I'm Peter Benedict, Senior Retail Consumer Products and Services Analyst at Baird. I want to be the first to welcome you all to the 2026 Consumer Technology and Services Conference. I'm really pleased to be kicking things off here with Tractor Supply, leading rural lifestyle retailer in the U.S., a little more than 2,300 stores currently. They also have 200 or so PetSense locations. Their sales are expected to exceed around $15 billion this year, and the stock carries a market cap of just under $17 billion. With us today, we have CEO Hal Lawton, CFO Kurt Barton, and, of course, Mary Wynn-Pilkington, who heads up the IR effort. She's here as well. I think the guys are going to have some prepared remarks. Then we'll do some Q&A. If you have a question, we can try to weave it in. just email session1 at rwbaird.com. I'll do my best. And there will be a breakout session afterwards if you have questions that haven't been addressed. So with that, I'll turn it over to Hal.
Great. Thanks, Peter. Good to see everybody this morning. Thanks for joining us. Just a couple opening remarks. As Peter mentioned, Tracksply, now over 2,400 stores in the United States, farm and ranch, and then a couple hundred Pets End stores. This is a business that's 88-plus years old now, has a track record of navigating different cycles and very resilient business model, one that has incredible strength and loyalty with our core customer, and then continues to expand our total addressable market. over the last several years, handful of years, we've made some notable investments and some strategic initiatives. New stores have always been a hallmark of tractor supply. Over the last handful of years, we've remodeled nearly half of our stores and made incremental investments in areas like digital and in our final mile delivery program. And those have been very successful and created significant shareholder value creation. All that said, our performance in the last couple of quarters in particular has been less than what we would have aspired to deliver. That's primarily due to softer end markets that we participate in, our total addressable market. 40% of our total addressable market is farm and ranch. Another 20% is pet. Another 20% is home improvement. All four of those sectors are soft and under some kind of pressure relative to their historic norms. And that's created some weakness in our business. That said, we're not sitting still. We're taking some significant action. We can provide some further updates on that today. We provided some of those updates on our most recent earnings call, namely those two major areas of kind of immediate action we've been taking. It had been around reaccelerating our pet business and also further establishing our price, value, competitive advantage in the market. And we've been navigating in those two areas and putting significant energy in action against over the last few months and look forward to sharing some of those updates on that. But again, just stepping back, Tractor Supply, 88-plus-year-old business, a hallmark of navigating a variety of different cycles, very resilient business model, and pleased to be here today to talk with you.
Peter, I'll just add on to some of Hal's comments. I thought I'd hit three things that I think all three of them are very focused on, not only for us, but for the conference. I'll hit a little bit on the operating environment today.
the consumer, and particularly the rural consumer, and then in our business, what's our focus in the
near term? I'll start by saying very consistent with our typical approach with your conference, we're not coming in providing intra-quarter business update, but our comments are very purposeful to be more reflective of the broader consumer and customer, the broader retail market. I'll start with the operating environment. No doubt the operating environment today is very different and a bit more cautious than going into the year for most companies and tractor supplies and inclusive of that. When you think about the operating environment today, you know, with global conflict, higher fuel prices, higher interest rates, longer, higher interest rates, and even choppy and much, much, much, much less ideal weather conditions in the environment. So our operating environment is a bit more difficult and cautious than we saw going into this market. Take that on to the customer and the consumer. We're seeing very much the same thing that most retailers are saying. We're seeing a consumer that's very highly value focused, being much more deliberate, discerning in their spend, particularly in the discretionary sides of the business, seasonal or big ticket purchases. You see customers being much more discerning, planned, and deliberate in that. Focused on value. Much more uncertainty on the consumer on the inflation at this point. When we see not only their spending and where they choose to spend in their wallet, but even the surveys that we pulse in with our own customers, our customers are telling us even greater percentage of the decision-making on their purchasing is impacted by inflation. In the most recent survey that we've given, fuel has now become the highest level inflationary pressure that they're telling us impacting their decision. And when you think about fuel, while it impacts most businesses, all retailers, there's a bit of uniqueness to the rural customer. The average rural consumer will drive, as an example, 400 miles on average a week. That's about 30% more than a suburban or urban customer. Even more further specific with tractor supply, two-thirds of our customers tell us they own one truck or at least one truck. 