Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Second Quarter 2023 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. We ask that all participants limit themselves to one question and return to the queue for additional questions. Please be advised that reproduction of this call, in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, Megan. Good morning, everyone. Thanks for taking the time to join us today. On the call for our prepared remarks are: Hal Lawton, our CEO; Kurt Barton, our CFO; and John Ordus, EVP and Chief Stores Officer. Seth Estep, our EVP and Chief Merchandising Officer will join us for the Q&A 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 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 on this. We will be available after the call for follow-ups. Now, it is my pleasure to turn the call over to Hal.

Thank you, Mary Winn. Good morning, everyone, and thank you for joining us. I'd like to begin by thanking the 52,000 Tractor Supply team members for their commitment to each other and our customers and for their dedication to serving life out here. Our team is executing at a high level and did a nice job nimbly adjusting in the second quarter. We're operating in a tougher environment than we expected at the beginning of the quarter, and certainly tougher than what we forecasted as we entered the year. Consumer spending continues to shift in favor of services. Shoppers that are tired of inflation are being judicious on their baskets. Consumers continue to pull back on discretionary purchases. Additionally, our business was further impacted by the abnormal seasonal trends, particularly in the month of June. Despite this environment, we still expect 2023 to be a pretty solid year. Our customer is healthy and we're gaining share, outgrowing our market by 2x, and we are significantly outpacing total U.S. retail sales growth. We anticipate that we will have positive sales comps and positive comp transactions for the year, albeit in the low-single-digits range. Importantly, net sales and earnings will grow strong mid-single-digits on top of a 53rd week last year. We have a long track record of growth and high expectations of performance. We view our underperformance to these expectations as specific to the current environment. The team has dialed-in and understands the challenges. For the remainder of the call today, I'll speak to a few highlights of the second quarter and then share an update on our Life Out Here strategy. John Ordus will then provide greater insights on our real estate strategy and our plans to accelerate our store growth. Then Kurt will follow John and share further details on the second quarter and our full-year outlook. So let's dig in. Turning into the second quarter. We grew net sales by 7.2% with comparable store sales up 2.5%, and diluted EPS was $3.83, an increase of nearly 9%. Our comparable store sales growth was driven by transaction growth of 1.8% and ticket growth of 0.6%. We expected and were pleased to see comp transactions turn back positive, and this trend has continued into Q3. We began the quarter with mid-single-digit comp sales growth in both April and May. As we moved through the month of June, we experienced a noticeable slowdown in our seasonal categories with the period coming in modestly positive. In my 25 years in retail, June was one of the most topsy-turvy months that I've seen: smoke, drought, storms, heat, it had a little bit of it all. As mentioned, our customer base is healthy. Our active customer counts are stable and growing. Importantly, our new customer trends have leveled out after a period of lapping tremendous growth in 2020 and 2021. Our customer satisfaction scores continue to break records and improve year-over-year. Customer demographic trends continue to trend younger and more female than pre-pandemic. Our Neighbor's Club reached a record 31 million members in the quarter, an increase of 5 million members in the last year. We're seeing continued favorable trends from our loyalty members. Retention rates remain at all-time highs. Neighbor's Club members continue comping at a faster rate than our overall performance, and our high-value members reached a record count in the quarter. A few key trends that we're seeing with our customers are as follows. First, customers are increasing their usage of credit. Second, shoppers continue to seek out value, particularly among our lower-income customers. Third, customers are buying a little more often, but a little less per trip. Now, shifting from our customer to our categories. Our year-round categories were up mid-single-digits indicative of our ongoing market share gains and our demand-driven needs-based business model. Our consumable, usable, and edible categories continue to deliver strong, stable performance and drive trips to Tractor Supply. In this quarter, CUE categories had growth in the low-double-digits. In companion animals, we are gaining substantial share throughout the category. Again this quarter, we have sequential increases in the number of customers shopping us for this category each week. In livestock, our Spring Chick Days event was one of the largest ever for us with the poultry category showing strong double-digit growth. We believe we're on track to exceed last year's record of 11 million birds sold. Not only are we seeing growth from existing customers, but we are also experiencing robust growth in new customers to the category, driving both trips and ticket. Our seasonal categories were flat and below expectations. The miss was primarily in June when there were several choppy environmental conditions across our markets that resulted in the consumer not being as engaged in the categories we expected. This softer seasonal performance in June had a material impact on our second quarter performance and was the main driver of our miss versus our expectations. Our big-ticket sales were down in the high-single digits and in line with our expectations. In fact, our performance in the quarter was a sequential improvement from the first quarter. The most significant pressure in the quarter was in zero-turn mowers, generators, and recreational vehicles. On the real estate front, we opened 17 new Tractor Supply stores and three Petsense by Tractor Supply stores in the quarter. For the second consecutive quarter, we've seen the cadence of our new store openings return to a more normalized rate. Our Petsense by Tractor Supply business is performing well and comps in the quarter were greater than overall Tractor Supply. The integration of Orscheln is right on track. Today, we fully transitioned and re-grand opened 15 locations. We remain very pleased with the customers' response as we convert to the Tractor Supply brand. Although, the operating environment may be different than we anticipated as we enter the year, I'm incredibly proud of how the team has come together to navigate the various circumstances and control what we can control. Now transitioning to an update on our Life Out Here strategy. We remain very confident in our long-term growth outlook. We participate in a large, fragmented, attractive market. We continue to benefit from numerous structural tailwinds, including rural revitalization, homesteading, self-reliance, and pet ownership. We have numerous substantive competitive advantages and are investing to expand them through our Life Out Here strategy. Since we first embarked on our strategy in the fall of 2020, the team has made remarkable progress on the transformation of Tractor Supply. As a reminder, the five pillars of our strategy include: deliver legendary customer experiences, advance our one tractor capabilities, operate the tractor way, go the country mile for our team, and generate healthy shareholder returns. The key initiatives that support this strategy include our Project Fusion Store remodels, our Garden Center transformation, our Neighbor's Club loyalty program, and the expansion of our omni-channel capabilities. Our Project Fusion Store layout is now in over 700 stores representing greater than 30% of our store base. This program is enhancing our space productivity with improved layout, signage, SKU expansions, and improved adjacencies. For remodels, it also offers an improved customer shopping experience that is much more contemporary. Complementing Project Fusion is the side lot transformation, which is leveraging and expanding our existing outdoor side lot retail space to drive greater productivity and convenience with the addition of a Garden Center and a drive-through pickup lane to support our omni-channel technology investments. With more than 400 Garden Centers today, we've significantly expanded our assortment of lawn and garden products that are relevant to our customer's lifestyle. Importantly, these two projects are delivering on our return expectations. They're providing material sales lifts. We're seeing improvement in customer satisfaction, and we're seeing higher levels of new customer acquisition in these remodeled stores. Our execution on the remodels continues to improve as we're in year three of the effort and we're reducing project costs while also continuing to shorten construction times. We re-launched our Neighbor's Club program to a points-based structure in April of 2021, and the timing was very fortuitous as it allowed us to lock in the millions of new customers that found us during the pandemic. In total, since the re-launch, our membership has increased by 12 million members, a 60% increase. Additionally, the design of the program has facilitated upward spend migration and driven strong retention rates. Lastly, the program provides invaluable insight into our customer behavior and allows us to personalize our offerings tailored to their needs. Look for us to evolve the structure again sometime in the next 12 to 18 months to further enhance value for our members. Underpinning our strategy are our substantial investments in our distribution network to support the significant sales increase and store growth. Today, our network is achieving record service levels and the strongest productivity we've experienced in the last five years. Our new state-of-the-art distribution center in Navarre, Ohio, our increased count of mixing centers now up to 15, and implementing engineered labor standards are all contributing to this performance. Today, I'm excited to share with you a new strategic focus area that we've been working on for a little over a year: the transformation of our real estate model enabled by a number of new capabilities designed to deliver material benefits to both revenue growth and operating margin rate, and reinforces our long-term guidance. First, we're raising our new store growth target. We now believe there's a 3,000 store opportunity domestically for Tractor Supply. This is supported by our total addressable market of more than $180 billion, our robust growth, and our ongoing market share gains. Our new target represents an increase of 200 stores, and we believe we continue to have significant runway for growth with high-return new stores. Second, we're implementing new capabilities to enable owned development of new store builds. This capability is expected to generate significant construction cost savings and allow for lower rents in these applicable stores once we sell them post-construction. Third, we're also announcing plans to periodically execute sale-leaseback transactions of our existing ownership of 117 stores, and we're going to step up our ongoing build of stores back to 90 stores per year starting in 2025. Today's real estate announcement extends our runway for growth and reinforces our long-term financial model. It's a compelling addition to our Life Out Here strategy that will further solidify our growth for many years to come. And with that, I'll turn it over to John who can share some more color on our real estate strategy.

