Tractor Supply Co /De/ Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company’s Conference Call to the First Quarter 2022 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. Please be advised that the reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. 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. Good morning, everyone. Thanks for taking the time to join us today, and I hope you’re all doing well. On the call today are Hal Lawton, our CEO; Kurt Barton, our CFO. And 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 risks 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. We shortened the prepared remarks to allow more time for Q&A. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up. Thank you for your time and attention this morning. Now, it’s my pleasure to turn the call over to Hal.

Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. I’d like to begin by thanking the Tractor Supply team for again delivering strong results. In some ways, this quarter may have been our best relative performance over the course of the last two years. The team demonstrated grit and determination as they overcame the lapping of last year’s robust performance, the impacts of the Omicron variant, particularly in January, the significant inflationary pressures and the ongoing supply chain constraints, the last two of which were both exacerbated by the tragic conflict in Ukraine. No matter what came at the team, they stepped up to the challenge to be there for our customers as a dependable supplier for the Out Here lifestyle. Our team members, our vendors and other supply chain partners have continued to rise to the occasion as we strive to live our mission and values every day. Speaking of our mission and values, in recognition of Earth Week, this week, we issued our Stewards of Life Out Here Sustainability Report. This comprehensive report provides detailed information and progress on our ESG efforts. It significantly enhances our transparency and disclosure related to our environmental sustainability actions. Of note, in the report is the establishment of a new water usage goal to reduce on an absolute level our water footprint by 25 million gallons by 2025. ESG makes great business sense for Tractor Supply. And setting targets for ourselves in these areas creates long-term value and allows us to have a positive impact on the world and the communities that we call home. As a purpose-driven company, we remain committed to constant improvement on this journey. Now, let’s turn to a review of the business for the first quarter of 2022. The year started out on a strong note. We grew net sales by 8.3% with comparable store sales up 5.2%. Diluted EPS was $1.65, an increase of 6.5% year-over-year. Our comparable store sales growth was driven by strong ticket growth of 6.7%, offset by a decline in transactions of 1.4%. Given the remarkable strength in our business last year, and as a reminder, we had a 38.6% comp in Q1 last year. We are very pleased with our sales growth. Last year, we shared with you that we materially benefited in the quarter from a combination of factors, in particular stimulus spending, favorable weather and inflation. This quarter, we successfully navigated the lapping of these factors, despite the spring season getting off to a slow start. On inflation, it benefited sales in the quarter by about 10 percentage points. As we shared on our last earnings call, we thought there was more pressure to the upside on inflation as we entered the quarter and that is certainly what we saw. We continue to see increasing costs in the commodity inputs and our product categories as well as the underlying variables like higher labor wage rates and transport costs that are impacting our vendor partners. Shifting to C.U.E. We experienced impressive demand in our consumable, usable and edible categories. As a reminder, these products are need-based and demand-driven, and they’re what drive trips into our stores. Our C.U.E. sales growth was almost three times our overall sales growth rate. Our C.U.E. customer trends have never been stronger. Kind of rounding out the business, seasonal category performance was mixed as we had solid performance in our winter season categories during a much colder January, but our spring season categories performed below average due to colder weather temperatures in the month of March. Shifting to e-commerce. E-commerce again saw double-digit growth, and this represented our 39th consecutive quarter of double-digit or better growth in e-commerce. We are making great strides in expanding our digital presence. Of note, our mobile app now represents more than 15% of our digital sales. This quarter, we crossed 3 million downloads of the Tractor Supply app. And this is a major milestone in our ONETractor strategy and our ability to offer our customers a more seamless shopping experience. Our Neighbor’s Club program reached a record 24.8 million members in the quarter, an increase of 24% from last year’s first quarter. It seems like much longer than a year ago, but we recently celebrated the one-year anniversary of the relaunch of Neighbor’s Club to a points-based loyalty program. The relaunch has been an overwhelming success as it has measurably encouraged customers to migrate their spending upwards. Our Neighbor’s Club members are comping at a faster overall rate than our overall company performance, and we’re seeing strong growth and retention in our high-value customers. We are confident in our business short term and long term. Last quarter, we shared with you several structural trends from which we’re benefiting, including world revitalization, increased pet ownership, home setting and the rise in self-reliance. As the market leader, we are well positioned to continue to benefit from these structural trends. Additionally, we are seeing increasing momentum from our Life Out Here strategic initiatives, enabling us to continue to gain share. As we look forward, we believe we have many vectors for growth, and our business has never been stronger. That said, we acknowledge that there is significant uncertainty in the macro environment. We have a lot of the year still ahead of us. And in keeping with our longstanding practices prior to the pandemic, we continue to believe that the best way to look at this business is on the half. On the heels of last year’s record performance and a strong start to the year, we are reiterating our guidance for fiscal year 2022. We continue to see significant opportunities for growth ahead of us. I’ll briefly address the Orscheln acquisition. We continue to work collaboratively with the FTC towards a positive resolution and hope to have an update in the coming months. Accordingly, we are limited in the comments we can make about the transaction at this time. Now, I’ll turn the call over to Kurt to discuss some of the details of the first quarter and our outlook for the rest of the year.

