Good morning, ladies and gentlemen and welcome to Tractor Supply Company’s Conference Call to Discuss Second Quarter 2022 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, Mrs. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead..

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today and I hope everyone is having a great summer. On the call today are Hal Lawton, our CEO; Kurt Barton, our CFO. And after our prepared remarks, we will 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 have 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 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 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. 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..

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 entered 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. Structural tailwinds continue to benefit us, including rural revitalization, home setting, self-reliance and pet ownership.

Our brand, loyalty program, digital capabilities, supply chain and 2,000 plus stores create significant enduring advantages for us and our strategic initiatives are all on track and reaching scale. Now, let’s turn to a 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%. 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 3x our overall sales growth rate.

This is the fifth consecutive quarter of C.U.E. outperforming our overall results. Our seasonal performance was below the company average, but positive. 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-term mowers, chicken coops, battery-operated outdoor power equipment and grills, with the biggest declines coming from frontage and 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 in 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. To-date, we have over 400 stores in the Project Fusion format.

We have over 230 stores with garden centers, more than 100 stores with store than the store Carhartts 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 you and existing customers.

Given our strong performance in the first half of the year, we are raising our financial outlook for fiscal 2022. Although the operating environment maybe different than we anticipated as we entered the year, we are pleased with how we are 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. Our customers and team members are passionate about the Out Here Lifestyle and they prioritize it.

Our customers’ over-indexes, 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 want to welcome Kimberly Gardner as our new Chief Marketing Officer.

Kimberly succeeds Christi Korzekwa, who announced her retirement earlier this year. Kimberly 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.

Our appreciation and thanks go to Christi for her leadership and dedication over the last decade at Tractor Supply. Now, I will 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..

significant product cost inflation, higher transportation costs, and to a lesser extent, product mix given the robust growth in C.U.E. 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. 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 the moderation of COVID-19 response costs as well as leverage in occupancy and other costs from the increase in comparable store sales.

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 6 months of the year to $691 million. Turning to our balance sheet, 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 are pursuing more inventory as there are categories we are working to improve our in-stock position.

To provide more clarity on this, on a 3-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.

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 to $14.05 billion, with comparable store sales growth of 5.2% to 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% to 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 to $9.60 compared to our prior guidance of $9.20 to $9.50.

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.

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 C.U.E.

and higher transportation costs. Both of these factors we first experienced in the fourth quarter of last year. Store 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.

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. 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..

Thanks, Kurt. Okay. So, 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 are 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.

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 is 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 bag 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 C.U.E. categories. These are destination categories for us that drive trips. Our supply chain is a critical differentiator for us to deliver on C.U.E.

as we work to ensure we not only have capacity for future growth that maintains the lowest cost to serve. To support our store growth and increased demand, our ninth distribution center located in Navarra, 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. With the success of our Fusion and Garden Center projects, growth in our Neighbor’s Club, the increased volume, velocity and variety of C.U.E.

products moving through our supply chain in stores allows us to leverage our scale and sophistication to widen our position in farm and ranch. Mobile engagement is a moat 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 are 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. Innovation and newness resonate with our customers and our merchant team as 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 of 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-sleeved 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 coral.

Our lineup of relevant brands like Porter Cable exclusively at Tractor Supply, the expansion of 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 Battery that we will roll out in the fourth quarter. Interstate Battery 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 traveler by Interstate Battery, 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.

As the dependable supplier in this destination category, we are 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. And importantly, across our C.U.E. categories, we are committed to being in stock and priced right for our customers. Our C.U.E. 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. This is a trend we’re seeing across other C.U.E. 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 cost 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. My thanks and appreciation go out to the team for their dedication to living our mission and values every day. And now we’d like to open up the call for questions..

Thank you. [Operator Instructions] Our first question is from Elizabeth Suzuki from Bank of America. Elizabeth, your line is open..

Great. Thank you so much.

So first, just regarding transportation costs, do you think we’re getting past peak cost pressure? And do you have any expectations that transportation costs could become a tailwind going into next year?.

Hey, Liz, how are you? This is Hal. Thanks so much for the question and for joining the call. On transportation costs, break it down into a couple of different buckets.

