Good morning, everyone, and welcome to the Tractor Supply Company's conference call to discuss the First Quarter 2024 Results. Please note that reproduction of this call, in whole or in part, is not allowed without written permission from Tractor Supply Company. Also, this call is being recorded.

Thank you, Alissa, and good morning, everyone. Thanks for taking the time to join us today. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we'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 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 in the Q&A session, 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 I'll turn the call over to Hal.

Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. 2024 is off to a solid start with first quarter results in line with our expectations. I would like to thank the Tractor Supply team for their ongoing commitment to each other and our customers. As evidenced by our continuation of record high customer satisfaction scores, the team is always there for our customers as the dependable supplier for life out here. Before I get into our review of the first quarter's results, I want to take a moment to share what we're seeing in the macroeconomic environment and its impact on our business. In our view, the U.S. economy remains strong. Unemployment continues at a low level, wages are growing at a steady pace. In spite of sticky inflation, consumer spending remains strong, and mobility has slowed as a consequence of a challenging housing market; that said, we continue to see outsized population growth in rural markets. As it relates to consumer spending, the shift of spending from goods to services continues to be a headwind for our business. In the first two months of the calendar year, consumer services spending growth was nearly 7%, whereas consumer spending on goods growth was less than 1%. As a result, the mix of goods as a share of PCE are now only 100 basis points above their pre-COVID average. This progressive shift is in line with our expectations as we enter the year. Also, as expected, inflation has remained sticky with outsized increases in shelter, food, away from home, energy, and insurance. As a consequence, consumers continue to be anxious about inflation, particularly the lower-income consumer. In the first quarter, our upper-income consumer over-indexed in big ticket categories and recreational purchases compared to our lower-income consumer, who is prioritizing their spending on needs. In our needs-based, consumables, usable, and edible categories, we see very little difference in our performance by income cohort. Once again, our business is proving to be durable, stable, and very consistent. Broadly speaking, in our economy, goods continue to disinflate and are generally running low single digits, with some categories experiencing moderate deflation. With the first quarter behind Tractor Supply, we have now successfully coped with our two most challenging compares due to the inflationary benefits that we had over the last 18 months that have substantially benefited our top line. We do not see additional downward deflationary pressures in the current environment. The transition from an inflationary cycle to a disinflationary cycle is playing out as we anticipated. In spite of a very challenging housing market, we continue to see positive migration trends to our markets. While rural migration trends have moderated from recent peaks, rural America again gained population in 2023. This marks the fourth consecutive year of growth in the rural population. It is our view that the sense of community found in our markets, and perhaps more importantly, the ability to secure a piece of property at a reasonable price has ensured that the rural migration trend is one that's here to stay for the time being. So with that, let's now turn to a review of the business for the first quarter. We grew net sales by 2.9%, with comparable store sales up 1.1% and diluted earnings per share up 10.9% to $1.83. Our comparable store sales growth was driven by transaction growth of 1.3% offset by a small decline in average ticket of 0.2%. These results were very much in line with our expectations that we shared with you as we started the quarter and the year. Overall, our customer base remains healthy and highly engaged. Total customer count grew mid-single digits with growth in active, new, and reactivated customers as we invested in our Neighbor's Club program and customer service. Neighbor's Club continues to represent the majority of our sales. During the quarter, we significantly enhanced our Neighbor's Club offering. As our points-based program enters its fourth year, it was appropriate for us to refresh our offering based on insights and customer feedback. The changes we made were all implemented with the goal of having customers receive rewards faster and to lower the spending required for tier qualifications. Our Neighbor's Club members have responded positively to these changes. For example, the new rewards redemption at a $2 and $5 level down from $10 is working as we designed and is driving greater customer engagement and trips for this cohort. The initial response from our customers on the collective changes has been very positive, and we’re seeing increased spending across the board. In addition, we continue to improve relevancy to our members through more personalized offers and tailored incentives and experiences based on their interest and shopping patterns. With more than 34 million members, Neighbor's Club should continue to build our customers' loyalty and affinity for Tractor Supply as we move forward. Our customer service scores continue to run at all-time highs. This is an area where we have strategically invested in training, compensation, benefits, tools, and technology to help elevate our customer service. This has garnered the attention of our customers, and I believe helps strengthen our scores. The strength of our portfolio products and shopping missions was very evident in the first quarter. We had robust growth in our seasonal categories. Our consumable, usable, and edible products performed in line with our chain average. Our performance this quarter was on top of the robust growth we've experienced over the last four years as our Customer, Usable, and Edible customer trends remain strong as we continue to gain market share. Our customers were certainly in the mindset to prepare for spring as we had strong big ticket growth in the mid-single digits, and strength in other early spring preparedness categories. Categories that performed below our comp sales growth were more in our discretionary businesses such as clothing, gifts, and truck tools and hardware. In our pet food and livestock categories, we continue to grow our market share. In pet food, we've seen growth moderate as the category disinflates and pet ownership moderates. Our customers' shopping trip in this category is highly differentiated, so we offer a broad assortment from value to super premium across private and exclusive brands in a pet-friendly environment, which now includes about 900 Pet Wash locations. Additionally, pet owners benefit from the one-stop shop convenience of our lifestyle retail format, in particular, from the cross-purchasing synergy with animal and livestock feed. In animal and livestock feed, we offer exclusive brands like DuMOR and Producer's Pride, along with the national brands from Purina, Cargill, Triple Crown, and more. We continue to innovate across our key categories of equine, cattle, and poultry in trends like organic and snack. And we bring a unique retail experience in these categories with events like our annual spring Chick Days. This year, the event is on track to have strong results. We continue to see growth from existing customers who are building out and adding to their flock. Organic feed and our assortment of premium breeds continue to lead the category and growth. Tractor Supply is the destination for backyard poultry. Today, nearly two-thirds of our backyard chicken owners consider them to be pets, and our customers over-index the poultry ownership with nearly one in five customers having chickens. Stepping back, we have a market share of about 20% in bagged livestock feed, and we continue to take share, and we are consistently outperforming the market across our two categories. After nearly two years of pressure on our big ticket comps, we were pleased to see big ticket categories turn positive in the quarter. We experienced broad-based strength across seasonal categories, including zero-turn tractors, recreational vehicles, and outdoor power equipment. Our digital sales returned to double-digit growth in the quarter with increases in visits and an improved conversion rate. Nearly 80% of our orders were either picked up in-store or fulfilled by a store. Almost 20% of our sales came through our mobile app. The team made excellent feature updates such as the new Express Checkout feature and the addition of estimated delivery times, and these have helped increase our conversion rate. This year, we're opening our tenth and largest distribution center in Maumelle, Arkansas. The startup of the distribution center is right on schedule as shipping will begin during June. Once again, we'll be able to capitalize on the opportunity to realign the store servicing areas across the DC network to balance transportation costs and DC capacity while improving service levels to our stores. It is great for our DC network to have this new capacity to better position our inventory and better service our stores, all the while allowing us to reduce our freight cost. Our supply chain investments over the last four years have provided us with material structural gross margin benefit from the reduction in stem miles. We opened 17 new Tractor Supply stores and 4 Petsense by Tractor Supply stores in the quarter. As I shared last quarter, 2024 will be the year of the Garden Center. We're leveraging the change of seasons across the storefront as the year shifts to spring. The team has come out of the gate strong to ensure we have a differentiated assortment and availability in time for the planting season. We now have nearly 500 Garden Centers across the chain. Based on our early read of spring, our expectation is that with more variety than ever and a grower network to support our Garden Centers, we should see customer response positively to this multi-year growth driver. At Tractor Supply, we're grounded in our purpose as a company to serve life out here and our deep-rooted commitment to our mission and values. We believe in finding meaningful ways to support our core mission. Earlier this week, we issued our fifth annual Stewards of Life Out Here Tear Sheet that highlights our stewardship priorities and progress. For all of us at Tractor Supply, we are highly committed to preserving life out here for future generations. We are proud to share our progress towards our ambitious goals. In summary, we're relatively pleased with our start to the year. Customer trends are in line with our expectations. The team is executing very well. We're controlling our controllables and making progress on our Life Out Here strategy. With the majority of the year remaining, we are reiterating our guidance for fiscal 2024.