Thank you, Hal. It's an exciting time for the store operations and real estate team. As we embark on new ways to capture growth and market share, while also driving efficiencies in our real estate processes. Over the last year, we've installed new leadership and talent in our real estate team. This has allowed us to reevaluate where we are in the natural progression of our store growth plans and our ability to leverage our real estate capital structure. This new approach will allow us to realize cost savings and be more nimble with our store portfolio. Our strong outlook for new store growth is a direct correlation of the millions of new customers we have acquired and our overall sales performance over the last several years. This provides us with nearly a decade of new store growth in the United States. We believe these are low-risk, high-return, organic growth opportunities. We anticipate accelerating our new store growth from approximately 70 stores this year to 80 in 2024 and 90 new stores in 2025 and beyond. Opening highly productive new stores is a core strength and competency of Tractor Supply. We continue strong new store productivity metrics with performance outpacing our historical investment thesis, and our stores are profitable in year one. As part of our growth plans, let's start with new stores. We have developed a new sales forecasting model to determine new stores' mature sales and pro forma results to develop our total market store growth opportunity of 3,000 stores. This was the first update to our modeling process in four years. We have infused the process with a machine learning model and insights from our 31 million Neighbor's Club members. This gives us tremendous confidence to raise our outlook by 200 stores for a total of 3,000 Tractor Supply stores in the U.S. To capture this growth, the real estate team is ramping up our pipeline to allow us to accelerate our store openings to 90 new stores by 2025. We are on track to open approximately 70 new stores this year with a step up to 80 new stores in 2024. We have a robust pipeline of new stores in our sites over the next 24 months. In fact, our pipeline is at the best level of development since prior to the pandemic. The team is also building new capabilities to optimize our real estate portfolio. For instance, we'll start owned development of stores this year through a fixed-fee developer model and over time anticipate self-development in new stores. This year, we anticipate 20 to 30 of our new stores will be in our own development pipeline for 2024 new store openings, many of which will begin development this year. A benefit of these new programs is our ability to have more control and visibility in this development process. The great news is that we estimate these capabilities will result in a 10% to 20% estimated rent reduction as compared to a developer model build. This rent reduction helps us continue to improve our new store returns. Part of the investment in creating this development model requires more upfront cash. It is exciting that we are able to fund this through the sale leaseback of 10 to 15 stores this year out of the 117 stores that we owned. Going forward, we plan to use the sale leaseback program on both existing owned stores as well as new store openings. This program will help fund our planned owned store development. It will also capture value in currently owned stores. With nearly 2,200 stores, we are also strategically investing in and optimizing our existing store portfolio as part of the lease renewal cycle. All stores will go through an in-depth review to ensure we have the right real estate strategy in place. We'll then take action to ensure that all stores have the right location, size, facility, rent structure, and format. These factors are critical to the success of our team and stores to deliver legendary customer service.

