Q2 2023 Tractor Supply Co Earnings Call
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Is not permitted without written authorization, a tractor supply company and as a result reminder, this call is being recorded I would now like to introduce your host for today's call. This is Mary Lind Pilkington Senior Vice President of Investor in public relations for tractor supply company Mary when he's.
Go ahead.
Thank you Megan good morning, everyone. Thanks for taking the time to join us today.
Call for our prepared remarks, or <unk> or C. E O <unk> Barton R. C. F O a John <unk> E V P N Chi stores officer.
<unk> R E D P. A chief merchandising officer will join us for the Q&A session.
Please note that we have made a supplemental slide presentation available on our website to accompany today. The earnings release now let me <unk> the safe Harbor provisions under the private Securities Litigation Reform Act of 1995. Please call may contain certain forward looking statement that are subject to significant risk and uncertainty.
Including the future operating and financial performance of the company in many cases these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward looking statements are reasonable I can give no assurance that such expectations or any of its forward looking statements will prove to be correct and.
Actual results make it for materially from expectations important risk factors that could cause actual results to differ materially from those reflected in the forward. Looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission.
Information contained in this call is accurate only as of the date discussed investor should not assume that statements will remain operative at a later time tractor supply undertakes no obligation to update any information discussing this call.
Given the number of people who want to participate we respectfully ask that you limit yourself to one question. If you have additional questions. Please feel free to get back in the queue. I. Appreciate your cooperation on that we will be available after the call for follow up.
Now it is my pleasure to turn the call over to Hal.
Thank you Mary when good morning, everyone and thank you for joining us.
I'd like to begin by thanking the 52000 tractor supply team members for their commitment to each other and our customers and for their dedication to serving life out here.
Our team is executing at a high level and did a nice job nimbly adjusting in the second quarter.
We're operating at a tougher environment than we expected at the beginning of the quarter and certainly tougher than what we forecast that as we enter the year.
Consumer spending continues to shift in favor of services.
Shoppers that are tired of inflation or be judicious on their baskets.
Consumers continue to pull back on discretionary purchases.
And Additionally, our business was further impacted by the abnormal seasonal trends, particularly in the month of June .
Despite this environment, we still expect 2023 to be a pretty solid year, our customers healthy and we're gaining share outgrowing our market by two X and we are significantly outpacing total U S retail sales growth.
We anticipate that we will have positive <unk> and positive comp transactions for the year, albeit in the low single digits range.
And importantly, net sales and earnings will grow strong mid single digits on top of a 53rd week last year.
We have a long track record of growth and high expectations or performance.
We view our under performance to these expectations S specific to the current environment the team as dialed in and understands the challenges.
For the remainder of the call today I'll speak to a few highlights of the second quarter, and then share an update on our lives out here strategy.
John orders will then provide greater insights on a real estate strategy and our plans to accelerate our store growth.
And then curtains baller, John and share further details on the second quarter and our four year outlook.
So let's dig in.
Alright turn into the second quarter, we grew net sales by 7.2% with comparable store sales of 2.5%.
Diluted EPS was $3.83 an increase of nearly 9%.
Are comparable store sales growth was driven by transaction growth of 1.8% and take it grows and 0.6%.
We expected and we're pleased to see <unk> transactions turned back positive and this trend has continued into Q3.
We began the quarter with mid single digits comp sales growth in both April and May.
As we move through the month of June we experienced a noticeable slowdown in our seasonal categories with the period coming in modestly positive.
And my 25 years in retail June was one of the most topsy turvy month that I've seen smoke droughts storms, he he'd had a little bit of it all.
As mentioned our customer base is healthy or.
Are active customer accounts are stable and growing importantly, our new customer trends of leveled out after a period of laughing tremendous growth in 2000 22021.
Our customer satisfaction scores continue to break records and improve year over year.
In customer demographic trends continue the trend younger and more females in pre pandemic.
Our neighbors club reached a record 31 million members in the quarter, an increase of 5 million members in the last year.
We are seeing continued favorable trends from our loyalty members retention rates remained at all time highs neighbors club members continued carping at a faster rate than our overall performance and our high value members reached a record count in the quarter.
Okay trends that we're seeing our customers as follows one customers are increasing in their usage of credit.
Two shoppers continue to seek out value, particularly in our lower income customers.
And three customers are buying a little more often but a little less per trip.
Now shifting from our customer to our categories are year round categories reps mid single digits.
They could've of our ongoing market share gains and are demand driven needs based business model.
Are consumable usable and edible categories continues to deliver strong stable performance and drive trips detractors of law.
And this quarter two categories had growth and the low double digits.
And Japan and animal we're gaining substantial share throughout the category again this quarter, we have sequential increases in the number of customers shopping us for this category each week.
And livestock, our spring chip day's event was one of the largest ever for us with the poultry category up strong double digits.
We believe we're on track to exceed last year's record of 11 million birds sold.
Not only be seeing growth from existing customers. We are also experiencing robust growth and new customers to the category and this is driving both trips and ticket.
Are seasonal categories were flat in below expectations.
The missiles, primarily in June when as mentioned previously there were a number of choppy environmental conditions across our markets that resulted in the consumer not being is engaged in the categories. We expected.
This software seasonal performance in June had a material impact on our second quarter performance and was the main driver of our myths versus our expectations.
Our big ticket sales were down in the high single digits and in line with our expectations.
