TSCO - NASDAQ

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss second quarter 2025 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. I would now like to introduce your host for today's call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, Tamia. Good morning, everyone. We appreciate your time and participation in today's call. On the call today participating in our prepared remarks are Hal Lawton, our CEO; Kurt Barton, our CFO; and Colin Yankee, our Chief Supply Chain Officer. In addition to Colin, we will also have Seth Estep, Rob Mills, and John Ordus join the call for the question-and-answer portion. Following our prepared remarks, we will open the floor for questions. Please note that a supplemental slide presentation has been made available on our website to accompany today's earnings release. Let me now reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. 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 these statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. [Operator Instructions] We appreciate your understanding and cooperation. We will also be available after the call for any further discussions. Thank you for your time and attention this morning, and it's my pleasure to turn the call over to Hal.

Good morning, everyone, and thank you for joining us today. To kick off today's call, I'll begin with a high-level overview of our second quarter performance, then I'll turn it over to Kurt for a more detailed review of the quarter and our outlook going forward. After that, Colin Yankee, our EVP and Chief Supply Chain Officer, will join to share an update on our Final Mile initiative, one of the most exciting and impactful transformations underway at Tractor Supply. I'll then return to close out the call with some final thoughts before Q&A. Before we dive into the results, I want to take a moment to thank our 52,000-plus Tractor Supply team members. Their dedication, resilience and passion for serving Life Out Here continue to set us apart. Truly, it's through their dedication and their legendary customer service and deep product knowledge that we continue to earn our customers' trust and loyalty. Their efforts are the foundation of our leadership in rural retail and central to how we deliver value every day. Overall, we are pleased with the record results we delivered in the quarter. Despite ongoing macroeconomic uncertainty and a tepid start to spring, our sales performance exceeded our modest expectations. This performance reflects continued strength in our core needs-based categories and share gains across key seasonal businesses. Before getting into the details of Q2, I'd like to highlight 4 trends. First, we delivered comp transaction growth in the quarter, which is a hallmark of Tractor Supply. Second, customer engagement was exceptional. We hit numerous all-time highs across key customer metrics, including Neighbor's Club membership, customer satisfaction, total customers shopped, new customer growth and record sales of live birds. And I could go on and on and on. Customer loyalty is a hallmark of Tractor Supply. Third, average unit retail turned positive, right in line with the inflection point that we called out at the beginning of the year and last quarter. This shift supported comp ticket growth in the quarter and positions us well for the back half of the year. And fourth and perhaps most importantly, we saw sequential comp sales improvement across the quarter. Each period performed better than the one before it, and that momentum has continued into early Q3. These trends underscore the resilience of our business model and the relevance of our offering, especially in today's environment. Our team's disciplined execution and deep connection to our customers continue to drive performance across the business. Now jumping into some of the details. These strengths translated into solid financial results for the second quarter. We grew net sales by 4.5% with a comparable store sales increase of 1.5%. This was our largest sales quarter ever, reaching $4.44 billion. Diluted EPS was $0.81. Our comparable store sales performance was driven by a 1% increase in transactions and a 0.5% increase in average ticket. In many ways, the quarter played out as expected once spring arrived across our markets. While April was impacted by wet weather and a slow seasonal start, May and June delivered comp sales above the quarterly average, with June marking our strongest comp month of the quarter. We are pleased with the momentum exiting Q2 as customers reengaged with seasonal categories and our core needs-based assortments. Turning to category performance. Our consumable, usable, and edible or C.U.E. products led the way with solid unit growth that consistently ran above our chain average. These demand-driven essentials remain a cornerstone of our business. A standout within C.U.E. was Chick Days. This year's event was our most successful to date. More customers than ever are turning to back our poultry, and we saw strong growth across both new and existing customers. From live birds to coops, feed and supplies, we saw strong broad- based demand across the category. Chick Days is retail theater at its best, uniquely Tractor Supply and reinforces the position we have in rural retail. In pet food, we believe the market has passed the trough of the downturn and is entering a recovery cycle, albeit slow and modest. We introduced new brands in both dog and cat across the spectrum of value to super premium with a focus on what differentiates Tractor Supply. We're actively refining our space allocation resets to adjust product assortment and relevant brands to ensure we're meeting the evolving needs of pet parents. At the same time, we're seeing momentum and continue to invest in our complementary pet initiatives. Allivet is expanding our reach in pet pharmacy, while pet wash stations and mobile vet clinics continue to deliver strong customer growth and loyalty. Seasonal merchandise performed well, including live goods, and we saw positive contributions from apparel, gift and decor. Our Garden Centers and seasonal live good tents supported strong growth in the lawn and garden category. We have more than 650 Garden Centers in operation and activated over 250 seasonal tents this spring. These efforts reflect a meaningful gain in merchandising capability and helped us to meet our customers' passions for gardening and tending to their property. Big ticket performed better than we anticipated. Customers continue to rely on the trusted advice of our team members when navigating larger purchases, a testament to the legendary service that defines the Tractor Supply in-store experience. We also believe we somewhat benefited from the bathtub effect as seasonal demand shifted from Q1 into Q2 and has continued on into Q3. In total, these were moderated by some softness in select discretionary categories, including pet hardlines, gun safes and air compressors. Additionally, certain later-cycle spring businesses such as chemicals, sprayers and pressure washers performed below expectations in the quarter but it picked up as we've moved into Q3. These areas of pressure were not unexpected, given the broader consumer sentiment and how the spring season unfolded. Now let's turn to customer engagement. Our Neighbor's Club loyalty program remains a key driver of customer engagement and a meaningful competitive advantage. In Q2, we had all-time highs across several customer metrics. We ended the quarter with a record 41 million members who accounted for over 80% of our total sales. We also saw record total customer count and an all-time high in high-value customers. And that's defined as those who shop frequently and spend more across categories. As part of our Neighbor's Club, we just celebrated the second anniversary of our Hometown Heroes program with a $1 million donation across 10 charities focused on military service members, veterans and first responders. Hometown Heroes receive top-tier Neighbor's Club status and benefits. Notably, about 15% of the Hometown Heroes are new to Tractor Supply, highlighting the program's reach and appeal. Shifting to the digital front. Our digital sales grew at a mid-single-digit rate for the quarter. Orders fulfilled by our stores remain the most popular fulfillment option, accounting for nearly 80% of digital orders, a reflection of the convenience and strategic placement of our more than 2,300 stores across rural America. Our store footprint continues to be a powerful enabler of digital growth. We saw robust performance in deliver-from-store and same-day delivery, which reinforces the unique advantage of our local presence in the communities we serve. Together, these capabilities enhance convenience for our customers and drive continued momentum in our digital ecosystem. Turning to the physical footprint. In the second quarter, we opened 24 new Tractor Supply stores and 2 Petsense by Tractor Supply stores, and we closed 1 Petsense store. We have a robust pipeline of low-risk organic growth opportunities ahead of us. Our recent acquisition of 18 Big Lots locations gives us great confidence to start 2026 with our new store pipeline in a strong position as we anticipate stepping up to 100 new stores next year. Over the past 2 years, we have significantly enhanced our real estate development capabilities, improving new store economics and fusion remodel returns. We continue to make progress on our Fee Development program, which gives us greater control over the time line and cost of new stores and allows us to capture approximately 15% rent savings over the lease term of a new store. All in, we're pleased with the progress we've made across the business in the first half of the year. Our performance in the second quarter reflects solid execution, continued resilience in our core categories and strong alignment with our long-term strategic priorities. Looking ahead to the second half of 2025, we recognize the uncertainty that remains from macroeconomic pressures to evolving tariffs. That said, our business model is built for resilience. Given our performance year-to-date and our outlook for the balance of the year, we are reconfirming our guidance for 2025. With a predominantly U.S. sourced assortment, trusted vendor relationships and a scalable flexible supply chain, we believe we are well positioned to navigate near-term volatility and to continue driving long-term value. And with that, I'll turn it over to Kurt.