25% of them, it's a diesel truck. And in this environment where fuel prices are higher, as you watch, diesel prices have accelerated higher year over year than even gasoline prices. And so for our customer, that's about $50 a week, more of inflation, almost $1,500 a year on average that's pressuring them at this point. So our customers have definitely been resilient over the years in inflationary environments, but certainly recognizing the pressure that's on the business. And we see that. We still see a strong, actively engaged customer on buying needs-based items, continuing to see growth in the queue and the consumables while the discretionaries underspend. So with our customer and for even our business, we're going to continue to monitor the fuel costs as that can impact not only their decision making, but even our input costs with higher freight costs as well. With that said, the consumer, our customer, the exciting thing and what we watch often for the health of the business, our customer continues to be engaged in the lifestyle and continues to be engaged with tractor supply. The customer shopping patterns, the engagement and loyalty to the lifestyle and track supply continues to be strong. Retention continues to be solid. We certainly see some of the impact on either what they're spending or the frequency of the spend, but it's great to see those neighbors club members and those customers continue to shop with tractor supply. Maybe I'll just end by saying our focus right now is certainly in these environments, our focus is controlling what we can control. With the macro pressures, our team is very focused on executing strong, driving value to the customers. In these environments, the team does an excellent job, and we're doing it right now, to switch and pivot to value drivers for the consumer and driving the needs-based business. Inventory management and cost control are key. Investing and in our capital allocation, I'll just end with saying we're going to continue to invest, and you'll see that not only in the near term but long term, investing for the things that give us a strong competitive position. Those items are areas that are really important to drive value and convenience. So investing in digital, investing in final mile, final mile unlocking a number of revenue stream opportunities, localization infusion, and certainly new store economics, which are really strong, will continue to invest in new stores. These are the things that are helping us offset some of these macro pressures. And so we're going to continue to lean on those. As far as that capital allocation, we're going to continue to invest in one of the best economic parts of the business, which is new stores. Our balance sheet is strong. It gives us the opportunity to be nimble, but yet disciplined on where we're going to invest, but nimble to be able to make the investments in different areas of the business. And that includes capital allocation on shareholder return. We can be nimble and lean heavier on or adjust in share repurchases. So we've got all those opportunities with a healthy balance sheet. And for the long term, I'll just remind you that a differentiator for tractor supply is we have a very resilient, loyal customer base. We have a needs-based business that buoys us in environments like this where there's pressure on discretionary, and we have a still growing opportunity to gain market share in rural America. And we're excited about the long term. So those are some of the thoughts. Well, that's great. You're addressing
a lot of the current issues that are out there, which is great. And I want to take a step. We're going to dig into a lot of what you guys just kind of touched on, but I just want to take a bit of a step back because you do operate in a very unique market relative to most retailers. You've got about a seven to eight percent market share position, I think, when you think across the entirety of the addressable market. Maybe talk about some of the key secular themes that are driving kind of your end markets, where they sit right now, what's working, what's not working from a secular standpoint, and what you think kind of an underlying growth rate should be for this
kind of this tam that you guys go after yeah great uh thanks for the question peter um i referenced our total addressable market earlier uh our tam is over a couple hundred billion dollars uh in size uh we shared that at our most recent investor conference in the winter of 2024 for those who want to go back and look at that and in that in that uh investor presentation we had a pie chart and it showed the breakdown of our of our tam by sector and i referenced it earlier about 40 percent of our tam is farm and ranch that's kind of our historic core uh market base another 20 is pet another 20 roughly is home improvement and then you've got the remaining 20 across a variety of smaller categories related to our business and markets things like clothing etc If you think about those first three sectors that I mentioned, I'll first start with PET because that one's very well known and documented. That sector has been soft for the better part of two years and it's projected to continue to be soft this year as well due to reduction in particular in dog population across the country and kind of the impact that has on the business. That sector has been kind of flat to negative, really, for the last one to two years, particularly on the goods side of things. The second would then be home improvement. Again, that kind of sector, very well documented. There were some earnings reports last week, I believe it was, or two weeks ago, that just came out for talking about that sector. It's roughly flattish as well. And then you think about farm and ranch. that may be one that folks are in this room lesser uh lesser exposed to but again you can get credit card data on the farm and ranch sector you can pull placer data on the farm and ranch sector we continue to outperform in that sector but that sector is flat to negative as well right now so when you take those three sectors and you put them together that's 80 of our end markets that are kind of soft and kind of weak relative to historic times. Now, on a historic, typically our sector is an at or above GDP growth sector. And then we have been a share gainer in the context of that. We continue to be a share gainer right now in just more of a softer and weaker environment. But structurally, it's a very sound market. It's consumables-based, it's usable based, it's edible based, it's needs, it's essential products. And, you know, it's an end market that's shown that it's had strength, you know, for the last 40 plus years. And, you know, we were confident it'll continue to be that way, and it will continue to take
