Q3 2024 Tractor Supply Co Earnings Call
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Speaker Change: Good morning, ladies and gentlemen, and welcome to tractor supply company's conference call to discuss third quarter 2024 results.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: We will conduct a question and answer session and instructions will follow at that time.
Speaker Change: We ask that all participants limit themselves to one question and return to the queue for additional questions.
Speaker Change: Please note that the queue for our question and answer session did not open until the start of this call.
Speaker Change: Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of tractor supply company.
Speaker Change: And as a reminder, this call is being recorded.
Speaker Change: 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 tractor supply company.
Speaker Change: Please go ahead.
Speaker Change: Thank you operator, good morning, everyone and thanks for taking the time to join US today on the call today are how long our CEO Kurt Barton our CFO. After our prepared remarks, we'll open the call up for your questions Seth <unk>, our EVP and Chief merchandising officer will join us for the question and answer session.
Speaker Change: Please note that we have made a supplemental slide presentation available on our website to accompany today's earnings release.
Speaker Change: Now, let me reference the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
Speaker Change: Call may contain certain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company in many cases these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward looking statements are reasonable it can give no assurance that such expectations are.
Speaker Change: Any of its forward looking statements will prove to be correct and actual results may differ materially from expectations important risk factors that could cause actual results to differ materially from those reflected in the forward. Looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate.
Speaker Change: It only as of the date discussed investors should not assume that statements will remain operative at a later time tractor supply undertakes no obligation to update any information discussed on this call given the number of people who want to participate we respectfully ask you to please limit yourself to one question. If you have additional questions. Please feel free to get back in the queue.
Speaker Change: I appreciate your cooperation we will be available after the call for follow up. Thank you for your time and attention. This morning now it's my pleasure to turn it over to Hal. Thank you Mary Winn and good morning, everyone and thank you for joining US today my sincere thanks and appreciation go out to my fellow 50000 tractor supply team members and then we all did them watching that.
Speaker Change: Devastation over the last few weeks, it's been reached by Hurricane Helene and Milton with Great concern and Heartbreak Hurricane Helene struck particularly close to the heart for me given my roots in East, Tennessee tractor supply has taken a multitude of actions big and small to take care of our team members customers and communities. During this difficult time.
Speaker Change: Like to give a special thank you to all our team members, who rallied to help the communities impacted by this storm season, we will continue to be there for our team members customers from our communities in the days and months ahead for the recovery process I would also like to thank our many vendor partners, who are stepping up in the recovery effort.
Speaker Change: As it relates to a sales benefit from our response, we had no material benefit in Q3 that have seen an impact in Q4, and additionally had been somewhat encouraged by the recent change of seasons.
Speaker Change: This morning, we shared some exciting news that we've entered into a definitive agreement to acquire all of that a leading online pet pharmacy. This is a company. We know very well is they've been excellent partners to us in fulfilling our pet subscription business for the last couple of years.
Speaker Change: This is a great opportunity for us to bring another benefit to our 37 million Neighbor's club members al.
Speaker Change: <unk> offers a convenient and cost effective way to get medications and specialty items for their pets and livestock.
Speaker Change: The addition of all of that allows us to expand our total addressable market by about $15 billion.
Speaker Change: All of that is a best in class platform with an excellent management team and a strong financial profile. This is a great example of a strategic tuck in acquisition, we anticipate that all of that will be accretive to earnings in 2025, and we look forward to welcoming the alphabet team to tractor supply.
Speaker Change: We are planning to host an investment community day in New York City on the afternoon of Thursday December 5th at that time, we look forward to providing more details on our life out here strategy for the second half of the decade, including our plans to leverage olivette online and in stores.
Speaker Change: So now let's shift to the quarter.
Speaker Change: For the third quarter, the macro retail environment was in line with our expectations and our customer remained resilient.
Speaker Change: While the overall economy remained strong as evidenced by a 3% Q2 GDP overall retail sales continue to moderately underperform. The primary driver of this underperformance is the continued shift of consumer spend to services as a consequence, we estimate that retail sales growth was nearly flat.
Speaker Change: That in our third quarter.
Speaker Change: It is our estimate that the farm and ranch channel was modestly negative in the quarter and that we continue to be a share gainer I would describe the sentiment of our customer as relatively stable as supported by the recent jobs report and the current unemployment rate of four 1%.
Speaker Change: Since it with prior quarters, our consumer continues to be judicious with their spending focused on innovation newness and needs based products year to date through the third quarter. The macro retail environment is running in line with the subdued expectations that we had as we entered the year.
Speaker Change: Also as expected our team has managed our business exceptionally well correspondingly our sales and profitability to continue to run in the range of our beginning guidance and have allowed us to consistently raise the lower end of our outlook.
Speaker Change: Let's turn to some highlights of our performance for the quarter. We grew net sales by one 6% with comparable store sales down a slight <unk>, 2% diluted EPS was $2.24. Our comparable store sales performance was driven by transaction growth of <unk>, 3% offset by average ticket decline of <unk>, 5%.
Speaker Change: Emergency response as mentioned earlier had no material impact on Q3 comp sales.
As we shared on our last call, we anticipated that the quarter would be in line with our full year guidance as we move through the quarter. Many of the same trends from the first half of the year continued to play out.
Speaker Change: Notably our customer engagement remains strong the investments we've made in our neighbor's club our world class loyalty program, our competitive advantage for us as we continued to see solid growth in customer counts and retention.
Speaker Change: Our neighbor's club comp sales continue to outpace our overall sales growth at the same time, we reached an all time high on our sales penetration and a record membership of more than 37 million members.
Speaker Change: Our neighbor's club retention rate your major markedly consistent as our best customers continue to shop us more frequently and remain extremely low oil.
Speaker Change: Our hometown Heroes program has gained traction with our customers as our store team members have rallied around this unique benefit as an opportunity to engage with veterans and first responders in their local communities.
Speaker Change: Additionally, our new customer data platform has gone live for all stores and digital platforms, which will allow for greater data integrity, a 360 degree view of our customer and deeper personalization.