Thank you, Hal, and hello to everyone on the call. Let me start by building on Hal's comments about the quarter. Our first-quarter performance was right down the middle when compared to our expectations on both the top line and the bottom line. Regarding the cadence of comp sales for the quarter, we started out with a very strong January as the month featured some spans of brutal cold. While February was warmer than normal and relatively soft, the best way to view the winter season performance is to look at weather categories across January and February combined. Overall, we were pleased with our cold-weather category performance. We comped positively in March in spite of a limited arrival of spring across our markets. Where this season had turned to spring, we were very pleased with how the business performed. All geographic regions performed in a tight band for the quarter. Average unit retail was impacted by modest product deflation of about 1% in line with our expectations. We're encouraged by the trends we are seeing in unit growth and the underlying share gains in categories where deflation has had an outsized impact on AUR. Our gross margin rate of 36% increased 50 basis points from last year. We were very pleased with these results, which were driven primarily by ongoing lower transportation costs, disciplined product cost management, and the continued execution of our everyday low-price strategy. We were able to strategically provide great value for our customers while maintaining our gross margin. We remain committed to being the everyday low-price leader in our markets. Our first-quarter SG&A expense rate, including depreciation and amortization, increased 16 basis points to 28.2%. This increase in SG&A as a percent of net sales was primarily attributable to our planned growth investments, which included higher depreciation and amortization as well as the modest deleverage of our fixed cost given the level of comparable store sales growth. The leverage from our distribution center productivity gains did partially offset the loss of fixed cost leverage. Excluding depreciation and amortization, SG&A was essentially flat as a percent of sales. This was better performance than we anticipated entering the year as there were approximately $5 million of expenses that we had planned to occur in the first quarter that we now anticipate incurring in the second quarter. From my perspective, the team did a great job controlling the controllables. Altogether, operating income increased 7%, with operating margin expansion of 34 basis points. Net income increased 8.2% and diluted EPS increased 10.9% to $1.83. During the quarter, we repurchased approximately 0.5 million shares and paid quarterly cash dividends totaling $118.8 million, returning $236.2 million of capital to shareholders. We also increased our dividend by 7%, marking our 15th consecutive year of growing our dividend. Turning now to our balance sheet. Merchandise inventories were $3.0 billion at the end of the first quarter, representing a modest decrease of about 4% in average inventory per store. Lower freight costs were a contributor to the decrease in inventory dollars. Excluding freight in Orscheln, our comparable inventory was up modestly in dollar value and units. We are pleased with how we exited the winter season and the quality of our inventory as of the end of the first quarter. In our commitment to be the dependable supplier for our customers' lifestyle, we are at the highest in-stock levels since pre-COVID. With strong annualized cash flows and improved working capital, we continue to maintain a healthy balance sheet with a leverage ratio of around 2x. As Hal mentioned, we are reiterating our guidance for 2024. We anticipate this year to be a continued story of ongoing share gains offset by macro headwinds. We continue to expect full-year sales of $14.7 billion to $15.1 billion and project comparable store sales to be in the range of down 1% to a positive 1.5%. As we manage through the first half of the year, we expect to see second-quarter comp sales in line with our full-year outlook. Given the trends in our comp sales, our outlook assumes that strength in big ticket and seasonal will continue. We are planning for modest AUR pressure on CUE with positive unit trends. Our expectation is that select discretionary categories will remain under pressure. For the second quarter, we expect gross margin expansion in line with the first quarter from continued supply chain efficiencies and benefits from effective cost management, partially offset by the mix impact of growth in big ticket, which runs below the chain average. We anticipate the gross margin expansion to be offset by SG&A deleverage from our planned investments, including the incremental cost for the opening of our new distribution center. As I mentioned earlier, there's approximately $5 million of shifting to the second quarter that we had initially anticipated in the first quarter, including staffing and training costs associated with the opening of the DC. As a result, we expect second-quarter operating profit margin to be down slightly compared to the prior year. As I shared when we initially provided guidance in February, there are a few factors that will impact operating margin in certain quarters. We anticipate the tailwinds of lower transportation costs to continue to benefit our results in the second quarter and begin to flatten year-over-year starting in Q3. In regards to SG&A, the second and third quarters will be pressured from the startup costs for the new distribution center, while the supply chain benefits will not begin to be realized in gross margin until late in the third quarter. To sum it up, for the full year, we continue to guide toward net income of $1.06 billion to $1.13 billion and diluted earnings per share of $9.85 to $10.50. With the majority of the year still ahead of us, we believe these expectations are still appropriate. We continue to believe that the best way to look at our business is not by the quarters, but by the halves of the year. In this environment, what sets Tractor Supply apart is our ability to effectively manage the top line and bottom line while investing in our Life Out Here strategic growth drivers.