Thank you, Hal, and good morning, everyone. Echoing Hal's remarks, we are pleased with our second quarter financial results, which delivered record sales and net income. As Hal noted, the quarter began more slowly than anticipated, largely due to a delayed start to the spring season. Based on my experience, when spring arrives later, especially when accompanied by favorable moisture levels, we typically see a more compressed peak selling window but also a shift in demand to later in the season. That's exactly what we observed this year with spring-related sales activity effectively pushed back roughly a month. From a regional standpoint, 6 of our 7 geographic regions delivered positive comparable sales, all within a tight band. Notably, every region posted positive comps in the month of June and we're encouraged to see this momentum continuing in the third quarter. As we indicated last quarter, we expected the second quarter to mark the turning point from the deflationary headwinds we've been facing, and that outlook proved to be on target. After experiencing 6 consecutive quarters of pressure on our comparable sales from deflation, the impact this quarter was rather neutral. Moving down our income statement, gross margin expanded by 31 basis points to 36.9%, driven by disciplined product cost management and consistent execution of our ongoing everyday low price strategy. I want to thank our merchant team who continues to play a critical role in delivering results through our product cost management initiatives even in a dynamic environment. We're seeing meaningful benefits from their disciplined execution combined with the ongoing efficiencies we're capturing across our supply chain. These efforts continue to drive our gross margin performance and improve our overall cost structure. Selling, general and administrative expenses as a percent of sales increased by 51 basis points to 23.9%. This increase reflects planned investments in strategic growth initiatives, which included higher depreciation and last year's opening of our tenth distribution center. Additionally, we experienced a modest deleverage of fixed costs, given the level of comparable store sales. We remain laser-focused on cost control and ongoing productivity initiatives, highlighted by continued high performance of our distribution center network, which has increased productivity for the last 3 years and delivered its highest second quarter efficiency results. Operating income grew 2.9% to $577.8 million. Net income increased 1.1% to $430 million, and diluted EPS grew 2.8% to $0.81. Our balance sheet remains strong and is a clear competitive advantage as we navigate an evolving macro environment. Merchandise inventories totaled $3.1 billion at quarter end, representing a modest 1.5% increase in average inventory per store. This increase supports improved in-stock levels in key C.U.E. categories to meet customer demand while also reflecting the impact of tariffs on second quarter direct import receipts. We're very pleased with both the positioning and quality of our inventory. Our consistent, thoughtful approach to inventory management continues to be a key differentiator for Tractor Supply. We returned $196 million to shareholders this quarter through dividends and share repurchases. For the full year, we now anticipate share repurchases will be in the range of $325 million to $375 million, below our original outlook of $525 million to $600 million, reflecting a more measured pace of repurchases as we manage capital allocation with discipline. As Hal shared, we are reaffirming our fiscal 2025 outlook. We continue to recognize the evolving macroeconomic environment and are closely monitoring indicators of consumer spending. We continue to expect net sales growth of 4% to 8%. Comparable store sales are projected to be flat to up 4%, reflecting a balanced view of the current environment and our ongoing initiatives to drive traffic and anticipated ticket gains. Our operating margin is anticipated to be between 9.5% and 9.9% with net income between $1.07 billion and $1.17 billion. This translates to EPS in the range of $2 and $2.18. As we noted last quarter, the current tariff landscape is creating some added cost pressure. We're proactively addressing this by working closely with our supply chain and vendor partners to mitigate the impact. As to timing, we have seen the tariff impact begin to come through on our direct imports. There have been modest cost concessions on nondirect inventory. At this point, there has been limited impact to the average unit retail. All of this aligns with our expectations that the impacts related to tariffs will primarily occur in the second half of this year and beyond. Given the ongoing developments and the dynamic nature of tariff policies, we are reaffirming our guidance to encompass what we see as a range of possibilities. That said, as we shared on our last call, we're thoughtfully managing the business toward the midpoint of that range while remaining agile as the situation evolves. Looking to the second half of the year, we expect to see an acceleration in comparable sales performance, supported by transaction growth, gains in average comp ticket and soft compares in the second half of the year. It's also worth noting that the prior year had minimal weather-related sales benefit with only 1 notable hurricane and limited winter weather. In addition, the lower mix of big ticket items in the second half of the year creates less reliance on big ticket sales. These factors give us cautious optimism as we move into the back half of the year. We continue to anticipate gross margin expansion in the second half of the year, albeit at a lower rate of expansion compared to the first half. As we have previously shared, we begin to lap the transportation cost benefits from the new DC, and we anticipate shifting from favorable compares to modestly higher year-over-year transportation costs. Additionally, tariffs are anticipated to create some slight pressure on gross margin as we balance cost increases with maintaining competitive everyday low pricing. On the SG&A front, while we do foresee some deleverage in the back half, it is projected to be less pronounced than what we experienced in the first half, reflecting the anticipation of leverage on fixed costs with stronger comp sales performance, lapping the opening of the new DC in the prior year as well as our ongoing focus on disciplined expense management. We remain confident in our ability to execute our strategic plan and deliver long-term value for our shareholders. With that, I'll turn it over to Colin to provide more details on our Final Mile initiative. In my 25-plus years with Tractor Supply, this stands out as the natural next evolution in our supply chain. In my view, it's a true differentiator that strengthens our position and enhances how we serve our customers. And now, Colin, I'll turn it over to you.

