Q2 2022 Tractor Supply Co Earnings Call

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I would now like to introduce your host for today's call Mrs. Mary Winn Pilkington Senior Vice President of Investor and public relations for <unk>.

<unk> supply company Mary Winn. Please go ahead.

Thank you operator, good morning, everyone. Thanks for taking the time to join US today and hope everyone is having a great summer on the call today are Hal Lawton, our CEO , Kurt Barton our CFO .

And 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 Q&A session. Please note that we've made supplemental slide presentation available on our website to accompany today's earnings release now let me reference to Safe Harbor provisions at the private Securities litigation.

And Reform Act of $19 95. 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.

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 fourth.

Looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed investors should not assume that statements will remain operative at a later time tractor supply undertakes no obligation to update any of it.

Information discussed in this call we have shortened our prepared remarks 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 an additional question. Please feel free to get back in the queue. We appreciate your cooperation and we will be available after the call for follow up thank you.

And for your time and attention. This morning now it's my pleasure to turn the call over to Hal. Thank you Mary Lynne.

Good morning, everyone and thank you for joining us today the.

The second quarter was another strong quarter for tractor supply as we delivered record results on both sales and earnings I would like to begin by thanking the 48000, plus tractor supply team members for once again delivering impressive performance through strong execution and for their dedication to serving life out here.

Our business continues to be incredibly stable and resilient this quarter. The team did an excellent job managing inflationary impacts operating through continued supply chain disruption and navigating the evolving consumer demand.

We continue to win with our customers and took substantial share in the quarter.

We entered the back half of the year, where their inventory on plan and excellent visibility into our expense base.

We remain very confident in our growth outlook in our life out to your strategy.

Structural tailwind to continue to benefit us, including rural revitalization homesteading self reliance and pet ownership.

Our brand loyalty program and digital capabilities supply chain in 2000, plus stores create significant enduring advantages for us.

And our strategic initiatives are all on track and reaching scale.

Now, let's turn to review of the business for the second quarter of 2022.

In many ways the second quarter was a mirror image of Q1.

The quarter started off slow as April was pressured from cycling stimulus and the delayed start of spring.

May was our strongest month.

June was solid and modestly above the quarter's comp in spite of record breaking heat, which has continued into Q3 and will limit the sales upside in the current quarter.

We grew net sales by eight 4% with comparable store sales up five 5%.

Our comparable store sales growth was driven by strong ticket growth of seven 5% offset by a decline in transactions of 2%.

We experienced positive comp sales growth for each of the last nine weeks of the quarter.

Comp transactions were positive for the months of May and June combined.

Diluted EPS was $3 53 and.

An increase of 10, 7%.

Year round categories were up high single digits indicative of our demand driven needs based business model.

The impressive results and our consumable usable and edible categories continued this quarter as the business performed more than three times, our overall sales growth rate.

This is the fifth consecutive quarter of Q outperforming our overall results.

Our seasonal performance was below the company average but positive.

Big ticket was flat to last year and exceeded our expectations given that we were cycling strong performance last year, driven by stimulus and ideal weather for the spring and summer season.

We had strength in zero turn mowers chicken coops battery operated outdoor power equipment and grills with the biggest declines coming from front engine mowers log splitters and walk behind mowers.

Our neighbor's club reached a record 26 million members in the quarter. Our Neighbor's club members are comping at a faster rate than our overall performance.

We're seeing strong growth and industry, leading retention and our high value customers.

Our team members' commitment to providing legendary service continues to differentiate the shopping experience within our stores.

As a proof point our customers overall satisfaction scores were at the highest level ever for a second quarter.

We are successfully scaling our store real estate and remodel projects.

To date, we have over 400 stores in the project fusion format.

We have over 230 stores with garden centers more than 100 stores with store than a store carhartt.

And over 600 stores with a pet watch.

These are all improvements that make tractor supply a more contemporary relevant farm <unk> ranch oriented retailer. These.

These improvements are allowing us to gain share with new and existing customers.

Given our strong performance in the first half of the year, we're raising our financial outlook for fiscal 2022.

Although the operating environment may be different than we anticipated as we entered the year. We're pleased with how we're navigating the various circumstances and remain very confident in the significant opportunities ahead of us.

<unk> is a unique highly differentiated retailer are needs based business model has a track record of growing through varying economic conditions.

Our customers and team members are passionate about the out here lifestyle and they prioritize it.

Our customers to over index as homeowners landowners animal owners and pet owners.

We believe that the structural macro trends that I mentioned earlier, our long term and sustainable as.

As the market leader, we have substantial advantages.

Additionally, our investments in our lives out here strategy are reaching critical mass and furthering our competitive advantage.

Tractor supply has never been stronger.

Before I turn the call over to Kurt I want to welcome Kimberly Gardner as our new Chief Marketing Officer.

Kimberly succeeds Christy <unk>, who announced her retirement earlier this year Kimberly brings an extensive background in marketing with a data driven approach to brand development that I believe will continue the evolution of our marketing organization and continuing to build on the strength of the tractor supply brand.

Our appreciation and thanks go to Christie for her leadership and dedication over the last decade at tractor supply.

Now I will turn the call over to Kurt to discuss some of the details of the second quarter and our financial outlook for the rest of the year.

Thank you Hal and Hello to everyone on the call.

At the halfway Mark for the year. The tractor supply team has started fiscal 2022 with strong performance that came in ahead of our expectations. We're very pleased with the consistency and the strength of our topline performance. This.

This quarter retail price inflation contributed about 12 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the supply chain, we continue to see increasing costs in the commodity inputs in our product categories as well as underlying variables like higher labor.

Labor wages and transportation costs impacting our vendor partners.

Comp transactions declined, 2.0%, which was slightly below our expectations as we anticipated pressure from cycling the benefits of stimulus in the prior year, we experienced incremental headwinds from the delayed start to the spring and the drought conditions in the latter part of the quarter.

Complementing the commentary house shared on the cadence of the quarter all regions of the country delivered positive sales comps the geographic diversification of our store base worked to our advantage. This quarter, we did experience softer performance in select regions of the country impacted by the drought in particular, the far west and.

Texoma regions, which while positive lagged the chain average the south central and South Atlantic were our best performing regions.

Turning to our digital performance the second quarter represented our largest e-commerce quarter and net sales ever.

On the back of 39 consecutive quarters of double digit growth our ecommerce grew approximately 7%.

Excluding April we had solid performance with double digit sales for May and June combined.

Our mobile App continues to ramp with double digit growth and represented about 15% of total digital sales in the quarter.

<unk> continues to perform well with comp sales growth above the company average.

Turning now to gross margin.

For the second quarter, our gross margin declined by 24 basis points to 35, 5% of sales. This was primarily attributable to three factors significant product cost inflation higher transportation costs and to a lesser extent product mix given the robust growth in <unk> products.

We continue to experience broad based inflation.

Domestic and import freight costs have increased substantially year over year as well as fuel costs as we shared last quarter. We expect many of these inflationary trends to continue into the second half of 2022.

I continue to give the team a lot of credit for the remarkable job they are doing between tracking and forecasting freight and the coordination of retail price increases at the store level. They have been nimble. The team has effectively managed these cost increases at the SKU level through our price management actions and.

Other margin driving initiatives. The team has also been working to capture 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 22, 1% an improvement of 19 basis points.

This improvement was primarily attributable to more normalized incentive compensation and the moderation of COVID-19 response costs as well as leverage in occupancy and other costs from the increase in comparable store sales.

These items were partially offset by investments in store wages and our strategic growth initiatives, which includes a step up in our depreciation and amortization.

Compared to the second quarter of 2021 operating profit margin was essentially flat contracting by only four basis points net income improved seven 1% to $397 million and diluted EPS increased 10, 7% to $3 53.

We remain committed to returning cash to shareholders. During the second quarter, we returned $291 million to shareholders through the combination of share repurchases and higher cash dividends. This brings our total cash returned to shareholders through the first six months of the year to $691 million.

Turning to our balance sheet merchandise inventories were $2 5 billion at the end of the second quarter, representing an increase of about 21% in average inventory per store.

Consistent with the first quarter. This increase is primarily attributable to inflation, we believe the quality and the composition of our inventory excellent and that we are in great shape as we go into the second half of the year. If anything we are pursuing more inventory as their categories. We are working to improve our in stock position.

To provide more clarity on this on a three year basis, our units per store inventory is increased single digits, while sales are up over 60%.

Moving now to our updated guidance for 2022, which is detailed in our press release, we issued this morning.

We are raising our financial outlook for the year, given our strong performance year to date as Hal mentioned earlier. This now includes net sales in the range of $13 $95 billion to $14.05 billion.

With comparable store sales growth of five two to five 8% for the year. We now forecast an operating profit margin around 10, 2%. This represents the midpoint of our previous guidance of $10 one to 10, 3% of sales.

While higher costs have handicapped some upside at the same time, we believe we are able to mitigate pressures on the downside.