Thanks, John, and good morning to everyone on the call. Turning to our second quarter results. While our sales trends were below our expectations, I commend the team on how they have remained nimble and steadfast in our commitment to be the dependable supplier for Life Out Here. In many ways, our second quarter top-line results were very consistent with our results in the first quarter with strong CUE growth, flattish seasonal performance, and a decline in big-ticket sales. Our comparable store sales growth was the strongest in the Far West and South Atlantic, and Texas, Oklahoma. The strength of these regions was offset by pressure in the Northeast and Midwest regions where seasonal trends added incremental pressure on consumer demand. Comp sales in the quarter benefited by about 5 percentage points from retail price inflation. Most of this inflation reflects retail price increases that were put in place in the second half of 2022 that we have not lapped as of yet. Much like the first quarter, the benefit of price inflation to our average ticket growth was offset by the impact of three factors. First, the average ticket was impacted by the softness in big ticket and declines in seasonal categories, which run at a higher average ticket. Second, we also experienced softer sales in discretionary and impulse add-on items. Third, on a positive note, we also saw our customers shopping us more frequently with a slight reduction in the number of items per basket. Overall, our customers are buying more units or pounds from us in total. Moving down our income statement, our gross profit increased 9.3% to $1.51 billion. Gross margin increased 69 basis points to 36.2% from 35.5% in the prior year's second quarter. Gross margin was a highlight for the quarter as we continue to maintain strong product margin from our ongoing execution of an everyday low price strategy. The gross margin rate increase was primarily attributable to lower transportation costs driven by improvements in the global supply chain and efficiencies from our new distribution center in Navarre, Ohio. Product mix pressured gross margin given the strength in CUE. This was somewhat offset by the margin improvement from lower big-ticket sales, which carry a lower gross margin rate. As a percent of net sales, selling, general and administrative expenses including depreciation amortization increased 77 basis points to 22.8%. The increase in SG&A as a percentage of net sales was primarily attributable to our planned growth investments, which included higher depreciation and amortization and the onboarding of our new DC. Additionally, higher medical claims also contributed to the increase in SG&A. The growth in medical claims is due to new benefit offerings that had stronger engagement rates than we anticipated, as well as higher program costs overall. We have made some adjustments to the program and will continue to do so. We don't anticipate this to be a headwind in 2024. Approximately 80% of our SG&A growth year-over-year represents investments for growth such as new stores, the impact of Orscheln Farm and Home, the new DC, and the depreciation from our capital investments for items such as Project Fusion remodels and Garden Center transformations. The core SG&A costs leveraged well, even in a low comp sales environment. Overall, the team had strong execution and scaled our core costs to our sales performance. For the quarter, operating profit margin was 13.4%, an 8 basis points decline from the prior year. Consistent with our guidance from the year, Orscheln stores had a modest drag on operating income, principally due to factors unique to the transition. In Q2, we attribute approximately 10 basis points of operating margin decline to activities relating to Orscheln. Turning now to our balance sheet. Merchandise inventories were $2.7 billion at the end of the second quarter, representing a decrease of 1.7% in average inventory per store. We are pleased with the quality of our inventory as we enter the second half of the year. During the second quarter, we strategically issued $750 million in long-term debt, which brings our weighted average fixed rate to 3.4%. With strong annualized cash flows, we continue to maintain a healthy balance sheet with a leverage ratio of around 2x. At Tractor Supply, we are committed to building on our track record of long-term value creation for our shareholders. Our real estate portfolio management is another way that we can continue to facilitate strong returns. Let me shift now to share a few financial highlights as a result of the evolution of our real estate strategy. The sale leaseback of 10 to 15 owned stores is anticipated to close during the second half of the year, resulting in a net after-tax benefit of about $0.20 per share. We are under contract on 10 stores and expect to close on those stores in the third quarter. The expected net gain reflects a selective reinvestment of a small portion of the benefit from the sale back into our store infrastructure this year. For modeling purposes, the net gains will be recorded in operating income as an offset to SG&A. Given the migration to our new real estate development strategy, we anticipate that we have about a decade of runway from the sale of existing company-owned stores ahead of us. This increases cash flow over the coming years and is a great way for us to leverage the strength of our balance sheet. The more efficient owned development program is expected to drive lower new store rent. As the program ramps, these savings are anticipated to more than offset the incremental rent expense from the sale leaseback of existing stores. In 2025 and beyond, the acceleration of our new store growth to about 90 stores annually should help us capture market share and bolster the high end of our long-term guidance ranges. We continue to have very robust new store economics providing us with the confidence to make this shift. Now let me turn to our updated fiscal 2023 financial outlook. At the halfway point of the year, we are now forecasting low-single-digit comp sales and mid to high-single-digit earnings growth. We continue to believe this will be a year of solid performance for us as we continue to gain market share and advance our strategic initiatives. We are carefully watching many leading macroeconomic indicators, consumer behavior, retail trends, as well as our own insights to assess the health of the consumer. While our customers remain healthy, we are more cautious about their discretionary spending in the second half of the year. At the same time, we are moderating our expectations for the performance of our seasonal categories based on our trends in the first half of the year that have been choppy and below our expectations. We believe it is prudent to recalibrate our expectations for both the discretionary and seasonal categories based on our year-to-date trends. For the year, we now anticipate net sales in the range of $14.8 billion to $14.9 billion, comp store sales growth of 1.3% to 2.5% growth. Our operating margin rate is expected to be in the range of 10.2% to 10.3% with net income of $1.12 billion to $1.15 billion. Diluted EPS is forecast to be $10.20 to $10.40. This includes a net after-tax benefit of about $0.20 per share for the sale leaseback. We anticipate about $0.15 will be recognized in Q3 and $0.05 in Q4. In the light of the updates to our real estate strategy, anticipated capital expenditures for the year are now forecasted to be in the range of $800 million to $850 million compared to our prior range of $700 million to $775 million. This increase reflects the move to owned development for select new store growth that will be funded through the sale of existing stores. It is important to note that the proceeds from the sale of our owned stores are expected to offset the incremental capital outlay under the development program. The combined transactions are expected to be relatively neutral to our cash position. As to the calendarization between the third and fourth quarters, we continue to believe that comp sales will be stronger in the third quarter than the fourth quarter. Both quarters are modeled to achieve comp sales growth. Please keep in mind that we are lapping a monumental winter storm in the fourth quarter of 2022 that we estimate contributed 200 basis points to comp sales in the quarter. As for retail price increases, our plans continue to reflect a moderation from the impact of inflation. At the same time, we would anticipate a pickup in our comp transaction growth as we experienced this quarter. Our guidance reflects ongoing gross margin expansion in the second half of the year. We anticipate continued benefit from transportation and the new distribution center, along with some pressure from unfavorable product mix. For the third quarter, our SG&A performance exclusive of the sale leaseback is anticipated to be in line with the second quarter. In the fourth quarter, however, we expect a modest deleverage given the comparisons from the prior year. For modeling purposes, the Orscheln stores will go into our comp calculation in 2024 based on when the store is converted to our point of sale system. We will share more details when we provide our 2024 outlook. Looking ahead, we will remain agile and play offense. We will leverage our core competencies that have served us well while strengthening our capabilities and investing in our Life Out Here growth strategy. For Tractor Supply, we expect to end the year in a strong position for the future. Now, I'll turn the call over to Hal to wrap us up.

