Tractor Supply Company

moment it'll be about 10 or 20 seconds just as I transfer us over make sure that everything's communicating loud and clear and let me know on the dashboard how everything is sounding. Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss fourth quarter and fiscal year 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 or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. The host for today's call is Mrs. Mary Wynn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Now, first up is a year-end video. I would now like to pass the call to our host, Mrs. Mary Wynn Pilkington. Mary Wynn, please go ahead.

Thank you, Alyssa. Good morning, everyone. Thanks for taking the time to join us today, and I hope you enjoyed watching the video of Tractor Supplies Year in 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 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 include 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-ups. Thank you for your time and attention this morning.

Thank you, Mary Wynn, and thank you to everyone for joining our call this morning. In 2023, Tractor Supply celebrated our milestone 85th anniversary. Over 85 years, Tractor Supply has been a growth company with a clear purpose, to help our customers live life out here. Since 1938, we've operated in all types of economic conditions, embraced innovation, and adapted to changing times. We've elevated the farm and ranch channel, bringing the sophistication of other retail categories to improve the shopping journey and ensure we have scalable platforms. Stractor Supply's needs-based, demand-driven business model has stood the test of time. No doubt this past year has proved challenging. More topsy-turvy than we expected with the beginning of the year, with unfavorable weather, rising interest rates, and inflation impacting consumer spending habits. But we believe these headwinds are temporary. We continue to invest for growth in 2023 and gain market share along the way, especially in companion animal and livestock feeds. I think the opening video was a great recap of the highlights of the team's significant accomplishments across Tractor Supply in the year and over the last few years. As I reflect on 2023, our Tractor Supply team has navigated so much together. And our team has proven their ability to execute against the macro and other headwinds while also building our future. I sincerely thank them for living our mission and values. In 2023, we faced the well-documented macro headwinds that weighed on consumer goods spending, particularly discretionary goods, as well as unfavorable weather impacts every quarter on our business. While we've made progress over the years to de-seasonalize our business, we will always be the reliable supplier for our customers for their seasonal needs like heating fuel and fertilizer. We estimate that adverse weather conditions negatively impacted our comp sales by approximately 200 basis points for the full year, including a lapping of the late December winter storm in 2022. Personal consumption expenditures saw strong mid-single-digit growth in 2023. That said, spending on goods as a percent of PCE declined nearly a point as consumers continued to shift spending on services back to pre-COVID levels. In particular, this affected our big-ticket business, which represents a little over 10% of our sales and had a negative 6% comp for the year. Despite the headwinds we faced, we remained committed to our journey of transforming tractor supply. Since introducing our Life Out Here strategy in October of 2020, we have dramatically transformed tractor supply. Over this time, we've invested nearly $2.5 billion in capital spending with about 80% of that spend targeted for growth initiatives as part of our Life Out Here strategy. This includes new and remodeled stores, new distribution centers, upgrading our technology infrastructure, and several other strategic investments. We've also significantly improved our operating capabilities, including relaunching our Neighbors Club program, creating our field activity support team, expanding our mobile footprint, and delivering on the increased volume of consumable, usable, and edible products. Additionally, our average store volume continues to far exceed pre-pandemic levels, going from $4.5 million to $6.5 million annually per store. Approximately 40% of our stores are in the Project Fusion layout, allowing us to drive improved space productivity. We continue to see a mid-single-digit comp list benefit in the first year from our Fusion remodels. We will enter the spring of 2024 with more than 450 garden centers that are also driving space productivity while allowing us to enter into new categories that resonate with our customers' hobbies for gardening and their needs for outdoor products. Stores with our garden centers are attracting new customers at a faster pace than the rest of the chain. Additionally, our garden center stores are providing a multi-year comp benefit. Our distribution centers achieved a record year of productivity. The opening of our Navarre, Ohio DC in January, 2023 allowed us to unlock savings across our network with the largest rebalancing of our stores ever. This provided us with substantial STEM mile savings while also allowing for significantly improved service to our stores. Also importantly, our supply chain team member attrition reduced materially as we implemented a new progressive wage scale. And no doubt these investments are resonating with our customers as we have achieved record high customer satisfaction scores throughout the year. As always, our store managers were critical to the success, and importantly, we achieved a near all-time low of 12% attrition in this group. Overall, our customer base remains healthy and highly engaged. Now let's go through some of the specific highlights to the fourth quarter and the fiscal year. For the year, we achieved record sales of $14.6 billion, Our comp store sales were even with the prior year, and diluted earnings per share were $10.09. This comes on top of record performance over the last three years. We continue to have solid