Tractor Supply Company — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss First Quarter 2024 Results. [Operator Instructions]. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded.
Thank you, Alissa, and good morning, everyone. Thanks for taking the time to join us today. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session.
Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. 2024 is off to a solid start with first quarter results in line with our expectations. I would like to thank the Tractor Supply team for their ongoing commitment to each other and our customers. As evidenced by our continuation of record high customer satisfaction scores, the team is always there for our customers as the dependable supplier [ for ] life out here.
Thank you, Hal, and hello to everyone on the call. Let me start by building on to Hal's comments about the quarter. Our first quarter performance was right down the middle when compared to our expectations on both the top line and the bottom line. Regarding the cadence of comp sales for the quarter, we started out with a very strong January as the month features some spans of brutal cold.
Thanks, Kurt. Tractor Supply has a proven business model that has been resilient over many business cycles. As a company, we have numerous levers to continue to gain market share and numerous levers to effectively control expenses. Our Life Out Here strategic priorities are on track and delivering on our expectations. We continue to see fantastic opportunities for growth ahead. In store and online, we're ready for the spring and summer season. Customers are responding positively to our new product assortments from Weber, Toro, YETI and more. We have several product test and learn initiatives in store and online, like Martha Stewart and Eddie Bauer.
[Operator Instructions] The first question comes from the line of Seth Sigman with Barclays.
I wanted to talk about the big ticket improvement. Obviously, that's a nice change from what we've seen. If I recall, when you talk about big ticket, you're looking at transactions over a certain size. Can you try to separate for us the difference between sales from high price point products, so you mentioned riding lawn mowers. Have you actually seen comps in those specific high-ticket categories go positive? Or is it more basket building, you're seeing the benefit from more units per transaction as part of the spring activity?
Seth, thanks for the question. We were very pleased with our big ticket performance in Q1. I'll highlight 2 trends and then provide some examples in the context of each of those. The first one I'll highlight was in January, where we had the nice cold weather come through the country. And as a consequence of that, had some nice big ticket sales that go along with that as we often do, whether that's things like snow throwers or log splitters. And to your point, the cutoff that we use for big ticket is $350 price point. .
The next question comes from the line of Simeon Gutman with Morgan Stanley.
My question is also on big ticket, and Hal maybe I can put it in this way, if you look at it relative to 2019, and I think we're trying to assess whether there's like a bottoming and a turn that's happening versus seasonal. I think your comments around the March volume sounds like there may be a turn. But if we compare it to 2019 or 2020, granted it's hard to understand what baseline is normal versus not, but looking at it that perspective, and then -- and if there's anything about these big ticket trends that informs you about the cadence of the year. It doesn't sound like it, and it sounds like the cadence has always been pretty static across the quarters, but anything that you think about maybe big ticket strength continuing into the second half that maybe you didn't plan for?
Simeon. I'll reiterate a couple of the comments that I have on the previous question, just to tee up the discussion. So on big ticket, as it relates to spring, we saw nice big ticket ramp in absolute dollars and comps as we exited Q1 and those trends have continued into Q2, and we're very pleased with our big ticket spring sales. As we look at a multiyear history on that, if you recall, last year, we commented that our big ticket categories were back to 2019 levels. So I would articulate the growth that we're seeing now is kind of consistent and growth that would be on top of a normal -- go back to 2019 trend. So we feel like it's a healthy growth, compounding growth and very much in the kind of stable on top of 2019 levels.
The next question comes from the line of Seth Basham with Wedbush.
I'm just trying to understand your inflation and deflation outlook a little bit more as we see a rise in oil prices here, do you think that could lead to any material inflation as we move through the year?
Seth, good morning. As it relates to inflation, the -- probably the most important point to take away from us is that we've lapped our 2 most difficult quarters as it relates to comping on top of inflation. As we remarked at the end of our Q4 call, we were lapping 11% inflation from Q3 of 2022. And then we're lapping substantial inflation from last year in Q1 of 2023. So as we look ahead, we have significantly less lapping issues.
