Tractor Supply Q2 2022 Earnings Results & Report

Tractor Supply EPS Results

• Actual EPS: $0.7060
• Consensus EPS: $0.7060
• Beat/Miss: Met Expectations
• One Year Ago EPS: $0.6380
• EPS Beat Rate: 3 of last 8 quarters

Tractor Supply Revenue Results

• Actual Revenue: $3.90 billion
• Expected Revenue: $3.89 billion
• Beat/Miss: Beat by +$9.65 million
• YoY Revenue Growth: +8.40%

Tractor Supply (NASDAQ:TSCO) (NASDAQ:TSCO) is a specialty retailer serving the needs of farmers, ranchers, hobby farmers, pet owners, gardeners and other rural lifestyle customers. The company operates under the Tractor Supply banner and focuses on products that support everyday rural living, land maintenance and animal care.

Its merchandise includes livestock and pet feed, animal health and care products, fencing, hardware, tools, power equipment, lawn and garden supplies, work clothing, footwear, automotive products and seasonal goods. Tractor Supply also offers services such as equipment repair and other conveniences designed for rural and suburban customers. Through its Petsense business, the company provides pet products and services, including supplies for dogs, cats and other companion animals.

Tractor Supply traces its origins to 1938, when it began as a mail-order business supplying tractor parts. It has since developed into one of the largest rural lifestyle retailers in the United States, serving customers through stores and digital channels across much of the country. The company is headquartered in Brentwood, Tennessee, and its operations are led by a management team focused on expanding its rural retail and pet-care businesses.

Tractor Supply Q2 2022 Earnings Call Transcript

Key Takeaways

• Tractor Supply delivered record Q2 results with net sales up 8.4%, comparable store sales +5.5% and diluted EPS rising 10.7% to $3.53.
• The company raised its FY2022 outlook, now expecting net sales of $13.95 billion–$14.05 billion, comps of 5.2%–5.8%, and diluted EPS of $9.48–$9.60.
• Gross margin contracted by 24 bps to 35.5% amid broad‐based product cost inflation and higher transportation expenses, with margin pressure set to persist into H2.
• Digital channels had a record e-commerce quarter, growing about 7%, while Neighbor’s Club membership reached 26 million with stronger retention and spending.
• Inventory per store was up ~21% year-over-year due to inflation but remains well-positioned, supported by capacity investments including a new distribution center and over 400 Project Fusion store conversions.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss first quarter 2022 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. We ask that all participants limit themselves to one question and return to the queue for additional questions. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. As a reminder, this call is being recorded. 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. Mary Winn, please go ahead.

[Mary Winn Pilkington, SVP of Investor and Public Relations at Tractor Supply Company]

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today, and I hope everyone's having a great summer. On the call today are Hal Lawton, our CEO, 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 Q&A session. Please note that we've made supplemental slide presentation available on our website to accompany today's earnings release. Now let me reference the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risk and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control.

[Mary Winn Pilkington, SVP of Investor and Public Relations at Tractor Supply Company]

Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or 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 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 in this call. We have shortened our prepared remarks to allow more time for Q&A.

[Mary Winn Pilkington, SVP of Investor and Public Relations at Tractor Supply Company]

Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have an additional question, please feel free to get back in the queue. We appreciate your cooperation, and 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 the call over to Hal.

[Hal Lawton, President and CEO at Tractor Supply Company]

Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. The second quarter was another strong quarter for Tractor Supply as we delivered record results on both sales and earnings. I would like to begin by thanking the 48,000-plus Tractor Supply team members for once again delivering impressive performance through strong execution and for their dedication to serving Life Out Here. Our business continues to be incredibly stable and resilient. This quarter, the team did an excellent job managing inflationary impacts, operating through continued supply chain disruption and navigating the evolving consumer demand. We continue to win with our customers and took substantial share in the quarter. We enter the back half of the year with our inventory on plan and excellent visibility into our expense base. We remain very confident in our growth outlook and our Life Out Here strategy.

[Hal Lawton, President and CEO at Tractor Supply Company]

Structural tailwinds continue to benefit us, including rural revitalization, homesteading, self-reliance, and pet ownership. Our brand, loyalty program, digital capabilities, supply chain, and 2,000+ stores create significant enduring advantages for us. Our strategic initiatives are all on track and reaching scale. Now let's turn to review of the business for the second quarter of 2022. In many ways, the second quarter was a mirror image of Q1. The quarter started off slow as April was pressured from cycling stimulus and the delayed start of spring. May was our strongest month. June was solid and modestly above the quarter's comp in spite of record-breaking heat, which has continued into Q3 and will limit the sales upside in the current quarter. We grew net sales by 8.4% with comparable store sales up 5.5%.

[Hal Lawton, President and CEO at Tractor Supply Company]

Our comparable store sales growth was driven by strong ticket growth of 7.5%, offset by a decline in transactions of 2%. We experienced positive comp sales growth for each of the last 9 weeks of the quarter. Comp transactions were positive for the months of May and June combined. Diluted EPS was $3.53, an increase of 10.7%. Year-round categories were up high single digits, indicative of our demand-driven, needs-based business model. The impressive results in our consumable, usable, and edible categories continued this quarter as the business performed more than 3 times our overall sales growth rate. This is the fifth consecutive quarter of CUE outperforming our overall results. Our seasonal performance was below the company average but positive.

[Hal Lawton, President and CEO at Tractor Supply Company]

Big ticket was flat to last year and exceeded our expectations given that we were cycling strong performance last year driven by stimulus and ideal weather for the spring and summer season. We had strength in zero-turn mowers, chicken coops, battery-operated outdoor power equipment, and grills, with the biggest declines coming from front-engine mowers, log splitters, and walk-behind mowers. Our Neighbor's Club reached a record 26 million members in the quarter. Our Neighbor's Club members are comping at a faster rate than our overall performance. We are seeing strong growth and industry-leading retention in our high-value customers. Our team members' commitment to providing legendary service continues to differentiate the shopping experience within our stores. As a proof point, our customers' overall satisfaction scores were at the highest level ever for a second quarter. We are successfully scaling our store real estate and remodel projects.