Thanks, Kurt. Tractor Supply has a proven business model that has been resilient over many business cycles. As a company, we have numerous levers to continue to gain market share and numerous levers to effectively control expenses. Our Life Out Here strategic priorities are on track and delivering on our expectations. We continue to see fantastic opportunities for growth ahead. In-store and online, we're ready for the spring and summer season. Customers are responding positively to our new product assortments from Weber, Toro, YETI, and more. We have several product test and learn initiatives in-store and online, like Martha Stewart and Eddie Bauer. Across companion animals, we're adding to our assortment with new brands like ACANA, Real Mesa, and Native Pet and expanding our offerings across brands like Purina Pro Plan, SPORTMiX, and Hill's Science Diet. Our Garden Centers are set to help our customers prepare for their hobbies of gardening, especially with a focus on vegetables and fruit trees and just simply enjoying their property. Across the seasons, we have new product offerings specific to the Garden Center. We're currently showcasing our roses, Plant of the Month, and are prepared with hanging baskets for Mother's Day. As we move into the second half of the year, we will shift to Fall Harvest and Halloween and then to Christmas with live goods and decor. Overall, this is a great way for us to track new customers and soften the front of our store. Across the store, we have a tremendous amount of newness for our customers' passions and lifestyles. We also continue to invest in customer service at our stores. In addition to our Hey GURA app, to turbocharge the service our store team members provide to our customers, we are leveraging AI in our stores and Garden Centers through our Tractor Vision, which uses cameras and computer vision technology to provide data to deploy alerts that help our team members efficiently and effectively staff the store. One scenario where this is incredibly beneficial is when customer traffic builds up at our registers; Tractor Vision will alert team members through their ERP that another team member needs to come up to open another register. We're also leveraging Tractor Vision to monitor our front apron of the store for dwell time. This allows a team member to better serve our customers, particularly in categories like outdoor riding lawnmowers. These are the types of investments and capabilities that separate us from our farm and ranch competition and really make us a leader in retail. It's an exciting time at Tractor Supply. My thanks and appreciation go out to the team for their dedication to delivering our mission and values every day. And now we'd like to open up the call for questions.

