The operator introduces the conference call for Tractor Supply Company's Fourth Quarter and Fiscal Year 2023 Results. The call is being recorded and participants are asked to limit themselves to one question. The host, Mary Winn Pilkington, introduces the CEO and CFO for prepared remarks, followed by a question-and-answer session. A year-end review video is shown and a supplemental slide presentation is available on the company's website. The host also mentions the safe harbor provisions and potential risks and uncertainties.

The company believes its forward-looking statements are reasonable but cannot guarantee their accuracy. Actual results may differ from expectations due to important risk factors. The information discussed is only accurate as of the date discussed and may not remain operative in the future. The call has been extended to allow for more Q&A and participants are asked to limit themselves to one question. Tractor Supply has been a growth company for 85 years and focuses on helping customers live Life Out Here. They have adapted to changing times and have a successful business model.

The past year has been challenging for Tractor Supply, with unfavorable weather, rising interest rates, and inflation affecting consumer spending. However, the company remains committed to investing for growth and gaining market share. The team has shown resilience and commitment in navigating these challenges, and the company remains focused on its mission and values. Adverse weather conditions had a significant impact on sales, and consumer spending on goods has declined as people shift back to spending on services. Despite these challenges, Tractor Supply remains dedicated to transforming the company.

Since implementing the Life Out Here strategy in 2020, Tractor Supply has made significant investments in growth initiatives, such as new and remodeled stores, distribution centers, and technology upgrades. They have also improved their operating capabilities and seen a mid single-digit comp lift benefit from their Fusion remodel. The company plans to have over 450 garden centers by 2024, which have been attracting new customers and providing a multiyear comp benefit. The opening of a new distribution center has led to increased productivity and savings, and the implementation of a new wage scale has reduced employee turnover.

The company achieved record sales and customer satisfaction scores, with solid market share gains and a successful digital business. In the fourth quarter, comparable store sales declined, but operating profit margin expanded. The company returned over $1 billion to shareholders and has raised its new store growth target to 3,000 stores. New capabilities have been implemented to support this growth.

Tractor Supply's real estate capabilities are expected to generate cost savings and lower rents for applicable stores. The company opened 70 new Tractor Supply stores and 13 Petsense stores in 2023, and successfully converted 81 Orscheln stores to the Tractor Supply brand. Total customer count increased, with positive growth in active and reactivated customers. Neighbor's Club added 4 million new customers and represented 77% of sales. The re-branding of Petsense and expansion of Neighbor's Club to Petsense is resonating with customers, with Neighbor's Club membership representing nearly 70% of sales at Petsense.

In 2023, Petsense has shown impressive cross-shopping rates with Tractor Supply and is approaching $225 million in sales and 200 store milestone. The company's financial services and supply chain continue to be competitive advantages. They have opened two new distribution centers and have 15 mixing centers for high-velocity replenishment. In 2023, they moved nearly £8.5 billion of products through their supply chain and are the largest seller of packed feeding food in the US. The company plans to continue building on their progress in 2024, using the same playbook as the last few years. Their biggest challenge is prioritizing their numerous growth opportunities.

The paragraph discusses the financial outlook for Tractor Supply in 2024, which is expected to be a continuation of ongoing share gains offset by macroeconomic headwinds. The company remains confident in its long-term targets and expects to return to them when macro conditions improve. The assumptions for the outlook include cautious consumer spending, pressure on average ticket due to inflation, and continued market share gains through strategic initiatives. The company is unique in its market and tailored to the "Out Here" lifestyle, with a customer base that is passionate about the brand. The speaker, Kurt Barton, also reiterates the company's confidence in its long-term opportunities and addresses two items before reviewing the quarter.

The company experienced a decline in net sales and diluted EPS due to the absence of a 53rd fiscal week in 2022. The unseasonably warm winter also had a negative impact on sales, estimated to be around 400 basis points. This was expected, as the company had a strong comp performance in the prior year due to a winter storm. Adjusting for the weather impact, the comp sales performance was in line with the previous quarter. October and November had similar comp sales, but December saw a decline due to the absence of the winter storm. On a normalized basis, all months had a slight decline in comp sales.

In the fourth quarter, the company saw solid performance in all product categories with above chain average comps. Discretionary categories had a mid single-digit decline, while big ticket sales improved over the previous five quarters. The company also had a strong holiday season, with the highest sales day ever recorded. Throughout the year, there was a slowdown in retail price inflation, with a slight net deflation in Q4. However, the company successfully managed through this and expects to see an increase in raw material inputs in 2023. Gross margin also improved in the fourth quarter due to lower transportation rates and efficiencies in the supply chain.

The company's commitment to everyday low prices and disciplined product cost management has resulted in favorable financial performance. However, there was an unfavorable product mix shift due to a higher mix of lower-margin products. This, along with planned growth investments and higher medical claims, led to an increase in SG&A expenses. The company also saw a decrease in incentive compensation and a benefit from the sale-leaseback program. Despite these factors, operating margin improved and diluted EPS remained flat compared to the previous year. The company's new store pipeline is strong and new store sales and profitability are exceeding historical averages. However, the addition of Orscheln stores to non-comp sales makes it difficult to accurately report new store productivity.