[Hal Lawton, President and CEO at Tractor Supply Company]

To date, we've had over 400 stores in the Project Fusion format. We have over 230 stores with garden centers, more than 100 stores with store-within-a-store Carhartt, and over 600 stores with a pet wash. These are all improvements that make Tractor Supply a more contemporary, relevant, farm and ranch-oriented retailer. These improvements are allowing us to gain share with new and existing customers. Given our strong performance in the first half of the year, we're raising our financial outlook for fiscal 2022. Although the operating environment may be different than we anticipated as we entered the year, we're pleased with how we're navigating the various circumstances and remain very confident in the significant opportunities ahead of us. Tractor Supply is a unique, highly differentiated retailer. Our needs-based business model has a track record of growing through varying economic conditions.

[Hal Lawton, President and CEO at Tractor Supply Company]

Our customers and team members are passionate about the Out Here lifestyle, and they prioritize it. Our customers over-index as homeowners, landowners, animal owners, and pet owners. We believe that the structural macro trends that I mentioned earlier are long-term and sustainable. As the market leader, we have substantial advantages. Additionally, our investments in our Life Out Here strategy are reaching critical mass and furthering our competitive advantage. Tractor Supply has never been stronger. Before I turn the call over to Kurt, I wanna welcome Kimberley Gardiner as our new Chief Marketing Officer. Kimberley succeeds Christi Korzekwa, who announced her retirement earlier this year. Kimberley brings an extensive background in marketing with a data-driven approach to brand development that I believe will continue the evolution of our marketing organization and continue to build on the strength of the Tractor Supply brand.

[Hal Lawton, President and CEO at Tractor Supply Company]

Our appreciation and thanks go to Christi for her leadership and dedication over the last decade at Tractor Supply. Now I'll turn the call over to Kurt to discuss some of the details of the second quarter and our financial outlook for the rest of the year.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Thank you, Hal, and hello to everyone on the call. At the halfway mark for the year, the Tractor Supply team has started fiscal 2022 with strong performance that came in ahead of our expectations. We are very pleased with the consistency and the strength of our top-line performance. This quarter, retail price inflation contributed about 12 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the supply chain. We continue to see increasing costs in the commodity inputs in our product categories, as well as underlying variables like higher labor wages and transportation costs impacting our vendor partners. Comp transactions declined 2.0%, which was slightly below our expectations.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

As we anticipated pressure from cycling the benefits of stimulus in the prior year, we experienced incremental headwinds from the delayed start to the spring and the drought conditions in the latter part of the quarter. Complementing the commentary Hal shared on the cadence of the quarter, all regions of the country delivered positive sales comps. The geographic diversification of our store base worked to our advantage this quarter. We did experience softer performance in select regions of the country impacted by the drought, in particular, the Far West and Texahoma regions, which, while positive, lagged the chain average. The South Central and South Atlantic were our best-performing regions. Turning to our digital performance, the second quarter represented our largest e-commerce quarter in net sales ever. On the back of 39 consecutive quarters of double-digit growth, our e-commerce grew approximately 7%.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Excluding April, we had solid performance with double-digit sales for May and June combined. Our mobile app continues to ramp with double-digit growth and represented about 15% of total digital sales in the quarter. Petsense continues to perform well with comp sales growth above the company average. Turning now to gross margin. For the second quarter, our gross margin declined by 24 basis points to 35.5% of sales. This was primarily attributable to three factors, significant product cost inflation, higher transportation costs, and to a lesser extent, product mix given the robust growth in CUE products. We continue to experience broad-based inflation. Domestic and import freight costs have increased substantially year-over-year, as well as fuel costs. As we shared last quarter, we expect many of these inflationary trends to continue into the second half of 2022.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

I continue to give the team a lot of credit for the remarkable job they are doing between tracking and forecasting freight and the coordination of retail price increases at the store level. They have been nimble. The team has effectively managed these cost increases at the SKU level through our price management actions and other margin-driving initiatives. The team has also been working to capture efficiencies in the supply chain to reduce miles, continuing to limit promotions, and leaning into the more efficient value provided through Neighbor's Club. SG&A, including depreciation and amortization as a percent of net sales, was 22.1%, an improvement of 19 basis points. This improvement was primarily attributable to more normalized incentive compensation and a moderation of COVID-19 response costs, as well as leverage in occupancy and other costs from the increase in comparable store sales.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

These items were partially offset by investments in store wages and our strategic growth initiatives, which includes a step-up in our depreciation and amortization. Compared to the second quarter of 2021, operating profit margin was essentially flat, contracting by only 4 basis points. Net income improved 7.1% to $397 million, and diluted EPS increased 10.7% to $3.53. We remain committed to returning cash to shareholders. During the second quarter, we returned $291 million to shareholders through the combination of share repurchases and higher cash dividends. This brings our total cash return to shareholders through the first six months of the year to $691 million. Turning to our balance sheet.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Merchandise inventories were $2.5 billion at the end of the second quarter, representing an increase of about 21% in average inventory per store. Consistent with the first quarter, this increase is primarily attributable to inflation. We believe the quality and the composition of our inventory is excellent, and that we are in great shape as we go into the second half of the year. If anything, we're pursuing more inventory as there are categories we are working to improve our in-stock position. To provide more clarity on this, on a three-year basis, our units per store inventory has increased single digits while sales are up over 60%. Moving now to our updated guidance for 2022, which is detailed in our press release we issued this morning.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

We are raising our financial outlook for the year given our strong performance year to date, as Hal mentioned earlier. This now includes net sales in the range of $13.95 billion-$14.05 billion with comparable store sales growth of 5.2%-5.8%. For the year, we now forecast an operating profit margin around 10.2%. This represents the midpoint of our previous guidance of 10.1%-10.3% of sales. While higher costs have handicapped some upside, at the same time, we believe we are able to mitigate pressures on the downside. Diluted EPS is anticipated to be in the range of $9.48-$9.60, compared to our prior guidance of $9.20-$9.50.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Please note that our fiscal 2022 guidance includes a benefit for the 53rd week, which is estimated to be approximately 1.5 percentage points of net sales and $0.15 of diluted EPS. As you model the second half of the year, let me address two items. First, for both the third and fourth quarters, we would anticipate that our comp sales growth would be consistent with our first half of the year. As Hal mentioned earlier, the extreme heat and drought conditions are continuing into the third quarter, and we forecast these conditions will limit upside to sales. Second, I want to address the cadence of operating profit. We anticipate the earnings cadence between Q3 and Q4 to be more in line with historical trends. For operating profit margin in the second half of the year, we forecast flat to slight contraction.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

