Tractor Supply Co /De/ Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss Fourth Quarter and Fiscal Year 2024 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Please note that the queue for our question-and-answer session did not open until the start of this call. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. The host for today's call is Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Now, first up is a year-end video. I would now like to pass the call to our host, Mary Winn Pilkington. Mary Winn, please go ahead.

Thank you, Alisa. Good morning, everyone. We appreciate your time and participation in today's call. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. Following our prepared remarks, we'll open the floor for questions. Seth Estep, our Chief Merchandising Officer, will also be available during the Q&A session. Please note that a supplemental slide presentation has been made available on our website to accompany today's earnings release. Now, let me reference the Safe Harbor provisions under the 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. As we move into the Q&A session, please limit yourself to one question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation. We will also be available after the call for any further discussions. Thank you for your time and attention this morning. And now it's my pleasure to turn the call over to Hal.

Good morning, and thank you to everyone for joining our call today. Before we begin, I would like to acknowledge the recent wildfires and winter storms. Our thoughts and prayers are with all those affected. I'd also like to express our deepest appreciation to the first responders who worked tirelessly to protect our communities during these challenging times. Our Tractor Supply team has and will continue to stand with our communities as they recover from these events. The opening video, I think, did an excellent job highlighting the key accomplishments of the Tractor Supply team in 2024. And my sincere appreciation and gratitude go out to the team for all they do. Over the year, we consistently executed with distinction and delivered solid results in a tepid retail environment. Additionally, the team made progress against our Life Out Here strategy, enabling continued market share gains and future growth. Now, let's go through some of our highlights specific to the fourth quarter and the fiscal year, starting with financials. In the fourth quarter, our net sales grew 3.1%, and comparable store sales increased 0.6%, driven by strong comp transaction growth of 2.3%. Our fourth quarter diluted EPS was $0.44. For the fiscal year, we achieved record financial results on both the top and bottom lines. Net sales were nearly $14.9 billion, growing 2.2% versus 2023 with a comp store sales increase of 0.2%. Diluted earnings per share were also a record $2.04 on a split-adjusted basis. Our digital business reached another year of record sales, topping over $1.1 billion. These results are on top of record performance over the last four years. In 2024, we also generated a record $1.4 billion in operating cash flow. We used this cash flow to fund the business and attractive growth opportunities. In 2024, we opened 80 new Tractor Supply stores and 11 Petsense stores. The team has done a fantastic job opening highly productive new stores as this remains a core strength and competency of Tractor Supply. Other business investments we made in 2024 include a new distribution center in Maumelle, Arkansas, and more than 160 Fusion remodels. After funding our business initiatives, for the fourth consecutive year, we returned more than $1 billion to our shareholders through dividends and share repurchases. 