share in it. Yeah. I mean, you're a dominant player when you think about the farm and ranch set. But you talk about pet, you talk about, you know, home improvement. Of course, there's all sorts of other companies out there that come to mind. Maybe talk about the competitive set that you guys think about both the brick and mortar based folks but also the digital folks how has that evolved over the last several years where how do you see yourself
fitting in from a competitive standpoint yeah i think um on a competitive front the way i think about retail now is uh you know much like it was just pre-coded um i think about farm and ranch uh That end market, we continue to take significant share in. We've got a number of competitive advantages relative to our competition around scale with our manufacturers, supply chain, digital, our neighbor's club, et cetera. We're outgrowing the farm and ranch market kind of week to week, month to month by usually two to three points of overall growth. and so continue to take share there and fully expect to do so as we move forward and have historically always taken share in that market. And then if you think about home improvement, that market has been reasonably stable. There's not been significant share going back and forth in that market and I think we continue to do well there. We anchor hard on the garden side in riding lawnmowers. We saw the largest number of riding lawnmowers in the United States each year. So that's an anchor for us and will continue to be. Obviously, we have a strong tools and hardware business. It's anchored in truck, as Kurt talked about earlier. If you're in our business, you'd say, oh, this feels like an ace harder, but a little heavier, a little harder, a little more truck oriented. That sector, I think the competitive environment's very stable. And then in pet, you know, it's a sector that's very competitive. And one that's, as we all know, increasingly shifting to online we've got to continue to be very competitive there one that's increasingly shifting to services we just made an acquisition that i think positions our ecosystem better uh in that in that area of the business um and uh um you know it's a more broadly than if i just were to step back i think you know retail is in similar to 2018 and 2019 where it's consolidating you see particularly with gas prices where they are people taking visiting less number of retailers consolidating their trips across those we are a consolidating retailer we sell a lifestyle we don't sell a specific category so that fares well for us but we've got to make sure we we fight hard for that for that trip yeah and with sticking with the companion animal kind
of pet business what's there's a macro issue there i think we appreciate but what's like the self-diagnosis that you guys have done as you look at maybe how you've been merchandising you've been approaching that category are there changes that you're making to try to kind of maybe bend the
curve before the sector turns. Yeah. If I were to step back and just talk about pet for a minute, kind of maybe break it into two buckets of things, one dog, cat, and then goods versus services. So on dog and cat, the dog population peaked in 2023, and then it had a step down into 2024, had a step down into 2025 and it's expected to step down again here into in 2026. It's been primarily second dogs that haven't been replaced or you know singular dogs of course when they when they pass away as well but mostly second dogs and and larger dogs and by contrast though the cat population has been going up during that time so you're seeing kind of a crossing of those two groups in terms of their overall growth rate. In our business at Tractor Supply, we are 80% dog, 20% cat. By contrast, the industry is 60% dog, 40% cat. So we have a mixed headwind there in addition to just in general, a dog headwind in the market. The second thing I'll call out is goods versus services. If you look at pet, and kind of across most sector experts right now, it is a flat to maybe modestly up business, call it like a flat to plus one. But the services side of it is what's leading it up. I call it plus five to plus 10%. And then the good side is negative, call it like negative one, negative two. So if you're in grooming, or if you're in vet services, those sorts of things, those are the ones that are growing in the high single digits still. But the good side of it, because one, you don't have new dogs coming onto the market as much as they were three or four years ago. So all the hardline side of it that goes along with a new dog is depressed. And then obviously, if you have lesser dogs in the market, there's lesser food being bought. And then the third thing I'll bring up is in the context of food, we've seen a big shift over the last seven, eight years out of dry food, kibble, into fresh food, which is now nearly 10% of the business. So those are kind of the three main factors I would say that everyone in the pet industry is navigating. And then as it relates to us, what are some of the actions we're taking? So first off on the dog cat piece, we are shifting our space in our stores more to cat so that we've got a square footage that's reflective of the market more so. So we're pivoting there and you'll hear more about our cat expansions. On the dog side, we've got several things that are going on over the next six weeks. We'll reset 70-ish percent of our dog area in the store. We'll be redoing the entire dog feed area. We'll be redoing the entire snack and