Thank you, Hal, and hello to everyone on the call. The Tractor Supply team has started fiscal 2022 with strong performance that came in ahead of our expectations. On a two-year stack, our comparable store sales were 43.8%. Looking at the cadence of the quarter, January and February were the strongest months with March positive, albeit not at the rate earlier in the quarter. We benefited from cold weather trends early in the quarter, while spring is late to break across most of the country. Please keep in mind, we were comping ideal weather conditions in the first quarter of last year with an early spring across many of our markets. This quarter, retail price inflation contributed about 10 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the supply chain. As we shared with you last quarter, we anticipated this would be the toughest compare on transactions as we cycled the largest transaction gain since the beginning of the pandemic in Q1 of last year of 21%. To illustrate, we were experiencing positive comp transactions until we cycled the last two weeks of the quarter where we clearly saw the benefits of stimulus on transactions in the prior year. As we expected, big ticket declined given the robust performance we were cycling, driven by stimulus and the early starts of the spring selling season. Last year, as we reported, big ticket comps significantly outperformed the chain average comps. And on a two-year stack, our big ticket performance exceeded the 43.8% comp growth of the chain. We continue to see strong C.U.E. performance with strength in categories such as dry dog food, poultry, feed and heating fuel. For instance, dry dog food achieved over a 20% comp. Petsense performed above the company average, which was in line with our pet performance. Overall, we were very pleased with our top line performance. Turning now to gross margin, which outperformed our expectations. For the first quarter, our gross margin declined by 29 basis points to 34.9% of sales. The decrease in gross margin is primarily attributable to three factors: significant product cost inflation; higher transportation costs; and to a lesser extent, product mix. We continue to experience broad-based inflation while also seeing a step-up during the quarter in key commodities such as grains and oil. Domestic and import freight costs have increased substantially year-over-year as well as fuel costs. We expect many of these trends in product cost and freight to continue throughout 2022. The robust growth in our C.U.E. categories, which have a lower gross profit rate did put some pressure on gross margin. The team did a remarkable job of managing these cost increases through our price management actions and other margin driving initiatives. Examples include capturing efficiencies in the supply chain to reduce miles, continuing to limit promotions and leaning into the more efficient value provided through Neighbor’s Club. SG&A, including depreciation and amortization as a percent of net sales was 26.9%, an improvement of 11 basis points. This improvement was primarily attributable to the normalization of incentive compensation, moderation of COVID-19 response costs and leverage in occupancy and other costs from the increase in comparable store sales. These items were partially offset by investments in store wages and incremental costs related to our Life Out Here strategic investments for growth. This includes a step-up in our depreciation and amortization. Please also keep in mind, given our results last year, we were cycling strong SG&A leverage, which benefited from 38.6% comp sales in the first quarter of 2021. Net income was $187 million, and diluted EPS was $1.65 compared to $1.55 in the first quarter of 2021. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases. Last quarter, we increased our quarterly dividend by 77% from $0.52 a share to $0.92. During the quarter, we returned $400 million to shareholders through the combination of share repurchases and cash dividends. Turning now to our balance sheet, which remains strong and provides us the ability to invest in our business for the long term. Merchandise inventories were $2.6 billion at the end of the first quarter, representing an increase of about 21% in average inventory per store. This increase is primarily attributable to inflation, along with our investment in inventory to support the growing demand. Moving now to our guidance for 2022, which is unchanged. As Hal mentioned earlier, we are reconfirming our guidance for the year. This includes net sales in the range of $13.6 billion to $13.8 billion with comparable store sales growth of 3% to 4.5%. For the year, we forecast an operating margin of 10.1% to 10.3% of sales. We continue to expect diluted EPS in a range of $9.20 to $9.50. We acknowledge that we beat our own expectations for the first quarter and that ongoing inflation should benefit our top line. With the dynamic macro environment as a backdrop, we believe it’s prudent to maintain our outlook for the year. Keep in mind, Q1 is our smallest quarter of the year, and it’s great to start out the year ahead of our expectations. We recognize that flowing the first quarter performance through may put pressure towards the top end of our guidance ranges. For those of you who’ve followed us for some time, this is not a new convention to guidance and is in line with how we provided guidance historically prior to the pandemic. We continue to believe the best way to look at our business is not by the quarter, but by the halves of the year. With as much inflation pressures we’re seeing in our business, we are closely watching comparable average ticket and transactions. We anticipate that the breakdown of growth may be a bit different than our prior expectations, given the high level of inflation benefiting average ticket with transactions seeing incremental pressure. Historically, we’ve experienced trip consolidation by consumers during strong inflationary times. As inflation pressures persist, it puts higher pressure on gross margin, yet provides an offsetting benefit to SG&A leverage. As such, we’re maintaining our expectations on our operating margin. As a reminder, the prospective acquisition of Orscheln Farm and Home is not included in our guidance. In summary, we are very pleased with our performance in the first quarter and our outlook for 2022. The team is executing at a very high level. We remain committed to investing in the business to retain the loyalty of our longtime and newer customers. Our goals are to maintain our everyday low prices and improve customer service, strengthen our supply chain and grow our digital commerce, all in support of our commitment to drive strong shareholder returns for the long term. With that, I’ll turn the call back over to Hal.