Diluted EPS is anticipated to be in the range of $9 48 to.

To $9 60.

Compared to our prior guidance of $9 20 to $9 50.

Please note that our fiscal 2022 guidance includes a benefit for the 50 <unk> week, which is estimated to be approximately one five percentage points of net sales and 15 of diluted EPS.

As you model the second half of the year, Let me address two items first for both the third and fourth quarters, we would anticipate that our comp sales growth would be consistent with our first half of the year at.

As Hal mentioned earlier, the extreme heat and drought conditions are continuing into the third quarter and we forecast these conditions will limit upside to sales.

Second I want to address the cadence of operating profit, we anticipate the earnings cadence between Q3 and Q4 to be more in line with historical trends.

For operating profit margin in the second half of the year, we forecast flat to slight contraction.

The performance in the fourth quarter is forecasted to be positive year over year with the third quarter experiencing some contraction.

The variation between the quarters is predominantly a function of gross margin spin.

Specifically, the third quarter will experience greater mix pressures from the strength, we're seeing in Q and higher transportation costs. Both of these factors. We first experienced in the fourth quarter of last year. So our compares naturally ease in the fourth quarter.

For the second half of the year, we expect inflation to be consistent at an elevated level with as much inflation pressure. We are seeing in our business. We continue to closely watch comparable average ticket and transactions.

In times of rising inflation, we anticipate that the breakdown of comp sales growth will trend to higher ticket performance from inflation offset by transactions the.

The impact on transactions is pronounced this year, especially as we lap the prior year's benefit from stimulus.

As a reminder, the prospective acquisition <unk> farm and home is not included in our guidance. We continue to work collaboratively with the FTC towards a positive resolution and hope to have an update soon accordingly, we are limited in the comments, we can make about the transaction at this time.

In summary, we are very pleased with our performance in the second quarter and our outlook for 2022, the resiliency of our business has been proven over time, we have an amazing track record of navigating the challenges of the external environment as.

As evidenced by our ongoing market share gains the team is executing at a very high level.

Our financial outlook for the year is delivering on the key drivers of our long term algorithm that we shared in January accelerated sales growth strong earnings and increase cash returned to our shareholders with that I will turn the call back over to Hal.

Thanks Kurt.

Speaker 1: Is not includde our guidance. We continue to work collaboratively with the F TC towards the positive resolution and hope to have an update. Soon accordingly. We are limited in the comments. We can make about the transaction at this time. In summary we are very pleased with our performance in the second quarter and our outlook. For 2022. The resiliency of our business has improven. Over time. We have an amazing track record of navigating the challenges of the external environment as evidenceced by our ongoing market share gains that team is executing at a very high level. Our financial outlook for the year is delivering on the key drivers of our long term algorithm that we shared in January . Accelerated sales growth strong earnings and increased cash return to our shareholders with that I will turn the call back over to health thanks K OK. So now's to review some of the growth drivers for tracure supply to capture the significant opportunity we see ahead of as previously mentioned with a total addressable market of $18 billion. Our light out year strategy positions us well to capture the market share first project. Fion and garden center initiatives are two key grow drivers of our strategy and they RE designed to drive space productivity and sweat our existing assets. We are on track to have project. Fusion implemented in nearly 30% of our stores by year end. Our multiyear plan to renovate existing stores allows us to improve the shopping experience for our customers where the revitalized layout and expanded offerings.

So now let's review some of the growth drivers for tractor supply to capture the significant opportunity we see ahead of us.

As previously mentioned with a total addressable market of $180 billion.

Our life out here strategy positions us well to capture the market share.

First project fusion and Garden Center initiatives, our two key growth drivers of our strategy and they are designed to drive space productivity and sweat our existing assets.

We are on track to have project fusion implemented in nearly 30% of our stores by year end.

Our multi year plan to renovate existing stores allows us to improve the shopping experience for our customers with a revitalized lay out and expanded offerings. The.

The changes are resonating with our customers and our team members.

As of today, we have over 230 garden centers that are up and running.

We continue to forecast, having garden center transformations of our side lots and over 15% of our stores by year end.

Over the spring and summer selling seasons, our stores with a garden center significantly outperformed the chain average and are on track with our business case.

The expanded assortment of live goods is resonating not only with existing customers, but is a key asset to attracting new customers that skew female and younger.

The garden centers have allowed us to gain share and we will continue to play a significant role in our merchandising plans across the seasons.

Yes.

As the number one seller of bag fee and a top five retailer in pet food. It is critical that we were able to deliver for our customers as the dependable supplier in these key categories.

Speaker 1: The changes are resonating with our customers and our team members. As of today, we have over 230 garden centers that are up and running. We continue to forecast having garden center transformations of our sidelots in over 15% of our stores by the year-end. Over the spring and summer selling seasons, our stores with the garden center significantly outperform the chain average and are on track with our business case.

These are destination categories for us that drive trips our supply chain is a critical differentiator for us to deliver on Q as we work to ensure we not only have capacity for future growth that maintain the lowest cost to serve.

To support our store growth and increased demand our ninth distribution center located in the Navarro, Ohio is on track to begin shipping in the first quarter of 2023.

Speaker 1: The expanded assortment of live goods is resonating not only with existing customers, but is a key asset to attracting new customers that skew female and younger.

Additionally, we are targeting the top 180, most challenged stores to implement a full suite of resources, which would include things like a feed room mixing center allocations.

Speaker 1: The garden centers have allowed us to gain share and will continue to play a significant role in our merchandising plans across the seasons.

High volume store racking and much more to date, our process improvements have been executed across about 50% of our targeted stores.

Speaker 1: Number one seller of bag fee and a top five retailer in pet food, it is critical that we were able to deliver for our customers as the dependable supplier in these Q categories.

While still in the early stages, we are pleased with the improved operations at these stores.

Speaker 1: These are destination categories for us that drive trips.

With the success of our fusion and Garden center projects growth in our Neighbor's club the increased volume velocity in variety of key products moving through our supply chain stores allows us to leverage our scale and sophistication to widen our position and farm and ranch.

Speaker 1: Our supply chain is a critical differentiator for us to deliver on Q as we work to ensure we not only have capacity for future growth that maintain the lowest cost to serve.

Speaker 1: To support our store growth and increased demand. Our ninth distribution center, located in neabboro Ohio, is on track to begin shipping in the first quarter of 2020. -three and.

Mobile engagement is the moat that we're creating around our business, we are well on our way to converting our 26 million Neighbor's club members in the power users of our App.

Speaker 1: Additionally, we are targeting the top 180 most challenged stores to implement a full suite of resources, which would include things like a feed room, mixing center allocations.

We are currently ahead of our year to date goals for our mobile App downloads with new offers and features like the <unk> mobile App personalization, we're able to differentiate our digital shopping experience and capture growth opportunities.

Speaker 1: High-volume store racking and much more. todayate our process. Improvements have been executed across about 50% of our targeted stores.

Whether online or in stores. We believe we are well positioned to take advantage of the change from summer to fall with our customers.

Speaker 1: While still in the early stages, we are pleased with the improved operations at these stores.

Innovation and newness resonate with our customers and our merchant team has exciting plans to capitalize on our customer needs.

Speaker 1: With the success of our Fusion and garden center projects. Growth in our neighbor club, the increased volume, velocity and variety of key products moving through our supply chaining stores allows us to leverage our scale and sophistication to widen our position in farm and ranch.

Our customers count on us for brands that have the durability to get the job done and clothing is no exception.

For instance, our lineup in apparel <unk> accessories includes leading brands like carhartt wrangler in Colombia, as well as our exclusive brand rich cut.

Speaker 1: Mobile engagement is a MO that we are creating around our business.

Speaker 1: We are well on our way to converting our 26 million neighbor' Club members into power users of our app.

Rich Scott has resonated with our customers and has allowed for our assortment expansion to include footwear and women's clothing from insulated outerwear hoodies long sleeve T shirts boots and more our payroll products focus on the demand driven work wear categories.

Speaker 1: We are currently ahead of our year-to-date goals for our mobile out downloads.

Speaker 1: With new offers and features, like the myt mobile app personalization, we were able to differentiate our digital shopping experience and capture growth opportunities.

And truck tool and hardware our annual event Ultimate workshop will be in stores in the coming weeks and will be bigger than ever.

Speaker 1: Whether online or in-stores, we believe we are well positioned to take advantage of the change from summer to fall with our customers.

More than 700 stores now have an improved tool corral our lineup of relevant brands like Porter cable exclusively at tractor supply the expansion and makita and strong brands like caution default makes our ultimate workshop sales event more relevant.

Speaker 1: Innovation and newness resonate with our customers, and our merchant team has exciting plans to capitalize on our customer needs.

Speaker 1: Our customers count on us for brands that have the durability to get the job done, and clothing is no exception.

He then offers great value on the brands our customers need to outfit their workshop our garage.

Speaker 1: For instance, our line up at apparel workwear accessories includes leading brands at call heartart, rangler and Columbia, as well as our exclusive brand Ridge cut.

