Tractor Supply Company is hosting a conference call to discuss their Second Quarter 2023 results. Hal Lawton, Kurt Barton, and John Ordus will be present for the prepared remarks, while Seth Estep will join for the Q&A session. The company has made a supplemental slide presentation available on their website. The call may contain forward-looking statements that are subject to certain risks and uncertainties.

Tractor Supply Company's second quarter was impacted by a shift in consumer spending and abnormal seasonal trends. Despite this, the company is still expecting 2023 to be a good year as their customers are healthy and they are significantly outperforming total U.S. retail sales growth. Mary Winn asked participants to limit themselves to one question and reminded them that they can follow-up after the call. Hal Lawton then took over the call.

The second quarter of the year saw a 7.2% increase in net sales with comparable store sales up 2.5%. Transactions were up 1.8% and ticket growth was 0.6%. June was a topsy-turvy month, but customer base remained healthy with active customer counts stable and growing. Customer satisfaction scores were breaking records and improving year-over-year, with customer demographics becoming younger and more female.

Tractor Supply's Neighbor's Club saw a record 31 million members in the quarter, with retention rates at all-time highs. Consumers are increasing their usage of credit, seeking out value, and buying more often but less per trip. Year-round categories saw mid-single-digit growth, while consumable, usable, and edible categories saw low-double-digit growth. The Spring Chick Days event was one of the largest ever, with double-digit growth in the poultry category. However, seasonal categories were flat and below expectations due to choppy environmental conditions across their markets.

Tractor Supply experienced a softer seasonal performance in June which had a material impact on their second quarter performance, leading to a miss versus expectations. Big ticket sales were down in the high single digits, zero turns, generators, and recreational vehicles saw the most significant pressure, and they opened 17 new Tractor Supply stores and three Petsense by Tractor Supply stores. The integration of Orscheln is on track and the customer response has been positive. Tractor Supply is confident in their long-term growth outlook due to numerous structural tailwinds and competitive advantages. They have made remarkable progress on the transformation of Tractor Supply since they started their Life Out Here strategy in 2020.

The five pillars of the company's strategy are to deliver legendary customer experiences, advance one tractor capabilities, operate the tractor way, go the country mile for the team, and generate healthy shareholder returns. Initiatives supporting this strategy include Project Fusion Store remodels, Garden Center transformation, Neighbor's Club loyalty program, and the expansion of omni-channel capabilities. Project Fusion Store layout is now in more than 700 stores and is increasing space productivity and improving the customer shopping experience. Garden Centers have been expanded with lawn and garden products, and the Neighbor's Club program has been re-launched with a points-based structure. These projects are delivering material sales lifts, improved customer satisfaction, and higher levels of new customer acquisition.

Tractor Supply has seen a 60% increase in membership since their re-launch and have implemented a number of new capabilities to further enhance value for their members. This includes a new state-of-the-art distribution center in Navarre, Ohio, an increased count of mixing centers, and the implementation of engineered labor standards. Additionally, they are raising their new store growth target to 3,000 stores and implementing new capabilities to enable owned development of new store builds, which is expected to generate significant construction cost savings and lower rents.

Tractor Supply is announcing plans to periodically execute sale leaseback transactions of their 117 stores and build 90 stores per year starting in 2025. The company has installed new leadership and talent in their real estate team to reevaluate their store growth plans and leverage their real estate capital structure. This new approach will allow them to realize cost savings and be more nimble. They anticipate accelerating their new store growth from 70 stores this year to 90 stores in 2025 and beyond, with strong new store productivity metrics and profitable stores in year one.

Tractor Supply has developed a new sales forecasting model and machine learning model to increase their store growth from 2,800 to 3,000 stores in the U.S. by 2025. The real estate team is ramping up their pipeline to open 90 new stores by 2025 and the pipeline is currently at its best level since before the pandemic. The team is also building new capabilities to optimize their real estate portfolio, such as self-development of stores and sale lease back programs, which could result in a 10-20% estimated rent reduction. The sale lease back program will be used on both existing owned stores and new store openings.

