Q1 2022 Tractor Supply Co Earnings Call
Good morning, ladies and gentlemen, and welcome to tractor supply company's conference call to discuss the third quarter 2022 result.
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Of tractor supply company as a reminder, this call is being recorded.
I would now like to introduce your host for today's call. This is Mary Winn.
Pilkington senior Vice President of Investor and public relations protracted supply company.
Mary Winn. Please go ahead.
Thank you operator, good morning, everyone. Thanks for taking the time to join US today and I hope you're all doing well on the call today are Hal Lawton, our CEO , Kurt Barton our CFO . After our prepared remarks, we will open the call up for your questions Seth <unk>, our EVP and Chief merchandising officer will join us for the <unk>.
Question and answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release.
Provisions under the private Securities Litigation Reform Act of $19 95. This call may contain certain forward looking statements.
That are subject to significant risks.
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 Companys 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.
We shortened the prepared remarks to allow more time for Q&A given the number of people who want to participate we respectfully ask that you limit yourself to one question. If you have additional questions. Please feel free to get back in the queue. I. Appreciate your cooperation we will be available after the call for follow ups.
Thank you for your time and attention. This morning, and now it's my pleasure to turn the call over to Hal. Thank you Mary Winn and good morning, everyone and thank you for joining us today I'd like to begin by thanking the tractor supply team for again delivering strong results.
In some ways. This quarter may have been our best relative performance over the course of the last two years the team demonstrated grit and determination as they ever came the lapping of last year's robust performance.
Impacts of the omicron to various particularly in January the significant inflationary pressures and the ongoing supply chain constraints. The last two of which were both exact exacerbated by the tragic conflicts in Ukraine.
No matter what came at the team they stepped up to the challenge to be there for our customers as a dependable supplier for the out here lifestyle.
Our team members, our vendors and other supply chain partners have continued to rise to the occasion as we strive to live our mission and values every day.
Speaking of our mission and values and recognition of Earth week. This week, we issued are stewards of lights out here sustainability report. This comprehensive report provides detailed information and progress on our ESG efforts.
Significantly enhances our transparency and disclosure related to our environmental sustainability actions.
Of note in the report is the establishment of a new water usage goal to reduce on an absolute level of water footprint by 25 million gallon by 2025.
ESG makes great business sense for tractor supply and setting targets for ourselves in these areas creates long term value and allows us to have a positive impact on the world and the communities we call home.
As a purpose driven company, we remain committed to constant improvement on this journey.
Now, let's turn to a review of the business for the first quarter of 2022.
The year started out on a strong note.
We grew net sales by eight 3% with comparable store sales up five 2%.
Diluted EPS was $1 65, an increase of six 5% year over year.
Our comparable store sales growth was driven by strong ticket growth of six 7% offset by a decline in transactions of one 4%.
Given the remarkable strength in our business last year and as a reminder, we had a 38, 6% comp in Q1 last year. We were very pleased with our sales growth last year, we shared with you that we materially benefit in the quarter from a combination of factors in particular stimulus spending favorable weather.
And inflation.
This quarter, we successfully navigated the lapping of these factors despite the spring season getting off to a slow start.
On inflation it benefited sales in the quarter by about 10 percentage points as we shared in our last earnings call. We thought there was more pressure to the upside on inflation as we entered the quarter and that is certainly what we saw.
We continue to see increasing costs in the commodity inputs in our product categories.
As well as the underlying variables like higher wage labor wage rates and transport costs that are impacting our vendor partners.
Shifting to Q, we experienced impressive demand in our consumable usable and edible categories.
As a reminder, these products are need based and demand driven and they are what drive trips into our stores.
Our <unk> sales growth was almost three times, our overall sales growth rate.
Our key customer trends have never been stronger.
Rounding out the business' seasonal category performance was mixed as we had solid performance in our winter season categories. During a much colder January .
But our spring season categories performed below average due to colder wetter temperatures in the month of March.
Shifting E Commerce E Commerce again saw double digit growth and this represented our 39th consecutive quarter of double digit or better growth in E. Commerce, we are making great strides in expanding our digital presence.
Of note our mobile App now represents more than 15% of our digital sales. This quarter, we crossed 3 million downloads of the tractor supply App and this is a major milestone in our one <unk> strategy and our ability to offer our customers a more seamless shopping experience.
Our Neighbor's club program reached a record $24 8 million members in the quarter, an increase of 24% from last year's first quarter.
It seems like much longer than a year ago, but we recently celebrated the one year anniversary of the relaunch of Neighbor's club to a points based loyalty program.
The relaunch has been an overwhelming success as it has measurably encourage customers to migrate their spending upwards. Our neighbor's club members are comping at a faster overall rate than our overall company performance and we're seeing strong growth and retention in our high value customers.
We are confident in our business short term and long term.