Thanks, Kurt. Stepping back, Tractor Supply has achieved remarkable growth over the past few years and the team has done an excellent job scaling our processes, capabilities, and organization to manage this growth. Key operational areas like inventory and payroll grew materially but at a lesser rate than sales and were always in control. Key philosophies like EDLP were re-embraced and our marketing media mix shifted fully away from print to digital. The combination of these two enabled our promotional activity to achieve all-time lows, and we remain there. In addition to these efforts, we launched our Life Out Here strategy to continue the ongoing transformation of our business. This strategy helped lock in new customers, substantiate our market share gains, and is a platform for our future growth. The timing could not have been better. At the halfway mark of 2023, it is shaping up to be a solid year for Tractor Supply on top of three extraordinary years. Our market is stable and our customers remain healthy. The team is effectively controlling what we can control. As we celebrate our 85th anniversary, Tractor Supply remains a unique highly differentiated retailer. Our needs-based business model has a track record of growing through various economic conditions. As a company, we have a proven ability to manage through dynamic environments whether that is macroeconomic or seasonal weather trends. Our customers and team members are passionate about the Out Here lifestyle and they prioritize it. Our customers over-index homeowners, landowners, pet owners, and animal owners. As a market leader, we have substantial advantages that are getting stronger every day. Additionally, investment in our Life Out Here strategy has critical mass. The natural evolution of our real estate strategy is furthering our competitive advantages. We see meaningful growth potential in our markets. I remain extremely confident that we have tremendous runway for growth ahead of us, and with the right team and the right strategy, we're continuing to build a strong foundation for the future. With that, let's open up the call for questions.