We also have a new strategic partnership with Interstate battery that will rollout in the fourth quarter Interstate.

Speaker 1: Ridge cut has resonated with our customers and is allowed for our assortment expansion to include footwear and women's clothing from insulated out-taweare: hoodies, long sleet T-shirts, boots and more. Our apparel products focus on the demand-driven workwear categories.

Battery has a proven track record as the largest battery distribution network in the United States that will allow us to better serve our stores.

Branded as traveler by Interstate battery, we will have a great lineup that is relevant all with improved in stocks and reliability.

Speaker 1: In trucktool hardware. Our annual advanced ultimate workshop will be in stores in the coming weeks and will be bigger than ever.

And our seasonal business, we anticipate that this will be a strong heating season, given the elevated energy costs.

Speaker 1: More than 700 stores now have an improved tool corral our lineup of relevant brands like Porter cable, exclusively attractive supply. The expansion of maiquita and strong brands like bosh and to Walt makes our ultimate workshop sales event more relevant.

As the dependable supplier in this destination category, we're investing ensure we have strong in stock position.

And heating we have a new collection of the innovative and exclusive home heating equipment with smart home technology, providing maximize efficiency in a cost effective way for our customers to heat their homes.

Speaker 1: The event offers great value on the brands our customers need to outfit their workshopper garage.

For the fall harvest and Christmas holiday season, we will be leveraging an expanded assortment of our garden centers to drive productivity of the space.

Speaker 1: We also have a new strategic partnership with interstate battery that we will roll out in the fourth quarter.

Speaker 1: Interstate battery has a proven track record of the largest battery distribution network in the United States. That will allow us to better serve our stores.

And importantly across our key categories, we are committed to being in stock and priced right for our customers our acute categories continue to drive trips to tractor supply.

Speaker 1: Branded is traveler by interstate battery, we will have a great lineup that is relevant, all with improved insocks and reliability.

As an example, our pet customer counts are up high single digits with trips and baskets increasing for these customers.

Speaker 1: In our seasonal business. We anticipate that this will be a strong heating season, given the elevated energy costs.

This is a trend we are seeing across other key categories like livestock feed in poultry.

Speaker 1: As a dependable supplier in this destination category. We're investing. Sure we have strong in-stock position.

We are well positioned to continue to gain market share with a great lineup of seasonally relevant products with legendary customer service.

Speaker 1: In heating. We have a new collection of the innovative and exclusive home heating equipment with smart home technology, providing maximum efficiency and a cost-effective way for our customers to heat their homes.

To wrap up the tractor supply team continues to thrive through the dynamic macroeconomic environment, while making significant progress laying the foundation for the future.

Speaker 1: For the fall harvest. In Christmas holiday season we will be leveraging an expanded assortment of our garden centers to drive productivity of the space.

<unk> is a proven business model that has been resilient over many different business cycles.

Our business has been incredibly resilient and stable over the last several years, whether we look at that by weak region or product category.

Speaker 1: And importantly, across our Q categories. We are committed to being in stock and price right for our customers.

Speaker 1: Our AC categories. Continue to drive trips to track our supply.

At the same time, we believe we have visibility into our cost and are managing our inventory to customer demand.

Speaker 1: As an example, our pet customer counts are up high single digits, with trips and baskets increasing for these customers.

We are winning with our customers.

Speaker 1: This is a traweing across other Q categories like livestock feed and poultry.

With significant growth in market share opportunities. It remains an exciting time at tractor supply.

Speaker 1: We are well positioned to continue to gain market share with a great line of the seasonally relevant product with legendary customer service.

My Thanks, and appreciation go out to the team for their dedication to living our mission and values every day.

And now we'd like to open up the call for questions.

Speaker 1: To wrap up, the Tractor supply team continues to thrive through the dynamic macroeconomic environment while making significant progress, laying the foundation for the future.

Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.

If for any reason you would like to remove that question. Please press star followed by two <unk>.

Speaker 1: Track fly has a proven business model that has been resilient over many different business cycles.

Again to ask a question or one.

Speaker 1: Our business has been incredibly resilient and stable over the last several years, whether we look at that by weak region or product category.

If youre using a speakerphone, please remember to pick up your handset before asking your question.

I'll pause here briefly ask questions registered.

Speaker 1: At the same time, we believe we have visibility into our cost and are managing our inventory to customer demand.

Our first question is from Elizabeth Suzuki from Bank of America Elizabeth Your line is open.

Speaker 1: We are winning with our customers.

Speaker 1: With significant growth in market share opportunities, it remains an exciting time as Tractor supply.

Great. Thank you so much so first just regarding transportation costs do you think we're getting past peak cost pressure and do you have any expectations that transportation costs to become a tailwind going into next year.

Speaker 1: My thanks and appreciation go out to the team for their dedication to living our mission and values every day.

Speaker 1: And now we'd like to open up the call for questions.

Hey, Liz how our year to date this is Hal.

Speaker 2: Thank you. If you'd like to ask a question, please press star, followed by 1, on your telephone keypad.

Thanks, so much for the question for joining the call.

On transportation costs.

Break it down into a couple of different buckets first off.

Speaker 2: If for the reason, you would like to remove that question, please press star, followed by two.

Speaker 2: Again to ask a question. Are one.

Spot rates for both <unk>.

Speaker 2: If you are using a speaker film, Please remember to pick up your handset before asking your question.

Import products through container spot rate as well as spot rates for domestic.

Are trending down.

Speaker 2: We will pause here briefly as questions registered.

And starting to reach kind of.

Kind of average levels for last year and in some cases below that.

Speaker 2: Our first question is from Elizabeth suziki from Bank of America. Elizabeth yourolline is open.

That said the flip side is the vast majority of our business for both domestic and imports.

Done on contracts.

Speaker 3: Thank you so much. So first, just regarding transportation costs, do you think we're getting past peak cost pressure and do you have any expectations that transportation costs could become at tailwind going into next year?

Are the contracts that we are in this year are at higher rates than they were last year. So kind of when you kind of look at it all it all kind of blends to about the same number so as we get in towards the back half of the year, we do expect some of the pressure to moderate.

Speaker 1: Hey Z, how are you to date? This is how. Thanks so much for the question for joining the call on transportation costs and break it down into a couple different buckets. First off.

I don't anticipate.

Wind on transportation cost for 12 to 18 months.

Speaker 1: Spot rates for both import products, So container spot rates as well as spot rates for domestic.

Great and just one quick follow up on imports.

Actual <unk> percentage is pretty small as a percentage of total product that you expect to see any would you expect any impact to gross margin if tariffs on goods from China roll off.

Speaker 1: Are trending down and starting to reach kind of kind of kind of averagees levels for last year and in some cases below. That said, the flip side is the vast majority of our business provboth- domestic and import- are done on contracts and the contracts that we are in this year are at higher rate than they were last year.

Liz Hi, this is Kurt yeah.

Yes.

Have imports at around 12% of our business just for the full group as a reminder.

And back when the China tariffs were put into place I mean, we had some product having the tariffs in there if there were to be reverse of those tariffs.

Speaker 4: So kind of when you kind of look at it all.

Speaker 1: It all kind of wind to about the same number. So as we get towards the back half of the year we do expect some of the pressure to moderate, but I don't anticipate a tailwind on transportation costs for 12 to 18 months.

That would be a benefit to us we managed well when putting managing through the increase in the tariffs and.

And then of course with imports do keep in mind that.

Speaker 3: Great and just one quick follow-up on imports. I mean your actual import percentage is pretty small as the percentage total product, but do you expect to see any? Would you expect see any impact to gross margin if tariffs on goods from China roll off?

That product has a longer lead time those costs have to work through the system. So similar to almost the explanation that you heard from Hal on transportation any shift in tariffs would take six 912 months to really see playing through the inventory and cost of goods sold and as any.

Speaker 1: lihigh, this is kirt. Yes, we have imports at around 12% of our business. Just for the, the full group, as a reminder, and back when the China tariffs were put into place, I mean we had some product having tariffs in there. If there were to be reverse of those tariffs, that would be a benefit to us. We managed well when putting managing through the increase in the tariffs.

Changes in a tariff environment changes certainly we'll update our guidance and it is generally.

A benefit to us as we can get some relief from those tariffs.

It had to be baked into the cost over the last few years.

Great. Thank you so much.

Our next question is with Steven Forbes from Guggenheim Steven Your line is open.

Speaker 1: And then, of course, with imports. Do keep in mind that.

Good morning, how occurred.

Speaker 1: That product have a longer lead time. Those costs have to work through the system. So similar almost the explanation that you heard from how, on transportation, any shift in tariffs would take six 9, 12 months to really see playning through the inventory and cost of goods sold. And as as any changes in a tariff environment, changes certainly will update our guidance and it is generally.

Maybe how I wanted to focus on our tractor is addressing.

The internal cultural and.

But I think we need with the team members.

And the current inflationary environment and if you can maybe.