Speaker Change: Overall, our neighbor's club offerings continue to drive meaningful wins with our members.
Speaker Change: At tractor supply, we continue to invest in customer service as we believe visit a differentiator for us our customers come to us for trusted advice, our commitment to excellence in service and investments in training tools and technology are being recognized by our customers. Our scores continue to run at all time highs with improvements year over year every month for four.
Speaker Change: D consecutive months.
Speaker Change: Turning to our category performance strong positive comps in big ticket items continued for the third quarter, notably in zero turn and front engine riding lawn mowers as well as recreational vehicles.
Speaker Change: This year, our team did a tremendous job, bringing newness and innovation with attractive pricing to these categories and our customers have responded positively to the new product lineup and our investment in inventory as we experienced last quarter, we anticipated our consumable usable edible products would run modestly below the chain average in the third quarter as.
Speaker Change: Deflation weighed on our average unit retail the needs based demand driven nature of our product categories continues to drive unit velocity in this segment of our business.
Speaker Change: Specifically in pet food industry data suggest the category was slightly positive in Q3 consistent with trends through the first part of the year as the category Disinflate and pet ownership trends remained soft.
Speaker Change: Our business in this category, while moderating from historical trends continues to be a share winner in both households, and dollars. Although this is a small number of math at this point a couple of data points on share tractor supply was two times the category growth rate in Q3, and nearly six times added the grocery channel again pointing back that this is.
Speaker Change: Small number map relative to the previously higher growth rates in this category has seen the last few years.
Speaker Change: In the quarter in the pet business, we invested in in stock inventory rates maintain our emphasis on E. D. L. P leveraged our customer service to drive basket building and focused our marketing on the newness and innovation, we've added to our lineup and our most recent all store meeting we invested in training for our nearly 45000 store team members on selling techniques for <unk>.
Speaker Change: Dude and driving treat attachments. We also had a very successful pet appreciation days were remarketed newly introduced brands like our Cana and real Mercer and our exclusive brands such as retriever for health and Mutt nation by Miranda Lambert.
Speaker Change: In equine livestock and poultry feed we continue to gain market share.
Speaker Change: While average unit retails are down mid to high single digits. In these categories, we had unit or pound growth across all species.
Speaker Change: And as large animal counts continued to be pressured we are certainly a share winner with our strong unit performance.
Speaker Change: Much like the first half of the year categories that performed below our comp sales growth were in our discretionary businesses, such as clothing footwear and outdoor living as well as in hard lines products, such as AG fencing and pet kennels.
Speaker Change: Additionally, seasonal businesses, such as heating heating fuel and insulated outerwear were negative.
Speaker Change: Our customer continues to respond to newness and innovation a great example of the strong start to our Halloween decor, which included a differentiator and it expanded assortment such as a six foot rooster skeleton that went viral and another Great example is in wildlife supplies were a destination for Deere corn and have expanded this year into trail cameras in theaters.
Speaker Change: Digital sales continue to outperform a double digit growth. The team has made substantial improvements in search and checkout. We continued to accelerate our digital sales with platforms that set the standard for our customers and rival best in class retail experiences.
Speaker Change: We opened 16, new tractor supply stores in the quarter, bringing our year to date total to 54 are new store productivity continues to perform very well our pipeline for 'twenty five and into 'twenty six remains very robust with significant runway for low risk value, creating organic growth ahead of us.
Speaker Change: As we exited the third quarter, we've achieved some significant milestones in our life out here strategy.
Speaker Change: We now have 45% of our chain and our project fusion lay out in more than 550 garden centers.
Speaker Change: These are capital investments that provide a multi year runway for growth and extend the terminal value of our stores.
Speaker Change: They help us to be more relevant to both our core and new customers, allowing us to garner a greater share of their spending and be the dependable supplier for their lifestyle.
Speaker Change: I commend the team on these investments and results given the scope and scale of these initiatives. It is hard to identify another retailer that has made this substantial investment in their store base in such a short period of time.
Speaker Change: We've also made major investments in our supply chain over the last four years. The team has added 2 million square feet to our DC capacity with a seamless opening of two new distribution centers. These new Dcs have allowed us to service our existing store base, while providing flexibility for future volume and new store growth.
Speaker Change: The addition of 10 mixing centers, bringing our total to 16 has improved our service levels to our stores.
Speaker Change: A new important distribution center has also allowed for greater flexibility to flow our seasonal goods. As a result, we have had a 20% structural improvement in our stem miles and corresponding cost savings. Our DC productivity has also reached strong levels.
Speaker Change: In conclusion, the team is performing admirably short term and long term treated tracks lifestyle, we are efficiently managing the elements within our control and advancing our life out here strategy. As we ended the fourth quarter. We are raising the low end of our guidance for the fiscal 2000 and for sales and earnings to reflect our performance year to date.
Speaker Change: And our outlook for the fourth quarter of the year the.
Speaker Change: The fourth quarter has started out well as we benefited from emergency response sales for Hurricane Helene and Milton both of which were fourth quarter events for us. The sales benefit is reflected in our guidance for the year as we plan for the fourth quarter. We continue to anticipate that our customers remain prudent with our spending as is typical in an election year, we are capitalizing on our strengths and enhancing.
Speaker Change: Our competitive edge in the market with the support of our team members their strong connections with our customers and our successful strategic initiatives. We continue to outpace our competitors now I will turn the call over to Kirk to provide more color on our performance and outlook.
Kirk: Thank you Hal and good morning to everyone on the call.
Kirk: As Hal mentioned, our third quarter top line results were consistent with our expectations and in line with the results in the first half of the year. We saw continued strength in big ticket sales, while our discretionary categories remained pressured our seasonal category performance exclusive of Big ticket was in line with chain average.
Kirk: A modest decline to prior year.
Kirk: Similar to the first half of the year, we saw strong performance in seasonal categories, such as live goods mulches and soils grilling and wildlife supplies. This was offset by softness in AG fencing heating outdoor living and lawn and garden tools.