Thank you. Our first question will come from Karen Short with Credit Suisse. Your line is now open.

Hi, thanks very much for taking my question. I'm going to just kind of roll two into one, if that's okay. So the first question and tied into the second was that I think you always had the assumption that your kind of comp would be 1% to 2% above GDP and that relationship doesn't seem to be holding right now. So I just want to talk about that. And then excluding the benefit of the sale leaseback, you had also indicated 2023 would be the peak investment period for you, and then we should start to see operating margin expansion in 2024. Is this still your thinking? And I guess I'm again excluding the sale leaseback development and then benefit. Thanks very much.

Hey, Karen, good morning, and thanks for joining the call. On your first part of the question, a bit to my comments earlier, we see this period of time as a bit of an aberration versus our ongoing growth algorithm. As you see in GDP and you see where PCE is going. Then you see the shift from goods to services right now. As you know, services historically have been 68%, 69% of consumer spending, goods kind of 31%, 32%. As you know, goods kind of shifted up to say 35%, 36% during the pandemic. We're kind of halfway back on that march back to 31%. So that, as we said in our prepared remarks, is a bit of a headwind in our business, but certainly expect that we've got maybe halfway to go on that and then it would level back out in its normal equilibrium. I would expect that our growth algorithm would return to that 1% or 2% above GDP growth in the guidance we've given historically. Again, we view this period of time as a bit of an aberration from that long-term algorithm just given the macro dynamics. And then the second thing is, yes, no change to the guidance so to speak that we've given on the out year. Certainly expect 2023 to still be our peak investment year. As you mentioned, the sale leaseback is really just a $0.20 plus or minus that'll be in every single one of our years going forward as an add or two to our EPS. But expect that we'll be at our peak investment period this year and that will start to moderate down next year with an opportunity for margin expansion accordingly.

Thank you, Karen. Our next question comes from the line of Scot Ciccarelli with Truist. Your line is now open.

Good morning, guys. Scot Ciccarelli. So I have a question on the real estate changes as well. I mean, it makes sense that you guys can improve your cost structure as you take ownership of the build, but if you would expect your stores to remain productive over a long stretch of time. Is this a better model to actually own the stores outright rather than lease in the first place? How obviously you have some history with that at one of your prior shops. Or does this real estate shift suggest that we may see changes to the existing footprint, whether it's changing locations, kind of relocation type scenarios or different sizes, etc. Thanks.

Hey Scot, this is Kurt. Good morning. The real estate model as you think about the opportunity that we have to drive a strong performance of new stores that we've seen since there's a structural shift in the tailwinds into the rural economy and our markets, the new stores are performing well. As John mentioned, we built a real estate team that is ready to begin ramping back up to a 90-ish new store openings. The sale leaseback of existing stores fits right in with that. We're an asset-light model. I do not believe owning stores fits, which is why we have over 95% of our stores under a lease. Over time, 30 plus years, we've accumulated a number of owned stores that were not strategically planned. There's a bit of pent-up value in these stores, and it's a great time right now to use those stores to fuel. It allows us to keep a cash-neutral position to execute on a strategy that drives greater long runway, greater total shareholder return in the overall long-term algorithm. I'm really keeping both of those very much tied together as part of our operations.

