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.

And now, I'll turn the call over to Kurt. Thank you, Hal, and good morning to everyone on the call. In many ways, our second quarter top line results were consistent with the results in the first quarter, with solid seasonal growth and exceptional big ticket sales, while our year-round discretionary categories remained pressured. As we expected, Q 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 few categories. As Hal mentioned, we are pleased with our unit movement in queue, 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 Texahoma for the exact opposite reasons, as they had tougher compares and less than ideal weather conditions this quarter. As for 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 mixed 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 modesty leverage 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 years. 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 Q 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 to $15 billion, with comp store sales in the range of down a half a 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 to $1.12 billion. The alluded 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, 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're 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 to leverage. 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 modesty leverage in the fourth quarter. In total, we remain on track to 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 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. Thanks, Kurt.

Despite the temporary solstice in our channel, structural elements remain very attractive for Tractor Supply. We have numerous tailwinds, including our life out here strategic initiative, our market being a beneficiary of continued net world migration, high return new store growth opportunity, and ongoing share gains. Tractor Supply is extremely well positioned as a leader in a large fragmented market. Before we go into Q&A session, I'd like to wrap up with three comments. One, as we head into the back half of the year, I am very excited about our robust innovation pipeline, the compelling values we have in our market, and our new brand launches. We just set our annual deer event and Halloween decor program, and both are off to a strong start. And pet, we have a number of upcoming activities, including our expanded pet appreciation month, a new lineup for Mutt Nation by Miranda Lambert, and an expansion of 4Health, our exclusive brand premium dog food. Additionally, we have an exciting new NCAP program, as well as new center court and drive-by events that are focused on compelling values that are core to our lifestyle. The second comment I'd have is that we continue to believe that as and when economic conditions become more neutral for us, that we will return to our long-term algorithm. As mentioned, there's really two economic conditions that are impacting us the most. The first is the transition from goods to services in the context of PCE spend, and the second is deflation. We believe both of these are transitory, and we don't need them to improve, but rather just to normalize for us to return to our long-term algorithm. And the third comment is that the team is playing offense, and we're not only executing our existing initiative, but we're working on plans for the back half of the decade and working on the next growth drivers of our life out here strategy. Tractor supply does not lack for opportunities. And we believe we have multiple new opportunities that could expand on our $180 billion total addressable market. I'm very excited to share more details of the next drivers of our strategy in the near future. Our stores and online are ready for the changes of season as we enter the third quarter. Tractor Supply is well prepared to meet the needs and expectations of our customer. We've invested in our store base, in inventory, in our supply chain. and our digital capabilities in customer service to ensure that we can deliver on our promise of providing the best products and solutions for life out here. We've also enhanced our neighbors club to provide more benefits and rewards to our loyal customers. We're excited about the upcoming events and promotions that will showcase our unique and differentiated seasonal assortment of merchandise, and we expect to see continued improvements across our categories. To conclude, I'm incredibly proud of our team. Throughout our 85-plus year history, no matter what issue we face, our team members have always come together. We have a unique and special culture. It's our special sauce and key differentiator. And it's what gives me great confidence in the future of Tractor Supply. And with that, let's open up the call for questions.

We will now begin the question and answer session. In the interest of time, we ask that everyone limit themselves to one question and then rejoin the queue for follow-up. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. Our first question comes from the line of Scott Ciccarelli with Truist. Your line is now open.

Good morning, guys. Scott Ciccarelli. um historically when we've had a a pretty wet uh spring which i think is pretty fair to assume across most of the country you guys have had a very extended selling season so do you expect that to be the case um for the balance of the year and then secondly you mentioned that uh you're expecting roughly flat let's call it uh comps in the third quarter are you currently tracking in line with that or is that just kind of the bogey for the end of the quarter thanks

Hey, Scott, good morning. To your first question on the wet spring, it was an inordinately wet spring, particularly in the south and southwest. Texas, in particular, was wet almost the entire quarter. We had hoped that that might lead to an elongated spring, particularly in the month of June and into July, and actually be favorable for us given comparison 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 spring to an immediately hot summer. And, you know, we did not see, as we called out, ag fencing as an example. That's a big category for us in general and particularly in Texas. And as an example, we did not see that category recover in June like we, you know, had some aspirations for. That said, you know, it's a wet week this week. And we, you know, are hopeful that that can pay some dividends as we, you know, turn the corner into August and into the fall period. And as it relates to Q3, yeah, 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, you know, the one thing I would call out is July is our toughest compares of the three months. It's, you know, we get sequentially easier in comparison to the tune of like a point or two points each of the next two months. So, anyway, thanks, Scott, for the question. Great. Thanks.