The performance in the fourth quarter is forecast to be positive year-over-year, with the third quarter experiencing some contraction. The variation between the quarters is predominantly a function of gross margin. Specifically, the third quarter will experience greater mix pressures from the strength we are seeing in CUE and higher transportation costs. Both of these factors we first experienced in the fourth quarter of last year, so our compares naturally ease in the fourth quarter. For the second half of the year, we expect inflation to be consistent at an elevated level. With as much inflation pressure we are seeing in our business, we continue to closely watch comparable average ticket and transactions. In times of rising inflation, we anticipate that the breakdown of comp sales growth will trend to higher ticket performance from inflation, offset by transactions.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

The impact on transactions is pronounced this year, especially as we lap the prior year's benefit from stimulus. As a reminder, the prospective acquisition of Orscheln Farm and Home is not included in our guidance. We continue to work collaboratively with the FTC towards a positive resolution and hope to have an update soon. Accordingly, we are limited in the comments we can make about the transaction at this time. In summary, we are very pleased with our performance in the second quarter and our outlook for 2022. The resiliency of our business has been proven over time. We have an amazing track record of navigating the challenges of the external environment. As evidenced by our ongoing market share gains, the team is executing at a very high level.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Our financial outlook for the year is delivering on the key drivers of our long-term algorithm that we shared in January, accelerated sales growth, strong earnings, and increased cash return to our shareholders. With that, I will turn the call back over to Hal.

[Hal Lawton, President and CEO at Tractor Supply Company]

Thanks, Kurt. Okay. Now let's review some of the growth drivers for Tractor Supply to capture the significant opportunity we see ahead of us. As previously mentioned, with a total addressable market of $180 billion, our Life Out Here strategy positions us well to capture the market share. First, Project Fusion and Garden Center initiatives are two key growth drivers of our strategy, and they're designed to drive space productivity and sweat our existing assets. We are on track to have Project Fusion implemented in nearly 30% of our stores by year-end. Our multiyear plan to renovate existing stores allows us to improve the shopping experience for our customers with a revitalized layout and expanded offerings. The changes are resonating with our customers and our team members. As of today, we have over 230 garden centers that are up and running.

[Hal Lawton, President and CEO at Tractor Supply Company]

We continue to forecast having garden center transformations of our side lots in over 15% of our stores by the year-end. Over the spring and summer selling seasons, our stores with a garden center significantly outperformed the chain average and are on track with our business case. The expanded assortment of live goods is resonating not only with existing customers, but as a key asset to attracting new customers that skew female and younger. The garden centers have allowed us to gain share and will continue to play a significant role in our merchandising plans across the seasons. As the number one seller of bagged feed and a top five retailer in pet food, it is critical that we are able to deliver for our customers as the dependable supplier in these CUE categories. These are destination categories for us that drive trips.

[Hal Lawton, President and CEO at Tractor Supply Company]

Our supply chain is a critical differentiator for us to deliver on CUE as we work to ensure we not only have capacity for future growth, but maintain the lowest cost to serve. To support our store growth and increase demand, our ninth distribution center located in Navarre, Ohio, is on track to begin shipping in the first quarter of 2023. Additionally, we are targeting the top 180 most challenged stores to implement a full suite of resources, which would include things like a feed room, mixing center allocations, high volume store racking and much more. To date, our process improvements have been executed across about 50% of our targeted stores. While still in the early stages, we are pleased with the improved operations at these stores.

[Hal Lawton, President and CEO at Tractor Supply Company]

With the success of our Fusion and Garden Center projects, growth in our Neighbor's Club, the increased volume, velocity and variety of CUE products moving through our supply chain and stores allows us to leverage our scale and sophistication to widen our position in farm and ranch. Mobile engagement is a mode that we are creating around our business. We are well on our way to converting our 26 million Neighbor's Club members into power users of our app. We are currently ahead of our year-to-date goals for our mobile app downloads. With new offers and features like the My Pet mobile app personalization, we're able to differentiate our digital shopping experience and capture growth opportunities. Whether online or in stores, we believe we are well positioned to take advantage of the change from summer to fall with our customers.

[Hal Lawton, President and CEO at Tractor Supply Company]

Innovation and newness resonate with our customers, and our merchant team has exciting plans to capitalize on our customer needs. Our customers count on us for brands that have the durability to get the job done, and clothing is no exception. For instance, our lineup in apparel, workwear, and accessories includes leading brands like Carhartt, Wrangler, and Columbia, as well as our exclusive brand Ridgecut. Ridgecut has resonated with our customers and has allowed for our assortment expansion to include footwear and women's clothing. From insulated outerwear, hoodies, long sleeve T-shirts, boots and more, our apparel products focus on the demand-driven workwear categories. In truck tool and hardware, our annual event, Ultimate Workshop, will be in stores in the coming weeks and will be bigger than ever. More than 700 stores now have an improved tool corral.

[Hal Lawton, President and CEO at Tractor Supply Company]

Our lineup of relevant brands like Porter-Cable exclusively at Tractor Supply, the expansion to Makita, and strong brands like Bosch and DEWALT makes our Ultimate Workshop sales event more relevant. The event offers great value on the brands our customers need to outfit their workshop or garage. We also have a new strategic partnership with Interstate Batteries that we will roll out in the fourth quarter. Interstate Batteries has a proven track record and is the largest battery distribution network in the United States that will allow us to better serve our stores. Branded as Traveller by Interstate Batteries, we will have a great lineup that is relevant, all with improved in-stocks and reliability. In our seasonal business, we anticipate that this will be a strong heating season given the elevated energy costs.

[Hal Lawton, President and CEO at Tractor Supply Company]

As a dependable supplier in this destination category, we're investing to ensure we have strong in-stock position. In heating, we have a new collection of innovative and exclusive home heating equipment with smart home technology, providing maximum efficiency and a cost-effective way for our customers to heat their homes. For the fall harvest and Christmas holiday season, we will be leveraging an expanded assortment of our garden centers to drive productivity of the space. Importantly, across our CUE categories, we are committed to being in stock and priced right for our customers. Our CUE categories continue to drive trips to Tractor Supply. As an example, our pet customer counts are up high single digits with trips and baskets increasing for these customers.