Thank you, Scot. Our next question comes from the line of Michael Lasser with UBS. Your line is open.

Good morning. Thanks a lot for taking my question. So you deemed a 2.5 comp in the second quarter with 500 basis points of like-for-like price inflation. You probably got some demand that was shifted out of 1Q into 2Q. Your guidance implies you're going to do call it a 1 to 2 comp for the back half of the year, even as you lap some of the big price increases from last year. So can you give us a sense for what is going to accelerate or improve in the business to offset the mitigating contribution from inflation? And have you already started to see that quoted again? Thank you.

Good morning, Michael. I want to address a couple of points. First, I don’t believe it’s accurate to claim that we had sales from Q1 shift into Q2. Given the weather and seasonality we experienced this year, we don’t have any data or customer purchasing insights indicating any pull or deferral into Q2 related to weather. Therefore, that’s not something we need to account for when considering sequential performance. Additionally, we have observed a sequential improvement in comp transactions throughout the quarter, which is continuing into Q3, and we anticipate this trend will persist for the rest of the year. Regarding average unit retail, as we've mentioned before, we expect it to moderate over the year, with big ticket items making up a smaller percentage as the year progresses. This creates a bit of a mix and benefit. Finally, regarding units per transaction, we believe we are nearing the bottom. Over the last 15 years, our trends in units per transaction peaked during the pandemic when customers were stocking up and consolidating trips. We are now much closer to the levels seen during the Great Recession in 2008. We foresee this being a smaller headwind moving forward. When you consider all these factors together, it aligns with the guidance we've shared, which aims to be conservative on the lower end and realistic on the higher end.

Thank you, Michael. Our next question comes from the line of Chuck Grom with Gordon Haskett Research Advisors. Your line is now open.

Hey, thanks. Good morning. Hal, there's some concern out there that as households continue to revert back to pre-COVID behaviors that some of the gains that Tractor's enjoyed over the past three years when sales per store have moved from call it $4 million to $6 million will be given back. I'm curious how you'd address this concern and can you highlight the key drivers that Tractor can control in the back half and into 2024?

Yes, hey Chuck, and good morning, and thanks for joining the call. As I think we all know in this call, this has been a question for 18 to 24 months. What I'd say is we continue to see a very healthy customer base. Our active customers reached an all-time high this quarter. We saw positive comp transactions in the quarter. If you look at the categories that are driving the footsteps and driving our customers, it's things like pet, animal, and those are based on counts of population out there in each of those categories. Lastly, our share gain: at least half of the volume that we've grown over the last few years has been share-related. If I point to share, active customers, comp transactions, and pet, animal, and look at those indicators, it's just a very different business than many of the other companies that kind of had a pandemic benefit reverted, whether it was technology-related companies that had a user base that shifted online and pivoted back or something that's home-related, electronics-related. We're just a very different business and don't see any elements of reversion in our customer base or business.

Thank you, Chuck. Our next question comes from the line of Daniel Imbro with Stephens. Your line is now open.

Yes, hey, good morning, everybody. Thanks for taking the questions. Hal, I wanted to follow up on who that new customer is. How is the retention trending? I think you mentioned they're younger, so I'm curious, is there a difference in spending power between this most recent vintage of new customers and the historical ones? And are we seeing any change in the Neighbor's Club adoption? I would think the push towards value makes the loyalty program more valuable, but can you provide any commentary or quantification around how that's trending differently?

Yes, hey Daniel, and good morning. Start out by first saying we're very pleased with the trends we're seeing in new customers. We had record high new customers in 2020 and 2021. Our Neighbor's Club program being re-launched in April of 2021 was incredibly well-timed as it allowed us to lock those new customers in. We've grown 15 million members over the last three years in our Neighbor's Club program. We've had increased retention rates of our Neighbor's Club program each of the last few years too. We've lost those cohorts in, they're growing with us and remaining active. Certainly, as we got into 2022 and things balance some, we saw our new customer counts trending down year-over-year; that has now leveled out. We feel really good about our new customer trends as we move forward. Sequentially, that should be helpful as we look at year-over-year improvements. The Neighbor's Club program continues to be very successful; our top tiers have grown, and we've reached a record number of customers in our top tier. Retention rates remain at all-time highs and continue to improve. Our Neighbor's Club members continue to outperform our overall base in comps, to reiterate that, that reflects 75% of our sales. Our customer base remains very healthy, with record active customers, positive comp transactions, and solid trends in new customers. We're feeling good as we head into the third quarter regarding the strength of our customer base.

Thank you, Daniel. Our next question goes to the line of Seth Sigman with Barclays. Your line is now open.