Last quarter, we shared with you several structural trends from which we're benefiting including world revitalization increased pet ownership homesteading and the rise in self reliant.
As the market leader, we are well positioned to continue to benefit from these structural trends.
Additionally, we are seeing increasing momentum from our lives out here strategic initiatives, enabling us to continue to gain share.
As we look forward, we believe we have many vectors for growth and our business has never been stronger.
That said, we acknowledge that there is significant uncertainty in the macro environment. We have a lot of the year still ahead of us and in keeping with our long standing practices. Prior to the pandemic. We continue to believe that the best way to look at this business is all in the half.
On the heels of last year's record performance and a strong start to the year, we are reiterating our guidance for fiscal year 2022.
We continue to see significant.
Opportunities for growth ahead of us.
I'll briefly address the worst will an FTC towards a positive resolution <unk>.
<unk> and hope to have an update in the coming months.
Accordingly, we are limited in the comments, we can make about the transaction at this time.
Now I'll turn the call over to Kurt.
And discuss some of the details of the first quarter and our outlook for the rest of the year.
Thank you Hal and Hello to everyone.
The performance that came in ahead of our expectations on a two year stack.
Looking at the cadence of.
Were the strongest months with.
Right earlier in the quarter.
Since early in the quarter while spread.
Country.
Please keep in mind.
We were comping ideal weather conditions in the first quarter of last year with an early spring across many of our markets.
This quarter retail price inflation contributed about 10 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the globe.
Shared with you last quarter, we anticipated this would be the toughest compare on transactions as we cycled the large.
Just transaction gain since the beginning of the pandemic in Q1 of last year of 21%.
To illustrate we are experiencing positive comp transactions until we cycle. The last two weeks of the quarter, where we clearly saw the benefits of stimulus on transactions in the prior year.
As we expected big ticket decline given the robust performance, we were cycling driven by stimulus and the early start to the spring selling season.
Our big ticket performance.
This exceeded the 43, 8% comp growth of the chain.
We continue to see strong Q performance with strength in categories, such as dry dog food poultry feed and heating fuel.
For instance, dry dog food achieved over a 20% comp.
<unk> performed above the company average, which was in line with our pet performance.
Overall, we are very pleased with our top line performance.
Patients for the first quarter our gross.
Margin declined by 29 basis points to 34, 9% of sales. The decrease in gross margin is primarily attributable to three factors significant product.
Cost inflation higher transportation cost and to a lesser extent product mix.
We continue to experience.
Domestic.
The increased substantially year over year.
Year as well as fuel costs.
Product costs and freight to continue.
Throughout 2022.
The robust growth in our key categories, which have a lower gross profit rate did put some pressure on gross margin.
The team did a remarkable job of managing these cost increases through our price management actions and other margin driving initiatives.
Examples include capturing efficiencies in the supply chain to reduce miles continuing to limit promotions.
And leaning into the more efficient value provided through neighbor's club.
SG&A, including depreciation and amortization as a percent of net sales was 26, 9% an improvement of 11 basis points.
This improvement was primarily attributable to the normalization of incentive compensation moderation of COVID-19 response costs and leverage in occupancy and other costs from the increase in comparable store sales.
These items were partially offset by investments in store wages and incremental costs related to our life out here strategic investments for growth.
This includes a step up in our depreciation and amortization.
Please also keep in mind, given our results last year, we were cycling strong SG&A leverage which benefited from 38, 6% comp sales in the first quarter of 2021.
Net income was $187 million and diluted EPS was $1 65 compared to $1 55 in the first quarter.
Committed to returning cash to shareholders.
Last quarter, we increased our quarterly.
Dividend by 77%.
92.
During the quarter, we returned $400 million to shareholders through the comps.
And cash dividends.
Okay.
Turning now to our balance sheet, which remains strong and provides us the ability to invest in our business for the long term merchandising. The doors were $2 6 billion at the end of the first quarter, representing an increase of about 21% and average inventory per store. This increase primarily attributable to inflation.
Along with our investment in inventory to support the growing demand now to our guidance for 2022.
Which is unchanged.
As Hal mentioned earlier, we are reconfirming our guidance for the year. This includes net sales in the range of 13, 6% to $13 8 billion.
With comparable store sales growth of three to four 5%.
For the year, we forecast an operating margin of 10, 1% to 10, 3% of sales. We continue to expect diluted EPS in a range of $9 20 to $9 50.
We acknowledged that we beat our own expectations for the first quarter and that ongoing inflation should benefit our top line.
With the dynamic macro environment as a backdrop the smallest quarter of the year.
And it's great to start out.
Year ahead of our expectations.
We recognize that flow from the first quarter performance through May put pressure towards the top end of our guidance ranges for those of you followed us for some time. This is not a new convention to guidance and is in line with how we provided guidance historically prior to the pandemic.
