Tractor Supply Co /De/ Q1 FY2025 Earnings Call

Good morning, ladies and gentlemen and welcome to Tractor Supply Company's Conference Call to discuss First Quarter 2025 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 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. I would now like to introduce your host for today's call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, Alyssa. 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. 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 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. 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 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. Thank you for your time and attention this morning. It's my pleasure to turn the call over to Hal.

Good morning, everyone, and thank you for joining us today. As always, I'd like to begin by thanking the Tractor Supply team for all they do and for their dedication to our purpose of serving life out here. Despite a softer than expected start to the year, given the delayed spring selling season, we're proud to report another quarter of strong execution by the Tractor Supply team. In the face of volatile weather and a shifting operating landscape, our team remained focused on what we could control: investing with purpose, managing costs with discipline, and most importantly, serving our customers. On the customer front, the underlying health of our business remains strong and healthy. And I'll highlight four key indicators. One, we had robust transaction growth. Two, we had strong unit growth in our consumable, usable, and edible categories. Three, we had positive new customer counts. And four, we had record retention of existing customers. These customer indicators reinforce our belief that our customer base remains both healthy and engaged and that we continue to gain market share. Now I want to take a moment to address the updated guidance we issued today. Since we shared our initial outlook for 2025, the macro environment has clearly become more uncertain. Drawing on some of the scenario planning we used during the early days of COVID, today, in addition to an updated fiscal year outlook, we're providing second quarter guidance. The updated fiscal year outlook is reflective of three primary considerations. One, it flows through the seasonal spring softness we've experienced to date. Two, it assumes that pressure on big ticket categories will persist for the remainder of the first half. And three, it reflects a range of scenarios related to tariff costs that our vendor base and we are incurring in the second quarter. In other words, we've considered the implications of tariffs through the ninety-day pause that began on April 9. While not our standard practice, given current conditions, as I mentioned, we are also providing second quarter guidance as we believe offering near-term visibility is important for our investors at this time. As always, our goal is to be transparent, and we remain committed to updating our outlook as we gain greater visibility. I'll now turn the call over to Kurt to walk you through the financials.