Thank you, Kurt. Before I get into the details of our Final Mile expansion, I want to take a moment to recognize the remarkable progress our team has made. In just a few short years, we've transformed our supply chain from a solid operation to a nimble, purpose- built, digitally-enabled, customer-facing network, one that not only supports growth but fuels a competitive advantage for Tractor Supply. Our supply chain is uniquely designed for Life Out Here. We built a network to support our specialized store format, ensuring that our customers have access to the products they need to take care of their land, their livestock, their livelihood and their lifestyle. Over the last 5 years, we've invested in our supply chain, and those investments have driven material returns. That includes our direct- to-customer capabilities using our own distribution network. Our next step is fully integrating our Final Mile solution with our end-to-end supply chain to support our delivery needs, whether those sales are generated in store, online or through our direct sales business. It's important to recognize that every element of our supply chain is tailored to the demand of our compact store footprint in rural communities and the specialized assortment our customers depend on. We move a lot of tonnage and a wide variety of products through our small store footprint. And that means we have to be precise in how we flow product and anticipate demand patterns. There isn't much room for error, and we've built a supply chain that uses world-class technology and data analytics to make all that happen. To achieve that, we've scaled machine learning across 90% of our replenishment forecasts, added new logistics nodes, launched gig-enabled and team member delivery capabilities and are now moving more volume with greater precision and flexibility than ever before. Our teams move quickly using their knowledge of our assortment, the complexity of operating in these rural locations, and applying our operational excellence principles to deploy new Final Mile capabilities across more markets in the first half of 2025. Hal and I have gone out and done deliveries with our drivers, and that experience quickly demonstrates that this is about more than dropping a parcel on a front porch. We can and we will handle more of those small items with the capabilities we're putting in place. But we're also doing things that others can't. We're delivering dozens of stall mats that weigh 94 pounds each, 16-foot fence panels, stock tanks and multiple pallets of animal feed on a recurring basis to the same customers. These are high-weight high-volume goods that don't fit in the back of a sedan or a van. Many of these deliveries involve driving down gravel roads, navigating through pasture gates directly on to properties where our customers live and work. In many cases, our team members are trusted to enter our customers' property and have their gate codes as well as specific details about where to place the product, extending that legendary service we strive for in our stores out on to our customers' land. With our eyes on direct sales, we know we need to scale this network and integrate it with our end-to-end supply chain. Today, we have nationwide DC coverage where every DC replenishes stores and also serves as a fulfillment center for direct-to-customer orders. Our mixing center network provides just-in-time replenishment for our fastest-moving products. And with 90% of digital deliveries ending up within 40 miles of an existing Tractor Supply store, we have the foundation in place to scale a Final Mile network capable of serving our customers, whether that's for a single bag of product or several pallets. To support this, we're leveraging a fleet of Tractor Supply delivery drivers equipped with pickup trucks and trailers or stake bed trucks capable of handling these orders to these types of properties, but they're also capable of delivering smaller items while out on their delivery routes. Like the rest of our supply chain, this delivery network is built for the realities of rural living. With that backdrop, let me take a moment to update you on our Final Mile rollout, a powerful competitive differentiator and a key strategic enabler for our direct sales and digital growth initiatives, each of which we see as $1 billion incremental sales opportunities. Since January of this year, the team has been incredibly busy with our phased rollout. This is a highly coordinated effort involving store operations, supply chain and technology all working together to ensure a seamless customer experience. I often compare our approach to that of the auto parts retailers, leveraging their existing store networks to enable last-mile delivery without building costly new distribution infrastructure. We're implementing a hub-and-spoke model. We are currently in market across 145 hub stores with an additional 220 stores covered as spokes. This brings our total final mile coverage to about 15% of stores covered at the halfway point of the year. By year-end, we anticipate having about 25% of the chain with Final Mile capabilities. All of this is in addition to the existing same-day delivery capabilities we have in all of our stores with third-party delivery partners. The early results from our Final Mile rollout are exceeding expectations, and they're proving out the value of this initiative as a meaningful growth driver. In markets where Final Mile is active, we're seeing average order size of nearly $400, which is a multiple of our average basket. Our largest order has been valued at more than $40,000, a higher customer satisfaction score than other delivery options, a 10x lower return rate and stronger repeat engagement from high-value big barn customers. Our Final Mile is more than a logistics upgrade, we are playing offense where we have the infrastructure, the density and the trust to handle these types of deliveries in rural markets. Our drive for legendary service now extends beyond our stores and into our customers' barns, workshops and fields, reinforcing why Tractor Supply is the most dependable supplier for Life Out Here. To wrap up, what sets our model apart is the integration of our distribution centers, mixing centers and local store hubs, enabling cost-effective fulfillment of more inventory without the need for massive stand-alone infrastructure build-out. This gives us a clear operational edge in the hard-to-reach final mile that's so critical in rural America. Now I'll turn it back over to Hal to close out our prepared remarks.