2024 marked the 15th consecutive year of dividend growth for Tractor Supply. Finally, at the conclusion of the year, we successfully acquired Allivet and look forward to integrating Allivet into our business, offering it to our millions of Neighbor's Club members who are pet owners. Additionally, our team member and customer engagement has never been stronger. Frontline team member attrition is at a record low. Total active customer accounts are at record highs. High-value customer retention is at record levels. Customer service scores continue to hit all-time highs. In our Neighbor's Club, one of the largest loyalty programs in retail continues to attract record levels of new customers, and we're exiting 2024 with all-time highs in both retention rates and retained customer counts. Neighbor's Club is truly a key differentiator for Tractor Supply, and we're committed to continued enhancements. For instance, in 2024, our members benefited from more personalized offers, new tiers, and more meaningful rewards. Additionally, the expansion of Neighbor's Club to Petsense by Tractor Supply continues to drive strong customer engagement. This expansion allows us to deepen relationships with existing customers and attract new pet customers to both banners. Neighbor's Club membership represents over 85% of sales at Petsense with continued momentum. Overall, Neighbor's Club membership now exceeds 38 million, and as a percent of our sales, it reached a record 80%. With our Life Out Here Strategy, we have built on Tractor Supply's long-standing commitment to invest in our powerful flywheel. We've substantially transformed our business and are operating from a higher level of performance. We've not given back any of the gains we've made over the last five years, delivering against our strategy, and we're very excited about the future. As we planned for 2025, we're forecasting strong net sales growth of 5% to 7% and comp sales performance of 1% to 3%. We anticipate that the headwinds we've been facing will moderate as we move through the year, leading to continued market share gains. We expect product deflation to be relatively neutral by mid-2025, and we see signs of stabilization in both personal consumption expenditure and the balance of goods versus services, as well as in the pet food category. Regarding the new presidential administration, while there are many unknowns that we acknowledge, such as tariffs, we are confident in our ability to navigate these circumstances as they evolve. Many of these unknowns are not specific to Tractor Supply. Our business profile is attractive relative to other retailers and companies. We remain confident in our long-term targets and expect to return to them when market conditions normalize. Tractor Supply is a unique and highly differentiated retailer. We have a history of executing with discipline on our strategy, delivering strong financial results, and continuing to expand our competitive moat. We continue to gain market share across our major product categories, and our customer metrics remain incredibly healthy. We're excited about the continued evolution of our Life Out Here strategy, building on our strengths, sustaining the momentum of our existing strategy, and launching new initiatives that increase our total addressable market to $225 billion. We're entering the New Year with momentum and opportunity. With that, I'll now turn the call over to Kurt.