Kirk: As we expected our Q performance was slightly below the chain average given the retail price deflation and moderating pet category trends the industry is experiencing.
Kirk: Retail price deflation, which was approximately 1% was in line with our expectations. The vast majority of this deflation came from our Q categories.
Speaker Change: As Hal mentioned, we are pleased with our unit movement in Q as we successfully manage through the impact of deflation this quarter and are now starting to lap the beginning of this deflationary cycle from last year.
Speaker Change: Our comp sales growth was relatively consistent across all regions of the chain within a range of down 2% to up modestly the.
Speaker Change: The strongest regional performance was in Texoma due to inventory investments made in big ticket easier compares and better overall weather compared to last year.
Speaker Change: This strength was offset by pressure in the far west Midwest and Commonwealth as the summer heat lingered and the lack of the change of season to fall in these areas.
Speaker Change: As to the cadence of the quarter. All months were also in a relatively tight band of essentially plus or minus 1%.
Speaker Change: Weather was generally a net neutral factor on the third quarter comparable sales results.
Speaker Change: Stream heat persisted throughout the quarter in certain regions with no shift to cooler weather in the northern regions Hurricane Helene and other storms in the last two weeks of the quarter did not produce net incremental sales to Q3 as any pre hurricane demand was more than offset by softer volume in the south as a result of heavy rains and.
Speaker Change: <unk> intense seat and the far west and Midwest regions. We do believe this created a timing shift that has benefited early Q4 sales.
Speaker Change: Moving down to our income statement.
Speaker Change: Our gross margin increased 56 basis points compared to last year.
Speaker Change: We continue to be very pleased with these results, which were driven primarily by ongoing lower transportation costs, along with disciplined product cost management and the continued execution of an everyday low price strategy.
Speaker Change: These improvements were partially offset by the mix impact from strong growth in big ticket categories, which have below chain average margins.
Speaker Change: As a percent of net sales SG&A expenses increased 119 basis points to 27, 8%. This increase was primarily attributable to our planned growth investments, which included the onboarding of a new distribution center and higher depreciation and amortization.
Speaker Change: As well as modest deleverage of our fixed costs given the decline in comparable store sales.
Speaker Change: The new D. C was approximately a 25 basis point headwind on SG&A for the quarter we.
Speaker Change: We were also lapping a one time depreciation expense benefit in the prior year of approximately 35 basis points or $11 million.
Speaker Change: These factors were partially offset by strong productivity and cost control and to a lesser extent, a slight benefit from our ongoing sale leaseback transactions.
Speaker Change: For the quarter operating profit margin was nine 4% diluted EPS was $2 24 compared to $2 33 last year, which included an <unk> benefit from the depreciation change I mentioned earlier.
Turning now to our balance sheet merchandise inventories were $3 1 billion at the end of the third quarter, representing an increase of four 3% in average inventory per store.
Speaker Change: Last quarter, we shared that we have strategically invested in inventory as we look to improve our in stock position in Q and support the strength in our big ticket sales were.
We effectively controlled our inventory as we reduced our average inventory growth per store by more than 50% sequentially from the second quarter, our inventory levels and in stock rates are in excellent shape as we enter the fourth quarter.
Speaker Change: With strong annualized cash flows we continue to maintain a healthy balance sheet with a leverage ratio of around two times, our announced acquisition of ally that fits perfectly with our tuck in M&A strategy and is highly complementary to our business.
Speaker Change: Given that we have significant financial flexibility this acquisition will be financed by our balance sheet.
Speaker Change: Year to date, we have returned more than $760 million of capital to our shareholders through share repurchases and dividends.
Speaker Change: Looking ahead, we are updating our fiscal 2024 guidance to raise the lower end of the range on both the topline and earnings we now anticipate net sales to be in the range of $14 eight $5 billion to $15 billion, we expect comparable store sales to be between flat to up 1%.
Speaker Change: We are forecasting an operating margin rate of 9.8 to 10, 1%. Our net income is expected to be between $1.09 billion to $1.12 billion and we anticipate diluted earnings per share of $10.10 to $10 40 compared to our prior guidance of $10 to $10 40.
Speaker Change: As I see it today, our outlook for the remainder of the year is appropriately described as right down the middle of the fairway at this time, we believe that our EPS will more likely be at the midpoint of the range, allowing for a breath of possibilities that remains quite varied for Q4.
Speaker Change: As Hal mentioned, the fourth quarter is off to a solid start with the most significant sales weeks of the quarter still ahead of US we continue to see the quarter, having a wider range of potential outcomes on comp sales given the easier compares while acknowledging that we could see more volatility in consumer spending.
Speaker Change: On the high end of our outlook range. In addition to the easing compares factors. We considered include a more normalized start to winter.
Speaker Change: Lapping net deflation, which began in the fourth quarter of 2023 and the emergency response activity from the recent hurricanes.
Speaker Change: On the low end of the range dynamics. We contemplated include moderation in big ticket trends potential consumer uncertainty due to the federal election, and a shorter holiday selling season with five less selling days between Thanksgiving and Christmas.
Speaker Change: Our outlook on gross margin SG&A and operating margin remained consistent with past commentary in the fourth quarter, we will be lapping our most difficult gross margin comparison with 129 basis points of expansion in the prior year.
Speaker Change: Where we began to see the benefits from lower transportation costs, and our product cost management initiative.
Speaker Change: As to SG&A, we anticipate better performance than in the third quarter, given our comp sales outlook.
Speaker Change: We continue to forecast a return of capital to our shareholders in the range of $1 billion, reflecting the strength of our cash flow and the confidence we have in the long term.
Speaker Change: In conclusion, we are confident in our ability to deliver on our financial outlook for the year.
Speaker Change: At tractor supply our philosophy is to stay on offense and remain proactive we're enthusiastic about the progress of our life out here strategy, maintaining our industry leadership and expanding our legacy of generating long term value for our shareholders.
Speaker Change: Now I'll turn the call back over to Hal to wrap up.
Thank you Kurt.