[Hal Lawton, President and CEO at Tractor Supply Company]

This is a trend we're seeing across other CUE categories like livestock feed and poultry. We are well positioned to continue to gain market share with a great lineup of seasonally relevant products with legendary customer service. To wrap up, the Tractor Supply team continues to thrive through the dynamic macroeconomic environment while making significant progress laying the foundation for the future. Tractor Supply has a proven business model that has been resilient over many different business cycles. Our business has been incredibly resilient and stable over the last several years, whether we look at that by week, region, or product category. At the same time, we believe we have visibility into our costs and are managing our inventory to customer demand. We are winning with our customers. With significant growth and market share opportunities, it remains an exciting time at Tractor Supply.

[Hal Lawton, President and CEO at Tractor Supply Company]

My thanks and appreciation go out to the team for their dedication to living our mission and values every day. Now we'd like to open up the call for questions.

[Operator]

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, star one. If you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is from Elizabeth Suzuki from Bank of America. Elizabeth, your line is open.

[Elizabeth Suzuki, Analyst at Bank of America]

Great. Thank you so much. First, you know, just regarding transportation costs, do you think we're getting past peak cost pressure? Do you have any expectations that transportation costs could become a tailwind, going into next year?

[Hal Lawton, President and CEO at Tractor Supply Company]

Hey, Liz. How are you today? This is Hal. Thanks so much for the question and for joining the call. You know, on transportation costs and break it down into a couple different buckets. First off, spot rates for both import products, so container spot rates, as well as spot rates for domestic, are trending down and starting to reach kind of average levels for last year and in some cases below. You know, that said, the flip side is the vast majority of our business for both domestic and import are done on contracts. The contracts that we are in this year are at higher rates than they were last year.

[Hal Lawton, President and CEO at Tractor Supply Company]

Kind of when you kinda look at it all, it all kinda blends to about the same number. As we get in towards the back half of the year, we do expect some of the pressure to moderate, but I don't anticipate a tailwind on transportation costs for 12-18 months.

[Elizabeth Suzuki, Analyst at Bank of America]

Great. Just one quick follow-up on imports. I mean, your actual import percentage is pretty small as a percent of total product. Would you expect to see any impact to gross margin if tariffs on goods from China roll off?

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Liz, hi. This is Kurt. We have imports at around 12% of our business just for the, you know, the full group as a reminder. Back when the China tariffs were put into place, I mean, we had, you know, some product having tariffs in there. If there were to be reverse of those tariffs, that would be a benefit to us. We managed well when putting, you know, managing through the increase in the tariffs. Of course with imports, do keep in mind that that product has a longer lead time. Those costs have to work through the system. Similar to almost the explanation you heard from Hal on transportation, any shift in tariffs would take, you know, six, nine, 12 months to really see playing through the inventory and cost of goods sold.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

As any changes in a tariff, you know, environment changes, certainly we'll update our guidance and it is generally a benefit to us as we can get some relief from those tariffs that have had to be baked into the cost over the last few years.

[Elizabeth Suzuki, Analyst at Bank of America]

Great. Thank you so much.

[Operator]

Our next question is with Steven Forbes from Guggenheim. Steven, your line is open.

[Steven Forbes, Managing Director and Analyst at Guggenheim]

Good morning, Hal, Kurt. Maybe Hal, I wanted to focus on how Tractor is addressing, you know, the internal cultural and wage and benefits needs of its team members in the current inflationary environment. If you can, maybe highlight some of your learnings from the annual sales meeting as it pertains to, you know, what your team members are asking for and what they're sort of speaking as to their customer needs.

[Hal Lawton, President and CEO at Tractor Supply Company]

Yeah, good morning, Steve. How are you? Thanks for joining our call. Yeah, start with the culture at Tractor Supply is foundational for us. Our mission and values are our number one priority, and we are constantly looking for ways to make deposits in our culture and continue to build on it. As you mentioned, our annual sales meeting, which was just last week, is one big way that we do that. You know, as it relates to kind of the investments we made in the team, we're proud of the investments we made in our team in particular over the last couple of years.

[Hal Lawton, President and CEO at Tractor Supply Company]

You know, they range from wage investments to bonus enhancements and improvements and to, you know, broader rollouts of benefits and not just healthcare benefits, but additional items like tuition reimbursement, paternity leave, et cetera. Those have been substantial in their monetary, both at an individual level and also material in terms of investment on the overall company level. You know, we are committed to paying a fair day's wage for a fair day's work. You know, that said, as we look forward, we do think that the majority of that investment is behind us. You know, we feel good about where we are from a market perspective on a relative basis. We're seeing retention rates well below 2019 levels.

[Hal Lawton, President and CEO at Tractor Supply Company]

We're seeing excellent engagement scores with our team members. We feel really good about our culture and our morale and our team as we head into the back half of the year. You know, we have a track record of consistency and resiliency in you know, all different economic environments. I think that's one of the things that, you know, I do anticipate that as the economy becomes a little tougher and we start to see the labor market ease and layoffs occurring, that there will be, you know, a flight to quality.

[Hal Lawton, President and CEO at Tractor Supply Company]

I think that'll be a really good thing for Tractor Supply and allow us to, you know, further improve our retention and attract high quality talent, just given the resiliency and stability of our business and our commitment to our team members and culture.

[Steven Forbes, Managing Director and Analyst at Guggenheim]

Thank you. I'll keep it to one.

[Mary Winn Pilkington, SVP of Investor and Public Relations at Tractor Supply Company]

Thank you, Steve.

[Operator]

Our next question is from Kate McShane from Goldman Sachs. Kate, your line is open.

[Kate McShane, Analyst at Goldman Sachs]

Hi. Thanks. Good morning, and thanks for taking our question. Kurt, I think in your commentary you mentioned that you're trying to reduce promotion, which is counter to what we're hearing across retail. I wanted to see if there were any more details around that. Just with regards to margin and preserving margin, has there been any effort to push some of the costs back onto vendors, or has there been any effort to push for more sharing of costs as we've seen with other retailers?

[Seth Estep, EVP and Chief Merchandising Officer at Tractor Supply Company]

Hi, Kate, this is Seth. Good morning. Thank you for the question. First question there on kind of what Kurt talked about in prepared remarks on promotional activity. You know, over the course of the last 2.5 years, we've put a concerted effort on really going to our true north as an EDLP retailer, and we're committed to driving to stay towards that course of being an EDLP retailer. Fundamentally, we are not planning adding additional promotion to our strategy.

