention trends that changed how you're thinking about that program membership evolving over time? And in any way to sort of size up what the true opportunity is for the 20% of sales that are coming from non-members today?

Steven Zaccone:

I wanted to ask on gross margin. So given the guidance for the second quarter that it should be similar in terms of expansion. Can you just talk through the back half of the year because you start to face some tougher comparisons. Just talk through some of the expectations in the back half?

Michael Lasser:

Can you give us a sense for how the pet food category has been performing as of late? Have you been surprised that there's been general softness in these trends? And how has Tractor Supply's market share compared this quarter to the last couple of quarters, especially as it seems like the company has been taking more aggressive steps whether it's price investments, kinks to the loyalty program.

Harry Lawton:

Michael, I'll comment first on pet. First off, I'll just step back on pet and say it's an incredibly attractive market. It's one that outperformed kind of the broader retail market for decades. It's been a long-term source of growth for us. And I think that the slowdown in that industry this year has been well documented, with that slowdown being driven really by 2 macro drivers. The first is moderation in pet ownership. And the second is stagnant pricing, right? That's an industry that's historically been able to claw 2 or 3 points of price increase every year, given the substantial price increases that have occurred in that category over the last 2 years, basically, that category is flat in pricing for the year.

Scot Ciccarelli:

I know it's still a, somewhat, limited data set, but you talked about seeing good results from your Garden Centers where spring has broken. I know you guys have previously provided a framework for what you expect to happen. But can you provide any kind of real-time updates in terms of what you're seeing on actual results?

Scot Ciccarelli:

Is there a way to quantify the comp lift, though, Hal?

Operator:

The next question comes from the line of Peter Benedict with Baird.

Kurt Barton:

Yes, Peter, this is Kurt. I'll start with your first part of your question and then hand it over to Seth to address the back end part of it. Orscheln is running right in line with our expectation. The first quarter, for instance, is still lapping a lot of the liquidation in Orscheln. And then in second quarter, as we transition, you begin to get outside of a lot of that liquidation. So as we converted into our point of sale, it's somewhat in line with the time frame of having all of the Tractor Supply inventory in the Tractor Supply system. So we begin to lap a more normal time frame, particularly in the back half of the year.

Operator:

Final question comes from the line of Peter Keith with Piper Sandler.

Harry Lawton:

Peter, thanks for the question. To start by the highest level, rural is very -- I think rural America is doing very well right now. We see our highest performance across our store base in rural America right now. If you look at the national statistics, you see net urban migration out -- kind of more migration coming out of cities than in. And you see that migration going to rural America. I think there's a variety of drivers for that, but that trend benefits us.

Mary Pilkington:

All right, everyone, that will wrap up our call today. I'm around and we're available for calls. And if you need anything, please don't hesitate to reach out, and we look forward to talking to you at the end of our second quarter. So thank you.

Mary Winn Pilkington:

Thank you, Alissa. Good morning, everyone. Thanks for taking the time to join us today, and I hope you enjoyed watching the video of Tractor Supply's year-end review. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we will open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. We have extended the call to allow for more time for Q&A. Given the number of people who want to participate, we respectfully ask you to limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up. Thank you for your time and attention this morning.

Kurt Barton:

Thank you, Hal, and hello to everyone on the call. I want to start by reiterating Hal's comments on 2023 and our confidence in the long-term opportunities for Tractor Supply. Over my 2.5 decades in this business, I've never seen a year where we've had many transitory headwinds as we did in 2023 that did not break positively at some point during the year. Before I get into my review of the quarter, I wanted to address two items. First, for comparability purposes, please keep in mind, 2022 had a 53rd fiscal week that provided a net sales benefit of $225 million to the prior year fourth quarter, representing about 5.6 percentage points of our net sales decline this quarter. On a full year basis, it negatively impacted net sales by 1.6 percentage points. In addition, diluted EPS in 2022 benefited by $0.16 for the quarter and the year from the 53rd week. Second, overall, the unseasonably warm winter weighed on our results in the fourth quarter. We estimate the impact to be approximately 400 basis points of pressure on our comp sales performance. We knew this was going to be the most challenging quarter of the year, given our strong comp performance of 8.6% in the prior year as we were cycling the late December 2022 winter storm that provided a 200 basis point comp benefit to the fourth quarter of last year. The majority of the pressure was in transactions, given the needs-based nature of our business and it impacted our seasonal categories across Q and other winter goods. Our Q business in the fourth quarter has a higher mix of cold weather seasonal products such as wood pellets, bulk propane, bird feed and pine savings for bedding. From the cadence of the quarter to our product categories, seasonal impacts always play into our performance. Coming into the fourth quarter, we anticipated it would work against us and the quarter played out much like we expected. Factoring in the seasonal impact from the weather, our fourth quarter performance was very much in line with our run rate from last quarter. Most of my remaining commentary of our comp sales performance is on a normalized basis, adjusting for the impact of weather. October and November were very similar in comp sales performance, with December seeing the biggest comp sales decline as we were lapping the winter storm from last year. On a normalized basis, all months performed relatively consistent with a slight decline in comp sales. Turning to our product categories. We continue to see solid performance in Q with above chain average comps, essentially flat for the quarter. On a normalized basis, Q had a positive comparable sales as we continue to gain share. Discretionary categories performed in line with our expectations with a mid single-digit comp sales decline. Big ticket performance showed a continued improvement over the trends of the previous five quarters. Comparable big ticket sales ran slightly negative for the quarter and were positive in the low single digits on a normalized basis. Although our business is not primarily driven by holiday sales in Q4, we were encouraged by our performance during the holiday season, including recording our highest sales day of all time on the day after Thanksgiving and strong performance in the week leading up to Christmas. As we have experienced all year, we saw a continued slowdown in retail price inflation throughout the year, with Q4 experiencing a slight net deflation. We have successfully managed through deflation in various commodities throughout 2023, and believe we are nearing the trough now. In 2023, raw material inputs rolled over as evidenced by the 35% decline in corn from its most recent high in 2022 and currently running about 15% above the historical average. As we exit 2023, these types of feedstock declines are already reflected in our retail prices. Structural inflationary factors such as higher wage rates, transportation costs and other overhead items are all still supporting higher product costs. Moving on to gross margin. For the fourth quarter, our trend of strong gross margin performance continued with a year-over-year improvement of 129 basis points to 35.3% of sales. Our gross margin expansion was led by improvements in the supply chain from lower transportation rates and efficiencies in our network, including opening a new DC. We continue to benefit from our commitment to everyday low prices, and disciplined product cost management. While our promotional activity was modestly greater than the prior year, we were able to strategically provide great value for our customers while maintaining our gross margin. These favorable drivers were partially offset by an unfavorable product mix shift due to a higher mix of Q and a lower mix of high-margin seasonal categories. As a percent of that sales, SG&A expenses, including depreciation and amortization, increased 113 basis points year-over-year to 26.2%. This increase was primarily attributable to our planned growth investments, which included higher depreciation and amortization and the onboarding of our new DC, along with some lost fixed cost leverage due to the decline in comparable store sales. Additionally, higher medical claims also contributed to the increase in SG&A, although to a lesser extent than last quarter. The SG&A deleverage was partially offset by a decrease in incentive compensation and the benefits of the sale-leaseback program initiated last quarter. In Q4, we sold five Tractor Supply stores, which contributed a 40 basis point benefit to SG&A. Operating margin improved 16 basis points for the quarter to 9.1%. Excluding the cycling of the 53rd week, diluted EPS of $2.28 was essentially flat with the prior year. Our new store pipeline continues to be strong. Our new store sales and profitability numbers continue to outperform historical averages. Given the addition of the Orscheln stores to our non-comp sales numbers, the new store productivity metric for the organic new Tractor Supply stores is cloudy in our external reporting. By our calculations, TSC new store productivity in 2023 was about 67% of our mature store average. Average sales in year one of a new store have increased more than 40% compared to 2019, in line with the performance of the chain. Our stores continue to be profitable in year one, cash flow positive at about the same point and have a payback in two to three years. Our new store economics unlock sustainable growth and solidify our lead in the channel. Strong new store economics are a hallmark of Tractor Supply. As I reflect back on 2023, I continue to be encouraged by the resiliency of our business and the structural nature of it. Now let's move to our outlook for 2024. Hal shared how we are thinking about the macro backdrop for the coming year. We are anticipating a gradual slowdown with the lingering question of do we have a soft landing or if the risk of a harder recession remains. With this in mind, we have taken a cautious approach to our 2024 financial outlook and have forecasted our comparable sales performance below our long-term algorithm. Navigating economic cycles is in our DNA. We have successfully managed through diverse market conditions, including periods of inflation to disinflation and even deflation. Our deep understanding of these dynamics allows us to proactively adapt to the market conditions. We expect average unit retails to be neutral to a modest headwind for the near term, as we anticipate stickiness to input costs such as labor wage rates and other items to mitigate any further reversion in commodity pricing. For fiscal 2024, we are forecasting net sales of $14.7 billion to $15.1 billion. Comparable store sales are anticipated to be in the range of down a modest 1% to an increase of 1.5%. We are cautiously optimistic that big ticket trends will revert to positive for the full year as we are cycling 18 months of declines. We expect gross margin expansion of about 40 to 60 basis points from continued supply chain efficiencies, benefits from effective cost management and a moderation of the mix impact of Q. We anticipate the gross margin expansion to be offset by SG&A deleverage due to a couple of primary factors. First, depreciation and amortization is anticipated to increase in the mid-teens. While this is an improvement from recent underlying growth as our investments in our strategic growth initiatives moderate, we will deleverage as D&A grows faster than sales. Second, we plan to open our tenth distribution center in the second quarter. As a reminder, the operating cost for the new DC are reflected in SG&A, while the supply chain benefits are reflected in gross margin. Our DC network is expected to pressure SG&A by approximately 10 to 15 basis points. The benefit in gross margin will not completely offset this pressure since it takes time for the new facility to fully ramp to maturity and realize the supply chain benefits. As a result, we expect modest pressure on our operating margin from the opening of this new DC. These two primary factors are partially offset by the lapping of some higher-than-normal medical benefits in 2023. We do not expect those to reoccur due to our proactive changes to our benefit programs. In 2024, we will continue our planned strategic sale-leaseback program to sell some of our existing owned stores. We anticipate these sales will occur in the second half of the year on a similar cadence to 2023 and with a similar EPS contribution. We continue to forecast these strategic sale leasebacks to be ongoing for the next 7 to 10 years. For the year, we forecast an operating margin of 9.7% to 10.1%. We are forecasting interest expense of approximately $50 million to $55 million. We plan to maintain a healthy leverage ratio of approximately two times, and we expect our effective tax rate to be in the range of 22.7% to 23.0%. Diluted EPS is forecast in a range of $9.85 to $10.50. Net capital expenditures are forecast to be $625 million to $700 million or about 4% to 4.5% of sales. This net amount reflects the anticipated proceeds for the sale of existing and newly developed Tractor Supply stores. Gross capital expenditures are forecast to be in the range of $850 million to $925 million. Our capital plans reflect a ramp in our new store openings to approximately 80 Tractor Supply stores. We anticipate opening 10 to 15 Petsense by Tractor Supply stores in 2024. Our new store pipeline continues to be solid, and we expect store opening cadence B in line with 2024. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases. For 2024, we anticipate share repurchases in a range of $575 million to $625 million which is estimated to have a benefit of a net reduction in weighted average shares outstanding of approximately 2%. Now I'd like to walk through a few items to consider for the calendarization of our expectations. As always, we believe the best way to look at our business is in halves and not quarters due to the nature of our business. We expect comp sales for each of the quarters to be in a relatively tight range, consistent with our overall 2024 guidance. We are planning for positive comp transactions for the year. As to earnings, we expect our EPS growth to be slightly more favorable in the first half as opposed to the second half. There are a few factors that will impact operating margins in certain quarters. We anticipate the tailwinds of lower transportation costs to benefit our results through the second quarter and begin to flatten year-over-year starting in Q3. As a result, gross margin expansion for the first half of the year is anticipated to be near the high end of our annual guidance range, while the second half may be near the low end of the range. In regards to SG&A, the second and third quarters will be pressured from the start-up costs for the new distribution center, while the supply chain benefits will not begin to be realized in gross margin until late in the third quarter. Please keep in mind, we will be lapping an $0.08 per share benefit from the depreciation change in the third quarter of last year. Considering each of these factors, the third quarter will be our toughest earnings comparison as we anticipate a decline in operating margin and EPS due to the combination of these factors. As a reminder, the Orscheln stores will be added to the comp store calculation beginning in the second quarter with a tiered approach as we cycle the timing of moving these stores to our point-of-sale systems and rebranding of stores to Tractor Supply. Specific to the first quarter, we had a challenging first quarter last year as it was abnormally warm in January and February and relatively cold March. We were also benefiting from retail price inflation in the high single-digits. Given the recent Arctic cold temperatures across most of the regions, we are seeing good momentum as we start the first quarter. Overall, we are anticipating positive comp sales for the first quarter. To wrap up, we have clearly defined strategic priorities and are investing to capture the long-term opportunities in our market. We are committed to driving productivity and making appropriate trade-offs to fuel our investments while we protect our operating profit margins and earnings. We intend to maintain this focused approach through 2024. We are committed to continuously striving for stronger results. With that, I will turn the call back over to Hal.

Operator:

We will now begin the Q&A. [Operator Instructions] Our first question comes from the line of Zach Fadem with Wells Fargo. Your line is now open.

Kurt Barton:

Hey, Zach, this is Kurt. Good morning. In regards to the comp sales performance, I'll point back to some of the things I mentioned on our prepared remarks. For the fourth quarter, the best way to look at it is start with the backdrop that when we look at the seasonal performance, the challenge is about an extremely mild fourth quarter going up against an Arctic storm of last year, there's 400 basis points of pressure. October and November were unseasonably warm as well. So you've got negative low single-digits generally consistent when you normalize for the December storm across all of the months. And all of that principally in the weather-related categories that I pointed out on the call. So as I mentioned, the fourth quarter ran consistently with the trend rates of the third quarter. Our consumable or needs-based business continues to be running solid, especially the year-round non-seasonal-related categories, the strength in all of our feed and food, the confidence that we have comes from examples such as livestock feed, equine feed, poultry feed, wildlife supplies, cat and dog running unit positive comps in the fourth quarter. Some of that up against the last year pantry filling that happens in the last week of the year against that storm. So you could see the traffic that we get from the consumables, the stability of the core of our business running really strong. So we still have that and care that confidence that our customers are shopping us just as consistent as they were before. We have growth in active customers, Neighbor's Club contributing more. All of those are the drivers of the consistency of the business.

Operator:

Thank you. The next question comes from the line of Chris Horvers with JPMorgan. Your line is now open.

Hal Lawton:

Hey, Chris, thanks for joining the call this morning. Yeah, on weather, I think as we reflect on last year, we had a lot of discussion on weather times felt like we're playing meteorologists. And I think we just decided to be prudent as we look at this year, not look at whether it's potential upside or downside as we called out, there's a number of other factors that could also influence our sales as the year progresses whether that be the agriculture market, oil, housing, et cetera. And instead, we just chose to focus on for the purposes of our guidance and range of outcomes this year, really the factors that we think are going to have the most influence on our sales as we can see it right now, which are our continued market share gains, offsetting the shift still in consumer spending from goods to services, as well as disinflation, which is dominantly a first half issue. And then as it relates to competitive encouragement, I'd say we really haven't seen anything different in competitive activity for the foreseeable past. So it's been really, for the last -- since COVID, the competitive activity has been pretty stable, pretty rational. Our share gains continue to -- we continue to take share in the market, and really haven't seen anything out of the ordinary from a competitive perspective, whether that be in our farm and ranch -- core farm and ranch competitors or the multitude of other national retailers that we compete against as well.

Kate McShane:

Hi, good morning. Thanks for taking our question. Our question centered around SG&A. We just wondered if you could talk a little bit about how you're thinking about wage growth in 2024, and how does incentive comp come into play in 2024? What happened regarding incentive comp in 2023, given the flat comp for the year? And how should we think about that.

Operator:

Thank you. Our next question comes from the line of Jason Haas with Bank of America. Your line is now open.

Kurt Barton:

Yeah, Jason, this is Kurt. I'll answer that question. On my prepared remarks, I was very specific on that on what is really driving our new store productivity. So I want to point everyone back to that. We continue to see the Tractor Supply consistent, strong new store productivity. 2023 ran at 67% new store productivity. The 80 stores that we plan for 2024 are expected to be coming out the gates very consistent in the same way and our new store maturation process of a four to five year 65% to 70% new store productivity is where we target and we expect 2024 with the strong pipeline that we've got, we believe an excited -- just as we have in 2023 about what these new stores will produce.

Peter Benedict:

Hi, guys. Good morning. I guess, Kurt, maybe a question for you. As we think about the EBIT margin and how it toggles within your guidance range, roughly speaking, about 15 basis points up or down per point of comp move. If you guys -- if you think we see a scenario where your comps are either below the low end of your guide range or they come in above the high end of the range, any sense for how the incrementals or decrementals would look. Anything we should think about there is 15 basis points a good benchmark? Or just curious kind of your thoughts on that. Thank you.

Operator:

Thank you. Our next question comes from the line of Scot Ciccarelli with Truist. Your line is now open.

Kurt Barton:

Yes, sure. Why don't I start with that, Scot, on the comp, and then I'll toss it to set a little bit on the performance of Garden Centers, some of the 2024 drivers, et cetera. Our expectation and how we've modeled in our long-term targets is still the same as our expectations for 2024. As we continue to add Garden Centers roughly 150 to 200 of those a year. And you get from Fusion and Garden Center mid-single-digit to high single-digit on combo lift as those mature in year one and then a lower benefit in like year two, but still a benefit over the chain, that roughly plays into our algorithm, and we would anticipate for this year to play similar to that the Fusion Garden Center initiative is driving -- give or take some roughly one point of comp in our guidance range. And Neighbor's Club is another initiative that's driving consumers to spend up the tiers, more transactions, getting more of their share of wallet is another driver. So just kind of pointing out the two biggest strategic initiative drivers, and then I'll toss it over to Seth, maybe to talk a little bit about what's driving the garden centers.

Operator:

Thank you. The next question comes from the line of Chuck Grom with Gordon Haskett Research Advisors. Your line is now open.

Kurt Barton:

Yes, Chuck, this is Kurt. The Orscheln conversion went very well. All stores converted, as we mentioned, to the Tractor Supply brand. The first six to nine months of -- since the acquisition was a transition, a lot of noise through that. We now have them all branded Tractor Supply. The team is engaged. We've got the Tractor Supply products and services, our Tractor Supply, feed and food brands. And when we begin to cycle that in second quarter where we converted all over we do anticipate to see much like a new store maturation, perhaps we'll learn it in a similar type maturation curve, but we anticipate and have baked into our guidance some new store maturation type comp benefit from those 81 stores as well. And how it compares? We anticipate these markets from our real estate study that there is upside to the historical performance in those stores to be able to run in line with Tractor Supply averages. Albeit we've said it's very much in line with like a Midwest tractor supply average, which is a bit below the overall tractor supply average store level. So there's room to have these grow over time. And we're excited about our ability to capture new customers, bring them into Tractor Supply in these stores. And so overall, for 2024, even into 2025, we believe much like a new store, there's a benefit from the maturation.

Michael Lasser :

Good morning. Thank you so much for taking my question. What if you assumed for input cost relief in 2024, especially key variables like transportation costs and commodity costs? And then how does that inform your view of the gross margin outlook for this year? Because it seems like the gross margin has been expanding significantly in part because of this relief? And is there a risk that at some point, Tractor Supply could invite more competition as its gross margin is about 150 basis points higher than it was in 2019? Thank you so much.

Operator:

Thank you. The next question comes from the line of Seth Basham with Wedbush. Your line is now open.

Seth Estep:

Hi, Seth, this is Seth. Relative to our companion animal business, we remain very excited about the opportunity that we have in companion animal and we've continued over the years to manage through multiple cycles and have a track record of this. What I'd say like relative to comp, companion animal continues to be a comp driver for us in both units as well as top line. When you look at trends in the industry, approximately for our customers, approximately 75% of our customers own a pet, and about half of those that own more than one pet. And so just structural to our customer base in general, it's an area that we are highly committed to. We believe you think about like our convenient locations, our team members, our omnichannel capabilities, our robust and differentiated assortments. We see those as all competitive advantages in the pet space, and we continue to take market share there. And we believe we have substantial market share opportunities ahead, both in 2024 and beyond with our existing customer base, as well as the new customers that are out there. So companion animal in general for us, it remains a healthy business, and it's something that we were confident in taking share in the years to come.

Peter Keith:

Hey, thanks. Good morning, everyone. Just to touch base on deflation, Kurt, you said modest deflation. I'm wondering if you could actually just quantify that if we think if it's like down 1% as comp headwind, and then bigger picture, there are some concerns that deflation will take you guys back to the back half of like 2015 to 2017 where comps were sluggish for a longer period of time. Do you see any key differences from the economic backdrop today versus several years ago when we last saw deflation?

Operator:

Thank you. The next question comes from the line of Joe Feldman with Telsey Advisor Group. Your line is now open.

Kurt Barton:

Joe, this is Kurt. I'll quickly just affirm what our -- was assumed in our guidance and then let Seth give you the answer about why we're assuming that for 2024. But we do believe that big ticket should be in line with our overall guidance range for the year. That's as you see that, that's relatively flattish at the midpoint to slightly favorable. And we're going up against two consecutive years of negative big ticket comps. So it has a lot to do about the compares. And in 2022, we were coming off of all of the stimulus spending in 2023. There's a bit of a swing off of durable goods into services and some of the weather-related pressures. And in 2024, we're cycling that and we've got some great offers, some new innovations that I know Seth can speak to.

Hal Lawton:

Broad-based, I'd just say, retail, in general, is rebounding some of the big ticket, and we could definitely see that as we approach kind of November and December.

Operator:

Certainly. Our final question comes from the line of Michael Baker with D.A. Davidson. Your line is now open.

Kurt Barton:

Yes.

Kurt Barton:

Yes, Michael.

Hal Lawton:

Hey, Michael, it's Hal. Thanks for the question. I'd just say it's certainly, we saw some benefit from the weather in the first three weeks of January, really the second and third week, but January is our smallest month of the year, smallest month of the quarter. And the thing that the month that's really going to determine our comps for Q1 is going to be March. We are, as I mentioned in my prepared remarks, very excited about our spring setup this year. We've got our most innovation in the last three or four years now that kind of the supply chain disruptions and all those things have been worked through. Our vendors have been able to really spend the last year getting their innovation pipeline restarted. Our in-stock rates and our spring sets are back to the expected 95% plus that we historically have set at, and we feel great about spring. We're optimistic about Q1, as Kurt said, we're certainly expecting a positive comp. We're off to a good start with the month of January behind us. But really, the most important thing that we're focused on is having a win in March.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Mary Winn Pilkington:

Thank you, operator, and good morning everyone. Thanks for taking the time to join us today. On the call today for our prepared remarks are Hal Lawton, our CEO, and Kurt Barton our CFO. Seth Estep our EVP and Chief Merchandising Officer will join us for the Q&A session. Please note that we have made a supplemental slide presentation available on our website to accompany today's earnings release. Now, let me reference the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risk and uncertainties, including the future operating and financial performance of the company. In many cases these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Given the number of people who want to participate, we respectfully ask that you please limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up. Now, it is my pleasure to turn the call over to Hal.