Thanks Hal and hello to everyone on the call. Let's start with some key insights for the fourth quarter and full year. I'll spend the bulk of my time on our outlook for 2025. We had a solid performance given the overall conditions for the fourth quarter. Comparable store sales increased 0.6%, driven by strong comparable average transaction increase of 2.3%, partially offset by a comparable average ticket decrease of 1.7%. Unit volumes were solid, and the ticket pressure was principally from average unit retail. For the fourth quarter, we always believe that weather trumps the holiday. Typically, the winter weather has a much greater impact on the fourth quarter, and once again, that is how this year played out. We continue to face the ongoing headwind of deflation in key product categories. We estimate that deflation had approximately a 100 basis point drag on our comp sales performance in the quarter, most of which came from commodity-based products consistent with recent trends. As we progressed through the quarter, we saw a positive impact from early October hurricanes. While the warmer-than-usual temperatures in late October and November presented challenges, December had a modest improvement in weather and solid holiday performance, demonstrating our resilience and ability to adapt to varying conditions. Looking at category performance for the quarter, we had strong comps in our seasonal department and truck, tool, and hardware, both performing better than chain average. Our consumable, usable, and edible products performed in line with chain average. Notably, we had mid-single-digit unit growth as we see we are likely gaining share in these categories overall. This was offset by ongoing deflation. The warm weather in November, and to a lesser extent, December weighed on our winter seasonal business. Overall, our spring and summer seasonal categories drove positive comp sales with Zero Turn and front-engine mowers, both up double-digits. This reflects the unseasonably warm weather we had in the quarter. Cold weather-related categories, such as insulated outerwear and heating, modestly underperformed chain average due to these warm conditions. Big ticket performance continued to outperform in the low single-digits as we experienced strength in hurricane response categories like generators. Additionally, grilling, mowers, trailers, and truck toolboxes all performed well. Although our business is not primarily driven by holiday sales in Q4, we were encouraged by our performance during the holiday season, including recording our highest sales day of all time, on the day after Thanksgiving, and strong performance for the holiday season. Moving on to gross margin. Gross margin decreased nine basis points to 35.2% from the prior year's fourth quarter. It is worth calling out that we were lapping our most difficult gross margin comparison of the quarter with 129 basis points of expansion in the prior year. Our performance was relatively in line with our expectations. As a percent of net sales, SG&A expenses, including depreciation and amortization, increased 60 basis points year-over-year to 26.8%. This increase was primarily due to our planned growth investments, including higher depreciation and the onboarding of a new distribution center, along with modest deleverage of our fixed costs, given the level of comparable store sales growth. These factors were partially offset by the team's disciplined focus on productivity and our ongoing emphasis on cost control. We did have a modest benefit from our ongoing sale leaseback strategy. This quarter, we had a similar number of existing store sales as the prior year with a slightly higher average gain per store. Operating margin declined 69 basis points for the quarter to 8.4%. Now, let's move to our outlook for 2025. As I have previously shared, navigating economic cycles is in our DNA. We have a long track record of successfully managing through diverse market conditions. The needs-based nature of our business, combined with our deep understanding of these dynamics, allows us to proactively adapt to market conditions. The same can be said about tariffs. As Hal commented in his opening remarks, there are certainly a number of unknowns at this time on this important topic. Our team has been cycle-tested with lessons learned from the prior administration. We have continued to diversify our country of origin for imports. We have been scenario planning and are prepared to address any proposed actions. It is worth noting that this is a topic that affects all of retail. We are differentiated as we have only about 12% or so of our sales that are direct imports and have a large key business that is domestically sourced. Given the fluid nature of the discussion on tariffs and the number of unknowns, our guidance does not assume any changes in tariffs at this time. We successfully managed through tariffs in prior cycles, and will remain flexible and nimble to adapt to the changing environment. For fiscal 2025, we are forecasting net sales growth of 5% to 7% to $15.6 billion to $15.9 billion. Approximately four points of this growth is driven by new stores and Allivet. With a purchase price of $135 million, we anticipate Allivet adding more than $100 million to our net sales and being accretive to earnings. Comparable store sales are anticipated to increase 