Yes. And Seth, this is Kurt. Just to tie that back to our guidance. As we entered 2024, I have said that we could see and are planning for 2024 from an inflation, deflation, relatively neutral, plus or minus a point. And we expect as we're starting to lap some of those inflation quarters last year, Q2 may have a similar impact as we saw in Q1. But then if you were to play out the current environment today, it would really put us in an expectation for the year sort of that neutral standpoint. And we'll know more on how the back half looks after Q2, but still pretty much playing right in line with our guidance.
The next question comes from the line of Chris Horvers with JPMorgan.
I wanted to expand on the big ticket commentary and focus on what's happening with spring. Can you contrast what you saw in March in markets where spring broke? Where did it break? Where it hasn't yet broken? And how you're thinking about what's April telling you about the business so far in the quarter?
Yes. Chris, we think where the sun has been out and conditions have been right, we've been very pleased with spring. Our big ticket sales are strong, our Live Goods are selling well. Our Garden Centers are performing, categories like grilling, other categories like fertilizer and grass seed, we're seeing real strength across the board when the sun is -- where the sun is out and conditions are right. Interestingly, in the first half -- in the first quarter, conditions were stronger, really more in the Northeast and the Midwest, as there was a decent bit of cloudiness and precipitation through the Southeast and over into Texas throughout the back of the last couple of weeks of the quarter. And that's, interestingly, kind of continue to bid into the second quarter.
The next question comes from the line of Steven Forbes with Guggenheim Partners.
I think you noted 34 million members in the program, which is surprised to the upside here a little bit, at least as per our expectations. So I was wondering if you could maybe expand on the changes you made to the program. Is there anything sort of notable in terms of acquisition, maybe converting those non-Neighbor's Club members into members or repeat or retention trends that changed how you're thinking about that program membership evolving over time? And in any way to sort of size up what the true opportunity is for the 20% of sales that are coming from non-members today?
We're very pleased with the continued progress we're making in our Neighbor's Club platform. And clearly, our customers are engaging in it and using it, finding value in it and it's a key retention driver and behavior driver for our business. And it's certainly become an integral part of how we go to market and a key area of competitive advantage for us.
The next question comes from the line of Steven Zaccone with Citigroup.
I wanted to ask on gross margin. So given the guidance for the second quarter that it should be similar in terms of expansion. Can you just talk through the back half of the year because you start to face some tougher comparisons. Just talk through some of the expectations in the back half?
Yes, Steven, this is Kurt. The gross margin drivers are very similar throughout the year, but yet, as I mentioned in some of my remarks, it has a bit of a difference in impact by quarter. So our biggest opportunity and biggest growth driver in gross margin will be, throughout the year, our transportation and freight. And in transportation and freight, it's both transitory or rate-related, where we are coming off of those higher costs, particularly in the ocean freight, but also the more sustainable is the structural where the new improvements in the supply chain, the distribution centers are driving down our stem miles. And even as we open up our tenth distribution center, we'll reoptimize the lanes and reduce stem miles, be able to optimize by finding the lowest better rates, and that happened with our Navarre, Ohio DC last year.
The next question comes from the line of Michael Lasser with UBS.
Can you give us a sense for how the pet food category has been performing as of late? Have you been surprised that there's been general softness in these trends? And how has Tractor Supply's market share compared this quarter to the last couple of quarters, especially as it seems like the company has been taking more aggressive steps whether it's price investments, kinks to the loyalty program.
Michael, I'll comment first on pet. First off, I'll just step back on pet and say it's an incredibly attractive market. It's one that outperformed kind of the broader retail market for decades. It's been a long-term source of growth for us. And I think that the slowdown in that industry this year has been well documented, with that slowdown being driven really by 2 macro drivers. The first is moderation in pet ownership. And the second is stagnant pricing, right? That's an industry that's historically been able to claw 2 or 3 points of price increase every year, given the substantial price increases that have occurred in that category over the last 2 years, basically, that category is flat in pricing for the year.