First off, spot rates for both import products, the container spot rates as well as spot rates for domestic are trending down and starting to reach kind of averages levels for last year and in some cases, below. That said, the flip side is the vast majority of our business for both domestic and imports are done on contracts.

And the contracts that we are in this year are at higher rates than they were last year. So kind of when you kind of look at it all, it all kind of blends to about the same number. So 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 to 18 months..

Great.

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

Liz, hi, this is Kurt. Yes, we have imports at around 12% of our business just for the full group as a reminder. And back when the China tariffs were put into place, I mean, we had some product having the tariffs in there. If there were to be reverse of those tariffs, that would be a benefit to us.

We managed well when putting – managing through the increase in the tariffs. And then, of course, with imports, do keep in mind that, that product has a longer lead time. Those costs have to work through the system.

So similar to almost the explanation that you heard from Hal on transportation, any shift in tariffs would take 6, 9, 12 months to really see playing through the inventory and cost of goods sold. And as any changes in a tariff environment changes. Certainly, we will 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..

Great. Thank you so much..

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

Good morning, Hal and Kurt. Maybe, Hal, I wanted to focus on how Tractor is addressing the internal cultural and what agent befit needs of its team members in the current inflationary environment.

And if you can maybe highlight some of your learnings from the annual sales meeting as it pertains to what your team members are asking for and what they are sort of speaking as to their customer needs..

Good morning, Steve, how are you? And thanks for joining our call. I’d 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.

And as you mentioned, our annual sales meeting, which was just last week is one big way that we do that. As it relates to kind of the investments we made in the team, we’re proud of the investments we’ve made in our team, in particular over the last couple of years.

And they range from wage investments to bonus enhancements and improvements and to broader rollouts of benefits and not just healthcare benefits, but additional items like tuition reimbursement, paternity leave, etcetera.

And those have been substantial in their monetary both at an individual level and also material in terms of investment on the overall company level. And we are committed to paying a fair day’s wage for a fair day’s work. That said, we look forward – we do think that the majority of that investment is behind us.

We feel good about where we are from a market perspective on a relative basis. We’re seeing retention rates well below 2019 levels. We’re seeing excellent engagement scores with our team members. And we feel really good about our culture and our morale and our team as we head into the back half of the year.

We have a track record of consistency and resiliency in all different economic environments. And that’s one of the things that 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 a flight to quality.

And I think that will be a really good thing for Tractor Supply and allow us to 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..

Thank you. I will keep it to one..

Thank you, Steve..

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

Hi, thanks. Good morning. 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. So I wanted to see if there were any more details around that.

And just with regards to margin and preserving margin, has there been any effort to push some of the cost back on to vendors? Or has there been any effort to push for more sharing of costs as we’ve seen with other retailers?.

Hi, Kate, this is Seth. Thank you for the question. First question there on kind of what Kurt talked about in the prepared remarks on promotional activity, over the course of the last 2, 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 the course of being an EDLP retailer. Fundamentally, we are not planning adding additional promotion to our strategy.

And 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 those sales, market share and obviously protect margin as well there.

For your second question around cost push-backs, the short answer would be yes.

We are definitely working with our vendor partners and 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 this also typically carry higher gross margins for us as well. So 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..

Okay, thank you..

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

Good morning, guys. Scot Ciccarelli. So I think in the prepared comments, Hal, you talked about evolving demand and a different operating environment than what you expected at the beginning of the year. But it doesn’t sound like the business has changed a whole lot.

So can you provide any more color maybe on what you’re seeing in terms of recent trends that kind of made you make that comment?.

Yes. Good morning. And thanks, Scot, for the question and for joining the call. 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. And we’ve got a portfolio of geographies.

So at times when certain geographies are seeing unfavorable weather, we will see favorable weather elsewhere. We’re seeing some balance of that as it averages across. I’d also point to the strength of our C.U.E. business and the fact that it is the fifth consecutive quarter it’s performed at these elevated levels.

Categories like dog, dry food, we’re taking significant share. That business is running mid-double-digit unit comps well into the mid-20% on sales dollar comp. We’re also seeing similar strength in poultry feed and equine feed. And those businesses are demand-driven, need based. They drive the traffic into our stores.

And so 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 frontage and riders where we need to.