We continue to believe the best way to look at our business is not by the quarter, but by the half of the year.
With as much inflation pressures, we're seeing in our business. We are closely watching comparable average ticket and transactions, we anticipate that the breakdown of growth may be a bit different than our prior expectations.
<unk>.
With transaction seeing incremental price.
Our experienced trip consolidation by consumer.
Tumors during strong inflationary times.
As inflation pressures persist it puts higher pressure on gross margin yet provides an offsetting benefit to SG&A leverage as such.
We're maintaining our expectations on our operating margin.
As a reminder, the prospective acquisition of or some farm at home is not included in our guidance.
In summary, we are very pleased with our performance in the first quarter and our outlook for 2022. The team is executing at a very high level, we remain committed to investing in the business to retain the loyalty of our longtime.
Improved customer service strengthen our supply chain and grow our digital commerce all of them.
The support of our commitment to drive strong shareholder returns for the long turn the call back over to Hal.
Thanks Kurt.
Last quarter and an enhanced earnings event, we shared significant details on our lives out here strategy.
We believe we have.
Robust idiosyncratic drivers for growth over time.
Our strategy is gaining traction and the team is executing well.
For the remainder of <unk>.
In my prepared remarks, I am going to provide an update on our customer, including our neighbor's club and provide some highlights of our merchandising initiatives for the spring and summer season.
Our customer translate share through legendary customer service are numerous digital properties are seamless shopping experience and our neighbor's club loyalty program.
Our customer base continues.
It needs to be remarkably healthy and highly engaged with our brand.
And our Q2 2020 earnings call nearly two years ago, we discussed that our goal is to nurture and capitalized on the generational growth we were seeing in our customer base seizing on the opportunities Mers and expand the number of category shop by both customer sets.
And I'm pleased to share with you today that that's exactly what we're seeing in our customer base.
Our active customer base is now much larger than coming into the pandemic as we money.
On our new car.
Customers, we continue to see strong new customer acquisition with absolute run rates that are at pre COVID-19 levels and very stable.
Continuing on a theme since 2020, our new customers continue to skew younger.
We're seeing ongoing growth in our millennial shoppers as there has been a net migration out of urban areas largely driven by millennials.
Since the start of the pandemic the most robust homeownership growth, it's in the millennial cohort with the growth coming in suburban and rural areas.
<unk> of the tractor supply brand.
Another cost.
Is it a contributor to our strong sales growth has been our neighbor's club.
As I mentioned earlier, the revamp of the program in April of last year from an Infinity program too.
The program has been rapidly adopted by our customers neighbors.
The Neighbor's club is a significant growth platform for us.
Notably, we reached our highest level of customer spending over $1 annually.
Level of customers ever spending over $2000 annually.
Transaction total sales and spend per active neighbor's club member all grew significantly in the quarter.
These customer trends are an indication that we continue to benefit from the structural tailwind as I mentioned earlier, such as rural revitalization pet ownership homesteading and self reliant.
Our brand momentum is stronger than ever.
However, and we're investing to ensure we continue to play offense in the context of these trends.
The overall health of our customer base contributes to our confidence in our outlook for the year.
Let's shift to spring.
Our stores and e-commerce are well positioned to take advantage of the seasonal change to serve our customers.
As of today, we have over 175 garden centers customer ready for spring.
We continue to forecast, having garden center transformations of our side lots and over 15% of our stores by the end of the year.
Where spring has cooperated we are very excited about our customers' response to the expanded product offering and layout.
For power equipment.
Tractor supply is the exclusive retailer of the Green works Pro 60 volt platform, which includes more than 75 battery operated preferred return riding push mower.
Leaf blowers snow throwers and more.
Tractor supply began offering Dreamworks pro 60 volt products online earlier, this year and we rolled them out in our stores the past few weeks.
Notably the addition of battery operated zero turn mower from Greenway parks strengthens our position as the zero returning headquarters with our market, leading assortment from Toro Bad Boy and Cub Cadet.
This past Saturday, we hosted a try before you buy it and then at our stores that allowed our cost customers an opportunity to test drive our market leading.
Stores.
Chick days are always an exception.
Adding time in store and something that our costs.
Since the spring.
We sell millions of birds each year.
And this year, we've expanded our breed options as well as widened our feed and care assortment.
This is a great example of the homesteading category for our new millennial customers.
No.
And importantly, our store teams have done great.
Whether they are novice or.
We have a leading lineup.
A top selling highest quality tools that are relative to our customers.
Last week, we announced the addition of Dremel and Bosch.
To our power to power tool lineup.
As mentioned on several previous calls a key component of project fusion is an expansion of our assortment in truck.
Tool in hardware.
Our lineup and tools now includes makita Dewalt Porter cable exclusively Bosch and dremel.
We are much more of a destination now for our customers in this category.