1% to 3%. We expect modest gross margin expansion of about 20 to 40 basis points from continued supply chain efficiencies, along with benefits from effective cost and price management, and our exclusive brands and retail media initiatives. We anticipate a relatively stable overall transportation market. We forecast the gross margin expansion to be offset by SG&A deleverage due to a couple of key factors. First, depreciation and amortization is anticipated to increase by about 10% with a higher growth rate in the first half compared to the second half of the year. While this is an improvement from recent underlying growth rates, as our investments in our strategic growth initiatives moderate, we will deleverage as D&A grows faster than sales. Second, we are investing in our Life Out Here 2030 strategic initiatives. To launch our direct sales and Final Mile initiatives, we are planning a net investment of about 15 to 20 basis points of operating margin into these exciting growth opportunities. In 2025, we will continue our planned strategic sale-leaseback program to sell some of our existing owned stores. We expect to sell an incremental two to four existing stores to fund the step-up in new stores from 80 to 90 in 2025. We anticipate these sales will occur throughout the year with a similar EPS contribution as in 2024 overall. For the year, we forecast an operating margin of 9.6% to 10%, centering around our 2024 performance. We anticipate interest expense of approximately $65 million to $70 million. We plan to maintain a healthy leverage ratio of a little over two times. We expect our effective tax rate to be in the range of 22.2% to 22.5%. Diluted EPS is forecast in a range of $2.10 to $2.22. Net capital expenditures are forecast to be $650 million to $725 million or about 4% to 4.5% of sales. This net amount reflects the anticipated proceeds from the sale of existing and newly developed Tractor Supply stores. Gross capital expenditures are forecast to be around $1 billion. Our capital plans reflect a ramp in our new store openings to approximately 90 Tractor Supply stores. We anticipate opening about 10 Petsense stores this year. Our new store pipeline remains exceptionally strong and continues to exceed historical averages in both sales and profitability. We expect our store opening cadence to be in line with 2024. As we announced this week, we anticipate starting construction of our 11th distribution center in Idaho later this year, with operations commencing in late 2026 or early 2027. This is an exciting expansion of our distribution center network that will allow us to effectively service our existing stores and new store growth opportunities in the Pacific Northwest. We remain committed to returning cash to shareholders through a combination of a growing dividend and share repurchases. For 2025, we anticipate share repurchases in a range of $525 million to $600 million, which is estimated to lead to a net reduction in weighted average shares outstanding of approximately 1% to 2%. Now, I'd like to discuss a few items to consider in relation to our expectations. As always, we believe the best way to look at our results is in halves and not quarters due to the nature of our business. We expect comp sales for each quarter to be in a relatively tight range, consistent with our overall 2025 guidance. We anticipate that comp sales will be modestly stronger in the second half of the year as our comparisons ease and the headwind from deflation continues to moderate. We are planning for positive comp transactions for the year, along with flat to slightly positive average ticket. We also expect that deflation will pose a modest headwind in the first half of the year. We believe we are nearing a trough, having successfully managed through deflation in 2023 and 2024. Regarding earnings, we expect our EPS growth to be relatively consistent between the first half and second half of the year. Our forecast calls for the first half of the year to have marginally better operating margin performance compared to the second half as we begin to cycle recent transportation efficiencies. Specific to the first quarter, we've had a solid start this year given the current cold weather trends. As a reminder, January last year was also very cold with strong comps. Overall, we anticipate positive comp sales for the first quarter. Our first quarter diluted EPS is anticipated to be relatively consistent with the prior year as our positive sales growth is somewhat offset by investments in the business. We are planning for continued gross margin expansion to be offset by incremental investments to launch our strategic initiatives and the operational costs for our new Arkansas distribution center, which opened in mid-2024. As a consequence, operating margin is anticipated to be flat to slightly below prior year. To wrap-up, we have clearly defined strategic priorities and are investing to capture long-term opportunities in our market. We are committed to driving productivity and making appropriate trade-offs to fuel investments while protecting our operating profit margins and earnings. We intend to maintain this focused approach throughout 2025 as we self-fund our Life Out Here 2030 initiatives. We are committed to continuously striving for stronger results. With that, I will turn the call back over to Hal.