The company's stores have been profitable, cash flow positive, and have a quick payback period. The company is cautiously approaching their financial outlook for 2024 due to potential economic slowdown. They expect a modest decline in comparable store sales, but anticipate gross margin expansion through supply chain efficiencies and cost management. However, this may be offset by SG&A deleverage. The company has a history of successfully navigating economic cycles.

In 2023, depreciation and amortization is expected to increase, and the opening of a new distribution center will put pressure on operating margin. However, this will be partially offset by the lapping of higher medical benefits and the ongoing sale-leaseback program. The company forecasts an operating margin of 9.7% to 10.1%, interest expense of $50 million to $55 million, and a healthy leverage ratio. Diluted EPS is expected to be between $9.85 and $10.50, and net capital expenditures are forecast to be $625 million to $700 million.

Tractor Supply Company is forecasting gross capital expenditures of $850 million to $925 million in 2024, with plans to open 80 new stores and 10-15 Petsense by Tractor Supply stores. They also plan to return cash to shareholders through dividends and share repurchases. The company expects comp sales to be consistent throughout the year, with positive comp transactions. EPS growth is expected to be slightly higher in the first half of the year. Lower transportation costs will benefit results in the first half, while start-up costs for a new distribution center will pressure SG&A in the second and third quarters.

The third quarter will be the toughest earnings comparison due to several factors, including a decline in operating margin and EPS. The addition of Orscheln stores to the comp store calculation will begin in the second quarter. The first quarter of last year was challenging due to warm weather and retail price inflation, but the company is anticipating positive comp sales for the first quarter. Tractor Supply is committed to its strategic priorities and investing for long-term opportunities while maintaining a focused approach. The company is gaining market share and has strong customer metrics.

The company's strategic priorities are resonating with customers, leading to strong brand equity and customer satisfaction. The team is engaged and committed to being an employer of choice. The company's Life Out Here strategy is driving results, particularly in Project Fusion, Garden Centers, Neighbor's Club, and Digital initiatives. By 2024, the company plans to have Project Fusion layouts in 50% of its stores, which have been successful in driving sales and customer satisfaction. The company also plans to focus on its Garden Centers in 2024 and will implement a new live goods center prototype in many locations.

The company has developed a new prototype for their garden centers that requires less capital investment and allows for greater value creation. They also have plans to capitalize on their loyalty program and enhance their digital presence to drive transactions and improve the customer experience.

Tractor Supply is leveraging AI technology to improve search and redesign their checkout process. They are also introducing a new homepage focused on personalization and utilizing data from their Neighbor's Club. These improvements are aimed at attracting a younger customer base and driving future growth. The company's strategic priorities are resonating with customers and leading to strong returns. The focus remains on providing value and innovation to customers, with a commitment to everyday low prices. Tractor Supply has a number of new and exclusive product launches planned for this year, including Toro HAVOC Zero-Turn Mower, YETI and Solo Stove, Martha Stewart and Eddie Bauer, Priefert cattle fencing, Weber Grill, MuttNation, and Triumph Equine Feed. These products will be available both in-store and online. Additionally, Tractor Supply has added the Toro Havoc zero-turn mower to their lineup, which is exclusive to their stores and has a competitive price point. This will further solidify their position as a destination for zero-turn mowers.

Tractor Supply offers a unique and exclusive selection of trailers over $1,000, designed to support their customers' lifestyle. They have successfully expanded programs like YETI and Solo Stove to more stores and will be piloting the introduction of Weber Grills in 2024. They are also relaunching their MuttNation partnership and introducing new brands in the pet wellness category. Tractor Supply continues to focus on taking market share by introducing new national brands in various categories.

Tractor Supply is expanding their deer wildlife sets and offering new exclusive brands to cater to their customers' hobbies. They are also launching their annual Chick Days event, which has become a significant part of their business. The event attracts both existing and new customers, and serves as a gateway for customers to explore other categories such as gardening. Overall, Tractor Supply continues to be a trusted source for all their customers' needs.

Tractor Supply's purpose is to serve those who live life out in rural areas and this drives meaning in their daily work. The future of the company is bright and they thank their team members, customers, and communities for their dedication and trust. The company is consistent, reliable, and sustainable, leading to earnings growth. In the Q4, sales were down 4% due to a mild season compared to an Arctic storm the previous year. The company expects to see growth in the long-term through internal drivers like lawn and garden and Neighbor's Club.

The speaker discusses the unseasonably warm months of October and November, which had negative low single-digit impact on the company's sales. However, the fourth quarter still performed consistently with the previous quarter, with the consumable or needs-based business remaining strong. The company has confidence in its customers' loyalty and growth in active customers and Neighbor's Club. In terms of future outlook, the company is not factoring in weather as a potential benefit in 2024 and is not concerned about competition from big box retailers expanding their farm and ranch assortment.