treats area as well as the wellness area on the snack and treats area you'll see much more health and wellness protein those sorts of things building in similarly animals are people are feeding their animals healthier foods and diets just like they are they're the human just like we are ourselves uh you also we also are rolling out uh fresh pet so we now have fresh pet and over 250 stores uh that's been complete we talked about that on earnings call that that will be done by the end of this quarter. That is complete already. And then we'll be rolling it out to the better part of another 500 stores by year end. So working to embrace those trends, whether it's on fresh, whether it's on cat, whether it's on the wellness side inside of dog. And then lastly, we just acquired VIP Pet Care. This is a business we've worked closely with for the last 15 to 20 years. They do mobile pet clinics. We see over a million customers a year with VIP pet care. And we have 700, 800 stores remaining that we can expand it into. So there's upside on the growth there. And the services sector is an area, as I mentioned earlier, that's high single-digit growth in dogs. So it gives us an avenue to play in that more. And then also there's a variety of synergies on the back end I can talk about later in terms of connecting to the Allibet business that we've we acquired a year and a half ago or connecting into our neighbor's club business and driving some loyalty over time there improved engagement so we're very excited about that acquisition as well but to your point Peter we're not standing still we we're you know very conscious of what the trends are investing into those trends to re-accelerate our pet business. And another
initiative that you guys have been front-footed on is direct sales, which is kind of maybe an incremental, Tam, that you kind of outlined a year or two ago. Talk about what that means, why Tractor Spy has a right to win with direct sales, and just a time frame to kind of start
to see that really impact the P&L. Yeah. We talked about this also at our investor conference a year and a half ago, so I'll reference it. And folks can pull some of those slides if they want. But there's five core customer segments that Tractor Supply serves. On the kind of more fringe side, we have this customer segment called Country Dabbler. Then you've got our Pet Enthusiast. And then in our core, you've got a Backyard Homesteader and a Hobby Farmer. And those are our core customers. And then kind of our B2B that's on the left-hand side of that is Big Barn. And that is over a $10 billion TAM. It is an area that we've underserved historically because they're more business-oriented. And when they're more business-oriented, time is money, and they require some different go-to-market approaches than what we've historically done. Namely, those two kind of go-to-market approaches. The first is delivery. You've got to be able to get the product out to their barns, their ranches, their farms, and you've got to be able to not only get it to the driveway, but you've got to be able to get it into the barn or you've got to be able to get it into the stable. That's what we're building out in Final Mile. We are seeing a significant amount of success with that. Our big barn customer growth has been significant over the last 12 to 18 months. And direct sales, which I'll get to in a minute, has been a big piece of that. But what's been an even bigger piece as we're getting into it is the unlocking of delivery and being able to get the products that our customers want in the quantities they want at the time and in the location they want on the big, big barn customer. So and think of this as a bit like our pro strategy for those who hear about it a lot in home improvement. This would be a bit more of our pro strategy. And then direct sales for those customers that don't have the time to go into a store to pick their product or even don't have time to go online to select their items and go through the purchase process there. We have a direct sales team that we've been building out this year that will do over $50 million in sales that are going out and calling on these big barns and these big customers and then taking their orders, building that relationship and grabbing that volume over time. and it's been very successful we're a little over a year year and a half into the rollout of that program now uh every other month we're hiring a new cohort bringing them up putting them out in the market and then building that that customer base and so our art the strategies we're we're executing at big barn have been have been very successful both on the direct sales side as well
as the delivery in the final mile side when when you say pro i think a lot of times investors will start to get back on their heels though that that's a lot of investment there's a lot of capex it's margin to lose like how does the return on capital i guess well what's the investment required to make it happen but then when you think about the return on capital of this business
um how does it compare to kind of the the core tracker yeah i'll take that um the differentiator with that versus how you at your point you normally start to think if you talk pro it means you've got all this capital and spent this is a very much a hub and spoke type environment it's asset light. So for us, we're utilizing our stores as the source of the product and the base as to where it's being delivered from. You've got a sales rep that may cover five, six, seven stores and environment. And you've really got a low level of capital, leased trucks, leased vehicles, et cetera, for the field source, it's really not a capital-intensive environment. We can leverage our cross-stock and mixing centers, our distribution centers, and our stores as the source for it. We're implementing principally a field-based team. And so it's not as capital-intensive as often you think about a large, big home improvement type approach. Got it. Okay.