Thanks, Kurt. Last quarter at our Enhanced Earnings Event, we shared significant details on our Life Out Here strategy. We believe we have robust idiosyncratic drivers for growth over time. Our strategy is gaining traction and the team is executing well. For the remainder of my prepared remarks, I’m going to provide an update on our customer, including our Neighbor’s Club, and provide some highlights of our merchandising initiatives for the spring and summer season. Our customer trends are in great shape, and we’re committed to capturing wallet share through legendary customer service, our numerous digital properties, our seamless shopping experience and our Neighbor’s Club loyalty program. Our customer base continues to be remarkably healthy and highly engaged with our brands. In our Q2 2020 earnings call, nearly two years ago, we discussed that our goal was to nurture and capitalize on the generational growth we were seeing in our customer base, seizing on the opportunities to retain millions of new customers and expand share of wallet with our core customers and expand the number of capital categories shopped by both customer sets. And I’m pleased to share with you today that that’s exactly what we’re seeing in our customer base. Our active customer base is now much larger than coming into the pandemic, as we have retained the majority of the millions of new customers that shopped us the last couple of years. And our active customers are driving frequency and spending more money. On our new customers, we continue to see strong new customer acquisition with absolute run rates that are at pre-COVID levels and very stable. Continuing on a theme since 2020, our new customers continue to skew younger. We’re seeing ongoing growth in our millennial shoppers as there’s been a net migration out of urban areas, largely driven by millennials. Since the start of the pandemic, the most robust homeownership growth is in the millennial cohort, with the growth coming in suburban and rural areas. We believe the growth in the millennial customer supports the vibrancy and relevance of the Tractor Supply brand well into the future. Another positive contributor to our strong sales growth has been our Neighbor’s Club. As I mentioned earlier, the revamp of the program in April of last year from an Infinity program to tiered points-based loyalty program has been rapidly adopted by our customers. Neighbor’s Club is a significant growth platform for us. Notably, we reached our highest level of customer spending over $1,000 annually, and we also reached our highest level of customers ever spending over $2,000 annually. Transactions, total sales and spend per active Neighbor’s Club member, all grew significantly in the quarter. These customer trends are an indication that we continue to benefit from the structural tailwinds I mentioned earlier, such as rural revitalization, pet ownership, home setting and self-reliance. Our brand momentum is stronger than ever, and we’re investing to ensure we continue to play offense in the context of these trends. The overall health of our customer base contributes to our confidence in our outlook for the year. Let’s shift to spring. Our stores and e-commerce are well-positioned to take advantage of the seasonal change to serve our customers. As of today, we have over 175 garden centers customer-ready for spring. We continue to forecast having garden center transformations of our side lots in over 15% of our stores by the end of the year. Where spring has cooperated, we are very excited about our customers’ response to the expanded product offering and layout. To capture incremental share of wallet in the lawn and garden category, we’ve expanded our offerings of battery-powered outdoor power equipment. Tractor Supply is the exclusive retailer of the Greenworks Pro 60-volt platform which includes more than 75 battery-operated professional-grade residential tools, including zero-turn riding and push mowers, chainsaws, trimmers, leaf blowers, snow throwers and more. Tractor Supply began offering Greenworks Pro 60-volt products online earlier this year, and we rolled them out in our stores the past few weeks. Notably, the addition of battery-operated zero-turn mower from Greenworks strengthens our position as the zero-turn headquarters with our market-leading assortment from Toro, Bad Boy and Cub Cadet. This past Saturday, we hosted a Try Before You Buy event at our stores that allowed our customers an opportunity to test drive our market-leading assortment and the various models in our stores. Chick Days are always an exciting time in store and something that our customers look forward to with the change of seasons to spring. We sell millions of birds each year. And this year, we’ve expanded our breed options as well as widened our coop, feed and care assortment. This is a great example of a home setting category for our new millennial customer who’s adopting the Out Here lifestyle. And importantly, our store teams have the knowledge to help a customer in the category, whether they are a novice or an expert. We have a leading lineup of top selling, highest quality tools that are relative to our customers. Last week, we announced the addition of Dremel and Bosch to our power tool lineup just in time for spring. As mentioned on several previous calls, a key component of Project Fusion is an expansion of our assortment in truck, tool and hardware. Our lineup and tools now include Makita, DeWalt, PORTER-CABLE exclusively, Bosch and Dremel. We are much more of a destination now for our customers in this category. And as an aside, we’re also on track to have Project Fusion implemented in nearly 30% of our stores by year-end. To wrap up, the Tractor Supply team continues to thrive through the dynamic macroeconomic environment while making incredible progress for laying the foundation for the future. Tractor Supply has a proven business model that has been resilient over numerous different types of business cycles. With significant growth and market share opportunities ahead of us, it’s an exciting time to be at Tractor Supply. My thanks and appreciation go off to the team for their dedication to living our mission and values every day. And now, we’d like to open up the call for questions.