Thank you, Colin. I hope Colin's update on our Final Mile progress convey the excitement and confidence we have in the strategic investment and the role it will play in further differentiating Tractor Supply from the competition. As we enter the back half of the year, we're focused on delivering highly relevant seasonal events, product innovation and exclusive brand launches that reinforce our leadership in rural lifestyle retail. From hardlines to lifestyle, pet to poultry and digital to in-store, we're strengthening our position as the most dependable supplier for our customers living Life Out Here. Over the next several weeks, we'll be celebrating Purina Days in store and online. Purina's iconic red checkerboard and Tractor Supply's deep rural roots share a heritage built on trust, quality and commitment to animal care. Together, we offer a partnership that no other retailer can replicate, grounded in decades of serving the needs of Life Out Here. Nearly 90% of our customers own a pet or animal and approximately half have both. Purina Days allows us to deepen our connection with customers by showcasing expert knowledge, trust and nutrition solutions and exclusive offers to support the health and well- being across all their animal species. This event reinforces our leadership in animal nutrition and care from backyard chickens to show cattle and from barn cats to beloved family dogs. Looking ahead, one of the marquee moments this fall would be our Deer Event, a signature seasonal activation that continues to gain traction with our customers year after year. This event is designed to meet the needs of outdoor enthusiasts and landowners preparing for the fall hunting season and wildlife season. We'll be featuring a curated assortment that includes deer feeds and attractants, wildlife and animal management products, trail cameras and seasonal apparel, all designed to help our customers prepare their land and gear up with confidence for the season. Importantly, the Deer Event drives cross-category engagement and reinforces our authority in outdoor, wildlife and hardlines. It also aligns seamlessly with our broader merchandising cadence and marketing strategy as we transition into fall. We're also excited to build out our Field & Stream offering, a long-term commitment to an iconic outdoor brand with a deep connection to the rural lifestyle. This move unites 2 names with a strong heritage for customers who love the outdoors. We're expanding the assortment to include wildlife, safes and outdoor gear, thoughtfully curated for the needs of our customers. Field & Stream is a natural fit within our portfolio, and we believe it will become a cornerstone of our long-term merchandising strategy. On the hardlines side, we're very pleased with the introduction of Lincoln Electric. This line includes welding tools and accessories that enhance our hardlines assortment and complement existing brands like Hobart and JobSmart, giving customers a wider range of price points and performance tiers. Lincoln positions Tractor Supply as a serious destination for rural trades people, farmers and DIYers who demand performance and reliability. Looking further ahead, our Halloween, holiday and winter seasonal sets are coming together with a thoughtful mix of function and festivity. From cold weather gear to seasonal decor and gifting, our assortments are designed to deliver both inspiration and utility as our customers prepare for the colder months. Beyond seasonal execution, we remain focused on our new growth opportunities, including our direct sales and Final Mile solutions, our pet and animal Rx platform through the Allivet acquisition, fusion localization remodels and our growing retail media network. Each of these represents meaningful incremental value drivers as we continue to evolve our Life Out Here strategy. Our stores and online platform are ready for the second half of the year. We've invested in inventory, service and capabilities to help our customers live Life Out Here. As always, our team remains focused on what we can control, investing with purpose, managing cost with discipline and, most importantly, serving our customers. Thank you for your time today. With that, operator, we're now ready to open up for questions.

[Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley.

Congratulations on the turn in comps. And Kurt, how should we think about the second half? We were prevailing. We had a little stronger traffic. Does the complexion of traffic and ticket changed at all in your mind versus where we were a quarter ago? And then is there anything to call out with the traffic in the second quarter? Were there certain categories that got better, meaning transaction count got better versus getting a little bit worse?

Simeon, yes, thank you for the question. Good morning, everybody. In regards to second half comps, as I indicated in my prepared remarks and I'll share a little bit of extra color, first, on transactions. We have had consistent solid transactions throughout the first half of the year with a 2% transaction growth in Q1, 1% in Q2. Our transaction growth continues to be solid. We expect that to continue and to be a contributor to the second half of the year. It's the consumable side of the business and the growth in customers and Neighbor's Club members that are driving that. So we do not anticipate seeing those trends changing. In regards to the ticket side of it, we continue to see the evolution from and the shift from the deflationary impact moving to inflationary and then some of the other pressures, including tariff driving some benefit to the ticket. In summary, for the second half of the year, we see demand solid, our customers in a strong position. The expectation for the second half of the year would be balanced between both ticket and transactions, and it would continue to have a bit of a balance as you saw in second quarter. We are expecting, as I indicated, inflection and stronger comp sales in the back half of the year than the first half.

The next question comes from Robert Ohmes with Bank of America.

I wanted to just follow up on other drivers in the back half. The -- I know that there were some key seasonal items that were drivers in the second quarter. How are you guys thinking about a seasonal as a driver in the back half? And also, the July strength, was there any pull forward in that from your customers supporting big ticket or anything related to concerns about tariff pricing?

Robby, and thanks for joining the call today and for the question. Just kind of doubling down on Kurt's comments about the second half. I'd start out by just saying we continue to be optimistic about a step change in our comp performance in the second half. We anticipated this really all the way back to our investor conference day. We foreshadowed that. We had reiterated it in our Q4 earnings call, talked about it again in our Q1 earnings call. And what we kind of foreshadowed and we're optimistic about is what is playing out. As it relates to the back half of the year, as Kurt said, we fully expect comp transactions to continue to be strong, and we expect we will have positive average ticket in the second half as well. Those 2 coming together to lead to a step change in our comp run rate from the first half of the year to the second half of the year. I'd say in addition to just the natural math, we have a number of things that are kind of playing to our advantage in the second half. The first is we have some favorable lapping. Last year, it was a really warm July with a lot of drought. It's the exact opposite this year with a lot of moisture in the ground and continued very strong momentum in the month of July. So to your point, Robby, did we pull things from July into June? Absolutely not. In fact, the momentum, as I mentioned in the call from June has continued and even strengthened into July. So we have favorable momentum in July lapping. As you look into the balance of the year, we've got likely favorable lapping with the lack of emergency response last year. There was really only 1 notable storm last year, and it kind of split a little bit across Q3 and Q4. And then we had really no winter in our Q3. So we have a lot of favorability in kind of last year lapping as well. And the final thing I'll add is rural America is doing very well right now. There is strong consumer confidence in rural America. We continue to see domestic migration into rural America. Rural America disproportionately benefit from the job creation that's going on. If you look at the 2.2 million gross jobs that have been created this year, there's a disproportion of those in rural America next to urban America. And Life Out Here is doing very well. So as we look towards the back half of the year, we've got favorable kind of just math dynamics. We've got favorable lapping. We've got a lot of events in place, and we've got rural America doing well. So we feel very good about our second half and the inflection that we're optimistic about, and we're already seeing it as I said in our July numbers.

The next question comes from Chris Horvers with JPMorgan.

So my question is, do you think that the weather was a net headwind in the second quarter? Perhaps that the right trend is 2% as we're building into the back half? And as you think about the acceleration that you mentioned in June and July, it seems like maybe June was running mid-single digit if you were flat heading into June and July would be better. So the other way to ask the question would be, do you look at March to July in its entirety in terms of the base of comp and as we think about the acceleration in the back half? And any comment on explicit inflation expectations in the back half?

Just a couple of follow-ups on that. Yes, I mean, I think spring, first of all, plays out different every year. And so there's kind of a natural starting point to spring and a natural kind of end point to spring every year and it kind of just -- those are different every year and you have different peaks every year. This year, spring started significantly late. I mean, arguably, even in the deep South, it was mid- to late March before you even saw the spring uptick. And it was early May in the North, arguably a little later that you saw it. So I would say it shifted back 4 to 6 weeks on the start. And then on the end, I don't think it's finished yet. A lot of times, it will end July 4, sometimes Father's Day. This year, it's extended beyond. We have a lot of moisture in the ground, grasses are green, bugs are out, weeds are out. There's a lot of mowing, a lot of weed control, a lot of pest control still occurring. All that said, our C.U.E. business continues to be very strong, poultry, equine, bedding. You look across the board, lubricants right now, propane sales, forage, those businesses are doing very, very well. So it's not just seasonal. Final point, to your comment on the 2% comp, I guess while we're not giving quarter-to-quarter comps, what I would say is that what's implied -- as Kurt said, we're guiding the business to the midpoint of our annual guidance. And that certainly implies higher than a 2% comp for the back half of the year, and that is what we are looking for.