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

Good morning. Good morning. Thank you so much for taking my question. Hey, Michael. Hey, Hal. Hal, can you walk us through the thought process on just the changes you've made recently? Did you see any customer impact from some of the social media chatter And how did it impact your sales? Thank you so much.

Yeah, hey, Michael, and thanks for the question. I'd start out by saying, obviously, it was a difficult situation to play it out in a public arena, but unfortunately, becoming increasingly common in business and in 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. All that said, we have no evidence that it had a measurable impact on our business. We continue to monitor the situation and look at a variety of data sets, 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 Tract 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, you know, 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 our commitment to being stewards of life out here and You know, track supply, again, credible culture. We never lose sight of our obligations to be great stewards of our business over the long term. Thanks, Michael, for the question. Thank you very much.

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

Great. Good morning. Thanks, sir. Great, good morning. Thanks very much for taking my question. I wanted to go back to the same-store sales trend, and I was curious if we could talk through the guidance adjustment a bit more, I guess specifically on the second half, because you leave open the option that you could still have negative same-store sales in the back half, even though the compares look a little bit easier. So has anything really changed from a ticket perspective, maybe deflation lasting a little bit longer than you expected? And then from a transaction perspective, You know, do you have the view that the pet food landscape is just softening a little bit more than you expected? So maybe that side of the business is also coming in a little bit weaker. Thanks very much.

Yeah. Hey, Steven, I'd start out by saying the first half played out very much in line, kind of right down the middle of our, you know, kind of base case center point of our guidance. Um, 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, uh, and maybe some of the things like ag fencing and, and, uh, dog containment and such were a little bit weaker, but everything else, I would say animal feed, pet food, our cue products in general, uh, uh, et cetera, you know, seasonal, uh, even the discretionary business, we expected them to be reasonably negative. You know, all those played out very much in line with what we expected. You know, 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 for 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, will be much of the continuation of the first half of the year. with Q4 being really where there's a broader range of outcomes. And 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 strong and start that trend back towards our long-term algorithm. And there's some favorable compares there, which create a nice setup. And we've got a number of activities also going into the market during that time. On the flip side, there is 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, you know, that could lead to, you know, a lesser performance in Q4. So we 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 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 pretty straightforward at this point in terms of our outlook.

Okay, thanks for the detail.

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

Robert Marlayson, yeah good morning guys thanks for taking the question Kurt I know you addressed inventory briefly during the prepared remarks that you felt comfortable can you maybe give us a little more color. Robert Marlayson, On the build that you saw in the second quarter and and maybe where you would have us expecting inventories to kind of level out over the over the balance of the year and why you don't think there's you don't have too much, thank you.

Yeah, 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 Q 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 increase is at and the position on inventory for today and even the back half?

Hey, Peter, Seth. Yeah, thanks, Kurt. Yeah, as Kurt mentioned, we were down last year about 1.7%. When we think about this year's inventory position, we have purposefully invested in where we're continuing to see growth. So when you look right now, we're continuing to invest in areas like grills, minibikes, wreck vehicles, even like riders where we're continuing to see some strong momentum in various parts across our store base. But we're also in the best in-stock position we've been since pre-pandemic. We're investing in in-stocks. We're up around 400 basis points in in-stocks when you compare to where we are this year versus last. And when you look at our clearance inventory, while we don't give specific numbers, our clearance and aged inventory is actually down versus last year. And I would say both those in-stock positions and you look at our clearance and aged inventory are both really good indicators of the quality that we have. And I would just say as we look ahead to the back half, we're committed to making sure we're investing in the categories that are working. We're investing in being a dependable supplier and making sure that we have our key core Q products on shelf. And I feel really good about the innovation pipeline we're investing and being in a position to drive sales. So quality of inventory remains strong. We're in a great inside position and feel good about the inventory.

Great. Thanks so much.

