Tractor Supply Co /De/ Q4 FY2022 Earnings Call

Thank you, everyone, for joining us. I hope you enjoyed watching the video of Tractor Supply's year-end review. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we've made available a supplemental slide presentation 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. 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.

Thanks, Mary Winn, and good morning, everyone, and thank you for joining our call this morning. I think the opening video was a great recap of the highlights of a record year for Tractor Supply. Year-end is when we reflect on our accomplishments, and I'm pleased to share the results from the team in 2022. We had sales growth of 11.6% and diluted earnings per share growth of almost 13%, and this is on top of a record performance in 2021. We had solid market share gains across all our product categories, and these gains continue to contribute materially to our sales growth. At Tractor Supply, it all starts with the team. My sincere thanks and appreciation go out to the more than 50,000 team members of Tractor Supply who work diligently every day to live our mission and values. Regardless of the operating challenges throughout the year and really over the last three years since we entered the pandemic, the team has delivered impressive results while also making significant progress on our Life Out Here strategy. I commend and thank the team for stepping up to every challenge that has come at us over this time period. Our team plus our business model are the reasons why we have a record of consistent and stable growth across all economic environments. With this year's results, we've now posted three consecutive years of exceptional sales growth. The highlight of this phenomenal track record continues to be the consistency of our results and the broad-based strength of our performance. Including new stores in the 53rd week, our revenue on a three-year basis has increased about 70%, with a three-year comp stack of 46.5%. Over the same period of time, we've invested nearly $1.7 billion in our stores, distribution centers, technology, and other strategic initiatives as part of our Life Out Here strategy. We also have significantly improved our operating capabilities, including relaunching our Neighbor's Club program, creating our field activity support team, expanding our mobile footprint, and delivering on the increased volume of our consumable, usable, and edible products. We've remained focused on introducing new capabilities, improving the shopping journey, and ensuring we have scalable platforms, all with the underlying goal to be the dependable supplier that our customers count on. As a company, we hit several significant billion-dollar milestones in 2022. We grew our sales to a record $14.2 billion, increased net income to over $1 billion, achieved $1 billion in private label credit card sales, and returned more than $1 billion in capital to shareholders for the second consecutive year. This culminated with diluted earnings per share of $9.71. Now turning to our fourth quarter and fiscal 2022 performance. Our business continues to be incredibly resilient, and the quarter unfolded much like we anticipated. Albeit, comp sales performance was stronger than forecast as the late December winter storm provided a comp sales lift of approximately two percentage points. Excluding the impact of the winter storm, importantly, our underlying results were in line with the high end of our expectations for the quarter. Now let's go through some of the highlights for the quarter and the fiscal year. For the fourth quarter, our comparable store sales growth was 8.6%, and it was driven by strong ticket growth of 6.3% and transaction count increase of plus 2.3%. Importantly, even without the winter storm benefit, our comp transactions would have been positive for the quarter. All months of the quarter comped positive. October, December were our strongest comp sales months. Both two and three-year comp stacks were relatively consistent across the quarter. On e-commerce, it achieved mid-single-digit positive sales growth, and we continue to build out our ONETractor capabilities. As of year-end, the Tractor Supply app has had over 4.4 million downloads since it was launched mid-2020. For the seventh consecutive quarter, we continued to see our consumable, usable, and edible products outperform our overall comp sales results. This strong performance was driven by dry dog food as well as feed for poultry, equine, and wild birds. Our outperformance in year-round categories offset the declines in big ticket categories. We continue to gain share across our categories, both online and in-store. Shifting now to Neighbor's Club. Our Neighbor's Club membership exceeded 28 million members and represented nearly 75% of our sales for the year. During the quarter, we launched the Tractor Supply Visa Credit Card. This new co-brand credit card allows our customers to earn more on their everyday purchases, both in-store and anywhere Visa is accepted. Our overall customer satisfaction score hit a new all-time high as we continue to invest in our team to provide best-in-class customer service. Our supply chain continues to be a competitive advantage for us. In 2022, we moved more than 8 billion pounds of consumable, usable, and edible products through our supply chain as we are the world’s largest seller of bag feed and food for livestock and companion animals. Our scale and reach provide us with the cost to serve that is lower than our competition. We continue to advance on our commitment to be stewards of Life Out Here. As a result, our efforts to enhance our sustainable business practices have been recognized by various third parties. With nearly 1,800 team members, our field activity support team has made powerful contributions to our in-stock performance and the execution of our sales-driving initiatives. This was a year that we made significant progress on our Life Out Here strategy. Our outlook for 2023 is right in line with our long-term guidance. And Kurt will share more details on our outlook as well as more details on our performance in 2022 in just a moment.