Chris, this is Kurt. I'll just add on the inflation question that you asked for. That does imply with ticket increase that we are seeing not just in the commodity, that's not where the expected inflation is, but there will be incremental inflation across the entirety of the product category. So yes, we do anticipate having some inflationary benefit in the back half of the year versus the historical deflation that we've been seeing in the last 2 years.

The following question comes from Seth Sigman with Barclays.

Actually, I was going to follow up on that last point around the inflation. Can you talk a little bit more about the cadence of the price changes that you're planning here that drives that inflation in the back half of the year? And I think at some point, we may have talked about low to mid-single-digit type of tariff-driven inflation. Is that still your expectation for the second half of the year? And then just finally, elasticity, what have you embedded here for the guidance? Any thoughts on that?

We're roughly planning for a balanced ticket and comp transactions for the back half, as Kurt said, so you can kind of reverse engineer that on what our implied comps are and what our implied average ticket that we'd need for the second half. And there's a little range in that. We feel very confident in looking at what our average ticket is going to be for Q3 and Q4 on our C.U.E. products. Those we have great visibility to on its current average unit retail, what our average unit -- moving average unit costs are and how that's going to play out in the second half. That's been the underlying inflation that we've been calling out for 2 or 3 quarters, and that we still have very good visibility to. On the tariff-related products, we have excellent visibility into what that pricing will be for Q3 and have good visibility into how that will affect our AUR, and we'll be watching for elasticities very closely. Q4, we have good visibility into but are still being -- maintaining a lot of flexibility with all of our eyes on the August 1 tariff deadline. And we've put in place a number of tactics to give us a lot of flexibility in Q4 on pricing. And we've got a lot of draft spreadsheets on pricing and that -- a lot of that will be determined post August 1. We've got a lot of flexibility on that. But net-net, there's a relative level of implied inflation on all of our tariff products. It's just varying ranges and we leverage our portfolio strategy for that.

The following comes from Steven

A lot of focus on same-store sales. I wanted to shift to margins. As you know, you're calling for this step change in comps in the back half of the year. Can you just help us think to the flow-through to margins and then EPS? Maybe what drives upside to the gross margin in the back half? And then on SG&A, Kurt, just help us think through the level of same-store sales growth you need to leverage SG&A?

Yes. Steven, on the operating margin, the first half for the -- versus the second half is very much 2 different stories, and I'll try to give you a bit of additional color in regards to the reference points that I already had in my prepared remarks. But in the gross margin, we had easier compares and we start to lap some of those benefits in the second half of the year. So as we said in the beginning of the year going into this year, we saw stronger gross margin performance in the first half than the second half. So of our range on gross margin, the second half of the year will be at the low end of that range on gross margin. On the SG&A side, as we've now lapped the opening of a distribution center and have higher comps expected for the back half of the year, while we see the gross margin below the first half -- in the second half, we also see SG&A really almost half of the level of deleverage in the second half that you saw in the first half. So operating margin in our -- if you look at the base case, there's some operating margin decline year-over-year. We said we're making investments in these strategic initiatives. On the gross margin, mix is a little bit stronger pressure this year. Tariffs puts a little bit of pressure, but we believe we can still maintain, even at these elevated comps, we can maintain the operating margin rate that we gave in our guide.

The next question comes from Michael Lasser with UBS.

One for Seth and one for Colin. My question for Seth, is the nature of the inflation that Tractor is going to benefit from in the back half of the year going to be different than the market has been accustomed to where it's going to be more on the non-C.U.E. items? So what have you seen already from an elasticity perspective and how are you planning that? And then my question for Colin is on the new capabilities, obviously, Amazon is making a big push in the rural areas. Does Tractor's new capabilities make it more of a competitor to this other big player? And does that change the complexion of the business?

Yes, thanks, Michael. This is Seth, thanks for the question. To hit your first question first on elasticities and kind of the nature of inflation in the back half, to piggyback some of Hal's comments, first and foremost, I would just say we have a portfolio pricing approach to how we can manage both our margin dollars and margin rate as we approach pricing in the back half. I would just say the merchants have been working with our suppliers to assess where we can go find alternative sources of supply. We have had a tariff task force quickly stood up to where we can navigate some of the cost or cost pressures that might be coming through. And at this time, they are moderate in nature with the ability to approach those with a partnership approach. In the past, when we've seen similar inflationary factors that aren't just C.U.E.-related, specifically in times like we're navigating right now, whether it be tariffs in 2018, 2019 as well as just the inflationary period coming out of COVID, when the entire market tends to have to make strategic pricing moves and move, typically elasticities tend to go down slightly as well. We are -- we have a bunch of different scenarios modeled. Feel good about the tools and the team we have in place, and I'm confident in the belief that we'll be able to appropriately manage the margins as we look to the back half.