Hal: I continue to believe that the structural backdrop remains very attractive for tractor supply we participate in a large attractive fragmented and growing market, where our consistent share gainer and had numerous tailwind, including our life out here of strategic initiatives, our market being a beneficiary of continued net rural migration.
Hal: And high return new store growth opportunities short term and long term track supply is extremely well positioned as the leader in life out here.
Hal: As we look to close the always important fourth quarter, we have exciting plans in place to drive sales. We're in the midst of launching our first hometown heroes days veterans and first responders over index in our communities and track slides uniquely positioned to celebrate those who keep us safe and make life out here possible. The event starts on Saturday with a chain wide event with our store.
Hal: Hosting their community interact with fire trucks, canine units and ambulances as well as food trucks and local farmer markets over the two weeks, we really offering special promotions to our hometown heroes, including 10% off on first responders day and veterans day.
Hal: Hometown Heroes days is the perfect way to drive excitement for this program and for Neighbor's club more broadly. This is a unique event, which will further support and strengthen this important customer segments shopping affinity with tractor supply and as a great way for us to get back to them.
Hal: We have an exceptional lineup of innovative and new products as well as enticing values and fresh offerings for the fourth quarter and Big ticket highlights include Massimo golf carts Liberty safe tactic Cam cameras, EBIT, Ember patio heaters, and Blackstone grills, and our Q business, we're expanding our cat food assortment testing new items such as free.
Hal: <unk> zacks, adding exclusive skus and nutrient to try them equine feed and launching exclusive brand extensions such as for helps shreds and tools were offering notable deals across our tool shop event on brands, such as to Walt and Porter cable and introduced new tailgating truck boxes, just in time for the outdoor season.
Hal: Our garden centers will be transformed to a winter Wonderland with live Christmas trees points that is reis and tractor is seasonal decor.
Hal: And while the holiday merchandising is fine and brings great retail theater our stores what is most important in the fourth quarter to driving our business is the weather and said to this year as always we'll be offering our customers all the things they need to weather the winter, including log splitters snow throwers chain solve them more and if and when the winter comms our customers know they can count.
Hal: On us for these critical supplies to get through the winter as well as products like propane and alternative heating sources with strong inventory levels, we're committed to being the dependable supplier for life out here, our stores are well stocked with a key products our customers depend on for their home and maintenance needs in the winter months.
Hal: I hope you get a chance to get in our stores. This season to see firsthand the great merchandising initiatives, we have in place as I mentioned earlier. Please mark your calendar for our investment community day to be held on the afternoon of Thursday December 5th the team is excited to share our growth strategy for the back half of the decade, we're confident in our ability to navigate the challenges and seize the sing.
Hal: <unk> opportunities we see ahead.
Hal: And with that let's open the call for questions.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: I would like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: If for any reason you would like to remove your question from the queue you May press star two.
Speaker Change: As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Speaker Change: Once again that is star one to queue for questions.
Speaker Change: Our first question comes from the line of Zacks, Adam with Wells Fargo. Your line is now open. Please go ahead.
Hey, good morning. So now are at about 25% of your stores have lawn and garden centers and roughly half of your stores are converted to fusion curious if that historical <unk>.
Speaker Change: Mid single digit lift for the combination is still holding in this environment, which if it is it would mean about 150 basis points to the comp.
Speaker Change: That's right and then how should we think about the outlook for <unk> for lawn and garden fusion and any other store initiatives that you have planned for 25.
Speaker Change: Yeah.
Speaker Change: Hey, Zach Tau Lawton, and good morning, and thanks for joining us on the call.
Speaker Change: Yeah, great milestone for us that we are we've reached with over 1000 stores now in our fusion format and a 500 stores in our Garden center format over 500 stores.
You think back to where we were in August of <unk> I mean October of 2020, when we had zero of each so you know come a long ways and in a short amount of time.
Speaker Change: As we look forward yes.
Speaker Change: Yeah, we feel good both about the pace that we're doing on our remodel program, which is between 175 and 225 stores a year, we've been consistently running at that pace. The last couple of years of course, all new stores are built with the fusion concept and then between half and three quarters of the stores just depend.
Speaker Change: On a variety of factors are receiving the garden center.
Speaker Change: A bit more on the new stores, because we have a little more control of the set up.
Speaker Change: But the same on existing store remodels as well.
Speaker Change: And then yes, we are continued to be very pleased with the performance of fusion.
Speaker Change: Those stores do continue to outpace the broader chain.
Speaker Change: Additionally, they continue to have higher customer scores on key areas of things like store environment clean and uncluttered those sorts of things. They also tend to have a higher female as well as a.
Speaker Change: Younger shopper base as well so all the all the boats quant and call metrics that we've shared historically on fusion continue.
Speaker Change: To occur.
Speaker Change: And we continue to be very pleased with the Garden Center business, while it's been a couple of years now of of tougher spring summer weather. We continue to have strong performance in live goods as we talked about as well as all the other ancillary products that go around it and then this year, we will be using as I can.
Speaker Change: <unk> talked about in our prepared remarks, the fusion set up even to bring even a heightened and more.
Speaker Change: Done.
Speaker Change: Paul execution as well as winter Wonderland.
Speaker Change: Execution.
So all in all a very good progress and it just to wrap it up in my prepared remarks, I talked about the farm and ranch channel being a negative in the kind of low to mid single digits call. It a minus two minus three minus 4% and you look at our overall growth of one 6%.
Speaker Change: And would point to many of our competitive advantages and strategic initiatives. We've been implement that we've been investing in is as the reasons for that share gain and one of the important ones is fusion issue as we just went through the numbers. So I think it's a it's a fusion is doing well it's a major contributor.
Due to our share gain and we're excited to continue the initiatives we turned it back half of the decade.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: I appreciate your time now.
Speaker Change: <unk>.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Chris <unk> with J P. Morgan. Your line is now open. Please go ahead.
Speaker Change: Okay.
Chris: Thanks, and good morning, So just wanted to talk about the weather and the storms. So can you talk about what the storms have done for your business so far.