Highlights some of your learnings from the annual sales meeting as it pertains to.

And what your team members are asking for and what their sort of speaking as to as to their customer needs.

Yes, good morning, Steve how are you and thanks for joining our call.

Speaker 1: A benefit to us as we can get some relief from those tariffs head that have had to be baked into the cost over the last few years.

I would start with.

The culture at tractor supply is.

Foundational for us our mission and values our number one priority.

Speaker 3: Great Thank you so much.

And we are constantly looking for ways to make deposits in our culture and we continue to build on it.

Speaker 2: Next question is with Stephen Forbes from buggenheim. Stephen e onen is open.

And as you mentioned, our annual sales meeting, which was just last week as one big way that we do that.

Speaker 1: Morning alkirt maybe how I wanted to focus on how tractor is addressing the internal cultural and what wagents me its needs but the team members and in the current inflationary environment candmaybe highlight some of your learnings from the annual sales meeting as it perouttains to what your team members are asking for and what they're sort of speaking as to as to their customer needs.

As it relates to kind of the investments we've made in the team. We are proud of the investments we've made in our team in particular over the last couple of years.

And.

They range from wage investments to.

Bonus enhancements and improvements.

And to broader rollout of benefit to not just health care benefit but.

Speaker 1: In good morning steed hy and thanks for joining in our call I D start with have say.

Additional items like tuition reimbursement that paternity leave etsy.

Speaker 1: The culture is tractor. Supply is foundational for us, our mission and values our number one priority and we are constantly looking for ways to put make deposits in our culture and to continue to build on it. And, as you mentioned, our annual sales meeting, which was just last week, is one big way that we do that, as it relates to kind of the investvest we made in the team. We're proud of theinvmentsestments we made.

Et cetera.

And those have been substantial in their monetary both at an individual level and also our material in terms of investment on the overall company level and we are committed to paying a fair day's wage for a fair day's work.

That said as we look forward, we do think that the majority of that investment is behind US we feel good about.

Where we are from a market perspective on a relative basis.

We are seeing retention rates.

Well below.

Sure.

2019 levels we're.

We're seeing excellent engagement scores with our team members.

And we feel really good about our culture and our morale.

Our team.

As we head into the back half of the year and we have a track record of consistency and resiliency in.

Speaker 1: And substantial in their monetary, bothte at an individual level and also a material in terms of investment on the overall company level, and we are committed to paying a fair day's wage for a fair day's work. And that said, as we look forward, we do think that the majority of that investment is behind us. We feel good about where we are from a market perspective, on a relative basis.

All different economic environments, and then that gets one of the things that I do anticipate that as the economy becomes a little tougher and we start to see.

The labor market ease and layoffs occurring that there will be a flight to quality and I think that'll be a really good thing for tractor supply and allow us to.

Further and further improve our retention and attract high quality talent, just given the resiliency and stability of our business and our commitment to our team members and culture.

Speaker 1: We're seeing retention rates well below 2019 levels, we're seeing excellent engagement scores with our team members and we feel really good about our culture and our morale and our team as we head into the back half of the year and we have a track record of consistency and resiliency in all different economic environments. And then it gets one of the things that I do anticipate.

Thank you I'll keep it to one.

Thank you Steve.

Our next question is from Kate Mcshane from Goldman Sachs.

Your line is open.

Hi, Thanks, Good morning, Thanks for taking our question.

Kurt I think in your commentary you mentioned that you are trying to reduce promotion, which is counter to what we're hearing across retail side wanted to see if there are any more details around that and just with regards to margin and preserving margin.

Has there been any effort to push some of the cost back onto centers or has there been any effort.

To push for more sharing of costs as we see with other retailers.

Hi, This is Seth good morning, Thank you for the question.

First question there on kind of what Kurt talked about in prepared remarks.

Speaker 5: You occupy one.

Speaker 2: Thank you, Steve.

Promotional activity over the course of the last two two and a half years, we've put a concerted effort on really going through our true north as in the DLP retailer and we're committed.

Speaker 2: Our next question is from Kate mchaan from Goldman' Sachs.

Speaker 2: Kate your line is open.

Speaker 3: I thanks good morning. Thanks for taking our questioncurt. I think in your commentary you mentioned that you're trying to reduce promotion, which is counter to what we're hearing across retails, So I wanted to see if there any more details around that. And just with regards to margin and preserving margin it, has there been any effort to push some of the costs back on to vendors or has there been any effort?

Driving to stay towards that of course would be in the <unk> retailer fundamentally we're not planning, adding additional promotion into our strategy and with that it goes to the quality I think of our inventory position.

So the ability now for us to leverage the $26 million plus members in our Neighbor's club database. So.

So that we can very strategically go after our shoppers and our customers to drive both sales and market share.

Speaker 1: To push four more sharing of causes we seen with other retailers. I think this is that good morning. Thank you for the question. First question there on kind of what Kurt talked about in prepared remarks on promotional activity.

Obviously.

Protect margin as well there from.

For your second question around cost pushback.

The short answer would be yes. We are we are definitely working with our vendor partners.

Speaker 1: Over the course of the last 2, two and a half years we put a concerted effort on really going to our true North as an EDLP retailer and we're committed to driving to stay towards that course of being an EDLP retailer. Fundamental, LY we are not planning adding additional promotion into our strategy and with that it goes to the quality, I think, of our inventory position and also the ability now for us to leverage.

And conversations proactively planning across the supply chain cost of goods as well as building on things like our exclusive brand programs that we know that we can drive incredible value create loyalty drive market share and in many ways is also typically carry.

Higher gross margins for us as well so.

At the current time, I mean, we're stand our true north and promotion as well as definitely looking to push back on costs that are flowing through the system at the same time.

Speaker 6: The 26 million plus members in our neighbors club database. So that we can very strategically go after our shoppers and our customers to drive both sales market share and obviously protect margin as well there for your second question. Around a cost pushbacks to the short answer be yes we are we are definitely working with our vendor partners and.

Okay. Thank you.

Our next question is with Scott Ciccarelli from Truest Scott.

Scott Your line is open.

Good morning, guys Scot Ciccarelli.

So I think in the prepared comments.

Speaker 6: Conversations, proactively planning across the supply chain cost to goods, as well as building on things like our exclusive brand programs, that we know that we can drive incredible value, create loyalty, drive market share and in many ways, it's also typically carry higher gross margins for us as well. So at the current time, I mean we're standing our true North and promotion as well as definitely looking to push back on.

You talked about evolving demand.

Current operating environment than what you expected at the beginning of the year, but it doesn't sound like the business has changed a whole lot. So can you provide any more color maybe on what youre seeing in terms of recent trends that kind of.

Made you make that comment.

Hey, good morning, and thanks, Scott for the question and for joining the call.

I'd say.

The highest level our business just continues to be incredibly resilient stable and consistent kind of week to week day to day.

Speaker 6: Costs that are falling through the system at the same time.

Speaker 7: System at the same timeokay Thank you.

And.

We've got a portfolio of geographies so at times when certain geographies are seeing.

Speaker 2: Our next question is with Scot ccretli from truest.

Speaker 2: Our next question is with Scot ckarerelli from truest Scot, your line is open.

Unfavorable weather, we will see favorable weather elsewhere, we're seeing some balance of that as it averages across.

Speaker 1: gloring guys skepta Li. So I think in the prepared comments how you talked about evolving demand and a different operating environment than what you expected in the beginning of the year, but it doesn't sound like the business has changed a whole lot, So can you provide a more color maybe, on what you're seeing in terms of recent trends? That kind of made you make that comment.

Speaker 1: Growing guys. sketa relli. So I think in the prepared comments how you talked about evolving demand and a different operating environment than what you expected at the beganning of the year, but it doesn't sound like the businesseshas changed a whole lot. So can you provide a more color maybe, on what you're seeing in terms of recent trends? That kind of made you make that comment.

I would say also point to the strength of our Q business.

And the fact that this is the fifth consecutive quarter. It's performed at these elevated levels CAD.

Categories like dog dry food, we're taking significant share that business is running mid double digit unit comps well into the mid 20 percents on sales dollar comps.

Speaker 1: Good morning and up and thanks all for the question and for joining the call.

Also seeing similar strength in poultry feed in equine feed and those businesses are demand driven needs based they drive the traffic into our stores and so with that and then the rest of the business. We've been really good at evolving with consumer demand and a pretty quick way of leaning into categories that are going well.

Speaker 1: I I say at the, the highest level. Our business just continues to be incredibly resilient, stable and consistent, kind of week to week, day to day, and we've got a portfolio of geographies. So at times when certain geographies are seeing unfavorable weather, you we'll see favorable weather elsewhere and we're seeing some balance of that as it averages across.

<unk> grilling moderating in certain categories, where like.

Brendan and riders, where we need to and the team's just done an excellent job navigating that kind of evolving consumer demand.