And the team has just done an excellent job navigating that kind of evolving consumer demand having the right inventory at the right place at the right time. And as 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 we feel really good about inventory. And if anything, we’d like to have more of it in some of our C.U.E. categories. But I think that’s the thing that’s just the strength of Tractor Supply in our business model is the demand-driven, need-based consistency of the business.

If I go back in history, 30 years plus now of positive revenue growth, 30 years of consecutive of positive comp transactions, 29 of 30 of positive sales comp dollars.

And it’s just the consistency of the business and the strength of the team to be able to navigate these evolving consumer demand that gives us the confidence in our – in raising our outlook for the year and also the consistency of the first half performance..

So just to clarify, Hal, like so you’re not seeing incremental weakness somewhere where maybe you’re being surprised and that wasn’t the reference to evolving demand..

Yes. I’d say as I mentioned in the prepared remarks, the business has continued to evolve this year as consumer demand has evolved. 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 multiple years ago.

But in there, we have some categories that were very strong, grilling and safe as examples. But then we had other categories that were below expectations, but those all netted to be right in line with what we thought.

And so we’re not seeing a precipitous drop off anywhere, just the continued evolution as you always have in the business and maybe a little bit more faster evolving just given the market dynamics that we’ve all been operating in over the last 2 or 3 years, really. But nothing of concern or material weakness or anything like that..

Got it. Thank you very much..

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

Good morning, everyone. Nice quarter. Nice quarter. Kurt, I think you mentioned a 21% increase in inventory per store.

Could you review what time period that covered? And does that indicate perhaps that you still have some shelf price adjustments to do to catch up with that? And 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?.

Good morning, Chuck, yes, 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 is 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 been baked into it.

There is some inflation we expect to continue in the business. 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 is in a healthy position. There is some more on the consumables side we are working to get more of to improve our in-stock position, but we feel very good about it. And as I mentioned, unit growth over the last 3 years is single digits, while our sales have been growing at 60%.

And I think that’s a really important point is that we’re growing the inventory modestly, and our turns are in great shape..

Thank you..

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

Hi, thanks. Good morning, everyone. So great results. I was hoping you could just talk about the new customers you’ve acquired over the last 2 years with COVID. It does seem like the rest of the channel feels like that customer has exited their stores.

So if you feel like you’re retaining them, maybe you could talk about some of the strategies you’ve implemented.

And secondarily, is there any risk on some of these poultry customers that have come in, we’ve heard that a short-lived hobby and maybe those customers could roll off a little more quickly?.

Hey, Peter, how are you today? Thanks so much for the question. I’d start out by saying we estimate our market was roughly flat on a dollar basis for Q2. And therefore, we took substantial share in the quarter.

And 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. And I’d point to categories – a few different categories on that.

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. This is the third year now of substantial growth in poultry.

And each year, we’re seeing the customers that engage in the category last year reengage at very high retention rates. In fact, one of the highest retention rates that we have in our C.U.E. business. And then we’re also seeing significant new customers entering the category.

And 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. With rising inflation and cost, you can have a meat bird in 3 months, have an egg layer in 4 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. We’ve made a significant investment in our garden centers over the last 2 years and exiting Q2 with 230 garden centers.

And over 10% of our chain now has a garden center. Live goods, has been 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 – and given us kind of that next kind of demand-driven need-based transaction driver in our stores.

So, we feel really good about our customer retention, how we have engaged with the customers over the last 2 years and we are holding on to them. And the last thing I would point to is our Neighbor’s Club now, it’s 26 million members, comprising well over 70% of our sales. Retention rate is still running well above 80%.

And our largest tier and one of our fastest-growing tier is retention rate above 95%. So, I feel really good about the state of our customer and start and I will close with, as I mentioned at the beginning, we took substantial share in the quarter, which has been a consistent trend over the last 2 years, 2.5 years..

Very helpful. Thanks so much..

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

Hey. Good morning. Hal and Kurt, we started to see some underlying commodity prices roll over a bit.

So first, could you talk to your expectations around the inflation change today relative to your last quarter outlook? And 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..

Good morning. On inflation, I would start by just saying it continues to be persistent and consistent.