Thank you for your question. Our next question comes from the line of Chuck Gronk with Gordon Haskett Research Advisors. Bill, you can open.

Hey, thanks. Good morning. Thanks a lot. Hope you guys are well. Just to get back to the comp discussion, how, you know, 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.

Yeah, hey, Chuck, and thanks for the question. As I mentioned in the prepared remarks, we still feel very confident in our long-term guidance, and there's really two main factors that we see as, you know, that are macro factors that are impacting us right now for performing at that long-term guidance rate, namely the shift in consumer spend from goods to services, and the second being deflation inflation. And so now if you hit both of those, if you think about our average ticket for the first half of the year, which is roughly flat, historically we would have at a minimum kind of a one and a half-ish percent, maybe average ticket growth could be two, two and a quarter. So even if we just had some favorability in average ticket, all of a sudden that walks you up to nearly a point and a half or two point comp right there. And then if you think about PCE year to date, services are up 6%, 7%, whereas goods are up 1%. If you were to see that normalized, even if goods underperform services, say goods are 2.5% or 3%, and maybe services are 3%, 3.5%, you get that extra point to two points on the goods kind of rising tide. And all of a sudden, you're walking back to a 4%, 4.5% comp right there. And so, We really do see it as cleanly as that is that at some, you know, kind of in the future, you know, certainly have confidence that deflation will moderate and we'll get back to a consistent, you know, kind of inflation rate in this country and in our business. And then similarly expect that, you know, the good services shift will moderate. And I think that's probably the bigger question. We probably have the better lens as to when the deflation will moderate. because we see that in our business. But on the goods and services, I think that's kind of the open question. It is only 90 basis points away from its pre-COVID levels, so it doesn't have a significantly further to go. But, you know, is that six months? Is that nine months? Is that three months? I think, you know, time will tell there. Thanks, Chuck, for the question.

Great. Thanks, Al.

Thank you for your question. Our next question comes from the line of Kate McChain with Goldman Sachs. Your line is now open.

Hi. 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?

Yeah. Hey, Kate. Good morning. This is Kurt. On Big Ticket, I'll share a few specifics on that. As we mentioned, we've been continually pleased this year to see the rebound on Big Ticket after a couple years of softness in Big Ticket. First quarter ran positive, high single-digit. Big Ticket and the ever-important Q2 ran a low double-digit growth rate in Big Ticket. So you hear the commentary from us on our investment in that area of the business, how we're driving the sales through innovation. So very pleased with the results on Big Ticket. Q2 tends to have the largest portion of our sales on Big Ticket in the low teens and It averages in the high single digit as a percentage of our sales for the year. So in the second half of the year, it does become a lesser of an impact. But on a year-over-year basis, we really do see that there's opportunity in the back half of the year in areas that we're winning in that Seth just mentioned, whether it be recreational vehicles or even riders. And then in the back fourth quarter, really some of the winter-related heating, log splitters, those type of areas, snowblowers, we can continue to win in innovation and our ability to drive great value in big ticket. So it's certainly one of the tailwinds for us. The team's done an excellent job bringing new product to our customers and driving value even through areas like deferred financing as a great value for big ticket. So while not as much of a swing factor in the second half, we do believe that's one of the tailwinds on our comps for the second half of the year.

Thank you. Thank you for your question. Our next question comes from the line of Brian Nagel with Oppenheimer. Your line is now open.

Hi, 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've discussed this already. But just to be clear, so inventories, you know, get us on face value. We're good seeing coming out of the quarter higher than usual. So is it your expectation then that over the next, you know, whatever, a couple of quarters, the inventory levels will, will moderate kind of naturally, or is there some, some type of, um, more aggressive action you have to take to get inventories back in line with sales?