And in fact, our performance in the quarter was a sequential improvement from the first quarter.
The most significant pressure in the quarter within zero returns generators and recreational vehicles.
On the real estate frankly open 17, new tractor supply stores and three pets is by tractor supply stores in the quarter with.
For the second consecutive quarter, we've seen the cadence of our new store openings returned to more normalised right.
Are persons by tractor supply business is performing well in comps in the quarter were greater than overall tractor supply.
And the integration of Orson is right on track.
Today, we fully transition and Re-grand opened 15 locations.
We remained very pleased with the customer's response as we convert to the tractor supply brand.
Although the operating environment may be different than we anticipated as we ended the year I'm incredibly proud of how the team has come together to navigate the various circumstances and control, but we can control.
Now transition on updating our life out here strategy.
We remain very confident in our long term growth outlook.
We participate in a large fragment it attractive market, we continue to benefit from numerous structural tailwinds, including rural revitalization homesteading self reliant and pet ownership.
We have numerous substantive competitive advantages and are investing to expand them through our life out your strategy.
Since we first barked on our strategy in the fall of 2020. The team has made remarkable progress on the transformation of tractor supply.
As a reminder of the five pillars of our strategy include deliver legendary customer experiences advance are one tractor capabilities.
Operates attractor way.
Go to the country mile for our team and generate healthy shareholder returns.
And the key initiatives to support this strategy include our project fusion store remodel.
Our garden centre transformation.
Our neighbor club loyalty program and the expansion of our Omnichannel capabilities.
Our project fusion store layout is now in over 700 stores.
Representing greater than 30% of our store base.
This program is enhancing our space productivity with improved layout signage skew expansions and improved adjacency.
And for Remodels. It also offers and improved customer shopping experience that is much more contemporary.
Complimenting project fusion is the sidelight transformation, which is leveraging expanding our existing outdoor sidewalk retail space to drive greater productivity convenience with the addition of a garden center and a drive through pick up line to support our Omnichannel technology investments.
With more than 400 garden centres today, we've significantly expanded our assortment of lawn and garden products that are relevant to our customers lifestyle.
Importantly, these two projects are delivering on our return expectations.
They are providing material sales lips, we're seeing improvement in customer satisfaction, and we're seeing higher levels of new customer acquisition in these remodeled sores.
Also our execution on the Remodels continues to improve as we're in the year three now of the effort and we're reducing project cost and also continuing to shorten construction times.
We relaunched our neighbor's club program to a points based structure in April of 2021, and the timing was very fortuitous as it allowed us to lock in the millions of new customers that boundless through the pandemic.
In total since the relaunch our membership has increased by 12 million members, it's 60% increase.
Additionally, the design of the program is facilitated upward spend migration and driven strong retention rates.
Lastly, the program provides invaluable insight into our customer behavior and allows us to personalize our offerings tailored to their needs.
Look for us to have all the structure again sometime in the next 12 to 18 months to further enhance value for our members.
Underpinning our strategy are substantial investments in our distribution network to support the significant sales increase in store growth.
Today, our network is achieving record service level and the strongest productivity we've experienced in the last five years.
Our new state of the art distribution center in Navarre, Ohio and.
And our increased count of mixing centers now up to 15.
And the implementation of engineered labor standards are all contributing to this performance.
Today I'm excited to share with you a new strategic focus area that we've been working on for a little over a year.
The transformation of our real estate model enable by a number of new capabilities.
Designed to deliver material benefit to both revenue growth and operating margin rate and reinforce our long term guidance.
First we're raising our new store growth target. We now believe there's a 3000 store opportunities domestically for tractor supply.
This is supported by our total addressable market of more than $180 billion are robust growth in our ongoing market share gains.
Our new target references to the increase of 200 stores.
And we believe we continue to have significant runway for growth with high return new stores.
Second we're implementing new capabilities to enable owned development of new store builds.
This capabilities expect to generate significant construction cost savings and allowing for lower rent in these applicable stores once we sell them posts construction.
Third we're also announcing plans to periodically execute sale leaseback transactions of our existing ownership of 117 stores.
And we're going to have a step up in our ongoing build of stores to back to 90 stores per year starting in 2025.
Today's real estate announcement extends our runway for growth and reinforces our long term financial model.
It's a compelling addition to our life out here strategy that will further solidify our growth for many years to come.
And with that I'll turn it over to John who can share some more color on our real estate strategy.
Thank you well this is an exciting time for the store operations in real estate team as we embark on new ways to capture grill and market share, while also driving efficiencies and a real estate processes.
Over the last year, we've installed new leadership in town and our real estate team.
This was allowed us to reevaluate where we are in the natural progression of our store growth plan and our ability to leverage our real estate capital structure.
This new approach will allow us to realize cost savings and be more nimble with our store portfolio.
Our strolling outlook for new store growth is direct correlation of the millions of new customers, we have acquired and our overall sales performance over the last several years.
This provides us with nearly a decade of new store growth in the United States.
We believe these are low risk high return organic growth opportunities.
We anticipate accelerating the new store growth from approximately 70 stores this year.
<unk> 2024, and 90, new stores in 2025 and beyond.
Opening highly productive new sources of core strength of competency a tractor supply.
We continued strong new store productivity metrics with performance based on our historical investment thesis at our stores are profitable and year one.
As part of our growth plan, let's start with new stores.