Certainly, seeing some moderation, if you look at a few of the metrics, fuel costs, slightly down, spot rates on containers, down a bit, commodities moderating, but still, if you look at even on a year-over-year basis and certainly on a 2-year and 3-year basis, kind of record highs.

And I think there is a lot of debate in the industry right now and whether or not some of the reduced prices around corn and wheat are going to hold, or whether it’s just a temporary lull that will go back up as we start to look at the crop yields and demand towards the back half of the year.

I think the thing we are both watching at a very high macro level is PPI. And PPI has got to come down first, just generically speaking, across retail before CPI is going to come down.

And it’s going to take – because retailers got to turn through their higher cost inventory for two months, three months, four months at a minimum before you start to see any reduction on the CPI retail side.

So, I think inflation is going to hold and continue to be consistent really through the CPI kind of retail level, certainly through the balance of this year..

Thanks Hal. Appreciate the time..

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

Great. Thanks for taking my question. Just a 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, 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.

So, I just wanted to be clear on where Tractor Supply would be in terms of pricing changes under that scenario. Thanks so much..

Yes. Jonathan, this is Kurt. In regards to tariffs, I will address part of it first. I will let Seth talk about pricing and how we would address that. But let me frame up the size of it and the timing of it. So, for instance, just referencing back that imports are roughly 12% of our business. Not all of those imports are subjected to tariffs.

So, you are talking single-digit percentage of our business. And when tariffs were enacted, it’s over – it was over a 12-month, 18-month period of time that it flowed through. And we view it and you have to manage it very much like it’s another form of inflation.

And as it flows through our model, we then have to address how we are going to be able to manage our margins, whether it’s retail price or any other levers that we pull through that. And because it’s single-digit percentage 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 will manage through that as any tariff adjustments occur. Seth, I will turn it over to you to talk about pricing strategy..

Yes. Hey. Thanks Kurt. 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.

Our team has incredible tools in place, great visibility into moving average cost, a lot of forecasting together. And 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 are hitting the right price on the right categories. We are 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.

So, 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 are hitting our targets that we need..

Got it. Thanks for the color Kurt and Seth..

Yes. Thanks Jonathan..

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

Hi guys. Thanks a lot. Kurt, I 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. So, I just want to clarify there.

And then just bigger picture with the garden centers, curious what the biggest learnings have been so far, both positive and negative.

And I guess on the negative, what have you changed since you started that endeavor 12 months to 18 months ago?.

Hi good morning. This is Hal. Thanks Chuck for the question. First, I will just say on our comps, they have been very consistent in June and into July. And I think the heat and the drought is certainly impacting the business. But as I mentioned in my remarks, it’s really taken more of the upside out of Q3 more so than it impacted to the downside.

And that’s why Kurt was kind of mentioning in his comments, kind of in our 5.2 to 5.8 guide set for the year that we expect in Q3 and Q4 to roughly run in the middle of that. And as we mentioned, that’s kind of how we – what our total Q2 was as well. So, feel very good about that. And we are navigating the drought well.

But – and again, it’s kind of impacted the upside potentially really more in the quarter. Yes, and then on garden centers, 230 of them as we exited the quarter here.

As I mentioned earlier, we are seeing a strong attraction of it for new customers and destination trips, more younger and female While we – and I think the thing that’s different about our garden centers, while we certainly sell annuals and perennials, we are seeing real strength in what you would expect in kind of rural America, which is trees, shrubs, fruits and vegetables.

And our garden centers are performing at the expectations we had, continuing to deliver strong comp lifts in the stores that we roll it out. And we have been very pleased with our vendor partnership as well, and there has been a lot of interest from our vendor partners in doing business with us as we expand into other markets..

Great. Thanks Hal..

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

Good morning. Thanks a lot for taking my question. There has a lot – 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 implies 2 years – 3-year stacks are going to remain relatively consistent over the next couple of quarters? And as part of that, when would you expect traffic to turn back positive? Thank you very much..

Yes. Hi Michael and good morning. I would start with we look at the history of the business and just the consistency of our performance and the stability of our performance over 30-plus years in all the varying economic cycles that we have been through. The second thing is we then look at kind of the foundation of the business and our C.U.E.

business and the demand-driven, need-based orientation that, and the strong stability we have there and the share gain. And then we obviously have our own internal forecast that 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.