The first question comes from the line of Seth Sigman with Barclays.

I wanted to talk about the big ticket improvement. Obviously, that's a nice change from what we've seen. If I recall, when you talk about big ticket, you're looking at transactions over a certain size. Can you try to separate for us the difference between sales from high price point products, so you mentioned riding lawnmowers? Have you actually seen comps in those specific high-ticket categories go positive? Or is it more basket building; you're seeing the benefit from more units per transaction as part of the spring activity?

Seth, thanks for the question. We were very pleased with our big ticket performance in Q1. I'll highlight two trends and then provide some examples in the context of each of those. The first one I'll highlight was in January, where we had nice cold weather come through the country. As a consequence of that, we had some nice big ticket sales that go along with that, as we often do, whether that's things like snow throwers or log splitters. And to your point, the cutoff that we use for big ticket is the $350 price point. But then the other comment I'll make is in the month of March, particularly the last couple of weeks, where we start to see that spring ramp occur, we saw a nice lift in big ticket over those weeks. As we highlighted in the prepared remarks, in categories like riding lawnmowers and outdoor power, we saw strong positive comps in those categories during those weeks. As we highlighted in the prepared remarks, we saw an over-penetration in those purchases of higher-income consumers versus lower-income consumers. As we talked about, just kind of buying a bit more towards the need for the lower-income consumers. The last thing I'll add is that the trend on big ticket that we saw in March for spring sales has continued into Q2.

The next question comes from the line of Simeon Gutman with Morgan Stanley.

My question is also on big ticket, and Hal maybe I can put it in this way: if you look at it relative to 2019, and I think we're trying to assess whether there's like a bottoming and a turn that's happening versus seasonal. I think your comments around the March volume sounds like there may be a turn. But if we compare it to 2019 or 2020, granted it's hard to understand what baseline is normal versus not, but looking at it from that perspective. And then if there's anything about these big ticket trends that informs you about the cadence of the year. It doesn't sound like it, and it sounds like the cadence has always been pretty static across the quarters, but is there anything that you think about maybe big ticket strength continuing into the second half that maybe you didn't plan for?

Simeon, I'll reiterate a couple of the comments that I have on the previous question just to tee up the discussion. So on big ticket, as it relates to spring, we saw nice big ticket ramp in absolute dollars and comps as we exited Q1, and those trends have continued into Q2. We're very pleased with our big ticket spring sales. As we look at a multi-year history on that, if you recall, last year, we commented that our big ticket categories were back to 2019 levels. So I would articulate the growth that we're seeing now is kind of consistent and growth that would be on top of a normal — going back to 2019 trend. So we feel like it's a healthy growth, compounding growth, and very much stable on top of 2019 levels. The final thing I'll add is we called out numerous times, the drought conditions and the heat conditions that occurred in a number of our key markets in the last two years, whether that's the Midwest or Texas, given the cooler weather that we've had and the nice precipitation we've experienced, grass is green across the country right now. And we all just returned from our executive walks across the whole country last week, and we all came back and kind of talked about the same thing. You've got really green grass, and it's growing well and the temperatures are staying cool. So the conditions are right for big ticket sales as well for us. But we're very pleased with the big ticket activity, strong exit in Q1, and continuing that pace into Q2, healthy on top of 2019, and the conditions are favorable for it this year.