[Seth Estep, EVP and Chief Merchandising Officer at Tractor Supply Company]

With that, it goes to the quality, I think, of our inventory position, and also the ability now for us to leverage the 26 million-plus members in our Neighbor's Club database, so that we can very strategically go after our shoppers and our customers to drive both sales, market share, and obviously, you know, protect margin, as well there. For your second question, around cost pushbacks, you know, the short answer would be yes.

[Seth Estep, EVP and Chief Merchandising Officer at Tractor Supply Company]

We are definitely, you know, working with our vendor partners, you know, in conversations, proactively planning across the supply chain cost of goods, as well as building on things like our exclusive brand programs that we know that we can drive incredible value, create loyalty, drive market share, and in many ways, those also typically carry higher gross margins for us as well. At the current time, I mean, we're staying to our true north in promotion as well as definitely looking to push back on costs that are flowing through the system at the same time.

[Kate McShane, Analyst at Goldman Sachs]

Okay. Thank you.

[Operator]

Our next question is with Scot Ciccarelli from Truist. Scot, your line is open.

[Scot Ciccarelli, Managing Director at Truist]

Good morning, guys. Scot Ciccarelli. I think in the prepared comments, how you talked about evolving demand and, you know, a different operating environment than, you know, what you expected at the beginning of the year, but it doesn't sound like the business has changed a whole lot. Can you provide any more color maybe on what you're seeing in terms of recent trends that, you know, kind of made you make that comment?

[Hal Lawton, President and CEO at Tractor Supply Company]

Yeah, good morning and thanks, Scot, for the question and for joining the call. You know, I'd say at the highest level, our business just continues to be incredibly resilient, stable and consistent kind of week to week, day to day. You know, we've got a portfolio of geographies. So at times when certain geographies are seeing unfavorable weather, you know, we'll see favorable weather elsewhere. We're seeing some balance of that as it averages across. You know, I'd say also points to the strength of our CUE business and the fact that it's the fifth consecutive quarter it's performed at, you know, these elevated levels. You know, categories like dog dry food, you know, we're taking significant share.

[Hal Lawton, President and CEO at Tractor Supply Company]

That business is running mid double-digit unit comps, well into the mid-20% on sales dollar comps. We're also seeing similar strength in poultry feed and equine feed. You know, those businesses are demand driven, needs-based. They drive the traffic into our stores. With that, and then the rest of the business, we've been really good at evolving with consumer demand in a pretty quick way, leaning into categories that are going well, like grilling, moderating in certain categories where like front-engine riders where we need to. The team's just done an excellent job navigating that kind of evolving consumer demand, and having the right inventory at the right place at the right time. You know, Seth mentioned the quality of our inventory. I mentioned in the prepared remarks that we're ending our inventory on plan at the end of the quarter, and we just.

[Hal Lawton, President and CEO at Tractor Supply Company]

We feel really good about inventory, and if anything, we'd like to have more of it in some of our CUE categories. I think that's the thing that's just the strength of Tractor Supply and our business model is the demand-driven, needs-based consistency of the business. You know, if I go back in history, 30-plus years now of positive revenue growth, 30 years of consecutive positive comp transactions, 29 of 30 of positive sales comp dollars. You know, it's just the consistency of the business and the strength of the team to be able to navigate these evolving consumer demands that gives us the confidence in raising our outlook for the year and also the consistency of the first half performance.

[Scot Ciccarelli, Managing Director at Truist]

Just to clarify, Hal, like, so you're not seeing incremental weakness somewhere where you maybe are being surprised, and that wasn't the reference to evolving demand?

[Hal Lawton, President and CEO at Tractor Supply Company]

Yeah, I'd say, as I mentioned in the prepared remarks, the business has continued to evolve this year as consumer demand has evolved. You know, certainly as we mentioned on big ticket, it was flattish for the second quarter. Now, that's on top of 40% comps from last year, so really still elevated sales levels compared to, you know, multiple years ago. But in there, you know, we had some categories that were very strong, grilling and safes as examples. But then we had other categories that were, you know, below expectations, but those all netted to be right in line with what we thought. You know, we're not seeing a precipitous drop-off anywhere.

[Hal Lawton, President and CEO at Tractor Supply Company]

Just, you know, the continued evolution as you always have in the business and maybe, you know, a little bit more faster evolving just given the market dynamics that we've all been operating in over the last two or three years really. Nothing of concern or material weakness or anything like that.

[Scot Ciccarelli, Managing Director at Truist]

Got it. Thank you very much.

[Operator]

Our next question is from Chuck Cerankosky from Northcoast Research. Chuck, your line is open. Chuck, your line is open.

[Chuck Cerankosky, Managing Director and Analyst at Northcoast Research]

Good morning, everyone. Nice quarter. Kurt, I think you mentioned a 21% increase in inventory per store. Could you review what time period that covered? Does that indicate perhaps that you still have some shelf price adjustments to do to catch up with that? How much of that inventory might be to make sure you have things in stock that are hard for your supply chain to get a hold of?

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Good morning, Chuck. Yeah, thank you for the question. In regards to our inventory position, the additional comments I can give to you, in addition to the prepared remarks, our inventory as of the end of the second quarter, there's a 21% growth year-over-year compared to second quarter of last year. I'll share just a few other color commentary on it. That is a very similar year-over-year growth that we had at Q1. Our average inventory per store is actually slightly down compared to the first quarter numbers, but very similar on a year-over-year basis. A majority of our inventory growth is inflation, and that inflation has, you know, been baked into it. There's some inflation we expect to continue in the business.

[Hal Lawton, President and CEO at Tractor Supply Company]

I think the most important point is what you've heard from Seth and Hal and I now is that the merchant team did an excellent job recognizing that some of the demand from last year that was stimulus driven, we were wise in regards to managing the supply chain and the purchasing. The inventory's in a healthy position. There is some more on the consumable side we are working to get more of to improve our in-stock position, but we feel very good about it. As I mentioned, unit growth over the last three years is single digits while our sales have been growing at 60%. I think that's a really important, you know, point is that we're growing the inventory modestly, and our turns are in great shape.

[Chuck Cerankosky, Managing Director and Analyst at Northcoast Research]

Thank you.

[Operator]

Our next question is with Peter Keith from Piper Sandler. Peter, your line is open.