In the first quarter, our total sales were a record $3.47 billion, an increase of 2.1%. Comparable store sales declined 0.9%. This performance was driven by strong transaction growth of 2.1% offset by a decline in average ticket of 2.9%. Diluted earnings per share were 34¢. These results were below our expectations, and we believe that weather was the key swing factor on our results in the quarter. As we analyze our performance across the weeks of the quarter, geographical regions, or product categories, the results point to the delay in spring seasonal shift as the key factor weighing on our results. We also recognize the evolving macroeconomic environment and are closely monitoring ongoing discussions around a potential economic slowdown and its impact on consumer spending. We do believe that some of the softness in big ticket categories reflects a degree of caution in consumer sentiment amid the current environment. That said, based on our analysis of first quarter performance, we believe our underperformance was primarily driven by adverse weather conditions, rather than broader macroeconomic trends. Where our business had a normal transition to spring, we were pleased with the results. Unfortunately, that was not the case in the vast majority of the country. We estimate the arrival of spring was delayed by about three weeks across most of our markets, especially in the Midwest and Northeast where there was snow just last week. Looking at the cadence of comparable store sales over the quarter, we began with a strong January, successfully comping over last year's performance. When evaluating January and February together, we were particularly pleased with the results in our cold weather categories which performed well. However, the momentum slowed as we moved into mid-February and March. Typically, we begin to see early signs of spring in the South by mid-February, but this year, that transition was delayed due to prolonged cold temperatures and winter storms that extended into mid-March. As a result, demand for spring seasonal categories was significantly softer than anticipated. In the first quarter, spring is much more important in the South than winter in the North. To give you some further perspective, our spring categories in the South were down about 30%. In total, we estimate that the delay in spring weather was a headwind of about 250 basis points. Also, it's important to recall that we were lapping an early Easter in 2024 which we estimate was approximately a $20 million headwind to comp sales in the quarter, particularly considering that March represents about 40% to 45% of the quarter. Turning to our geographic regional performance, it's helpful to view our markets through the lens of our Northern Southern geographies. As I mentioned earlier, our Southern markets were impacted by a slower spring season, which weighed on our overall results. In contrast, the Northern markets delivered reasonably solid performance, especially considering the lingering cold weather. However, given the concentration of our store base and the relative size of our spring business in the South, the strength in the North was not enough to offset the headwinds we experienced in the South during the quarter. Simply put, when spring stalls in the South, it stalls the quarter. And that's exactly what we saw this time. Categories that had the strongest performance were our winter seasonal products, followed by year-round categories including notable strength in our consumable, usable, and edible products. Overall, our sales increased in the mid-single digits with unit growth in the high single digits. Given the extended cold weather in the quarter, a leading growth category was heating fuel, which was up north of 20%. Propane, wood pellets, bedding, and pine shavings are great examples of the resiliency of our business model: domestically sourced, needs-based products. Additionally, products such as bird feeding and poultry feed had robust growth as did equine and livestock feed. We were only halfway through our chick days program, but we have been very pleased to date. Broadly, we believe that we continue to gain market share in pet food and our feed categories, even as key indicators like pet ownership and cattle and horse counts continue to have modest declines. Categories that were a negative drag on our comp sales included our spring seasonal and related big ticket items like riding lawnmowers and outdoor power equipment, and our spring items in clothing and gifts, truck tools, and hardware. For perspective, our lawn and garden department declined low double digits and riding lawnmowers were down about 25%. While certain seasonal categories weighed on our comparable sales, it's important to underscore the resilience and strength of our core business. In fact, our 2.1% increase in comp transactions highlights the underlying health of our model and the needs-based demand-driven products our customers depend on us for, day in and day out. Transaction growth was offset by a lower average ticket, driven primarily by a negative product mix from fewer spring seasonal goods and modest pressure from lower average unit retail prices. Average unit retail was impacted by a low double-digit decline in big ticket items and strong growth in lower-priced heating fuel. Combined, about 75% of our AUR decline is explained by these two categories alone. We continue to experience modest product deflation of about 50 basis points in line with our expectations. This decline was partially mitigated by increased units per transaction. We are 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 36.2% increased 25 basis points from last year. This increase was primarily attributable to our disciplined product cost management and the continued execution of our everyday low price strategy. Our gross margin expansion was modestly below our expectations due to negative product mix given the softer spring sales, which carry a higher gross margin than our winter seasonal products. Our first quarter SG&A expense rate, including depreciation and amortization, increased 81 basis points to 29%. This increase in SG&A as a percent of sales was primarily attributable to planned growth investments which included higher depreciation and last year's opening of our tenth distribution center. We also had deleverage of our fixed costs given the level of comparable store sales decline. These factors were partially offset by continued productivity and cost control, as well as a modest benefit from our ongoing sale leaseback strategy. Operating income decreased 5.3% to $249.1 million, and net income decreased 9.5% to $179.4 million. During the quarter, we repurchased approximately 1.7 million shares and paid quarterly cash dividends totaling $122.4 million, returning $216.4 million of capital to shareholders. We also increased our dividend by 4.5%, marking our sixteenth consecutive year of growing our dividend. At the same time, we raised our share repurchase authorization by an incremental $1 billion. Turning now to our balance sheet, merchandise inventories were $3.2 billion at the end of the first quarter, representing a modest 1.5% increase in average inventory per store. We are pleased with how we exited the winter season and the quality of our inventory at the end of the first quarter. The strength of our balance sheet remains a competitive advantage to position us well to navigate the dynamic macro environment. Turning now to our outlook for the balance of the year. As Hal noted, the macroeconomic landscape has become more uncertain since the start of the year. In light of these evolving conditions, we are updating our full year outlook to be reflective of the comments Hal made in his opening remarks. We now expect net sales growth between 4% and comparable store sales to range from flat to up 4%. We are forecasting an operating margin of 9.5% to 9.9% with net income between $1.07 and $1.17 billion. This translates to earnings per share in the range of $2 to $2.18. While the tariff environment adds incremental pressure to our cost base, we are actively managing these impacts through close coordination with our vendor and supply chain partners. With multiple scenarios in play, we're positioning the business towards the midpoint of these ranges. Looking to the second quarter, our guidance calls for net sales growth of approximately 3% to 4%. Comparable store sales between flat and up 1% and earnings per diluted share of 79¢ to 81¢. As those of you that have followed us for some time know, we continue to believe the best way to look at our business is to view our performance on the halves. It's the way we manage our business and continues to be the best way to judge our performance. We are being prudent in our guidance to give the most realistic view based on what we know today. We're controlling our controllables and making progress on our Life Out Here strategy. 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. We will be disciplined in our capital investments in our cost structure. With more than two and a half decades of experience with Tractor Supply, I have seen the company navigate through multiple business cycles. We know the playbook and are committed to our results standing tall in retail. We are closely monitoring consumer demand indicators and forward-looking signals, including shifts in consumer sentiment. Tractor Supply's long-standing track record of resilience and success positions us as a leader in the retail sector ready to seize the market share opportunities ahead and continue to deliver shareholder value.