Yes, Michael, for the second part of the question there, what I'd say is what we're doing is we're taking a contemporary approach to rural delivery with all the systems and sophistication that you expect from Tractor Supply as we compete with regional competitors, co-ops, your local fencing company. We have great confidence in this initiative because we've got the locations where our customers live, we have the inventory our customers need, and we have the supply chain built for this rural terrain. Just a little bit of color/ commentary on what we're doing. In Q2, our team did 75,000 deliveries out there in the market. 75,000 times, we've been able to go out in people's properties and engage with them and extend that legendary service out there. We're able to get a wider variety of products using our Final Mile delivery out there in greater quantities. But also we're seeing customers choose that for the more convenience types of deliveries that they need as they're managing their lifestyle and their jobs as they live their lives there. I cannot understate the power of the trust and the relationship between our drivers and the customer and the relationship that's there, that is different than other kind of delivery providers. What I'll say is we're only going to get better as we continue to build this out. We're going to keep you updated on it, but we're really looking on how we're extending our legendary service from our stores out on to our customers' properties, not a fundamental change in the business model.

The following question comes from Chuck Grom with Gordon Haskett Research Advisors.

Can you discuss early results in PetRx? How many Neighbor's Club members were already using PetRx? And then how many Neighbor's Club members, I guess, can you add to it? And just on the weather as we move into the back half of the year, can you remind us how much in lost sales you think you saw last year in November and December? Obviously, the weather wasn't good but the forecast for November and December is much better for you. So just curious on that front.

All right, Chuck. This is Rob Mills. First, thank you for the question on Allivet. I first want to kind of begin just talking a little bit and sharing just a great appreciation across both Allivet and the TSC teams on this focused strategic initiative. This is a new category for us. We've seen strong cross-functional collaboration between the 2 organizations. And big picture, we're integrating very nicely. In early May, we launched the Rx and OTC categories onto Tractor Supply's platform as well as our mobile property. The launch went really well. We're seeing really strong momentum in the growth of orders and customer adoptions. Prior to this, the Neighbor's Club penetration was low, but we're putting extreme focus on leveraging our Neighbor's Club data, the capabilities, driving specific campaigns and we're seeing good adoption rate. We haven't shared any kind of formal numbers. We're early into this journey so we're getting a lot of learnings out of the way. But with that being said, we have strong momentum. When we think about the customer growth, I could tell you in Q2, we saw the strongest customer acquisition growth that we've seen in many years across the Rx and OTC category, especially when you look at the Allivet business. Looking ahead briefly, Q3, we're putting investments on that customer experience. We've gotten some great learnings and feedback from our Neighbor's Club customers. You'll see us focused on even more ease of how we transfer that script, driving in-store training, adoption with our team members, to drive education with our customers and then just overall awareness through Neighbor's Club messaging, promotional testing and then leveraging the tools that we have with pet washes, mobile clinics and just in-store signage. So big picture, we're excited. We're early in this journey. We're seeing great adoption, more to come. We'll keep you updated but we have a positive trend, and week-over-week, we're growing.

Chuck, this is Kurt. And on regards to the second half weather last year, the 2 biggest pressure points where we last year in the second half landed really or produced really about a flattish comp. We said weather and some of the pressure on discretionary spend last year. Q3 had the biggest weather pressure, and we saw no real favorable weather with the heat and the drought. So we are cycling 2 quarters where weather was a net negative. We didn't quantify the specifics then, so I won't try to go ahead and project that. But we know as Hal said, that's a -- it's a favorable compare that we'll be lapping this second half.

The next question comes from Steven Forbes with Guggenheim.

Hal or maybe Colin, maybe just a follow-up on the Final Mile initiative, a 2-parter here. So you mentioned AOVs of $400, but curious if you can comment on who the early adopters are, right, as we think back to sort of your customer segmentation work that you did during the Analyst Day. And then second part, right, how should we frame the ROI ramp of this offering, given the comments around fleet and driver investments, 75,000 quarterly deliveries in the second quarter? But what's like the breakeven number of deliveries and how do we think about sort of the unlock of ROI?

Yes. Steven, I appreciate the question, and thanks for joining the call. Two things. On the customer side, it's very much the big barn customer that we laid out in our investor conference day. These are landowners, animal owners, multi-species animal owners, and their needs are on a weekly basis or more so, and they buy in high order volumes. And as Colin was laying out, the competition that we're facing as we go out and start to call on these customers is a really fragmented set of competition, whether it's the local co-ops. We're seeing a lot of fencing sales so there's a lot of local fencing contractors and those sorts of things that we're competing with. But we're finding the market to be exactly what we anticipated it to be from a customer perspective. As it relates to the ROI, first off, I'll remind you that the delivery is expense-based. And so we can throttle our investment up and down, whether at an enterprise level or at an individual hub and market level based on the demand that we're seeing. I'll also remind you that there's 3 ways -- 3 levers of demand that the Final Mile is delivering. The first is direct sales, and oftentimes, those 2 are inextricably linked and should be. But there's also 2 other levers. Our online bulk orders, which is well over $100 million, $150 million -- nearly $200 million of sales, those will now flow through our final mile as well. We will no longer be relying on third-party delivery for that. Those have really low customer set, high return rates. So there's a lot of ROI that comes along with those. And then finally, it enables delivery of items in store when the store sells them and we're unable -- the customer is unable to get them home. So there's 3 means for that. There's revenue generation, shipping revenue generation that comes along with each as well as obviously product demand fulfillment. We haven't shared the ROIs across each one of those. But as time goes on, you can expect to hear more from us on each of those pieces. But we remain as bullish on them now as we did 6 to 7 months ago when we had our IC day, if not even more. Thanks for the question.