In the second quarter of 2022, the company experienced strong CUE growth, flattish seasonal performance, and a decline in big ticket sales. The strongest regions were the Far West, South Atlantic, and Texas, Oklahoma, while the Northeast and Midwest experienced pressure from seasonal trends. The average ticket was impacted by price inflation, softness in big ticket, and declines in seasonal categories.

In the second quarter of the year, the company experienced softer sales in discretionary and impulse add-on items, but customers were shopping more frequently with fewer items in each basket. Gross profit increased 9.3% and gross margin increased 69 basis points due to lower transportation costs and efficiencies from a new distribution center. Selling, general and administrative expenses increased 77 basis points due to growth investments, higher depreciation and amortization, and higher medical claims due to new benefit offerings. Adjustments have been made to the program and it is not expected to be a headwind in 2024.

Tractor Supply is committed to creating long-term value for its shareholders, and is doing so by strategically issuing long-term debt and managing its real estate portfolio. The company has issued $750 million in long-term debt, resulting in a weighted average fixed rate of 3.4%, and is under contract to close on 10 stores in the third quarter, resulting in a net after-tax benefit of $0.20 per share. SG&A growth year-over-year is mainly due to investments in new stores, Orscheln Farm and Home, and a new DC. Inventory per store has decreased 1.7% and the company has a leverage ratio of 2x.

The company is expecting to gain net profits from the sale of existing company-owned stores and reinvesting a portion of the money back into the store infrastructure. This will lead to lower new store rent and an acceleration of new store growth to capture market share. The company is forecasting low-single-digit comp sales and mid to high-single-digit earnings growth for 2023, but is more cautious about consumer discretionary spending in the second half of the year.

The company is expecting net sales of $14.8 billion to $14.9 billion, comp store sales growth of 1.3% to 2.5%, operating margin rate of 10.2% to 10.3%, net income of $1.12 billion to $1.15 billion, and diluted EPS of $10.20 to $10.40. The net after-tax benefit of about $0.20 per share from the sale leaseback is expected to be recognized in Q3 and Q4. Capital expenditures for the year are expected to be in the range of $800 million to $850 million, which is an increase from the prior range due to the move to own development for select new store growth. Comp sales are expected to be stronger in the third quarter than the fourth quarter, with both quarters achieving comp sales growth. The guidance reflects ongoing gross margin expansion in the second half of the year.

Tractor Supply has experienced remarkable growth over the past few years, largely due to their EDLP philosophy and shift from print to digital marketing. Their Life Out Here strategy has helped to lock-in new customers and substantiate their market share gains. They anticipate continued benefit from transportation and the new distribution center, but some pressure from unfavorable product mix. For the third quarter, their SG&A performance is expected to be in line with the second quarter, while the fourth quarter may experience a modest deleverage. They anticipate ending the year in a strong position for the future.

Tractor Supply is celebrating its 85th anniversary and has a proven ability to manage through dynamic environments. The company has advantages that are getting stronger, and their real estate strategy is furthering their competitive advantages. They see meaningful growth potential in their markets and have a tremendous runway growth ahead of them. Karen Short asked about their comp being 1-2% above GDP and their peak investment period for 2024.

Hal Lawton explains that the current economic period is an aberration and that their growth algorithm should return to 1-2% above GDP growth. He also notes that their peak investment year will be 2023 and that the sale leaseback will add a small amount to their EPS each year. Lastly, he mentions that by taking ownership of the build, they can improve their cost structure while still expecting their stores to remain productive over the long term.

Kurt Barton discussed the real estate model of their asset light model, which involves the sale and leaseback of existing stores. He stated that owning stores does not fit into this model, but that there is pent-up value in the owned stores which can be used to fuel new stores. He believes that this strategy will lead to greater long-term total shareholder return. He also noted that the second quarter saw a 2.5 comp with 500 basis points of like-for-like price inflation, likely due to demand that was shifted from the first quarter.