Hey, good morning, everyone. So my question is around the second half guidance; the implied margins do seem like you're baking in potentially more margin improvement in the second half of the year versus the first half of the year despite potentially lower comps. I know some of that now is the sale leaseback. But I guess two questions. One, can you just remind us and maybe help bridge some of the drivers for the second half margin expansion? And then second, how do you think about potentially reinvesting more of that margin improvement given the sales performance that you're seeing? Thank you.

Hey Seth, this is Kurt. I'll take the first part of that question and let Seth address the second part regarding reinvestment of any margin. The performance on an operating margin standpoint for the second half, on a gross margin standpoint, will be very similar to that of the second quarter. We continue to see, as we signaled and guided at the beginning of the year, strong performance from everyday low pricing. We expect to continue to see transportation being the biggest benefit fueling gross margin expansion. As a reminder, over two years where transportation costs were pressured, we absorbed most of that, and this is anticipating somewhat transitory; we're getting the return on that in 2023. On the SG&A standpoint, what really stands out is the difference in the second half, as you observed, is we expect Q3's SG&A, excluding the sale leaseback benefit, to perform very similarly to Q2, experiencing the 70 to 80 basis points deleverage, principally from investments in the business. However, Q4 really has the best comparisons. If you look back at the fourth quarter of last year, while we had robust sales, we also had increased costs from the storm and the Orscheln acquisition transition with higher incentive compensation. We are lapping that and we expect a modest level of SG&A deleverage in Q4. By holding the gross margin steady, you can expect better performance on SG&A. It's really about how well we're managing to spend. I also can't ignore that the team has done an excellent job scaling costs and leveraging investments we made. We are seeing significant efficiencies, even along with SG&A on distribution and supply chain driving lower costs and efficiencies.

Yes. Thanks, Kurt. In relation to whether we should reinvest and how we think about that? First, I would just say EDLP remains our true north, and that strategy continues to pay off for us. If you look at the success we're having with our accumulated activity, our transactions, and our continued record of customer counts coming to Tractor Supply, our plan is to maintain that EDLP focus and not to revert from it. We will reinvest if we see a need to do so, but we do not foresee a meaningful type of reinvestment. Lastly, I would just say that our inventory position continues to be very strong. As we look ahead to the back half, instead of a reinvestment of margin, we've put ourselves in a position to really partner with our key suppliers to go out there, get special buys, pursue key values, and ensure we have meaningful values for our customers to drive the full basket. I'm very pleased with our incredible team and the great reset activity we have ahead that we can manage our top line and drive market share while simultaneously managing our margin structure.

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

Hey, good morning, guys. So I want to maybe Hal speak a little bit more about the historical context here. I mean, you started to mention some things in answering Mike Lasser's question, but obviously, we're coming off an unusual period with COVID. You're starting to see this normalization occur. Your customers' behaviors are changing. Maybe just talk a little bit more about what that means to the credit basket trends and then kind of what we think that indicates here over the next six to twelve months. I know you're assuming this will continue in the back half of this year, but how are you just thinking about it longer-term? Thank you.

Yes, hey Peter, and good morning. If you look back over 30 years of this company's comp growth, it's been almost equally split 50:50 between average ticket and comp transactions. If you look really at our body of work over the last 3.5 years during the pandemic, there have definitely been periods of inflation and UPT increases, but collectively, it's about 50:50 comp transactions and average ticket. That formula has really always been present in our historical numbers. Our expectation is that as we navigate the current economy and consumer behaviors, we will migrate back to that historical blend as we exit this year and move into the next. There's going to be some ins and outs, as we mentioned in the second half when we expect UPT headwind to level out as we approach year-end; AUR is expected to decrease. Those will work a little bit in tandem, and big-ticket will become a lesser portion of sales, which will provide a mixed benefit. We are observing comp transactions increasing, which balances out right now and delivers the implied guidance we have for the second half. We've secured all-time record active customers this quarter, and our active customer base grew this past quarter. They are shopping more frequently while performing a slight deconsolidation of their trips. Additionally, our share gain in categories like pet food, where we continue to take significant share, supports us as we are perceived as a value player.

Megan, we'll go to the next caller, please.

Absolutely. Thank you, Peter. Our next question will come from the line of Peter Keith with Piper Sandler. Your line is now open.

Hi everyone, hope everyone's good. Good morning. I wanted to just follow-up on the new real estate strategy and just put it into the context of your long-term algorithm. Is it meaningful enough that perhaps some of those targets on an annualized basis could be adjusted? I'm guessing I'm looking specifically at the sales growth target of 6% to 7% and then the EPS growth target of 8% to 11%.