Speaker 1: I think also pots to the strength of our Q business and the fact that the fifth consecutive quarter it's performed at the elevated levelscategories. Like G dry food we're taking significant share. That business is running mid-double-digit unit comps well into the mid 20% on sales dollar com. We're also seeing similar strength in poultry feed and e wine feed.

Having the right inventory at the right place at the right time.

Sam mentioned the quality of our inventory I mentioned in the prepared remarks that we're ending our inventory on plan at the end of the quarter and we just we feel really good about inventory and if anything we'd like to have more of it.

Some of our key categories.

But I think thats the thing Thats, just the strength of tractor supply and our business model is the demand driven needs based consistency of the business.

Speaker 1: And you know those businesses are demand-driven needs basa.se, they drive the traffic into our stores and so with that and then the rest of the business, we've been really good at evolving with consumer demand in a pretty quick way, a leaning into categories that are going well, like drilling, moderating in certain categories where, like frurnengine riders, where we need to, and the team just done an excellent job navigating that kind of evolving consumer demand.

I'll go back in history 30, plus years now of positive revenue growth 30 years of consecutive of positive comp transactions 29 of 30, a positive sales comp dollars and it's just the consistency of the business and the strength of the team to be able to navigate these evolving consumer demand.

That gives us the confidence in our in raising our outlook for the year and also the consistency of the first half performance.

Speaker 1: Having the right inventory is the right place at the right time and Seth mentioned the quality of inventory. I ioned the prepared remarks that we're ining our inven on plan at the end of the quarter and just we feel really good about in inventory and, if anything, we'd like to have more of it in some of our Q categories.

So just just to clarify so youre not seeing incremental weakness somewhere where you maybe are being surprised and that wasn't the referenced above and demand.

Yes, I would say as I mentioned in the prepared remarks.

The business has continued to evolve this year as consumer demand has evolved.

Speaker 1: And I think that's I something that's just the strength of Tractor supply in our business model is the demand driven needs based consistency of the business. If I go back in history 30 plus years now of positive revenue growth 30 years of consecutive of positive comp transactions 29 to 30 a positive sale of comp dollars and just consistcy of the business and the strength of the team to be able to navigate these evolving consumer demand that gives us the confidence in our in raising our outlook for the year and also the.

Certainly as we mentioned on big ticket it was flattish for the second quarter now that's on top of 40% comps from last year, So really still elevated sales levels compared to multiple years ago, but in there. We had some categories that were very strong grilling and safe as examples but then.

<unk> had other categories that were below the low expectations, but those all netted to be right in line with what we what we thought and so we're not seeing a precipitous drop off anywhere it's just that.

Continued evolution as you always have in the business and maybe a little bit more faster evolving just given the market dynamics that we've all been operating in over the last two years or three years really.

But nothing of nothing of concern or material material.

Weakness or anything like that.

Got it thank you very much.

Sure.

Our next question is from Chuck Cerankosky from Northcoast research.

Speaker 1: Now that's on top of 40% compps from last year, So really still elevated sales levels compared to, you know, multiple years ago. But in there, you know, we had some categories that were very strong- grilling and safe, as examples- But then we had other categories that were know below, below expectations. But those all netted to be right, in line with what we, what we thought. And so you know we're not seeing a for precipitous drop off anywhere. Just, you know the continued evolution is you always have in the business and maybe you know a little bit more faster evolving, just given the market dynamics that we.

Chuck Your line is open.

Your line is open good morning, everyone nice quarter.

Curt I think you mentioned, the 21% increase in inventory per store.

Would you review, what time period that covered and Zen indicate perhaps that.

You still have some shelf price adjustments to do to catch up with that and how much of that inventory might be to make sure you have things in stack that are hard for.

Your supply chain to get a hold of.

Good morning, Chuck Yes. Thank you for the question in regards to our inventory position.

The additional comments I can give to you.

And in addition to the prepared remarks, our inventory as of the end of the second quarter. There was a 21% growth year over year compared to second quarter of last year.

Sure just a few other color commentary on it that has a very similar year over year growth that we had at Q1, our average inventory per store is actually slightly down compared to the first quarter numbers, but very similar on a year over year basis, a majority of our inventory growth.

Speaker 8: Could I think you mentioned a 21% increase in inventory for store. Could you review what time period that covered and does that indicate perhaps that you still have some shelf price adjustments to to do to catch up with that and how much of that inventory might be to make sure you have things in stock that are hard for you supply chain to get a hold of?

As inflation and that inflation has been baked into it there is some inflation we expect to continue in the business I think.

Speaker 1: More in Chuck. Yes, Thank you for the question. In regards to our inventory position, the additional comments I can give to you in addition to the prepared remarks: our inventory as of the end of the second quarter: there's a 21% growth year-over-year compared due second quarter of last year. surere just a few other color commentary on it.

Most important point is what you've heard from SaaS and how and I know is that the.

The merchant team did an excellent job recognizing that some of the demand from last year that was us that was stimulus driven we.

We were wise in regards to managing the supply chain and the purchasing the inventories in healthy position. There is some more on the consumable side, we are working to get more of to improve our in stock position, but we feel very good about it and as I mentioned.

Speaker 1: That is a very similar year-over-year growth that we had at Q1. Our average inventory per store is actually slightly down compared to the first quarter numbers, but very similar on a year-over-year basis.

Unit growth over the last three years.

Is single digits, while our sales have been growing at 60% and I think that's a really important.

Speaker 1: A majority of our inventory growth is inflation and that inflation is have been baked into it. There's some inflation we expect to continue in the business. I think the most important point is what you've heard from Seth and how and I now is that the merchant team did an excellent job, recognizing that some of the demand from last year that was that- was stimulus driven. We were wise in regards to managing the supply chain and the purchasing, the inventoryries and healthy position.

<unk> is that we're growing the inventory modestly and our turns are in great shape.

Yes.

Thank you.

Our next question is with Peter Keith from Piper Sandler.

Peter Your line is open.

Hey, Thanks, good morning, everyone.

So great results was hoping you could just talk about the new customers you've acquired over the last two years with Covid does seem like the rest of the channel feels like that customer has exited their stores. So if you feel like youre retaining them, maybe you could talk about some of the strategies you've implemented and secondarily is there any risk on some of these poultry customers that have come in we've heard that some.

Speaker 1: There is some more on the consumable side. We are working to get more of to improve our in-stock position, but we feel very good about it and, as I mentioned, unit growth over the last three years is single digits, while our sales have been growing at 60% and I think that's a really important point is that we're growing the inventory modestly in our turns are in great shape.

Shortlived hobby and maybe those customers could roll off a little more quickly.

Okay.

Hey, Peter alloy today and thanks, so much for the question.

Speaker 7: Thank you.

Start out by saying, we estimate our market was roughly flat on a dollar basis for Q2.

And.

Therefore, we took substantial share in the quarter.

Speaker 2: Next question is with Peter Keith from Piper Sandler.

Speaker 2: Peter your line is open.

Hi.

Our new customers that we've acquired over the last couple of years are certainly contributing to that share growth.

Speaker 1: thankmorning everyone So great results- was hoping you could just talk about the new customers you've acquired over the last two years with COVID-19. Does seem like the rest of the channel feels like that customer has exited their stores. So if you feel like you're retaining them, maybe you could talk about some of the strategies you've implemented. And and secondarily, is there any risk on some of these poultry customers that have come inwe've heard that some short-lived tobby and maybe those customers could roll off little while quickly.

In addition to just share of wallet gain that.

That we've had with our kind of core customer.

And at points in categories different categories on that first of all at that point to dry dog food and the numbers I gave earlier on unit growth and sales dollar growth and those are well above the market run rate right now.

Similarly on poultry now a very large business for us with continued growth.

Speaker 4: Hey Peter, hour are today. Thanks so much for the question. I'd start out by saying we estimate our market was roughly flat on a dollar basis for Q2 and therefore we tooksubant.

This is the third year now of substantial growth in poultry.

And each year, we're seeing the customers that engage in the category last year Reengage at very high retention rates in fact, one of the highest retention rates that we have in our <unk> business.

Speaker 4: fincial share in the quarter. Our few customers that we've acquired over the last couple of years are certainly contributing to that share growth, in addition to just share of wallet gain that we've had with our kind of core customer.

And then we're also seeing significant new customers entering the category that category not only is it kind of an outdoor have harbin activity, but it also has a big element of kind of self reliance.

Speaker 4: And at point to categories, a few different categories on that. First off that point to dry dog food and the numbers I gave earlier on unit growth and sales dollar growth and those are well above the market run rate right now. Similarly on poultry, now in very large business for us with continued growth. This is the third year now of substantial growth in poultry.

With rising inflation in costs.

You can.

Have a meat bird and three mines have an egg layer in four months.

We're seeing people invest in their blocks.

Currently not only just for.

The notion of kind of rural revitalization, but also really in the spirit of kind of self self reliant.

I would also point to live goods, we've made significant investment in our in our garden centers over the last two years.