Kurt Barton :

Thank you, Hal, and hello to everyone on the call. There are three key observations about our business that build on Hal's comments that I'd like to share before diving into the quarterly results. First, looking at the impact of weather. There are some years weather works to our favor and others where it clearly works against us. We've certainly tried to be transparent over the years as to the impact from the volatility related to weather, both in favorable and unfavorable events. No doubt 2023 will be a year where weather goes down as unfavorable for our business. From a warm January, a late start to the spring that never materialized over most of our markets, to a hot and dry summer across major markets like Texa-Homa and the Midwest, our seasonal businesses have been under pressure all year. Second, our execution continues to be strong. Our Life Out Here initiatives are performing well and are positively impacting our results. Neighbor’s Club, Project Fusion and Garden Centers, pet and digital initiatives are all driving top line growth. Third, we view the softness in our customers' retail spending to be unique to the macro challenges in the current environment. Our customer engagement is strong and our initiatives are driving positive results. We remain committed to investing for long-term growth, but we will be agile as we navigate the current environment. We are committed to continuing our track record of long-term value creation for our shareholders. Now, turning to our third quarter results. While our sales trends were below our expectations, the team managed the environment well, controlling what we can control. We also remain steadfast in our commitment to being the dependable supplier for Life Out Here. Our third quarter top-line results were driven by strong and consistent CUE growth, offset by below trend seasonal performance and a weak summer demand and a lack of early fall seasonal sales, and discretionary big ticket sales remained under pressure. Our comparable store sales growth was solid in regions such as the southeast and the far west. The performance of these geo regions was offset by pressure in Texa-homa and the Midwest, where heat and drought trends added incremental pressure on consumer demand, as well as the warm start to the fall in the northern markets. Comparable transactions were flat for the quarter, with growth in our core year-round categories being offset by reduced demand for our seasonal categories. We had a modest decline in the average comp ticket. Our average unit retail was up 3% to 4%. The benefit of the growth in our average unit retail was offset by the softness in big ticket and declines in seasonal categories, which run at a higher average ticket. Additionally, but to a lesser extent, we continue to experience softer sales and discretionary and impulse add-on items, putting pressure on the average units per transaction. Moving down our income statement, our gross profit increased 7.3% to $1.25 billion. Gross margin increased 101 basis points to 36.7% from 35.6% in the prior year's third quarter. Gross margin was a highlight for the quarter as we continue to maintain strong product margin from our ongoing execution of everyday low price strategy. At a time when the overall promotional environment across retail has picked up modestly, our large and robust membership of Neighbors Club offers us a great way to provide value. Our loyalty program allows us, together with our vendors, to strategically target value propositions for our customers. The gross margin rate increase was primarily attributable to lower transportation costs, driven by improvements in the global supply chain and efficiencies from our new distribution center in Ohio. Product mix pressured gross margin given the strength in CUE. This was somewhat offset by the margin improvement from lower big ticket sales, which carry a lower gross margin rate. As a percent of net sales, our selling, general and administrative expenses, including depreciation and amortization, increased 38 basis points to 26.7%. The increase in SG&A as a percent of net sales was primarily attributable to our planned growth investments, which included higher depreciation and amortization and the onboarding of our new DC, along with some lost fixed cost leverage due to the decline in comparable store sales. Additionally, consistent with last quarter, higher medical claims also contributed to the increase in SG&A. We have made adjustments to our benefits program and will continue to do so. We don't anticipate this to be a headwind in 2024. During the quarter we completed the planned sale lease back of 10 Tractor Supply store locations, benefiting SG&A by approximately 70 basis points, net of transaction and repair costs. Additionally, the increase in SG&A was partially offset by a one-time benefit to depreciation expense of approximately 35 basis points or $11 million pre-tax. This benefit is attributed to a change in the useful lives of assets for certain remodeled stores, due to a reassessment of lease terms to better represent the economic profile of these investments. As I reflect on the SG&A performance overall, I would be remiss if I didn't mention that our operations team did a great job scaling our core variable costs to our sales performance. Our distribution center teams achieved some of the best cut times, fill rates and overall productivity measures in years. And our store teams did a great job balancing store payroll to scale back, while also maintaining the right level of customer support and driving our best-in-class customer satisfaction scores. Overall, the team had strong execution and scaled our core variable costs well in this environment. As an example, to further illustrate, nearly 85% of our core SG&A dollar growth year-over-year represents investments in our strategic growth initiatives. My appreciation goes out to the team for controlling what we could control. For the quarter, operating profit margin was 10%, a 62 basis point improvement from the prior year. Turning now to our balance sheet. Merchandise inventories were $2.8 billion at the end of the third quarter, flat to the prior year on a per store basis. We are managing it closely and continue to be very pleased with the quality and position of our inventory. Our in-stock rates are the best they've been in over two years. In addition, our inventory shrink improved year-over-year. With strong annualized cash flows, we continue to maintain a healthy balance sheet with a leverage ratio of around 2x. Our long-term debt has no nearing maturities and it's fixed at very attractive rates. Now, let me turn to our updated fiscal 2023 financial outlook. For the year, we now anticipate net sales in the range of $14.5 billion to $14.6 billion and comp store sales even with last year. Our full year operating margin rate is expected to be in the range of 10.1% to 10.2%, with net income of $1.1 billion to $1.11 billion. Diluted EPS is forecast to be $10 to $10.10. This includes a net after tax benefit of about $0.08 in Q4 for our remaining sale leaseback transactions this year. We continue to forecast anticipated capital expenditures for the year in the range of $800 million to $850 million or about $725 million to $775 million net of our capital needs for the fixed fee real estate strategy that we shared last quarter. This higher level reflects the move to own development for select new store growth that will be funded through the sale of existing stores. It's important to note that the proceeds from the sale of our own stores are expected to offset the incremental capital outlay under the development program. The combined transactions are expected to be relatively neutral to our cash position. Implied in our outlook is for fourth quarter comp store sales to be down low to mid-single digits. As Hal mentioned, we anticipate continued discerning consumer spending and unfavorable compares relating to weather as we experience the ongoing El Nino pattern, combined with the cycling of last year's monumental winter storm, which drove 200 basis points of favorable impact on comps. We anticipate continued strength in our core year-round categories, yet the softness in demand for seasonal and discretionary will continue to limit the top side on our performance. As a reminder, we are also lapping the 53rd week, which included an extra week of sales in the prior year, contributing approximately $225 million to top line sales and $0.16 of diluted earnings per share. As for retail price increases, our plans reflect a continued moderation of inflation. While still positive, we believe it will be modest. Our guidance reflects ongoing gross margin expansion year-over-year. We anticipate continued benefit from transportation and our new distribution center, along with some pressure from an unfavorable product mix. In the fourth quarter, we expect continued SG&A deleverage given our investments and the expected comparable store sales declines. As we shared last quarter, for modeling purposes, the Orscheln stores will go into our comp calculation in 2024, based on when the store is converted to our point of sale system. Most stores converted to our point of sale during Q2 and Q3 of this year. As is customary, we will provide our guidance for 2024 at our fourth quarter earnings call. We're still finalizing our outlook for sales, as there are a number of puts and takes to be considered. Let's start with the fact that we're a needs-based, demand-driven business, with a long history of positive comps. Additionally, as we see 2024 today, we expect we'll have less benefit from inflation, but we're 18 months into cycling big ticket softness. And the weather, hopefully, cannot be worse than it was this year. But we do anticipate that the operating environment will continue to be challenging with a higher than normal degree of uncertainty and ongoing pressure on consumer confidence and household budgets. As we've shared over the last couple of years, we've always planned that 2023 would be our peak capital investment level. With that as a backdrop, we plan to prudently invest in our strategic priorities in 2024, with next year's net capital spending in the 600’s, which will relieve some depreciation expense. We remain excited about the progress on our Life Out Here strategy and are very pleased with our initiatives. Our 10th distribution center will open during the second quarter of 2024. Much like our distribution center opening this year, this new DC benefits gross margin, but will pressure our SG&A as the facility ramps up. The gross margin benefits typically lag the opening by about one quarter. Similar to 2023, we anticipate executing approximately 15 existing store sale leaseback transaction in 2024 to fund the own development new store program, and we anticipate the opening of 80 new Tractor Supply stores and 10 to 15 Petsense locations. Over our history, we have continually adapted to the operating environment around us. The needs-based, demand-driven characteristics of our product offerings support our ability to continue to be a winner in retail. We will remain agile and play offense. We will leverage our core competencies that have served us well, all while strengthening our capabilities and investing in our Life Out Here growth strategy. Now, I will turn the call over to Hal to wrap us up.

Operator:

[Operator Instructions] Our first question comes from the line of Scot Ciccarelli with Truist. Your line is now open.

Kurt Barton:

Hey Scott. This is Kurt, and good morning. First, let me just start by saying, we still see an environment where there's some net inflation year-over-year while modest. Inflation is clearly slowing, but not turning to deflation at this point. And specific to some of the categories, we are seeing, there's areas this year where there's year-over-year deflation, particularly areas like bird feed, livestock feed, corn based. Yeah, there's some level of deflation. But there's areas like you mentioned, where we're still seeing some level of inflation still in the system, such as pet food. And then there's most of our areas in our product categories, what I describe as they've hit a plateau. It's stable, and we're running pretty consistent. And as that moves to the pipeline, very much consistent with our outlook for this year and beyond, was that we start to moderate down to a low single digit level of inflation in 2023. Too early to really say for 2024, but the general call would be that things begin to stabilize. Inflation, deflation is not as much of a factor in the average ticket that it's been over the past few years, and it's more stabilized and neutralish. And we're certainly focused on it. This team works consistently in environments of change and inflation, deflation, have a history performing very well. Know that we're monitoring it. I'll be able to share more information on that in the fourth quarter call when we give our outlook for 2024.

Kurt Barton:

Yes, in general, our history has been that in a deflationary environment we're able to leverage our scale, manage our retail pricing. It generally produces a benefit on the rate, just like inflation did over the last few years, put a bit of pressure on that rate. And we managed both environments very well, and historically it's been as you described it.

Operator:

Thank you. The next question comes from the line of Steven Forbes with Guggenheim Partners. Your line is now open.

Hal Lawton:

Yeah. Hey, Steven. The biggest change, very much consistent with what we expect when we said peak years of 2022 and 2023, are those big investments in the distribution centers. We will open that second new distribution center next year in 2024, but a majority of that capital is in 2023. So on a net capital spend that we're forecasting in the $725 to $775, if you back off of that into the $600’s, the biggest majority of that is supply chain. There's other efficiencies in there, such as we continue on our investments in the stores, such as Fusion and Garden Centers to re-engineer and find efficiencies in our investments. Really excited about the two newest formats that we are rolling out in the stores that we've been able to re-engineer and drive costs out of our Garden Center, and that's giving us even lower cost debt. And then maybe the third thing would be the investments we made in 2023 on integration and remodeling the Orscheln stores. We'll be rolling off of that. I think those three things are the biggest difference, but no shift in our strategic investments.

Operator:

Thank you. The next question comes from the line of Peter Benedict with Baird. Your line is now open.

Kurt Barton:

Yeah, Peter. On SG&A, as I mentioned in my prepared remarks, I felt one of the highlights was how the team managed pivoting off of a number of years and quarters with strong top line sales, to scale to the appropriate level of volume for Q3. And it just shows our ability to be agile in that case. To your point on the 85% was growth, some of the things that really played out to help drive the core SG&A to a really low growth level. First area, supply chain, and I mentioned this in the previous last couple quarters. We had built the supply chain almost through muscle, 3PL, other areas that distribution centers were running at max capacity or above that level and that was inefficient. We've been able to shut off some of the 3PL higher costs. The team is running at some of the highest level of productivity. So one of our biggest areas of leverage in a flat to slight negative comp sales environment was our distribution supply chain, as they actually leveraged as a percent of sales because of productivity. John and team focusing on scaling down task or non-customer service work to modestly drive hours down, that also reflects some of the SG&A benefits. In general, in an environment that there is softer demand at Tractor Supply, as we look ahead to even future quarters and next year, we'll plan and scale our core levels of investments and our operating expenses in line with our sales growth. And then from there, this team will continue to claw back inflationary pressures, even in operating expenses that have embedded over the last few years. And this is a team that's been built with lean management, continuous improvement in our DNA, and we have profit improvement goals. And those are all things as we plan ahead to 2024 that gives us confidence in our ability to manage and still hold to our long-term algorithm and targets on operating margin.

Operator:

Thank you. The next question comes from the line of Michael Baker with DA Davidson. Your line is now open.

Hal Lawton:

Yeah, hey Michael, good morning. Thanks for the question. Appreciate your participation in the call. You know, as it relates to discretionary, just one would acknowledge 15%-ish of our business kind of big ticket discretionary, mid-single digit negative comps, a slight improvement from sequentially from what we saw in the first half of the year, kind of in line with what we expected. The myth throughout the entirety of this year for us has been our seasonal businesses. Our CUE business continues to perform very strong, with comps well above our reported total company comp performance with significant share gains happening in our CUE business. On our Q2 call or Q1 and Q2 calls, when we talked about seasonal, we acknowledged that there could be an element of the consumer spending discretionary piece that kind of seeps into that seasonal business. I would characterize the fall and winter business, though, more demand driven needs based than even spring, because in the winter, the businesses that are really strong for us and large and robust are things like wood pellets and propane. In fact, three of our top 10 skews during the winter season are two wood pellet skews and the propane skew. Those are demand driven needs based. When it's cold, people, are burning the pellets in their wood stoves or they are using propane for heating other homes or supplemental heating. And when it's not cold, they are not. And this time last year, actually as we entered Q3, the last week of Q2 and as we entered Q3, it was we had cooler weather and then that continued throughout the balance of Q3. We didn't, have that at all this year. And then even as we're heading into Q4 here, it's going to be 80 degrees this weekend in Boston. You just don't need wood pellets and you don't need propane during that time. And so you can see it very clearly in our business. On the flip side, we are seeing strength in outdoor projects, outdoor wildlife, those sorts of categories, whether it's grilling, whether it's deer corn and the deer hunting season. You can certainly see it in the lawn and garden categories, even in riding lawnmowers. Those businesses this time of year though are just not large enough to offset. Even with nice growth in those categories, they are just not large enough to offset those sorts of pieces that are demand driven. We also do sell a lot of insulated outerwear type categories, whether its coats and a lot, fleece lined pants and those sorts of things, gloves, boots. I think as it gets cold, I would expect those to not be lost sales. But there is an element of like wood pellets and propane that once you don't have that cold weather, you do lose it. I think we are being prudent in our implied guidance for the fourth quarter. Last year, we didn't have – it was not – it was a warmish November. So there – but we know there's an El Nino that's in forecast right now. And so we just thought it'd be prudent to not assume that we'd have any upside as we lapped that in November, as we talked about in our prepared remarks. And then of course we're hurtling [ph] or we’re comping on top of a robust storm from last year that, as we noted in our Q4 earnings call last year, contributed two points of comp to the quarter.

Hal Lawton:

Yeah, I think that's a fair way to – that's an absolutely fair way to say it.

Operator:

Thank you. The next question comes from the line of Michael Lasser with UBS. Your line is now open.

Kurt Barton:

Yeah, Michael, this is Kurt. Gross margin has certainly been not only a high point for this quarter, this year, but to your point, what we've been able to accomplish, leveraging our scale and size in the last years has been a real testament to the team. I'll give you a few examples of why we believe this is a sustainable gross margin, and most of it is around the structural nature of it. As you think ahead, I'll first acknowledge, as we continue to grow in CUE and take market share, it puts a little bit of pressure from product mix. And we've been cycling and absorbing those gross margin expansions with higher pressure from CUE mix in the past few years, more than we would see going forward. Supply chain benefits have really been one of the top two areas of gross margin expansion. And we've seen and come off some of the highest supply chain costs. We've absorbed some of the inefficiencies in the robust, fast growth period. So the supply chain costs, declining transportation costs, improvement in the reduced miles from new distribution centers are all structural. And as you think about transportation costs, you think about it as in this particular time, we are still in an environment where transportation costs, both domestic and import, are higher than the pre-pandemic levels. I'm not saying that we expect to revert back to pre-pandemic norms, but I think the important thing is that we're not coming off of a new extreme low, but yet coming off of some of the highs. And then the second most impactful piece of gross margin is the structural sustained difference of coming off promotionals that were embedded into our normal programs and really leveraging EDLP and Neighbor’s Clubs. So the biggest drivers are structural. We expect to be able to change those. And the benefit that our fast team has driven in our production, not only in sales, but the funding from our vendors is structurally in there as well. So we anticipate to be able to have continued gross margin expansion. And even next year, as you think about seasonal, it may be able to bounce back and that has higher margins. So we have a lot of expectations on our ability to sustain and even expand gross margin for those reasons.

Kurt Barton:

Yeah. I'll take that one. I mean, I'd have to just go to this is still very early in our planning cycle. This business has been resilient in regards to our ability to maintain our comp sales. It's so much of a needs based core business in there that we are planning for some uncertainty. There are some headwinds on the consumer, but we got strong strategic initiatives. We're lapping some difficult challenges from the seasonal business. And we can be nimble, but I'm just not going to try to predict or go down a path of what level of comps or how low it could be because this business has a track record. In 30 years we've had one year of negative comps and it was ever so slightly. And we're confident in our ability to produce strong sales performance.

Michael Lasser :

Thank you very much.

Michael Lasser :

Thank you so much.

Oliver Wintermantel :

Yeah, thanks. I was looking for your guidance for the fourth quarter comp, the low single digits to mid-single digit decline. Kurt, how do you expect transactions versus ticket are performing in that kind of environment in regards of last year's, the winter storm? Is it mostly in transactions that are going to decline in the fourth quarter?

Oliver Wintermantel :

Okay. Thanks very much. Good luck.

Ryann Mushkin :

Good morning. This is Ryan on for Scott. Thanks for taking our question. Our research would suggest that there is an opportunity to have stores get deliveries from the distribution centers more frequently. Do you agree? And if so, what do you think the sales opportunity may be? Thanks.

Ryann Mushkin :

Thank you so much.

Chris Horvers :

Thanks very much. So following up on some of the prior questions, you are assuming comps are down roughly 4% in the fourth quarter. And you also said that your business has a long history of positive comp, sort of alluding that ‘24 would be positive. So, I guess what's unique to the fourth quarter? I understand there's two points of weather lap year-over-year. Why wouldn't the business be positive in that quarter if weather is sort of the only variable that's been the unknown?

Chris Horvers :

Got it. And then my follow-up is just on the consumer broadly. It is a needs-based business. How is the consumer changing? Because I think if you look across retail right now, you're not the only one who is seeing weakness, and it seems like it has deteriorated a bit. So are some of the things that you're talking about in terms of units per transaction and the usage of credit, is your view that there has been some degree of deterioration in the consumer over the past six months or so?

Chris Horvers :

Got it. Thanks very much.

Operator:

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.

Mary Winn Pilkington:

Thank you, Megan. Good morning, everyone. Thanks for taking the time to join us today. On the call for our prepared remarks are

John Ordus:

Thank you, Hal. It's an exciting time for the store operations in real estate team. As we embark a new ways to capture growth and market share, while also driving efficiencies in our real estate processes. Over the last year, we've installed new leadership and talent in our real estate team. This has allowed us to reevaluate where we are in the natural progression of our store growth plans and our ability to leverage our real estate capital structure. This new approach will allow us to realize cost savings and be more nimble with our store portfolio. Our strong outlook for new store growth is direct correlation of the millions of new customers we have acquired and our overall sales performance over the last several years. This provides us with nearly a decade of new store growth in the United States. We believe these are low risk, high return, organic growth opportunities. We anticipate accelerating our new store growth from approximately 70 stores this year to 80 in 2024 and 90 new stores in 2025 and beyond. Opening highly productive new stores is a core strength and competency of Tractor Supply. We continue strong new store productivity metrics with performance outpacing our historical investment thesis, and our stores are profitable in year one. As part of our growth plans, let's start with new stores. We have developed a new sales forecasting model to determine new stores mature sales, and pro forma results to develop our total market store growth opportunity of 3,000 stores. This was the first update to our modeling process in four years. We have infused the process with a machine learning model and insights from our 31 million Neighbor's Club members. This gives us tremendous confidence to raise our outlook by 200 stores for a total of 3,000 Tractor Supply stores in the U.S. To capture its growth, the real estate team is ramping up our pipeline to allow us to accelerate our store openings to 90 new stores by 2025. We are on track to open approximately 70 new stores this year with a step up to 80 new stores in 2024. We have a robust pipeline of new stores in our sites over the next 24 months. In fact, our pipeline is at the best level of development since prior to the pandemic. The team is also building new capabilities to optimize our real estate portfolio. For instance, we'll start own development of stores this year through a fixed fee developer model, and over time anticipate self-development in new stores. This year, we anticipate 20 to 30 of our new stores will be in our own development pipeline for 2024 new store openings, many of which will begin development in this year. A benefit of these new programs is our ability to have more control and visibility in this development process. The great news is that we estimate these capabilities will result at a 10% to 20% estimated rent reduction as compared to a developer model build. This rent reduction helps us continue and improve our new store returns. Part of the investment in creation of this development model requires more upfront cash. It is exciting that we are able to fund this through the sale lease back of 10 to 15 stores this year out of the 117 stores that we owned. Going forward, we find to use the sale lease back program on both existing owned stores as well as new store openings. This program will help fund our planned owned store development. It will also capture value in currently owned stores. With nearly 2,200 stores, we are also strategically investing in and optimizing our existing store portfolio as part of the lease renewal cycle. All stores will go through an in-depth review to ensure we have the right real estate strategy in place. We'll then take action to ensure that all stores have the right location, size, facility, rent structure, and format. These factors are critical to the success of our team and stores to deliver legendary customer service. With that, let me now pass it over to Kurt for our financial review.

Hal Lawton:

Thanks, Kurt. Stepping back, Tractor Supply has achieved remarkable growth over the past few years and the team has done an excellent job scaling our processes, capabilities, and organization to manage this growth. Key operational areas like inventory and payroll grew materially but at a lesser rate than sales and were always in control. Key philosophies like EDLP were re-embraced and our marketing media mix shifted fully away from print to digital. And the combination of these two enabled our promotional activity to achieve all-time lows and we remain there. In addition to these efforts, we launched our Life Out Here strategy to continue the ongoing transformation of our business. This strategy helped lock-in new customers, substantiate our market share gains, and is a platform for our future growth. The timing could not have been better. At the halfway mark of 2023, it is shaping up to be a solid year for Tractor Supply on top of three extraordinary years. Our market is stable and our customers remain healthy. The team is effectively controlling what we control. As we celebrate our 85th anniversary, Tractor Supply remains a unique highly differentiated retailer. Our needs-based business model has a track record of growing through various economic conditions. As a company, we have a proven ability to manage through dynamic environments whether that is a macroeconomic or seasonal weather trends. Our customers and team members are passionate about the Out Here lifestyle and they prioritize it. Our customers over indexes homeowners, landowners, pet owners, and animal owners. As a market leader, we have substantial advantages that are getting stronger every day. Additionally, investment in our Life Out Here strategy has critical mass. The natural evolution of our real estate strategy is furthering our competitive advantages. We see meaningful growth potential in our markets. I remain extremely confident that we have a tremendous runway growth ahead of us, and with the right team and the right strategy, we're continuing to build a strong foundation for the future. With that, let's open up the call for questions.

Karen Short:

Hi, thanks very much for taking my question. I'm going to just kind of roll two into one, if that's okay. So the first question and tied into the second was that I think you always had the assumption that your kind of comp would be 1% to 2% above GDP and that relationship doesn't seem to be holding right now. So I just want to talk about that. And then excluding the benefit of the sale leaseback, you had also kind of indicated 2023 would be the peak investment period for you, and then we should start see to see operating margin expansion in 2024. Is this still your thinking? And I guess I'm again excluding the sale leaseback development and then benefit. Thanks very much.

Operator:

Thank you, Karen. Our next question comes from the line of Scot Ciccarelli with Truist. Your line is now open.