Thanks, Kurt. As we shared in December at our Investment Community Day, we're embarking on the next leg of growth for Tractor Supply with our Life Out Here 2030 strategy. This strategy is designed to continue investing in what's working as well as begin investments in several new opportunities, creating horizons of growth that we expect to last through the end of the decade. Key initiatives in our Life Out Here strategy will continue to be our Project Fusion and Garden Center rollouts. Both of these projects are working well and delivering compelling returns through improved space productivity. In 2025, these initiatives will be complemented with enhanced localization capabilities. Specifically, the team has developed data-driven archetypes that tailor approximately 25% of store space to better reflect customer needs, further optimizing the incremental sales opportunity of each unique site. Going forward, all new stores and Fusion remodels will have localized space allocation and assortment based on their respective archetypes. Turning to our Neighbor's Club, we have significant plans in place to capitalize on this unique, strategic asset. A significant focus this year will be to bring our members PetRx through our recent Allivet acquisition. The acquisition of Allivet expands our total addressable market by $15 billion to $225 billion. Allivet has a proven platform to make pet ownership easier by providing convenient access to brand-name medications, expert pharmacy advice, and convenient reordering with its AutoShip program. Our efforts in Q1 are focused on integrating Allivet's catalog onto tractorsupply.com and updating a member's Neighbor's Club profile to include their prescription and veterinarian information. We look forward to providing our 38 million Neighbor's Club members with a value-added pet and animal prescription service and introducing Tractor Supply to Allivet's customers. As Kurt mentioned, we're investing this year in several key strategic initiatives, especially direct sales and Final Mile. It's critical to get these off to a strong start, and the team is focused on our multiyear journey to capture the significant opportunity with these initiatives. In direct sales, our efforts in the first half focus on building a scalable field sales model and launching Version 1 of our business-to-business selling platform. In Final Mile, our efforts in the first half focus on hardening our existing delivery hubs, activating inventory across more locations, and bringing bulk online orders in-house for delivery. While our long-term strategy sets the foundation for sustained growth, our 2025 operating plans are designed to deliver measurable results today, ensuring we continue to meet our evolving customers' needs and build momentum towards achieving our long-term goals. The year has started solidly, and our teams have been busy supporting our customers for all their winter needs as the dependable supplier of the Out Here Lifestyle. From heating fuel and heating pellets to insulated winter clothing and livestock feed, we are highly engaged in ensuring our customers have what they need to deal with the recent winter storms and recovery. As the calendar will soon turn to spring, we've already transitioned over 600 of our stores to our spring sets, and the remainder will do so over the next couple of months. Our merchant teams have done an excellent job bringing value and innovation to our spring lineups. Examples include expanding Weber grilling to all stores and launching exclusive zero-turn mowers from Cub Cadet and the second year of the Toro Havoc, as well as introducing new national live goods programs. In our Companion Animal segment, we're pleased to launch new products, both in-store and online. We recently launched 4health shreds, expanded our temptations assortment in cat, and introduced new freeze-dried and shelf-stable treats. We are currently running our annual Pet Appreciation days with a month of targeted savings offers and in-store events to drive excitement. Additionally, we will continue to leverage our over 1,000 pet wash locations. Last year, we conducted over 1.8 million pet washes, including a record-breaking 500,000+ in Q4. Our pet aisle is more robust than ever, featuring familiar favorites as well as unique offerings that deliver the quality our customers expect at incredible value. In our Animal segment, spring at Tractor Supply means it's time for our annual spring Chick Days. The arrival of chicks at our stores is a sure sign of spring and creates strong retail theater in our stores. Backyard poultry continues to see significant engagement with our customers, highlighting a shift towards sustainable and self-reliance living. Whether as pets or as a source of eggs, chicks are both a practical and enjoyable hobby for many and are often referred to as the third pet. We have more shopping trends and insights than ever on our poultry customers and can build out more targeted campaigns based on where they are in their journey. Earlier this week, we announced a multiyear strategic licensing partnership with Field & Stream. Beginning in June, Tractor Supply customers will be able to shop for a variety of hunting and outdoor Field & Stream branded products. We're excited about the opportunities this partnership presents and look forward to providing more details in future earnings calls. As the season turns to spring, I hope you get a chance to visit our stores and see the actions and initiatives coming to life. Our future remains exceptionally bright and exciting. Our upcoming initiatives, scale, and capabilities demonstrate our ability to meet the evolving needs of our customers. We're excited about the future and look forward to continuing our journey of growth and innovation in the channel. I'd like to close where I started by expressing gratitude to our team members for their unwavering dedication to each other and to serving our customers. I'd also like to thank our customers for choosing us as their trusted supply for Life Out Here, and also our communities for embracing us as an integral part of our hometowns. With that, operator, we'd now like to open the line for questions.