Hal Lawton discussed the sales from Q1 not shifting into Q2, comp transactions improving throughout the quarter and continuing into Q3, AUR moderating throughout the year, and UPT being near the bottom of units per transaction. He concluded that this is why they provided their guidance, being as conservative as possible on the low end and realistic as possible on the high end.

Hal Lawton addresses the concern that Tractor Supply Co. may give back the gains it has made over the past three years in sales per store. He states that the company has a healthy customer base, with positive comp transactions and share gains. He also points out that Tractor Supply Co. is a different business than other companies that may have experienced a pandemic benefit, and that they do not see any elements of reversion in their customer base or business.

Hal Lawton reported that the company had record high new customers in 2020 and 2021, and the re-launch of the Neighbor's Club program in April of 2021 was well-timed and helped to retain customers. Retention rates have continued to increase and Neighbor's Club members outcompete the overall customer base, with 75% of sales coming from Neighbor's Club members. The top tier of members has also grown to a record number.

The company is expecting to see similar operating margins in the second half of the year as seen in the second quarter, due to strong performance from everyday low pricing and the return of transitory transportation costs that were absorbed in the past two years. Seth Sigman asked about reinvesting any margin improvement, which Kurt Barton left for Seth to answer.

Kurt discussed the expected performance of SG&A in the third and fourth quarter of the year, noting that in the fourth quarter there will be a modest level of deleverage due to the lapping of storm-related costs, the Orscheln acquisition transition, and higher incentive compensation. Seth then discussed Tractor Supply's EDLP focus and stated that there is no need for any meaningful reinvestment as their inventory position is strong and favorable.

Hal Lawton explains that the company's comp growth has been split 50:50 between average ticket and comp transactions for the past 30 years. During the pandemic, there have been periods of inflation and UPT increases, but overall it has remained at 50:50.

Peter expects the mix of UPT and AUR to level out by the end of the year, and the average ticket to remain at an okay level due to an increase in comp transactions and active customers. He also mentions that customers are shopping more frequently, and that Petco is gaining significant share in categories like pet food, where they are viewed as a value play. The mix is expected to evolve throughout the year, but it should revert back to its historical 50-50 blend over time.

Peter Keith inquired about the new real estate strategy and its effects on the company's long-term goals, specifically the sales growth target and EPS growth target. Kurt Barton responded that the new strategy will give the company a longer runway and will bolster the higher end of the long-term algorithm, though any adjustments to the long-term guidance will not be made until the fourth quarter earnings report. Brian Nagel then asked about any geographic differences in the weakening trends of the seasonal sales.

Hal Lawton discussed the seasonal business in the months of April, May, and June. April and May were on expectations and June saw significant underperformance due to various environmental conditions. However, there were bright spots in the 10 days leading up to Memorial Day, the Southeast, Texas, and the Far West when there was good weather. The Midwest went straight from winter to drought and the Northeast had 21 days of rain in June.

Hal Lawton discussed the success of the Neighbor's Club program, which has added 15 million members in the last few years. He went on to mention that they are looking to make the program better by tailoring it to certain customer characteristics, offering smaller rewards, and possibly adding more tiers.

Kurt Barton answered a question from Steven Zaccone about the change in sales guidance, explaining that while weather was a factor in Q2, there was also a pullback on discretionary items. He also noted that they plan for base weather in the second half, not more favorable weather, and that Q4 would be a different seasonal period of time.

The company is taking a reasonable and prudent approach to their seasonal categories, acknowledging the consumer behavior that has been seen in the first half of the year and factoring in the strong winter storm that occurred in the fourth quarter. They are not expecting a shift in consumer behavior or a strong shift in favorable weather, and their guidance is reasonable. Mary Winn Pilkington concluded the call, saying she is available for any questions or follow-up and that they look forward to speaking to everyone at their Q3 earnings call in October.

The speaker wishes the reader a pleasant day.

This summary was generated with AI and may contain some inaccuracies.