Our first question is from Scot Ciccarelli from Truist. Scot, please proceed.

Good morning, guys. Scot Ciccarelli. So, I guess, my question is, with the 10% impact from pricing in the comp, what kind of, if any, demand structure are you guys seeing? And kind of related to that, how should we think about the impact on the top line from inflation as we get later in the year because obviously, we’re going to be cycling larger impacts as we go? Thanks.

Good morning, Scot. Thank you for joining our call and for your question. To start at a high level, the consumer is very healthy. As Kurt mentioned, we exceeded our expectations in Q1, with some nuances to consider. In the business where we are comparing to last year’s stimulus, particularly in big ticket items, we observed some follow-up, which aligned with our expectations and what we outlined at our enhanced earnings event regarding anticipated pressure from big ticket sales primarily in the latter part of Q1 and early Q2. While we noted a slightly slower start to spring, it has been in the expected categories, and spring always arrives. Our experience over the decades shows various outcomes for spring, but we continue to see strong customer demand. Our C.U.E. business reflects this, outperforming our overall comp rate significantly, with dry dog food exceeding 20% in comparable sales. March was actually our highest month for dollar volume in dry dog food. Looking at the bigger picture, we cater to a lifestyle with demand-driven, need-based products that have consistently performed well across different economic conditions. Additionally, we have two favorable factors contributing to our performance: ongoing macro tailwinds like world revitalization and pet adoption, and our Life Out Here strategy, which includes 175 garden centers and plans to have nearly 30% of our stores remodeled with Fusion by year-end. Currently, we are experiencing many positive influences, and we have not observed significant consumer reaction to inflation or other economic factors. Regarding your question about the impact of inflation, I would refer back to Kurt's remarks in his prepared statements. We exceeded our expectations in Q1, so given our historical pattern of conservatism and the current macro environment, we considered it wise to reaffirm our guidance. If you look at our strong performance in the first quarter, it positions us toward the higher end of our annual guidance. If we continue to perform well throughout the rest of the year, we could end up having a very successful year. I believe inflation remains a persistent challenge, but we've been able to manage it effectively.

Next question is from Simeon Gutman of Morgan Stanley. Simeon, please go ahead.