Thank you. We will now begin the question-and-answer portion of today’s call. The first question comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.

Good morning, everyone. I wanted to focus my one question on comp transactions, which were positive and a good sign of health. Can you talk about transaction breadth in two ways, geographically and then if you can look at it across immature and mature stores, how balanced is it?

Good morning, Simeon, and thanks for the question. We were pleased with our comp transaction growth in Q4. The breadth was widespread across both categories and geographies. In areas with weather activity, we saw stronger comp transactions, as you would expect. Our comp transaction growth was strong, particularly related to average ticket growth across all regions and categories. I'll note the numerous positive metrics on customer counts and retention as well. We are very pleased with the comp transaction growth and expect comp transactions to remain a strong force in 2025. Comp transactions have been a key component of our growth over the last five years, with around half of our total growth in this period driven by them, which differentiates us from the rest of retail. New stores continue to perform right in line with our expectations, with first-year performance around 4.2 to 4.3. The IRRs and operating profit margin rates are also performing in line with expectations across the 2021 to 2024 classes.

Thanks for the question. Good luck.

Thank you. The next question is from the line of Steven Forbes with Guggenheim. Your line is now open.

Good morning, Hal, Kurt, Seth. Kurt, you mentioned localization initiatives and the Field & Stream partnership as well. So I was hoping maybe you can walk us back to the Analyst Day, where you explored the customer segmentation work that you executed. Any way to reframe the opportunity as you think about localization and what drove the strategic partnership with Field & Stream? How do we contextualize the product category opportunities, the potential lift in sales per square foot that you see from the localization? Any color that will help us think about what it means for comp transactions, new store productivity, and the maturation curve of the stores themselves?

Hey, Steven, this is Seth. Thanks for the question. I would separate both topics. First, regarding localization, I would say it remains aligned with what we shared at the Investment Community Day and during my prepared remarks. We recognize the opportunity to adjust our macro space floor planning in our Fusion and new stores to maximize space productivity. We anticipate that changing approximately 25% of our floor plans will likely deliver an incremental low single-digit lift. Our wildlife and hunting categories have seen fast growth, and we are exploring significant assortments and partnerships in that space due to consumer demand. The Field & Stream partnership reflects our efforts to enhance localization and our assortment strategy as we seek to drive growth in response to strong consumer interest.

Thank you.

Thank you. The next question is from the line of Peter Keith with Piper Sandler. Your line is now open.

Hey. Thanks, guys. You mentioned the poultry category, and I'm wondering if the rising egg prices are starting to drive some acceleration in that category. As we think about egg prices potentially continuing to go up this year, could you reflect back on what you saw in 2023 when there was also meaningful chicken demand? What did you see in your results in terms of customer acquisition and traffic?

Yes. This is Seth, Peter. Thanks for the question. Backyard poultry and flocks are core to our customers. About one in five of our current shoppers participate in this hobby, which is well above the national average. We're excited about this year's Chick Days, as it provides an opportunity for our current shoppers to expand their flocks while we personalize their experiences. As we saw in 2023, elevated egg prices encouraged many customers to enter the hobby, and we are excited about engaging both current and new shoppers with this event. We look forward to sharing the results of Chick Days over the next few weeks.

Sounds great. Thank you very much.

Thank you. The next question is from the line of Seth Sigman with Barclays. Your line is now open.

Hey guys, good morning. You discussed macro headwinds potentially moderating through 2025. It seems like that's what's reflected in the comp guidance for the year. Can you elaborate on what that means specifically for Tractor Supply? Your business has been much more stable this year than a lot of other cyclical businesses. What categories have really underperformed, and are there any signs that those are starting to improve? Can you also speak to the big-ticket performance within that context?

Good morning, Seth, and thanks for the question. I reference back to my prepared remarks to highlight three factors weighing on our business over the last 18 to 24 months and our outlook for those in 2025. First, personal consumption expenditure and the reversion from goods to services spend. Secondly, underlying deflation in commodity-related items. Finally, stabilization in the pet category. All three of these have been headwinds we've been facing, and we have been transparent about how they impacted metrics like average ticket. We see positive trends moving towards more neutral conditions through 2025. With goods and services, it's reached its pre-COVID levels. The pet category is stabilizing, leading to low single-digit growth this year, allowing us to gain share. Regarding deflation, we are seeing signs that we will start comping over the pressures we faced from deflation between April and May of this coming year. Commodity markets are showing increases, which could act as a tailwind for us in the year ahead.

Hal, I’ll just add on big ticket performance. We've seen excellent comeback coming off two years of declining sales, driven by newness, innovation, competitive pricing, and financing. We acknowledge our guidance cycles strong big-ticket comps in 2025. However, we are optimistic about this category due to our ongoing efforts and strategies focusing on zero-turns, trailers, and several other areas that will help us continue comp growth.

Very helpful. Thank you both.

Thank you. The next question is from the line of Kate McShane with Goldman Sachs. Your line is now open.

Hi. Good morning. Thanks for taking our question. We wondered if we could focus on the operating margin guide. The lower end of it seems a little bit lower than what you were discussing in December, which was around flat. Is that right? If so, what's driving the change? Can you talk about the range? Is that concurrent with your top line expectations for 2025, or is there something else we should consider?