And as an aside were also on track to have project fusion implemented in nearly 30% of our stores by year end.
To wrap up the tractor supply team continues to thrive through the dynamic macro.
Economic environment, while making incredible progress for laying the foundation for the future.
Tractor supply is a proven business model that has been resilient over numerous different types.
For their dedication to living our mission and values every day.
And now we'd like to open up the call for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.
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Okay.
Our first question.
From Scott <unk>.
<unk>.
From truest.
Scott. Please go ahead.
Good morning, guys Scot ciccarelli so.
I guess my question is with a 10% impact.
From pricing in the comp.
What kind of if any demand restructuring you guys seeing and kind of related to that how should we think about the impact on the topline from inflation as we get.
Later in the year, because obviously, we're going to be cycling.
The larger impact as we go.
Hey, Scott good morning, and thanks for joining our call I appreciate the question.
Does that start out just at the highest level consumers very healthy as.
As Curt mentioned, we exceeded our expectations in Q1.
Kind of a few nuances on that where are we in the business, where we're lapping the stimulus from last year, notably in Big ticket. We saw some fall off there, but it was very much in line with what we expected and what we had foreshadowed at our enhanced earnings event. When we talked about some pressure for big ticket dominantly in the last part of Q1 and early part of <unk>.
Q2.
Start to spring, but in spring always comes with.
We had it many play out in many different ways.
Spring.
But otherwise.
And the customer and I would point to tick to our Q business.
<unk>.
As an indication of that.
<unk> three times our overall.
Dry dog food above 20% comps in fact, the month of March was our highest dollar volume ever in dry dog food.
If I just step back we serve a lifestyle, it's demand driven needs based kind of product categories for the most part.
Have a track record across all different types of economics.
Now I'll make cycles in.
In addition to that track record of consistency in the demand driven business model two additional factors going for US now one are the continued.
Continued kind of macro tailwind things like world revitalization in pet adoption that I mentioned earlier.
And then also our life out here strategy and with the 175 garden centers and by the end of the year, 30% of our nearly 30% of our stores remodel with fusion. We've just got we've got a lot of tailwind right now.
As it relates to the consumer we've really not seen much reaction.
Inflation or any other kind of economics.
Elements.
As far as the impact on inflation to your second part of your question.
Point to Curt's comments in his prepared remarks around we did exceed our expectations in Q1.
Just given the reason our historic convention of sticking to the halves.
Environment, we thought it was prudent to reiterate our guidance, but certainly if you roll through.
This quarter it would take you towards the high end of our guidance for the year here and then if we were to exceed performance for the rest of the year.
To do that we didn't have evidence a nice year.
Okay.
Do you think inflation continues to be persistent.
<unk>.
And we continue to see it come through.
And we continue to be able to navigate it very effectively.
Okay.
Okay.
Okay.
Our next question is from Simon Gutman of Morgan Stanley .
Simon Please go ahead.
<unk>.
Hello two.
Two questions now in the interest of time. The first is the business mix of needs versus once we used to talk about this a while ago. So how do you how do you how should we think about the percentage of the business that discretionary if the consumer slows and then the second question is.
Little more tactical if you look at the earnings complexion for the rest of the year looks like the incremental margins for the rest.
For the year looked like they're higher.
Comp.
So I guess the bridge is there less investment as we're lapping the cost et cetera.
Sure.
Yes Simeon.
Hey, this is Kurt I'll hit both of those questions.
If I understood the question.
Questions. Your first question generally is around.
Needs bursty discretionary versus a needs based business, which were predominantly and then really.
Business continues to be.
Strong and a need space.
Fresh scenario and as you've heard from us soon.
Some less need space discretionary the discretionary piece of our businesses.
Low percentage roughly like 50.
Due to those more discretionary.
How just mentioned some of those areas, we as we expected and saw lifts last year was stimulus we expected and saw some of that trade off in the back and the back end of Q1.
In regards to our outlook for the year and how we really manage feeds the margins. We expect we expect our gross margin as inflation persist to have some level of pressure on the business.
And it's we're going to see pressure from those three primary categories product inflation, the supply chain costs and even considering the strength of Q.
As we continue to take market share puts a little bit of pressure for mix.
<unk>.
As we manage through this we really see the opportunity.
Levers of gross margin and SG&A and in each quarter could be a big difference as inflation puts pressure on gross margin. We also do see the opportunity for that to help us leverage in SG&A and in the first half of the year, where inflation year over year has.
A more of an.
Impact and not as much stronger compares whereas the back half of the year, we're really starting to see inflation tick up you could see as you did in Q1 stronger inflation, but we have opportunity to leverage on SG&A and that's how we're going to view. This business, we're going to manage this as we have the last couple of years through a number of differ.
Scenarios and we do see a scenario, where there is higher inflation and we've got the levers to be able to manage gross margin and SG&A and it could differ by quarters, but that's what gives us the confidence to be able to land that target for the year of 10, 1% to $2 three on the operating margin.