We have developed a new sales forecasting model to determine new stores mature still and pro forma results to develop our total market store growth opportunity of 3000 stores.
This was the first up into our modeling process in four years.
We have infused the process with a machine learning model and inputs from our $31 million neighbors phone numbers.
This gives us tremendous confidence through their outlook by 200 stores for a total of 3000 tractor supply stores in the U S.
The catchers growth the real estate team is ramping up our pipeline to allow us to accelerate our store openings to 90, new stores by 2025.
We are attracted open approximately 70, new stores this year with a step up to 80 new stores in 2024.
We have a robust pipeline of new stores in our sights over the next 24 months.
<unk>, our pipeline to the best level of development. So the prior to the pandemic.
The team is also building new capabilities to optimize our real estate portfolio.
We will start one development of stores this year through fixed fee developer model and overtime anticipate self development of new stores.
This year, we anticipate 20 to 30, new stores will be in our own development pipeline for 2024, new store openings menu with will begin development in this year.
A benefit of these new programs with the ability to have more control and visibility in the development process.
The Great news is that we estimate these capabilities will result of 10% to 20% estimated rent reduction as compared to a developer model Bill.
Those weren't reduction helps us continue to improve our new story returns.
Pardon me investment accretion of this development model requires more upfront cash.
And an exciting that we are able to fund this through the sale leaseback of 10 to 15 stores. This year out of 117 stores that wheel.
Going forward, we find that you can fill these back program of of existing owned stores.
Well, a new store openings.
This program to help fund our plan on store development and.
And we'll also captured value in currently owned stores.
With nearly 2200 stores. We are also strategically investing in optimizing our existing store portfolio as part of the lease renewal cycle.
All stores will go through an Indepth review to ensure we have the right real estate strategy in place.
We will take action to ensure that all sorts of the right location size facility rub structure and format.
These factors are critical to the success of our team and stores to deliver legendary customer service.
With that let me know passed over to Kurt for our financial review.
Thanks, John and good morning to everyone on the call.
Turning to our second quarter results.
While our sales trends were below our expectations I commend the team and how they have remained nimble and steadfast in our commitment to be the dependable supplier for life out here.
In many ways, our second quarter top Bun results were very consistent with our results in the first quarter with strong <unk> growth flattish seasonal performance and a decline in big ticket sales.
Are comparable store sales growth once the strongest in the far West South Atlantic and Texas, Oklahoma.
The strength of these regions was offset by pressure in the northeast and Midwest regions, where seasonal trends added incremental pressure on consumer demand.
Cop sales in the quarter benefited by about five percentage points from retail price inflation.
Most of this inflation reflects retail price increases that were put in place and the second half of 2022 that we have not laughed as of yet.
Much like the first quarter the benefit of price inflation to our average ticket growth was offset by the impact of three factors.
First the average ticket was impacted by the softness in big ticket and declines in seasonal categories, which run at a higher average ticket.
Second we also experienced software sales and discretionary an impulse add on items.
Third on a positive note. We also saw our customers shopping us more frequently with a slight reduction and a number of items per basket overall, our customers are buying more units or pounds from us in total.
Moving down our income statements are gross profit increased nine 3% to $1.51 billion <unk>.
Gross margin increased 69 basis points to $36, 2% from 35.5% in the prior year's second quarter.
Gross margin was a highlight for the quarter as we continued to maintain strong product margin from our ongoing execution of an everyday low price strategy.
The gross margin rate increase was primarily a triple two lower transportation costs driven by improvements in the global supply chain and efficiencies from our new distribution center in Navarre, Ohio.
Product mix pressured gross margin given the strength in queue.
This was somewhat offset by the margin improvement from lower big ticket sales, which carry a lower gross margin right.
As a percent of net sales selling general and administrative expenses, including depreciation and amortization increased 77 basis points to 22.8%.
The increase in SG&A as a percentage of net sales was primarily attributable to our planned growth investments, which included higher depreciation and amortization and the onboarding of our new D C.
Additionally, higher medical claims also contributed to the increase in SG&A.
The growth in medical claims is due to new benefit offerings that had stronger engagement rates than we anticipated as well as higher program costs overall.
We have made some adjustments to the program and will continue to do so we don't anticipate this to be a headwind in 2024.
Approximately 80% of our SG&A growth year over year represents investments for growth such as new stores impact of or some farm and home the new D C and the depreciation from our capital investments for items, such as projects fusion Remodels and Garden Center transformations.
The core SG&A costs leveraged well, even in a low comp sales environment overall, the team had strong execution and scaled our core cost to our sales performance.
For the quarter operating profit margin was $13, 4% and eight basis points declined from the prior year.
Consistent with our guidance from the year or some stores had a modest drag on operating income.
Principally due to factors unique to the transition in.
Q2, we attribute approximately 10 basis points of operating margin declined to activities relating to or something.
Turning now to our balance sheet merchandise inventories were $2.7 billion at the end of the second quarter, representing a decrease of 1.7% an average inventory per store. We are pleased with the quality of our inventory as we enter the second half of the year.
During the second quarter, we strategically issued $750 million in long term debt, which brings are weighted average fixed rate to three 4%.
With strong annualized cash flows we continue to maintain a healthy balance sheet with the leverage ratio of around two times.
A tractor supply we are committed to building on our track record of long term value creation for our shareholders are real estate portfolio management is another way that we can continue to facilitate strong returns let.