Hey, Brian, I'll start by saying we are very comfortable with our inventory levels right now and the quality of our inventory. and we don't see any actions required on the quality of our inventory as we move forward, just to be very clear on that. There's two main drivers of our inventory increases, really three main drivers of our inventory increases year over year. The first I would call out, as Kurt did, which was the laughing of comparison last year, we were down, I think, negative 1.7% on inventory last year. The second is our investment in big ticket. Obviously, those are higher average unit retail items, so that's going to disproportionately drive our inventory dollars up. But when we saw the strength in riders, in UTVs, in things like grills and other big ticket categories, we invested into that. And we'll continue to do that in the Q3 as well. As an example, we typically have about 800 stores that are kind of go-long stores and riders that have an extended season. This year, we've increased that to 1,150 stores. We are seeing the strength in big ticket continue into Q3, so that investment is paying off, and we expect it to continue to. The third thing I would call out is just a reiteration of what Kurt and Seth said, which is our investment in in-stock rates. We are four points higher year-over-year in in-stock rates. It's our highest in-stock rate Since the pandemic. And that is really on the shelves inside of our stores. And as you all know, I spent a lot of time in our stores, been in five different markets in the last five weeks. We have never looked healthier and better since my time at the company in areas like dog treats, in areas like leashes, in hardware, in hand tools, in areas like lubricants and batteries. As Seth called out, our clearance levels are lower than last year at this time. and in incredibly good shape. As you all know, our clearance levels have been running at historic lows since the pandemic and continue to do so. The team is doing an excellent job navigating inventory. So, anyway, to step back, we feel incredibly good about the quality of our inventory, have no concerns about it in the second half, and, in fact, feel great about the investments we've made, which are driving in-stock rates and kind of a bit of a go-longer strategy in Big Ticket. Thanks, Brian, for the question.

No, thanks, Tom. I appreciate it, Colin.

Thank you for your question. Our next question comes to the line of Stephen Forbes with Guggenheim Partners. Your line is now open.

Good morning. Hal, 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 Q trends versus member trends. And maybe in that regard, if you think about potential, like how would you speak to the opportunity ahead given where the member base and the member share sits today?

Yeah, so maybe I'll talk a little bit about our neighbors club in that context. First off, I would say we continue to be very pleased And in fact, it's kind of performing better than what we would expect in the beginning here because there's a number of members signing up for Neighbors Club, as I called out now, at 36 million. The second thing I'd call out is we continue to see retention rates of our Neighbors Club remain at kind of historic rates. So as you're growing your member base and you're growing retention, I mean, you know, that's you know, kind of a strong kind of balance there, right, and multiple, increasingly added it together. I'd say what we saw was our higher income cohorts that are our strength, strong on retention, modest moderation, mostly in kind of the, as we, and when we looked at it, a lot of it, we really do, that they're the ones that over-indexed on services and on travel and on vacations here in the second quarter. But again, modest moderation there. The group that we continue to focus on, and we called this out last quarter as well, is that entry cohort into our neighbors club. And we lowered the tier threshold and we increased the type of rewards you could redeem in our last quarter and saw nice improvement there. We're continuing to focus on that through the second quarter. As we look towards the back half, we're very excited about the implementation of our customer data platform, how that's going to further accelerate our ability to personalize with customers and our communications and help continue to stimulate all groups, but in particular that kind of entry-level group. In addition, we launched this quarter our Hometown Heroes program. It's off to an excellent start in terms of member sign-up. And as we called out, while I don't expect these trends to continue, the early signups have been a significant piece of it. It's new to Tractor Supply and new to our Neighbors Club program. So, you know, we have, I think it's one of the best membership programs, loyalty programs, loyalty programs, excuse me, in the market out there. The team continues to iterate and make it better and better. Our customers continue to give us very favorable marks on it. And we do see Neighbors Club as instrumental to our success as we move forward.

Thank you.

Thanks, Steven.

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

Yeah, thanks, guys. With the variability of the outcomes in the range for the third quarter and the fourth quarter, maybe it would be helpful if you could walk us through comp ticket and comp traffic expectations for those two quarters. And maybe on the ticket side, maybe you can break it out in AUR or inflation. Thank you.

Hey, Oliver, how are you today? Thanks for the question. I would, uh, the, the, the main driver of the variation for the second half, uh, in the range of outcomes for our comp is really what the driver of our, uh, range for the first half was, was transactions. I, you know, as we've been, uh, uh, I think pretty transparent, we have great inside to average ticket, great inside to our average unit retail. You know, pending some mix, you know, we know exactly what our pricing for our seasonal products are already going to be for the year. We know what our Q trends are. We obviously have a perspective on how we're going to be pricing Q 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. 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 or 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'll drive need. And depending on the federal election and the shortened holiday season, I think, you know, that will drive sentiment. And 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.

Got it. Thanks very much, and good luck. Yeah, thanks, Oliver.