Speaker 4: And each year we're seeing the customers that engage in the category last year reengage at very high retention rates, in fact one of the highest retention rates that we have in our Q business. And then we're also seeing significant new customers entering the category and that category not only is it kind of an aldoor half hobby and activity but it also has a big element of kind of self-, reliance with rising inflation in cost.

And exited Q2 with 230 garden.

And over 10% of our chain now has a garden center live goods.

Now grown into a material business for us.

And it's attracted a more female customer as well as a younger customer into our business.

And really helped us and given us kind of that next kind of demand driven needs base.

Drop transaction driver in our in our stores.

Speaker 4: You can have a meat bird in three months, have an egg layer in four months and we're seeing people invest in their flocks currently, not only just for the notion of kind of rural revitalization but also really in the spirit of kind of self reliance. I'd also point to live goods we've made a significant investment in in our garden centers over the last two years. An exited Q2 with two hundred and thirty garden centers.

Feel really good about our customer retention.

How we've engaged with the customers over the last two years and were holding on to them and the last thing I would point to is our neighbor's club now at 26 million members.

<unk>.

Our comprising well over 70% of our sales retention rates still running well above 80% and our largest tier.

One of our fastest growing tier its retention rate above 95%. So we feel really good about the state of our customer start that and I'll close with as I mentioned at the beginning.

Speaker 4: And over 10% of our chain now has a garden cent. Our live goods is now grown into a material business for us and it's attracted a more female customer as well as a younger customer into our business and really helped us, given us kind of that next kind of demander of the needs based drip transaction driver in in our stores. So T feel really good about our customer retention, how we've engaged with the customers over the last two years and we're holding on to them.

We took substantial share in the quarter, which has been a consistent trend over the last 225 years.

Very helpful. Thanks, so much.

Our next.

And as with Zack <unk> from Wells Fargo.

Your line is open.

Hey, good morning, Helen Kurt we started to see some underlying commodity prices rollover a bit. So first could you talk to your expectations around the inflation changed today relative to your last quarter outlook and then assuming we do see some gradual moderation here can you help.

Speaker 4: Last thing I point to was our neighbors club. Now is 26 million members are comprising well over 70% of our sales. On our retention rates still running well 80%, and our largest Tier and our one of our and our fastest growing Tier, it's retention rates above 95%. So feel really good about the state of our customer is a start at and I'll close with, as I mentioned, the beginning. We took substantial share in the quarter, which has been a consistent trend over the last 2, two and a half years.

Let me think through how slowing commodity prices could help your business and in what ways could it negatively impact your business.

Thanks.

Good morning.

On inflation.

I'd start by just saying it continues to be persistent.

And consistent.

Certainly seeing some moderation if you look at a few of the metrics fuel costs slightly down spot rates on containers down a bit.

Commodities moderating, but still if you look at even on a year over year basis, and certainly on a two and three year basis kind of record record highs.

And I think Theres a lot of debate in the industry, right now and whether or not some of the reduced prices around corn and wheat are going to hold.

Speaker 1: Your last quarter outlook and then, assuming we do see some gradual moderation here, can you help me think through how slowing commodity prices could help your business and in what ways could it negatively impact your business?

Or whether it's just a temporary lull that will go back up as the.

We started to see crop yields and demand towards the back half of the year.

Speaker 4: Thanks good morning on. On inflation, I'd start by just saying it continues to be persistent and conpersistent, certainly seeing some moderation if you look at, you know, a few of the metrics: fuel costs slightly down, spot rates on containers down a bit, commodities moderating, but still if you look at even on a year over a year basis.

I think the thing we're most watching is at a very high macro level is PPI.

And PPI has got to come down burst just generically speaking across retail before CPI is going to come down.

And it's going to take because retailers got a turn through their higher cost inventory for 234 months at a minimum before you start to see any reduction on the on the CPI retail side.

Speaker 4: Certainly on a two and three -year basis kind of record record to highsand. I think there's a lot of debate in the industry right now: Ther or not some of the reduced prices are on corn and we are going to hold, or whether it's just a temporary lull that will go back up as we certainly look at crop yields and demand towards the back half of the year. I think there that they were both watching at a very high macro level is PPI.

So I think inflation is going to hold and continue to be consistent really through the CPI kind of retail level certainly through the balance of this year.

Thanks Al appreciate the time.

Our next question is with Johnson Matthey <unk> from Jefferies.

Jonathan Your line is open.

Speaker 4: And PI going to come down first, just generically speaking across retail, before CPI is going to come downand it's going to take. Retailers is going to turn through their higher cost inventory for two 3, four months at a minimum before you start to see any reduction on the on the CPI retail side, and so I think inflation is going to hold them continue to be consistent really through the.

Great. Thanks for taking my question just a follow up on the topic of tariffs. Kurt you mentioned it would be a P&L benefit under a rollback scenario just to be clear.

All of these costs flow through to gross margin or would you look to pair back pricing on some skus that were impacted I think some retailers have indicated they would look to reinvest in pricing to drive market share.

It seems unlikely for other retailers. So just wanted to be clear on where tractor supply would be in terms of pricing.

Changes under that scenario. Thanks, so much.

Yes, Jonathan this is Kurt and.

In regards to tariffs.

I'll address part of that first I'll, let Seth talk about pricing and how we would.

Dress that but let me frame up the size of it and the timing of it. So for instance, just referencing back that imports are roughly 12% of our business not all of those imports are subjective tariff. So you are talking.

Speaker 1: Follow up on the topic of tariff cur you mentioned it would be a P N L benefit under a rollback scenario. Just to be clear, you know, would all of these costs flow through to gross margin or would you look to pair back pricing on some SKUs that were impacted? I think some retailers have indicated they would look to reinvest in pricing to drive market share. It seems unlikely for other retailers, So just wanted to be clear on where Tractor supply would be in terms of price.

Single digit percentage of our business and when tariffs were enacted.

Over it was over a 12 to 18 month period of time that it flowed through and we view it and you have to manage it very much like it's another form of inflation and as it flows through our model. We then have to address how we're going to be able to manage our margins whether its retail price or any other levers that we pulled through that.

And because it's single digit percentage of it do keep in mind. These this.

We never really called it out over those periods of time as a margin headwind and we would manage it like other levels of inflation, where we don't believe its a <unk>.

Significant headwind, we managed it as a needs based business fairly well not necessarily a notable margin gain either but we believe we will manage through that as any tariff adjustments were occurred Seth I'll turn it over you talked about pricing strategy, Yes, hey, thanks, Kurt Thanks, Jonathan for the question.

Speaker 1: All of those imports are subjective to tariffs. So you're talking.

Speaker 1: Single digit percentage of our business and when tariffs were acted it's over. It was over a 12- 18 month period of time that it flowed through and we view it- and you have to manage it- very much like it's another form of inflation.

Hey, I would just say in terms of pricing relative to tariffs as Curt mentioned, our direct import business is about 12%.

Speaker 1: And as it flows through our model. We then have to address how we're going to be able to manage our margins, whether it's retail price or any other levers that we pull. Through that and- and because it's single-digit percentage of it, do keep in mind these. This we never really called it out over those periods of time at the margin headwind and we would manage it like other levels of inflation. Where we don't believe it's a significant headwind, we manage it as a beat-based business fairly well.

But at the same time, we utilize more of a kind of a broad based portfolio strategy and we come to our pricing strategies.

Our team has incredible tools in place.

Great visibility into moving average cost.

A lot of forecasting together and I would just say that we use every lever the.

Pricing strategy, just to manage and land our total business whether that be relative to tariffs, whether that'd be to total cost will be promo whether it be clearance.

Speaker 6: Not necessarily a notable margin gain either, but we believe will manage through that as any termiff adjustments were occurred. Seth 'alternative? You talk about pricing strategy. Yes, he's. He's shanthan for the question. Hey, I would just say, in terms of pricing relative to tariff, that current mentioned- I mean our direct import business- was about 12%. But at the same time, we utilize more of a kind of a broad-based portfolio strategy when we come to our pricing strategies.

The team really does strategize just to make sure that we're hitting the right price on the right categories, we're positioned to take market share and just utilizing the tools that we have in place and the visibility to land, where we need to land. So it's more of a broad portfolio strategy approach when we come to pricing and it's just one of the levers that we look at it and utilize to make sure that.

Were hitting our targets that we need.

Got you thanks for the color.

Yes, thanks, Jonathan.

Speaker 6: Our team has incredible tools in place: great visibility into moving average cost, a lot of forecasting together, and I would just say that we use every lever- the pricing strategy- just to manage and land our total business, whether that be relative to tariffs, wherether that be to total cost, or it be promo or it be clearance. The team really does strategy just to make sure that we'rehitting the right price on the right categories.

Our next question is with Chuck Grom from Gordon Haskett, Chuck Your line is open.

Great. Thanks, a lot just wanted to clarify on the guide that it sounds like July is being impacted by the drought conditions, but.

Still expect comps in the back half of the year to be similar to the front half, which would be sort of in that low 5% range. So just want to clarify there and then bigger picture.