Kurt Barton:

Hey Scot, this is Kurt. Good morning. And the real estate model as you think about the opportunity that we have to drive a strong performance of new stores that we've seen since there's a structural shift in the tailwinds into the rural economy, into our markets, the new stores are performing well. We -- as John mentioned, we built a real estate team that is ready to begin to ramp back up to a 90-ish new store. The sale leaseback of existing stores fits right in with that. We're an asset light model. Do not believe owning stores fits, which is why we have over 95% of our stores under a lease. And over time, 30 plus years, we've accumulated not strategically a number of owned stores. There's a bit of pent-up value in these stores, and it's a great time right now to use those stores to fuel and be able to keep a cash neutral value to execute on a strategy that allows us to even further drive new stores, bring efficiency in the new store model. So I look at those, we look at those very much tied in between as a great way to fund a model that drives greater long runway, greater TSR in the overall long-term algorithm. And I really keep both of those very much tied together as part of a key part of our operations.

Michael Lasser:

Good morning. Thanks a lot for taking my question. So you deemed a 2.5 comp in the second quarter with 500 basis points of like-for-like price inflation. You probably got some demand that was shifted out of 1Q into 2Q. And your guidance implies you're going to do call it a 1 to 2 comp for the back half of the year, even as you lap some of the big price increases from last year. So can you give us a sense for what is going to accelerate or improve in the business to offset the mitigating contribution from inflation? And have you already started to see that quoted again? Thank you.

Operator:

Thank you, Michael. Our next question comes from the line of Chuck Grom with Gordon Haskett Research Advisors. Your line is now open.

Hal Lawton:

Yes. Hey Chuck, and good morning, and thanks for joining the call. As I think we all know in this call, this has been a question for 18, 24 months. And what I'd say is we continue to see a very healthy customer base. Our active customers were at all-time highs this quarter. We saw positive comp transactions in the quarter. And if you look at the categories that are driving the footsteps and driving our customers, it's things like pet, animal, and those are based on counts of population out there in each of those categories. And so -- and then the last thing I'd point out is our share gain. At least half of the volume that we've cap -- that we've grown over the last handful of years has been share related. And so if I point to share active customers, comp transactions, pet, animal and look at those things, it's just a very different business than many of the other companies that kind of had a pandemic benefit reverted whether it was technology-related companies that had a user base that shifted online and then pivoted back or maybe something that's home related, electronics related. We're just a very different business and don't see any elements of reversion in our customer base or business.

Daniel Imbro:

Yes. Hey, good morning, everybody. Thanks for taking the questions. Hal, I wanted to follow-up on who that new customer is. How is the retention trending? I think you mentioned they're younger, so I'm curious, is there a difference in spending power between this most recent vintage of new customers and the historical ones? And are we seeing any change in the neighborhood -- Neighbor's Club adoption? I would think the push towards value makes the loyalty program more valuable, but can you provide any commentary or quantification around how that's trending differently?

Operator:

Thank you, Daniel. Our next question goes to the line of Seth Sigman with Barclays. Your line is now open.

Kurt Barton:

Hey Seth, this is Kurt. I'll take the first part of that question and I'll let Seth answer the second part in regards to the reinvestment of any margin. The performance on an operating margin standpoint for the second half on a gross margin standpoint will be very similar to second quarter. We continue to see, and as we signaled and guided at the beginning of the year, we have strong performance from everyday low pricing. We expect to continue to see transportation being the biggest benefit in fueling of the gross margin expansion. As a reminder, over the two years where transportation costs were pressured, we absorbed most of that and this is anticipating somewhat transitory. We're getting the return on that in 2023. On an SG&A standpoint, what really -- that's really the big difference in say the second half as you're observing, we expect Q3 on an SG&A standpoint, excluding the sale leaseback benefit to perform very similar to Q2 in that 70, 80 basis points deleverage principally from the investments in the business, but Q4 really has the best compares. And so in line with what we expect to go into the year when you look back at the fourth quarter of last year where while we had robust sales, we had increased cost in repairs from the storm, we had Orscheln acquisition transition, we had higher incentive compensation. We are lapping that and we expect in the fourth quarter, excluding the benefit from any sale leaseback to really still only have a modest level of SG&A deleverage principally on the compares. So if you hold the gross margin, you get better performance on SG&A. It's really about how well we're managing to spend. And I also can't ignore that the team has done an excellent job scaling the cost, leveraging investments we made, we are seeing significant efficiencies, even SG&A on the distribution and supply chain side of the business driving lower cost and some efficiencies beyond our expectations. With that, Seth, I'll -- maybe you can address the second part of that question.

Operator:

Thank you, Seth. Our next question comes from the line of Peter Benedict with Baird. Your line is now open.

Hal Lawton:

Yes. Hey Peter, and good morning. If you look back over 30 years of this company's comp growth, it's been almost equally split 50:50 between average ticket and comp transactions. And if you look really at our body of work over the last 3.5 years during the pandemic, there's definitely been periods of time of inflation, periods of time of UPT increases. But when you look at it collectively, it's about 50:50 comp transactions and average ticket. And that's just the formula that has really just kind of always been there in our historical numbers. And our expectation as that we -- as we navigate the current economy that we're operating in and consumer behaviors that we will migrate back to that historical blend as we kind of exit this year and move into next year. And there's going to be some ins and out, as we said in the second half of this year where we expect UPT, the headwind there to kind of level out as we get towards the end of the years. And we expect AUR to kind of come down. Those will work a little bit in together, big ticket becomes a lesser portion of sales. And so we get that mixed benefit there. And that all works out to an okay average ticket. We're seeing comp transactions increase that kind of balances a little bit right now and ends up delivering on the kind of implied guidance that we have for the second half of the year. And on the comp transactions, as I said, we had all-time record active customers this quarter. Our active customer base grew this past quarter. Their shopping is more frequently. We're seeing them do a little bit of deconsolidation of their trips as Kurt mentioned. But we're also gaining significant share in footsteps. And in categories like pet food where we continue to take substantial share, we're really viewed as kind of a value play, almost a warehouse like model. I mean, our average pet food bag size is 35 pounds, and that's very different than say, pet specialty and others. And if you look at a price per pound basis, I mean, we can be as good as 20%, 25%, 30%, advantage on a price per pound basis. And so we're just that naturally drives footsteps in our store. So the mix will evolve a little bit throughout the balance of this year, but we've certainly bought it all through and expect that over time it'll revert back to its historical performance of kind of a 50:50 blend.

Operator:

Absolutely. Thank you, Peter. Our next question will come from the line of Peter Keith with Piper Sandler. Your line is now open.

Kurt Barton:

Hey Peter, this is Kurt. The new real estate model, one of the many things that we're excited about is not only does it give us the long runway, but to your point, move from 70 to 90 stores a year. It's driving incremental sales. Those new stores have the -- expected to have the consistent tailwind into the comps. We believe this new real estate strategy not only gives us a longer runway, but really strengthens the long-term algorithm, gives us more confidence in that and bolsters the higher end of that. Mid-year through the year, we typically don't and aren't adjusting our long-term guidance we certainly will factor all of that in along with the outlook for 2024 as we report on our Q4 earnings, typically refreshing any adjustments to our long-term targets at this point. But we're excited about what it does for the long-term algorithm and the overall total shareholder return.

Brian Nagel:

Hi, good morning. Thanks for taking my question. So the question I have maybe just dig a little bit deeper into the comps around the trends seasonal sales. So the -- what I would ask there is, you talked a lot about the weakness here. It falls similar to what we saw in Q1, but any geographic differences that, that you noticed? And then as we move down to Q3, recognizing you have trim guidance from a year, but did you see any type of rebound in seasonal sales as maybe some of these weather, some of them not all, some of these weather events have started to abate.

Operator:

Thank you, Brian. Our next question will come from the line of Zach Fadem with Wells Fargo. Your line is now open.

Hal Lawton:

Hey, Zach, and good morning, and very perceptive. First off, I'd say on the comp, it's hard to calculate that both given the magnitude of the comps that we had in that period. But what I would -- given the magnitude of the comp, but what I would say is we can absolutely look at the 15 million Neighbor's Club members that we've added over the last few years and when they started to shop with us and how we locked them in using the Neighbor's Club program. And I've spoken to that many times. But we feel great about the cohorts from that first revision of our Neighbor's Club program. As we look ahead, there's a lot of -- we've been getting a lot of feedback from our customers and we can make it even better in the next -- in the next version. Doing some things to uniquely call out certain characteristics of customers if they're say a horse owner or say a military veteran, what can we do to better tailor that when they self-identify? There's also some things we can do on our rewards and maybe bite sizing the rewards up to giving some $5 rewards instead of always $10 rewards. We're also looking at a way to add, say, a fourth perhaps even the fifth tier. We -- as we mentioned, we've got our largest number of highest value customers ever. How do we actually take it up another tier and even give further rewards for those that are in that tier. So looking at a lot of ways to again it's -- that program locks our customers in. It encourages spin and encourage migration. It really encourages purchasing on big ticket and then redemption on the queue businesses. We're just looking for ways to reinforce that more and also make it more personable for our customers. And the team's hard to work on it, and we have more detail on it. We look forward to sharing it.

Operator:

Absolutely. Our final question will go to the line of Steven Zaccone with Citigroup. Your line is now open.

Kurt Barton:

Hey, Steven, this is Kurt. Appreciate the question. The -- as we talked about when Brian asked the question on Q2, I'll go back to the fact that a bit of Q2's performance, you have to acknowledge that as we saw some differentiation between some of the geographies that indicates weather was a contributor, but even in some of the strong geographies and across all that we saw a pullback on some of the discretionary. We are going into the second half acknowledging that, that it's a different seasonal period of time, particularly in the Q4. We plan for base weather. We do not plan for more favorable weather. And at this point on the seasonal categories, unless, we look at it as base and unless there's a strong demand for our product because of a shift in weather seasonal, the consumer on some of the discretionary items is a little bit more prudent on that today. And then also we acknowledge, as I mentioned, some of the impulse in discretionary category. So we anticipate that the consumer behavior is in line with the first half of the year. We're taking a reasonable prudent approach there. And then we're also factoring in the strong winter storm that we had in the fourth quarter that we're lapping up against. But underpinning all of that is a strength in our year-round core business running in the mid-single-digits. Comp transactions still performing strong at this point, and we've got a really good healthy customer. Hal mentioned some of the shifts that we've seen, UPT coming off some of its highs as you revert back to the mid-single-digits, it's really a matter of UPT and the consumer coming off of the cycle as we've seen in the last couple quarters and really having more strength in the size of their basket and the demand for the discretionary. And we could be a couple quarters away from that. And we factor that into our guidance. Our guidance is reasonable. We're not factoring in a favorable shift in the consumer or a strong shift in favorable weather. It's taken all those factors that we've seen year-to-date as well as some of the headwinds in the second half.

Mary Winn Pilkington:

Thank you, Megan. This will conclude our call. I am available for any questions or follow-up. So please feel free to reach out and we look forward to speaking to you at our Q3 earnings call in October. So thank you.

Mary Winn Pilkington:

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today. On the call today are

Seth Estep:

Thank you, Hal. I'm excited to share with you some insights into our merchandising categories and market share position. We are committed to driving sales productivity as we deepen our relationships with our customers. I'd like to start by congratulating Nicole Logan, SVP of Animal and Softline divisions; and Randall Dodds, SVP of Seasonal and Hardline divisions on the recent promotions. They each bring significant retail and industry experience that complement their tenure at Tractor Supply. These new roles each have three merchandising divisions reporting to each of them. It is exciting to have this new organizational structure to allow us to operate at greater scale, have deeper category insights and enhanced strategic partnerships. Overall, we're now organized into six merchandising divisions. So let's start with our largest division, companion animal, that represents more than 20% of our 2022 sales. This business includes both the consumables and hard lines across companion animal. Around 75% of the Tractor Supply customers have a pet, and approximately 50% have more than one pet. Also, our customers dog weight on average about 20 pounds more than the US average. With the ongoing humanization of companion animals, these key structural tailwinds support our positive outlook on this category. We are a destination for pet customers, with a comprehensive and differentiated assortment at an everyday low price, and we continue to gain share. For example, our growth in pet food, treats and litter continues to lead the market in both dollar and pound growth, gaining another 33 basis points of share in Q1. Our business model of private brands, strong national and differentiated partners, club pack sizes and legendary customer service sets us up to continue gaining share, perhaps even more if we see the consumer more pressured for value. Moving on to our second largest division, livestock and equine, which represents just under 20% of sells. This is a key category for farm and ranch, and we continue to consistently outperform the market. Of note, this category is almost solely the consumables portion of our lifestyle seed categories. In other words, this business does not include fencing, which, in many ways, can be considered containment for large animals. With strong exclusive brands like DuMOR and Producer's Pride, along with national brands from Purina, Cargill, Triple Crown and more, we continue to innovate across our key categories of poultry, equine and cattle. We are the clear leader in this space, with approximately 20% market share. Broadly, one out of every five bags of animal feed is bought at Tractor Supply, and we continue to take share, consistently outperforming the market by 5 percentage points. Next up in our category lineup at an equal weighting are our seasonal and our truck tool and hardware divisions. We are excited to get our spring seasonal business off and running. This is an area where we think we have substantial share opportunities. We are a leader in core categories like outdoor power as the destination for Zero Turn Mowers and categories like grass feed and fertilizers. Also, our live goods assortment is included in this division. As of today, we have more than 350 garden centers ready for spring, with the vast majority just entering year two of operations. Where spring weather has cooperated, we are very excited about our customers' response to the expanded product offering and layout in our Fusion and Garden Center stores. More broadly, this season, we are offering a differentiated garden assortment of live goods, including vegetables and plants, soils, mulch, and chemicals tailored to Life Out Here. We like our initial reads for seasonal products where the weather has turned and are excited for the spring season. Our fourth division is truck, tool and hardware that includes lifestyle items like trailers, power tools, welders and truck accessories. Historically, in tools, we have serviced as a convenience play in power tools and hardware. As part of our Fusion layout, we have made significant investments in corresponding progress on elevating our power tool selection, and it has resulted in one of the highest sales lift categories in our Fusion stores. The additions of Makita, Bosch and Dremel, coupled with being the exclusive retail destination for Porter-Cable power tools, has allowed us to have consistent share gains over the last three years. Up next is our Ag and Outdoor Recreation division, which includes categories such as fencing and sprayers as well as our outdoor sport categories. We are in the business of helping people maintain their land and contain their animals. We have the largest share in the country and have outgrown the market by mid-single digits. And for outdoor recreation, we are very excited about the growth prospects for this segment as we test an expanded assortment in several Orscheln Farm and Home stores. Our final segment ranked on sales volume is clothing and decor, which has exhibited rapid growth since the pandemic, trending well above the company average. This business includes apparel, footwear and farmhouse decor. As one of the largest retailers of Carhartt, along with other brands like Wrangler and Colombia, our customers are finding our assortment meets their workwear needs and their lifestyle. For years, we've known there was a market opportunity in women's workwear at Tractor Supply. And the team has leaned into this category, and the shopper is responding. While still off a relatively small base, our women's apparel business grew 24% in Q1, led by growth in our exclusive brands of Blue Mountain and Ridgecut. We will continue to look for ways to grow these high-margin categories by growing both leading national and best-in-class exclusive brands. In closing, with our new alignment and additional resources, Tractor Supply is well positioned to continue to be the market leader and operate with speed, agility and efficiency to capture growth and drive sales productivity. We are in the midst of one of the most exciting times at Tractor Supply as we are in the spring season. And I hope you get a chance to get out to our stores and see all the exciting merchandising experiences and product innovation. Now, I'll turn it over to Kurt.

Hal Lawton:

Thanks, Kurt. Tractor Supply has a proven business model that has been resilient over many business cycles. Throughout our 85-year history, we have successfully navigated all types of business environments and have emerged stronger each time. We continue to see positive migration trends to our markets. This marks the third consecutive year of positive population growth in rural America. This reflects an increased desire to seek out more space and take advantage of the affordability that country suburban, exurban and rural markets offer with a lower cost of living and the ability to live Life Out Here. It is our view that the sense of community found in our markets, and perhaps more importantly, the ability to secure a piece of property at a reasonable price, has ensured the rural migration trend is one that's here to stay for the time being. The millennial generation has embraced Life Out Here. Our customers have been resilient thus far in the face of slower macroeconomic growth, elevated inflation and higher interest rates, and they prioritize their lifestyle and passions. With significant growth and market share opportunities, we are excited about the balance of the year and remain confident in our business. My thanks and appreciation go out to the team for their dedication to living our mission values every day. And now, we'd like to open up the call for questions. Thank you so much.

Steven Zaccone:

Great. Good morning, everyone. Thanks for taking my question. I wanted to start just thinking about the context of the year. So given the slightly weaker-than-expected same-store sales in the first quarter, can you just talk about the confidence to recover these spring sales over the balance of the year? It sounds like January can't be made up, but how material is that for the full year? And then just you sounded a bit more cautious on discretionary from what you've seen from your consumers. So just elaborate on how much that could be an impact to the full year. Thanks very much.

Steven Zaccone:

Great. Thanks for all the detail. I’ll leave the floor.

Operator:

Thank you for your question. The next question comes from the line of Scot Ciccarelli with Truist. You may proceed.

Hal Lawton:

Hey, Scott, so I'll reference that really just in the context of dominantly a big ticket and the fact that, historically, if you were to take out 2021, when you had the – the stimulus and you were to take out 2020 when there was a modest stimulus combined with, obviously, COVID, I think if you were to go back over like my 20-plus years history in retail and home improvement and the farm and ranch, Seth and Kurt, I think we'd all say that like things like riding lawn mowers, bigger ticket items like that, customers typically buy them when they need. The vast majority of those categories or purchases are needs based. And that's really what we were trying to signal is we're seeing more of that than we did kind of in 2020 and 2021, really more of reversion to kind of historic purchasing patterns of those sorts of categories, nothing otherwise intended to be implied.

Hal Lawton:

Exactly, exactly. Nothing otherwise intended to be implied. And thanks for the clarification.

Operator:

Thank you for your question. The next question comes from the line of Chris Horvers with JPMorgan. You may proceed.

Hal Lawton:

Hey, Chris, as we called out quarter-to-date, we're nearly done with April is mid-single-digit comps and low positive single-digit comp transactions. And so given the cool wet weather that's continued into April, we're relatively pleased with that performance. As a recollection from last year, June was not a strong spring selling season. The last year's spring only had a handful of really good weeks, and then it went very hot. And that's what I was referencing earlier about the drought. If you recall, on our Q2 call, we started to talk about the drought in the back half of -- kind of back half of June and into July. And then we reiterated that that we saw that impact us for the first six, eight weeks of Q3 as well. So, we are optimistic that we can have a solid May comp on top of a weaker June and have an extended selling season into July and August this year, particularly in core areas for us, like Florida, Texas, and California. California and Texas, in particular, were under extreme drought conditions by the time we got to mid-June last year and really extended into September. As we know, those areas have had extreme weather the first half -- the first quarter of this year. We're all reading about the flooding in California and such. And we think that will bode well for us as we get into the summertime in those areas of the country.

Hal Lawton:

Yes. And thanks for calling that out, Chris. As Kurt mentioned in his prepared remarks, we see a variety of ways for us to achieve our guidance this year, both on the sales side and on the earnings side. And as it relates to earnings, there's a number of expense opportunities that are starting to show up, if you will, particularly in our supply chain and in the Orscheln integration cost. On the gross margin side, look, this is the benefit of being a scaled player in our market. And when you start to see kind of just a little bit of moderation in pricing, we're able to take advantage of that and drive some upside in our gross margin rate and still remain incredibly price competitive and lead the market there. Additionally, we've seen container costs come down significantly, and that's starting to flow through. And it had some impact in Q1, but it will have more impact in Q2 and Q3. Also domestic freight is starting to trend down as well. There was a couple of, I think -- recently, one of the big freight companies mentioned that we were in a freight recession or depression, and that bodes well for us in terms of being able to leverage our scale to drive down freight costs, in particular because we've got new routes to market coming online with our new DC. And obviously, with the 150 stores we have that we're building plus with Orscheln. So, we feel really good about our gross margin rate performance. Do you feel like there's continued upside as we look towards the year? And that's one of the reasons that gives us strong confidence to be able to reinforce our guidance.

Operator:

Thank you for your question. The next question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed.

Kurt Barton:

Simeon, this is Kurt. I'll hit both of those. Why don't I start with the second then the first. It's a quick one. The -- the variation between geographies between weeks all reinforce what Hal was just saying. To your question, if you take like the Midwest, Northeast Commonwealth states, you compare that to the rest of the geographies. You did see a disparity because those states had a very mild winter, where it's really strong for them. And then they saw no spring, they basically saw more snowfall in March than they did in January. So we did see a very clear disparity between those low or mid-single-digit negative to mid-single-digit positive in the other geographies, which, again, just gives us the confidence in the trends of the business. On the gross margin question, I'll give the primary drivers, and I'll just give you the order of magnitude on what we're seeing in gross margin. And these are all areas of structural improvements. These are things that we planned for, but as Hal said, we see continued upside in gross margin. First is our price management was the biggest driver of that. That was offset by the second, which would have been a mix impact from CUE and then the third was benefit from freight. Freight is the one that we believe continues to have potential benefit going forward. On price management, just a couple of points on there. When we talk price management, it really includes more than just managing the retail price. It's the retail pricing, it's the management of everyday low pricing, our promos, and then even the cost negotiation and concessions. And Seth the team did an excellent job leveraging our scale, our size in this environment to produce a strong enough price management direct margin to offset -- more than offset the CUE. So between retail price management and pressure from CUE, that was about half the benefit. Transportation was about the other half.

Operator:

Thank you for your question. The next question comes from the line of Seth Sigman with Barclays. You may proceed.

Hal Lawton:

Yeah. Hey, good morning. And thanks, Seth, for the question. I'll speak just about Orscheln integration for a moment. First off, it's -- the integration is going very well. Most importantly, it's being well received by the Orscheln team members as they are converting to Tractor Supply team members. And it's also being really well received by customers and even more so than I anticipated. Secondly, the team is doing a fantastic job cadencing the stores and transitioning them over to Tractor Supply banners. We have several done already. We've got almost 20 that are converted from a point-of-sale transaction. We're implementing the Fusion remodel on all of them, and we are on -- we are ahead of schedule on those transitions. And then what that allows us to do is to take our back half plan and optimize a bit how the expense structure that we had planned. And so, specifically, there's two elements that are driving that. The first is our IT integration cost. Our team is doing an excellent job integrating from an IT perspective, and we're finding some leverage there and some need to not have to spend what we previously anticipated. And the second is around the sale of the SSC and the DC. We previously planned that to the end of the year. We're now optimistic that we can pull that forward by maybe a month or two or three, and we'll save some dollars there as well from an operating cost perspective. So in general, the Orscheln acquisition is going very, very well. We're very pleased with how it's progressing and wanted to share that outlook today. More broadly, what I'd say is, I think like most companies that are reporting this weekly cycle, everyone is kind of -- you seem to see a lot of people holding guidance in spite of like what you just articulated, some upside for us on gross margin rate, on expense and others just in the spirit of -- because there's a lot of the year left to go.

Operator:

Thank you for your question. The next question comes from the line of Brian Nagel with Oppenheimer. You may proceed

Kurt Barton:

Hey, Brian, this is Kurt. Yes. On that, I'll give -- I'll just continue to give a few points. In areas where they're not as impacted by weather, you heard me mention to the previous question, the South, the Texas area, Far West, all those areas we saw performance in line with our expectations versus the areas of the North and Midwest where it was below our expectations. I'll also add in what also was so evident to us is that internally, when we look at the variation by categories in merchandising, the categories that we -- that are not impacted by weather variations right in line with expectations. When we look at the weeks within it, you can look at the first few weeks and the last three weeks, and you see which weeks are not like the others. And then when we look at our external measurements, where we've utilized market industry information on that, it also confirms that Tractor Supply outperformed the market. In farm and ranch, we've seen in market industries, it's running negative in those, especially in those areas where there is a lot of farm and ranch competition. So from all the data points that we see for -- I mean, for Q1, the -- any of the softness was seasonal and then as we look throughout the rest of this quarter, it's really a matter of when does spring start. It's not if, but when. And it's a matter of whether it's ideal, typical, poor, but Tractor Supply has been able to pivot and be able to manage each of those quarters. And to house point, it's very much shaping up like one of those years where it gives us the opportunity for a good extended selling season.

