Tractor Supply Company

Good morning ladies and gentlemen and welcome to Tractor Supply Company's conference call to discuss second quarter 2023 results. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. We ask that all participants limit themselves to one question and return to the queue for additional questions. Please be advised that reproduction of this call in whole are in part is not permitted without written authorization of Tractor Supply Company. And as a result, reminder, this call is being recorded. I would now like to introduce your host for today's call, Mrs. Mary Wynn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Wynn, please go ahead.

Thank you, Megan. Good morning, everyone. Thanks for taking the time to join us today. On the call for our prepared remarks are Hal Lawton, our CEO, Kurt Barton, our CFO, and John Ortis, EVP and Chief Stores Officer. 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 uncertainty, 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, and 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 on this. We will be available after the call for follow-up. Now it is my pleasure to turn the call over to Hal.

Thank you, MaryWen. Good morning, everyone, and thank you for joining us. I'd like to begin by thanking the 52,000 Tractor Supply team members for their commitment to each other and our customers, and for their dedication to serving life out here. Our team is executing at a high level and did a nice job nimbly adjusting in the second quarter. We're operating in a tougher environment than we expected at the beginning of the quarter, and certainly tougher than what we forecasted as we entered the year. Consumer spending continues to shift in favor of services. Shoppers that are tired of inflation are being judicious on their baskets. Consumers continue to pull back on discretionary purchases. And additionally, our business was further impacted by the abnormal seasonal trends, particularly in the month of June. Despite this environment, we still expect 2023 to be a pretty solid year. Our customer is healthy. And we're gaining share, outgrowing our market by 2x. And we are significantly outpacing total U.S. retail sales growth. We anticipate that we will have positive sales comps and positive comp transactions for the year, albeit in the low single digits range. And importantly, net sales and earnings will grow strong mid-single digits on top of the 53rd week last year. We have a long track record of growth and high expectations of performance. We view our underperformance to these expectations as specific to the current environment. The team is dialed in and understands the challenges. For the remainder of the call today, I'll speak to a few highlights of the second quarter and then share an update on our Life Out Here strategy. John Ortis will then provide greater insights on our real estate strategy and our plans to accelerate our store growth. And then Kurt will follow John and share further details on the second quarter and our four-year outlook. So let's dig in. All right, turning to the second quarter. We grew net sales by 7.2%, with comparable store sales up 2.5%. And diluted EPS was $3.83, an increase of nearly 9%. Our comparable store sales growth was driven by transaction growth of 1.8%, and ticket growth of 0.6%. We expected and were pleased to see comp transactions turn back positive, and this trend has continued into Q3. We began the quarter with mid single-digit comp sales growth in both April and May. As we moved through the month of June, we experienced a noticeable slowdown in our seasonal categories, with the period coming in modestly positive. In my 25 years in retail, June was one of the most topsy-turvy months that I've seen. Smoke, drought, storms, heat. It had a little bit of it all. As mentioned, our customer base is healthy. Our active customer counts are stable and growing. Importantly, our new customer trends have leveled out after a period of laughing tremendous growth in 2020 and 2021. Our customer satisfaction scores continue to break records and improve year over year. And customer demographic trends continue to trend younger and more female than pre-pandemic. Our Neighbors Club reached a record 31 million members in the quarter, an increase of 5 million members in the last year. We're seeing continued favorable trends from our loyalty members. Retention rates remain at all-time highs. Neighbors Club members continue comping at a faster rate than our overall performance. And our high-value members reached a record count in the quarter. A few key trends that we're seeing our customers as follows. One, customers are increasing in their usage of credit. Two, shoppers continue to seek out value, particularly in our lower income customers. And three, customers are buying a little more often, but a little less per trip. Now shifting from our customer to our categories. Our year-round categories were up mid-single digits, indicative of our ongoing market share gains and our demand-driven needs-based business model. Our consumable, usable, and edible categories continue to deliver strong, stable performance and drive trips to tractor supply. In this quarter, Q categories had growth in the low double digits. In companion animal, we are gaining substantial share throughout the category. Again, this quarter, we had sequential increases in the number of customers shopping us for this category each week. In livestock, our spring chick days event was one of the largest ever for us, with the poultry category up strong double digits. We believe we're on track to exceed last year's record of 11 million birds sold. Not only are we seeing growth from existing customers, we are also experiencing robust growth in new customers to the category, and this is driving both trips and tickets. Our seasonal categories were flat and below expectations. The miss was primarily in June, when As mentioned previously, there were a number of choppy environmental conditions across our markets that resulted in the consumer not being as engaged in the categories we