For the remainder of our prepared remarks, I would like to address the key questions and themes we have heard from many of you in recent weeks. In this time of uncertainty, I want to make sure we're giving you a real-time view into how we're thinking about the business and the current dynamic environment. So let's start with the top question on everyone's mind: How is Tractor Supply managing through tariffs, and corresponding price check strategies? First, it's important to recognize this management team has a strong track record of navigating complexity with discipline and clarity. We've been through many other battles together. It was during the prior rounds of tariffs, inflationary spikes, or supply chain disruption, we know how to operate in these environments and we're applying those same playbooks now, refined with better data and sharper execution, building on our learnings from these past rounds. We begin from a position of strength on tariffs. This is not an existential crisis for Tractor Supply. Over 60% of our business is from products that are manufactured, bagged, assembled, or grown in the United States. Only 12% of our business is direct imports. On our direct imports, we have reduced the share from China from north of 90% to below 70% and we're on track to be closer to 50% by year-end. Regarding the recent tariff announcements, we're taking a proactive but measured approach. Like many, we stood up a task force, and our merchant sourcing, inventory, and supply chain teams have been working twenty-four-seven since. Despite our relatively advantaged retail business model, the increased costs are substantial for many of our manufacturing partners and us. One of the competitive advantages of Tractor Supply is our agile supply chain and deep vendor relationships. We're working hard through vendor negotiations, diversified sourcing, and smarter inventory planning to mitigate the cost pressures and ensure a strong inventory position in the second half. We've already had some early wins, and I expect we'll continue to find ways to offset a portion of the costs and ensure key programs are available to our customers this fall and winter. On pricing, our top priority is always to provide value for our customers. They rely on us to maintain their daily lives regardless of economic conditions, and we take that obligation very seriously. That said, we're already seeing requests for price increases from select vendors in areas of the market, and I fully expect that we'll see more in the coming weeks and months. Where we take price, we will be surgical: category by category, SKU by SKU, leveraging our portfolio strategy, always with a top priority being a focus on value perception, but also with an understanding of margin sustainability. A bit on price elasticity: the needs-based nature of our core categories like pet food, animal feed, lubricants, wood pellets, and shavings are basically consumer staples. Repair categories like mower parts, trailer accessories, and fencing are destination categories for us and ones that our customers count on to extend the useful lives of their assets. The needs-based nature of our business gives us resilience and pricing flexibility that many discretionary businesses don't have. Ultimately, our goal isn't just to offset costs but to protect long-term trust with our customers. Our customer loyalty remains strong. We feel confident in our ability to navigate this moment while continuing to grow profitably. That leads to another frequently asked question around the health of our consumer and what trends we're seeing in consumer spending, including any indications of trade down activity or shifts in discretionary demand. I'll start by saying the health of our customer remains very stable, as I said at the outset. Engagement remains high, albeit understandably cautious. In Q1, traffic and transactions both ran above last year, and we're not seeing discernible trade down in categories like feed and food. As Kurt mentioned, big ticket was pressured. However, when the sun was out, seasonal big ticket was solid. Thus, getting a read on these categories in the quarter was difficult. Regarding shifts late in the quarter, and how this has transitioned in Q2 given the recent drop in the stock market, headlines about potential recessions, noise on tariffs, and the continued delayed spring, I will say that traffic and transactions continue to run positive, and customer engagement remains strong. I have visited stores throughout the country in the past few weeks, and our customers are pursuing life out here with the same passion as in previous years. Much of the noise we see in the news has had little effect on them to date. Our Q categories are performing well. They continue to positively comp, and in fact, we've seen a modest step up in our pet run rate. However, we continue to see pressure in our big ticket categories early in Q2. With Easter shifting and spring running roughly three weeks behind, as Kurt mentioned, it's still difficult to parse whether consumer demand is delayed or fundamentally different this year. We'll continue to watch this closely, especially with three months of spring selling still ahead and a wide range of spending outcomes being forecasted by economists. It's important to keep in perspective that big ticket only represents less than 15% of our business. Reflecting back on our customers, they are resilient and passionate about their lifestyle. While our business isn't inelastic, our needs-based, demand-driven profile is very attractive and a long-term strength. In fact, we have posted only one negative comp year in the last three decades. Our customers are always looking for value, and we're confident we will be well-positioned if they choose to be more selective and stretch their budgets. Now shifting to a fun topic, which has garnered a lot of headlines recently: how has your chick day's performance been so far? This year's event is on pace to deliver record-breaking results and is a great reflection of Tractor Supply's