Thank you for your question. Our next question comes from the line of with Wells Fargo. Your line is now open.

Hey, good morning. Kurt, you mentioned the election as a potential second half headwind. So first, are there performance call outs 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?

Yeah, hey, Zach. In regards to elections, in my history as we've looked at that and we have been through cycles, there is no real meaningful performance change based on the year of a federal election or the outcome of a federal election. Now, we have seen and I think it's well understood that this is a very intense environment today with this election, what that does to the consumer sentiment is certainly one that we are being conscious of. And I think the election will take a lot of attention. and could impact the consumer spending habits, et cetera. But really, over the years, how we've seen the performance of the consumer has really proven to have no strong indication that we should plan for or change our outlook in any particular way. It's just viewed as one that could be a variable in the ranges of outcome. And so we're conscious of that. But we've been able to pivot. in either one of these environments. And the one last thing I would just point to is that for us, which I think is different, is that it doesn't tend to have much of a change because it's a needs-based business where regardless of the outcome, the lifestyle and the needs that we serve don't really change that much. So we watch and we're creating strategies under scenarios, but we don't see a specific outcome that we are planning for. Got it. Thanks for the time.

Thank you for your question. Our next question comes from the line of Chris Hovers with JP Morgan. Your line is now open.

Thank you. I'm French now. So 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 cat you know the pet food category you know enough elasticity to get that growing more quickly sure hey chris this is kurt and i'll take the first part of the question on the commodities and then i'll let seth address the your question on pet food uh on commodities just some key points that i think is helpful to reference corn which is the largest commodity impact item but Additionally, when you think of corn, soybean, cotton, steel, they all are commodities that play into our pricing. They have all been at year-to-date or year-over-year in the low teens deflationary point compared to June of 2023. All of them are generally back to 2019 levels. And they are 30 or nearly 40% off of their 2022 year highs. So we've been going through a two-year cycle of that. And all indications are we are at the 2019 levels. We're at what we believe is the trough. Most of these costs have already been embedded into it. The only other variability that, and I indicated that that is, you would look at Q4 and see that to be a neutral or potentially even beginning to see an inflationary turn. And the way commodities shift will, I think, will really drive whether or not Q4 or even the Q1 is a shift into some slight inflation or keeps us at a plateau. The corns and soybeans tend to move within about a 60- to 90-day timeframe through our systems. And so they move pretty quickly and impact the cost of goods sold in a really timely basis. I'll turn it over to Seth on the follow-up question on pet food.

Yeah, hey, Chris. Hey, 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 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 to both feed and pet food, I would say, as you think about the current environment we're in, 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. Thanks very much.

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

Of course. Our final question comes from the line of Peter Keith with Piper Sandler.

Thank you very much, everyone, for squeezing me in. So, how you mentioned 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 tractors by 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?

Yeah. Hey, Peter. Thanks for the question. I'd really point to two things. One, I think structurally we play a little bit more in big ticket than a lot of the other farm and ranch competitors on the margins. But, you know, I think that helped raise our waterline a little bit on total sales. Also, I would say On the Q business, in particular on the feed side, well, the Q business in general, particularly dog food and animal feed, we're gaining share in both. Our share gains in animal feed in our view in Q2 were outsized. And I think a lot of that comes down to our scale, our cost position, both working with our vendors and our partners there, but also our supply chain and And whether it's our DCs, our mixing centers, our freight partners, and just us having the best cost position in the market, being able to invest that appropriately in price. As you know, we have over 20 price zones. We're able to get really targeted in where we want to price and how we need to price to drive those units. So I think those would be the things I'd speak to. And then the final point would be, of course, our strategic initiatives. Uh, uh, you know, as I think, you know, it relates to say like the fusion remodel program, you know, we're approaching half of our store base now being the fusion remodel program. Um, uh, you know, so I think our store environments relative to the farm and ranch channel are significantly, uh, a higher level of the store environment. Now, uh, our commitment to customer service, we call that out. So you get, I think a better level of customer service in our stores. And so just all those sorts of things are starting to add up to continue to drive the, the outside share game. Thanks, Peter, for the question. Thank you.

Victoria, we'll wrap up our call today. To everyone on the call, we look forward to speaking to you at the time of our Q3 call in October.

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