Tractor Supply Company

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss second quarter 2024 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 the 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 Wynn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Wynn, please go ahead.

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 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, 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. MaryWood, Given the number of people in the Q amp 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 up now it's my pleasure to turn it all over to how.

Hal Hallstein, Thank you very well and good morning everyone and thanks for joining us as always i'd like to begin by expressing my thanks and appreciation. to my fellow 50,000 plus tractor supply team members for their commitment to each other and our customers and for their dedication to serving life out here. And this quarter, I'd like to give a special shout out to our technology team who did a tremendous job recovering our business from the CrowdStrike outage without a material impact. So let's start with the operating environment for our business before I discuss our second quarter results. Overall, the macroeconomic indicators that we all follow continues to be rather mixed for the consumer in the second quarter. While in line with our expectations at the beginning of the year, I would characterize the health of the consumers modestly more cautious than last quarter, but certainly still within the range of our forecast at the beginning of the year. Consumer spending on goods appears to be fatigued across income cohorts. While we've seen improvements in the consumer inflation rate, unemployment has ticked upwards to the highest rate since late 2021. Additionally, consumer sentiment and consumer confidence are both subdued, and the consumer spending landscape continues to be rather choppy. Additionally, in the recent personal consumption expenditures report, we saw another soft month for goods. While in line with our expectations, the ongoing shift of spending from goods to services continues to be a headwind for our business. The mix of goods as a share of PCE is still about 90 basis points above the pre-COVID average. As it relates to retail sales for the second quarter, U.S. retail was flat to modestly positive with growth in non-durable categories, which was in line with our performance as a company. And in the farm and ranch channel, we estimate that that channel experienced mid-single digit decline, which is indicative of our continued share gains in the channel. With that said, our business for the first half of 2024 has performed right down the middle of our guidance. For instance, half of the month of the year have had positive comp sales, and our year-to-date comp sales are up about 0.2%. And overall, our profitability is also right in line with our expectations, and the team has continued to manage our business exceptionally well. As we look at our business in halves and reflect back on the spring season, as we always talk about, weather can certainly shift sales between quarters. And given this year, the early Easter, and then the couple of weeks of warm weather that we had there in late March, we estimate a potential pull forward of 15 to $20 million in sales from the first quarter from the second quarter into the first quarter. And so if you think about it, this kind of balances out our performance across the two quarters. And additionally, we thought we'd have some potential for an elongated spring, particularly in late June, but that did not materialize on the customer front. Of note, we did see our higher-income customers moderate just modestly as spending for vacation travel has surged for this group. And conversely, though, our lower-income customer cohort moderated up sequentially from the first quarter. And net-net, our overall customer base, though, continues to grow and be very strong. Now let's shift to some performance highlights for the quarter. We grew net sales by 1.5%, with a comparable store sales decline of 0.5%. The diluted EPS was $3.93. Our comparable store sales performance was driven by a modest transaction decline of 0.6%, with our average ticket coming in at 0.1% positive. As we shared on our last call, we anticipated that the quarter would be in line with our four-year guidance. As we moved through the quarter, many of the same trends from the first quarter continued to play out. Importantly, we continued to see healthy customer engagement. The investments we've made in Neighbors Club, our world-class loyalty program, are a competitive advantage for us as we continue to see solid growth in both customer counts and customer retention. If you recall, in the first quarter, we significantly enhanced our Neighbor Club offerings. The changes were implemented with the goal to have members receive rewards faster and lower the spending required for tier qualifications. This quarter, as part of our ongoing and continued improvements in the program, we launched Hometown Heroes, which recognizes military service members, veterans, and first responders. And this program brings together under one banner our longstanding support for the selfless men and women who serve America. A highlight of the program is that our hometown heroes receive the highest level status and benefits of our Neighbors Club loyalty program. And while still very early, we're pleased with their enrollment. Of note, about 20% of our hometown heroes to date are new to Neighbors Club, and about 15% are new to Tractor Supply. Once again, our Neighbors Club comp sales outpaced our overall sales growth. At the same time, we also reached an all-time high on our sales penetration and record membership of more than 36 million members. And that means we've added nearly 5 million members over the last 12 months. And our Neighbors Club retention rate remains remarkably consistent as our best customers continue to shop with us more frequently and remain extremely loyal. At the same time though, we are seeing slight disengagement of our non-core customers is down just modestly. We believe this is attributable to the overall macro headwinds that I mentioned in my opening remarks. And given that this customer is not as highly engaged in the kind of life out here lifestyle, our belief is that this customer cohort is a little sluggish or fatigued given the duration of inflation and higher cost of living since 2022 and just being judicious in their spend. And as we look forward though, our neighbors club is laser focused on this opportunity as we improve our personalization capabilities particularly with our customer data platform that we'll be implementing later in the year. Our