Brian Nagel:

No, that's very, very helpful. And just one quick follow-up. So again, I'm asking you necessarily to be a meteorologist, but as you look at the dynamic here, as we've had this, what seems to be a very wet late winter, early spring, going historically, has that ever not led to an extended spring or in the spring that was actually better for Tractor Supply?

Brian Nagel:

Got it. I appreciate it. Thank you.

Operator:

Thank you for your question. The next question comes from the line of Kate McShane with Goldman Sachs. You may proceed.

Kurt Barton:

Kate, hey, this is Kurt. Our original expectation and guidance, just to reiterate that, we see as we entered this year, GDP growing 1% to 2% was our assumption. And then Tractor Supply has historically been growing outside of that as we're grabbing market share, so another 1% or 2% of growth beyond that. And where Seth talked about -- where we're gaining market share, we are certainly gaining market share in categories like companion animal, in poultry, in other areas. And so that gain is part of what we expect to be able to do. But I'd also say, as we look at this year, where there may be any challenges in regards to the consumer, this is a great opportunity. Just like we saw where some discretionary, saw some softness, offset by a robust gain in market share. And I think that's the resiliency of the business, and that's -- one of the exciting things is that, if there is some softness in some categories, we've got opportunity in live goods, companion animal, others to gain market share. And we see upside to our market share gains compared to our standard model for this year and the next couple of years.

Kate McShane:

Thank you.

Scott Mushkin:

Hey, guys. Thanks for taking my question. A little bit focused on the merchandising management team. You're obviously beefing it up. And so I was wondering, what drove that decision? Do you see significant opportunities to expand the total addressable market? And if yes, where do you think those opportunities are?

Scott Mushkin:

And do you see the data from the frequent shopper card helping you with the vendors and the relationship is getting stronger and more beneficial?

Scott Mushkin:

Thanks guys.

Steven Forbes:

Good morning, Hal, Seth and Kurt. I wanted to revisit the side lot plus Fusion remodels in terms of cost versus sales lift as we approach the core of the spring selling season here. So two-part question. One, can you remind us of the net cost of such projects, and whether you've been able to improve the net spend behind these projects as you scale the initiative? And then, two, how has the spring selling season, albeit early, changed your expectation, right, for the overall sales lift or the ROIC that you expect to generate behind this spend as well?

Steven Forbes:

Thank you.

Operator:

Absolutely. The final question comes from the line of Peter Benedict with Baird. You may proceed.

Kurt Barton:

Yes. Peter, I'll hit those. On the inflation, our outlook on the retail price inflation for the year hasn't changed much at all. A vast majority of retail price inflation, as I mentioned in Q1, was what was put in place in the second half of last year. And we're seeing a bit of a steady plateau. Maybe some categories like pet will continue to see some. So our expectation is high single-digit Q1 moving into the mid single-digit Q2 to maybe slightly lower in Q3 and then getting into low single-digit Q4. And we're not seeing significant cost deflation. So at this point, there may be some deflation in certain areas of the business. But overall, there's some disinflation that we have expected in there. The great thing is, this year, we expect to see comp transactions really being a key driver to it. And that's what we're seeing right now, as Hal mentioned. And our expectation, as the year unfolds, it really is a good balance between ticket and transactions. Lastly, I'd say what is exciting, you heard this from both Hal and I is in other parts of the business, in cost, in SG&A, we are taking advantage of our ability to use the scale where there's either excess capacity or there's cost coming down. The operating expenses have efficiencies there and you heard that in some of our messaging. So hopefully, that helps answer the question, a lot of great expectation. Our ability in any sales scenario to really have increased operating margin in 2023.

Kurt Barton:

Yes, absolutely, Peter. Neighbor's Club has been an integral part of driving our business and enabling customer behavior, particularly on our consumables. More and more of our customers are signing up for our private label credit card. We announced last quarter that we reached for the first time $1 billion in sales on that credit card. You get a 5% discount when you use the credit card in your purchases, which drives kind of repeat behavior on food and feed in particular. As Seth talked about, we are outgrowing the feed market by 5 points repeatedly every single quarter. And we have a 20% share far and away the largest share in the market in that category. Same thing on dog food, I mean we are far and away the share leader in dog food. It doesn't matter what metric you look at, pounds, units, dollar growth and even new customer counts. Every single week, our new customer counts for dog food are going up. And those are what we can count on to drive our transactions. And I think one of the things you mentioned is the business has -- is kind of changing to some degree from kind of three, four, five years ago in terms of having the scale we have in pet food now to complement the scale we've always had in Animal Feed and that's driving positive comp transactions for us. As we said, even in March, where we had soft weather on the seasonal side, it still allowed us to have positive comp transactions.

Operator:

That concludes today's Tractor Supply Company's conference call to discuss first quarter 2023 results. Thank you for your participation. You may now disconnect your lines.

Mary Winn Pilkington:

Thank you, operator. Good morning, everyone, and thanks for joining us. I hope you enjoyed watching the video of Tractor Supply's year-end review. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we've made available a supplemental slide presentation on our website to accompany today's earnings release. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although, the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up. Thank you for your time and attention this morning. Now it's my pleasure to turn the call over to Hal.

Kurt Barton:

Thank you, Hal, and hello to everyone on the call. Let me build on how sentiment for 2022. As we start out the year, we anticipated that our business would continue to exhibit consistent performance as we have a proven business model that has stood the test of time. The team delivered against our goals and exceeded our expectations. The impact of the 53rd week on our performance is detailed in our press release. To recap, the 53rd week added about $225 million to our net sales in the fourth quarter representing 6.8 points of our net sales growth. On a full year basis, it represented 1.8 points of the 11.6% growth year-over-year. Diluted EPS benefited by $0.16 for the quarter and the year. For the fourth quarter, all regions of the country once again delivered positive sales comp. All months were comp positive. As for the cadence of the quarter, our comp store sales were performing at the high end of our outlook as we move into mid-December. Then as Winter Storm Elliott moved across the country, our sales accelerated given the storm’s impact on our customers’ needs for heat, insulated outerwear, livestock feed and forage and some load up of other C.U.E. products. As Hal shared, we estimate the storm provided about 2 percentage point benefit to our comp sales. Much like any emergency response events such as hurricanes, the profitability of these sales from winter storm events of this magnitude is lower due to the mix of products and higher incremental operating costs. Our commitment to being the dependable supplier for Life Out Here was exhibited during this historic storm. Looking back, when excluding the December winter storm comparable store sales have been remarkably consistent across all four quarters of the year. Similar to trends through the year, retail price inflation contributed about 11 points to our comparable store sales in Q4 as the team continues to navigate the ongoing cost pressures across the supply chain. The comparable average ticket growth of 6.3% benefited from inflation, partially offset by a shift in sales mix to needs-based consumables versus the larger ticket items. Demand for C.U.E. categories was nearly 3 times the chain average, while big ticket sales performance was down mid-single digits. We did see strong performance in winter needs-based items such as heaters, snow throwers and log splitters. The performance in these big ticket categories somewhat offset the declines we saw in more discretionary categories like utility and recreational vehicles and trailers. Moving on to gross margin. For the fourth quarter, our gross margin improved by 28 basis points to an even 34% of sales. Our price management actions and other margin-driving initiatives were able to offset the pressures from year-over-year product cost inflation, higher transportation costs and product mix due to the strength of C.U.E. categories. During the quarter, we experienced a significant moderation in the rate of price increases from our vendors, but by no means are we seeing deflation. Our promotional activity was in line with the prior year and we are seeing moderation in transportation costs that we expect to flow through in 2023. Of note, it’s our belief that transportation costs most likely peaked in the fourth quarter. As a percent of net sales, SG&A expenses, including depreciation and amortization, increased 14 basis points year-over-year to 25.1%. As we indicated in Q3, this increase was primarily attributable to three factors

Operator:

[Operator Instructions] Our first question comes from the line of Scot Ciccarelli with Truist. Scot, your line is now open.

Hal Lawton:

Yes. Good morning and thanks for your question. Appreciate you joining the call today. We’re very pleased with the guidance we provided on our comp sales for 2023 to be between 3.5% and 5.5%, very much in line with our long-term guidance range as well. As Kurt said in his prepared remarks, we expect it’ll be a blend of transacts – positive comp transactions and ticket. We do expect inflation will be stronger in the first half, but moderate in the second half. And what I’d say more broadly is, our market that we participate in continues to run reasonably in line with GDP kind of flat to low single digit growth. And we are taking significant share in the marketplace. As we’ve said several times over the last three years, our sales growth, half of that can be attributable to share gain. And we certainly are expecting that to continue in 2023. And the share gain is really a composition of the competitive advantages that we have as well as the investments we’re making in our Life Out Here strategy and the fact that we’re reaching scale on a number of those now, particularly our Fusion and Garden Centers. And they will continue to add material growth to our comps. But again, we’re very positive on our outlook for 2023 and expect the momentum that we exited 2022 to continue into the year.

Operator:

Our next question comes from the line of Karen Short with Credit Suisse. Karen, your line is now open.

Hal Lawton:

Yes. Hey, Liz, good morning and thanks for taking the call. I’m sorry, Karen, I apologize, Karen. Karen, how are you this morning? Good morning. You all are right beside each other your name’s alphabetically on my list, so my apologies. But Karen good morning and thanks for your question for joining the call. On the sales growth, as you said, we are in an investment cycle in our business and the thing that we’re excited about is that we’re able to grow earnings as we did last year double digits, and we’re able to grow our sales as we did last year double digits even in the context of an earnings cycle. And we anticipate to continue to grow sales at a significant rate next year as well as our earnings at a significant rate next year, even inclusive of all the capital expenditure and kind of underlying DNA that comes along with that, as well as all the other investments we’re making in the business. But we’re very optimistic and confident in the outlook that we’ve provided. On the mix by category, we’ve roughly talked about discretionary being more like 15% of our business. Big ticket is kind of in the low double digits. There’s a few other categories that would be plus or minus in that discretionary area as well. And I think the way we think about that business is that some categories will have - continue to be negative in their comps but there’s others when it’s seasonally relevant that will be positive. And an example of that is what Kurt articulated in his prepared remarks saying that, our big ticket sales were kind of mid-single digit negative comps. And it was really – there was two sets of categories in there. The kind of discretionary non-seasonal related ones were kind of negative double digits, but then you had ones that were seasonally relevant and there was a demand around those say like log splitters and snow throwers that are also big ticket and could be viewed as discretionary or in our kind of math for discretionary and those blended together to drive a negative single digit – mid single digit comp. And we think it’ll play out that way much of this year. As an example, as we get into the end of Q1 and early Q2 when we had the drought last year that disproportionately affected as we commented last year, things like riders. And we expect those to come back as the drought is abetting in many areas of the country even in spite of the consumer shifting more towards needs based needs based spend. Anyway, thanks Karen, for joining the call. I appreciate the question.

Operator:

Our next question comes on the line of Liz Suzuki with Bank of America. Liz, your line is now open.

Hal Lawton:

Yes, hey Liz. And good morning, and thanks for joining the call. As we've said several times, last year and this year are two biggest peaks in investments. And as we talked about in our enhanced earnings calls a couple of years ago, the first part of this five-year cycle that we're in for our Life Out Here strategy would be towards more the bottom end of our – middle end of our range. And then as we move towards the out years, call it, 2024, 2025, 2026, we see opportunities to increment up on our op margin towards that higher end and kind of get back to a nice leverage across our P&L, let's say, 5 or 10 basis points a year. And really, the biggest determinant of the 10.1% to 10.3% this year would just be the sales range. And if we're up more towards the 5.5, we would expect to leverage more on some of our fixed costs and be more towards that 10.3%. If we're down more towards the 3.5%, we think we'll be more in that 10.1% to 10.2% range as there's a little less leverage on some of our fixed costs. We pull some other levers to kind of manage the business. But certainly, as we look out towards the back half of this five-year investment cycle, we see opportunities for our margin rate to increment up.

Hal Lawton:

Yes. So the mix of our remodels in 2023 will be a little different than last year because of the Orscheln acquisition. This year, as we shared in our opening remarks, it's kind of 70 to 80-ish new stores that will open this year. We'll also be integrating the 81 Orscheln stores. Those will be kind of basically a Fusion remodel. And then we'll do around 150 more Fusion remodels as well. And that's in line with what we did this year, kind of in that 200 to 250 range. It's just the fact that 80 of those will be taken up by the Orscheln integration this year. We continue to be very excited about Fusion and very excited about our side lots. Go ahead, Liz.

Hal Lawton:

Yes, perfect. Look forward to seeing you.

Brian Nagel:

Hi, good morning. Great quarter, congratulations. So I have two quick questions. I'll merge them into one. First off, with regard to the sort of say, the weather bump in sales late in Q4, should we think about that as incremental demand? Or does that potentially pull forward demand would have happened in Q1? And then the second question I have, Kurt, you mentioned in your script, that you're seeing, I guess, price increases moderate and that's from your suppliers. The first I have is, so then what action – that's occurring, what action is Tractor Supply taking? Are you maintaining your retail prices? Or are you actually adjusting your retail prices to account for those now modeling input costs? Thanks.

Kurt Barton:

Yes, Brian, good morning. And I'll just add to that. On that winter storm, we view it very much like a discrete event like the hurricane events have been. You heard my commentary on there. The exciting thing though is, with those types of events, consistent with this storm is it introduces Tractor Supply as a needs-based business to other new customers. And that's what we do as we capitalize on that, we see it as part of our opportunity in 2023 as new footsteps into the business. So great opportunity from that one event as we continue to serve our markets in a significant widespread winter storms such as that. In regards to your question about prices abating and how we manage that, one is, we will – those prices will take time to work through the system. So we do very well at managing whether that be the product cost or the transportation to be able to manage as those flow through and balance between the competitive retail price that we have, gaining market share and how much we actually take to the bottom line. Specifically, the biggest item in the gross margin benefit in 2023 is the easing of the transportation cost. And as you look back even over the last two years, on our gross margin, we've been very specific as we've been able to find offsets or pass through some of those the transportation cost has been the primary one where we've absorbed some of that. And so we will – as those prices abate and ease through, it's a key contributor to how we expect to see gross margin expansion throughout 2023.

Operator:

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon, your line is now open.

Hal Lawton:

Yes, hey Simeon, and thanks for joining the call. Good to speak to you this morning. On the C.U.E., I would say our AUR is in line with the rest of the market. So kind of high single-digits, generally speaking, across food and speed, but our market share is on a dollar basis, we’re running 2x the market. And on a pound basis, we’re running 3x the market in growth. And so it’s – the majority of our growth there well over half is transactions-based, unit-based and share gain. And dog dry food is the numbers I was just mentioning right there, those were specific to that to dog dry food. But we’re seeing similar type of numbers in poultry feed, in equine feed, in livestock, et cetera. And I would say it is pulling through to the rest of our business, in terms of driving positive footsteps and transactions into our store. And then also, our average ticket continues to remain very solid with very modest reduction in our UPT. In fact, this was the lowest year-over-year in our UPT decline in 2022. And when you look at the customer – underlying customer cohorts in our Neighbor’s Club program, what you’re seeing and as was mentioned in the prepared remarks is that the millennials have moved out to kind of rural America and kind of that Sunbelt migration, they start in poultry and pet food with us and then very quickly are migrating into four to five other categories in terms of us being their destination. And so I’d say we’re seeing strong growth, its market share gains in C.U.E. that we’re taking. We’re confident we will be able to continue to take those gains. We are the lowest cost to serve in the market, the fastest supply chain, the lowest price is the best customer service. And when they get in there, should they shop the whole lifestyle, and we’re seeing that in our average ticket and also in our on customer data.

Operator:

Our next question comes from the line of Zach Fadem with Wells Fargo. Zach, your line is now open.

Kurt Barton:

Zack, hey, this is Kurt. The first question in regards to cadence throughout the quarter, as I mentioned in my prepared remarks, the – all four quarters really would expect to be in line with our overall guidance. We don’t expect significant variation between the quarters. I would encourage you, as you reflect back on last year, as we talked about some of the headwinds we saw in the middle parts of the year, with the late start to the spring, the drought that impacted Q2 and Q3. We talked about how in those quarters, there were some headwinds that took some of the top side off of the comps in those quarters. So we see good opportunity to be able to capitalize comping up against those quarters. We obviously had a really strong Q4. We talked about the winter storm. So those are all things that factor into our model as we plan the comps. And on the gross margin question, maybe remind me again your question on the gross margin.

Kurt Barton:

Got you. Yes. Well, of course, we always prioritize market share gains competitive in pricing. We are the lowest cost to serve. We’ve invested in our supply chain and distribution to be able to capitalize on this shift in the environment where transportations are coming down. So we’ll be able to take advantage of our own efficiencies that we can control. As there’s opportunities as prices decline, we will take some opportunity modest as we see it in our plan, opportunity to invest in the gross margin. And all of that is considered in our expectation that we could see gross margin growing 20 basis points to 40 basis points in 2023.

Kurt Barton:

Exactly. Yes. Thank you. There is not a pronouncement, anything of material. And I’d just point back to how consistent each of the quarters were in 2023. So there’s really no meaningful shift in there.

Operator:

Our next question comes from the line of Chris Horvers with JPMorgan. Chris, your line is now open.

Hal Lawton:

Yes. Hey Chris, and good morning. Thanks for your question and for joining the call. First, we were very pleased with our Q4 business in general. As I said and Kurt, absent the storm, we were still at the high end of our comp expectations and we would have still had positive comp transactions for the quarter regardless of the storm. And we were also very pleased with our seasonal businesses. They performed in line with our expectations. And then in the last week of right before Christmas, for us, when we have a winter storm like that, it drives more footsteps into our stores, and they end up shopping the entire lifestyle when they’re in there. So we saw excellent performance that week. And in holiday-related items, whether it’s in apparel, whether it was in decor, candy, toys, tools. It was a solid, very solid close to the year for us on both, as I said, not only just on demand-driven store-related items. And then on pet, we are seeing unit growth and double-digit comps across all categories in pet, whether it’s dog, whether it’s cat, whether it’s hard goods, whether it’s consumables, whether it’s food, whether it’s sundries or accessories. Certainly, the food is outpacing the other categories, but all categories in our pet business are seeing very strong growth.

Mary Winn Pilkington:

So we’ve hit the top of the hour, but we’ll let the call go just a few minutes longer because our prepared remarks were longer.

Steven Forbes:

Good morning, Hal, Kurt, Mary. I wanted to focus on member cohort trends. So you mentioned, I think, during the prepared remarks, retention rates right among the high-value customers. I was curious if you could expand on retention, repeat behavior sort of in aggregate across the member cohorts as a whole and whether you’re seeing a difference in behaviors right, between those members acquired over the past three years versus those members acquired 2019 earlier.

Steven Forbes:

Thank you. Best of luck.

Peter Keith:

Hi, thanks. Good morning, everyone. One thing that we’re hearing in the channel right now, and it’s kind of a funny dynamic for Farm and Ranch, but that the chicken category is on fire. And certainly, there’s been some well-publicized discussion of price increases with eggs. So I guess I’m wondering, is that a kind of an emerging trend that chickens have perhaps reaccelerated for you. And is that a category that actually could be big enough to move the needle as we look at 2023?

Peter Keith:

All right. Thanks and congrats on the continued success.

Operator:

Our final question comes from the line of Peter Benedict with Baird. Peter, your line is now open.

Kurt Barton:

Hey, Peter, this is Kurt. In regards to CapEx and your two questions, the growth in CapEx in 2022 at the high end of our expectations reflected a couple of things. Certainly, there’s inflation in the cost of building a distribution center, the new stores, et cetera, that was a piece of it. But also in this environment, the team has done an excellent job of ramping up and ensuring that all of the pieces that go into these fusion remodels that we’ve got the fixtures and all of the equipment ready to go. So the pipeline is in good shape for what we plan to use to grow into the 200 to 250 remodeled stores next year. And there’s some timing of that capital that impacted 2022. And then certainly, for 2023, we expect consistent numbers. We’ve got a construction of a complete new distribution center in Maumelle, Arkansas. So for both years, they absorbed the $150 million-ish cost of some of our largest distribution centers in those years. And that leads to the second question that you had going forward, we really believe that as we said, these would be the two peak years that the biggest investment over the other years is really on the supply chain side. And it’s reverting back more to that over the next few years, $600 million, $650 million in capital going forward. And it’s a very planned, purposeful five-year growth to convert the supply chain and the stores into the new Life Out Here strategy, look and shopping experience for our customers. So I would expect to see that number come down a bit after 2023.

Mary Winn Pilkington:

Sure thing. For that, we’ll wrap up our call. Thanks, everyone, for joining us, and we look forward to speaking to you on our first quarter earnings call in April. I’m around. If anybody wants to reach out, please let me know and we’ll get you on the calendar. Thank you all. Have a great day.

Mary Winn Pilkington:

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today, and I hope everyone is doing well. On the call today are Hal Lawton, our CEO; Kurt Barton, our CFO. After our prepared remarks, we'll open up the call for your questions. Seth Estep, our EVP and Chief Merchandising Officer; will join us for the question-and-answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risk and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in the call. Given the number of people who want to participate, we respectively ask that you limit yourself to 1 question. If you have additional questions, please get back in the queue. It's now my pleasure to turn the call over to Hal.