Speaker Change: Sort of what's embedded into the balance of the quarter. It seems like you're targeting Nevada at roughly 2% comp in in the fourth quarter.
Speaker Change: And then just on the margin front you start to lap that transportation cost tailwind as you talked about does the emergency response create some headwinds in gross margin that we should think about in the fourth quarter and does that DC headwind go away and SG&A. Thank you.
Okay.
Speaker Change: Oh.
Speaker Change: Hey, Chris It's Kurt in regards to I was taking notes on what I think theres about three points in there. There is the question on the storms.
Speaker Change: There is a question regards to the margin on D.
Kurt Barton: D C headwinds and our D C benefit and when does that turn in the emerging response. So let me just try to hit those things in regards to the weather I'll I'll. Just mentioned Q3 first as I had mentioned some of them prepared remarks.
Kurt Barton: Leading up until about mid September just as an example, the business was running at a slight positive comp sales trend and in the back two weeks, while we did see benefit like in emergency response from generators and others at the front end of Hurricane Helene because that's a.
Kurt Barton: That's one of those storms that really straddles both quarters.
Kurt Barton: It was offset or more than offset by.
Kurt Barton: In that particular storm across most of the south and southeast just blanketed with storms and so the.
Kurt Barton: That dampened a bit of the overall.
Kurt Barton: Traffic in the last week or two of September as I mentioned I see that more as a positive because that just defer some of the demand on the business. So both.
Kurt Barton: Both Helene and built in the pad net.
Kurt Barton: For the full year and in Q4, a benefit to US we will have we have so many of the important weeks ahead of us I wont quantify exactly what we expect from these storms, but generally hurricanes have a modest level of benefit on each hurricane and we anticipate that for Q4 the emergency response.
<unk> has a mixture of product some of the bigger ticket generators, lower but has a mix of higher margin. So we do not anticipate the storms emergency response really having a impact on margin in the fourth quarter.
Kurt Barton: And yes, the distribution center been a headwind to SG&A in 2024 does start to cycle out as you'd get about nine to 12 months out it really takes about that much time to be able to even out the inventory and be able to have the other distribution centers.
Kurt Barton: Have a productivity offset to it so we'll share more information on 2025 in regards to that in our January call.
Okay.
Speaker Change: Thank you.
Speaker Change: Next question is from the line of Chuck Grom with Gordon Haskett Research Advisors. Your line is now open. Please go ahead.
Speaker Change: Hey, good morning, Thanks, very much guys.
Speaker Change: In the past on your third quarter calls you've provided some early framework for the out year in terms of store count margin puts and takes or et cetera is there anything we should be mindful of as we build out our models for <unk>.
Speaker Change: For next year, and then along those lines and you have a long term comp algo or 4% to 5%.
Speaker Change: I'm sure you don't want to underlying getting to that next year, but can we think about the puts and takes.
Speaker Change: Over the next 12 to 18 months on the on the comp.
Speaker Change: Yes.
Speaker Change: Hey, Chuck good morning.
Speaker Change: I think on the.
Speaker Change: <unk>.
Speaker Change: Two things I'd say as it relates to two looking out.
Speaker Change: In the next year and beyond what I think we've got a very clear recipe of how we're operating our business right now in terms of this year, we increased from 70, new stores to 80, new stores and we've talked about how we're moving to 90, new stores next year and.
Speaker Change: That is the recipe that we're planning on we have an exciting.
Speaker Change: <unk> portfolio of high return new store opportunities out there we've been challenged by many of our investors to go capture that value sooner.
Speaker Change: And we're kind of moving in that direction, we talked earlier about our consistent remodel approach somewhere between a 175 and 220 stores a year. If you think about that at kind of the average of that at two hunter with 2300 stores roughly right now that means about every 10 years, we're remodeling a store which is.
Speaker Change: I think a nice healthy run rate for a for a retailer.
Speaker Change: And other than that Theres, no real outliers on on how we're thinking about the business as we turn into next year as it relates to our long term comp algorithm I'd point to the same commentary we had on the last call, which as you know, we we look to return to that as quickly as possible.
Speaker Change: And you know the two major factors impacting our are doing so.
Speaker Change: Is inflation deflation.
Speaker Change: And consumer spending nominally between services and goods. If you look at deflation inflation Curt had some comments on that earlier and we start to lap some of that around now.
Speaker Change: And we will continue to lap that over the next six to nine months and then start to.
Speaker Change: Really be through that cycle and.
Speaker Change: We all look at the low price for corn was really middle of this year and we would we've but.
Speaker Change: But we also had the big dip down that we took last year starting in October and then our goods to services.
Speaker Change: The consumer continues to have to shift a number of.
Speaker Change: A good bit of their spend into services right now if you look at whether its rent insurance costs. Those sorts of things I mean services continues to outpace the spend on goods somewhere in the range of six to seven points versus say one to two points on goods and you can see that had a correspondingly into retail sales and as I talked about in the <unk>.
Speaker Change: We think retail sales were slightly positive <unk> and the one ish one 5% range for for Q3 arc arc, our fiscal Q3, and you know our sales were right in line, if not slightly above that at the at the one 6% range. So that's kind of how we see that the the.
Speaker Change: The macro environment shaping up right now and what we see as we turn the corner to 2025.
Speaker Change: Yeah.
Speaker Change: Thanks, Chuck Great. Thanks Al.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Karen short with Melia Research. Your line is now open. Please go ahead.
Karen short: Hey, Thanks, Great to talk to you again and look forward to seeing you in December.
Karen short: So my question is.
Speaker Change: Looking at <unk> when you look at the range.
Speaker Change: Oh come on in sales and gross profit dollars and gross margins.
Speaker Change: It's pretty wide. So wondering if you could address that and then also let him too.
Speaker Change: Commenting on wharf is typically puts and takes.
Speaker Change: <unk> gross margin and SG&A.
Speaker Change: I wanted to address more specifically the longer term algo.
Speaker Change: When you think you can return to that.
Speaker Change: E mail address that at the analyst day, but any preliminary comments would be great.