Okay.
Okay. Thank you.
Our next question is from Kate Mcshane from Goldman Sachs.
You May proceed.
Hi, good morning, Thanks for taking our question. Thank you again for the detail around the changing composition of the guide I was just wondering how we should think about potentially the upside and downside risks to the guide where do you think there could be elements.
Great that being.
Particularly conservative.
Yes, Hey, good morning. This is Kurt in regards to your question on the guide let me give you.
A couple of perspectives really how we see the business and how we looked at it going forward first I'll just reiterate what Hal and I have said, we're coming off of Q1, great start to the year, where theres a strong performance hitting on all metrics and just to point out Q1 on a two year stack basis from.
The strength in new customers to strengthen neighbor's club our transaction towards the highest two year stack of any of the four quarters. So the core of the business is strong and healthy that said.
I just mentioned earlier it is it is ripe and consistently in the last two years, we're managing the business.
In multiple scenarios so to your point in your question there are various scenarios and in <unk>.
Under one scenario there is inflation that drives the comps outside of even the initial expectations with that inflation. It puts pressure on margins that leverage in SG&A, we certainly see that with inflation it could impact some of the transactions we've seen trip consolidation we've seen.
Customers begin to change in their spending patterns with the inflation, but thats not necessarily negative for us as we benefit in ticket and that can help us leverage our SG&A and so the number of various scenarios that we see playing out we feel very comfortable that in the next three quarters.
As we manage that that we can still meet our expectations and our guidance and very confidence confidence in the demand in the business and the strength right now going into the rest of the year.
Thank you.
Yes.
Our next question is from Michael Baker of D. A Davidson.
Michael You May proceed.
Hi, how are you.
One question and a follow up kind of.
Short term and the long term.
On the short term aspect of it just the weather being a little sub par.
March.
We expect to see <unk> sales presumably.
So we should expect to gain that back in the second quarter I assume but have we seen as how has April been in terms of the weather and then the longer term question.
Can you remind us of how you think about housing and the impact.
To your business.
Rates are up housing is probably going to slow existing home sales were down six or seven months in a row, although prices have been up how do we think about that longer term for your business. Thanks.
Yeah, Hey, Michael it's Hal.
And then I'm going to take the first the second part of your question first on housing.
And then have Jeff talk a little bit about spring.
On the housing we don't have as much of a direct correlation to new home starts and existing home sales like other segments of retail that said one of the trends we had been benefiting from is the notion of homesteading and people investing in their homes and in their land and also rural revitalization.
<unk> as well as we've had kind of a.
A shift out of urban and even suburban urban areas into extra urban rural I think all the dataset still suggest that.
<unk>.
Those trends are continuing.
Even if you look at the existing home sales and new home sales, which should come out the last few days, while there were some year over year reductions still very strong absolute numbers and then if you look at the amount of housing stock that were short in the United States I think youre going to continue to see very strong absolute numbers for many many years, many quarters and years to.
Come.
And I think youre going to see more of that outside of the cities and we will continue to benefit from that in most of our customers own their land owned their own their homes and and.
And as the.
Home and land depreciation, particularly added rural which has.
<unk> had outsized gains versus urban theyre benefiting from that and there has been a bit of a wealth of factset and it certainly feel like that homesteading trend in that rural revitalization trend.
There are still very strong macroeconomic tailwind for us.
Hum on spring as Curt mentioned, we've had at <unk>.
Spring has been slow to start but we are very excited about our spring plans inventory is in a great spot marketing and merchandising are primed Qs driving footsteps and I'm going to turn it over to SaaS talk a little bit about some of our spring plans in more detail. Thanks al Thanks, Mike for the quest.
<unk>.
Hey, first and foremost as Hal mentioned, obviously, a little bit delay here to the start of spring, but as we've seen the weather start to break off the southern the southern most areas. The last couple of weeks. We are very encouraged we see in our game plan come to life first and foremost I would just say in Texas last week and visited several <unk>.
<unk> centers.
And I would tell you both our customers and our team members could not be more excited about us really going deeper into live goods and gardening, which we know it has been historically the number one categories, where we were not first and top of mind for them and becoming more of that top of mind and we are seeing.
Very good positive results, particularly in the Garden center stores and being set up for 175.
Plus as we enter spring here.
But it's also not just about wide goods right.
We have the best in class Zero turn lineup that's out there we spoke a little bit about big ticket at the end of Q1, but what I would tell you is where we're seeing weather break we're seeing very strong demand across the entire zero turn lineup both in brands.
Our consumer responding with that merchandising and we've spoken some obviously about green works pro and that exclusive partnership that we have this year, that's a new real category that we haven't been able to attack in years past.
That we know that we can go and take market share.