Yes, Kate, this is Kurt. Thanks for the question. On operating margin, we forecast that our 2025 operating margin would be more in line and centered around the 2024 operating margin. The range reflects our comp sales guidance of 1% to 3%. We see significant growth opportunities, and we are investing strategically to launch our programs. Thus, the range incorporates appropriate flow-through under different comp scenarios while allowing for gross margin expansion to maintain solid operating margin performance.

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

Good morning. Thank you for taking my question. Regarding the outlook for this year, you noted that the business has started solidly, given some of the weather, and you're guiding to an acceleration over the course of the year. Should we interpret the 1% to 3% comp outlook as conservative, or are there factors that could limit any potential upside? Also, if there is comp upside, how should we expect that to flow to the bottom line? Would you potentially reinvest some of that back into initiatives resulting in limited upside?

Hey Michael, thanks for the question. Our guidance reflects a full 52-week outlook, and we remain confident in our 1% to 3% comp. As it relates to potential upside, we will evaluate various scenarios throughout the year. Should we see comp outperformance, we would assess our initiatives, investments, and overall needs of the business, leaning into those that create the most value. We expect that with comp growth, our operating margins would show improvement. If we achieve our longer-term comp targets of 3%, 4%, or 5%, we expect operating margin to leverage similarly.

Thank you very much. Good luck.

Thank you. The next question comes from line of Peter Benedict with Baird. Your line is now open.

Hi, guys. Good morning. Thanks for taking my question. Kurt, just jumping around to Allivet. Is there any seasonality in that business that we should consider? I know you said it's going to be slightly accretive to earnings this year. Could you share how it might impact the P&L? I would assume it's higher gross margin, but I'm curious about your view on the magnitude of earnings lift here in year one from Allivet.

Yes, Peter, for the most part, Allivet is quite consistent and stable. There is some seasonality, particularly during spring and summer with flea and tick categories. However, we view it as a fairly stable business. It comes with solid operating margin, and we expect it to be accretive while we work on getting Neighbor's Club members onboarded to Allivet. We're confident that Allivet will equate to Tractor Supply-level operating margins over the long term as we grow their business robustly.

Sounds good. Thank you.

Thank you. The next question is from the line of Karen Short with Melius Research. Your line is now open.

Hi. Thanks very much. I wanted to focus on comp in general. Can you give a sense of what contribution the new store will make to comp and how you view new store productivity going forward?

Yes, Karen, regarding new store contributions, we view it net of cannibalization. Each new store contributes modestly to comp sales after cannibalization. We expect new store productivity to contribute positively but modestly to overall comp metrics as we ramp up from 80 to 90 new stores in 2025. Over the next several years, this will evolve positively as we open additional locations.

Great. Thank you.

Alice, I think we've got time for one more question, please.

Certainly. The next question is from the line of David Bellinger with Mizuho. Your line is now open.

Hi. Good morning. Thanks for the question. It's on the gross margins, which are down very slightly year-over-year this quarter. I think that was the first time since late 2022. We were just a little unclear on the drivers, other than the tough comparison in the prior year. Could you provide more detail on promo activity and how the holiday season played a role? Secondly, how should we think about year-on-year gross margin progression throughout 2025? Any specific drivers baked in, like retail media?

Yes. Thanks, David. On gross margin for the fourth quarter, it came in in line with our expectations. We anticipated flat year-over-year gross margin as we knew we were comparing against 129 basis point growth in the previous year. There wasn’t anything particularly unique affecting performance, nor was there a significant promotional activity. Still, we did have targeted promotional efforts that helped maintain our margins. Looking to 2025, we expect modestly higher gross margins in the first half, improving in the back half due to exclusive brands and retail media contributions.

Great. Thank you.

Thank you, David. Just to wrap our call up. I am available all day and coming up next week as well if anybody needs anything. Please don't hesitate to reach out, and I look forward to talking to you on our Q1 call in April. Thank you.

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