Yeah, Hey, Karen.
Speaker Change: On the long term algo.
Speaker Change: Maybe hit that one first.
Speaker Change: <unk>.
Speaker Change: Very much as I've said.
Speaker Change: A moment ago look forward to getting back to our long term algo.
Speaker Change: We don't see any internal I.
Speaker Change: Issues in terms of returning to our long term algo or market continues to be incredibly favorable in terms of just the overall optics of our market the strength of our market's attractiveness of our markets our position and competitive differentiation in the market is the strongest it's ever been we think the combination of those two absolutely in normal operate.
Speaker Change: <unk> kind of circumstances.
Lead to our long term algo, we're very confident in our ability to return to that long term algo and the two main.
Speaker Change: Things that we're watching and in the context of returning to that are as I mentioned earlier the goods to services split on overall consumer expenditures and then two how inflation deflation plays out and then that plays into our average ticket as we've talked about in the past our recipe is really a 50% growth based on average ticket 50 per.
Speaker Change: St growth back based on comp transactions.
Speaker Change: The goods and services shift is much more about a transactions type a.
Speaker Change: A headwind and then the inflation deflation, obviously being an average ticket headwind, we do see that but the pressure of the headwinds on both of those dissipate into 2025 I think the question as to what to what degree and over what period of time through 'twenty five.
Speaker Change: And we will share more of that a little bit of that in our Investor Day, and then certainly you'll hear our perspective on that in our Q4 earnings call.
Speaker Change: As it relates to the the the range of outcomes in sales in Q4, I'll address that and then Curt can speak to some of the gross margin ins and outs that are on the range of sales I would start with in the month of October has played out much like what we expected with the with the one addition being the.
Speaker Change: Keynes that Curt talked about previously.
Speaker Change: Those will provide a modest benefit to Q4 as Curt shared in the past, we've seen maybe 2030 basis points of benefit for our hurricane of those sizes.
Speaker Change: Think something to that effect is what's in our guidance and in Q4.
Speaker Change: The other major things that are going to play into Q4, one is going to be weather.
Speaker Change: It needs to get cold for our business to really perform well in Q4, we saw a lot of heating pellets. We saw a lot of heating fire places we saw a lot of insulated outerwear and a lot of other products in our business that are that our cold weather related we've had about a week week and a half of cold weather. This year this quarter, so far when that hit.
Speaker Change: It was very good it's now probably if everybody can think about where they are sitting right now it's very warm right now and so by consequence people are buying heating and insulated outerwear. So we've had a bit of a mixed in October and that's typically what you can expect in October as you look forward into the last two months. It really comes down to the continuation of cold weather do we get in India.
Speaker Change: Or do we get it in December last year, we got cold weather and neither month. The second comes down to holiday shopping we've got five less days. This year historically customers have been able to compress for the most part but the question will be just how does the calendar play out this year and does that occur.
Speaker Change: With Christmas being on a Wednesday, he got a unique setup, where online is able to play much more strongly.
Speaker Change: Matt you said on that final Super weekend than it has in the past and then of course, you've got the federal election, and we do expect that consumer spending leading up to and in fact federal election will be dampened, both just with distraction as well as a little bit of just wait and see mode and so then you got to see how does that pick back up but at the end.
Speaker Change: Today as I said on my prepared remarks, while the holiday sales are important to our business the make or break for our business is the is how we support our customers with what their needs are particularly during the cooler weather season. So that's what's most.
Speaker Change: Most indicative will be most indicative of our of our sales in Q4, and I'll turn it over to Kirk for some comments on margin, yes, Karen Here's how we look at the gross margin and the SG&A in the fourth quarter and I'd start by saying the all year. The business has been remarkably consistent and and so I'll refer to Q.
Speaker Change: Four versus some of the highlights of Q3, we had 56 basis points of benefit in Q3 as it was really the last quarter before we start to lap the significant benefit we started to see last year in fourth quarter on both transportation and our cost savings or cost cutting initiatives and so we will have only a modest level.
Speaker Change: Of benefit remaining on transportation and cost in fourth quarter.
Speaker Change: That will for the most part likely be offset by product mix. So gross margin is relatively give or take a bit more flattish year over year in Q4, and then on the SG&A side.
<unk>.
Speaker Change: What are the puts and takes are similar other than in Q3, we were cycling 35 basis points benefit of a onetime depreciation in.
Speaker Change: In Q4, we'll still have roughly 2025 basis points of pressure on the new distribution center we.
Speaker Change: Paid a little bit more leverage on on.
Speaker Change: On the comp sales as we anticipate positive comp sales for the fourth quarter. So you really see yourself moving in that in about a $50 $60 65 basis points of pressure from SG&A in the fourth quarter.
Speaker Change: As it is a it does not have as much of the one times as say Q3 does so net that does put operating margin.
Speaker Change: In a and.
Speaker Change: <unk> declined from year over year, but that's always been in our expectations for fourth quarter as we were lapping the strongest performance year over year.
Speaker Change: Hopefully the spring womens Wranglers care, sorry will.
Speaker Change: We'll make a note of that.
Speaker Change: [laughter].
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Michael Lasser with UBS. Your line is now open. Please go ahead.
Michael Lasser: Good morning. Thank you so much for taking my question Michael.
Michael Lasser: My question is.
Michael Lasser: One of the key debates is kin tractor supply get back to the historic levels of 1% to 2% growth in traffic. It seems like what you're suggesting is the ability to get back to that level of traffic growth on a consistent basis is going to be macro depend.
Michael Lasser: And where it will be influenced by the shift from services to good.
Michael Lasser: Yes.
Speaker Change: Correct, you're being more needs based retailer that has more consistent trends in areas like.
Michael Lasser: Consumables Q.
Michael Lasser: She has held up relatively well through what specifically do you see as.
Michael Lasser: Influencing the assortment or category performance that will improve in a more robust economic environment, we're in but robust retail environment to drive that traffic growth.
And as you see it a little bit less gross margin expansion because of the some of the drivers from this year stayed would you be willing to sacrifice some gross margin in order to drive the traffic growth. Thank you very much.