In the paragraph, Hal Lawton discusses the company's approach to weather and its potential impact on sales. He explains that they have chosen to focus on other factors such as market share gains, consumer spending, and disinflation for their guidance and range of outcomes. He also mentions that competitive activity has been stable and rational since the start of COVID-19 and that the company continues to take share in the market. The next question from Kate McShane is about SG&A and how the company is thinking about wage growth and incentive compensation for 2024, given the flat comp for the year. Kurt Barton responds by saying that the company will continue to monitor wage growth and that incentive comp will be influenced by the company's performance in 2023.

Kurt Barton, speaking to Kate, discusses the company's expectations for wage rate growth and incentive compensation. He also addresses a question about new store productivity in 2024, stating that the company expects it to be around 60%, but that they have consistently seen strong productivity in the past. He directs listeners to his earlier remarks for more details.

The company plans to open 80 new stores in 2024, with a target of 65-70% new store productivity within 4-5 years. They are confident about the potential of these new stores, similar to their expectations for 2023. The EBIT margin is expected to fluctuate by about 15 basis points for every point of comp move, and the company has factored in various scenarios into their guidance range. However, the EBIT margin movement is not linear within the sales range. Factors such as gross margin and a deflationary environment can affect the margin rate.

The speaker responds to a question about the company's Garden Centers and their impact on the company's performance. They mention that the Garden Centers have a significant impact on the company's comp lift and that they expect this trend to continue as they add more Garden Centers each year. They also mention other strategic initiatives that are driving consumer spending and share of wallet. They then pass the question to another speaker who provides more details about the performance of the Garden Centers.

Tractor Supply is optimistic about their garden center initiative, which has an addressable market of over $20 billion. They have been focused on building scale and expanding their grower base to 450 garden centers for the upcoming spring season. They believe this is the year that their efforts will pay off and they will be able to drive significant sales. They also plan to leverage this footprint throughout the year, not just during the spring season. The recent conversion of Orscheln stores has gone well and Tractor Supply is confident in the sales productivity and margins of these locations compared to their legacy stores. They expect to see benefits to their comps in 2024 and 2025 from these stores.

In the first six to nine months after the acquisition, all stores were converted to the Tractor Supply brand. This caused some disruption, but now all stores are engaged and selling Tractor Supply products. The company expects to see a similar maturation curve as new stores, and anticipates a comp benefit from these 81 stores. The company believes there is room for growth in these stores and is excited to bring in new customers. In 2024 and 2025, the company expects to see a benefit from the maturation of these stores. In the Q&A portion, the company was asked about input cost relief for 2024, specifically transportation and commodity costs, and how this will affect gross margin. The company also addressed the possibility of inviting more competition due to its higher gross margin compared to 2019.

The speaker discusses two factors that have shifted expenses from gross margin to SG&A, including the field activity support team and the transformation of the supply chain. These structural changes have resulted in a 150 basis point difference in gross margin rate. Looking ahead, the speaker attributes the remaining difference to the company's scale and ability to negotiate with vendors.

In the fourth quarter, the company expects continued benefits in the freight market and has been working closely with vendors to reduce costs. They have also maintained strong pricing and do not see any encroachment from competition. In the companion animal category, they remain excited about the opportunity and have a track record of managing through multiple cycles.

The speaker discusses how companion animal sales have been a strong driver for the company and expects to continue taking market share in the future. They also mention that approximately 75% of their customers own a pet and they see this as a competitive advantage. The speaker also addresses concerns about deflation and states that they expect a neutral deflation for the year.

In response to a question about commodity deflation and its impact on the company, the speaker explains that most of the deflation occurred in 2023 and is already reflected in their retail prices. They do not anticipate a significant impact on their business and believe it is adequately reflected in their guidance. They also note that this situation is different from 2015, as it is more structural in nature. In regards to big ticket, they expect it to be positive in 2024.

Kurt affirms that big ticket sales should be in line with their overall guidance range for the year, with flat to slightly favorable comps. This is due to the easier compares from the previous two years and new innovations coming in 2024. Seth mentions some of these innovations, such as exclusive products and a private label credit card, that will drive big ticket sales.

Hal Lawton, CEO of Macy's, stated that retail in general is rebounding and they expect to see an increase in big ticket purchases as they approach November and December. They expect all quarters to be consistent with their range and the first quarter to be positive, around 1%. While they saw some benefit from the weather in January, March will be the determining month for their first quarter comps. Macy's is excited about their spring setup and the increase in innovation from their vendors after supply chain disruptions.

The company's in-stock rates and spring sets are back to the expected level, and they are optimistic about Q1. They are focused on having a win in March. The Q&A session has ended and anyone with follow-up questions can reach out. The call is concluded.

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