unique position as the go-to destination for backyard poultry. We're seeing continued momentum from our core customers expanding their flock, alongside strong engagement this year from new customers entering the category, many of whom are responding to the elevated egg prices and looking to take more control of their food supply. As you know, we're working with live animals, which comes with lead times. Our demand forecast was set with hatcheries back in June of last year, which means our ability to flex up inventory in season is somewhat limited, but we believe this will be a record bird count this year. The strong sell-through we're seeing speaks to the relevance of our assortment and expertise in this space, and it certainly drives our average unit retail up in the category. This trend has generated terrific earned media for Tractor Supply, reinforcing our leadership in the backyard poultry space. Moreover, our Chick Days event continues to be a standout example of retail theater at its best. It brings our Life brand to life in a highly engaged manner for customers, creates meaningful traffic in our stores, and strengthens our position as the destination for all things rural lifestyle. Our assortment of premium breeds continues to lead the category in growth, with customers over-indexing to poultry. As we have mentioned before, ownership of poultry is nearly one in five customers having chickens. Chick Days is like an annuity for Tractor Supply, as birds typically live five to seven years, and the recurring feed and supplies drive trips back to Tractor Supply. A fun fact is that one chicken can eat over 75 pounds of feed a year, which keeps our customers coming back again and again. We're seeing strong comps in coops, chick toys, and treats, which is a clear sign that innovation and newness continue to resonate this year with our customers. What is especially notable is the strength in big-ticket coops, with some models approaching a thousand dollars—a great example of customers investing in the Out Here lifestyle when they see innovation and value. Shifting to another topic, as we've discussed several times on our earnings call, we've been dealing with the deflationary environment in many of our Q categories since late 2023. We are frequently asked about inflationary signals, specifically at what point we think we'll see deflation turn to inflation. On this point, I'll reinforce the guidance that we provided last quarter. Putting aside the recent tariffs, we expect average unit retails to benefit from inflation in our Q categories by the middle of the year. We believe that the pet category is past its trough and is on the way to returning to historical trends. Additionally, one of the most important input commodities to our livestock feed, corn, has been well above last year's low watermarks. As discussed, it is likely that the new tariffs will lead to some level of inflationary pressures. Net-net, we believe we're on the cusp of turning from deflation to inflation in our business. Finally, we've heard the broader question about our willingness to continue investing in our Life Out Here 2030 strategic initiatives if the economy were to be in a slowdown. I'll start on this question by reinforcing the multitude of compelling growth opportunities Tractor Supply is targeting. We shared these as part of our Life Out Here 2030 strategy in our investor day in December, and we're even more excited about them now. Many of these multiyear investments are being implemented in an asset-light manner, especially the sales-driving initiatives like localization, direct sales, and Pet RX, with the possibility of pushing investment into 2026 if appropriate to do so. We have not made a decision to do this at this point but will continue to evaluate business conditions and make these decisions as appropriate. Now, a quick update on a few of the initiatives: Tractor Supply Pet Rx launched earlier this week and is a great opportunity for us to scale following our acquisition of Alivet. The team moved with speed and agility to integrate Alivet with the Tractor Supply website. This quarter, we reached a milestone of 40 million Neighbor’s Club members, the majority of whom have a pet or animal. We have an opportunity to offer an easy and affordable solution for their Rx needs. Great first quarter progress on this acquisition. We've also made strong progress on our direct sales initiative. The first batch of sales teams has launched in select markets, and they are building on the foundation we laid with the rollout of our final mile delivery hubs. At the same time, we've begun the first phase of localizing our stores, and each customer archetype has now been executed in the market. Stepping back in a slowing growth environment, our prioritization is to balance growth and margins. We remain focused on managing risk. This cycle-tested management team successfully navigated previous rounds of tariffs. We were very successful during the pandemic and all the supply chain disruptions that followed. We'll be prudent and nimble with our investments to balance the short term with the significant long-term opportunities we see ahead. To wrap it up, if you take just one thing from our call today, let it be this: Tractor Supply is built for resilience. Tariffs, weather, deflation to inflation, none of it changes our focus or belief in the strength of our durable business model. Our flywheel has stood the test of time. We operate in needs-based categories; we know our customers well, and we continue investing capabilities that will build on our competitive advantages. Our team is focused, our balance sheet is strong, and our long-term strategy is working. I am confident in our ability to navigate through the current environment and emerge even stronger on the other side. My deepest gratitude and heartfelt thanks again goes out to our Tractor Supply team for their unwavering dedication to abiding by our mission and values each and every day. This commitment is the driving force behind our continued success.