Hey Peter, this is Kurt. The new real estate model, one of the many things that we're excited about, is not only does it give us the long runway, but to your point, moving from 70 to 90 stores a year is driving incremental sales. Those new stores are expected to contribute consistent tailwind into the comps. We believe this new real estate strategy not only provides us a longer runway but strengthens the long-term algorithm, increasing our confidence in it and bolstering the higher end of that. Mid-year through the year, we typically don't adjust our long-term guidance. We will take all of that feedback along with the outlook for 2024 into account when we report on our Q4 earnings. Typically, we refresh any adjustments to our long-term targets at that point. We're excited about what this does for the long-term algorithm and total shareholder return.

Thank you, Peter. Our next question will come from the line of Brian Nagel with Oppenheimer. Your line is now open.

Hi, good morning. Thanks for taking my question. So the question I have maybe just dig a little bit deeper into the comps around the trends in seasonal sales. What I would ask there is, you talked a lot about the weakness here. It falls similar to what we saw in Q1. Are there any geographic differences that you noticed? As we move down to Q3, recognizing you have to trim guidance from a year, did you see any type of rebound in seasonal sales as perhaps some of these weather events have started to abate?

Yes. Hey, Brian, and good morning. As I mentioned in my prepared remarks, the seasonal business was on expectations during April and May. We had talked about that in our earnings calls for Q1 and provided a quarter-to-date perspective. In June, as I mentioned, we saw significant underperformance in our seasonal business, and that was really the bulk of our myth for the entire quarter. June was topsy-turvy with all the various environmental conditions out there. But to your point, we did see bright spots at moments in time throughout the quarter as well as in certain parts of the geography. An example would be the ten days leading up to Memorial Day; we experienced fantastic performance from a seasonal and total business perspective due to favorable weather. However, this was a short period rather than several weeks of spring. Parts of the Southeast, South Atlantic, and regions including Texas and the Far West performed well when we had good weather. The Midwest and Northeast, however, experienced more pressure from cold fronts and storms, and this contributed to our underperformance in June.

Thank you, Brian. Our next question will come from the line of Zach Fadem with Wells Fargo. Your line is now open.

Hey, good morning. Hal, you hinted at another iteration of the Neighbor's Club program at some point in 2024. Can you talk about the lift, the comp lift you saw the last time you updated the program? Is there any info you can share on the types of changes that are on the table that you think could make the program better?

Hey, Zach, and good morning. I appreciate your insight. Firstly, regarding the comp, it's hard to calculate that both given the magnitude of the comps we had in that period. Given the magnitude of the comp, what I can say is we can look at the 15 million Neighbor's Club members we've added over the past three years and how we registered their shopping patterns. The cohorts from that first revision of our Neighbor's Club program have been meaningfully beneficial. As we look ahead, we've received a lot of feedback from our customers regarding ways we can enhance the program in the next iteration. We may uniquely call out certain characteristics of customers based on self-identification, such as being a horse owner or a military veteran. There are some potential changes to our rewards, such as implementing smaller dollar amounts like $5 rewards instead of only $10 rewards. We're also exploring the addition of a fourth or possibly even a fifth tier. We've witnessed record numbers of high-value customers, and we want to incentivize those further. Overall, objectives include reinforcing the program's appeal while personalizing it based on our customer's unique needs. The team's actively working on this, and we're excited to share more details in the future.

Megan, we'll take one more question as we're at the top of the hour. Please proceed.

Absolutely. Our final question will go to the line of Steven Zaccone with Citigroup. Your line is now open.

Great. Good morning. Thank you very much for squeezing me in. I wanted to just go back to the sales guidance change to better understand how much of the change in sales guidance is really due to seasonal missing expectations versus the discretionary being a bit weaker. In one sense, the first half was really choppy with weather throughout the year, as you've discussed. So that'd be helpful. When you think about getting back to mid-single-digit comps, which is the original guidance, what's the biggest drivers to get you back to that trend in the business? Thank you.

Hey, Steven, this is Kurt. I appreciate the question. As we talked about when Brian asked, I'll go back to noting some differentiation in geography revealing weather effects contributed significantly, along with some softer discretionary pullbacks. In the second half, we're acknowledging a different seasonal period, particularly in Q4. We plan for base weather conditions and do not account for additional favorable weather. We view the seasonal categories as being base forecasts. Unless there’s strong demand driven by weather, consumers are more cautious now regarding discretionary items. We're moderating our expectations towards a stronger Q4 based on similar first-half trends. Underpinning this are strengths in our year-round core business, mid-single-digit growth currently, and strong comp transactions. We will remain close to our customers in monitoring their spending power and adjust our approach as required for 2024.

Thank you, Steven. That will conclude our question-and-answer session. I will now pass the conference back over to Mary Winn for closing remarks.

Thank you, Megan. This will conclude our call. I am available for any questions or follow-ups, so please feel free to reach out. We look forward to speaking to you at our Q3 earnings call in October. Thank you.

That concludes today's conference call. Thank you for your participation. I hope you have a wonderful day.