Let me shift now to share a few financial highlights as a result of the evolution of our real estate strategy.
The sale leaseback of 10 to 15, one stores is anticipated to closed during the second half of the year, resulting in a net after tax benefit of about 20 per share.
We are under contract on 10 stores and expect to close on those stores in the third quarter.
He expected net gain reflects a selective reinvestment of a small portion of the benefit from the sale back into our store infrastructure. This year.
For modeling purposes, and net gains will be recorded in operating income as an offset to SG&A.
Given the migration to our new real estate development strategy, we anticipate that we have about a decade of runaway from the sale of existing company owned stores ahead of us.
This increases cash flow over the coming years and is a great way for us to leverage the strength of our balance sheet.
The more efficient one development program is expected to drive lower new store rent.
As the program ramps. These savings are anticipated to more than offset the incremental rent expense from the sale leaseback of existing stores.
In 2025 and beyond the acceleration of our new store growth to about 90 stores annually should help us capture market share and bolster the high end of our long term guidance ranges. We continue to have very robust new store economics, providing us the confidence to make this shift.
Now, let me turn to our updated fiscal 2023 financial outlook.
At the halfway point of the year, we are now forecasting low single digit cop sales at mid to high single digit earnings growth we.
We continue to believe this will be a year of solid performance for us as we continue to gain market share and advanced our strategic initiatives.
We are carefully watching many leading macroeconomic indicators consumer behavior and retail trends as well as our own insights to assess the health of the consumer.
All our customers remained healthy we are more cautious about their discretionary spending and the second half of the year at the same time, we are moderating our expectations for the performance of our seasonal categories based on our trends in the first half of the year that had been choppy and the lower expectations.
We believe it is prudent to recalibrate, our expectations for both the discretionary and seasonal categories based on our year to date trends for the year. We know anticipate net sales in the range of 14.8 to $14 $90 billion comp store sales growth of 1.3 to two and a half per cent growth are off.
Waiting margin rate is expected to be in the range of 10.2% to 10.3% with net income of 1122 $115 billion.
Diluted EPS is forecast to be $10.20.
To $10.40.
This includes a net after tax benefit of about 20 per share for the sale leaseback.
We anticipate about 15 cents will be recognized in Q3 and five in Q4.
In the light of the updates to our real estate strategy anticipated capital expenditures for the year are now forecasted to be in the range of $800 million to $850 million compared to our prior range of $700 million to $775 million.
This increase reflects the moved one development for select new store growth that will be funded through the sale of existing stores.
It is important to note that the proceeds from the sale of our owned stores are expected to offset the incremental capital outlay under the development program that.
The combined transactions are expected to be relatively neutral to our cash position.
As to the calendar as Asian between the third and fourth quarters. We continue to believe that cop sales will be stronger in the third quarter than the fourth quarter.
Bold quarters are modeled to achieve cop sales growth. Please keep in mind that we were lapping a monumental winter storm in the fourth quarter of 2022 that we estimate contributed 200 basis points to comp sales in the quarter.
As for retail price increases our plans continue to reflect a moderation from the impact of inflation at the same time, we would anticipate a pickup in our cop transaction growth as we experienced this quarter.
Our guidance reflects ongoing gross margin expansion in the second half of the year. We anticipate continued benefit from transportation and the new distribution center, along with some pressure from unfavorable product mix.
For the third quarter are SG&A performance exclusive of the sale leaseback is anticipated to be in line with the second quarter in.
In the fourth quarter. However, we expect a modest deleverage given the compares from the prior year.
For modeling purposes, the horsemen stores will go into our cost calculation in 2024 based on when the stores converted to our point of sale system, we will share more details when we provide our 2024 outlook.
Looking ahead, we will remain agile and play offense, we will leverage our core competencies that have served us well all while strengthening our capabilities and investing in our life out here growth strategy for tractor supply, we expect to end the year in a strong position for the future.
Now I'll turn the call over to how to wrap this up.
Thanks Kirk stepping.
Stepping back tractor supply has achieved remarkable growth over the past few years and the team has done an excellent job scaling our processes capabilities and organization to manage this Greg.
Key operational areas like inventory and payroll grew materially, but at a lesser rate and sale and we're always in control Keith.
<unk> philosophy is like E L P, where re embraced and our marketing media mix shifted fully away from print to digital.
And the combination of the two enabled our promotional activity to achieve all time lows and we remain there.
In addition to these efforts we launched our life out here strategy to continue the ongoing transformation of our business.
This strategy help locie in new customers substantiate our market share gains and it's a platform for our future growth.
Time, he could not have been better.
At the halfway Mark of 2023, it is shaping up to be a solid year for tractor supply on top of three extraordinary years.
Our market is stable and our customers remain healthy.
Team is effectively controlling what we control.
As we celebrate our 85th anniversary tractor supply roommate, the unique highly differentiated retailer or.
Our needs based business model has a track record of growing through various economic conditions.
As a company we have a proven ability to manage three dynamic environments, whether that is a macro economic or seasonal weather trends.
Our customers and team members are passionate about the out here lifestyle and they prioritize it.
Our customers Overindexes homeowners landowners pet owners and animal owners.
Is the market leader, we have substantial advantages that are getting stronger every day.
Additionally, investment our life out here strategy is critical mass.