Kurt Barton:

Thank you, Hal, and hello to everyone on the call. Our business continues to be incredibly resilient. This is a business that was built for all economic environments with stability in both revenue and earnings over multiple decades. Comparable store sales have been remarkably consistent across all 3 quarters year-to-date. All regions of the country once again delivered positive sales comps. The geographic diversification of our store base worked to our advantage this quarter. The South Atlantic and Mid-Atlantic were our best-performing regions. As expected, we did experience softer performance in select regions of the country impacted by the severe heat and drought in particular, in the Far West and Texahoma regions, which, while positive, lagged the chain average. For background, July was the second hottest in 30-plus years. And during August, about 40% of the U.S. was under extreme drought conditions. As Hal shared, we believe that the less than ideal weather weighed on our transactions as well as our big ticket sales. Much like the second quarter, retail price inflation contributed about 12 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the supply chain. The comparable average ticket growth of 7% benefited from inflation, partially offset by declines in big ticket sales and average units per transaction. Big ticket sales performance, while positive on a 2-year stack was impacted by the severe drought and cycling 2 hurricanes in the prior year. We saw the largest impact in categories such as generators, 0 turns and trailers. Moving on to gross margin. For the third quarter, our gross margin declined by 32 basis points to 35.6% of sales. Our price management actions and our other margin-driving initiatives were able to offset the pressures from cost inflation and higher transportation costs. With the continued robust growth in our C.U.E. categories, we saw pressure on our gross margin as C.U.E. runs below chain average on gross margin rate. In regard to inflation, while moderating, we continue to see increasing costs in the commodity inputs in our product categories, as well as underlying variables like higher labor wages and transportation costs impacting both us and our vendor partners. We have remained agile and nimble to manage all the complexity of today's environment, effectively managing cost increases at the SKU level through our price management actions and other margin driving initiatives. The team has also been working to capture efficiencies in the supply chain to reduce miles continuing to limit promotions and leaning into the more efficient value provided through Neighbor's Club. SG&A expenses, including depreciation and amortization, increased 9% to the prior year's third quarter. As a percent of net sales, SG&A expenses increased 16 basis points year-over-year to 26.3%. This increase was in line with our expectations, primarily attributable to our strategic growth initiatives, including depreciation and amortization; and hourly wage and benefit investments in both our stores and our distribution centers. These items were partially offset by a moderation of COVID-19 response costs, more normalized incentive compensation and leverage in our occupancy and other costs from the increase in comparable store sales. Diluted EPS was $2.10, an increase of 7.7% from the third quarter of last year. Our balance sheet remains incredibly strong. At the end of the quarter, merchandise inventories were $2.7 billion, representing a 19.2% increase year-over-year in average inventory per store. The increase reflects growth to support the robust sales trends along with the impact of inflation. Looking at our inventory growth on a 3-year stack, it represents a 30% increase in average inventory per store compared to Q3 2019, meaningfully below our sales increase over the same period of time. There continue to be select product categories where we are still pursuing inventory, especially in C.U.E. Stepping back, we believe our inventory position is in good shape. Our strong balance sheet and the consistency of our free cash flow continue to be a position of strength for Tractor Supply, allowing us to invest in the business for growth and return cash to shareholders. To further our financial flexibility, we just entered into a new 5-year credit agreement on September 30 that increases our senior credit facility from $700 million to $1.2 billion. We also added 2 new banks to our banking group, including a minority-owned bank. Moving now to our updated guidance for fiscal 2022. Our updated guidance reflects the strong results for the first 3 quarters of the year and the positive momentum we see in our business continuing into the fourth quarter. In addition, we are incorporating the impact of our recent acquisition of Orscheln Farm and Home. We are forecasting fiscal 2022 net sales of $14.06 billion to $14.12 billion including about $75 million in sales from Orscheln. This is the first time in the history of our company that annual sales are forecast to be above $14 billion. Comparable store sales growth is anticipated to be in the range of 5.4% to 5.8%. For the year, we now forecast an operating margin of 10.1% to 10.5% in line with our prior guidance, but with modest pressure from the acquisition as the sales and earnings benefit from Orscheln Farm and Home are offset by incremental transaction expenses and early integration costs. We anticipate the impact of Orscheln to be relatively neutral to operating income, while we expect a modestly negative impact on net income due to the interest expense associated with funding the acquisition. Diluted EPS is now forecast in a range of $9.55 to $9.63. This compares to our previous earnings range of $9.48 to $9.60 per diluted share. We entered October with momentum. With this updated guidance, we are forecasting comparable store sales growth for the fourth quarter of 5% to 7%. We now expect to open approximately 60 to 70 new Tractor Supply stores, which is modestly below our outlook as we entered the year. We continue to be on track for 10 Petsense store openings in 2022. Given the conditions of the real estate and construction industries, the cadence of store openings for Tractor Supply has shifted a number of the openings into the fourth quarter. I give the cross-functional teams a lot of credit for completing over 250 projects this year as they lay the foundation for 2023 and beyond. Our new store pipeline continues to be solid and we expect to improve the cadence of openings in 2023 with more balance throughout the year. We remain committed to returning cash to shareholders through the combination of growing dividend and share repurchases. For 2022, we remain on track for anticipated share repurchases in a range of $750 million to $800 million. As is customary, we will provide our full guidance for 2023 at our fourth quarter earnings call. We are early in our planning cycle for the next year. I thought it'd be helpful to set the stage and share some preliminary insights and color into our thought process, given that there are a few moving parts between 2022 and 2023. Our business model has stood the test of time and has proven to be resilient. We have significant confidence with 2023 on the horizon. We are well positioned for any consumer and economic environment. Further, we have consistent structural trends that will continue to benefit us. We continue to invest in our Life Out Here value strategy to capture this growth. Now the discrete items that impact our earnings in 2023 are the lapping of the 53rd week benefit this year, and the accretion from Orscheln acquisition. As I've shared previously, we forecast that the 53rd week will add approximately 1.5% growth in net sales and about $0.15 to the EPS this year. As you saw our press release earlier this month, we expect the Orscheln acquisition to be accretive to diluted earnings per share by at least $0.10. When adjusting for the 2022 benefit from the 53rd week and the accretion from the Orscheln acquisition, we plan for 2023's performance to be consistent with our long-term EPS guidance of 8% to 11% with our bias at this point in planning towards the midpoint of our range. Despite what might play out with the economy, this needs-based demand-driven characteristics of our product offering support our ability to deliver on our long-term outlook. We are making great progress towards our long-term financial goals, and we look forward to sharing with you our 2023 plans in more detail at our fourth quarter earnings call in January. Now to wrap up, we are continuing to separate Tractor Supply from the competition. In prior cycles, we have made investments that strengthened the company. We believe the current environment is an opportunity for us to lean into our strengths and further expand our lead for years to come. And with that, I'll turn the call back over to Hal.

Operator:

[Operator Instructions] Our first question comes from the line of Elizabeth Suzuki with Bank of America, Merrill Lynch.

Hal Lawton:

Liz, thanks for joining the call. I think we're doing an excellent job on navigating inventory and managing it. We don't feel like we're leaving any sales on the table because of it. But I think we are, at times, incurring some higher cost to run the inventory through our supply chain than we might otherwise. And also just on the labor side, having to work the back room a little bit more frequently than normal. The team has done an excellent job on it. But if you look at kind of weeks of supply and kind of pallet low quantities, we would be looking to continue to add inventory in our core C.U.E. businesses. As we talked about, this is the third consecutive quarter where our C.U.E. business has performed at 3x the chain average, dry dog food running well above 20% comps and other feed categories running very strong as well. And so it's just all about keeping up with the customer and then building our supply chain for the future to make sure that we can continue to move these billions and billions of pounds of food and feed that we do every year and maintain as lower cost as possible. We're very excited about our Navarre, Ohio, D.C. opening up early next year that will give us a little more streamlined supply chain and capacity to continue to serve our customers in Life Out Here.

Peter Benedict:

Appreciate some of the thoughts you guys gave here, at least initially around next year. Hal, I think we can appreciate how strong your business is. A lot of uncertainties on the macro front. You alluded to that early in your comments. How do you think about -- and maybe for Kurt as well here, just the company's ability to still land in that earnings algo in the event we get a tougher economic environment maybe than what your base case is, where are the levers? How do you think about managing the business in that environment? That's my question.

Operator:

Our next question comes from the line of Scott Mushkin with R5 Capital.

Hal Lawton:

Yes. Scott, it's good to talk to you today, and thanks for joining the call. The vet clinics are a core part of our fusion kind of menu. And as we go in to execute a Fusion store, we look at the existing mobile clinic activity. And if it warrants -- given the frequency of business and the customer count, if it warrants a stand-alone vet clinic, we are putting those in. And they've been very successful and are just really another value-added feature to support our pet business. As we talked about, we are gaining substantial share in pet. For the last handful of quarters, we've run 10 to 15 points above the market growth rate in pet. And even as you're hearing others talk about the pet business starting to moderate, we aren't seeing that at all in our business, and it's because we're gaining substantial share. That share gain starts with the core basics of great customer service, in-stock, the right price, strong private label brands, but then it's certainly augmented with our other offerings, whether it's pet wash, whether it's the vet clinics and our Rx solutions, which are available online. And the pet business is a strong source of growth for us, and we expect it will continue to be as we go forward.

Steven Forbes:

I wanted to focus on member trends. So Hal, curious if you can discuss any incremental learnings around retention or repeat behavior, specifically as it pertains to the 2020 member cohort as they approach their second anniversary. And then maybe just quickly comment on whether you view the 2021 or 2022 cohorts any differently?

Operator:

Our next question comes from the line of Chris Horvers with JP Morgan Chase.

Hal Lawton:

Yes. Good morning, Chris, and how are you? We had -- we exited -- as we mentioned, September was our strongest month of the quarter. Outperformed relative to the overall average, obviously, and had flat comp transactions. It has -- we have had that momentum continue and even a little bit more coming into the fourth quarter here. It's certainly been cooler weather for the first month of the quarter here. And that's driven nice heating sales and insulated outerwear sales and heating fuel sales. As you know, some big businesses for us in the fourth quarter are propane and wood pellets. And just given the high energy costs that are out there, the cooler weather that's already begun, the angst that our consumers have around inflation, some of the concerns around how European energy prices might be back in the United States. We are very optimistic about how those categories will play out in the fourth quarter. And also optimistic around how the flat comp transactions in September will play out for the fourth quarter as well for us. And we feel like if you look back over the first 9 months of the year, there are numerous months where we had flat or positive comp transactions. And the ones where we didn't, you really can identify them through either stimulus in March and April of last year or whether it was the drought and heat-related activities or the delayed spring through Q1 and Q2. But if you look at January, February, et cetera and then you look at how we exited in Q3 and a couple of slices of month in Q2 where we had flat deposit and comp transactions, we feel very good that those sorts of trends will extrapolate into Q4. As it relates to inflation, we do anticipate that there will be some moderation towards the back half of next year. But if you look at our 2-year stacks on inflation and carry that into the first half of next year, we do anticipate that inflation will remain at elevated rates through at least the first half of next year. And I think that's reasonably consistent with the overall kind of macro U.S. outlook as well. But we do feel really good about our comp transactions now as we head into the fourth quarter and the momentum that we have going into the fourth quarter.

Scot Ciccarelli:

So Hal, previously, I think you touched a little bit on this earlier, maybe on Peter's question. And historically, you guys provided some expectations regarding the impact of your fusion remodels and side lot transformations. And now with some, let's call it, significant experience under your belt, I was hoping you could potentially update us on any other stats that you're kind of seeing out of these initiatives? Maybe any other important learnings that you've been able to conclude.

Operator:

Our next question is from Simeon Gutman with Morgan Stanley.

Kurt Barton:

Simeon, this is Kurt. Good morning to you and everybody on the call. In regards to our investment cycle, 2022, 2023 has really been viewed as, to your point, a peak in that investment cycle. We will be opening up Navarre, Ohio, as Hal mentioned earlier. We will be building the Maumelle, Arkansas distribution center in 2023, and we'll continue our path on this cadence for the existing store remodels under the Fusion program. So 2023 is really a bit of that peak. But it has been planned that way with the growth and depreciation that we've seen this year, roughly mid- to high 20%. We expect to see in 2023, about a similar year-over-year growth rate moderating net growth rate over time. So our SG&A is -- we've got great visibility to it. We feel confident to the point that Hal mentioned on cost. And the pressures from the investments, we also see the offsets to that in SG&A that we've got in regards to leveraging on these -- the comp sales. I am thrilled about the maturity and the development of the culture and the organization's view on profit improvement. We've got a lot of great things in the works right now, not only on the supply chain side and how we can continue to leverage the investments there to drive improvements in gross margin, but what we can do through procurement and how this organization is focused on driving efficiencies and productivities in the stores and in our distribution centers. So to wrap that up, yes, there continues to be pressure from investments in the business very much as we expected. But we've got also in the trend rate the expectations of the offsets to it, which is how we see SG&A generally playing flattish as a percentage of sales going forward.

Oliver Wintermantel:

I had a question regarding trade down if you've seen any of that within categories and if you expect promotions to step up in the fourth quarter?

Operator:

Our next question comes from the line of Kate McShane with Goldman Sachs.

Hal Lawton:

Kate, good morning. Thanks for joining the call. And thanks for your question on Orscheln. To start out, just reiterating my prepared remarks that we're thrilled to have Orscheln join Tractor Supply. While the transaction took longer than we anticipated, the outcome was very much in line with our original expectations on the remedy that would be necessary. We are already well underway to welcoming them into the company and starting to map out our plans for converting those stores to the Tractor Supply brand. We will be basically executing the Fusion and Garden Center remodel programs in those stores. And obviously, there'll be a little extra involved with them in terms of new signage for our nameplates and some updating of fixtures and painting of the walls and such like that. But we will -- our plan is to have all that accomplished by the end of next year. At the same time, we're excited to learn from Orscheln on a number of categories where they play differently than we do in terms of distortions. And on the same side, we think there's a lot of opportunity for us to take some of our best practices to them -- to their stores; one, in terms of -- and then driving dollars per square foot up closer to where we are because they're at about kind of 50-ish percent of where we are in dollars per square foot and because they are lesser dollars per square foot, the op margin percent on a per store basis is lower as well. So we're optimistic that we can raise that over time as well. And so there's some sales synergies over time, there'll be some op margin synergies over time. And then additionally, we'll be bringing our brand awareness to that business well over 80% unaided and aided together and things like our Neighbor's Club program, our digital capabilities. So we're really excited to have them join us. It gives us a great additional footprint in the Midwest. We're excited about transitioning those stores to the Tractor Supply brand and then bringing kind of the whole of Tractor Supply to those stores and ultimately and most importantly, to our customers there in that area of the country.

Chuck Grom:

Most of my questions have been asked, but I was curious on supply chain, how you talked about some relief on that front. I guess I'm curious, the lag, and how long we should anticipate it? To start to see some freight relief ocean container cost start to show up in the P&L?

Operator:

Our next question comes from the line of Michael Lasser with UBS.

Hal Lawton:

Yes, thanks for the question. We don't foresee a scenario of deflation in any near-term time horizon. '23 or into '24. If you look at where our retailers are now and just flow those through into the first half of the year, we're going to be at mid- to high single-digit inflation. And then fully expect that, that will moderate into the back half, both as we start to navigate reducing COGS increases but also, hopefully, as the economy PPI and CPI and other kind of inflationary indexes start to moderate as well. But I don't foresee at all a scenario of deflation in the near -- in any time horizon over the next few years. What I would say on some of those commodity-based products, we're well past just kind of core supply demand out there and the market is moving like they had 4, 5, 6 years ago in a normal environment. We're now in a market where even they've got higher input cost, whether it's fertilizer, and et cetera, that just has not come down. And even if it comes down, it's only coming down in a moderate way. They've got higher labor cost 10, 15, 20 points above a couple of years ago, and there's significant capacity constraints. I mean if you look at pet food, there are significant capacity constraints in the pet food market right now. So that's going to limit cost. That's going to limit any cost decreases that come. It's just the dynamics of the way the supply demand is shaping up right now. And then when you factor in non-U.S. markets and all the risk there, whether it's down in South America or certainly in middle -- in Eastern Europe with Ukraine and Russia and the difficulties in the war there, I just don't foresee a market at all where commodities are moderating to the point where they're driving substantive deflation in our business. That's just -- I don't see that in the cards at all.

Brian Nagel:

The question I have. Clearly, I mean clearly, Tractor Supplies are performing remarkably well here. And this is despite some macro headwinds out there. I mean the question I have as we look into '23 or whenever, if macro conditions were to worsen and start to impact somewhat the trends at Tractor, are there levers or what were the levers that you -- either you could or you would pull either from a cost standpoint or maybe a merchandising perspective to better tailor your business to that type of environment?

Operator:

Thank you for your questions. This concludes our QA session for today's call. I will now pass back to Mary Winn Pilkington for closing remarks. Thank you.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Mary Winn Pilkington:

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today and I hope everyone is having a great summer. On the call today are Hal Lawton, our CEO; Kurt Barton, our CFO. And after our prepared remarks, we will open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the Q&A session. Please note that we have made supplemental slide presentation available on our website to accompany today’s earnings release. Now, let me reference the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company’s filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. We have shortened our prepared remarks to allow more time for Q&A. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have an additional question, please feel free to get back in the queue. We appreciate your cooperation and we will be available after the call for follow-up. Thank you for your time and attention this morning. Now, it’s my pleasure to turn the call over to Hal.

Kurt Barton:

Thank you, Hal and hello to everyone on the call. At the halfway mark for the year, the Tractor Supply team has started fiscal 2022 with strong performance that came in ahead of our expectations. We are very pleased with the consistency and the strength of our top line performance. This quarter, retail price inflation contributed about 12 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the supply chain. We continue to see increasing costs in the commodity inputs in our product categories as well as underlying variables like higher labor wages and transportation costs impacting our vendor partners. Comp transactions declined 2.0%, which was slightly below our expectations. As. we anticipated pressure from cycling the benefits of stimulus in the prior year. We experienced incremental headwinds from the delayed start to the spring and the drought conditions in the latter part of the quarter. Complementing the commentary Hal shared on the cadence of the quarter, all regions of the country delivered positive sales comps, the geographic diversification of our store base worked to our advantage this quarter. We did experience softer performance in select regions of the country impacted by the drought. In particular, the Far West and Texhoma regions, which, while positive, lagged the chain average. The South Central and South Atlantic were our best-performing regions. Turning to our digital performance. The second quarter represented our largest e-commerce quarter in net sales ever. On the back of 39 consecutive quarters of double-digit growth, our e-commerce grew approximately 7%. Excluding April, we had solid performance with double-digit sales for May and June combined. Our mobile app continues to ramp with double-digit growth and represented about 15% of total digital sales in the quarter. Petsense continues to perform well with comp sales growth above the company average. Turning now to gross margin. For the second quarter, our gross margin declined by 24 basis points to 35.5% of sales. This was primarily attributable to three factors

Operator:

Thank you. [Operator Instructions] Our first question is from Elizabeth Suzuki from Bank of America. Elizabeth, your line is open.

Hal Lawton:

Hey, Liz, how are you? This is Hal. Thanks so much for the question and for joining the call. On transportation costs, break it down into a couple of different buckets. First off, spot rates for both import products, the container spot rates as well as spot rates for domestic are trending down and starting to reach kind of averages levels for last year and in some cases, below. That said, the flip side is the vast majority of our business for both domestic and imports are done on contracts. And the contracts that we are in this year are at higher rates than they were last year. So kind of when you kind of look at it all, it all kind of blends to about the same number. So as we get in towards the back half of the year, we do expect some of the pressure to moderate. But I don’t anticipate a tailwind on transportation costs for 12 to 18 months.

Kurt Barton:

Liz, hi, this is Kurt. Yes, we have imports at around 12% of our business just for the full group as a reminder. And back when the China tariffs were put into place, I mean, we had some product having the tariffs in there. If there were to be reverse of those tariffs, that would be a benefit to us. We managed well when putting – managing through the increase in the tariffs. And then, of course, with imports, do keep in mind that, that product has a longer lead time. Those costs have to work through the system. So similar to almost the explanation that you heard from Hal on transportation, any shift in tariffs would take 6, 9, 12 months to really see playing through the inventory and cost of goods sold. And as any changes in a tariff environment changes. Certainly, we will update our guidance. And it is generally a benefit to us as we can get some relief from those tariffs that have had to be baked into the cost over the last few years.

Operator:

Our next question is with Steven Forbes from Guggenheim. Steven, your line is open.

Hal Lawton:

Good morning, Steve, how are you? And thanks for joining our call. I’d start with the culture at Tractor Supply is foundational for us. Our mission and values are our number one priority. And we are constantly looking for ways to make deposits in our culture and continue to build on it. And as you mentioned, our annual sales meeting, which was just last week is one big way that we do that. As it relates to kind of the investments we made in the team, we’re proud of the investments we’ve made in our team, in particular over the last couple of years. And they range from wage investments to bonus enhancements and improvements and to broader rollouts of benefits and not just healthcare benefits, but additional items like tuition reimbursement, paternity leave, etcetera. And those have been substantial in their monetary both at an individual level and also material in terms of investment on the overall company level. And we are committed to paying a fair day’s wage for a fair day’s work. That said, we look forward – we do think that the majority of that investment is behind us. We feel good about where we are from a market perspective on a relative basis. We’re seeing retention rates well below 2019 levels. We’re seeing excellent engagement scores with our team members. And we feel really good about our culture and our morale and our team as we head into the back half of the year. We have a track record of consistency and resiliency in all different economic environments. And that’s one of the things that I do anticipate that as the economy becomes a little tougher and we start to see the labor market ease and layoffs occurring that there will be a flight to quality. And I think that will be a really good thing for Tractor Supply and allow us to further improve our retention and attract high-quality talent just given the resiliency and stability of our business and our commitment to our team members and culture.

Mary Winn Pilkington:

Thank you, Steve.

Kate McShane:

Hi, thanks. Good morning. Thanks for taking our question. Kurt, I think in your commentary you mentioned that you’re trying to reduce promotion, which is counter to what we’re hearing across retail. So I wanted to see if there were any more details around that. And just with regards to margin and preserving margin, has there been any effort to push some of the cost back on to vendors? Or has there been any effort to push for more sharing of costs as we’ve seen with other retailers?

Kate McShane:

Okay, thank you.

Scot Ciccarelli:

Good morning, guys. Scot Ciccarelli. So I think in the prepared comments, Hal, you talked about evolving demand and a different operating environment than what you expected at the beginning of the year. But it doesn’t sound like the business has changed a whole lot. So can you provide any more color maybe on what you’re seeing in terms of recent trends that kind of made you make that comment?

Scot Ciccarelli:

So just to clarify, Hal, like so you’re not seeing incremental weakness somewhere where maybe you’re being surprised and that wasn’t the reference to evolving demand.

Scot Ciccarelli:

Got it. Thank you very much.

Chuck Cerankosky:

Good morning, everyone. Nice quarter. Nice quarter. Kurt, I think you mentioned a 21% increase in inventory per store. Could you review what time period that covered? And does that indicate perhaps that you still have some shelf price adjustments to do to catch up with that? And how much of that inventory might be to make sure you have things in stock that are hard for your supply chain to get a hold of?

Chuck Cerankosky:

Thank you.

Peter Keith:

Hi, thanks. Good morning, everyone. So great results. I was hoping you could just talk about the new customers you’ve acquired over the last 2 years with COVID. It does seem like the rest of the channel feels like that customer has exited their stores. So if you feel like you’re retaining them, maybe you could talk about some of the strategies you’ve implemented. And secondarily, is there any risk on some of these poultry customers that have come in, we’ve heard that a short-lived hobby and maybe those customers could roll off a little more quickly?

Peter Keith:

Very helpful. Thanks so much.

Zach Fadem:

Hey. Good morning. Hal and Kurt, we started to see some underlying commodity prices roll over a bit. So first, could you talk to your expectations around the inflation change today relative to your last quarter outlook? And then assuming we do see some gradual moderation here, can you help me think through how slowing commodity prices could help your business and in what ways could it negatively impact your business? Thanks.

Zach Fadem:

Thanks Hal. Appreciate the time.

Jonathan Matuszewski:

Great. Thanks for taking my question. Just a follow-up on the topic of tariffs, Kurt, you mentioned it would be a P&L benefit under a rollback scenario. Just to be clear, would all of these costs flow through to gross margin, or would you look to pare back pricing on some SKUs that were impacted? I think some retailers have indicated they would look to reinvest in pricing to drive market share. It seems unlikely for other retailers. So, I just wanted to be clear on where Tractor Supply would be in terms of pricing changes under that scenario. Thanks so much.

Seth Estep:

Yes. Hey. Thanks Kurt. Thanks Jonathan for the question. I would just say in terms of pricing relative to tariffs, as Kurt mentioned, I mean our direct import business is about 12%. But at the same time, we utilize more of a kind of a broad-based portfolio strategy when we come to our pricing strategies. Our team has incredible tools in place, great visibility into moving average cost, a lot of forecasting together. And I would just say that we use every lever of the pricing strategy just to manage and land our total business, whether that be relative to tariffs, whether that be to total cost, whether it be promo, whether it be clearance. The team really does strategize just to make sure that we are hitting the right price on the right categories. We are positioned to take market share and just utilizing the tools that we have in place and the visibility to land where we need to land. So, it’s more of a broad portfolio strategy approach when we come to pricing and it’s just one of the levers that we look at and utilize to make sure that we are hitting our targets that we need.

Kurt Barton:

Yes. Thanks Jonathan.

Chuck Grom:

Hi guys. Thanks a lot. Kurt, I just wanted to clarify on the guide that it sounds like July is being impacted by the drought conditions, but you still expect comps in the back half of the year to be similar to the front half, which would be sort of in that low-5% range. So, I just want to clarify there. And then just bigger picture with the garden centers, curious what the biggest learnings have been so far, both positive and negative. And I guess on the negative, what have you changed since you started that endeavor 12 months to 18 months ago?

Chuck Grom:

Great. Thanks Hal.