[Peter Keith, Managing Director and Analyst at Piper Sandler]

Hey, thanks. Good morning, everyone. Great results. Was hoping you could just talk about the new customers you've acquired over the last two years with COVID. Does seem like the rest of the channel feels like that customer has exited their stores. If you feel like you're retaining them, maybe you could talk about some of the strategies you've implemented. Secondarily, is there any risk on some of these poultry customers that have come in? We've heard that's a short-lived hobby, and maybe those customers could roll off a little more quickly.

[Hal Lawton, President and CEO at Tractor Supply Company]

Yeah. Hey, Peter. How are you today? Thanks so much for the question. You know, I'd start out by saying, you know, we estimate our market was roughly flat on a dollar basis for Q2. You know, therefore, we took substantial share in the quarter. Our new customers that we've acquired over the last couple of years are certainly contributing to that share growth, in addition to just share-of-wallet gain, that we've had with our kind of core customer. I'd point to categories, you know, a few different categories on that.

[Hal Lawton, President and CEO at Tractor Supply Company]

First off, I'd point to dry dog food and the numbers I gave earlier on unit growth and sales dollar growth, and those are well above the market run rate right now. Similarly, on poultry, now a very large business for us with continued growth. You know, this is the third year now of substantial growth in poultry. Each year, we're seeing the customers that engaged in the category last year re-engage at very high retention rates. In fact, one of the highest retention rates that we have in our Q business. We're also seeing significant new customers entering the category. You know, that category, not only is it kind of an outdoor hobby and activity, but it also has a big element of kind of self-reliance.

[Hal Lawton, President and CEO at Tractor Supply Company]

You know, with rising inflation and costs, you know, you can have a meat bird in three months, have an egg layer in four months, and we're seeing people invest in their flocks currently, not only just for the notion of kind of rural revitalization, but also really in the spirit of kind of self-reliance. I'd also point to live goods. You know, we've made a significant investment in our garden centers over the last two years, and exiting Q2 with 230 garden centers. You know, over 10% of our chain now has a garden center.

[Hal Lawton, President and CEO at Tractor Supply Company]

Live goods is now grown into a material business for us, and it's attracted a more female customer, as well as a younger customer into our business, and really helped us in giving us kind of that next kinda demand-driven, needs-based transaction driver in our stores. Feel really good about our customer retention, our you know how we've engaged with the customers over the last two years, and we're holding on to them. You know, last thing I'd point to is our Neighbor's Club now at 26 million members are comprising well over 70% of our sales.

[Hal Lawton, President and CEO at Tractor Supply Company]

Retention rates still running well above 80%, and our largest tier and our fastest-growing tier, you know, its retention rate above 95%. Feel really good about the state of our customer. As I start, I'll close with, as I mentioned at the beginning, you know, we took substantial share in the quarter, which has been a consistent trend over the last two and a half years.

[Peter Keith, Managing Director and Analyst at Piper Sandler]

Very helpful. Thanks so much.

[Operator]

Our next question is with Zachary Fadem from Wells Fargo. Zach, your line is open.

[Zach Fadem, Analyst at Wells Fargo]

Hey, good morning. Hal and Kurt, we've started to see some underlying commodity prices roll over a bit. First, could you talk to your expectations around the inflation change today relative to your last quarter outlook? Then assuming we do see some gradual moderation here, can you help me think through how slowing commodity prices could help your business and in what ways could it negatively impact your business? Thanks.

[Hal Lawton, President and CEO at Tractor Supply Company]

Hey, good morning. On inflation, I'd start by just saying it continues to be persistent and consistent. Certainly seeing some moderation if you look at you know a few of the metrics, fuel costs slightly down, spot rates on containers down a bit, commodities moderating. Still, if you look at even on a year-over-year basis and certainly on a 2- and 3-year basis, you know kind of record highs. I think there's a lot of debate in the industry right now on whether or not some of the reduced prices around corn and wheat are gonna hold or whether it's just a temporary lull that will go back up as we start to look and see crop yields and demand towards the back half of the year.

[Hal Lawton, President and CEO at Tractor Supply Company]

I think the thing we're most watching is, at a very high macro level, is PPI. You know, PPI's gotta come down first, just generically speaking across retail, before CPI is gonna come down. You know, it's gonna take—'cause retailers gotta turn through their higher cost inventory for 2, 3, 4 months at a minimum before you start to see any reduction on the CPI retail side. I think inflation's gonna hold and continue to be consistent really through the at a CPI kind of retail level, certainly through the balance of this year.

[Zach Fadem, Analyst at Wells Fargo]

Thanks, Hal. Appreciate the time.

[Operator]

Our next question is with Jonathan Matuszewski from Jefferies. Jonathan, your line is open.

[Jonathan Matuszewski, SVP at Jefferies]

Great. Thanks for taking my question. Just to follow up on the topic of tariffs, Kurt, you mentioned it would be a P&L benefit under a rollback scenario. Just to be clear, you know, would all of these costs flow through to gross margin or would you look to pare back pricing on some SKUs that were impacted? I think some retailers have indicated they would look to reinvest in pricing to drive market share. It seems unlikely for other retailers. Just wanted to be clear on where Tractor Supply would be in terms of pricing changes under that scenario. Thanks so much.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Yeah, Jonathan, this is Kurt. In regards to tariffs, I'll address part of it first. I'll let Seth talk about pricing and how we would address that. Let me frame up the size of it and the timing of it. For instance, just referencing back that imports are roughly 12% of our business, not all of those imports are subject to tariffs. You're talking single-digit % of our business. When tariffs were enacted, it's

[Hal Lawton, President and CEO at Tractor Supply Company]

It was over a 12, 18-month period of time that it flowed through. We view it, and you have to manage it very much like it's another form of inflation. As it flows through our model, we then have to address how we're gonna be able to manage our margins, whether that's retail price or any other levers that we pull through that. Because it's single-digit % of it, do keep in mind this. We never really called it out over those periods of time as a margin headwind, and we would manage it like other levels of inflation, where we don't believe it's a significant headwind. We managed it as a needs-based business fairly well, not necessarily a notable margin gain either, but we believe we'll manage through that as any tariff adjustments were occur.

[Hal Lawton, President and CEO at Tractor Supply Company]

Seth, I'll turn over to you to talk about pricing strategy.

