The operator introduces the conference call for Tractor Supply Company's Third Quarter 2023 Results and provides instructions for the question-and-answer session. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations, introduces the speakers and reminds participants of the Safe Harbor Provisions. A supplemental slide presentation is available on the company's website. The company acknowledges the risks and uncertainties involved in their forward-looking statements.

Hal Lawton, CEO of Tractor Supply, thanks his team for their hard work and expresses confidence in the company's strong performance. However, the third quarter was more challenging than expected due to unfavorable weather conditions and customers being cautious with their spending. The company remains focused on their strategic initiatives and will continue to monitor the impact of the evolving macro environment on customer spending.

In the third quarter, the company's sales were impacted by unfavorable weather conditions, particularly extreme heat and drought in Texa-homa and excessive rainfall in other areas. The absence of emergency response events and cooler fall temperatures also contributed to the sales shortfall. Additionally, the company believes that their customers are experiencing strain due to various factors.

In the third quarter, the company saw a 4.3% growth in net sales, with a slight decrease in comparable sales. Factors such as inflation, higher credit card balances, and the shift from goods to services have affected the business. However, the company remains committed to the "out-here" lifestyle and has seen stable and growing numbers of active, reactivated, and new customers. E-commerce sales also saw strong growth, with the Buy Online, Deliver from Store Program up over 80%. The company's consumable, usable, and edible products continue to outperform overall sales, with categories such as dry dog food, cat food, and lubricants showing strength.

Despite declines in certain categories and products, our CUE advantage remains strong and drives customer traffic. Our big ticket categories and fall-winter products saw declines due to warm weather, but we continue to gain share online and in-store. Our loyalty program, Neighbor's Club, represents a significant portion of our sales and our high value customers continue to grow. The launch of Neighbor's Club at Petsense has also been successful in driving cross-shopping and increasing our share of wallets with customers. Trends of increased credit usage and value-seeking behavior among lower income customers have continued into this quarter.

Tractor Supply has achieved record-high customer satisfaction scores and continues to invest in their team to provide excellent customer service. They have also made progress in their Life Out Here Strategy, with 35% of stores now in the Project Fusion Layout and over 420 locations undergoing Garden Centers transformation. The Orscheln Farm and Home acquisition is on track, with 50 stores converted to the Tractor Supply brand. The company has opened 51 new stores and completed the sale of the Orscheln Store Support Center and Distribution Center. The real estate team has successfully executed a sale lease-back transaction and has 35 fee development sites in progress. Tractor Supply is updating their sales and earnings guidance for 2023 based on their strong performance in the third quarter and outlook for the fourth quarter.

The speaker reflects on the success of the company despite challenges such as a global pandemic, supply chain disruptions, changing consumer trends, and rising costs. They highlight the company's growth in sales, market share, and earnings over the past four years, as well as their focus on the "Out Here" lifestyle and their customers' needs. They also address the recent softness in sales, attributing it to temporary factors such as weather and consumer spending patterns, and express confidence in the company's long-term sustainability and competitive advantages. The next speaker, Kurt, will discuss the quarterly results and the impact of weather on the company's performance.

In 2023, the weather has been unfavorable for the business, with a warm January, late spring, and hot and dry summer. However, the company's execution and initiatives have been successful in driving top-line growth. Despite softness in retail spending, customer engagement remains strong. In the third quarter, sales were below expectations due to below trend seasonal performance and weak summer demand. However, the company remains committed to being a dependable supplier and saw solid growth in some regions. Comparable store sales were flat, with growth in core categories offset by reduced demand for seasonal categories.

In the third quarter, the company saw a slight decrease in average comp ticket, but an increase in average unit retail. However, this growth was offset by declines in big ticket and seasonal categories, as well as softer sales in discretionary and impulse items. Gross profit increased due to strong product margins and lower transportation costs. The loyalty program, Neighbors Club, helped provide value to customers. Gross margin also improved due to lower big ticket sales. Selling, general, and administrative expenses increased due to planned growth investments and higher medical claims.

The company has made adjustments to its benefits program and completed a planned sale lease back of 10 store locations. They also saw a one-time benefit to depreciation expense due to a reassessment of lease terms for certain remodeled stores. The operations team did well in scaling core variable costs to sales performance, with strong execution and best-in-class customer satisfaction scores. 85% of core SG&A dollar growth represents investments in strategic growth initiatives. Operating profit margin improved by 62 basis points. Merchandise inventories remained flat compared to the previous year and are being closely managed, with improved in-stock rates and inventory shrink.

The company has strong cash flow and a healthy balance sheet with low debt and attractive rates. The fiscal 2023 financial outlook includes net sales of $14.5-14.6 billion, flat comp store sales, and an operating margin rate of 10.1-10.2%. Net income is expected to be $1.1-1.11 billion, with diluted EPS of $10-10.10. The company will continue its fixed fee real estate strategy and anticipates a decrease in fourth quarter comp store sales due to consumer spending and weather patterns. Core categories are expected to perform well, but seasonal and discretionary items may be affected.

The company is reminding investors about the impact of the 53rd week and their plans for retail price increases. They expect continued gross margin expansion but also anticipate pressure from an unfavorable product mix. The Orscheln stores will be included in the comp calculation in 2024. The company is still finalizing their sales outlook for 2024, but anticipate less benefit from inflation and challenging operating environment. They plan to invest in strategic priorities in 2024 with a net capital spending in the 600s.

Tractor Supply is pleased with the progress of their Life Out Here strategy and will be opening a new distribution center in 2024. They plan to execute 15 store sale leaseback transactions and open 80 new Tractor Supply stores and 10-15 Petsense locations. They are confident in their ability to adapt to the changing retail environment and will continue to focus on needs-based, demand-driven products. As the fall and winter season approaches, they are prepared with new products and a focus on value for their customers.