Michael Lasser:

Good morning. Thanks a lot for taking my question. There has a lot – been a lot of discussion on this call around the state of the consumer, a lot of inflation. How did you factor overall economic pressures into your guidance for the second half of the year, especially when you consider that the guidance implies 2 years – 3-year stacks are going to remain relatively consistent over the next couple of quarters? And as part of that, when would you expect traffic to turn back positive? Thank you very much.

Michael Lasser:

Thank you very much.

Peter Benedict:

Good morning guys. So, thanks for taking the questions. Just, Kurt, I wanted – maybe if you can go back and expand upon the comments you made. You talked about some levers that you have that will allow you to kind of mitigate the downward pressure on EBIT margins right now and holding kind of that 10.2 for the year. Maybe expand upon those? And then how do you think about that same dynamic in the event that inflation does start to roll, and you are getting obviously 12 points of inflation right now if that reverts to par, how do those levers work? And how do you feel about the EBIT margin in that environment? Thank you.

Peter Benedict:

Great. Thanks so much.

Operator:

Okay. Our final question is from Scott Mushkin from R5 Capital. Scott, your line is open.

Hal Lawton:

Yes. Hey Scott and thanks for the question. And on the first part, the comp transaction decline is almost fully attributable to the stimulus lapping and the heat and the drought and kind of the compressed spring. As I mentioned earlier, in weeks and in geographies where those extraneous factors are not at play, we see strong positive comp transactions. Collectively across the months of May and June, we see positive comp transactions. We break our customers in a variety of different cohorts and segments. We see our lower-income customer group having some modest falloff, but we have mentioned that over the last month or two months. And – but as a reminder, that’s a very small piece of our customer segment. Our customers own homes, they own land, they own animals, they own pets. And to some degree, that insulates them. And that’s the consumer segment – I think being our business, but also if you just are reading all the newspaper headlines and watching all the various shows out there, those consumers are holding up well, and they continue to hold up well for us, too. And I think we can see that in a moment, and we also see it in the track record of this business over the last 10 years, 20 years, 30 years. And so our customers don’t very strong, still spending and still doing well. And when you pull out the extraneous factors, we still see strong positive comp transactions and feel very good about the health of the business. And the garden centers, we feel we are very positive on our garden centers in total. Really pleased in less than 2 years of having launched the strategy to have over 15% of our chain is garden centers now. And in the stores that have had it in place for now a second garden season, they are performing very strongly. We are very pleased with how quickly our garden centers are becoming a destination in the communities, very pleased with our vendors and being able to have the great product in there and replenishing it at the right rate. We have been very pleased with our store execution and hiring garden center specialists. So, you have got a strong customer service theme in the garden centers. And then it’s bridging over into the balance of the store with the transactions in there because we estimate about half of the transactions happen to garden centers are actually destination transactions that then bleed into the store or even into the side lot now. And the side lots become a much more kind of shoppable destination with the drive-through pickup. So, I am very pleased with the performance of the garden centers and just our sideline transformation. And then obviously, in combination with Project Fusion, which we haven’t talked about as much today, but now over 400 stores with Project Fusion, starting to reach critical mass over 20% of our stores now, seeing the lift in the comp sales there, but also the improved customer response to the elevation in the store experience, improvements in areas like apparel and pet food, obviously, in our power tools now we have got 100 – I think it’s 800 stores now – 700 stores now with an updated power tools area. So, our customers – when you look at the data, you can very much see the lift in the stores that we execute Fusion in our garden centers, and it’s a big driver of our market share gain that we are seeing.

Hal Lawton:

Thanks Scott.

Operator:

That concludes today’s call. Thank you for your participation. You may now disconnect your lines.

Mary Winn Pilkington:

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today, and I hope you’re all doing well. On the call today are Hal Lawton, our CEO; Kurt Barton, our CFO. And after our prepared remarks, we’ll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we’ve made a supplemental slide presentation available on our website to accompany today’s earnings release. Now, let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the Company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the Company’s filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. We shortened the prepared remarks to allow more time for Q&A. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up. Thank you for your time and attention this morning. Now, it’s my pleasure to turn the call over to Hal.

Kurt Barton:

Thank you, Hal, and hello to everyone on the call. The Tractor Supply team has started fiscal 2022 with strong performance that came in ahead of our expectations. On a two-year stack, our comparable store sales were 43.8%. Looking at the cadence of the quarter, January and February were the strongest months with March positive, albeit not at the rate earlier in the quarter. We benefited from cold weather trends early in the quarter, while spring is late to break across most of the country. Please keep in mind, we were comping ideal weather conditions in the first quarter of last year with an early spring across many of our markets. This quarter, retail price inflation contributed about 10 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the supply chain. As we shared with you last quarter, we anticipated this would be the toughest compare on transactions as we cycled the largest transaction gain since the beginning of the pandemic in Q1 of last year of 21%. To illustrate, we were experiencing positive comp transactions until we cycled the last two weeks of the quarter where we clearly saw the benefits of stimulus on transactions in the prior year. As we expected, big ticket declined given the robust performance we were cycling, driven by stimulus and the early starts of the spring selling season. Last year, as we reported, big ticket comps significantly outperformed the chain average comps. And on a two-year stack, our big ticket performance exceeded the 43.8% comp growth of the chain. We continue to see strong C.U.E. performance with strength in categories such as dry dog food, poultry, feed and heating fuel. For instance, dry dog food achieved over a 20% comp. Petsense performed above the company average, which was in line with our pet performance. Overall, we were very pleased with our top line performance. Turning now to gross margin, which outperformed our expectations. For the first quarter, our gross margin declined by 29 basis points to 34.9% of sales. The decrease in gross margin is primarily attributable to three factors

Operator:

[Operator Instructions] Our first question is from Scot Ciccarelli from Truist. Scot, Please go ahead.

Hal Lawton:

Hey Scot. Good morning. And thanks for joining our call. I appreciate the question. I’d start out just at the highest level. Consumer’s very healthy. As Kurt mentioned, we exceeded our expectations in Q1, and kind of a few nuances on that. Where we -- in the business where we’re lapping the stimulus from last year, notably in big ticket, we saw some follow-up there, but it was very much in line with what we expected and what we had foreshadowed at our enhanced earnings event, when we talked about some pressure from big ticket dominantly in the last part of Q1 and early part of Q2. As Kurt mentioned and I mentioned also in the prepared remarks, we’ve seen a little bit of a slow start to spring, but it’s been in the categories you would expect, and spring always comes. We’ve had it -- play out in many different ways over the last couple of decades on spring, but otherwise, really seeing no elasticity in the customer. And I’d point to our C.U.E. business as an indication to that, it’s comped 3 times our overall comp rate, dry dog food above 20% comps. In fact, the month of March was our highest dollar volume ever in dry dog food. If I just step back, we serve a lifestyle. It’s a demand-driven need-based kind product categories for the most part and have a track record of consistency and resiliency really across all different types of economic cycles. And in addition to that track record of consistency in the demand-driven business model, two additional factors going for us now. One are the continued kind of macro tailwinds, things like world revitalization and pet adoption that I mentioned earlier, and then also our Life Out Here strategy. And with 175 garden centers, and by the end of the year, 30% of our -- nearly 30% of our stores remodel with Fusion. We just got -- we’ve got a lot of tailwinds right now. And as it relates to the consumer, we’ve really not seen much reaction to inflation or any other kind of economic elements. As far as the impact on inflation, to your second point of your question, I’d kind of point to Kurt’s comments in his prepared remarks around we did exceed our expectations in Q1. Just given the -- our historic convention of sticking to the half and also just given the macro environment, we thought it was prudent to reiterate our guidance. But certainly, if you roll through the beat in the first quarter, it would take you towards the high end of our guidance for the year. And then, if we were to exceed performance for the rest of the year, we’d end up having a -- and continue to do that. We’d end up having a nice year. I do think inflation continues to be persistent. And we continue to see it come through, and we continue to be able to navigate it very effectively.

Simeon Gutman:

I’ll ask the two questions now in the interest of time. The first is the business’s mix of needs versus wants. We used to talk about this a while ago. So, how do you -- how should we think about the percentage of the business that’s discretionary if the consumer slows? And then, the second question is a little more tactical. If you look at the earnings complexion for the rest of the year, margins were down a little in the first quarter, but it looks like the incremental margins for the rest of the year look like they’re higher given the per point in comp. So, what’s, I guess, the bridge? Is there less investment? Is there a mapping up cost, et cetera? Thank you.

Operator:

Our next question is from Kate McShane from Goldman Sachs. Kate, you may proceed.

Kurt Barton:

Yes, Kate. Hey. Good morning. This is Kurt. In regards to your question on the guide, let me give you a couple of perspectives really how we see the business and how we look at it going forward. First, I’ll just reiterate what Hal and I’ve said. We’re coming off of Q1 a great start to the year where there’s a strong performance hitting on all metrics. And just to point out, Q1 on a two-year stack basis, from the strength in new customers, the strength in Neighbor’s Club, our transaction toward the highest two-year stack of any of the four quarters. So, the core of the business is strong and healthy. That said, as I just mentioned earlier, it is right and consistent even in the last two years, we’re managing the business in multiple scenarios. So, to your point in your question, there are various scenarios. And if under one scenario, there’s inflation that drives the comps outside of even the initial expectations, with that inflation, it puts pressure on margins, the leverage and SG&A. We certainly see that with inflation. It could impact some of the transactions. We’ve trip consolidation. We’ve seen customers begin to change in their spending patterns with the inflation. But, that’s not necessarily negative for us as we benefit in ticket and that can help us leverage our SG&A. And so, the number of various scenarios that we see playing out, we feel very comfortable that in the next three quarters as we manage that, that we can still meet our expectations and our guidance and very confident in the demand of the business and the strength right now going into the rest of the year.

Michael Baker:

One question and a follow-up kind of short term and then long term. On the short term, back to --just the weather being a sub par in March, do we expect to -- so you’ve lost some sales presumably. So, we should expect to gain that back in the second quarter, I assume. But, we’ve seen -- how has April been in terms of the weather? And then, the longer term question. how does -- can you remind us how you think about housing and impact to your business, rate drop, housing is probably going to slow, existing home sales have been down six or seven months in a row, although prices have been up. How do you think about that longer term for your business? Thanks.

Seth Estep:

Yes. Hey. Thanks, Hal. Thanks, Mike, for the question. Hey, first and foremost, as Hal mentioned, obviously, a little bit of delay here to the start of spring. But as we’ve seen the weather starts to break off the southern most areas the last couple of weeks, we are very encouraged with seeing our game plan come to life. First and foremost, I would just say, I was in Texas last week and visited several garden centers. And I would tell you, both our customers and our team members could not be more excited about us really going deeper into live goods and gardening, which we know it has been historically the number one category. So, we were not first in top of mind for them and becoming more of that top of mind, and we are seeing very good positive results, particularly in those garden center stores and being set up for 175 plus as we enter spring here. But it’s also not just about live goods, right? We believe we have the best-in-class zero-turn lineup that’s out there. We spoke a little bit about big ticket at the end of Q1. But what I would tell you is where we’re seeing weather break. We’re seeing very strong demand across the entire zero-turn lineup, both in brands and price point. We’re -- our consumer responding with that merchandising. And we’ve spoken some obviously about Greenworks Pro and that exclusive partnership that we have this year. That’s a new real category that we haven’t been able to attack in years past that we know that we can go and take market share. A couple of other quick things we think about spring and where we’re excited to drive the business. It’s not just about lawn and garden at Tractor Supply, but it’s also about home setting. Chick Days is off to a great start, whether be through new coops or these through new breeds, things of that nature, really, really strong demand that we’re seeing our consumer respond to and then just continue to dive into our C.U.E. related businesses and introducing newness across the four walls. So, excited about spring and what we have here in front of us and the plan coming to life.

Operator:

Our next question is with Steven Zaccone.

Hal Lawton:

Good morning, Steven, and thanks for joining our call. If we step back and just talk about the macroeconomic environment, what we’re seeing is very consistent with what we’re all reading in the headlines every day. I’ll start with persistent inflation. We had the CPI of 8.5% in the month of March, that we’ve seen 0.5 point increases a month for the last handful of months. It’s tough to say if we’re at peak inflation, the way I think about it is that we’re seeing persistent inflation. And I think we will see, strong inflation, not only through this year, but in the next year. As it relates to the economy, so far, the consumer has shown real strength and their ability to kind of navigate the inflation. And I think you’re hearing that today in our earnings call, but also hearing it in many other earnings calls that have come out over the last week, and there’s a variety of reasons for that. I mean, you’ve had strong wage growth across the country. You’ve got $2 trillion plus of pent-up savings that people are starting to tap into now, and you can see that in savings rate. You do see a little bit of credit card usage up. But I think if you dig into that what we’re seeing is people using their credit cards and then tapping into their savings to pay those down with default rates not yet moving up. I think, the consumer’s navigating this very well. And I think any talk of recession at this point is premature. And stepping back, if you look at our business, we’ve had 30 straight years of positive comp transactions. We’ve had 30 straight years of net sales growth, 29 of the last 30, we’ve had positive comp sales growth. This is a business that has been able to navigate all types of economic cycles, whether it was the recession in ‘20, the recession in 2007, ‘08, ‘09, whether it was COVID, just a couple of years ago. All those sorts of scenarios, this business has been incredibly resilient, stable and consistent through. And as I mentioned earlier, there’s a number of macroeconomic tailwinds that are really benefiting us that I think even accentuate the stability of our business. And then combine that with our Life Out Here strategy, which is just an indicative of just the next leg of growth for our company. And 40 years ago, we doubled down in animal fee, 20 years ago, we doubled down in pet food. Now, we’re doubling down in live goods combined with our Fusion remodel. We’ve never had more customers shopping Tractor Supply. We’ve never had a stronger digital business at Tractor Supply. Our business is incredibly strong right now. And we are very much excited about the business from a short-term perspective and long-term.

Brian Nagel:

Hi. Good morning. Nice quarter. I have two short questions that I’ll merge into one. The first question, I mean, I guess this is just more of a kind of a logistics, not question. But you talk about the quarter tracking above your expectations, but then also some of the weather pressures. So, I guess, my question there is, were you -- in your internal plan, were you planning for potentially more challenging weather, or -- what drove, so to say, the upside in the quarter to your tier internal plans. And then my second question, we talked a lot about of this inflation and how the consumer is managing that. Kind of flipping that over, as you look at some of your markets where maybe you’re more of a benefit of -- your consumers benefit more from higher oil prices or higher commodity prices? Are you starting to see that sort of say, work its way into the health of your -- the consumer shop in your stores?

Brian Nagel:

It’s very helpful. I appreciate it.

Karen Short:

Two questions. So one, I guess, the first one is in terms of inflation for the year, what is your actual updated expectation on inflation for the year? And then, embedded within that, on traffic, your traffic was only down 1% with 10% inflation. But on a two- and three-year basis, more or less held. So, could you just clarify how you’re thinking about traffic for the remainder of the year, because presumably, inflation will abate, so that should actually help the traffic overall on a one-, two- and three-year basis?

Karen Short:

Can I just clarify? It was only in the context that I think Kurt made a comment that traffic would continue to be pressured in light of -- or would be pressured in light of inflation, but that’s not [Technical Difficulty] I just want to clarify, that’s not what you’re seeing.

Operator:

Our next question is with Michael Lasser of UBS.

Hal Lawton:

Good morning. And thanks for the question, Michael. I’d say, probably three things on that to kind of break big ticket up a bit. There are -- we saw fall-off in big ticket sales directly attributable to stimulus, very much in line with what we expected. And those were in non-seasonal categories dominantly, things like gun safes. In the seasonal businesses, big ticket, as Seth mentioned, where we’ve seen the spring weather break, we’ve seen excellent results in things like riders and grills, bigger ticket items. And then, as it relates to inflation, we certainly are seeing inflation in those categories, like we’re seeing across the board. But I would say that we’re also pleased with our unit movement in those categories, not just sales driven by inflation. So, overall, we continue to be -- feel very confident in our business short term and long term, inclusive of big ticket. And we’re excited about the rest of the year.

Steven Forbes:

Good morning. Hal, Seth, I wanted to start with your in-market learnings, right? As it looks like you’ve both been on the road recently. So, can you take us through some of your key learnings? And what I mean by that is really the learnings from the store associates. What are they saying about their own behaviors? And did you notice anything different among the regions that you visited, maybe outside of seasonal trends?

Operator:

Our next question is from Chuck Grom of Gordon Haskett.

Kurt Barton:

Yes. Thanks for the questions, two of them there. I’ll just reiterate what Hal and I have talked about in regards to the comp performance and how that plays out for the year. Certainly, as we exceeded our expectation or coming off of strong Q1 performance, as you roll that through the year. And we’ll continue to say as we have the last two years, we are managing this business through multiple scenarios. You could have comp sales at the high end of our guidance range. It’s one quarter into the year as we see the rest of the year. We’ve got good momentum in the business. And so, as you play that out, we recognize that as you flow this through, this could be towards the high end of our guidance range. And as we’ve even indicated, it’s early to predict on levels of inflation, but as inflation persists, it even puts upward pressure on that. And at this point, the best we can do is tell you how we view the business and how we’re managing that. And then, in regards to our new store openings, I’ll start by saying we are -- we have no concerns in regards to opening of new stores. We have confidence in our ability to hit our 70 to 80 stores this year. We’ve got a solid track record of opening 70, 80 stores. Our process is solid. Our pipeline for new stores is really strong right now. And construction is not exempt from some of the challenges of supply chain, labor, et cetera. We put a lot of effort and to complete the 80 stores in the fourth quarter. And some of those scenarios that push stores out, we saw some in Q1 as well. And as those stores have been pushed out of Q1-- by the way, Q1 is our -- typically our smallest quarter of new stores. Those stores will open up in Q2, Q3. We still have a real strong pipeline and expect to hit our targets this year for new stores.

Operator:

Of course. Our final question will be from Chuck Cerankosky of Northcoast Research.

Hal Lawton:

Yes. Hey Chuck, how are you? And thank you for joining the call today. On C.U.E., I would attribute our strong growth to taking share. As we talked about in our enhanced earnings event, on a two-year stack, our total sales grew 52% relative to the market at 25%, which meant we grew -- outgrew the market by 27 points, significant share gain. And that is -- we’re the market leader in animal feed. We’re one of the market leaders in pet food and we are gaining significant share in both of those categories. It’s attributable to our business model, our customer service, our Life Out Here strategy, and so we’re -- that’s one of the reasons we’re just really excited about C.U.E. and the footsteps that’s driving into our stores and the setup that has for us for the balance of the year.

Operator:

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Hal Lawton:

Good morning, everyone. Thank you for joining us today. We are here in cold Nashville. We are excited to update you in greater detail on our Life Out Here strategy that we first shared with you back in October 2020. As our Year Review video highlighted, we are just getting started. At Tractor Supply, we are very early on our journey to build on the momentum in our business and capture the tremendous growth opportunities that we see ahead of us. As we operated early through the early days of the pandemic back in 2020, we set our sights on ensuring that our business would emerge stronger than before. Today, our business has never been stronger. We have significant momentum, our team is executing at a high level and our results demonstrate that our multiyear Life Out Here strategy is working. We are operating from a position of strength. We have a lot of exciting news and progress we want to share with you today. Kurt and I will take you through our fourth quarter and fiscal year 2021 results and review our outlook for 2022 before the team provides an update on our strategic priorities. Retail is ever evolving, that our most important strategic asset remains constant in our team members. They nurture our relationship with our customers and they make us who we are and what we stand for as a company. As a purpose-driven company, our team members create a sense of community in our stores and with each other. Our 46,000 team members are passionate about Life Out Here. Over the last 22 months of the pandemic, they have lived our mission and values to ensure that Tractor Supply is the dependable supplier that our customers count on. This team has worked diligently with grit and determination to overcome the challenging operating environment. They have come together to support the increased sales volume through our DCs, to our stores and online, welcome new customers into the lifestyle, onboarded new team members and navigated the supply chain disruptions. We have enhanced our IT capabilities and done so much more. My thanks goes out to their hard work and dedication to each other, our customers and the communities we call home. Thanks to the team. 2021 was a record year for our business as we successfully comped our record performance in 2020. And as we will share throughout today’s presentation, we are benefiting from the many market trends that continue to be structurally sound. So, let’s recap a few of the milestones in 2021. We celebrated the opening of our 2,000th store in December right here in our home state of Tennessee. We announced the acquisition of Orscheln Farm & Home. And we remain committed to the acquisition, which continues to be reviewed by the FTC and we hope to have an update soon. The strength in our customer base is supporting our market share gains across our categories. Our Neighbor’s Club program is growing with membership up 24% year-over-year as we transition from an affinity program to a tier rewards program. We have robust retention rates and engagement, especially with our highest value tier members. We are committed to making Tractor Supply a household name. Through our targeted investments in marketing, we are seeing a remarkable increase of 21 points in our unaided brand awareness. We are also investing in our supply chain as we announced the first of 3 new distribution centers over the next 5 years. And in September, we announced new robust ESG goals to further reduce our carbon emissions from our operations as well as new diversity equity inclusion goals. And the team has done a remarkable job managing through the well-documented challenges across the global supply chain and dealt with an unprecedented level of inflation. We have tremendous strength and it is broad-based. And now, let me provide some specific color on our fourth quarter performance. Our comparable store sales grew a robust 12.7% and this represents a 40% stack on a 2-year basis. Continuing the trend, we have had several quarters now. Every week was positive with broad-based strength across all regions and all categories. We believe we are significantly outpacing the industry in our growth and continuing to gain market share both online and in store. Inflation, it contributed over 850 basis points to comparable store sales as we navigated the ongoing cost pressures across the supply chain. Where necessary, we are taking price increases to pass through some of the cost pressures that we cannot offset. And our merchants and supply chain teams are currently navigating this challenging and disruptive environment extremely well and they are most focused on being that advocate for our customer to be everyday low price. As we closely monitor our customers’ purchasing behaviors, we are focused on product unit trends and as I said, we are committed to being priced right everyday. Consumable, usable and edible products, they continue to perform well with comps above the chain average. These categories, as we discussed often are needs-based, demand-driven and they drive trips to Tractor Supply. And key categories in our C.U.E. area, dry dog food, livestock feed, equine health and pet treats were among some of the strongest categories that continue to perform very well. While we were comping exceptional strength in the fourth quarter of last year for our big ticket categories, we had double-digit growth again this quarter. Looking at the cadence for the quarter, December was modestly below October and November comp performance. And as a reminder, December was the warmest on record in 30 plus years. That said, we exited the quarter strong as weather normalized and as we all know, January has started off quite cold. So to recap our sales performance, we had a remarkable year with consistency that gives us confidence that the trends we are experiencing are more structural in nature. The execution by our team has been excellent. Our store teams and distribution centers, along with our supply chain partners, have navigated another challenging year with outstanding execution of our operational playbook. We have faced every challenge head on, focused on controlling what we control, all the while staying true to being the dependable supplier for the Out Here lifestyle. The strength and diversity of our comp growth in 2021 on top of our record results in 2020 is very compelling. As evidenced in our share gains, the health of our customer continues to be very robust. All customer segments had strong growth with the fastest growth in our core farm and ranch segment. We continue to see stellar performance from our highest spending customers. Our retention rates remain higher than historical standards, and it’s even higher from our Neighbor’s Club members. 1 in 5 or 20% of our new customers came to Tractor Supply through our digital channels in the fourth quarter, reinforcing the importance of the investments we are making in this area. We are supercharging how we serve customers with convenience and meeting them how they want to engage with us. To recap, we are experiencing more customers shopping us than ever before. They are visiting us more frequently. And when they come to shop with us, whether it’s in our stores or online, they are spending more money per trip. Throughout the team’s upcoming presentations today, you will learn much more about our plans to continue to build on this positive momentum that we have with our customers. Before we get to the update on our Life Out Here strategy, Kurt will go through some of the key highlights of our fourth quarter and share more details around our 2022 financial outlook. Kurt?