Speaker 6: We're positioned to take market share and just utilizing the tools that we have in place in the visibility to land or we need to land. So it's more of a broad portfolio strategy approach when we come to pricing and it's just one of the levers that we look at and utilize to make sure that we're hitting our targets that we need.

With the garden centers curious what the biggest learnings have been so far both positive and negative and I guess on the negative would it be changed since you started that endeavor 12 to 18 months ago.

Hey, good morning. This is Hal thanks, Chuck for the question.

Speaker 1: Go you. Thanks for the color curve.

First I'd, just say on our comps.

They've been very consistent.

Speaker 6: Yeah I think sho.

In June and into July .

Speaker 2: Our next question is with Chuck gram from Gordon haskett. Chuck, your line is open.

I think the heat and the drought certainly impacting the business.

But as I mentioned in my remarks, it's really taken more of the upside out of Q3 more so than it impacted us to the downside.

Speaker 9: A great Thank about CURT wanted to clarify on the guide that it sounds like July is being impacted by the drought conditions but.

Speaker 9: Still that comps in the back half of the year to be similar to the front half, which would be sort of in the low 5% range. They just want to clarify there. And then the bigger picture with the, the garden center. Curious what the the biggest learnings have been so far, both positive and negative, and it guess on the negative would have be changed since she started that endeavor. 12 to 18 Mexico.

And Thats why Curt we've kind of mentioned in his comments kind of in our five two to $5 eight guide for the year that we expected Q3, and Q4 to roughly run in the middle of that in.

As you mentioned Thats kind of how we.

But our total Q2 was as well so I feel feel very good about that and we're navigating the drought well but.

And again, it's kind of impacted the upside potential rolling more.

Speaker 4: Thank you morning. This is how thanks Chuck for the question. First I'd just say on our comps, they've been very consistent in June and into July and I think they heat the drought, certainly impacting the business. But, as I mentioned in my remarks, it truly taken more the upside out of Q3.

In the quarter.

And then on garden centers.

230 of them as we exited the quarter here.

And early we're seeing a.

A strong attraction of it for new customers and destination trips.

More younger and female.

While we and I think the thing that's different about our garden centers, while we certainly sell annuals and perennials, we're seeing real strength in what you would expect in kind of rural America, which as trees shrubs fruits and vegetables.

Speaker 4: More so than it impacted to the downside. And that's why's kind of mentioning in his comments, kind of in our five to 5, eight guide for the for the year, that we expected Q3 and Q4 to roughly run in the middle of that and- and you mentioned that's kind of how we what our total Q2 was as well, So feel very good about that and we're navigating the drought well. But- and again it's kind of impacted the upside potential rollonly more in the quarter.

And our garden centers are performing at the expectations, we had continuing to deliver strong comp lifts in the stores that we roll it out and we've been very pleased with our vendor partnership as well and there's been a lot of.

Interest from our vendor partners.

Speaker 4: Yes and then on garden centers, 230 of them as we exited the quarter. Here, as I mentioned earlier, we single a strong attraction of it for new customers and destination trips, more younger and female, while we, I think the thing is different about our garden centers. While we certainly sell annuals and perennials, we're seeing real strength in what you would expecting, how of rural America, which is trees, shrubs.

And doing business with us as we expand into other markets.

Great. Thanks, Bob.

Our next question is with Michael Lasser from UBS, Michael Your line is open.

Okay.

Good morning, Thanks, a lot for taking my question, there's been a lot of discussion on this call around the state of the consumer a lot of inflation. How did you factor overall economic pressures into your guidance for the second half of the year.

Speaker 4: Fruits and vegetables and our garden centers are performing at the expectations we had, continuing to deliver strong complifts in the stores that we roll it out, and we've been very pleased with our vendor partnership as well, and there's been a lot of interest from our vendor partners in doing business with us as we expand into other markets.

Especially when you.

Consider that.

Guidance implies two year three year stacks are going to remain relatively consistent over the next couple of quarters and as part of that when would you expect traffic to turn back positive. Thank you very much.

Yeah, Hey, Michael and good morning.

I'd start with we look at the history of the business and just the consistency of our performance and stability of our performance over.

Speaker 2: Our next question is with Michael Lasser from UBS.

30, plus years and all of the varying economic cycles that we've been through the second thing is we then look at kind of the foundation of the business and our Q business and the demand driven needs based orientation that and the strong stability, we have there and the share gain.

Speaker 2: Michael, your line is open.

Speaker 6: Good morning, thanks. A law for particicket. My question: there's a lot bit a lot of discussion on this call around the state of the consumera lot of inflation. How did you factor overall economic pressures into your guidance for the second half of the year, especially when you consider that the guidance applies to your three -year stacks are going to remain relatively consistent?

And then we obviously have our own internal forecast that we have around the overall economy and we think we get a lot of deep insights into our own customer trends, whether it's from neighbor's club data and others.

Speaker 9: Over the next couple of quarters and, as part of that, when would you expect traffic to turn back positive? Thank you very much.

And we our view on the economy is that it will remain roughly as it is for the balance of the year.

Speaker 4: Yeah Hey Michael, and good morning.

And as a consequence, our performance will stay kind of in the same range that it's been operating in as we move forward for the balance of the year. We all saw Q1 GDP with negative we'll know in a few weeks' time on Q2s GDP, we certainly know consumer sentiment and business sentiment is negative.

Speaker 4: I' start with we look at the history of the business and just the consistency of our performance and the stability of our performance over 30 -plus years and all the varing economic cycles that we've been through. The second thing is we then look at kind of the foundation of the business in our Q business and the demand, the need, base orientation, that and the strong stability we have there and the share gain.

More likely than not that the Q2 GDP is roughly in line with what Q1 was and that and our expectations that the second half is about the same that if we are in a recession as a mild modest recession and we expect our business will continue to perform.

Speaker 4: And then we obviously have our own internal forecast that we have around the overall economy and we think and we get a lot of deep insights in our own customer trends where there's from neighbor's cloud data and others, and we our view on the economyomy is that it will remain roughly as it is for the balance of the yearand, as a consequence, our performance will stay kind of in the same range that it's been operating in as we move forward for the balance of the year.

In the same way.

On comp transactions.

We're certainly watching that closely and have aspirations of turning those back positive.

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Two big impacts to comp transactions. This year to date have been stimulus and then also the drought.

And the heat in weeks, where those two are not.

As applicable we do see we have seen positive comp transactions as we mentioned in my prepared remarks, the months of May and June in combination had positive comp transactions.

Speaker 4: We all saw Q1 GDP with negative. We'll know in a few weeks time on Q2's GDP. We certainly know consumer sentiment and business sentiment is negative, think it's more likely than not that the Q2 GDP isroughly in line with what Q1 was and but in our expectations since the second half is about the same, that if we are in a recession it's a mild, modest recession and we expect our business will continue to perform in the same way on comp transactions.

And in markets that are less affected by the heat right now we are seeing positive comp transactions and.

And we certainly anticipate as we get through those pressures the return of positive comp transactions.

Thank you very much.

Our next question is with Peter Benedict from Baird.

Speaker 4: We're certainly watching that closely and have aspirations turning those back positive. two big impacts to comp transactions this year to date have been stimulus and then also the drought in the heat in weeks where those two are not as applicable, we do see we have seen positive comp transactions. As we mentioned in my prepared remarks, the months of May in June and combination had positive transactions.

Peter Your line is open.

Good morning, guys.

Thanks for taking the question so just.

Curt I wanted to maybe if you go back expand upon the comments you made you were talking about some levers that you have.

Allow you to kind of mitigate the downward pressure on EBIT margins right now and holding kind of that $10 two for the year.

Maybe expand upon those and then how do you think about.

Speaker 4: And in markets that are less affected by the heat. Right now we are seeing positive comp transactions and we certainly anticipate, as we get through those pressures, the return of positive comp transactions.

That same dynamic in the event that inflation does start to roll you are getting obviously 12 points, where inflation right now is that reverts to.

How does how do those levers work and how do you feel about the EBIT margin in that environment. Thank you.

Speaker 10: Thank you very much.

Speaker 11: Phone.

Speaker 2: The next question is with Peter Benedict from baraird.

Yes, Peter good morning.

As we indicated in our prepared remarks and just.

Speaker 2: Peter your line is open.

Consistency of this business I'll start there Peter with just the fact that we've got good visibility on our expense structure, we've had consistency in both top line and in gross margin. So it's really important to just start there is a need space really durable business.

Speaker 6: So thank taken the question. So just current, I wanted to maybe, if you go back, expand upon the comlege you made. You talk about some levers that you have that are allow you to kind of mitigate the downward pressure on evenbit margins right now and holding kind of that 10 10, point two for the year mayd expand upon those. And then how do you think about that same dynamic in the that you know inflation does start to roll and you're getting obviously 12 points.

And then from there the other point that I'd mentioned is that the investments in the business. When you look at SG&A and the cost the biggest pressure is the investments of the business and the natural SG&A levers at a good low single digit number and we're making these purposeful invest.