Thank you, Hal, and hello to everyone on the call. Let me build on how sentiment for 2022. As we start out the year, we anticipated that our business would continue to exhibit consistent performance as we have a proven business model that has stood the test of time. The team delivered against our goals and exceeded our expectations. To recap, the 53rd week added about $225 million to our net sales in the fourth quarter representing 6.8 points of our net sales growth. Our commitment to being the dependable supplier for Life Out Here was exhibited during this historic storm. Looking back, excluding the December winter storm comparable store sales have been remarkably consistent across all four quarters of the year. Similar to trends through the year, retail price inflation contributed about 11 points to our comparable store sales in Q4. We did see strong performance in winter needs-based items. Our gross margin improved by 28 basis points to an even 34% of sales. Our price management actions and other margin-driving initiatives were able to offset the pressures from year-over-year product cost inflation, higher transportation costs, and product mix. Diluted EPS was $2.43, an increase of 25.9% from the fourth quarter of last year. Our balance sheet remains incredibly strong. Overall, we continue to believe that our inventory position is in good shape. Our Life Out Here strategic investments have made us stronger. For fiscal 2023, we are forecasting net sales of $15 billion to $15.3 billion, including at least $300 million in sales from Orscheln. We continue to believe the best way to look at our business is not by the quarter, but by the half of the year. Our business model has passed the test of time and is proven to be resilient. To wrap up, we are continuing to separate Tractor Supply from the competition. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases.

As we celebrate our 85th anniversary this year, Tractor Supply is a business that continues to have significant opportunities for growth ahead of us. We have idiosyncratic growth drivers that are separating us from the competition. Our marketplace has shown consistent growth for decades and decades, and our total addressable market of $180 billion continues to benefit from numerous trends that we believe are structurally found. Our stores with a Fusion layout and Garden Center transformations are gaining more customers than the balance of the chain. The comp lift for the Fusion remodels continues to run in the mid-single digits. When we execute a combination Fusion remodel and a Garden Center transformation, we have a comp lift in the high single digits. These projects provide us with the opportunity to continue our track record of consistent growth. Our Neighbor's Club program is a true competitive advantage for Tractor Supply. Once our customers are in the flywheel of Neighbor’s Club, their spending becomes significantly more reliable. We believe the current environment is an opportunity for us to lean into our strengths and further expand our lead for years to come. Tractor Supply enables passions and hobbies pursued by millennials, whether it is making memories with family and friends or caring for pets and animals or getting outside to hunt, fish, or camp. Tractor Supply serves as a key resource in our local communities for millennials to come to for trusted advice and expertise. With our Life Out Here strategy, we have ignited Tractor Supply’s next horizon of strong and sustainable growth. 2023 is poised to be another great year for Tractor Supply.

Hi. This is Joe Civello on for Scot. Great quarter, guys. I was just wondering if we could talk about your transaction growth you guys are projecting for 2023. Can you talk about how the expectations are driven by weaker comps, weather driven, or potentially incremental visits driven by Garden Centers, Fusion remodels, or the things you’re implementing in the store that’s helping to drive growth? Thank you.

We’re very pleased with the guidance we provided on our comp sales for 2023 to be between 3.5% and 5.5%, very much in line with our long-term guidance range as well. As Kurt said in his prepared remarks, we expect it’ll be a blend of positive comp transactions and ticket. We do expect inflation will be stronger in the first half, but moderate in the second half. More broadly, our market continues to run reasonably in line with GDP flat to low single-digit growth. We are taking significant share in the marketplace, and we certainly expect that to continue in 2023. The share gain is really a composition of the competitive advantages that we have as well as the investments we’re making in our Life Out Here strategy, particularly our Fusion and Garden Centers.