I’ll ask two questions now to save time. The first is about the business’s mix of needs versus wants. We used to discuss this topic some time ago. How should we think about the percentage of the business that’s discretionary if consumer spending slows down? The second question is more tactical. Looking at the earnings outlook for the rest of the year, margins were slightly down in the first quarter, but it appears that the incremental margins for the remainder of the year look higher based on the per point in comp. What’s the explanation for that? Is there less investment? Is there an increase in costs, or something else? Thank you.

Yes. Simeon, this is Kurt. I’ll address both of those questions. If I understood correctly, your first question is about the difference between discretionary and needs-based business, which is what we mainly focus on. Our business remains strong in a needs-based, demand-driven environment compared to discretionary spending. As we’ve mentioned before, while there is some decrease in needs-based discretionary spending, this segment has consistently accounted for only about 15% of our business. As Hal pointed out, we anticipated some shifts in this area after last year's stimulus and have observed some of that in the latter part of Q1. Regarding our outlook for the year and how we manage margins, we expect that persistent inflation will exert some pressure on our gross margins. We anticipate challenges from three main factors: product inflation, supply chain costs, and the impact of C.U.E. as we gain market share, which slightly affects our mix. Despite these challenges, we see opportunities to improve both gross margin and SG&A. Each quarter may vary as inflation affects gross margin, but we believe we can leverage our SG&A effectively. In the first half of the year, the impact of year-over-year inflation is more significant, while the second half may see increasing inflation rates. Similar to what we experienced in Q1, stronger inflation could occur, but we also have opportunities to leverage SG&A. We intend to approach our business as we have in previous years, considering various scenarios, including higher inflation, and we have the tools to manage both gross margin and SG&A. This could vary quarterly, but it gives us confidence in achieving our target operating margin of 10.1% to 10.3% for the year.

Our next question is from Kate McShane from Goldman Sachs. Kate, you may proceed.

Thank you again for the detail around the change in composition of the guide. I was just wondering how we should think about potentially the upside and downside risk to the guide. Where do you think there could be elements of where you could be particularly conservative?

Yes, Kate. Hey. Good morning. This is Kurt. In regards to your question on the guide, let me give you a couple of perspectives really how we see the business and how we look at it going forward. First, I’ll just reiterate what Hal and I’ve said. We’re coming off of Q1 a great start to the year where there’s strong performance hitting on all metrics. And just to point out, Q1 on a two-year stack basis, from the strength in new customers, the strength in Neighbor’s Club, our transaction toward the highest two-year stack of any of the four quarters. So, the core of the business is strong and healthy. That said, as I just mentioned earlier, it is right and consistent even in the last two years, we’re managing the business in multiple scenarios. So, to your point in your question, there are various scenarios. And if under one scenario, there’s inflation that drives the comps outside of even the initial expectations, with that inflation, it puts pressure on margins, the leverage and SG&A. We certainly see that with inflation. It could impact some of the transactions. We’ve trip consolidation. We’ve seen customers begin to change in their spending patterns with the inflation. But, that’s not necessarily negative for us as we benefit in ticket and that can help us leverage our SG&A. And so, the number of various scenarios that we see playing out, we feel very comfortable that in the next three quarters as we manage that, that we can still meet our expectations and our guidance and very confident in the demand of the business and the strength right now going into the rest of the year.

Our next question is from Michael Baker of D.A. Davidson.

One question and a follow-up. First, regarding the short term, considering the poor weather in March, have you lost some sales? Should we expect to recover those in the second quarter? How has April's weather been? Now, for the longer term, how do you view housing's impact on your business? With rate drops and the possibility of a slowdown, existing home sales have declined for six or seven consecutive months, yet prices have increased. What is your perspective on this long-term for your business? Thank you.

Yes. Hey, Michael, it’s Hal. I’ll address the second part of your question first regarding housing and then let Seth provide insights on spring. In terms of housing, our business does not directly correlate with new home starts and existing home sales like other retail segments do. However, we have been benefiting from the trend of home improvement, as people are investing in their homes and land, along with a focus on rural revitalization. There has been a noticeable shift from urban and suburban areas to ex-urban and rural locations. The data suggests these trends will continue. Though existing and new home sales have shown some year-over-year declines recently, the absolute numbers remain strong. Given the shortage of housing stock in the United States, we anticipate seeing robust numbers for many quarters and years ahead, particularly outside of urban centers, and we will continue to benefit from this trend. Most of our customers own their land and homes, and they have experienced appreciation in both, especially in rural areas that have seen significant gains compared to urban areas. This has created a wealth effect for them. Therefore, we believe that the trends in home improvement and rural revitalization continue to provide strong macroeconomic support for us. Regarding spring, as Kurt mentioned, it has been slow to start, but we are excited about our spring initiatives. Our inventory is well-positioned, and our marketing and merchandising strategies are effective in driving foot traffic. Now, I’ll hand it over to Seth to elaborate on our spring plans in more detail.