Hal Lawton:

Thanks, Kurt. Wow, what again outstanding 2021 on top of a record 2020. Yes, the team did a great job, they did, just fantastic. Alright. Let’s transition out of a typical earnings dialogue and look to the future. We have a very bright past with more than 83 years of serving Life Out Here. We are coming off a record 2 years of performance. But from our point of view, we are just getting started. We believe Tractor Supply is well-positioned for a bright future. We are in the early stages of the next transformation of Tractor Supply. This transformation should allow us to both grow our top line and earnings sustainably over a long period of time, while operating at a higher margin profile. Given the robust growth of our stores and online that have experienced, we have had a step function change in our business that is evident in our market share gains, sales growth and profitability. We are dedicated to investing and to continue strengthening our position in the marketplace and separate ourselves from our competition. We are committed to creating sustainable value creation for all of shareholders, for our team members, our customers, for the communities we call home, for our supply chain and vendor partners and ultimately, our shareholders. The roots of our long history of growth were established in 1938 when C.E. Schmidt founded a mail order catalog for tractor parts. We opened our first store in Minot, North Dakota, the following year. We serve Life Out Here. We are focused on the needs of recreational farmers, ranchers and all those who enjoy living the rural lifestyle. As I mentioned earlier, in December, we celebrated our 2,000th store opening in White House, Tennessee. This is a testament to all of our team members who continue to support each other, our customers and our communities. Not many companies have gotten to this milestone and I doubt C.E. Schmidt ever imagined this milestone when he started his tractor parts catalog business 83 years ago. Our mission and values are the foundation for our success. Our culture is shaped around our mission and values. We have lived by these principles for over 80 years and we will continue to do so for decades to come. Our mission and values help us in our business decisions and they serve as guiding beacons to ensure we maintain course even in uncertain times. It is not something that you can put in a financial model, but it makes a huge difference on our bottom line, but they are more than that. Our mission and values are what you feel when you walk into one of our stores and talk with one of our team members. We are not like other retailers. We are a relationship retailer. Our customers are passionate about family, their land and animals and their communities and they count on us, Tractor Supply, to be their dependable supplier. We are able to serve our customers so well, because we know our customers so well. We hire our customers. Our team members are members of and representative of the community. They are experts in equine and welding, gardening and pets. They are involved in 4-H and FFA. Our team members are the largest and most important strategic asset of our company. And I encourage you all to visit us out here to experience it for yourself. At Tractor Supply, we are committed to preserving Life Out Here for future generations. 13 years ago, we launched our stewardship program. As ESG has emerged as the universal standard for good corporate citizenship, we have adapted our stewardship program to align with this direction. And over the past year, we have made significant progress in our ESG efforts. A few highlights include significantly reducing our energy and water consumption, materially increasing the gender and ethnic diversity of our board, management executive committee and our overall team member population, conducting unconscious bias training for over 40,000 team members and implementing a new 6-week paid parental leave policy for full-time salary and hourly team members. In September of 2021, we announced new robust goals to further reduce our carbon emissions as well as continue our progress on diversity, equity and inclusion. After exceeding our initial carbon reduction goals set in 2018, Tractor Supply established more aggressive commitments. By 2025, we will reduce our absolute greenhouse gas emissions by 20% from what they were in 2020. By 2030, we will reduce those emissions by 50%. And by 2040, we’re committed to achieving net zero emissions across all our operations. Over the past 2 years, we’ve rallied around the theme of stronger together and made material investments to accelerate our initiatives for DE&I. Recently, we announced a 5-year goal to support and advance underrepresented groups across our workforce, vendors, suppliers and communities. Our commitment to being a good corporate citizen has been broadly recognized. Recently, we were named to Investor Business Daily’s 100 Best ESG Companies of 2021. Just yesterday, it was announced we were included in Bloomberg’s Gender Equality Index. And today, it was announced that we received a perfect score from the Human Rights Council. We are committed to being a leader in ESG as this is authentic to our mission and values while also making great business sense. Over our rich 83-year history, this business has a strong track record of success, complemented by consistency and resiliency. Highlights include 30 consecutive years of revenue gain, 12 consecutive positive comp store sales growth and an average share price performance of 28.3% since the year 2000. And this ranks as the fourth best-performing stock in the S&P 500 over the last 21 years. Thank you to our investors for their confidence and we continue to strive to earn your trust and build on it. And today is all about that, the future of Tractor Supply. As demonstrated by the highlights of 2021 that you saw in our opening video, our business has never been stronger. Our team has done an outstanding job navigating the challenges in ever-changing environment over the last 2 years. We’re benefiting from many market trends that continue to be structurally sound. We have strengthened our customer base, and we’re gaining market share across our categories. Importantly, our total addressable market has grown materially, and we see significant opportunities for organic growth as well as an increased number of new stores. And we will continue to invest from a position of strength to capture this growth through our Life Out Here strategy. Out here, Tractor Supply enjoys significant structural advantages. And these advantages have allowed us to gain substantial share over the past 2 years. Our unaided brand awareness is 55%. And that puts us among the best in retail and well above our farm and ranch competitors. With a network of over 2,000 stores and nearly $1 billion in digital business, supported by 8 million square feet across our distribution centers, we have a unique ability to serve our customers wherever and however they choose to shop. We believe no other rural lifestyle retailer provides a comparable experience. And we have deep relationships with our vendors and in many cases are their largest customer. Our Neighbor’s Club program has 23.6 million members. It is engineered to drive customer behavior, and it is the foundation for a sophisticated marketing platform and enables deep customer insights. Our brand, scale, our supply chain, our digital capabilities, our loyalty program, all in combination creates significant and enduring strategic advantages for our business. Our structural advantages are the result of long-term investments in the foundation of our business and the deep seated values embedded in our culture. These roots have enabled us to adapt in the face of the pandemic and the ripple effects of other impacts like the tight labor market, unprecedented inflation and supply chain challenges that are impacting our industry. At the same time, broad-based macro category trends towards self reliance, world revitalization, pet adoption, home setting, these things are benefiting our business. And when you add to that, the acceleration of trip consolidation as people are shopping single retailers more, you think about the adoption of digital trends and you put all these themes together and they are working to our advantage as customers value us for our proximity as a one-stop shop grows. These lifestyle changes are accompanied by long-term commitments by our customer to care for and maintain their land and animals. We believe these trends have staying power and are structurally and substantially sound. These changes align with our investments in the business and dovetail well with our strategic positioning as the dependable supplier for Life Out Here. And as the dependable supplier for Life Out Here, we offer a wide assortment for our customers’ lifestyle. Our total addressable market is large and growing, and it’s heavily fragmented. In 2019, we estimated the total addressable market for Tractor Supply to be about $110 billion and we shared that with you in October of 2020. Today, we estimate our addressable market to be much larger at $180 billion. The tailwinds and structural changes that we just outlined earlier contributed an estimated $30 billion increase in the TAM. And that’s a 25% growth over the past 2 years in our market. But by comparison, if you look at our business, we grew 50% over the past 2 years and consequently gained significant share in this market. Now in addition to our core market, we’ve expanded our TAM by over $40 billion given our investments and initiatives like Project Fusion and Side Lot, which have expanded our category offerings in areas like pet and lawn and garden. With a market share of about 7% of this $180 billion market, we see substantial opportunity for growth in an increasingly attractive market, both deepening our relationship with our current customers as well as reaching new customers. Given our total addressable market growth, continued strong performance of our new stores and our strategic initiatives, we’re revising our long-term store targets from 2,500 to 2,700 Tractor Supply stores in the United States. And we’re excited to serve 700-plus more communities over the next decade. Of note, we view the Orscheln acquisition to be accretive to our overall store growth opportunity. Opening highly productive new stores is a core strength and competency of Tractor Supply. We continue to have strong new store productivity metrics, with performance outpacing our historical investment thesis. And our stores are profitable in year 1. With compelling returns, we continue to have significant runway for growth with high-return new stores. Given the attractiveness of our market, we’re investing in growth through our Life Out Here strategy. We shared this strategy with you in the fall of 2020. And as a reminder, there are 5 pillars of our strategy, and they include deliver legendary customer experiences which focuses on driving greater traffic and increasing conversion; number two, advancing our ONETractor capabilities to reach new customers and deepen our connection with existing customers by offering a truly omni-channel experience; number three, operate The Tractor Way, which enhances the productivity and efficiency of our existing retail assets; number four, go the country mile for our team to ensure we continue to support and show our appreciation for our team members who drive our business every day; and then number five, generate healthy shareholder returns, which reinforces our commitment to effective stewardship of our shareholders’ capital. To support these transformational growth initiatives, we increased our capital investments from $275 million in 2019 to over $600 million in 2021. We made excellent progress in year 1 of our strategy and are on track with our expectations. We continue to be very excited about our strategy given our customers’ response, the performance of the key initiatives and the robust long-term growth prospects. Two key tenets of our Life Out Here strategy are the Fusion and Side Lot initiatives. They are designed to drive space productivity and sweat our existing assets. Project Fusion is a multiyear store remodel program that both revitalizes the store environment and introduces an improved layout and expanded offerings. These changes are designed with the customer and our team members in mind to drive productivity through areas like enhanced experiences like pet washes and wellness clinics, but operational improvements as well to better support growing demand, things like our feed rooms. Also, though, driving space allocation trade-offs such as the service desk, but also widening our assortment across departments like apparel and animal and tools. Complementing Project Fusion is the Side Lot initiative, which transforms and expands our existing outdoor side lot retail space to drive greater productivity and convenience with the addition of a garden center and a drive-through pickup lane to support our omni-channel technology investments. Importantly, these projects are delivering on the return expectations with material sales lifts, existing customer sentiment improvements and new customer acquisition. By 2026, nearly 100% of the store base will be in the Fusion layout, and 60% to 70% will have had executed the Side Lot initiative in it. By 2022, we plan to exit the year with nearly 30% of our chain in the Fusion layout and over 15% of our chain with Side Lot. And Seth will take us through a more detailed walk of these exciting transformations later in the presentation. Another key component of our Life Out Here strategy is the enhanced focus on customer service. This isn’t just about training, but also about enabling our team members to spend more time with our customers. To accomplish this, we rolled out the FAST program, the Field Activity Support Team. And we started this program with 1,200 team members in late 2020. And we expanded it by another 200 in 2021 and plan to add 300 to 400 more team members in the first half of this year. This team’s sole focus is on merchandising execution. And this specialization improves our store merchandising while simultaneously enabling our store team members to focus more time on customer service. And with over 95% on-time planogram completion, our stores have never looked better or been more shoppable for our customers. And this team enables improved store productivity and is funded significantly by our vendor partners. It’s truly a winning-winning program for all of our stakeholders. And John will share more details on our initiatives to fuel our legendary customer service later on. Tractor Supply is fortunate to have a highly engaged and loyal customer base. Last year, as we discussed, we converted our Neighbor’s Club from an affinity program to a tiered points-based reward program. Simply said, the more you spend, the more you save. And this conversion is resonating with our customers. And year-over-year, we’ve added 4.6 million new customers to the program, and we’re seeing broad strength continuing across our customer base. More customers than ever are shopping at Tractor Supply. And these customers are making more trips and are spending more money per trip. We’re experiencing strong retention of customers that have shopped us over the last 12 months. Our retention rates continue to run above our historical standards. And I’m excited for you to hear more customer insights and details on how we intend to continue to engage our new customers and drive retention of our existing customers from Christi. More than 5 years ago, we introduced our ONETractor strategy that drove significant progress in providing a seamless customer experience. Our focus on engaging with our customers anytime, anywhere and any way they choose has allowed us to reach nearly $1 billion in e-commerce sales last year. Our customer is deeply engaged with Tractor Supply. And this transformation is happening across the whole shopper journey. Our customer behaviors continue to evolve, embracing convenient ways of shopping with a continued preference for mobility. Since launching our mobile app in late 2020, we’ve had 2 million-plus downloads, with the app already $100-plus million platform for us. We remain focused on introducing new capabilities, improving the shopping journey and ensuring we have scalable platforms. As we enter 2022, we are more excited than ever about the future of Tractor Supply. We see significant opportunity to continue to grow the business, expand our competitive moat and drive business productivity all the while creating value for our shareholders. As we’ve completed the rollout of FAST and Neighbor’s Club, we freed up some bandwidth, and that’s going to allow us to focus on two new initiatives as well as evolve the focus of our digital initiative. The first one is lead with legendary service. We consistently rank in the top 10% to 20% of retailers on customer service, right out there with the best of them. But our goal is to be number one. And we have all the assets to achieve it. We’ve got the right format, the right team, the right culture. And we have made and will be making investments in our team, in their technology and in their training. And you’re going to hear more from John on our plans in this area in his presentation. Increasing mobile engagement. Mobile will be the next moat that we create around our business. We’re going to convert our nearly 24 million Neighbor’s Club members into power users. And Rob will share more highlights of our plans to accelerate our growth and achieve more than $2 billion in digital sales by 2026. Deliver on C.U.E. We talked often about how important this business is to us. We have the number one market share in bag feed, and we’re in the top five in pet food. And given our growth in these categories over the past 2 years, we’ve increased cubic volume by 26% running through our stores compared to 2019. These are destination categories. And it is critical for us to ensure we have capacity for future growth and, importantly, that we are the lowest cost to serve in the market in these categories. And our supply chain is a critical differentiator for us to deliver on C.U.E. And Colin will share more details on our ability to continue to widen the gap with our competition. Given our recent performance, and the significant opportunity that I’ve just outlined, we’re updating our long-term guidance. Now we’re maintaining our sales outlook of plus 6% to plus 7% in spite of a much higher base of sales. We’re increasing our operating margin guidance to a range of 10.1% to 10.6%, and that’s an increase from our previous guidance of 9% to 9.5%. We’re also increasing the top end of our range for EPS growth to 11%. And notably, we’re increasing our dividend payout to 40% while maintaining our commitment to share repurchases. And we’re spending approximately $650 million annually of capital. These are aggressive but achievable targets that will create significant shareholder value over time. And Kurt will share more details as he focuses on our ability to deliver strong and sustainable total shareholder return. From our founding 83 years ago, Tractor Supply has proven to be a business model that has stood the test of time to be resilient and differentiated. This business has shown the ability to evolve over the years to reflect our customers’ changing needs. And we’re investing to continue to evolve and capture the significant opportunities for growth. And underpinning our strategy is an experienced retail team that knows retail and our culture and our team members, and they are passionate about the out here lifestyle. As we enter year 2 of our multiyear Life Out Here strategy, our business is substantially stronger than before the pandemic. Our resilient and differentiated business model allows us to capitalize on the structural consumer trends, benefiting our business with a long runway of growth ahead of us. We have momentum in our business. And our results demonstrate that our multiyear Life Out Here strategy is working. We will continue to evolve our business from a position of strength. And with that, I’ll turn it to the team to walk you through more detailed plans. Thanks so much.

Christi Korzekwa:

Thank you, Mary Winn, and good morning. As you’ve already heard from Hal and Kurt, our future at Tractor Supply is extremely bright and promising, that’s why I’m excited to take a few minutes and give you an update on our customers, provide some insights into what we know about our ever-expanding marketplace and how we are using our industry-leading Neighbor’s Club program to drive our growth. Most importantly, we continue to see significant growth in the farm and ranch market which, as previously mentioned, we estimate to be more than $180 billion. And the pandemic continues to reshape and rewrite customer behavior. And it’s why we see such a large migration of customers from urban centers to rural and suburban areas moving into Tractor Supply’s neighborhoods. We also have seen customers’ homes become their sanctuaries during the pandemic, inspiring more home, outdoor living and land projects. And we only see that continuing as hybrid workforces are the new norm. We’ve also seen more pets become family members with record adoptions across the U.S. And with the pandemic’s disruptions to daily life and the broader supply chain, we’re recognizing a growing interest in self-reliance, sustainability and the desire to consolidate shopping trips. And this migration into a more rural, self-reliant lifestyle, or what we call Life Out Here, we believe, is a continuing cycle with lasting tailwinds. And according to our analysis, we have the potential to capture the interest of more than 40 million additional customers in our trade areas who do not shop at Tractor Supply today. So let me share some insights into our current customers. We’re seeing significant expansion with increased participation from our core farm and ranch customers and a surge in new customers. Core farm and ranch customers increased the number of animals and pets they care for and they expanded their gardens and land projects. They rely on Tractor to be open and ready to support them and they prefer Tractor over our competition. Based on data from Earnest Research, since the onset of the pandemic, Tractor Supply has seen six consecutive quarters of outpacing the farm and ranch channel in market share gains. And beyond our core customer, we have seen record levels of new customers as more move into our trade areas, adopt new pets, start of flock, and grow gardens. What both customer groups share is a passion or growing passion for Life Out Here. And with the increase in share among existing customers and the addition of so many new customers, our investment in and growth of the Neighbor’s Club to a best-in-class loyalty program this past year is key to our success. We’ve reimagined our Neighbor’s Club program to enhance our Neighbor’s Club members’ benefits and experiences. Based on feedback from our customers, we relaunched the Neighbor’s Club program last April, creating a tier-based program, enabling members to earn loyalty points tied to their spending levels. They can also access tier-specific benefits such as same-day delivery and trailer rentals. In essence, the more they spend, the more benefits they receive. And we continue to enhance the program with new benefits and member exclusive experiences every day. We see this program as another differentiator for Tractor Supply. No other farm and ranch program offers the scale and exclusivity of benefits that Neighbor’s Club can offer our members. The response to our Neighbor’s Club enhancements continues to be overwhelmingly positive as it increases customer retention and market share. Our program enrollment is now 23.6 million members strong and we added over 4.6 million members in the last 12 months. Our members represent 70% of our sales, they shop more frequently and they spend 3x more than nonmembers. We also annually retain over 97% of our high-value Neighbor’s Club members. And 90% of those members were active in the last 3 months. Our overall customer retention and recency is industry-leading. In addition, we’re seeing new customers join the program at record levels, with over 30% of all new customers joining with their initial purchase. We also continue to gain extremely rich and valuable insights about our customers and they are shopping us more frequently and across more categories. For example, taking a deeper dive into our core customers, we’ve seen explosive growth in our high-value farm and ranch customers. The number of extremely loyal customers, those who spend greater than $1,000 per year, has grown over 50% since 2019. While many of these customers rely on us for feed and supplies to take care of their growing pets and animals, we’ve learned they also shopped more broadly across our store as part of the continued change to consolidate all of their shopping trips. And we discovered their spending was structural across more high-repeat categories, including pet food, gardening, tools, home and outdoor living, supporting their self-reliant mindset for their families, homes, animals and land. Here is a snapshot of a customer from our highest loyalty tier, Preferred Plus. Jake has been a Tractor Supply regular for years, but we can see he’s changed his behavior over time, shopping more at the store and more categories each year. Many of them repeat consumable categories. He now spends approximately $4,500 each year and shops over 30x. Analysis of his transaction shows he regularly shops our pet food and feed categories, but he also frequently expand his basket with purchases in other categories like gardening and outdoor living. It’s so exciting to see millions of our high-value customers shop us in a similar fashion. But also playing a meaningful part in our growth are the 19 million new customers we’ve welcomed since the beginning of the pandemic. Many customers made initial trips in 2020 for home and yard improvement projects to shop for pets as well as for initial purchases in the backyard poultry and gardening categories. Because of our Neighbor’s Club program, we quickly recognized the surge of new customers early in the pandemic. And we were able to develop dedicated relevant marketing messages to connect with these new customers drive awareness for our pet, home and poultry-related offerings. These efforts help a record number of our new customers, with the highest recorded retention. Over 55% of our new customers returned to Tractor Supply for another purchase. These 10 million-plus new customers are engaging in high repeat activities, such as starting a new garden, adopting a new pet or starting a flock. And to bring these new customers to life, the data from our Neighbor’s Club regarding our new customers’ show they tend to be younger, more female and digitally engaged. We’re also seeing more millennials, who represent 30% of our new customers. Sarah is an excellent example, visiting us for the first time in the early part of 2020. She is one of our more than 1 million customers who started a backyard flock during the pandemic. And that initial poultry trip led her to buying pet food, clothing and gardening supplies from us. Like many new customers entering the poultry category for the first time, Sarah needed and continues to need trusted advice and expertise regarding her new flock, and we’re providing that. Whether it’s information we’re sharing through our digital channels or our store team members, we believe that our Welcome to Life Out Here marketing campaign and our offering of expert know-how in the Out Here lifestyle is a significant differentiator for us. I do want to point out something very important here. While Tractor Supply is enjoying record highs for attracting new customers, we’re also seeing all-time highs in their basket size. Average sales for new customers in 2021, was up $26 from the prior year, marking an expansion of nearly 40% since 2019. The rich insights we gain from our Neighbor’s Club members also allows us to personalize our messaging in a highly targeted and relevant manner. We can effectively segment our customers based on their interest because we know which categories they shop. Moreover, we know where they live and the local events they are passionate about. This continues to allow us to personalize our messages to each customer based on their specific interest and reasons for shopping Tractor Supply. Our core farm and ranch customer is more likely to receive content regarding livestock and equine feed or bulk pricing on fencing, while our newer customers might receive pet or poultry messaging. We have robust capabilities to target these personalized messages across various marketing channels and at significant scale, in digital advertising, within our mobile app, e-mails, push notifications, social media, text messages and our sizable website. This ability to deliver highly relevant messages to the right customer at the right time has allowed us to build an even stronger relationship with our members. Another major shift we have made to capitalize on our rich and growing customer opportunity is a transition from traditional promotional print marketing to highly targeted and broader reaching, brand building television, streaming and digital support. Early in the pandemic, we expanded our brand marketing to leverage national cable news and digital streaming while also partnering with marquee television properties and high-impact programming that resonates with our customers. It was an approach centered on programs that genuinely support our customers’ passions and Life Out Here, including the wildly popular Yellowstone series, it’s prequel 1883, Professional Bull Riding, NFL Sports and home networks like Discovery and HDTV. Looking ahead to 2022, we plan to lean deeper into this strategy as we have seen it drive the significant increases in key brand awareness metrics. At the beginning of the pandemic, we have recognized that we were one of the best kept secrets in retail for new customers. Then as more new customers shopped with us and became interested in living Life Out Here, we continued to grow awareness with our TV and digital strategies. We know from our customers that our assortment, convenience and know-how are significant reasons that they shop at Tractor, so we highlight these in all of our marketing. And as the metrics show, our expanded and targeted marketing efforts are paying off. Our unaided brand awareness is up 2,100 basis points. Customers considering Tractor for their Life Out Here needs is up 1,000 basis points. And we have seen a 25% increase in our ranking as their favorite retailer of choice. These are remarkable results we are incredibly excited about, particularly as we look to future growth. We are continuing to elevate our brand perception as our customers’ retailer of choice and are well on our way to making Tractor a household name synonymous with Life Out Here. So looking ahead, here is our game plan. First, Tractor Supply is part of a robust, growing and attractive market. We see significant opportunity for durable and sustained growth. Second, our customers are extremely engaged and loyal and return again and again, making us their retailer of choice for Life Out Here. Third, Neighbor’s Club is an industry-leading loyalty program, continuing to grow at a record pace, and is a key differentiator that allows us to drive expansive, continuous growth of our highly engaged customer base. Fourth, we have one of the best marketing technology platforms in the industry, allowing us to customize messages that cultivate loyalty. And last, we will continue our meaningful investments in high-profile, marquee marketing partnerships reinforcing our position with our customers and all of those potential customers that we are synonymous with Life Out Here. I look forward to answering any questions that you may have in our upcoming Q&A session in just a bit. But before we go to John to talk about legendary customer service, let’s hear from one of our customers. [Video Presentation]

Mary Winn Pilkington:

Thank you, John. We will take a moment here for a quick break. When we return, Chief Technology, Digital Commerce and Strategy Officer, Rob Mills, will share details on consumer-facing digital initiatives; Executive Vice President and Chief Merchandising Officer, Seth Estep, will provide an update on remodeling efforts inside and outside of our stores; and our Chief Supply Chain Officer, Colin Yankee, will share our vigorous efforts to meet strong consumer demand in a challenging supply chain environment. We will see you back in a few minutes. [Video Presentation] Welcome back. A reminder that a Q&A session with members of our executive team is coming up after this round of executive presentations. So, please stay with us. Joining us now to share how investments in our digital platforms are providing better customer experiences is EVP, Chief Technology and Digital Officer, Rob Mills.