And we – our view on the economy is that it will remain roughly as it is for the balance of the year. And as a consequence, our performance will stay kind of in the same range that it’s been operating in as we move forward for the balance of the year. We all saw Q1’s GDP was negative. We will know in a few weeks’ time on Q2’s GDP.

We certainly know consumer sentiment and business sentiment is negative. I think it’s more likely than not that the Q2 GDP is roughly in line with what Q1 was. And – but our expectation is that the second half is about the same.

And 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 are 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 do see – we have seen positive transactions. As we mentioned in my prepared remarks, the months of May and June in combination had positive comp transactions.

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

Thank you very much..

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

Good morning guys. So, thanks for taking the questions. Just, Kurt, I wanted – maybe if you can go back and expand upon the comments you made. You talked about some levers that you have that will 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? And then how do you think about that same dynamic in the event that inflation does start to roll, and you are getting obviously 12 points of inflation right now if that reverts to par, how do those levers work? And how do you feel about the EBIT margin in that environment? Thank you..

Yes. Peter, good morning. As we indicated in our prepared remarks and just the consistency of this business, I will start there, Peter, with just the fact that we have got good visibility on our expense structure. We have had consistency in both top line and in gross margin.

So, it’s really important to just start there as a needs-based, really durable business. And then from there – the other point that I would 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 and the natural SG&A levers at a good low-single digit number.

And we are 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 are investing in the business.

So, to your question about how we manage that, we certainly have the ability if needed to, to be nimble and flex on the investments because that’s the area that is the greatest pressure on SG&A. And then the business just has a solid core around DNA around profit improvement, lean thinking.

I mean this is something that has been built in over 10-plus years and really matured in our organization. And what we are doing today in regards to driving miles down, more inventory per truckload when you have got transportation costs. And what we are doing to just drive efficiency.

Those are the different levers that we are benefiting from today, and we will continue to use that for the next few years. If there is any reason to really have to adjust from our current thesis and algorithm. So, we feel very good about our ability to drive our long-term operating margins..

Great. Thanks so much..

Thank you. So, we will take one more question, Austin, and then we will wrap it up as we are at the top of the hour..

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

Hey guys. Thanks. Thanks for taking my question. I am just going to put them together because I know we are at the end of the call.

So, just on the near-term transaction trends, I mean how much do you want to attribute that to inflation, people trying to stock up and the drought? Maybe units per transaction are up, and those are the factors driving down your transactions. And then 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 we are expecting just because it gets traction. People know it’s there in the market. Those are two questions..

Yes. Hey Scott and thanks for the question. And 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 the 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. We break our customers in a variety of different cohorts and segments. We see our lower-income customer group having some modest falloff, but we have mentioned that over the last month or two months.

And – but as a reminder, that’s a very small piece of our customer segment. Our customers own homes, they own land, they own animals, they own pets. And to some degree, that insulates them.

And that’s the consumer segment – I think being our business, but also if you just are 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.

And I think we can see that in a moment, and we also see it in the track record of this business over the last 10 years, 20 years, 30 years. And so our customers don’t very strong, still spending and still doing well.

And when you pull out the extraneous factors, we still see strong positive comp transactions and feel very good about the health of the business. And the garden centers, we feel we are very positive on our garden centers in total. Really pleased in less than 2 years of having launched the strategy to have over 15% of our chain is garden centers now.

And in the stores that have had it in place for now a second garden season, they are performing very strongly. We are 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.

We have been very pleased with our store execution and hiring garden center specialists. So, you have got a strong customer service theme in the garden centers.

And 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 to garden centers are actually destination transactions that then bleed into the store or even into the side lot now.

And the side lots become a much more kind of shoppable destination with the drive-through pickup. So, I am very pleased with the performance of the garden centers and just our sideline transformation.

And 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 over 20% of our stores now, seeing the 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, in our power tools now we have got 100 – I think it’s 800 stores now – 700 stores now with an updated power tools area.

So, our 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, and it’s a big driver of our market share gain that we are seeing..

Thanks Hal. Great color there. Appreciate it..

Thanks Scott..

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

That concludes today’s call. Thank you for your participation. You may now disconnect your lines..