expected. This softer seasonal performance in June had a material impact on our second quarter performance and was the main driver of our miss versus our expectations. Our big ticket sales were down in the high single digits and in line with our expectations. And in fact, our performance in the quarter was a sequential improvement from the first quarter. The most significant pressure in the quarter was in zero turns, generators, and recreational vehicles. On the real estate front, we opened 17 new tractor supply stores and three pet cents by tractor supply stores in the quarter. For the second consecutive quarter, we've seen the cadence of our new store openings return to a more normalized rate. Our pet sense by tractor supply business is performing well, and comps in the quarter were greater than overall tractor supply. And the integration of Orchland is right on track. To date, we've fully transitioned and re-grand opened 15 locations. We remain very pleased with the customer's response as we convert to the tractor supply brand. Although the operating environment may be different than we anticipated as we enter the year, I'm incredibly proud of how the team has come together to navigate the various circumstances and control what we can control. Now, transitioning to an update on our Life Out Here strategy. We remain very confident in our long-term growth outlook. We participate in a large, fragmented, attractive market. We continue to benefit from numerous structural tailwinds, including rural revitalization, homesteading, self-reliance, and pet ownership. We have numerous substantive competitive advantages and are investing to expand them through our Life Out Here strategy. Since we first embarked on our strategy in the fall of 2020, the team has made remarkable progress on the transformation of tractor supply. As a reminder, the five pillars of our strategy include deliver legendary customer experiences, advance our one tractor capabilities, operate the tractor way, go the country mile for our team, and generate healthy shareholder returns. And the key initiatives that support this strategy include our Project Fusion store remodels, our garden center transformation, our neighbors club loyalty program, and the expansion of our omnichannel capabilities. Our Project Fusion store layout is now in over 700 stores, representing greater than 30% of our store base. This program is enhancing our space productivity with improved layout, signage, skew expansions, and improved adjacencies. And for remodels, it also offers an improved customer shopping experience that is much more contemporary. Complementing Project Fusion is the side lot transformation, which is leveraging and expanding 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. With more than 400 garden centers today, we've significantly expanded our assortment of lawn and garden products that are relevant to our customers' lifestyle. Importantly, these two projects are delivering on our return expectations. They're providing material sales lift. We're seeing improvement in customer satisfaction. and we're seeing higher levels of new customer acquisition in these remodeled stores. Also, our execution on the remodels continues to improve as we're in year three now of the effort, and we're reducing project costs and also continuing to shorten construction times. We relaunched our Neighbors Club program to a points-based structure in April of 2021, and the timing was very fortuitous. as it allowed us to lock in the millions of new customers that found us through the pandemic. In total, since the relaunch, our membership has increased by 12 million members, a 60% increase. Additionally, the design of the program has facilitated upward spend migration and driven strong retention rates. Lastly, the program provides invaluable insights into our customer behavior and allows us to personalize our offerings tailored to their needs. Look for us to evolve the structure again sometime in the next 12 to 18 months to further enhance value for our members. Underpinning our strategy are substantial investments in our distribution network to support the significant sales increase and store growth. Today, our network is achieving record service levels and the strongest productivity we've experienced in the last five years. Our new state-of-the-art distribution center in Navarro, Ohio, and our increased count of mixing centers, now up to 15, and the implementation of engineered labor standards are all contributing to this performance. Today, I'm excited to share with you a new strategic focus area that we've been working on for a little over a year, the transformation of our real estate model, enabled by a number of new capabilities that is designed to deliver material benefit to both revenue growth and operating margin rate and reinforce our long-term guidance. First, we're raising our new store growth target. We now believe there's a 3,000 store opportunity domestically for tractor supply. This is supported by our total addressable market of more than $180 billion, our robust growth, and our ongoing market share gains. Our new target represents an increase of 200 stores. And we believe we continue to have significant runway for growth with high-return new stores. Second, we're implementing new capabilities to enable owned development of new store builds. This capability is expected to generate significant construction cost savings and allowing for lower rents in these applicable stores once we sell them post-construction. Third, we're also announcing plans to periodically execute sale leaseback transactions of our existing ownership of 117 stores. And we're going to have a step up in our ongoing build of stores back to 90 stores per year starting in 2025. Today's real estate announcement extends our runway for growth and reinforces our long-term financial model. It's a compelling addition to our life out here strategy that will further solidify our growth for many years to come. And with that, I'll turn it over to John, who can share some more color on our real estate strategy.