Michael Lasser: Yeah.
Speaker Change: Hey, Michael Thanks for the question.
Speaker Change: First of all if I, maybe I'll just step back if.
Michael Lasser: If I look at our.
Michael Lasser: Our growth over the last five years.
Michael Lasser: Post Covid, which I think is the second highest in all all of retail a major retailers out there.
Michael Lasser: The key to that has been strengthened both average ticket and comp transactions. So it's it's not comp transaction growth has not only been a highlight of tracks five for the last 30 years 20 years, but also in the last five and I would say of most retailers out there where one of the few that have been that have <unk>.
Michael Lasser: Strong positive like double digit positive comp transaction growth over a multi five year five year period, So I'd put our transaction growth over the last five years up against anyone.
Michael Lasser: Second of all I think if you look at retail right now overall transaction growth and in retail is either is either flat to negative in general right now.
Michael Lasser: And so when you look at our modestly positive comp transactions you combine that with overall transactions given our new store growth at our comp transactions I would argue we're in the top quartile right now.
Michael Lasser: Of retail in terms of.
Michael Lasser: Overall transactions, so I look at it very pleased with how we've grown our transaction less five years, how we've held those transactions and even in the context of this environment that we're in how were modestly positive comping transactions and then with our new stores, having strong double a couple of points.
Michael Lasser: Transaction growth.
Michael Lasser: And then as I look forward I think it really does all come down to the goods to services shift and then our customers, having a little bit more money to spend on items in our stores and that's going to make its way into that extra half the transaction a year to them and it's also going to make its way a little bit into the <unk>.
Michael Lasser: <unk> per transaction, but I think what we're what we're seeing on our comp transactions being muted a bit is very comparable to what's happening in all all the rest of retail and I certainly believe as retail moderates back to its normal levels rising tides will lift all boats and those of us that continue to have a positive <unk>.
Michael Lasser: Transactions, we'll we'll continue to see stronger positive comp transactions is that as that occurs.
Speaker Change: Maybe I'll just I'll leave I'll leave it at that thanks, Michael.
Michael Lasser: Yeah.
Michael Lasser: Thank you very much.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Steven Forbes with Guggenheim Partners. Your line is now open. Please go ahead.
Speaker Change: Good morning, this is Julio <unk> on for Steve.
Speaker Change: Curious if you could expand on how the 37 million Neighbor's club members informed decision acquire out of it.
Speaker Change: Sure.
Speaker Change: I guess, how many neighbor's club using online solution for their pet pharmacy needs and any other any other color you can help contextualize the opportunity there would be great. Thank you.
Speaker Change: Yeah. Thanks, we are really excited about the acquisition of Ala that thing. It's a great example of kind of a tuck in acquisition they've been a partner to us for a few years now as our pet Rx provider.
Speaker Change: What we've observed over those few years has been best in class in terms of.
Speaker Change: Both their nationwide prescription licensing capabilities their distribution centers and their ability to get products shipped out in 24 hours their ability to get prescriptions approved and partner with the veterinarians.
Speaker Change: They're excellent website their strong management team and importantly, also excellent financial condition. So we feel all around it's a great business one that we're excited and thrilled to welcome into the tractor supply family.
Speaker Change: And we look forward to bringing that feature of a VAT of low cost affordable.
Speaker Change: Wide array of prescription prescriptions for pets and animals to our customers. As you said, we had 37 million plus members of our Neighbor's Club program. It is a highly engaged membership program. One that we continue to add value in and our customers continue to further and further become loyal around and.
Speaker Change: And we think the combination of all of that with our Neighbor's club is going to just be.
Speaker Change: Great mix and we look forward to over the next few years.
Speaker Change: Getting the deal done approved.
Speaker Change: Closed and then starting to bring that to our neighbor's club members and the ways that we've brought the additional features or benefits that we have today I'm very excited about it and more to come at our investment community day on that topic on December five.
Speaker Change: Great and then just a quick follow up.
Speaker Change: Kurt following two years of flattish comps has there been any change to the building blocks behind that 10 10.7 to 10.6 long term EBIT margin guidance realizing productivity plays a role but are there any margin factors. There that are maybe structurally higher today than where you originally framed it.
Speaker Change: No really there's not anything significant in our algorithm to a 10, one to a 10.6 and recognizing that we're going to continue to invest for the long term.
Last two years to comp sales puts pressure on our ability to leverage the SG&A and it's really been the difference. The team has just done a phenomenal job, though finding ways to offset that and there are number of cases on productivity in both our stores and our logistics distribution team that have just done a phenomenal job find.
<unk> new opportunities for productivity. So the team has done well to be able to maintain at 10 plus operating margin. The last couple of years. So the algorithm is still intact and our house mentioned all the different reasons of our expectations of being able to get back to the long term algo and that just gives us a better opportunity.
Speaker Change: <unk> to avoid the pressures of SG&A, So I feel very confident with the the long term algo still at this point.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Peter Benedict with Baird. Your line is now open. Please go ahead.
Speaker Change: Hey, good morning, guys. Thanks, Thanks for taking the question maybe one.
Speaker Change: Seth.
Just around the big ticket strength.
Speaker Change: Certainly continues to be unique relative to most of retail you talked about some of the.
Speaker Change: The nation I think some sharp pricing on these items I'm just curious if you can expand on it any any other factors, helping here I don't know you use a private credit has been.
Speaker Change: We've been playing a role and how do you guys think about like replacement cycles for some of those bigger ticket categories does that potentially starting to kick in here just kind of curious you can expand on that a little bit. Thank you.
Speaker Change: Yeah, Hey, Peter Thanks for the question.
Speaker Change: Just overall big ticket as we mentioned we definitely are very pleased with the performance there as you know.
Speaker Change: Q3 really was much in line with the strength of the performance as we exited Q2, and we really were able to maintain that.
Speaker Change: The third quarter it was our third consecutive quarter of big ticket growth.