Couple of quick things, we think about spring and we're excited to drive the business. It's not just about lawn and garden at tractor supply, but it's also about home setting.
Chick days is off to a great start.
<unk>.
Things of that nature.
Really really strong demand that we're seeing in our consumer respond to.
And then just continuing to dive into our Q related businesses in and introducing newness across the four we're also excited about spring.
What we have here in front of us and the plan come to life.
Thanks for the detailed response I appreciate it.
Yes.
Our next question is with Steven The County City.
Steven You May proceed.
Great. Thanks, Thanks, very much for taking my question good morning, everyone.
I guess, how I was kind of curious for your for your sense on the broader macro backdrop. It sounds like you're comfortable with the consumers in a healthy position, but just curious your input on how you see the consumer environment shaping up over the balance of the year, it's topical with investors and I guess, if we if we do get to a scenario where potentially in a recession. How do you think the business performs.
And in that environment.
Yes, good morning, Stephen and thanks for joining our call.
If we step back and just talk about the macroeconomic environment.
We're seeing is very consistent with what we're all reading in the headlines every day.
I'll start with persistent inflation, we had the CPI of eight 5% in the month of March.
We've seen half point increases a month for the last handful of months.
It's tough to say if we're at peak inflation, but the way I think about it is that where we're seeing persistent inflation and I think we will see strong inflation not only through this year, but into next year.
As it relates to the economy.
So far the consumer has shown real strength.
And their ability to kind of navigate the inflation and I think you're hearing that today in our earnings call, but also hearing and in many other earnings calls that have come out over the last the last week.
<unk>.
And Theres a variety of reasons for that I mean, you've had strong wage growth across the country. You've got two trillion plus of pent up savings that people are starting to tap into now and you can see that in savings rates.
You do see a little bit of credit card usage up but I think it would be dig into that what we're seeing is people using their credit cards, and then tapping into their savings to pay those down with default rates not yet moving up.
I think the consumer's navigating this very well and I think any any talk of recession at this point is premature.
<unk>.
Stepping back if you look at our business.
We've had 30 straight years of positive comp transactions.
30 straight years of net sales growth.
Nine of the last 30, we've had positive comp sales growth. This is a business that has been able to navigate.
All types of economic cycles.
It was the recession in 'twenty the recession in 2007 to eight nine.
Whether it was COVID-19 just a couple of years ago all of those sorts of scenarios. This business has been incredibly resilient stable and consistent through.
And as I mentioned earlier, there's a number of macroeconomic tailwind that are really benefiting us.
Even even accentuate the stability of our business and then combine that with our life out in your strategy, which is just indicative of just the next leg of growth for our company in 40 years ago, we doubled down in animal feed 20 years ago, we doubled down in pet food now, we're doubling down in live goods combined with our fusion remark.
Model.
We've never had more customer shopping tractor supply, we've never had a stronger digital business attract supply our business is incredibly strong right now.
And we're very much excited about the business from a short term perspective and long term.
That's all very helpful. Thanks very much.
Our next question is with Brian Nagel.
Brian You May proceed.
Hi, good morning.
Nice quarter.
Thanks, Brian .
Two short that will merge into one.
The first question I mean, I guess this is just more of a.
Kind of a.
Logistics Spinout question, but you talked about.
The quarter tracking above your expectations and then also some of the weather pressure. So I guess my question there as well.
In your internal plan, where are you planning for potentially more challenging weather or what drove sort of say the upside in the quarter to your to your internal plans and then my second question, we talked a lot about just inflation and how the consumers managing that you're kind of flipping that over as you look at some of your markets, where maybe you are.
More of a benefit of your consumers benefit more from.
Because of higher oil prices or commodity prices or are you starting to see that youre sort of say work its way into the health of your consumer shopping your stores.
Yes, Brian Hey, good morning. This is Kurt so the two questions. One in regards to some of the puts and takes in regards to our in comparison our expectations on Q1 and then the other one is some of the.
<unk> market areas, such as oil industry et cetera, So let me hit both of those.
In the quarter in Q1, whether from a perspective compared to last year up flat flattish to slightly modestly unfavorable and the point. There is last year. We pointed out we had such an early start to the spring in March is the biggest month that we saw.
Saw about 400 basis points last year in Q1 for weather and we pointed pointed that out this year, we had a start early start to the.
In the quarter with good cold weather in January that we benefited from but then we had the offset so weather was neutral is from from a perspective really some of the strength came in how well <unk> performed and our ability to just continue to capture market share. So.
Weather wasn't necessarily beyond significantly beyond our expectations, we plan that there could be a scenario that we would not see as much early start to the spring.
Hope that helps on that in regards to.
Some of the various micro economies all of that.
Two key ones that are asked a lot about oil industry farm economy in summary, I'd say right now its still too early to tell we are not seeing any meaningful meaningful shift in those markets that indicate anything and I'll illustrate why on some of that.