Thank you, Hal. We will now begin the question and answer session. If you would like to ask a question, you may do so by dialing 1 on your telephone keypad. To remove your question, you may press 2. And for those using a speakerphone, please remember to pick up your handset before asking your question. As a reminder, we ask that you ask one question then return to the queue. Once again, 1 to ask a question.

Oh, hey. Good morning, everybody. Thanks for all those comments at the end. Super helpful. Could you maybe clarify the tariff environment that you're assuming in the second quarter? And then even more importantly for the second half of the year, it was a little unclear to me. You mentioned something about the ninety-day stuff—is are you guys thinking 145% for China and 10% for the rest of the world? Is that what you're baking in for this quarter for the full year? I guess maybe some more clarity around that. Thank you.

Good morning. Thanks, Peter, for the question. Absolutely. So the way we've approached this is basically to think about tariffs in the context of the Q2 ninety-day receipts. Alright, so to your point, we are making the assumption that the current 10% in non-China and the 145% in China, in addition to other tariffs that have been introduced, such as the steel and aluminum tariffs, will be in place for the fullness of Q2. All the receipts occurring in our value system during the Q2 time frame will incur costs that will make their way into our value system in some way, whether that's our manufacturers' profit, whether we find efficiencies, or whether it makes its way over to the consumer. We've limited our guidance for today to the exposure we see over the next ninety days. Stepping back, we're optimistic and hopeful that much of the global trade policy will moderate, and cooler heads will prevail. But as we all watch the news, we'll see how that evolves. For the sake of being prudent and thoughtful, this is how we've approached the guidance.

Thanks. Good morning. It's Bharat Rao on for Chris. So on the Q2 guide, Hal, I think you mentioned expectations for continued big ticket pressure. But I'm curious what's being baked into the guide in terms of any sort of sequential improvement in the category and from the Easter shift. And then on the full year, with the top line range being raised at the high end, just curious as to what's baked into there as to what would help you ahead of the original guide in hitting that 4% comp. Thank you.

Yeah. Good morning. On Q2, we took a very prudent and conservative approach to the quarter. As I mentioned, we flowed in our full year guidance based on the performance in the seasonal business to date. We also assumed that there would not be a returning pickup in big ticket through the balance of the quarter. That said, we assumed that our Q categories would continue to perform as they are. We're seeing strength there and a modest pickup in several of those businesses. Additionally, we assumed that our core categories, the less big ticket seasonal businesses, would continue to perform well. These performed reasonably well in March and April, and we expect that to continue. Essentially, we took our current run rates from March and April and flowed them through the balance of the quarter. That said, spring is just beginning in the country, and we are very excited about it. We have great products and setups ready to go. We are hopeful that our prudent outlook will prove to be an overperformance. We felt this approach was the most prudent at this time.

Hey. Good morning. This is Josh Young on for Scott. You mentioned you're seeing requests for price increases from vendors at this point. Can you provide some more color on how widespread that is across SKUs? And have you started to pass through much price at this point?