Anyway, stores, critical of the business, as you mentioned, 2,400, target of 3,200, I think, at last check. Talk about the performance of the new stores, what the economics are. You made some decisions on own versus lease. And then, you know, given the operating environment we're in, what would it take for you to have to reassess that and say, hey you know what 90 to 100 maybe that's too much or or are we not even at that point yet yeah um
let me i'll talk first about uh uh our new store economic model and uh then i'll talk about some of the the quantitative results of that kind of and then uh talk about how we think about you know what we do every year in terms of evaluating shareholder capital uh first on our new stores our new stores are one of the best investments tractor supply can make particularly this environment given where our business results are very much understand the question you know around new stores and and you know are you kind of driving over the cliff building too many new stores what I'd say is a few things on that first off our new store maturity curve benefit still significantly exceeds the impact of cannibalization as well as competitive impact so it's still very much accretive that that kind of math right there the second thing is when you look at the return on invested capital of our new stores it's they are they are in the 23 24 25 range so right there in that low to mid 20s still very much in line with where they were 10 15 years ago and in fact a point or two higher. So our ROICs continue to be very strong on our new stores. And then if you look at the new store productivity, I think last quarter we were like in the high 60s in terms of our new stores opening at our average store sales volume. So we're opening up in like the high 60s. Our new stores are profitable in the first year, cash flow positive and kind of somewhere between year two and year three, outstanding investments. We've incrementally improved that investment over the last handful of years, as Peter mentioned, by embracing a sale leaseback model. So historically with tractor supply, if you think about the ROIC, right, the return on invested capital, you've got your, obviously your operating income on the top that the store is spending off, but then you've got your invested capital on the denominator side. So historically, where that invested capital would work is we would go to a developer and we'd say, we want this location. You go build it for us and finance that build. And then when it's done, we'll have an agreed upon lease and you can go flip that store in the market. They would typically spend $6 to $6.5 million to build the store, typically flip it for $7.5 to $8 million in pockets, somewhere between $1.25 to $1.75 million in net for that effort. Now what we're doing with half of our stores is we're using our balance sheet to fund that 18-month development cycle, and we're paying the developer a $500,000 flat fee. And so instead of them making, say, one, two, as I mentioned earlier, they're now making $500,000. That $700,000 is coming back to us. As I mentioned, it takes $6.5 million or so to build a store. So we're saving 10% right there in the cost of building our stores. And then we're able to then sell it immediately on the open market because we very much have a lease operating strategy and bolster our invested capital there. So new stores continue to be an outstanding investment for our shareholders. They continue to return well, and we are not kind of driving off that proverbial cliff. All that said, all the time, you know, throughout the year, but certainly about this time of year as we start to think about annual planning for the next year, we're always looking at what the right way to allocate our capital is. uh we've increased store counts from 70 to 80 to 100 over time uh and we've gone up and down depending on the operating environment that we're in uh and uh certainly always reserve the right to to do that as we move forward if we were to do something like that it would not be drastic like a 50 or 60 store reduction it would be some toggling up and down you know as we've had historically 10 or 20 stores up or down as as we see the environment and our need to evolve to reflect the environment. But this is a business that's always evolved to reflect the environment and we certainly would do that again if we think it's prudent. Right. All right well the doors are
opening in the back of the room. I think that means our time is up. Time went back. There will be a breakout session in the Asteroom. Join me in thanking the folks in Tractor Supply. Thanks Peter.