The next question comes from the line of Seth Basham with Wedbush.

I'm just trying to understand your inflation and deflation outlook a little bit more. As we see a rise in oil prices here, do you think that could lead to any material inflation as we move through the year?

Seth, good morning. As it relates to inflation, the most important point to take away from us is that we've lapped our two most difficult quarters concerning comping on top of inflation. As we remarked at the end of our Q4 call, we were lapping 11% inflation from Q3 of 2022, and then we're lapping substantial inflation from last year in Q1 of 2023. So as we look ahead, we have significantly fewer lapping issues. In particular, as it relates to things like animal feed, as we get towards the end of Q2, we really start to get back to a more normalized environment. And by the way, by the time we get to mid-Q3, we're basically lapping it all. So I feel really good as we look forward that we're kind of getting close to hitting the bottom on disinflation and starting to be back as we get towards the end of the year. We're not seeing anything different in our margin expectations, pricing expectations, or cost of goods expectations that we saw at the beginning of the year. As we've mentioned, we worked closely with our vendor partners in the middle of last year to pull back on a lot of the cost increases we've seen. That's been successful. You see that in our gross margin rate results. At the same time, we're appropriately moderated on prices. Our pricing has never been sharper in the industry. We monitor that very closely, and we've got multi-year trends on that, never been sharper than we had in Q1 and coming into Q2. And we don't see anything on the horizon that would change our retail price or cost of goods outlook. We did just complete all of our container shipping negotiations. Those are basically coming in kind of flat to last year. So there's not — we don't see headwinds in the future there. And I don't think that there's been a significant amount of oil, fuel, or cost type increases to impact certainly the first cost type at this point at all. And the freight market, given the status of the freight market and the overcapacity that exists, you had to start to see prices come up to reflect fuel in that area as well. So pretty stable, no real change to our outlook, either on this call or versus our last call.

Yes. And Seth, this is Kurt. Just to tie that back to our guidance. As we entered 2024, I have said that we could see, and are planning for 2024 from an inflation and deflation perspective, relatively neutral, plus or minus a point. And we expect as we're starting to lap some of those inflation quarters last year; Q2 may have a similar impact as we saw in Q1. But then if you were to play out the current environment today, it would really put us in an expectation for the year sort of that neutral standpoint. And we'll know more on how the back half looks after Q2, but still pretty much playing right in line with our guidance.

The next question comes from the line of Christopher Horvers with JPMorgan.

I wanted to expand on the big ticket commentary and focus on what's happening with spring. Can you contrast what you saw in March in markets where spring broke? Where did it break? Where it hasn't yet broken? And how you're thinking about what's April telling you about the business so far in the quarter?

Yes. Chris, we think where the sun has been out and conditions have been right, we've been very pleased with spring. Our big ticket sales are strong; our Live Goods are selling well. Our Garden Centers are performing, and categories like grilling and other categories like fertilizer and grass seed, we're seeing real strength across the board when the sun is out, and conditions are right. Interestingly, in the first quarter, conditions were stronger, really more in the Northeast and the Midwest, as there was a decent bit of cloudiness and precipitation through the Southeast and over into Texas throughout the back of the last couple of weeks of the quarter. And that's, interestingly, kind of continued into the second quarter. But we feel very optimistic about the southern markets. They always turn in spring. And, you know, it's beautiful in Nashville today. But we’re very pleased with our spring performance as we've headed into Q2 here. We see Q2 really very similar to Q1, just right down the middle of a fair way. We expect Q2 to be very similar to Q1. And with the one notable call-up that Kurt had around, we think it's the bottom quarter for us on disinflation as it relates to CUE. But otherwise, it's kind of a straight down the middle, very similar quarter to Q1. And as I said, we're very optimistic and pleased with our spring start.

The next question comes from the line of Steven Forbes with Guggenheim Partners.

I think you noted 34 million members in the program, which is a surprise to the upside here a little bit, at least as per our expectations. So I was wondering if you could maybe expand on the changes you made to the program. Is there anything sort of notable in terms of acquisition, maybe converting those non-Neighbor's Club members into members or repeat or retention trends that changed how you're thinking about that program membership evolving over time? And is there any way to sort of size up what the true opportunity is for the 20% of sales that are coming from non-members today?