Natural evolution of our real estate strategy is furthering our competitive advantages.
We see meaningful growth potential in our markets.
I remain extremely confident that we have a tremendous runway birth of ahead of us.
And with the right team and the right strategy, we're continuing to build a strong foundation for the future.
With that let's open up the call for questions.
Thank you.
Would like to ask a question. Please press start followed by one on your telephone keypad is there any reason you would like to remove that question. Please press star followed by two.
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Our first question will come from the line is Karen short with credit Suisse. Your.
Mine is now open.
Hi, Thanks, very much for taking my question I mean, I, just kind of royal to into line. If that's okay. So the first question and tie that into the second one was that that thank you always had the assumption that you're you're kind of car would be one to two per cent of five G. P.
That relationship doesn't it seem to be holding right now so I just wanted to talk about that and then excluding the benefit of the silliest back.
You had also kind of indicated twenty-three would be the peak and last name period for you.
And then we should start to see to see operating margin expansion. In 2024 is this still you are thinking and I guess I'm again, excluding necessarily back <unk> and then benefit thank you very much.
Hey, Karen good morning, and thanks for joining the call.
On your first.
Part of the question.
A bit to my comments earlier, we see this period of time is a bit of an aberration verses are.
Kind of ongoing growth algorithm.
It's as you see GDP and you see where PCE going and then you see the shift from goods to services right now.
Services, historically been 68, 69% of spin.
Goods kind of 31 32 is you know goods kind of shifted to say 35, 36% during the pandemic, we're kind of halfway back on that March back to 31%. So that as we said in our prepared remarks is a bit of a headwind in our business, but certainly expect that we have.
Maybe halfway to go on that and then it would level back out and.
It it's normal.
<unk> would expect that our growth algorithm would return to that one or 2% above GDP growth and.
And the guidance we have given historically again, we just do this period of time is a bit of an aberration from that long term algorithm just given the macro dynamics.
And then the second thing is yeah, no no no change to the guidance so to speak that we'd get in on the out years, certainly expect 2023 to still be our peak indefinitely ear.
As you mentioned the sale leaseback is really just a 20 plus or minus it'll be in every single one of our years going forward you know as it and add her to our EPS.
But expect that will be at our peak investment period. This year and that will start to moderate down next year with an opportunity for margin expansion accordingly.
Great. Thank you very much.
Take care of.
Thank you Karen.
Our next question comes from the line of Scott Secret Rally with Trust. Your line is that open.
Good morning, guys sketching rally so I I have a question on the real estate changes as well I mean, it makes sense that you guys can improve your cost structure is you take ownership of the build but if you would expect your stores remain productive over a long stretch of time, it's just a better model to actually own the stores outright rather than leafs in the first place how obviously.
Have some history with that at one of your prior shops or did this real estate shifts suggest that we may see changes to the existing footprint, whether it's changing location.
[noise] location type scenario of different sizes et cetera. Thanks.
Hey, Scott this is good morning and the.
The real estate model as you think about the opportunity that we have to drive up a strong performance of new stores that we've seen since there's a a.
A structural shift in the tailwinds into the rural economy into our markets. The new stores are performing well we test John mentioned, we built our real estate team that is ready to begin to ramp back up to a 90 ish new store the sale leaseback of existing stores.
Fits right in with that we're an asset light models do not believe owning stores fence, which is why we have over 95% of our stores under released and overtime 30, plus years, we've accumulated did not strategically a number of owned stores there is a bit up.
Pets pent-up value.
In the stores and it's a great time right now to use those stores to fuel and be able to keep a cash neutral value to execute on a strategy that allows us to even further.
Drive new stores bring efficiency and the new store model. So I look at those we look at those very much tied in between is a great way to fund.
A model that drives greater long runway greater T. S are in the overall long term algorithm and I really keep both of those very much tied together as part of a key part of our operations.
I'll take the rest online thanks guys.
Thank you Scott.
Oh, our next question comes from them I am Michael Lather with you B S. Your line is open.
Good morning, Thank you for taking my question.
A two and a half com in the second quarter with 500, <unk> price inflation, probably got some demand that we ship it out of one Q2, Q and your guidance and apply and you're Gonna do call and wanted to call for the back half of the year <unk>.
Some of the big price increases from last year. So can you give us a sense for what is the salary or.
In the business to offset the mitigating contribution from inflation or have you already started.
That quote.
Thank you Hey, Michael and good morning.
A couple of things first of all.
And when.
I don't think it's a fair comment to say we had.
Sales from Q1 shift in the queue too I just think given the the the.
Whether in the seasonality that we had this year.
Yeah, we don't have any any data or insights or customer purchase data that would suggest that there is any poll or kind of deferral into Q2 or.
Weather related kind of shifting into to you too.
So I would say that's not add something that we have to offset as you think about from a sequential perspective does that.
Anything as soon as we have seen cock transactions sequentially improved throughout the quarter and continuing into into Q3 and expect that that will.
That will be the case throughout the year.
And on Aur's, we've talked about all along we expect that that will will moderate through the year.
Big ticket lessons as a per cent as we get through the years. So that provides a bit of a.
Kind of mix benefit and then lastly on the <unk>. We do we do think we're at close to the bottom.
Units per transaction, if you go back and look over the last 15 years at our units per transaction trends. We reached an all time high during the pandemic if people were stocking up and consolidating their trips where now much closer to the where we were during the 2008, great recession and kind of reached at.