Good morning. Regarding price increases, we are not implementing any price increases at this time, and we've been very clear on that in the system. There's too much uncertainty. Once we have greater certainty, we look forward to productive conversations with our vendor partners and our supply chain network to discuss how to best navigate these situations going forward. That said, many of our vendors have to ship out of China for many products where they're single-sourced, and they are incurring a 45% tariff, which is reflected on their balance sheets. This cost will eventually find its way into their cost of goods, leading them to look for ways to manage that through their profitability and the rest of the chain. We anticipate those discussions will begin in the coming weeks and months.

Thank you for taking my question. Hal, can you clarify a little confusion we’re hearing from some folks on the call? You're stating that you only embedded the tariffs for the next ninety days, but to get to the midpoint of the full year guide, you have to assume around a 4% comp increase, which would suggest some degree of price increase. It's hard to see the degree of traffic increasing at that range given all the uncertainty today. So, first, can you reconcile that? Will you be taking some price? Second, how much price have you embedded into the midpoint of the guide in the second half? How much inflation and what are your expectations on the elastic response?

Absolutely. I'll start by discussing the second half and our outlook. First, we feel very good about our Q business, which continues to perform well, and it will have higher penetration in the second half, which will naturally elevate things. Secondly, our transactions are continuing strong, and we expect that to continue into the second half of the year. Third, as we've consistently mentioned, we expect AUR to begin to turn positive in the middle of this year, supporting average ticket as we approach the latter half of the year. Moreover, we had a drought last summer, and a very limited winter last year, which we expect will strengthen some of our business in the back half of the year. Ultimately, we feel very good about our guidance and are managing toward that midpoint while considering the variety of possible scenarios involved.

Michael, this is Kurt. Just to add to Hal’s comments, the costs Hal is referencing are being incurred by our vendors during the second quarter. Our 12% of imports reflect costs that will hit our balance sheet in the second quarter but typically flow through in the second half. As we consider how to share those costs across our value streams, we will look at our vendors and the need to pass through retail prices accordingly. This is why the Q2 guidance appears as it does, with potential for multiple scenarios—some being upside for the second half on AUR if we navigate appropriately. So, we believe we are in a strong negotiation position as we explore many options for adapting to these changes.

Thanks very much. Good morning. On the cadence of the business in the quarter, you provided a lot of detail, but can you double-click on each month for us? Are you tracking within the guide for April? I imagine you have recaptured some of the $20 million for Easter. Regarding trade down, historically, what parts of the business should we see it in first? It sounds like it's not an issue yet, but why would you anticipate seeing it?

Good morning. To elaborate further, January was a very strong month for us. We were successfully comping last year's performance, thanks to strong cold weather across the country, particularly in the North and Midwest. However, as we moved into February, broader discussions about the economy began, and mid-February saw a particularly strong winter storm in the South, negatively impacting our business for a few weeks. This left us with a pullback where we typically see a lift in those southern markets. Moving into March, we continued to see cooler and wetter conditions, particularly in the South, which impacted our sales. April is currently running in line with our expectations. Regarding trade down, we have not noticed any shifts yet. However, certain categories could be impacted, and we will continue to monitor this situation closely.

Morning, Hal. I hope you’re doing well. Let’s follow up on Tractor Supply RX. Can we discuss member intent and willingness to transition spend to your platform based on your segmentation and survey work? How should we think about the margin profile of RX amidst potential customer acquisition costs as the program matures?

Good morning. As I mentioned earlier, Rob Mills is here and is driving our integration efforts and digital initiatives. I’ll turn it over to him to further discuss the details.

Well, good morning, Steve. It's great to hear from you. First, I want to say how shared that we’re pleased with the Alivet integration. I'll break it down into three buckets: First, the Team—I've spent considerable time with the Alivet team, and I'm impressed with their culture and knowledge as we integrate both organizations toward a common goal. Second, we're focusing on initial integration. Recently, we launched Tractor Supply RX into our website and mobile app, with early adoption being very strong. We’ve worked hard to ensure our customer needs regarding speed, delivery, and ease in moving their scripts to our platform are met. Lastly, we are focused on in-store integration and driving product awareness and training through our partnership with PetIQ. We are optimistic and early in this journey but aiming to leverage our existing Neighbor's Club members, the majority of whom own pets. We expect great progress ahead.