We're very pleased with the continued progress we're making in our Neighbor's Club platform. And clearly, our customers are engaging in it and using it, finding value in it, and it's a key retention driver and behavior driver for our business. It's certainly become an integral part of how we go to market and a key area of competitive advantage for us. This quarter, we were pleased with the number of customers that we added to the Neighbor's Club platform. I called out that we had new customer growth in the quarter. That new customers are a key driver of Neighbor's Club program growth, so we’re very pleased to have positive new customer counts in the quarter. The second thing I'll call out is, to your point, we made adjustments to our membership program to allow for lower dollar increments to be redeemed in terms of points, both $2 and $5. We also modified our tier structure a bit to allow people to earn more dollars sooner. The entire goal of that was to drive that opening tier and that behavior to get them more engaged. As we talked about on these calls over the last two or three years, the best performance we've seen has been in our Preferred Plus tier. The second-best performance has been in our Preferred tier. Our basic Neighbor's Club tier was really where we wanted to reignite that group, reenergize that group. The changes we made, we saw a significant response and we're very pleased. We’ve got a number of things on the horizon that will continue to help us grow that program. As we called out at the beginning of the year, we've got a Heroes program that we'll be rolling out towards the end of the second quarter or beginning of the third quarter, right around the July 4 time frame. We'll share more about those details on our next call, but that's a lot — that's going to allow us to embrace another set of customers that we have, provide them incremental value, and we’re excited about that. We’ve gotten great feedback from the customers that we've tested that with. We’re also in the process of implementing a customer data platform that's going to allow us to significantly improve our personalization. That's time for implementation in the back half of the year, and it's going to allow us to just take our personalization capabilities and our targeting capabilities to the next level, in which we already do an excellent job—I’d say, a market-leading job on that, but this just keeps the improvement there. So, great performance in Neighbor's Club in the quarter, new features being launched already that are going to keep driving that, and then we’ve got a number of new things on the horizon. As I said, this is a distinct part of Tractor Supply and an area of competitive advantage for us.

The next question comes from the line of Steven Zaccone with Citigroup.

I wanted to ask on gross margin. So given the guidance for the second quarter that it should be similar in terms of expansion. Can you just talk through the back half of the year because you start to face some tougher comparisons? Just talk through some of the expectations in the back half?

Yes, Steven, this is Kurt. The gross margin drivers are very similar throughout the year, but, as I mentioned in some of my remarks, it has a bit of a different impact by quarter. So our biggest opportunity and biggest growth driver in gross margin will be, throughout the year, our transportation and freight. In transportation and freight, it's both transitory or rate-related, where we are coming off of those higher costs, particularly in the ocean freight, but also the more sustainable is the structural where the new improvements in the supply chain, the distribution centers are driving down our stem miles. And even as we open up our tenth distribution center, we'll reoptimize the lanes and reduce stem miles, being able to optimize by finding the lowest better rates—that happened with our Navarre, Ohio DC last year. Those — that will be the biggest driver. We'll start to lap in Q3, and heavily in Q4, some of the rate-related benefits, so it will begin to moderate on that aspect. But then, on the other aspect of that is our cost management on our products. And there's really been a very disciplined strategic approach toward that, that began last year, but really, we started to see the benefit modestly in Q4. Our merchants and our vendors really partner together to drive down some of those costs. We're actually even creating some of that AUR deflation so that in our CUE categories, our key drivers, we're able to offer the best value and even better gross margin rate. And that's some of what the pressure that I mentioned on AUR is— is that we feel very confident that we're bringing the best prices in our categories, regardless of competition, and that's what's helping to really gain market share. So for the back half of the year, transportation, cost management, and lower cost drivers will contribute. And then in the second half, the third item that will begin will be the supply chain benefits from the new distribution center. As the transportation costs are the highest one, that's why we've said the second half may be a slightly lower gross margin growth than the first half as we start to cycle it. But it's really been the main three things that will benefit throughout the year, but just beginning to feel less of a benefit on the transportation side in the second half.

The next question comes from the line of Michael Lasser with UBS.

Can you give us a sense for how the pet food category has been performing of late? Have you been surprised that there's been general softness in these trends? And how has Tractor Supply's market share compared this quarter to the last couple of quarters, especially as it seems like the company has been taking more aggressive steps whether it's price investments, kinks to the loyalty program? And then finally, there's been a lot of parsing of your words on quarter-to-date trends. Can you give us an explicit indication of what's been happening quarter-to-date, so we can understand if you have to see an acceleration from here in order to get to that down the fairway commentary about the second quarter?