That that bottom.
And so we expect that will be a lesser headwind as we as we move forward. So when you put those things all together that ends up with the guidance that we shared and yes, I think we try to be as conservative as possible in the low and realistic as possible on the high end.
Thank you.
Thank you Michael.
Our next question comes from the line is check <unk> with Gordon has good research advisors. Your line is now open.
Okay. Thanks, good morning.
They are so concerned out there that is helpful to continue to revert back to pre COVID-19 behaviors that some of the games that tractors enjoyed over the past three years when when sales per store has moved from call formulated a $6 million will be given back.
I'm curious how you to address this concern of can you highlight a few drivers that by truck with 10 control in the back half and then 244.
Yeah, I hate shopping good morning, and thanks for joining the call [noise].
As I think we all know on this call. This has been a a question for 18 24 months.
And what I would say if we continue to to see a very healthy customer base are active customers were at all time highs. This quarter, we saw positive comp transactions in the quarter.
And if you look at the categories that are driving the footsteps and driving our customers it seems like pet animal.
And those are based on counts of population out there in each of those categories and so and then the last thing I would point out is our share gain at.
At least half of the volume that we capture that we've grown over the last handful of years has been share related and satisfy point to share active customers comp transactions.
Animal and look at those things.
No. It's just a very different business and many of the other companies that kind of had a pandemic benefit reverted whether it's technology related company that had a user base shifted online and then pivoted back or.
Or maybe something that's home related electronics related you know, we're just a very different business and don't see any elements of reversion in our customer base our business.
Thank you.
Thank you check.
Our next question comes from the line of Daniel Enbrel, What Stevens Your line is open.
Good morning, everybody.
Yeah.
How I wanted to follow up on who the new customer is how is the retention training I think you mentioned, they're younger so I'm curious is there a difference in spending power.
Most recent vintage of new customers and a historical one and then everything any change in the neighborhood neighbors club adoption I would think.
Push toward value make the loyalty program where valuable.
Commentary of quantification around how that training differently.
Yeah, Hey, Daniel and good morning start out by first thing, we're very pleased with the trends, we're seeing a new customers, we had record high new customers in 202021.
As we talked about on path calls, our neighbor and I mentioned and prepared remarks, the neighbors club program being relaunched in April of 21 with incredibly well timed as it allowed us to lock those new customers in.
We've grown.
<unk> 15 million members over the last three years and our neighbors club program.
And we've had increased retention rate of our neighbors club program each of the last few years too so we'd lock those cohorts in their growing with us in their remaining active certainly as we got into 2022 add things balance we saw our new customer accounts on a year basis.
Trained down it is that is now leveled out.
We feel really good about our new customer trades as we move forward in sequentially that should be should be helpful. As we look at year over year improvements.
<unk> Club program continued to be very pleased with the 31 32 million members and neighbors club, we have our top tier is has grown and we reached a record number of customers in our top tier retention rates remained at all time highs and continue to improve in our neighbor's club members continue to out copper overall base and.
Again, that's on 75% of our sales.
As I said several times, our customer base is very healthy record active customers positive comp transactions.
Solid trends in new customers and feel really good as we're heading into the third quarter on our active customer base and our strength of our customer.
Mmm.
Thank you.
Thank you Daniel.
Next question goes to the line first segment with Barclays. Your line is now open.
Hey, good morning, everyone. So my question is around the second half guidance the implied margins. It does seem like you're baking in potentially more margin improvement in the second half of the year versus the first half of the year, despite potentially lower comps and I know some of that now is the sale leaseback, but I guess two questions. One can you.
You just remind us and maybe help bridge some of the drivers for the second half margin expansion and then second Uhm, how do you think about potentially reinvesting more of that margin improvement given the sales performance that you are seeing thank you.
Hey, this is Kirk I'll take the first part of that question an outlet Seth answered the the second part in regards to the reinvestment of any margin the performance on an operating margin standpoint for the second half on a gross margin standpoint will be very similar to the second quarter, we continue to see.
As we signalling guided at the beginning of the year, we have strong performance from everyday low pricing, we expect to continue to see transportation being the biggest benefit and fueling of the gross margin expansion as a reminder, over the two years were transportation costs.
Pressure, we absorbed most of that and this is.
Anticipating some of transitory we're.
Getting a return on that in 2023 on Ah SG&A standpoint, what really that's really the big difference in say the second half as you are observing we expect Q3 on SG&A standpoint, excluding the.
Sale leaseback benefit to perform very similar to Q2.
In that 70 80 basis points deleverage principally from the investments in the business, but Q for really has the best compares and so in line with Ah.
What we expect to go into here when you look back at the fourth quarter of last year, while we had robust sales we had increased costs and repairs from the storm. We had horse one acquisition transition we had higher incentive compensation, we are lapping that and we expect in the fourth quarter excluding the.
Benefit from any sale and leaseback to really still only have a modest level of SG&A deleverage principally on the compare so if you'll hold the gross margin you get better performance on on SG&A, It's really about how well we are managing expanded I also can't ignore that the team is an excellent job.
Scaling the costs leveraging investments we made we are seeing significant efficiencies, even SG&A on the distribution and supply chain side of the business driving lower cost and some efficiencies beyond our expectations with that setup. Maybe you can address the second part of that question <unk> <unk>.
Patients who.