Speaker Change: And as you mentioned in some of the categories that we've had where there'd be like zero turns front engine riders erect vehicles and a couple of other categories.
Speaker Change: I would point to a couple of things that.
Speaker Change: At a really differentiated us a little bit from the market I believe.
Speaker Change: I would start with just the product lineup itself I think the merchants have done a fantastic job of lines structure in these categories where.
Speaker Change: Where we are offering quality high value products across multiple brands, bringing innovation, we're working on differentiation with exclusive features and they're really built and tailored to our customer right in their customer needs.
Speaker Change: Kind of a large animal or the large acre ownership across a lot of our a lot of our.
Speaker Change: Customers are the next thing I'd say is just some of the strategic inventory investments that Curt mentioned earlier as well when we exited Q2, we made sure. We saw some of the strength here, we're looking at the weather patterns and we placed inventory in those in these categories to make sure that we can continue to maintain that as we went after it.
Speaker Change: And then the last thing I would just say is private label credit card, our private label credit card momentum has been very strong.
Speaker Change: With that our supplier base are partnering with us to continue to drive that and when you just kind of combine those things together what would be the the lineup itself the value quality proposition designing programs are specific to the lifestyle of our customer and then coupling that with things like our offerings both with prime.
Speaker Change: Global credit cards, and leveraging our neighbor's club, it's really a combination of all those together those are we playing on it seems to build in 2025 right now.
Speaker Change: I think youll see that will continue to expand on those things and really excited about the lineup as we as we move into next year.
Speaker Change: Thank you.
Speaker Change: The next question is from the line of Peter Keith with Piper Sandler.
Your line is now open. Please go ahead.
Speaker Change: Hi, Thanks, good morning, everyone. Congrats.
Speaker Change: Congrats on the continued market share gains.
Peter Keith: I wanted to ask about technology. So how you had referenced some greater data integrity.
Peter Keith: And personalization with Neighbor's club I was wondering how you're leveraging technology and AI to provide those solutions and anything that we might think about going into next year that that could perhaps provide some type of sales benefit.
Peter Keith: Yeah.
Speaker Change: Yes, good morning, Peter and Ned Thanks for the question.
Speaker Change: I'd say, we are infusing machine learning data science AI.
Speaker Change: Across the business.
Speaker Change: Both in our own analytics frameworks.
Speaker Change: Also in leveraging our provider software providers capabilities.
Speaker Change: Whether that's in things like reflects us on inventory management.
Speaker Change: Or whether that's with our new CDP in terms of Custer.
Speaker Change: Customer insights and personalization.
Speaker Change: And then I'm really proud that we're also building solutions.
Speaker Change: Internally to.
Speaker Change: To drive as I've shared earlier kind of better customer service in our stores and whether that's through things like tractor vision.
Speaker Change: Where we're upgrading our camera software and hardware technologies.
To be able to leverage our cameras to drive improved customer service through a variety of use cases, whether that's at the register on the apron in our garden centers, whether that's through our Hey, Goo Rah.
Speaker Change: Got a tool that we have that all of our team members are able to use to ask to get further knowledge inside of our stores when they are dealing with customers or when they just want to educate themselves, but we have a broad variety of things that we're using all really to drive improved customer service productivity with our team also in our distribution centers were due.
That we are using our vision technology to be able to look at the packing of trucks to look at left also trucks to watch and to use it to manage the yard so whether it's operationally in our D C. Whether it's for customer service in our stores or whether it's in our merchants are marketing use it for behind the scenes analytics and personalization, we're leveraging data.
Speaker Change: Science and machine learning and AI across the board. Thanks, Peter for the question.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Operator, we'll have time for one more question.
Speaker Change: Thank you Mary Lynne.
Speaker Change: Question comes from the line of Scot Ciccarelli with terrorist your line is now open. Please go ahead.
Scot Ciccarelli: Good morning, guys. Thanks for squeezing me in first.
Scot Ciccarelli: Clarification I think it might have been on chucks question are you expecting this year same SKU deflation to flip to same SKU inflation and 25, and then kind of related to that are you able to quantify to any degree the pressure on your business from the decline in farm income that we've seen because of commodity deflation.
Scot Ciccarelli: Hey, Scott this is Kurt on on deflation for the first nine months of the year. It's generally ran in line with our plan and expectations, we have seen a bit of a additional.
Scot Ciccarelli: Additional step down modest on some of the commodities.
Scot Ciccarelli: I expect Q4 to have a similar but slightly less diffley.
Scot Ciccarelli: Deflationary impact in Q3, but it really it really looks like today, if you're trying to peg Wednesday or a point of neutrality that that's been pumped it out.
Scot Ciccarelli: Anywhere from three to six months and you will have a much better view in January on what the expectation is on 2025. All indication is is we are shifting out of a deflationary environment towards an inflationary one the timing of when that conversion flips.
Scot Ciccarelli: We first thought it would be late 2020 for early 2025 that could be.
Speaker Change: Q1, Q2 of next year.
Speaker Change: And then in regards to your second question remind me again that point.
Speaker Change: Just farm income broadly has been under pressure because of commodity deflation and just trying to figure out have you guys made will quantify the impact on your business. Thanks, Yes for years, we've looked at the farm income level in strong years in soft years in it.
Speaker Change: It can have either an indirect slight halo.
Speaker Change: Or overhang on there and we really don't see much of a correlation to that and as you know I'll just point out our our majority of our customer are not professional farmers, it's not their number one source of income.
Speaker Change: And if anything we look sometimes at the overall market area and if there's an indirect benefit to that market area and how the the non farmers may spend at this point, we're not really seeing anything that points to that in our business today.
Speaker Change: Yeah.
Alright, well that will get us through the top of the hour and wrap up our Q&A for today as always we're available for any follow up calls please be on the lookout for the invitation to our investment community day in December that al referenced earlier and please reach out if you need any further information we look forward to the event and thank you for your interest in tractor supply.
Speaker Change: Hi.
Speaker Change: Okay.
Speaker Change: This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Extra supply.
Speaker Change: Yeah.