First we don't view.
Some of the rise in commodities or oil necessarily as a negative in those industries, but yet really more of a potential favorable tailwind to the business.
Right now the oil industry is a bit patient lagging some of the growth an increase in the oil prices.
The farm economy takes some time farmers to get product a product out of the ground farmers are faced with higher input costs right. Now. So I think it's a matter of something to watch overall those markets are very healthy and consistent with all other markets. We'll watch it closely but we're certainly ready and prepared to support those in.
Histories, if and when we begin to see specific lifts because of that.
Sure.
Thanks, Greg very helpful. I appreciate it.
Okay.
Our next question is with Karen short from Barclays.
Karen Please proceed.
Yes.
Hi, Thanks very much to.
Two questions. So one I guess the first one is in terms of inflation for the year. What is your actual updated expectation on inflation for the year and then embedded within that on traffic.
Traffic was only down 1% with <unk>.
10% and place them, but on a two and three year basis more or less held so could you just clarify how you're thinking about traffic for the remainder of the year because presumably inflation.
So that should actually help the.
Traffic overall on a one two and three year basis.
Yes, Hey, Karen how are you. This morning, thanks for joining our call and for the question.
On inflation and our enhanced earnings call, we mentioned that our assumption was around 4% for the year, but that if anything we saw a potential for upside to that.
It's very much what we saw in the quarter.
And we're not providing kind of an update on that 4% number today that I would say that.
There is that the potential for upside there still remains.
My comment to an earlier question around inflation being persistent I do think it will continue through the balance of the year and run.
At 4% or higher.
On the traffic we were very pleased with the traffic in the in the quarter that we had and it exceeded our expectations.
To your point on two and three year stacks it was either in line or above sequentially and with our previous quarters.
And in particular, if you think about.
The stimulus benefits from last year, but certainly the spring differences the weather differences in the month of March we were very pleased with the with how our comp transactions ran and we've never had more customer shopping tractor supply that we have on a rolling 12 basis, we've done an excellent job of maintaining the tens of millions of new customers that are.
Shopped us over the last two years, our active customer file is incredibly strong our neighbor's club membership program members have never been higher the participation active participation in the Neighbor's Club program has never been higher so we feel really good about our car customer trajectory our transaction trajectory within those customers.
<unk>.
And our customers kind of navigating inflation in our business kind of in a demand driven needs based type environment.
Sorry can I just clarify it was only in the context of it I think Curt made a comment that traffic will continue to be pressured in light of our would be pressured in light of inflation, but that's not actually.
Alright.
Okay.
Yes, I think to clarify I think what we're trying to articulate there was there is a variety of scenarios that could play out for the balance of the year.
And one of those could be that inflation continues to run high and if so that might drive some different behavior in customers shopping patterns, notably that they might consolidate trips more and if they do that what we might see as a higher basket size with slightly lower transactions.
And we just we're saying look that's one scenario that could play out and still very much within the context of our of our guidance.
And then the same thing on.
On the margin profile side kind of the point is more around <unk>.
Inflation still runs high we might see a little bit more pressure than what we had guided on gross margin rates still excellent margin rate performance, but we'd see a little bit less pressure on SG&A, because our fixed costs would be running on higher sales dollars and that would still deliver us the operating margin rate in the.
In line.
In the range of our of our guidance and we're very pleased with our operating margin performance in the first quarter, we really as Curt mentioned exceeded our expectations across all core metrics traffic sales.
And operating margin and EPS.
Great. Thank you very much.
Thanks Darren.
Our next question is with Michael Lasser of UBS.
Michael You May proceed.
Good.
Good morning, Thanks, a lot for taking my question. There is a heightened focused on big ticket spending given some of the indications from others out there around connected fitness equipment grills mattresses. Your suggestion is that.
Overall two year.
Big ticket trends are doing better than average and thats inclusive of what sounds like a drop off in the last two weeks of the quarter, which persisted into the first few weeks of this quarter.
What is driving the strength in big ticket growth for track attracted supply and how much is inflation contributing to that growth.
Yeah, Good morning, and thanks for the question Michael.
I'd say, probably three things on that.
Great Big tick it up a bit.
There are we saw a falloff in big ticket sales directly attributable to stimulus very much in line with what we expected.
Those were in non seasonal categories dominantly things like gun safe.
In the seasonal businesses Big ticket as Seth mentioned, where we've seen the spring weather break we've seen excellent results in things like riders and grills bigger ticket items.
And then as it relates to inflation, we certainly are seeing inflation in those categories like we're seeing across the board.
But I would say that we're also pleased with our unit movement.
In those categories not just sales driven by inflation. So overall, we continue to be feel very confident in our business short term and long term inclusive of big ticket.
And then <unk>.
Cited about the about the rest of the year.
Okay.