Hi. Thanks for taking my question. I guess I would argue that a good thing because you are one of the few companies that have invested and not harvested as it relates to the pandemic. So maybe just talk about that algorithm, and then the second question I just wanted to lump in there, when you look at your mix by category.

We’re very optimistic and confident in the outlook that we’ve provided. On the mix by category, we’ve roughly talked about discretionary being more like 15% of our business. And I think the way we think about that business is that some categories will continue to be negative in their comps, but there are others that will be positive. As an example, we expect certain seasonal items to perform well while some discretionary categories may decline. We think it’ll play out that way much of this year.

Thank you. And I don’t mind being confused for Karen because she dresses better than I do, so I appreciate it. Yes, so the guidance you gave for 2023 and in terms of the operating margin, I guess, it sounds like the investments in new DCs and in-store transformations and side lots are probably the factors that would keep that margin towards the lower end at the long-term guidance. But what do you view as the opportunities for operating margin to get to the top end of that guidance over time?

As we've said several times, last year and this year are our two biggest peaks in investments. We see opportunities to increment on our operating margin towards that higher end and get back to leverage across our P&L over the next few years. We see opportunities for our margin rate to increment up as we look out towards the back half of this five-year investment cycle.

Hi, good morning. Great quarter, congratulations. So I have two quick questions. The first off, regarding the weather bump in sales late in Q4, should we think about that as incremental demand? Or does that potentially pull forward demand that would have happened in Q1?

We don't see that as pull forward from Q1. We see it dominantly as incremental in Q4. Our business has been very consistent in the mid-single-digit comp range all last year. And as Kurt said, we were trending towards the high end of our comp guidance for Q4 when the storm hit. Our business is very stable and reliable right now, and we continue to run very consistently in that mid-single-digit comps.

Good morning, everyone. Nice results. My question, it's a couple of parts, but it's one topic. It's how C.U.E. is comping 3x the company average. If you could speak to – if you can, maybe the price benefit there or what's happening with the basket and the market share seems to be staggering because I don't think some of the items in that category are growing that fast.

Our AUR is in line with the rest of the market, but our market share is on a dollar basis, we’re running 2x the market. We are seeing strong growth, its market share gains in C.U.E. that we’re taking. We’re the lowest cost to serve in the market, the fastest supply chain, the lowest price is the best customer service. When they shop the whole lifestyle, we’re seeing that in our average ticket and also in our customer data.

Thanks. Good morning. A couple of questions on the outlook. First of all, could you walk us through the quarterly comp impact from the calendar shift? And if there’s anything we need to keep in mind on a flow-through or margin basis for those sales?

We see good opportunity to capitalize on comping up against last year’s quarters. We don’t expect significant variation between the quarters. All four quarters are expected to be in line with our overall guidance.

Thanks. Good morning, everybody. I wanted to follow-up on the discretionary question that was posed earlier. Did you see any sort of like deterioration in fashion apparel and footwear and toys?

We were very pleased with our Q4 business, and our seasonal businesses performed in line with our expectations. We saw excellent performance, especially with holiday-related items. And in pet, we are seeing unit growth and double-digit comps across all categories in pet. All categories in our pet business are seeing very strong growth.

Good morning, Hal, Kurt, Mary. I wanted to focus on member cohort trends. I was curious if you could expand on retention, repeat behavior across the member cohorts as a whole and whether you’re seeing a difference in behaviors between those members acquired in the past three years versus those acquired earlier.

The majority of our new customers over the last three years have continued to be active shoppers with us and a huge portion have become Neighbor’s Club members. That cohort is shopping us, and we are seeing purchase frequency, average ticket, number of categories, and total spend in the year very much in line with our long-time core customers.

For that, we’ll wrap up our call. Thanks, everyone, for joining us, and we look forward to speaking to you on our first quarter earnings call in April. Thank you all. Have a great day.