[Seth Estep, EVP and Chief Merchandising Officer at Tractor Supply Company]

Yeah. Hey, thanks, Kurt. Hey, thanks, Jonathan, for the question. I would just say in terms of pricing relative to tariffs, as Kurt mentioned, I mean, our direct import business is about 12%. But at the same time, we utilize more of a kind of a broad-based portfolio strategy when we come to our pricing strategies. You know, our team has incredible tools in place, great visibility into moving average cost, a lot of forecasting together. I would just say that we use every lever of the pricing strategy just to manage and land our total business, whether that be relative to tariffs, whether that be to total cost, whether it be promo, whether it be clearance. The team really does strategize just to make sure that we're hitting the right price on the right categories.

[Seth Estep, EVP and Chief Merchandising Officer at Tractor Supply Company]

We're positioned to take market share, and just utilizing the tools that we have in place and the visibility to land where we need to land. It's more of a broad portfolio strategy approach when we come to pricing, and it's just one of the levers that we look at and utilize, to make sure that we're hitting our targets that we need.

[Jonathan Matuszewski, SVP at Jefferies]

Gotcha. Thanks for the color, Kurt and Seth.

[Seth Estep, EVP and Chief Merchandising Officer at Tractor Supply Company]

Yeah. Thanks, Jonathan.

[Operator]

Our next question is with Chuck Grom from Gordon Haskett. Chuck, your line is open.

[Chuck Grom, Managing Director at Gordon Haskett]

Hey, great. Thanks a lot. Kurt, just wanted to clarify on the guide that it sounds like July is being impacted by the drought conditions, but you still expect comps in the back half of the year to be similar to the front half, which would be sort of in that low 5% range. Just wanna clarify there. Then just bigger picture, with the garden centers, curious what the biggest learnings have been so far, both positive and negative. I guess on the negative, what have you changed since you started that endeavor, 12-18 months ago?

[Hal Lawton, President and CEO at Tractor Supply Company]

Hey, good morning. This is Hal. Thanks, Chuck, for the question. First I'd just say on our comps, they've been very consistent in June and into July. You know, I think the heat and the drought's certainly impacting the business. As I mentioned in my remarks, it's really taken more of the upside out of Q3, more so than it's you know, impacted us to the downside. That's why Kurt was kind of mentioning in his comments, kind of in our 5.2%-5.8% guide for the year, that we expected Q3 and Q4 to roughly run in the middle of that. As we mentioned, that's kind of how we you know, what our total Q2 was as well.

[Hal Lawton, President and CEO at Tractor Supply Company]

Feel very good about that and we're navigating the drought well, but you know, it and again, it's kind of impacted the upside potential really more in the quarter.

[Seth Estep, EVP and Chief Merchandising Officer at Tractor Supply Company]

Garden centers.

[Hal Lawton, President and CEO at Tractor Supply Company]

Oh, yeah. On garden centers, 230 of them as we exited the quarter here. As I mentioned earlier, we're seeing a strong attraction of it for new customers and destination trips, more younger and female. You know, I think the thing that's different about our garden centers, while we certainly sell annuals and perennials, we're seeing real strength in, you know, what you would expect in kind of rural America, which is trees, shrubs, fruits, and vegetables. Our garden centers are performing at the expectations we had, continuing to deliver strong comp lifts in the stores that we roll it out.

[Hal Lawton, President and CEO at Tractor Supply Company]

We've been very pleased with our vendor partnership as well, and there's been a lot of interest from our vendor partners in doing business with us as we expand into other markets.

[Chuck Grom, Managing Director at Gordon Haskett]

Great. Thanks, Hal.

[Operator]

Our next question is with Michael Lasser from UBS. Michael, your line is open.

[Michael Lasser, Equity Research Analyst at UBS]

Good morning. Thanks a lot for taking my question. There's been a lot of discussion on this call around the state of the consumer, a lot of inflation. How did you factor overall economic pressures into your guidance for the second half of the year, especially when you consider that the guidance applies to your three-year stacks are gonna remain relatively consistent over the next couple of quarters? As part of that, when would you expect traffic to turn back positive? Thank you very much.

[Hal Lawton, President and CEO at Tractor Supply Company]

Yeah. Hey, Michael, good morning. You know, I'd start with we look at the history of the business and just the consistency of our performance and the stability of our performance over, you know, 30+ years in all the varying economic cycles that we've been through. The second thing is we then look at kind of the foundation of the business and our core business and, you know, the demand-driven, needs-based orientation of that and the strong stability we have there and the share gain.

[Hal Lawton, President and CEO at Tractor Supply Company]

We obviously have our own internal forecast that, you know, we have around the overall economy and we get a lot of deep insights into our own customer trends, whether it's from Neighbor's Club data and others. You know, our view on the economy is that it will remain roughly as it is for the balance of the year. As a consequence, our performance will stay, you know, kind of in the same range that it's been operating in as we move forward for the balance of the year. You know, we all saw Q1's GDP was negative. You know, we'll know in a few weeks' time on Q2's GDP. We certainly know consumer sentiment and business sentiment is negative.

[Hal Lawton, President and CEO at Tractor Supply Company]

I think it's more likely than not that the Q2 GDP is roughly in line with what Q1 was. In our expectations, the second half is about the same, that if we are in a recession, it's a mild, modest recession, and we expect our business will continue to perform in the same way. On comp transactions, we're certainly watching that closely, and have aspirations of turning those back positive. Two big impacts to comp transactions this year to date have been stimulus and then also the drought and the heat. In weeks where those two are not as applicable, we have seen positive comp transactions. As we mentioned in my prepared remarks, the months of May and June in combination had positive comp transactions.

[Hal Lawton, President and CEO at Tractor Supply Company]

In markets that are less affected by the heat right now, we are seeing positive comp transactions. We certainly anticipate as we get through those pressures, the return of positive comp transactions.

[Michael Lasser, Equity Research Analyst at UBS]

Thank you very much.

[Operator]

Our next question is with Peter Benedict from Baird. Peter, your line is open.

[Peter Benedict, Analyst at Baird]

Hi, guys. Thanks for taking the question. Just Kurt, I wanted to maybe if you go back, expand upon the comment you made. You talked about some levers that you have that'll allow you to kind of mitigate the downward pressure on EBIT margins right now and holding kind of that 10.2% for the year. Maybe expand upon those. Then how do you think about that same dynamic in the event that, you know, inflation does start to roll? You're getting, you know, obviously 12% for inflation right now. If that, you know, reverts to par, how do those levers work, and how do you feel about the EBIT margin in that environment? Thank you.