The following comes from David Bellinger with Mizuho.

It's on the buyback being notch lower. Can you walk us through why the magnitude of the change this year is so dramatic? Where is that capital shifting? And does it say anything at all on how you view your stock and the valuation that's currently attached to it?

Kurt here. We've -- in our long-term guidance, I think it's helpful to first just state in our long-term guidance, we've said in our capital allocation after the commitment to the dividend, we are opportunistic in share repurchases. We are committed to being a buyer of our stock. Our target is to remove 1% to 2% of net shares out annually. Our guidance originally put us at the high end of that. As we see the capital investment, particularly in inventory and how tariff -- the capital we spent on tariffs that will go on the balance sheet in an environment with higher interest rates, we're being very prudent and wise in our capital allocation and just deciding we're going to make that investment. And as we're in a time of tariff increases to spend the capital there. We have the ability to still remove 1% of the float out of the stock and be able to do that and just shift some of that capital spend from share repurchases into our working capital on inventory and put us in a great position. So it does not change our guidance in regards to this year's net earnings per share, and so therefore, we think it's the right prudent thing to do for this year. And again, I'll just reiterate, it does not take us outside of what we've said would be our parameters of how we engage in share repurchases.

The next question comes from Peter Benedict with Baird.

I guess there was a comment, I think maybe it was Hal, when you mentioned the term in the pet category or pet food, just maybe, Seth, I don't know if it's for you, could you expand on that? What exactly are you seeing? And how -- what's your outlook around the pet category?

Peter, it's Seth. Thanks for the question. On pet performance in the categories, Hal mentioned in the prepared remarks to your point, we do believe that we're at the point of basically some of the trough where demand had slowed. And we're starting to see that we are going to have and believe we have some tailwinds as we kind of look ahead, albeit potentially at maybe a little bit slower rate than historically we have run but really are leaning into some of the key core capabilities and are continuing to take market share. And I'd just -- I'd touch on a couple of other quick things quickly and where we're investing in pet. First, as Rob articulated of PetRx, we're pleased with how that's getting started. Our service offerings, we're seeing tremendous demand for in our in-store like vet service clinics that we have as well as our 1,000 pet washes. Over the course of this past month, all of our dog food, our cat food, several accessories in this week, our pet treat categories all gone through a major reset activity where we are introducing new brands, expanding brands that we're seeing traction in as well as introducing new products across like for health, whether it be with Shreds or our new UNTAMED product that we have out there. And then finally, throughout the course of the first half of this year, when we went through our localization project, we created a newer format for what we were seeing, we were putting infusion and we have even retro gone back in what we are calling our 5 -- we're calling it the 5G+ format. And at this point, we have over 500 stores that we have gone and put this new format in. It has a couple of hundred incremental SKUs. We should have over 800 by the end of the year. And we're seeing very positive results coming out of that outpacing the balance of the chain. So a lot of work going into pet to make sure it's such an important category for us as well as just our customer ownership with animal ownership, and I believe we're going to continue to take share.

The following comes from Scot Ciccarelli with Truist.

I know you've been asked about this already with the last-mile delivery, and I think Michael mentioned Amazon. But can you just provide maybe your broader latest thoughts around the competitive environment? Because it's not just Amazon, right? We've had Walmart expanding their delivery capabilities. You've had Lowe's expanding their rural assortment expansion. And obviously, these are much larger companies than some of your historical competitors.

Scot, thanks for joining the call. I appreciate the question. Stepping back, I'd say farm and ranch channel has always been a channel that people have had an eye towards and have looked to invest towards or rural America as well. I can think back, as you all know, I worked at a big-box home improvement store, and I can think back to 3 or 4 times that we tried to make an entrance into the farm and ranch channel during my tenure there. I think about in my tenure here at Tractor Supply, there's been more than a handful of companies that have announced entries into farm and ranch as well. What I'd say is that we compete against thousands of locations and hundreds and hundreds of companies each and every single day. We've got a track record of being pretty successful in our market while doing that. Our focus is really always around just serving our customers in the best way we can. And that's really around our legendary service, having all the products they need in a very convenient format and making sure we leverage our scale to price it as the best value in the market that you can get out there. And I think we are just such an integral element of rural retail. We don't take that for granted. We know that's a responsibility we have to embrace every single day, but I think it's a pretty good position to be in. And we're very confident in our ability to leverage that as we grow and put our initiatives on top of it moving forward. Thanks so much for the question.

This concludes the Q&A session of the call. I'll now pass it back to Mary Winn for closing remarks.

Thank you, everyone, for joining our call. We'll look forward to talking to you at our Q3 call in October. We're around this afternoon and -- for any follow-up as needed. So thank you again for your time and attention today.