Speaker 6: For inflation right now. If that reverts to par, how does, how do those levers work and how do you feel about the EBIT margin in that environment?

Speaker 6: Now if that der verts to par, how does how of those levers work and how do you feel about the EBIT margin in that environment? Thank you yes, Peter. Good morning.

<unk> all part of our long term algorithm to drive a strong operating margin.

And return we can do that while we're investing in the business. So to your question about how do we manage that we certainly have the ability if needed to to be nimble and flex on the investments because that's the area that is the greatest pressure on SG&A and then the business just has a.

Speaker 1: As we indicated in our prepared remarks, and just the consistency of this business. I'll start there Peter, with just the fact that we've got good visibility on our expense structure. We've had consistency in both top line and in gross margin, So it's really important to just start there as a needs-based, really durable business.

A solid core DNA around profit improvement lean thinking I mean, this is something that has been built in over 10, plus years and really matured in our organization and what we're doing today in regards to driving miles.

Speaker 1: And then from there. The other point that I'd mentioned is that the investments in the business. When we look at sna and the cost, the biggest pressure is the investments of the business and the natural SG levers at a good low single-digit number and we're making these purposeful investments all part of our long-term algorithm to drive a strong operating margin and return. We can do that while we're investing in the business.

<unk>.

More inventory per truckload, when you've got transportation costs and what we're doing to just drive efficiency. Those are the different levers that we are.

Benefiting from today, and we will continue to use that for the next few years, if theres any reason to really have to adjust from our current.

Speaker 1: So to your question about how we manage that, we certainly have the ability, if needed to, to be nimble and flex on the investments, because that's the area that is the greatest pressure on SGNA, and then the business just has a a solid core DNA around profit improvement, lean thinking. I mean. This is something that has been built in over 10 -plus years and really matured an organization.

Current thesis and algorithm. It so we feel very good about our ability to drive our long term operating margins.

Okay, great. Thanks, so much.

Thank you so we'll take one more question.

And then we'll wrap it up.

Top down.

Okay fine.

Anil question.

Scott Ms Kim from <unk> capital.

Speaker 1: And what we're doing today in regards to driving miles down, more inventory per truckload when you've got transportation costs, and what we're doing to just drive efficiency. Those are the different levers that we are benefiting from today and we'll continue to use that for the next few years if there's any reason to really have to adjust from our current current thesis and algorithm, and so we feel very good about our ability.

Your line is open.

Yeah.

Hey, guys. Thanks for taking my question I'm, just putting together because I know we're at the end of the call. So just the near term transaction trends I mean, how much do you want to attribute that to.

Inflation people trying to stock up and the drought maybe units per transaction are up and those are the factors driving down here.

Your transactions and then my second question is more longer term our research would suggest that maybe the second year of the Garden Center is maybe coming in above what maybe you were expecting just because it gets traction people know what's there in the market.

So those are two questions.

Yeah, Hey, Scott and thanks for the question and on the first part.

The comp transaction decline is.

Almost fully attributable to the stimulus lapping and the heat and drought and kind of a compressed spring as I mentioned earlier in weeks and in geographies where those.

Speaker 6: Hey guys thanks, thanks for taking my question. I M going just put them together because I know were at the end of the call, So I just then the near term transaction trends. I mean, how much do you want to tribute that to? You know inflation, people trying to stock up and the drought, you know, maybe units per transaction are up and those are the factors driving down your your, your transactions. And then my second question is more longer term. Our research would suggest that maybe the second year of the garden center is may be coming in above what maybe you were expecting, just because it gets traction.

Extraneous factors are not at play we see strong positive comp transactions collectively across the months of May and June we see positive comp transactions.

We break our customers in a variety of different cohorts and segments, we see it.

Our lower income customer group, having some modest falloff that we've mentioned that.

Over the last month or two and.

Speaker 1: People know what's there in the market. So those are are two questions. Yes hy Scot, and thanks the question. And on the first part.

But as a reminder, that's a very small piece of our customer segments, our customers own homes, they own land they own animals they own pets.

Speaker 4: The comp transaction decline is.

To some degree that insulates them in there.

Speaker 4: Almost fully of attributable to the stimulus flapping and the heat and the drought and kind of a compressed spring, as I mentioned earlier. In weeks and in geographies where those extrane factors are not at play, we see strong positive transactions collectively across the months of May and June . We see positive transactionswe break our customers in a variety of different cohorts and segments.

And that's the customer consumer segment, and then you look at our business, but also if you're just reading all the newspaper headlines and watching all the various shows out there those consumers are holding up well and they continue to hold up well for us too and I think.

We can see that in the moment and we also see it in the track record. This business over the last 10, 2030, 30 years and so our customers still very strong still spending and still still doing well and when you pull out the extraneous factors.

Speaker 4: We see it's the our lower income customer group having some modest falloff that we've mentioned that over the last month or two and But as a reminder. That's a very small piece of our custommer segments our customers' own homes they own land they own animals. They pets and to some degree that insulates them and there's and that's the con. Mer consumer segment. I be LL get our bus but also if you just are read all the newspaper headlines and watching all the various shows out. There.

We still see strong positive comp transactions and feel feel very good about the health of the business and the garden centers.

We feel we are very positive on our garden centers in total really pleased in less than two years of having launched a strategy to have over 50% of our chain with garden centers now and in the stores that have had it in place for now a second garden season, Theyre performing very strongly.

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We were very pleased with how quickly our garden centers are becoming a destination in the communities.

Speaker 4: Those consumers are holding up well and they continue to hold up well for us too, and I think we can see that in the moment and we also see it in the track record of this business over the last 10 20 30, 30 years, and so our customers still very strong, still spending and still doing well and when you pull out the extraneous factors, we still see strong, positive transactions and still very good about the health of the business.

Very pleased with our vendors and being able to have the great products in there and replenishing it at the right rate we've been very pleased with our store execution of hiring Garden Center specialists. So you've got a strong customer service being in the garden centers.

And then it's bridging over into the balance of the store with the transactions in there because we estimate about half of the transactions happened. The garden centers are actually destination transactions that then bleed into the store.

Speaker 4: And the Garden centers. We feel we are very a positive on our garden centers in total, really pleased in less than two years of having launched the strategy to have over 50% of our chain at garden centers now and in the stores that have had it in place for now a second Garden season. They're performing very strongly we are. We're very pleased with how quickly our garden centers are becoming a destination in the communities.

Or even into the sideline now in the sidelines to become a much more kind of shopping destination with the drive thru pickup so very pleased with the performance of the garden centers and just our sideline transformation.

And then obviously in combination with project fusion, which we haven't talked about as much today, but now over over 400 stores with project fusion starting to reach critical mass over 20% of our stores now seen the lift in comp sales there, but also the improved customer response to the elevation in the store experience.

Speaker 4: Very pleased with our vendors and being able to have the great product in there and we'replenishing it at the right rate. We've been very pleased with our store execution and hiring garden center specialists. So you've got a strong customer service being in the Garden centers and then it's bridging over into the balance of the store with the transactions in there, because we estimate about half of the transactions happ the Garden centers actually destination transactions that been bleed into the store.

Proven it's in areas like apparel and pet food, obviously in our power tools now we've got 100 I think it's 800 stores now 700 stores now with an updated power tools areas.

Our customers.

When you look at the data you can very much see the lift in the stores that we execute fusion and our garden centers.

Speaker 4: Or even into the sidelight now in the sidelks, become a much more kind of shoppable destination with the drive-through pickup. So I'm very pleased with the performance of the Garden centers and just our sidel transformation. And then obviously in combination with project Fusion, which we haven't talked about as much today but now over over 400 stores with project Fusion starting to reach critical math. That were 20% of our stores. Now seeing the list in the comp sales there, but also the improved.

And it's a big driver of our market share gains that we're seeing.

Thanks, a lot of great great color there appreciate it.

Thanks, Scott Thanks, Scott.

Allison This will conclude our call today, we are around for questions.

<unk> and I are available today to please feel free to reach out to us and thanks, everyone for joining us and we look forward to speaking to you on our third quarter call in October .

Speaker 4: Customer response to the elevation in the store experience, improvements in areas like apparel and pet food. Obviously in our power tools now, where we've got hundred- I think it's 800 stores now, 700 stores now with an updated power tools area. So customers we, when you look at the data, you can very much see the lift in the stores that we excute, Fusion in our garden centers and it's a big driver of our market share gains that we're seeing.

That concludes today's call. Thank you for your participation you may now disconnect your lines.

Yes.

Speaker 6: Thank have a lot of great well, a great color. They appreciate.

Speaker 3: Thanks Scot, Thank Scot, and also, this will conclude our call today. We are around for questions of maririanne, and I are available today, So please feel free to reach out to it. So thank everyone for joining us and we look forward to speaking to you on our third quarter call in October .

Speaker 2: That concludes today's call. Thank you for your participation. You may now disconnect your lines.