Michael, I'll comment first on pet. First off, I'll just step back on pet and say it's an incredibly attractive market. It's one that has outperformed the broader retail market for decades. It's been a long-term source of growth for us. I think that the slowdown in that industry this year has been well-documented, with that slowdown being driven really by two macro drivers. The first is moderation in pet ownership. And the second is stagnant pricing, right? That's an industry that's historically been able to claw 2 or 3 points of price increase every year; given the substantial price increases that have occurred in that category over the last two years, basically that category is flat in pricing for the year. So you've got some moderation in the category just for this year. We have an incredibly distinct value proposition in that category. Our value proposition includes, I think, importantly, the co-mingling of purchases with animal feed. Eighty-eight percent of our customers have animals and pets; the vast majority has both. So they appreciate being able to shop for both their animal and pet food at the same time. We complement that key kind of portfolio advantage obviously, with customer service, with a pet-friendly environment now having over 900 pet washes—which by the way, we see nearly 50,000 pets a week in our stores, with pet washes, pet clinics, etc. And that's true, just animals in our store. So we have a very distinct value proposition. We had all — kind of publicly available brands, the international brands, but we also have two very leading private label brands. We cover the range of assortments. So, an incredible value proposition there, one that's distinct and I think in particular one that really holds up well in this market, given the various competitive dynamics that are going on. And as I said, I want to reinforce, we are absolutely still taking share in that category, albeit at a lower growth rate because of the moderation in the category. But we are absolutely still taking share in that category, and we're only doing things to reinvest and lean in further to continue to capture that share. As we look forward, we fully expect that pet will continue to be a long-term growth category for us and a driver of our overall growth. As it relates to Q2, as I said, we expect it to be another just straight down the fairway quarter for us. We don't need meaningful acceleration to use your words to deliver that performance for the quarter. One of the things I already highlighted is that the last quarter of real material disinflation, particularly in animal feeds. So it would be great to have that behind us, and our outlook takes that into consideration. If anything, I think there could be some modest upside as we look ahead if you look at our quarterly comps last year. We had mid-single-digit comps in the month of April and May and then basically dropped off to a flat comp in the month of June. We can all recall June last year; it went immediately hot, and you had the Canadian forest fires. Our outlook does not count on that performance improvement, but it's an opportunity should we get the right conditions for that month.

The next question comes from the line of Scot Ciccarelli with Truist.

I know it's still a somewhat limited data set, but you talked about seeing good results from your Garden Centers where spring has broken. I know you guys have previously provided a framework for what you expect to happen. But can you provide any kind of real-time updates in terms of what you're seeing on actual results?

Two things on that. So we've gotten so much better at sorting our Garden Centers, staffing our Garden Centers, and putting technology in place to drive our Garden Centers. I would encourage everyone on the call, if you haven't had a chance to go visit one of our Garden Centers in the spring, to do so. We've got things this year like our Plant of the Month, as I mentioned on the call, which are Knockout Roses right now. We're deploying our Tractor Vision software into all the Garden Center stores to optimize and improve customer service. Our grower network now that we’re in year three in many of these stores is lined up to produce tailored product for us, and we're seeing those results in our live goods sales broadly across the country, even in areas where conditions have been ideal, we're seeing good results there. The team is doing things like, for Easter this year, for the first time, we brought in over 100,000 bulbs for Easter with a really nice packaging around them and made those things available. It just gives us even more confidence that we can execute in those sorts of ways. And so we're very pleased with our live goods and our Garden Center performance. In addition to the live goods piece, which was about half of the lift that we're looking for. We also, this year, have gotten much better at distinguishing what goes outside in our Garden Centers versus what goes inside; you'll see all of our pot assortments out there this year. You'll see organic soils closely cross-merchandised alongside our fruit and vegetables this year. You'll see soil and mulches lined up in our side lots to facilitate drive-through and load-up there. So we really got those things primed this year. And then as we look towards the back half of the year, this year, you'll see us have much more expansive programs and things like harvest, and that's really blowing that out this year with mums, pumpkins, a harvest product, Halloween product building a real kind of harvest destination in our Garden Centers. Similarly, you'll see Winter Wonderland really brought to life this year like we've not yet done for Christmas. So, really excited about our Garden Center performance in the current spring period, but also as we look forward to the plans that we have. The team is doing an excellent job across all functions, really lining us up like — as an example, on that Easter program, we shipped to our distribution centers. It was the first time we ran plants through our distribution center. So a lot of learnings and a lot of continued execution there.

Is there a way to quantify the comp lift, though, Hal?

Yes. So as we exit Q2, we'll have a much better sense of that, as you all will certainly recall, our — over the last year, we said our Garden Centers were not performing at our expectations, because of the suboptimal spring conditions that we operated in last year, but that we had high expectations for this year. That's noted; it is the year of the Garden Center; we're performing at those expectations. But again, six, seven weeks into spring with another six, seven, eight strong weeks to go. So more to come on that. But I think the short answer, I would say is they're performing at our expectations kind of season-to-date.