Should we reinvest in how we think about that first I would just say <unk> remains are true Norris and that strategy continues to pay off for us. If you look at the success, we're having with our cumulated activity or transactions in our our and our continued record kind of customer accounts that are coming to tractor supply and our plan is to continue.
Getting to maintain their focus and not to revert from that we will reinvest if we if we decided we need to but we do not foresee.
Need for any meaningful type of reinvestment.
And lastly, I would just kind of say is that our inventory position continues to be very strong and very favorable and as we look ahead to the back half instead of kind of a reinvestment a margin we put ourselves in a position to really partner with our key suppliers to go out there did special buys go after key values and make sure we have meaningful value.
Used for our customers to drive the full basket. So I'm very pleased I think we have an incredible team we got a great reset activity come forward that we can manage the top or we can drive the top line drive market share while at the same time really be don't manage the margin structure as well.
Okay. Thank you guys.
Thank you set.
Our next question comes from the line is Peter Bennett with Bird your.
You're lying if they'll open.
Good morning, guys. So I wanted to.
Maybe the house speak a little bit more about the historical context here.
Starting to mentioned some things and answering my classrooms question, but obviously, we're coming off of an unusual period with COVID-19.
You're starting to see this normalization occur your behavior consumers changing.
Maybe just talk a little bit more about what that means to the credit the basket trends.
And then what do we think that kind of.
Indicating here over the next six to 12 months I know you're assuming this will continue in the back half of this year, but how are you just thinking about a longer term. Thank you.
Yeah, Hey, Peter it and good morning.
If you look back over 30 years.
This company's comp growth.
It's been almost.
Equally split 50, 50 between average ticket and comp transactions.
And if you're looking really at our body of work over the last three and a half years.
During the pandemic.
There's definitely been periods of time that inflation and periods of time of <unk> increases, but when you look at it collectively it's about 50 50 comp transactions that average ticket.
That's just the formula that has really just kind of always been there and our historical numbers and our expectation is that we as we navigate the current economy that they were operating in and and consumer behaviors that we will migrate back to that historical blend as we kind of exit this year.
And move and move into next year, and there's gonna be some ins and outs as we said in the second half of this year, where we expect <unk> the headwind there to kind of level out as we get towards the end of the years and we expect AUR to kind of come down those will work a little bit together big ticket becomes a lesser portion of sales and so we get that mixed Bennett.
Fit there and that all works out too.
Average ticket, we're seeing comp transactions increase that kind of balances it a little bit right now and ended up delivering on the kind of implied guidance that we have for the for the second half of the year on.
On the comp transactions as I said, we had all time record active customers. This quarter active customer base grew this past quarter their shopping is more frequently.
Seeing them.
Do a little bit of deep the consolidation of their trips as Kurt mentioned, but we're also gaining significant share and footsteps hitting categories like pet food, where we continued take substantial sure. We're really viewed as kind of a value play almost a warehouse like model I mean, our average pet food Backsides is 35 pounds and that's.
Very different than say, perhaps specialty and others and if you look at a price per pound basis. I mean, we can be as good as 2025, 30%.
Advantage on a price per pound basis, and so we're just naturally drive split steps in our store. So the mix will evolve a little bit throughout the balance of this year, but we've certainly thought it all through and expect that over time, it'll it'll revert back to its historical performance of kind of a 50 50 blend.
They can look up to the next.
Please.
Absolutely. Thank you Peter.
Our next question will come from the line.
<unk>.
Hannah.
Okay.
Hi, good.
Good morning, I wanted to follow up on the real estate strategy and just putting it in the context of your long term an algorithm.
Is it meaningful enough, perhaps some of those targets an annualized basis is going to be adjusted and I'm looking specifically at the salesmen affirmative.
Percent and then ETS, we're a target of 8% to 11%.
Hey, Peter this was her.
The new real estate model.
One of the many things that were excited about is not only is it gave us a long runway, but to your point you moved from Saturday to to 90 stores a year is driving incremental sales those new stores have the.
The expected to have it a consistent tailwind into the comps.
We believe this new real estate strategy, not only gives us a longer runway, but really strengthens the longterm algorithm gives us more confidence in that and bolsters. The higher end of that mid year review the year, we typically down in art adjusting our long term guidance.
We certainly will factor all of that in along with the outlook for 2024, as we reported in our queue for earnings typically refreshing any adjustments to our long term part is at this point, but we're excited about what it does for the long term algorithm and the overall total shareholder return.
Okay. Thank you good luck in the back half.
Thank you Peter.
Our next question will come from the line, Brian with Oppenheimer.
Your line is open.
Hi, good morning, Thank you for taking them.
Question.
So the question we have.
<unk> with a deeper issue.
The comforter around a trend and seasonal sales.
What I would ask.
Wow.
This year.
She won but any geographic differences that you noticed.
He moved down to Q3, and recognizing that you kind of treated.
Just for the year.
Did you see any tax rebounded seasonal sales and maybe some of these where there is some novel.
Historic.
Yeah, Hey, Brian and good morning.
As I mentioned in my prepared remarks that a seasonal business was.
Kind of on expectations in the month of April and May we talk about that and are earning called for Q1, given in kind of a quarter today perspective on that.
And the ultimate is our commentary through the quarter publicly in in.
June that indicated with all significant under performance and our seasonal business.
And that was really the the.
