Tractor Supply Company

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss third 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 note that the queue for our question and answer session did not open until the start of this call. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mrs. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

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 column 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.

Thanks, MaryWen, and thank you to everyone for taking the time to join us this morning. To start, I would like to express my sincere thanks and appreciation to my fellow 50,000 Tractor Supply and PetSense team members. As always, they lived our mission and values, delivered legendary service to our customers, did a great job being nimble in the quarter, and continued to deliver against our strategic initiatives. At Tractor Supply, the underlying health of our business remains strong. we continue to achieve substantial market share gains. Our customer trends and customer engagement are robust and our life out here strategic initiatives remain on track. Entering the third quarter, we had a sharp focus on the impact of the evolving macro environment and the impact of that environment on our customers' retail spending patterns. Despite this view, our quarter was more challenging than we initially expected. The primary drivers of our underperformance were less than ideal weather conditions, as well as our customers continuing to be discerning what they're spending. On the weather impact for the quarter, as we shared in our July earnings call, we anticipated that our compares would ease through the quarter as we were lapping one of the worst droughts in a decade. We were not assuming a significant benefit from the weather, but rather that it would not continue to be a drag on our performance. In fact, it was a drag. We estimate that the unfavorable weather conditions in the third quarter contributed more than one point of comp to our sales shortfall compared to our expectations. While we never like to call out the adverse impacts of the weather on our business, there is no doubt that the challenging conditions continued to weigh on our sales this year as it relates to weather. In Q3, we had extreme heat and drought in Texahoma, and to a lesser degree, the Midwest, And also we had excessive rainfall and the absence of cool weather in other areas like the Northeast. As an example, Texahoma, which makes up a little over 15% of our sales, we saw extreme temperatures and dryness there for most of the quarter. In fact, in Austin, Texas, as an example, there were 44 consecutive days of temperatures over 100 degrees in the third quarter. And for perspective, this was twice as many as Q3 of last year. Additionally, last year in the third quarter, we benefited from both the emergency response from Hurricane Ian and a shift to cooler fall temperatures in the last few weeks of the quarter in some of our markets. This year, we did not have these events working in our favor. In the quarter, the emergency response from Hurricane Adelia was much smaller than the prior year, and a wave of summer-like temperatures continued into September and, in fact, even now into late October. turning to the macro environment. As we shared last quarter, we believe that due to the cumulative effects of many factors, our customers are showing signs of strain. Examples of these factors include inflation, higher credit card balances, and the resumption of school loan payments. Additionally, consumers continue to shift their spending from goods to services, reverting back to pre-pandemic levels. In the context of this shift, though, we believe that they remain more committed to the out-here lifestyle and that our business is stickier than more discretionary components of retail. But nonetheless, to some degree, we've been affected by this shift. Now turning to the numbers for the third quarter. The team delivered net sales growth of 4.3%, with a modest comparable sales decrease of 0.4%. The looted earnings per share for the quarter were $2.33, an increase of 11% over the prior year. Now let's shift to some highlights for the quarter. Comp transactions were flat to the prior year, offset by an average ticket decline of 0.3%. The average ticket performance was driven by a decline in units per transaction, with average unit retail remaining relatively strong. July was our best performing period of the quarter with positive comp. Both August and September cost negative given the seasonal trends I mentioned earlier. Importantly, our active customer counts are stable and growing low single digits. Also importantly, our reactivated as well as new customer counts are also both positive and growing. E-commerce achieved sales growth in the high single digits with strong conversion performance. our buy online, deliver from store program was up over 80%. And on a rolling 12 month basis, very notably, our digital sales have now surpassed $1 billion. Our consumable, usable and edible products represented a meaningful portion of our business in the quarter. And these businesses continue to outperform our overall sales comp results. With continued strength in categories like dry dog food, cat food, poultry feed, lubricants and shavings, just to name a few. Q continues to be one of our structural advantages and these categories and products represent the strength of our core business and they are what drive footsteps into our store. The gains in these categories were offset by declines in our late spring summer seasonal product and big ticket categories, as well as softness in demand for those fall winter product categories that usually begin to see some growth at the end of the quarter. due to the unseasonally warm weather. Big ticket performance remained under pressure, down in the mid-single digits, which was a slight improvement from the first half of the year. If I step back, overall though, we continue to gain share across categories, online and in-store, and continue, as I said earlier, to see strong customer trends. On the customer front, our Neighbors Club membership base represented more than 77% of our sales for the quarter. we're seeing continued favorable trends from our loyalty members. Retention rates have never been higher, and our Neighbors Club members continue comping at a faster rate than our overall sales performance. And importantly, our high-value customers again reached another record count in the quarter. In just over a year since launching Neighbors Club at PetSense, penetration of sales to our members now stands at over 65%. And we continue to benefit from the cross-shopping between the two brands as we grow our share of wallet with these customers and focus on pets out here in our collaboration between the two brands. A couple of trends that I mentioned last quarter did continue into this quarter. And those are, one, customers are continually increasing their usage of credit. And, two, shoppers continue to seek out value, particularly in lower-income customer cohorts. Importantly, our overall customer satisfaction scores hit another new all time high as we continue to invest in our team and they continue to do a fantastic job providing best in class customer service, a hallmark of Tractor Supply. Through the third quarter, our customer satisfaction scores have increased and experienced an improvement every week, year over year since 2021. We've made significant progress in our life out here strategy. We now have just over 35% of our chain or 780 stores that are in the project fusion layout. And our garden center transformation is now active in over 420 locations. We continue to be very pleased with the strategic benefits and the financial returns of these store level investments. Our Orchland farm and home acquisition remains on track with nearly 50 stores converted to the tractor supply brand. And during the quarter, we completed the sale of the Orsland Store Support Center and the Distribution Center as planned. Year-to-date, we've opened 51 new tractor supply stores in Ted Pence's locations. Our team has done an excellent job executing our real estate projects this year and getting us back to a normalized cadence of new store openings in spite of a tough backdrop in the broader construction market. During the quarter, the real estate team also successfully executed our first sale leaseback transaction with the sale of 10 stores. In addition, the team has about 35 fee development sites in the works. I anticipate our real estate strategy will continue to be a source of increasing strength for Tract Supply over the next few years. Given our performance through the third quarter and our outlook for the fourth quarter, we're updating our sales and earnings guidance for 2023. And Kurt will share some more details on our outlook later in the call. Before I hand it over to Kurt, if I just step back for a moment, if you told me in January of 2020 that we would nearly double our top line sales and earnings and deliver strong cash return to shareholders while increasing our capital investment and growth initiative and investing in team member wages and investing in brand building and doing all this through a global pandemic, major disruptions in global supply chains, rapidly changing consumer shifts, also rapidly escalating costs, including the highest consumer inflation in 40 years, it would have been hard to imagine. But that's exactly what this team has delivered. Over the last four years, we've added $7 billion in incremental sales. We've grown our market share significantly, and we've increased our earnings by 115%. and returned over $3.2 billion of cash to shareholders. Our resilient needs-based business model has a proven history of growing through various economic conditions. Our customers and team members are dedicated to the out-here lifestyle, and they prioritize it as it is their authentic lifestyle. Our customers over-index as homeowners, landowners, pet owners, and animal owners. We believe that the softness we're seeing is unique to transitory conditions in weather and consumer spending patterns. We continue to have a long-term structural macro trend that are favorable and sustainable. And as the market leader, we have substantial competitive advantages. And with that, I'll now turn the call over to Kurt. Thank you, Hal. And hello to everyone on the call.