Hey, great. Good morning, everyone. There's a lot of confusion about the guidance, and I know many factors are involved. It would be helpful to qualify the actual sales and EPS impact that you’ve embedded here from tariffs. You’re raising the high end of comps by 100 basis points for the full year, but lowering your earnings. We’d like to understand what's embedded here. Regarding the ninety-day pause, what have you assumed for tariffs beyond that? It seemed the messaging suggested you're not assuming that will be the go-forward rate.

Yes, Seth. This is Kurt. Let me address this in reverse order regarding the second half and receipts. Instead of parsing out the tariffs, we have emphasized that we've embedded only the tariffs incurred over the next ninety days into our guidance. This reflects the uncertainties we are facing and realities in the marketplace. We're managing through multiple scenarios, all focusing on maintaining market share. Our priority is keeping our prices low while negotiating with vendors; these various scenarios encompass how we might share costs across the value chain.

Hi. Thanks very much. You should have been in DC this week to explain the myriad of issues you're dealing with. My main question is about your full-year operating margin rate guide, and how to think about the split and cadence of gross margin versus SG&A. The guidance originally stated gross margin would improve 20 to 40 basis points, so I wonder how to interpret that now in the current environment.

Karen, this is Kurt. The primary drivers for both gross margin and SG&A should remain consistent with our original guidance. That being said, we can anticipate gross margin for the year to expand 20 to 40 basis points, with a larger increase expected in the first half compared to the second. This is mainly due to year-over-year comparisons. SG&A deleveraging guidance indicates a 50 basis points squeeze for the year, with slightly more in the first half. In the event of an inflationary environment, that pressure on margins could alter our outlook. However, our modeling should still be in line with our previous guidance.

Hello, good morning. Can you discuss the concept of moving production around to avoid tariffs, particularly in imported apparel lines? How practical is that? How easy is it? Do you end up just picking up additional costs from the new venue?

Hey, Chuck. This is Seth. Thanks for your question. We have been actively working on resourcing, particularly around Southeast Asia and other areas for the past three years. Much of this work has positioned us to reach a target of reducing our imports from China to below 50% by the end of this year. Specifically for apparel, we have already fully moved out of China on our private brand products before these tariffs were enacted. We have a dedicated task force assessing our programs and options for alternative sources and domestic products. We're confident in our needs-based business model, and over the past years, we've been preparing for these shifts, continuously gaining momentum in doing so.

Good morning. I'm going to resist the urge to ask a tariff question. Instead, can you provide an update on sale leaseback benefits in Q1 or Q2 and any responses on annual cadence? Additionally, regarding new store productivity, can you offer insight on your performance with Alivet? And what should we anticipate down the line?

Zach, hello. This is Kurt. On the sale leaseback, we expect consistency in annual benefits, with new stores slightly offsetting one-time start-up costs of strategic initiatives. There was a $17 million gain in Q1 as detailed in our Statements of Cash Flow. We anticipate another $6 to $7 million in incremental sale leaseback gain this year. Regarding new store productivity, we aim for mid-sixties, with our twelve-month rolling basis tracking at 62%. However, new stores can face challenges like comp stores, especially during challenging quarters, but are right where we expected. Alivet is contributing as per our forecasts and we're optimistic about the trajectory going forward.

Thank you for your comments on the fiscal environment. I'm curious about your market share capture year-to-date. What are some of the competitive advantages you are considering flexing as we get into a potential tariff price hike environment in the second half?

Hey, Peter. Thanks for the question. We continue to gain market share significantly, consistent over the past three years, particularly in our Q business. We are experiencing high single-digit unit growth across feed categories, especially poultry feed. In terms of competitive advantage, our scale allows us to negotiate better terms and manage our costs effectively. We have a strong market presence, which further allows us to lead necessary price increases in the market while securing trust with our customers. Overall, we've maintained positive comp transactions, showcasing our strength across various market conditions, and we feel excellent about the share gains we’re achieving moving forward.

Operator, we've reached the end of our planned remarks. Thank you, everyone, for joining us today. I look forward to speaking with you about our Q2 earnings in July.

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