[Kurt Barton, EVP, CFO, and Treasurer at Tractor Supply Company]

Yeah. Peter, good morning. You know, as we indicated in our prepared remarks and just the consistency of this business, I'll start there, Peter, with just the fact that we've got good visibility on our expense structure. We've had consistency in both top line and in gross margin. It's really important to just start there as a needs-based, really durable business. From there, the other point that I'd mention is that the investments in the business, when you look at SG&A and the cost, the biggest pressure is the investments of the business. The natural SG&A levers at a good low single digit number. We're making these purposeful investments, all part of our long-term algorithm to drive a strong operating margin, and return. We can do that while we're investing in the business.

[Hal Lawton, President and CEO at Tractor Supply Company]

To your question about how do we manage that, we certainly have the ability, if needed to be nimble and flex on the investments because that's the area that is the greatest pressure on SG&A. Then the business just has a solid core DNA around profit improvement, lean thinking. I mean, this is something that has been built in over 10+ years and really matured in our organization. What we're doing today in regards to driving miles down, more inventory per truckload when you've got transportation costs and what we're doing to just drive efficiency, those are the different levers that we're benefiting from today and will continue to use that for the next, you know, few years if there's any reason to really have to adjust from our current current thesis and algorithm.

[Hal Lawton, President and CEO at Tractor Supply Company]

We feel very good about our ability to drive our long-term operating margins.

[Peter Benedict, Analyst at Baird]

Great. Thanks so much.

[Mary Winn Pilkington, SVP of Investor and Public Relations at Tractor Supply Company]

Thank you. We'll take one more question, Austin, and then we'll wrap it up as we're at the top of the hour.

[Operator]

Okay. Our final question is from Scott Mushkin from R5 Capital. Scott, your line is open.

[Scott Mushkin, Founder and CEO at R5 Capital]

Hey, guys. Thanks for taking my question. I'm gonna just put them together because I know we're at the end of the call. On the near term transaction trends, I mean, how much do you wanna attribute that to, you know, inflation, people trying to stock up and the drought, you know, maybe units per transaction are up, and those are the factors driving down your transactions? My second question is more longer term. Our research would suggest that maybe the second year of the garden center is maybe coming in above what maybe you were expecting just because it gets traction. People know it's there in the market. Those are two questions.

[Hal Lawton, President and CEO at Tractor Supply Company]

Yeah. Hey, Scott, and thanks for the question. On the first part, the comp transaction decline is almost fully attributable to the stimulus lapping and the heat and the drought and kind of a compressed spring. As I mentioned earlier, in weeks and in geographies where those extraneous factors are not at play, we see strong positive comp transactions. Collectively across the months of May and June, we see positive comp transactions. You know, we break our customers into a variety of different cohorts and segments. We see our lower income customer group having some modest fall off, but we've mentioned that over the last month or two. As a reminder, that's a very small piece of our customer segment.

[Hal Lawton, President and CEO at Tractor Supply Company]

You know, our customers own homes, they own land, they own animals, they own pets, you know. To some degree, that insulates them, and that's the consumer segment. I think if you look at our business, but also if you just are, you know, reading all the newspaper headlines and watching all the various shows out there, those consumers are holding up well, and they continue to hold up well for us too. I think, you know, we can see that in the moment, and we also see it in the track record of this business over the last 10, 20, 30 years. Our customers still very strong, still spending and still doing well.

[Hal Lawton, President and CEO at Tractor Supply Company]

When you pull out the extraneous factors, you know, we still see strong positive comp transactions and feel very good about the health of the business. The garden centers, we feel very positive on our garden centers in total. Really pleased in less than two years of having launched the strategy to have over 15% of our chain with garden centers now. In the stores that have had it in place for now a second garden season, they're performing very strongly. You know, we're very pleased with how quickly our garden centers are becoming a destination in the communities. Very pleased with our vendors and being able to have the great product in there and replenishing it at the right rate.

[Hal Lawton, President and CEO at Tractor Supply Company]

We've been very pleased with our store execution and hiring garden center specialists. You've got a strong customer service theme in the garden centers. Then it's bridging over into the balance of the store with the transactions in there because we estimate about half of the transactions happen in the garden centers are actually destination transactions that then bleed into the store, or even into the side lot now. The side lot's become a much more kinda shoppable destination with the drive-through pickup. Very pleased with the performance of the garden centers and just our side lot transformation. Then obviously in combination with Project Fusion, which we haven't talked about as much today, but now over 400 stores with Project Fusion starting to reach critical mass.

[Hal Lawton, President and CEO at Tractor Supply Company]

Over 20% of our stores now seeing a lift in the comp sales there, but also the improved customer response to the elevation in the store experience, improvements in areas like apparel and pet food, obviously, and our power tools now, where we've got 700 stores now with an updated power tools area. Customers, when you look at the data, you can very much see the lift in the stores that we execute Fusion in our garden centers. It's a big driver of our market share gains that we're seeing.

[Scott Mushkin, Founder and CEO at R5 Capital]

Thanks, Hal. A lot of great color there. Appreciate it.

[Hal Lawton, President and CEO at Tractor Supply Company]

Thanks, Scott.

[Mary Winn Pilkington, SVP of Investor and Public Relations at Tractor Supply Company]

Thanks, Scott. Austin, this will conclude our call today. We are around for questions. Marianne and I are available today, so please feel free to reach out to us. Thanks everyone for joining us, and we look forward to speaking to you on our third quarter call in October.

[Operator]

That concludes today's call. Thank you for your participation. You may now disconnect your line.

Participants

Executives

• Mary Winn Pilkington, SVP of Investor and Public Relations
• Hal Lawton, President and CEO
• Kurt Barton, EVP, CFO, and Treasurer
• Seth Estep, EVP and Chief Merchandising Officer

Analysts

• Elizabeth Suzuki, Analyst at Bank of America
• Steven Forbes, Managing Director and Analyst at Guggenheim
• Kate McShane, Analyst at Goldman Sachs
• Scot Ciccarelli, Managing Director at Truist
• Chuck Cerankosky, Managing Director and Analyst at Northcoast Research
• Peter Keith, Managing Director and Analyst at Piper Sandler
• Zach Fadem, Analyst at Wells Fargo
• Jonathan Matuszewski, SVP at Jefferies
• Chuck Grom, Managing Director at Gordon Haskett
• Michael Lasser, Equity Research Analyst at UBS
• Peter Benedict, Analyst at Baird
• Scott Mushkin, Founder and CEO at R5 Capital