Often we'll go home company our next question.
Okay.
Our next question is from Steven Forbes from Guggenheim Securities.
Steven You May proceed.
Yes.
Good morning.
How SaaS I wanted to start with your end market learnings right is it looks like you have both been on the road recently, so can you take us through some of your key learnings and what I mean by that is really the learnings from the store associates.
What are they saying about their own behaviors and did you notice anything.
Different among the regions that you visited.
Maybe outside of seasonal trends.
Yeah, Hey, Steven.
And thanks for the question and we have.
<unk> been on the road a lot recently, making sure.
A core tenant attract supplies mission and values and our culture and I think our teams in a great shape.
John Ortis, and our field organization that has done a fantastic job and hiring where nearly 47000 team members now that an excellent job Manning managing attrition.
Our fast team continues to roll out to more stores in terms of kind of dedicated <unk> team members, we're rolling out new productivity programs as John outlined in our last earnings call, maybe the walk our stores right now they never been in better shape. They we've got great service in our stores right now product is well organized and all.
On the shelves.
We've got.
They are very clean and orderly.
We've got really all of assembly done across grills and all across riders and we are ready for spring, we're ready for the second quarter and then in terms of engagement with our store we had our engagement survey towards the end of last year. Our store team member engagement was at an all time high as I mentioned earlier.
And an excellent job managing attrition.
Our.
Our team members are really the glue of our company and we pride ourselves on the customer service that we deliver inside of our stores and I think we're only continuing to make progress on that even at an already high level and I think it's going to be a big benefit to us is that as we move into this as we are in the second quarter now.
Thank you best of luck.
<unk>.
Our next question is from Chuck Grom of Gordon Haskett.
Chuck you May proceed.
Hey, Thanks, a lot.
Thank you good morning, Curt can you provide a sense for how you see the rest of the year playing out on the comp front in order to arrive at that three to four 5% for your view, particularly here in the second quarter, just given the upside here.
The prologue here and then on the storage front can you talk about your confidence level to open up the 75 to 80 stores driven that you werent able to open up any here in March.
Thanks.
Yes. Good morning, just thanks for the questions two of them there.
Reiterate what Hal and I have talked about in regards to the comp performance and how that plays out for the year certainly.
We exceeded our expectation are coming off a strong Q1 performance.
As you roll that through the year and we'll continue to say as we have the last two years, we are managing this business through multiple scenarios.
You could have comp sales at the high end of our guidance range, it's one quarter into the year as we see the rest of the year.
We've got good momentum in the business and so as you play that out we recognize that as you flow. This through this could be towards the high end of our guidance range and as we've even indicated.
It's early to predict on levels of inflation, but as inflation persisted even puts upward pressure on that and at this point. The best we can do is tell you how we view the business and how we're managing that and then in regards to our new store openings.
I'll start by saying.
We are we have no concerns in regards to opening of new stores, we have confidence in our ability to hit our 70 to 80 stores. This year with a solid track record of opening 70 to 80 stores.
Process is solid our pipeline for new stores is really strong right now and construction is not exempt from some of the challenges of supply chain labor et cetera, we put a lot of effort and to complete the 80 stores in fourth quarter and some of the some of those.
Leo's that pushed stores out we saw some in Q1 as well and as those stores have been pushed out of Q1 by the way Q1 is our typically our smallest quarter of new stores.
Those stores will open up.
In Q2, Q3, we still have a real strong pipeline and expect to hit our targets this year for new stores.
Okay. Thank you.
As soon as we see at the top of the hour, maybe I will sneak one more question Ann.
<unk> next question please.
Of course.
Our final question will be from Chuck Cerankosky of Northcoast research.
Chuck you May proceed.
You May proceed good morning, everyone nice quarter, when you look at the <unk>.
Strong level of <unk> sales in the first quarter is there as a percentage of total is there something else going on besides stimulus spending and how is that mix shaping up thus far into the second quarter.
Yeah, Hey, Chuck how are you and thanks for joining the call today.
On Q.
I would attribute our strong growth to taking share.
As we talked about in our enhanced earnings event.
Sure.
On a two year stack, our total sales grew 52% relative to the market at 25%, which meant we had grew outgrew the market by 27 point Cigna.
Significant share gain and that is we're the market leader in animal feed we're one of the market leaders in pet food.
We are gaining significant share in both of those categories. That's attributable to our business model, our customer service our life out here strategy.
And so we're that's one of the reasons. We're just really excited about Q in the footsteps, it's driving into our stores and the setup that has for us for the balance of the year.
Alright, Thank you very much.
Okay. Thank you. Thank you often this completes our call today, we look forward to talking to you on our second quarter earnings call in July as Mary Anne and I are around today. So please feel free to reach out. Thank you very much for joining our call today.
That concludes the conference call. Thank you for your participation you may now disconnect your line.