The next question comes from the line of Peter Benedict with Baird.

Just curious, I believe the Orscheln stores are earning the comp base in the second quarter. Just curious how we should think about that? Anything that those stores are cycling from a year ago standpoint that we need to think about? And kind of related to that or maybe a little unrelated, I was curious if Seth would talk a little more about some of the merchandising innovation, newness that's in the store and maybe what he's most excited about as we look out over the balance of the year?

Yes, Peter, this is Kurt. I'll start by addressing the first part of your question and then hand it over to Seth for the latter part. Orscheln is performing solidly and in line with our expectations. For example, the first quarter is still reflecting much of the liquidation at Orscheln. As we move into the second quarter, we begin to move beyond much of that liquidation. Our transition to the point of sale aligns with the timeline for integrating all of the Tractor Supply inventory into our system. This means we will approach a more typical timeframe, especially in the latter half of the year. The Orscheln stores are matching many of the performance metrics we see in the Midwest, and we are pleased with how things are proceeding. As we mentioned during the acquisition, it represents a valuable opportunity for us, and this is becoming evident. We have 81 stores that were differently sized, and we've managed to rightsize many of them to align with the standard Tractor Supply size of 15.5 square feet. We also have some larger stores that let us conduct tests. Over the last year, we've rebranded and introduced the fusion concept to ensure that these stores provide a streamlined and efficient shopping experience akin to Tractor Supply. The team is actively engaging and gaining insights from the optimized Tractor process.

Thank you, Peter, for the question. Looking ahead to the second half of the year, I want to speak broadly beyond just Orscheln, referring back to our discussion last quarter about the significant innovations we've introduced in our stores since the pandemic began. This includes all the reset activities, new products, and partnerships with our suppliers, whose supply chains are returning to normal levels. I would highlight a few things we're particularly excited about: first, we've mentioned our strong performance in big-ticket items, and Hal mentioned tractors and riders. Our exclusive lineup, including Toro and Havoc, is performing exceptionally well, demonstrating our focus on products suited to our customers' needs. Additionally, we recently launched a broad assortment of Groundwork soils under our exclusive brands, which have been performing strongly. Our launch of Weber has also gone very well. Looking into the second half of the year, as we noted in our prepared remarks, there will be new product introductions in the pet category, including Iconic Classics, where we will be the first brick-and-mortar store in the U.S. to launch these products. We're also excited to introduce Real Mesa, which is a strong new digital brand making its debut in brick-and-mortar pet food. This is specifically aimed at our target consumer. Furthermore, our Garden Centers are undergoing new activities throughout the year, and we anticipate launching new programs mid-year, particularly for our hunting customers. We believe these will help drive business across our Tractor Supply stores on a regional and localized basis.

We've have maybe one more question just so that we're sure we end at the top of the hour.

Final question comes from the line of Peter Keith with Piper Sandler.

Nice results, by the way. So I wanted to kind of just ask around the broader economy. Housing remains quite sluggish. How do you see the economic backdrop in general for the rural economies where you guys operate versus maybe the broader U.S. economy? We've been housing into that discussion would be helpful as well. I guess is rural outperforming? Or do you think performing more in line with the broader U.S.?

Peter, thank you for your question. At a high level, rural America is currently thriving. We are observing our best performance in rural areas. Nationally, there is more net migration out of cities than into them, with many people moving to rural regions, which benefits us. As we noted in our previous earnings call, we expect 2024 to be a non-algo year for us, and we look forward to returning to our long-term growth trajectory as economic conditions stabilize. The two main economic factors affecting us are the transition from goods to services in personal consumption expenditures and the trend of disinflation, both of which are progressing as we anticipated earlier this year. We are now just 100 basis points away from goods to services reverting to pre-COVID levels, having already made significant progress. While the final point of this transition is uncertain, we are far along in the process. We believe that Q2 has marked the bottom of disinflation, and we feel optimistic as this is likely behind us. Regarding the broader housing market, we do not view it as a central factor for our business and are aware of discussions surrounding high interest rates and their potential impact on the housing sector and 2025 results. However, discussing 2025 results at this stage is premature. We do not anticipate that the long-term high rates will affect our business to the extent that it impacts those more sensitive to housing issues. Thank you, Peter, for your question.

All right, everyone, that will wrap up our call today. I'm around and we're available for calls. If you need anything, please don't hesitate to reach out, and we look forward to talking to you at the end of our second quarter. So thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.