Thank you, Hal and Mike, for the question. As Hal mentioned, there has been a bit of a delay to the start of spring. However, as we've seen the weather improve in the southernmost areas over the past couple of weeks, we are encouraged to see our game plan taking shape. I visited several garden centers in Texas last week, and I can tell you that both our customers and team members are excited about our deeper focus on live goods and gardening, which has historically been our top category. We are becoming more top of mind for them, and we are seeing very positive results, especially in those garden center stores, as we prepare for over 175 locations entering spring. It's not just about live goods; we believe we have a best-in-class zero-turn lineup. We've talked about big ticket items at the end of Q1, and where the weather is improving, we are seeing strong demand across our entire zero-turn lineup, in both brands and price points. Consumers are responding well to our merchandising. We have also discussed our exclusive partnership with Greenworks Pro, entering a new category that we haven’t previously targeted, which gives us an opportunity to gain market share. Additionally, we are looking forward to spring, not only in lawn and garden but also in home setting. Chick Days has had a strong start, whether through new coops or new breeds, showing robust demand from consumers. We are also continuing to expand our C.U.E. related businesses and introduce innovations throughout our offerings. We are excited about spring and the plans we have ahead of us.

Thanks for the detailed response. I appreciate it.

Our next question is with Steven Zaccone.

I guess, Hal, I was kind of curious for your sense on the broader macro backdrop. It sounds like you’re comfortable that consumers are in a healthy position, but just curious your input on how you see the consumer environment shaping up over the balance of the year? It’s topical with investors. And I guess if we do get to a scenario where potentially in a recession, how do you think the business performs in that environment?

Good morning, Steven, and thanks for joining our call. If we step back and just talk about the macroeconomic environment, what we’re seeing is very consistent with what we’re all reading in the headlines every day. I’ll start with persistent inflation. We had the CPI of 8.5% in the month of March, that we’ve seen 0.5 point increases a month for the last handful of months. It’s tough to say if we’re at peak inflation, the way I think about it is that we’re seeing persistent inflation. And I think we will see strong inflation, not only through this year but in the next year. As it relates to the economy, so far, the consumer has shown real strength and their ability to kind of navigate the inflation. And I think you’re hearing that today in our earnings call, but also hearing it in many other earnings calls that have come out over the last week, and there’s a variety of reasons for that. I mean, you’ve had strong wage growth across the country. You’ve got $2 trillion plus of pent-up savings that people are starting to tap into now, and you can see that in savings rate. You do see a little bit of credit card usage up. But I think if you dig into that what we’re seeing is people using their credit cards and then tapping into their savings to pay those down with default rates not yet moving up. I think, the consumer’s navigating this very well. And I think any talk of recession at this point is premature. And stepping back, if you look at our business, we’ve had 30 straight years of positive comp transactions. We’ve had 30 straight years of net sales growth, 29 of the last 30, we’ve had positive comp sales growth. This is a business that has been able to navigate all types of economic cycles, whether it was the recession in '20, the recession in 2007, '08, '09, whether it was COVID, just a couple of years ago. All those sorts of scenarios, this business has been incredibly resilient, stable and consistent through. And as I mentioned earlier, there are a number of macroeconomic tailwinds that are really benefiting us that I think even accentuate the stability of our business. And then combine that with our Life Out Here strategy, which is just an indicative of just the next leg of growth for our company. And 40 years ago, we doubled down in animal feed, 20 years ago, we doubled down in pet food. Now, we’re doubling down in live goods combined with our Fusion remodel. We’ve never had more customers shopping Tractor Supply. We’ve never had a stronger digital business at Tractor Supply. Our business is incredibly strong right now. And we are very much excited about the business from a short-term perspective and long-term.

Our next question is with Brian Nagel.

Hi. Good morning. It's been a strong quarter. I have two brief questions that I'd like to combine. First, you've mentioned that the quarter has been performing better than expected, despite some challenges from the weather. Were you anticipating more difficult weather in your internal planning, or what contributed to the positive results compared to your internal projections? Secondly, we've discussed inflation and how consumers are managing it. Looking at markets where consumers might benefit from rising oil or commodity prices, are you beginning to see any impact on the well-being of your customers in your stores?