market share gains across our major product categories, and our digital business reached another year of record sales, topping over $1 billion annually for the first time. Since launch, we have had over 7 million downloads of our mobile app and over 2 million in the year. For the fourth quarter, our comparable store sales declined 4.2%. Our fourth quarter diluted EPS was $2.28 with operating profit margin expansion of 16 basis points. For the second consecutive year, we returned over $1 billion to our shareholders through the combination of a growing dividend and share repurchases. Strategies of new capabilities that are designed to deliver material benefit to both revenue growth and operating margin reinforces our long-term guidance. In 2023, we raised 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 from our previous target of 2,800. We also implemented new capabilities to enable owned development of new store builds. This capability is expected to generate significant construction cost savings and allow for lower rents in these applicable stores once we sell them post-construction. Our real estate capabilities are a compelling addition to our life out here strategy that will further solidify our growth for many years to come. In 2023, the cadence of new store openings returned to a more normalized rate. We opened 70 new tractor supply stores and 13 pet cent stores in 2023. The team has done a great job opening highly productive new stores as this remains a core strength and competency of tractor supply. During the year, we successfully converted the 81 Orchland stores acquired in 2022 to the Tractor Supply brand, representing essentially a year's worth of new store growth. We're very pleased with the opportunity to drive both top-line and bottom-line performance of these locations closer to our standard run rates over time. Total customer counts increased 1% as we had positive growth in active customers and new reactivated customers. Neighbors Club added more than 4 million new customers and represented 77% of our sales for the year, our highest mark to date. Neighbors Club is successfully helping us migrate customers to a higher threshold of spending with us. During the year, we reached a new record for the number of high-value customers. Overall, our best customers are shopping us more frequently and spending more money per transaction. Last year's rebranding of PetSense to PetSense by Tractor Supply, along with our expansion of our Neighbors Club program to PetSense is also resonating with our customers. This expansion is allowing us to deepen relationships with existing customers and help attract new out-here pet customers to both banners. Our customers' response to these initiatives is very encouraging, with Neighbors Club membership already representing nearly 70% of sales at PetSense with continued momentum. The PetSense shopper is also cross-shopping at Tractor Supply at an impressive rate of 47%. PetSense is also helping us gain share across pet specialty as we approach $225 million in sales and our 200-store milestone in the PetSense brand. For the year, our financial services offering of our private label credit card together with our co-branded credit card outpaced our overall sales with strong growth. Our penetration increased from last year's record level and is now in the high single digits in overall sales. Our supply chain continues to be a competitive advantage for us. During the year, we opened up our ninth distribution center in Navarre, Ohio, and broke ground on our tenth distribution center in Maumelle, Arkansas. These investments were to enable the higher volumes of our existing stores, the continued build-out of our new stores, as well as the acquisition of Orchland. These investments in our DC network are complemented by our 15 mixing centers, that are there for high-velocity replenishment items. In 2023, we moved nearly 8.5 billion pounds of consumable, usable, and edible products through our supply chain, as we are the largest seller of bag-feeding food for livestock and companion animals in the United States. Our scale and reach provides us with a cost to serve that is lower than our farm and ranch competition and any other competitor in these markets. As we executed the third year of our life out here for long-term strategy, 2023 was a year that we made significant progress. We plan to continue building on that progress in 2024. Most of what you'll hear from us today won't sound all that different from the playbook we've used for the last two to three years, but that's intentional as we continue to be pleased with the benefits and financial returns of our strategic investments. As I've shared many times, Our biggest challenge is prioritizing the plethora of growth opportunities we have ahead of us. And we anticipate 2024 to be a continued story of ongoing share gains offset by macro headwinds. With this in mind, we've taken a cautious approach with it being below our long-term target. We remain confident in our long-term targets and expect to return to them when macro conditions return to neutral. Our underlying assumptions start with consumers continuing to be judicious in their spending on goods. Additionally, we anticipate average ticket to be pressured as we lap inflation. We're assuming market share gains that are supported by our strategic initiatives will continue. Housing, oil, agriculture, and weather are anticipated to be neutral factors in our guidance. Collectively, all these factors are considered to help us provide the guidance range that Kurt will share with you more later on. Tractor Supply is a unique, highly differentiated retailer. We are the leader in a large fragmented market. We're a needs-based business that is tailored to our out here lifestyle. Our customers have a passion for the out here lifestyle and over index as homeowners, landowners, pet owners, and animal owners. We live our mission and values and our culture defines our relationship with our customers. As we begin the year, we take great pride in our past and are equally excited about our future. And with that, I'll now turn the call over to Kurt.