The company offers a wide selection of products at affordable prices and is committed to keeping them in stock. They are currently showcasing fall and Halloween decor, and have expanded their lineup to include trendy and unique items. They also offer a variety of products for outdoor activities and have recently added Yeti products to their stores. As the holiday season approaches, they will have a variety of live goods and unique decor items available. They also offer a range of gifts, including fun and unique items like a toy lawnmower. This year's calendar is favorable, with 31 days between Thanksgiving and Christmas.

Tractor Supply is anticipating strong sales during the holiday season, with a robust playbook and plans for 80 new stores in 2024. They are also implementing artificial intelligence, including a knowledge tool called ‘Hey Gura,’ to enhance customer service. The company has a track record of growth and high expectations for performance, and believes current trends are temporary and related to the economic environment.

The speaker thanks the Tractor Supply team for their hard work during the busy retail period and then opens the lines for questions. In response to a question about inflation, Kurt Barton explains that while inflation is slowing down, it is not turning into deflation. He mentions that some categories, such as pet food, are still experiencing inflation while others, like bird and livestock feed, are seeing deflation. Overall, the company expects inflation to stabilize and become less of a factor in average ticket prices in the future.

The team is focused on managing change and inflation, and has a history of performing well in different economic environments. They will share more information on this in the fourth quarter call. If there is deflation, it may result in gross margin expansion. The company plans to spend around $600 million on capital expenditures next year, with a majority of that going towards supply chain investments.

Kurt Barton, CEO of a company, discusses the efficient investments in their stores, such as Fusion and Garden Centers, which have helped to reduce costs and improve their debt. He also mentions the investments made in integrating and remodeling Orscheln stores. When asked about the impact of these investments on SG&A, Barton explains that 85% of the growth in SG&A is due to these investments. However, he is confident in the team's ability to manage the core SG&A in the event of flat comps in the future. He also highlights their agility in scaling to the appropriate level of volume in Q3. Supply chain is one area that has helped keep core SG&A growth low in the past few quarters.

The company has seen improvements in their supply chain and distribution centers, resulting in increased productivity and cost savings. They plan to continue this trend in the future, while also managing operating expenses and maintaining their long-term targets. The analyst asks about the company's discretionary and seasonal business, and the company clarifies that their seasonal business is also considered discretionary. They also mention that sales in the fall and early winter have been slow, but it is unclear if these are lost sales or just delayed.

Hal Lawton, CEO of a retail company, addresses the impact of seasonal weather on their business. He notes that while their discretionary sales have been slightly negative, their CUE business has performed well with significant share gains. He also mentions that their fall and winter business is more demand-driven and needs-based, with products like wood pellets and propane being top sellers during colder weather. However, due to warmer temperatures this year, the demand for these products has been low, resulting in lower sales.

The company is seeing strong sales in outdoor projects and wildlife categories, but they are not large enough to offset the demand-driven categories. The company also sells a lot of insulated outerwear, but once the cold weather is gone, those sales are lost. The company is being cautious in their guidance for the fourth quarter due to a warm November last year and the potential impact of El Nino. They are also facing tough comparisons to a strong storm from last year. These seasonal categories are non-discretionary, but their success depends on weather conditions.

The Tractor Supply Company has seen a significant increase in gross margin, which has raised questions about its sustainability. However, the company's CEO, Kurt Barton, believes that this increased profitability is sustainable due to factors such as leveraging the company's size and scale, structural changes in the supply chain, and a decrease in transportation costs. While there may be some pressure on product mix as the company continues to grow, Barton is confident that the gross margin will remain stable in the long term.

The company's gross margin has been impacted by transitioning from promotional to EDLP and Neighbor's Clubs, as well as the efforts of the fast team. They expect to continue to expand gross margin next year, despite potential macro challenges. It is too early to predict the exact level of comps for next year, but the company has a track record of maintaining positive comps.

Hal Lawton adds to Kurt's remarks about the company's commitment to their long-term operating margin guidance and their ability to control operating expenses. He also mentions the underlying strength of the business and their confidence in its foundation. A question is asked about the guidance for the fourth quarter, and Kurt responds that there will likely be a decline in both transactions and average ticket due to last year's winter storm and potential weather challenges this year.

The speaker responds to a question about the frequency of deliveries from distribution centers to stores. They mention that they have been focused on this area for the past few years, increasing the number of mixing centers and expanding their distribution centers. They currently have over 500-600 stores receiving shipments twice a week, with the remaining stores receiving once a week. They are constantly looking for ways to improve in-stock rates, which they say are the best they have been since the pandemic began. They also mention that their inventory growth is under control and their shrink numbers are lower than previous years. Overall, they feel confident about their inventory management.

The speaker discusses the company's efforts to improve inventory performance and mentions that their in stock rates are the best they've been since the pandemic. They also address a question about the company's projected negative comps in the fourth quarter and mention that while weather is a factor, they also see a trend of consumers being more selective in their spending. They also mention that the winter season has not started off well for them due to a strong El Nino pattern.

The company is being cautious in their outlook for the fourth quarter due to lapping a strong storm from last year and the current negative trend in spending. However, they have seen active customer growth, new customer growth, and reactivated customer growth in the third quarter, along with all-time high customer satisfaction scores and strong market share gains. The company's value proposition is to be a dependable supplier for life, and while they are seeing record levels of customers in their stores, there has been a slight decrease in spending on discretionary items per basket.

The speaker discusses consistent themes in consumer spending and a shift towards services over goods, with discretionary retail businesses facing challenges. They also mention a deviation from expectations due to seasonal weather. The call concludes and the operator ends the conference.

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