The next question comes from the line of Scot Ciccarelli with Truist.
I know it's still a, somewhat, limited data set, but you talked about seeing good results from your Garden Centers where spring has broken. I know you guys have previously provided a framework for what you expect to happen. But can you provide any kind of real-time updates in terms of what you're seeing on actual results?
Two things on that. So we've gotten so much better at sorting our Garden Centers, staffing our Garden Centers, putting technology at play to drive our Garden Centers would encourage everyone on the call, if you hadn't had a chance to go visit one of our Garden Centers in the spring to do so. We've got things this year like our Plant of the Month, as I mentioned on the call, which are Knockout Roses right now. We're deploying our Tractor Vision software into all the Garden Center stores to optimize and improve customer service. Our grower network now that we're in year 3 in many of these stores are now really lined up to produce tailored product for us. And we're seeing those results in our live goods sales broadly across our -- the country [ for us ], even in areas where conditions have been ideal, we're seeing good results there. .
Is there a way to quantify the comp lift, though, Hal?
Yes. So as we exit Q2, we'll have a much better sense of that, as you all will certainly recall, our -- over the last year, we said our Garden Centers were not performing at our expectations, because of the suboptimal spring conditions that we operated in last year, but that we had high expectations for this year, noted it is the year of the Garden Center, we're performing at those expectations. But again, 6, 7 weeks into spring with another 6, 7, 8 strong weeks to go. So more to come on that. But I think the short answer, I would say is they're performing at our expectations kind of season-to-date.
The next question comes from the line of Peter Benedict with Baird.
Just curious, I believe the Orscheln stores are earning the comp base in the second quarter. Just curious how we should think about that? Anything that those stores are cycling from a year ago standpoint that we need to think about? And kind of related to that or maybe a little unrelated, I was curious if Seth would talk a little more about some of the merchandising, innovation, newness that's in the store and maybe what he's most excited about as we look out over the balance of the year?
Yes, Peter, this is Kurt. I'll start with your first part of your question and then hand it over to Seth to address the back end part of it. Orscheln is running right in line with our expectation. The first quarter, for instance, is still lapping a lot of the liquidation in Orscheln. And then in second quarter, as we transition, you begin to get outside of a lot of that liquidation. So as we converted into our point of sale, it's somewhat in line with the time frame of having all of the Tractor Supply inventory in the Tractor Supply system. So we begin to lap a more normal time frame, particularly in the back half of the year.
Thanks, Peter, for the question. So I would just say, if we look out to the back half, I'd speak a little bit more broadly even outside of Orscheln, and even go back to kind of last quarter's call and how really talked about this being the most innovation that we've seen in our stores since the start of the pandemic with all the reset activity, newness, partnership with our supplier base, how their supply chains are kind of back to normal levels.
We've have maybe one more question just so that we're sure we end at the top of the [ board ] hour.
Final question comes from the line of Peter Keith with Piper Sandler.
Nice results, by the way. So I wanted to kind of just ask around the broader economy. Housing remains quite sluggish. So how do you see the economic backdrop in general for the rural economies where you guys operate versus maybe the broader U.S. economy. We've been housing into that discussion would be helpful as well. I guess is rural outperforming? Or do you think performing more in line with the broader U.S.?
Peter, thanks for the question. To start by the highest level, rural is very -- I think rural America is doing very well right now. We see our highest performance across our store base in rural America right now. If you look at the national statistics, you see net urban migration out -- kind of more migration coming out of cities than in. And you see that migration going to rural America. I think there's a variety of drivers for that, but that trend benefits us.
All right, everyone, that will wrap up our call today. I'm around and we're available for calls. And if you need anything, please don't hesitate to reach out, and we look forward to talking to you at the end of our second quarter. So thank you.
This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.