Seth Estep:

Thanks, Rob. Good morning, everyone. Tractor Supply has been busy making headway with our Life Out Here strategy. In 2020, we outlined initiatives to grow space productivity as a major opportunity to deliver consistent comp store sales. This was a primary goal of our Operate the Tractor Way pillar. When we launched this strategy, we knew we had significant opportunity for improvement in sales per square foot compared to our hardline and specialty retail peers. Since then, we have been focused on our Project Fusion and the Side Lot transformation to drive convenience and to optimize our indoor and outdoor assortment. Importantly, we are making progress and we are driving significant productivity gains. Today, I want to walk you through a local store, updating you on the improvements and how we have continued to evolve our store layout with Fusion and Side Lot, highlighting some of the successes we are seeing as we rollout these strategic initiatives. Let’s get started. Welcome to one of our Tractor Supply stores, where we recently completed a combo Project Fusion and Side Lot Transformation remodel. For today’s tour, we are starting outside in our roughly 4,000 square foot garden center. When we first introduced our space productivity initiatives, we highlighted that our most significant opportunity to drive incremental sales, traffic and market share was through our Side Lot Transformation program. In this, we convert a space that’s traditionally been utilized for storage to a garden center that’s tailored to the lifestyle of our Out Here customers. We knew from customer research that the lawn and garden category, specifically live goods and bag products, was the number one hobby of our shopper where they did not look to Tractor Supply as their primary destination. And as the weather turns warmer and we enter spring 2022, we are excited to have more than 160 garden centers to start capitalizing on this opportunity. Our merchants have been aggressively adding growers to prepare for the season. In these garden centers, we will be offering a broad assortment of live goods with a focus on vegetable gardening, shrubs, trees as well as a full assortment of color to create excitement with our customers. Our offering is differentiated for the Out Here lifestyle. We are also introducing additional products in seasonally relevant categories, such as furniture, planners, drilling and outdoor living. From our early reads, we believe that these additions will drive share of wallet with both our core customers and attract new customers to Tractor Supply. From a performance perspective, we are seeing positive lifts in the seasonal department despite very few stores having a garden center in 2021 during the peak season. In our 27 stores where we added only a garden center and did not do a Fusion remodel, we are seeing triple-digit lifts in our live goods and the lift for packaged seeds leaves the chain with strong double-digit lifts on top of triple-digit lifts in 2020. Let’s now shift to the exciting trends of our Fusion and Side Lot combos, particularly the 15 combo stores that were opened for the 2021 spring selling season. In those stores, we are seeing double-digit sales lift performance for the entire store and strong performance across all merchandising divisions. Specific to our seasonal division, which includes our lawn and garden categories, the total seasonal product division lift in these stores is up more than 30% and we are getting incredible feedback from our customers as a shopper updated side lot, in our updated seasonal corner, in our fusion layout. In aisle, we are seeing successes in handheld products, belts, blades and everyday lawn and garden items. Looking ahead to 2022, all garden centers will be built in combination with a Fusion remodel as well as the vast majority of new stores will open with the garden center. As we know, we get the greatest sales lift when we combine our Project Fusion and our Side Lot initiative. These categories are a key focus for Tractor Supply to continue to capture share as identified in our total addressable market opportunities. I hope you share our excitement with our Side Lot Transformation. Now, let’s walk a few of the other areas inside the store and highlight some of the updates and the initial results that we are seeing from our Project Fusion remodels. As you enter the store, our customers immediately experience a dramatic update as they are greeted by the customer service hub, which consolidates our cash registers and customer service desk. Sight lines have also dramatically been improved with the implementation of the new Department Lightboxes. Customer feedback to these changes has been overwhelmingly positive. Our shopper survey results show positive increases in cleanliness, speed needs and checkout and availability of team member assistance. Also, our score for a variety of merchandise in store has improved more than 120 basis points in our Fusion customer survey results. And by moving the customer service desk to the hub, we added approximately 300 square feet of selling space in the center of the store that is more effectively being used to drive space productivity and show additional merchandising programs. So as we move to our pet department, we have reworked adjacencies, updated space allocations and increased the number of pallet positions. One of the biggest changes in our Fusion pet layout is leading the flow of the department with ct products. We know we have significant opportunity to grow sales and share of wallet in cat. And by placing it on the first aisle on Fusion, we are giving greater visibility and access. And when looking at the results, we are excited to see that our Fusion stores are over-indexing in new customer growth in this category. And existing Tractor Supply customers buying in this category is up 600 basis points versus non-Fusion stores. We are also seeing positive sales lifts in wet cat food and supplies across all-time periods post remodel. Since we first introduced you to our Fusion layout, we have also had an additional run of dry dog food in select stores, like you see here, which maximizes holding power and increases space allocations to accelerate growth in this key category. We believe approximately 40% of the Fusion remodels will have the space to add this additional footage in our pet department. We are confident that these changes will continue to drive our market share gains in pet. In addition to pet products, we continue to enhance the services we offer our pet parents, like self-service pet wash stations, which are now in more than 500 locations. In a small subset of stores, we are also piloting wellness centers, which operate in 44 stores to-date with a full-time veterinarian staff 5 days a week. Wellness centers are also complemented with mobile pet vet clinics that operate in more than 1,400 stores today. And in 2021, we serviced over 1.2 million pets through pet wash, wellness centers, pet vet clinics and televet solutions. We will continue to look to grow our pet services as an opportunity to increase customer lifetime value and bring in new customers. In our Fusion stores, we continue to drive space productivity in our livestock feed, health and supplies categories. Just like dog food, these sections, along with the entire pet department, are among the most highly productive areas of the store already. We have updated adjacencies, reallocated square footage and visually improved the department to support this important category. The most significant positive impact is the equine supplement, leg care and fly control categories, which are trending between 400 and 800 basis points above trend. And in select stores, we have added a feed barn that gives the stores the inventory holding power needed to stay in stock and allows customers to drive through and load heavy animal feed, fencing and other core categories directly into their vehicles. These are trip-driving categories where we will win as the 100% dependable supplier. Colin will share more details on how we will widen the gap versus the competition in this key area. Moving into our truck tool and hardware area, this part of the store experienced some of the most significant merchandising updates with the introduction of new brands, new fixtures and significant changes to space allocations. As a result, we are seeing growth in traffic counts, attachment and cross shopping in our power tool department. We see that existing customers are finding and shopping the power tool aisle for the first time. And these customers are much more likely to attach an accessory to the power tool purchase at a Fusion store versus a non-Fusion store. We have also rolled out this tool crowd concept to more than 300 additional non-Fusion stores based on the early results. And what really excites me is that our TAM assessment indicates that these are categories, where we continue to have significant share opportunities. And finally, let’s take a look at our apparel section, which is experiencing the most significant lifts inside the store across all of our Fusion remodel categories. In many remodels, we actually reduced the footprint of the department by consolidating our presentation, with new fixturing and merchandising. In these Fusion stores, apparel is running at comp above 35%, with high single-digit lift as compared to control stores. This is a category that gets an immediate response from the consumer and the lifts have been sustained over time. We believe this is attributed to the visual impact post conversion, updated space allocations of categories and brands as well as the expansion of women’s with brands like Carhartt, Ariat and Wrangler. Apparel is now a key customer mission for people to come to Tractor Supply. We are also excited to showcase brands throughout the department like Carhartt, that you can see here, store within a store concept in 90 locations, which are running departmental comps above company averages. We will continue to look for ways to differentiate our offering in apparel that support our customers’ lifestyles. So thanks for coming along with me on the store tour today. I hope you get the opportunity to get in store yourself and see our new Fusion and Side Lot upgrade soon. I hope you found our store tour insightful today. We believe that investing in our stores is just table stakes to win in today’s omnichannel retail environment. Overall, we are encouraged by the early results we are seeing from our Fusion and Side Lot initiatives, with the biggest impact coming when their innovations have reached a maturity of about 9 months post completion. As we look ahead, our target for Fusion-only stores is a mid-single-digit sales lift post project maturity and we are targeting a high single-digit sales lift on the Fusion and Side Lot combo stores. Our goal is to have 100% of the chain in the Fusion format by the end of 2026, while our combo Fusion and Side Lot stores will ultimately be across 60% to 70% of the chain. We are making significant progress towards our space productivity goals and delivering on the strategic pillar of operate The Tractor Way. We have a best-in-class customer-focused merchant team that will continue to grow sales and profit by driving innovation and optimizing our differentiated merchandising assortment. We are highly focused on capturing market share of our expanded TAM. And we have a compelling game plan for growth that will serve our core customers while bringing in new customers to the Tractor Supply family. All-in-all, we are committed to being the indispensable supplier for Life Out Here and widening the gap versus our competition. Thank you again for going on this Fusion and Side Lot store tour with me today. Next up is Colin, who plays such a key role in serving our customers. With the recent complications to the supply chain, Colin and his team have done an amazing job keeping our stores in stock.

Mary Winn Pilkington:

Thank you, Colin. Before Hal joins us to share his closing thoughts, EVP, Chief Financial Officer and Treasurer, Kurt Barton, rejoins us to deliver Tractor Supply’s strategy for robust shareholder returns.

Hal Lawton:

Thanks, Kurt. We appreciate everyone in the audience spending the last couple of hours with us. As we transition to Q&A, I hope you found compelling the updates we shared with you today. Kind of a quick summary of the incremental news we discussed. One, we are capitalizing the many macro structural benefits such as rural revitalization, self-reliance, home steady and pet ownership and we are investing in our capabilities like digital and loyalty to continue to widen our moat with the competition. Two, we provided an update to our long-term financial outlook that includes raising our operating margin to 10.1% to 10.6%. Three, we operate in a large, attractive and fragmented growing market that we now estimate to be $180 billion. Four, with our growing total addressable market and the vibrancy of our trade areas, we now see the opportunity for an additional 200 Tractor Supply stores, bringing our total store opportunity to 2,700 locations. Five, we had the financial flexibility to invest in our Life Out Here strategy and return capital to shareholders through the combination of dividends and share repurchases. Today, we announced our Board’s approval to increase our quarterly dividend by 77% and an additional share repurchase authorization of $2 billion. We remain committed to maintaining a disciplined capital allocation strategy to create value for our shareholders. Tractor Supply has a deep history and a track record of success. We are coming off a record 2 years. We have compelling opportunities for continued growth and the team to execute. The future tomorrow is bright for Tractor Supply. Thank you. Now we’ll take a 5-minute break before we go to the Q&A segment. See you in a minute. [Video Presentation]

Kate McShane:

Hi, good morning. Nice to see everyone. Our question is centered around the operating margin opportunity. So I guess this question is for Kurt. We wondered about the cadence of the operating margin expansion over the next 5 years. Is it fairly even each year? And what is the biggest difference in this outlook versus what you gave us in October when it was a 9% to 9.5% range? I am just thinking that since the last time we spoke with you, transportation and labor is higher, while the top line outlook is staying the same?

Mary Winn Pilkington:

Thank you. All right and our next question will come from Peter Benedict with Baird. Good afternoon. I guess, your time Peter. Nice to see you think morning.

Hal Lawton:

Hey, Peter, and thanks for joining us today. I appreciate your question. If we look backwards last year, I just can’t say enough about the fortitude and grit determination of the team to get 80 new stores open, to have 300-plus Fusion stores and over 150 Side Lot stores. And as you mentioned, given all the disruption from COVID is related permitting and construction crews and the availability of things like fixtures and other materials. To be able to still achieve our goals from the beginning of the year, it’s just a real tribute to that team. In light of those issues, which we expect to persist for all of this year, we kind of kept our cadence for this year, similar to last year, as we talked about a couple of hundred Fusion stores, around 150 side lot stores and again, another 80 new store. And then if you kind of – all of our new stores also will be done with Fusion and many of our new stores also have garden centers. And then if you kind of take the balance, it will be really equally spread over the remaining 4 years as we lead to 2026, and that does assume a slight step-up in annual cadence from ‘23 and beyond. On the returns, we are very – continue to be very pleased with the returns of both Fusion and Side Lot. As we shared on our last earnings call, the Fusion-only stores are running in that kind of mid-single-digit comp once they get kind of the 12-month kind of cycle, maturity cycle. And then our combo stores are right at that kind of high single-digit comp. We’re very excited that we’ve got about 150 stores in our Side Lot combos that will be hitting that 12-month mark right around the time spring hit. So it’s going to be a great opportunity for us to drive some sales and drive some share with those fresh stores. On the TAM, we talked about in my presentation about adding $40 billion to our TAM. And that is dominantly lawn and gardening, kind of live goods. And it’s a fresh category for us, and one we think is a great opportunity. Our customers qualitatively, as we talked about, I talked about it being the number one category that they participate in that we least serve them in. And we’re seeing great results as we talked about in the first cohort of stores. On the cost, it’s hard to get each individual store because there is so much nuance depending on the setup of the store and the age of the store. But toughly, the way to think about it is we took our capital from $300 million to $600 million, roughly. About $100 million of that is supply chain with little technology. That leaves about a couple of hundred million left that involves our store investments. And then if you take the kind of 350 combo Fusion, Side Lot stores this year, you can kind of divide those into each other and get a sense. The range is anywhere from $0.5 million to $1 million a store that really just depending upon the nuances around that store. But again, really pleased with the return we’re getting strong return on investment capital it’s hitting all of our business cases. And as I said, we’re really excited about having over 150 Side Lot stores open for business when we hit the spring garden season.

Mary Winn Pilkington:

And our next question comes from Zach Fadem with Wells Fargo. Hey, Zach.

Hal Lawton:

Hey. Zach, and I appreciate your question, and thanks for joining us today. I’d say two things. First off, kind of to clarify, high single-digit I think is kind of what we’re on the record right now, around the 12-month mark for the combo stores. As it relates to the impact on comp, I think that’s around – that’s roughly right. You take, call it, 9%, 10% lift on kind of 10% of the store base annually. And do the math, and that’s about what the contribution should be. That’s certainly baked guidance. And as Kurt said, it’s the thing that really gives us confidence in our guidance. And the last time we did an investor enhanced earnings call was in October 2020, we’re roughly 35%, 40% bigger in revenue, right, larger revenues from that date. And yet we’re still holding to our 4% to 5% long-term comp growth and 6% to 7% revenue growth. And it is because of the investments we’re making in the Side Lot and in Fusion and there are other areas that we’re confident they are really going to go after that growth and drive those sales and that we can do that mid-single-digit comp on top of revenue growth of over 50% in the last 2 years. And as we said, again, we’re very excited about having well over 150 Side Lot stores business here in the spring season, and we’re getting even a better read on the impact that it can have on our business.

Hal Lawton:

Thanks, Zach.

Peter Keith:

Hi, thanks, everyone. Good to see you and a terrific presentation today. I wanted to dig into some of the gross margin discussion. I think in thinking about the forward gross margin drivers, product mix was mentioned as a positive driver. That kind of goes counter to what we seen historically with the business, with the growth in C.U.E. I would think that product mix could also be hindered by the garden center expansion. So maybe you could unpack that a little bit on how you feel about product mix and what categories do you think can drive that positive shift? And then furthermore, just thinking about the other positive drivers to gross margin, pricing and promotions, there might be some skepticism on lower promotions, because there hasn’t been lot of promotions in the last 2 years? So maybe you could unpack how you’re thinking about delivering margin expansion on those, too?

Peter Keith:

Okay, thanks so much, guys. Good luck.

Steve Forbes:

Good afternoon, everybody.

Steve Forbes:

I wanted to focus on e-commerce and digital growth. So Hal or Rob, you mentioned 15% penetration by 2026, which is a, I think, about a mid ‘20 CAGR in the next couple of years. So can you comment on how the average customer engages with this channel? The profitability of this channel, how that’s evolved? And whether your initiatives behind this channel has increased the average numbers of transactions that you’re seeing within all customer cohorts?

Rob Mills:

Good morning, Steve. Great to see you, and thank you for the question. So in regards to the customer and the customer interaction, they are definitely engaging with from a digital perspective. And as you heard through my presentation, the focus around mobility first is very key as well as leveraging the power of the data that we have with Neighbor’s Club. We have seen tremendous growth. We are extremely confident with that penetration rate. And we’re holding in to really drive a personalized experience with that customer, telling what they need for the product, their services and just really simply, how do you remove any of the friction and really driving that convenience. From ability perspective, we’re profitable. We deliver contributions back to Tractor Supply. We have a profitable online business. We will continue, of course, to look at profitability, ways to improve the profitability, leveraging all the great work that’s being driven through either the analytics and understanding of our business through the product assortment mix as well as the work that’s being done and can’t see him. We look at the store as our primary hub, how do we fulfill from this store? Same day delivery, delivering from the store capability as well as buy online pickup as well as curbside pickup, which has been a tremendous growth opportunity. Lastly, I shared some core capabilities that we’re focusing on. And going back to the mobile piece, it is around how we’re putting mobile first. We’re using the power of the Neighbor’s Club and that analytics and knowing that customer to ensure that we’re always connected with that customer at all times. When they are researching items so you are leveraging as the expert, so all the way through the ordering process, when you’re actually fulfilling that customer order and how do you drive that connection back to the store, the store hub and being connected back to that team member. So we’re providing that knowledge, that trust and the authority that our customer trusted. And so I guess I’ll leave you with that. We have a clear road map, a strategy to move forward, both how we’re engaging to the customer. We listen to the customer. We leverage the data and we’re as well as we will continue to focus on the profitability, but we’re strong and we’re ready.

Mary Winn Pilkington:

Thanks, Steve. And our next question will come from Scot Ciccarelli at Truist. Hey, Scot. Nice to see you.

Hal Lawton:

Yes, hey, Scott. Thanks so much for the question today. I appreciate you joining us for the event. And I’ll toss it over to Christi to talk about our new customers and the customer insights for seeing.

Scot Ciccarelli:

So just to clarify, if I might, so this isn’t because you guys have expanded garden and live goods, this is just the customer migration towards kind of your areas and regions, which is what’s driven it?

Scot Ciccarelli:

Thank you very much.

Mary Winn Pilkington:

Our next question comes from Simeon Gutman with Morgan Stanley. Hi, Simeon. Nice to see you.

Kurt Barton:

Simeon, yes, thank you for the question. I think it’s a great one. And this team is basically focused on managing our operating margin overall. Here’s a couple of the things that in regards to over the next 3 to 5 years. You pointed out the investments that we’re making on the business. When we look at our operating margin, we look at what we’re doing to invest from a position of strength and for the future. We’re making key investments in the SG&A, and we’re making investments in our supply chain. And those investments in the supply chain will help drive the market share and the sales that will help drive gross margin. We’re making investments field activity support team. We’re making investments in our IT technology. So we’re making the right investments, and yes, that puts some pressure on the SG&A, but our focus on driving market share for the long-term and the ability to be able to enhance that gross margin, it’s going to differ between the years. But we’re going to be really focused on top line being competitive and getting a good price to our customer and maintaining a good operating margin and keeping that even balanced. I’ve mentioned in my presentation, I put in that slide that we recognize there is some uncertainties in the financial algorithm today, unprecedented inflation. We’re seeing wage inflation and make sure that we’re positioned again to invest in our stores, in our technology by doing all of those things along with just having COVID expenses still in the business like most of retail. All of those costs we have some expectations continue to play into the financial algorithm, and there is opportunity. We want to be careful. We want to be prudent in our operating margin. And we feel like some of those factors turn positive in the long-term, that does give us the opportunity for that while we’re being pretty prudent in that approach and making sure that we’re doing the right thing for the business and real steady throughout these 5 years.

Hal Lawton:

Thanks, Simeon.

Michael Lasser:

Good morning. Thanks for taking my question. Your guidance for this year assumes that you’re going to get 400 basis points of an inflation contribution. You also mentioned you expect traffic to be up. So let’s assume that’s going to be up 50 basis you the high end of your comp range. You also mentioned that you expect big ticket to be under pressure this year. Presumably, your core customer also saw an extraordinary amount of government support from stimulus, enhanced unemployment and child tax payments last year. How have you factored that into your guidance for this year? And as a follow-up, and a quick clarifying, after we get through fiscal supply chain disruption, what’s the prospect for some potential deflation in your categories?

Michael Lasser:

Thank you and good luck.

Chris Horvers:

Thanks. Good afternoon, thank you for the presentation. So a bit of a follow-up question to Michael. So as you think about elasticity and inflation, you saw some headwinds to gross margin rate from product cost inflation. Is that simply you managing the business from a gross profit dollar perspective versus not a gross margin rate perspective? And then similarly, on the macro side, as you think about your potential sensitivity to wealth effect and higher rates in housing, have you taken any of that into account considering your expectation for continued ruralization?

Chris Horvers:

So as you think about – clearly, you’ve had a strong wealth effect for the consumer low rates, house price increases, stock market benefit. Surely, that’s had some impact to your consumer and the sort of ruralization that you’ve seen as people sort of spend more time in rural homes. So have you taken any potential headwinds into account from rates moving up and decelerating the housing and wealth engine?

Mary Winn Pilkington:

Thanks, Chris. And up next is Scott Mushkin with R5. Hey, Scott, how are you, today?

Hal Lawton:

Hey, Scott, thanks so much of the question. And I think we’re going to break that up into two parts with Seth, can you maybe talk a little bit about the assortment and how we’re evolving and much of that he shared in the video and kind of recap some of that. And then maybe John can talk a little bit about the experiences in our stores, whether it’s chip days, pet watches, clinics and many of the other things, the 4-H and FFA type stuff that we do. But Seth, you want to hit the assortment expansion first?

John Ordus:

Yes. Hey, Scott. Good to see you, again.

John Ordus:

So I’m going to break it down in a couple different parts. So one is we hire our customers. So our team members love talking about everything that we have inside of our stores. So you brought up chick days, it’s an event side of our store, where we have chick captains in there. They know the chicks. They work with the chicks when customers come in here, there is a good conversation that goes back and forth between that customer and that team member. The other things we do is stuff for our Greenworks, like we love theater inside of the side of the store. So some events we’re doing this year, like try before you buy, we have an even a weekend where our team members are all going to be outside, and we’re going to be test driving the Greenworks and using the blowers and using the weed whipper and different things and using our different power equipment materials. The other thing is we love to be able to have the community involvement. So we bring in things like 4-H, FFA. We do things like hot dogs outside. We’ve come in, our customers do donations for them, but we have it where they can talk to each other, do chicken swaps and different things out front. So we kind of break up into many different parts, but we look to be part of those individual communities.

Scott Mushkin:

Thanks, guys.

Mary Winn Pilkington:

Thanks so much, Scott. Up next is Joe Feldman with TAG. Hi, Joe. Please go ahead with your question.

Hal Lawton:

Yes, Kurt, do you want to share our capital allocation strategy and then talk about tuck-in acquisitions after that?

Joe Feldman:

Thank you.

Brian Nagel:

Good. How are you doing? Good morning. Great presentation, thank you. So my question – I know it’s a bit of a follow-up to some of the prior questions. But I mean clearly one of the big themes in today’s meet in all the comments is just the rebasing higher sales. And as I think about that dynamic, clearly, there is now – there is more people sort of say there is a large portion of population living a lifestyle that wins to Tractor Supply. But at the same time, you have – you’ve taken market share gains. There is always been this market share opportunity for Tractor Supply, and we talked about that for years. But I guess as you look – maybe more color on what you’re actually seeing with market share? I mean through the academic where there are more permanent changes in your competitive set that lend to these sustainability some market share gains? Or – and on the other side, are you seeing – is this is happening? Are you starting to see some competitors that maybe seeded share starting to fight back more now?