Yes, Brian. Good morning. This is Kurt. There are two questions I want to address: one about the factors affecting our performance in Q1 compared to our expectations, and the other regarding specific geographic markets like the oil industry. In the first quarter, weather conditions were somewhat neutral compared to last year, leaning slightly unfavorably. Last year, we had an unusually early start to spring, especially in March, which contributed to a significant impact on our performance. This year, although we also started the quarter with favorable cold weather in January, it was offset later, leading to a more neutral effect overall. Our strengths this quarter came from how well C.U.E. performed and our ongoing ability to capture market share, so weather did not greatly exceed our expectations. Now, regarding the economic conditions in the oil and agriculture sectors, it's still too early to make any definitive assessments. We haven't noticed any significant shifts in those markets yet. Additionally, the recent increase in commodity and oil prices isn't seen as a negative for these industries but rather as a potential positive influence. Currently, the oil industry appears to be taking a cautious approach, lagging behind the rise in oil prices. Meanwhile, farmers need time to harvest their crops, so we should monitor these situations closely. Overall, those markets remain healthy and align with the trends in other sectors. We're prepared to support these industries if we begin to see any noticeable improvements due to these factors.

It’s very helpful. I appreciate it.

Our next question is with Karen Short from Barclays.

Two questions. So one, I guess, the first one is in terms of inflation for the year, what is your actual updated expectation on inflation for the year? And then, embedded within that, on traffic, your traffic was only down 1% with 10% inflation. But on a two- and three-year basis, more or less held. So, could you just clarify how you’re thinking about traffic for the remainder of the year, because presumably, inflation will abate, so that should actually help the traffic overall on a one-, two- and three-year basis?

Thanks for joining our call and for the question. On inflation in our enhanced earnings, we mentioned that our assumption was around 4% for the year, but that if anything, we saw a potential for upside to that. And that’s very much what we saw in the quarter. And we’re not providing kind of an update on that 4% number today, but I would say that potential for upside there still remains. Kind of my comment to an earlier question around inflation being persistent, I do think it will continue through the balance of the year and run at 4% or higher. On the traffic, we were very pleased with the traffic in the quarter that we had, and it exceeded our expectations. To your point on two- and three-year stacks, it was either in line or above sequentially with our previous quarters. And in particular, if you think about the stimulus benefits from last year, but certainly, the spring differences, the weather differences in the month of March, we were very pleased with how our comp transactions ran. And we’ve never had more customers shopping Tractor Supply than we have on a rolling 12 basis. We’ve done an excellent job of maintaining the tens of millions of new customers that have shopped us over the last two years. Our active customer file is incredibly strong. Our Neighbor’s Club membership program, members have never been higher. The participation, active participation in the Neighbor’s Club program has never been higher. So, we feel really good about our customer trajectory, our transaction trajectory within those customers and our customers kind of navigating inflation in our business kind of in a demand-driven, need-based type environment.

Can I just clarify? Kurt made a comment that traffic would continue to be pressured due to inflation, but that’s not what you’re seeing.

Yes. To clarify, we are trying to convey that there are various scenarios that could unfold for the remainder of the year. One possibility is that inflation remains high, which might lead to changes in customer shopping habits, specifically that they might consolidate their trips. If this happens, we could see larger basket sizes but a slight decrease in the number of transactions. We want to emphasize that this is just one possible scenario that fits within our overall guidance. Similarly, regarding our margin profile, the key point is that if inflation stays elevated, we could experience more pressure on our gross margin rates than anticipated. However, our margin rate performance remains strong, and we expect less pressure on SG&A costs because our fixed costs would align with increased sales. This would still allow us to achieve an operating margin rate within our guidance range. We are very pleased with our operating margin performance in the first quarter, as we exceeded our expectations across all core metrics, including traffic, sales, operating margin, and EPS.

Our next question is with Michael Lasser of UBS.

There’s a heightened focus on big ticket spending, given some of the indications from others out there around connected fitness equipment, grills, mattresses. Your suggestion is that overall to your big ticket trends are doing better than average, and that’s inclusive of what sounds like a drop-off in the last two weeks of the quarter, which persisted into the first few weeks of this quarter. So, what is driving the strength in big ticket growth for Tractor Supply? And how much is inflation contributing to that growth? Thanks.