The the bulk of our missed an entire quarter with our seasonal business in the month of June .
As I mentioned.
At half Easterby quarter.
Particularly in the month of June with all the various environmental conditions that were out there.
To your point, we did see Bryant bought.
At moments in time throughout the quarter as well as.
Certain parts of the geography as an example, the kind of 10 days, leading up to Memorial day, we're very good affirms Eagles executive and the total business acted as the Sun China's cut out almost across the entirety of the country and we had we had a really good a 10 day run there.
Historically, you think something like that.
Ladies that a few weeks of spring, we just don't have that kind of short period, but if you look in the southeast in the South Atlantic as Kirk hauled out we had actual performance there from time to time and they're both Texas homeland, a far west when we had good seasonal performance. We had strong strong I mean, we have good weather, we had seasonal performance there and then.
Her called out some of our underperforming regions around the Midwest and the northeast any the Midwest went straight from winter to the drought.
And in the month of June it rained 21 days.
In the northeast and so.
Those were dominate those were large contributors to the under performance in the month of June so.
Anyway, that's just a little bit of more depth and commentary there Brian .
Great I appreciate.
Thanks.
Thank you Brian .
Our next question will come from the line of <unk>, what is the Wells Fargo.
Of your line is now open.
Hey, good morning, how you had hinted at another iteration of the neighbors club program at some point 2024. So so first of all can you talk about the list accomplished you saw the last time you updated the program and is there any info you can share on the types of changes that are on the table that you think.
Could make the program better.
Hey, Zac and good morning, very perceptive.
First off I'd say, an accomplice, it's hard to calculate that.
Both given the magnitude of the comps that we had in that period.
But what I would've given the magnitude of cops, but what I would say we can absolutely look at.
The 15 million neighbors club members that we've added over the last few years.
And when they started to shop with us and how we locked in in using the neighbors club program and I've spoken to that many times, but we feel great about the cohorts from that first revert revision of our neighbors club program. As we look ahead, there's a lot of we've been getting a lot of feedback from our customers and how we can make it even better than the next cup in the next version.
Doing something to uniquely call out certain characteristics of customers. If they are say a horse owner say a military better what can we do to better tailor that when they self identify there's all sorts of things we can do on our rewards and maybe bite size and the rewards that they're getting some $5 rewards instead of only $10 rewards. We're also looking at a way to add.
A a for perhaps even the fifth tier.
As we mentioned, we've got our largest number of highest value customers ever how do we actually take it up another tyranny to get further rewards for those.
In that tears are looking at a lot of ways that again.
That program locks, our customers and it encourages stirred and encourage migration it really encourages purchasing on big ticket and then redemption on the queue businesses and we are looking for ways to reinforce that more and also make it more personable for our customers.
And it seems hard to work on it and we add more detail on it we look forward to sharing it.
Got it I appreciate your time.
Mmk will.
Thanks rapid half an hour take one word.
Absolutely.
Final question will go to the line of Stephen is account with Citigroup. Your line is that open.
Good morning, Thank you very much for screaming and so I wanted to just go back to the sales guidance change just to better understand how much is the change in in sales guidance Israeli due to seasonal missing expectations versus a discretionary being weaker.
And one of the first half was really choppy with leather throughout the year as you discussed so that'd be helpful. And then when you think about getting back to mid single digits.
Which was the original guidance, what's the biggest kind of drivers to get you back to that trend in the business. Thank you.
Hey, Steven This is Kirk appreciate the question.
D. As we talked about when Brian at ask a question on cue too I will go back to the fact that.
A bit of Q2s performance you have to acknowledge that as we saw some differentiation between some of the geographies.
That indicates whether it was a contributor but even in some of the strong geographies and across all that we saw a pullback on some of discretionary we're going into the second half to acknowledging that that is a different seasonal.
Period of time, particularly in the queue for all we planned for base, whether we do not plan for more favorable weather and at this point on the seasonal categories unless we look at it in a space and unless there is.
A strong.
Man for our products because of a shift in weather seasonal the consumer on some of the discretionary items.
Is a little bit more prudent on that today and then also were acknowledged as I mentioned some of the impulse and discretionary category. So we anticipate that the consumer behavior is in line with the first half of the year, we're taking a reasonable prudent approach there and then we're also factoring in.
The strong winter storm that we had in the fourth quarter that were lapping up against.
But underpinning all of that is a strength in our year round core business running in the mid single digits Com transactions still performing strong at this point and we've got a really good healthy customer how mentioned with some of the shift that we've seen <unk>.
Coming off some of its highest as you revert back to the mid single digits, it's really a matter of <unk> and the consumer coming off of the the.
The sighful at that as we've seen the last couple of quarters and really <unk>.
Having more strength and the size of their basket and to demand for the discretionary and we could be a couple of corners away.
Away from that and we factored into our guidance are guidance is reasonable or not factoring in a favorable shift and the consumer or a strong shift in favorable weather.
It's taken all of those factors that we've seen year to date as well as some of the headwinds in the second half.
Okay I appreciate that detail.
Thank you Steven.
That will conclude our a question and answer session. So at this time I will pass the conference back over to marry win for closing remarks.
Thank you Megan difficult concluded our call I am available for any questions or finalists. It. Please feel free to reach out and we look forward to speaking to you at Q3 earnings call in October and thank you.
That concludes today's conference call. Thank you for your participation I Hope you have a wonderful day.