customer service scores continue to run at all-time highs, with improvements every week for more than two and a half years. Customer service is a consistent differentiator for tractor supply, and our commitment to excellence in customer service and the investments we've made in training, tools, and technology are really paying off with our customer. And these efforts have also, though, received national recognition by various third parties, including USA Today and Forbes. Also, it's worth noting that the team received a CIO 100 award recently for our groundbreaking work to utilize AI to enhance the customer experience in our stores. Just great job by everyone around on our customer service. Moving to category performance, a highlight was the strong positive comps and big-ticket items for the second quarter, notably in categories like riding lawnmowers, recreational vehicles, and sporting goods. And the commonality in these categories was strong innovation and newness, and our customers really responded to this. Additionally, we continue to be pleased with our live goods performance, which comes well above the chain average, despite the hot weather that impacted many of our other seasonal categories. As we shared last quarter, we anticipated our consumable, usable, and edible product would run modestly below the chain average in the second quarter, as deflation weighed on our average unit retail. We once again grew units in these categories, and we believe we're continuing to gain market share. The needs-based, demand-driven nature of these product categories continues to drive unit velocity in this segment of our business. Clicking down into our Q categories. In pet food, recent industry data suggests that the overall category was flat to negative in Q2. As it relates to our business, we continue to take share, but we have seen growth continue to moderate as the category disinflates and pet ownership trends remain soft. Our customer shopping trip in this category is highly differentiated. We offer a broad assortment from value to super premium across national and exclusive brands in a pet friendly environment, which now includes more than 900 pet wash locations. Through the second quarter, we've had strong double digit growth in our pet wash service. Additionally, the value of our mobile pet vet clinic is another great gateway for pet customers to find tractor supply. Year-to-date, we also have seen mid-double-digit growth rates in visits to our clinics offered across more than 1,600 stores. The two of these in combination with the rest of our services and product benefits creates a great opportunity to reinforce our value proposition. Additionally, pet ownerships benefit from the one-stop shop convenience of our lifestyle retail format, in particular from the cross-purchasing synergy with animal feeds. As we've mentioned, the vast majority of our customers have both an animal and a pet. In equine livestock and poultry feed, we continue to gain market share. While our average unit retails were down mid to high single digits in this category in Q2, conversely, we had strong mid-single digit unit growth across all species. As large animal counts continue to pressure, we are certainly a share winner in the large animal categories with our strong unit growth. And in poultry, our annual spring chick days was another positive highlight in the quarter. The event builds on our reputation as the destination for backyard enthusiasts. From economy to organic feed, as well as our assortment of premium breeds, our lineup continues to resonate with our customers. Much like the first quarter, categories that perform below our comp sales were in our discretionary businesses, such as clothing, footwear, and decor. and also in the hard lines products of the business, such as things like ag fencing and pet kennels. Our digital sales continued the trend from last quarter of double-digit growth. We've accelerated our digital capabilities, and that's fueling engagement by our customers and also improving our conversion rate. Our 10th and largest distribution center in Maumelle, Arkansas, opened during the second quarter. The startup of the distribution center was right on schedule, and shipping began last month. It was a great job by the team. Once again, we are capitalizing on the opportunity to realign with store servicing areas across the DC network to balance transportation costs and DC capacity while improving service level to our store. Our supply chain investments over the last four years have provided us with a structural gross margin benefit from the reduction in STEM models. Our garden centers had strong performance during the important second quarter. We now have more than 500 garden centers across the chain. The merchants did a great job with a differentiated assortment and strong in stocks in time for the planting season. With more variety in live goods, as well as adjacent categories catered to outdoor living, we saw the customer respond positively to this multi-year growth driver. We opened 21 new track supply stores and three pet cents by track supplies in the quarter. Our new store productivity continues to perform very well. In a year since announcing our expanded real estate capabilities, allowing for own development, We continue to anticipate material benefits to both revenue growth and operating margin rates. Our team has built out capabilities to allow us to scale this initiative. We now have nearly 50% of our pipeline in own development, with our first locations already open. This development allows us to have rent reductions of 15% or more compared to our traditional bill-to-sue. And we continue to believe that we have a robust pipeline of low-risk organic growth opportunities ahead of us. To wrap up, I believe the team is pleased but not satisfied with our first half performance. We set high expectations for ourselves. Customer trends are relatively in line with our expectations. The team is executing well. In typical traction supply fashion, we are effectively managing the factors that we can control and making progress on our life out here strategy. As we plan for the second half of the year, we anticipate that our customers will recruit it with their spending as is typical in an election year. At the halfway point of the year, we are narrowing our guidance for fiscal 2024 to reflect our performance year to date and our outlook for the second half of the year. We continue to create more separation between us and our competition, thanks to our team members and the meaningful relationships they have with our customers in combination with our strategic initiatives. Our dedication to serving life out here remains unwavering. We will always strive to do the right thing.