Good morning, and thanks for the question, Michael. I would point out three key aspects regarding big ticket sales. Firstly, we experienced a decline in big ticket sales related to the end of stimulus payments, which aligns with our expectations. This decline was mainly seen in non-seasonal categories such as gun safes. Secondly, in the seasonal segment of big ticket items, as Seth mentioned, we’ve seen great results with the arrival of spring weather, particularly in categories like riders and grills. Lastly, concerning inflation, we are noticing increased prices in these categories, similar to the overall market trends. However, we're encouraged by our unit sales movement in these areas, which is not solely driven by price increases. Overall, we remain very positive about our business prospects both in the short term and long term, including big ticket items, and we look forward to the rest of the year.

Our next question is from Steven Forbes from Guggenheim Securities.

Good morning. Hal, Seth, I wanted to start with your in-market learnings, right? As it looks like you’ve both been on the road recently. So, can you take us through some of your key learnings? And what I mean by that is really the learnings from the store associates. What are they saying about their own behaviors? And did you notice anything different among the regions that you visited, maybe outside of seasonal trends?

Yes. Thanks for the question, Steven. We have been traveling quite a bit lately to ensure that our mission, values, and culture at Tractor Supply are upheld. Our team is doing very well. John Ordus and our field organization have excelled in hiring, bringing our total team members to nearly 47,000, and we are effectively managing attrition. Our FAST team is expanding to more stores with dedicated members, and we are introducing new productivity programs as John highlighted in our last call. If you visit our stores right now, they are in the best condition ever, providing excellent service. Our products are well-organized on the shelves, and the stores are clean and orderly. All assembly work on Grills and riders is completed, and we are well-prepared for spring and the second quarter. Regarding engagement, our store team member engagement was at an all-time high from our survey at the end of last year. We continue to manage attrition effectively, and our team members are truly the backbone of our company. We take pride in the customer service we offer in our stores and are making steady progress in that area, which will provide significant benefits as we move into the second quarter.

Our next question is from Chuck Grom of Gordon Haskett.

Kurt, can you provide a sense for how you see the rest of the year playing out on the comp front in order to arrive at that 3% to 4.5% full year view, particularly here in the second quarter, just given the upside here that you posted for 1Q? And then, on the stores front, can you talk about your confidence levels to open up 75 to 80 stores, given that you weren’t able to open up any here in 1Q?

Thank you for the questions. I want to emphasize what Hal and I have discussed regarding our comparable store performance and its implications for the year. We have exceeded our expectations following a strong first quarter, and as we move through the year, we’ll continue to manage the business under various scenarios. It's possible to see comparable sales at the high end of our guidance range, but we are only one quarter into the year. We are experiencing good momentum, and this could lead to results toward the upper end of our projections. While it's too early to predict inflation levels, ongoing inflation could add upward pressure on our sales. For now, we can share our outlook on the business and our management strategies. Regarding new store openings, I want to assure you that we have no concerns about opening new locations. We are confident in achieving our goal of opening 70 to 80 stores this year, supported by our proven track record. Our new store pipeline is strong, and while construction faces some supply chain and labor challenges, we are dedicated to completing 80 stores in the fourth quarter. Some projects did get delayed, and we saw that in the first quarter, which is typically when we open the fewest new stores. Those delayed stores will launch in the second and third quarters, and we remain optimistic about reaching our targets for new stores this year.

Austin, if we keep at the top of the hour, maybe we’ll take one more question in and then wrap up our call after the next question, please.

Of course. Our final question will be from Chuck Cerankosky of Northcoast Research.

Good morning, everyone. It was a solid quarter. Looking at the strong level of C.U.E. sales in the first quarter, is there something else happening beyond stimulus spending as a percentage of the total? How is that mix developing so far in the second quarter?

Yes, Chuck, I’m doing well, thank you for being on the call today. Regarding C.U.E., our impressive growth can be attributed to gaining market share. As mentioned in our earnings event, our total sales increased by 52% over the past two years, while the market grew by 25%, resulting in a 27-point outperformance against the market, which indicates significant share gain. We are the market leader in animal feed and are among the top in pet food, steadily increasing our share in both areas. This success is due to our business model, customer service, and our Life Out Here strategy. We are genuinely excited about C.U.E. and the positive impact it has on our stores and its setup for the remainder of the year.

This completes our call today. We look forward to talking to you at our second quarter earnings call in July. Both Marianne and I are around today. So, please feel free to reach out. But thank you very much for joining our call today.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.