Good morning, ladies and gentlemen, and welcome to Tractor Supply Company’s Conference Call to discuss First Quarter 2023 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. We ask that all participants limit themselves to one question and return to the queue for additional questions. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce our 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. On the call today are: Hal Lawton, our CEO; Kurt Barton, our CFO; and Seth Estep, EVP and Chief Merchandising Officer. After our prepared remarks, we’ll open the call up for your questions. Please note that we have made a supplemental slide presentation available on our website to accompany today’s earnings release. Now, let me 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 statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-ups. Now, it is my pleasure to turn the call over to Hal.

Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. For today's call, I will go through some highlights of our first quarter. Seth will then share some merchandising initiatives and updates and Kurt will review the quarter and our outlook in greater detail. Before we get started, I'd like to thank the Tractor Supply team for their ongoing commitment to each other and our customers. No matter the operating environment or how the seasons of the year unfold, this is a team that is always there for our customers and our communities to be the dependable supplier for the Out Here lifestyle. For nearly 85 years, our business has proven to be resilient, stable and very consistent, as we provide needs-based, demand-driven product categories as a lifestyle retailer. Now, let's turn to a review of the business for the first quarter of 2023. We grew net sales by nearly double digits at 9.1%, with comparable stores up 2.1% and diluted earnings per share of $1.65. We had 7 points of non-comp sales growth in the quarter. The two primary drivers were new stores and the Orscheln acquisition. We opened 17 new Tractor Supply stores and the Petsense by Tractor Supply stores in the quarter. And the Orscheln integration is running ahead of schedule. Our comp sales results were below our expectations. We attribute just over 200 basis points, the majority of our sales miss to a delayed start to the spring and to a lesser extent, a milder January. We continue to closely review customer data for trends and changes in their behavior. While select discretionary categories were below in the chain average, this was offset by stronger demand in our consumable, usable and edible products. We believe our customers remain resilient, but are…

Thank you, Hal. I'm excited to share with you some insights into our merchandising categories and market share position. We are committed to driving sales productivity as we deepen our relationships with our customers. I'd like to start by congratulating Nicole Logan, SVP of Animal and Softline divisions; and Randall Dodds, SVP of Seasonal and Hardline divisions on the recent promotions. They each bring significant retail and industry experience that complement their tenure at Tractor Supply. These new roles each have three merchandising divisions reporting to each of them. It is exciting to have this new organizational structure to allow us to operate at greater scale, have deeper category insights and enhanced strategic partnerships. Overall, we're now organized into six merchandising divisions. So let's start with our largest division, companion animal, that represents more than 20% of our 2022 sales. This business includes both the consumables and hard lines across companion animal. Around 75% of the Tractor Supply customers have a pet, and approximately 50% have more than one pet. Also, our customers dog weight on average about 20 pounds more than the US average. With the ongoing humanization of companion animals, these key structural tailwinds support our positive outlook on this category. We are a destination for pet customers, with a comprehensive and differentiated assortment at an everyday low price, and we continue to gain share. For example, our growth in pet food, treats and litter continues to lead the market in both dollar and pound growth, gaining another 33 basis points of share in Q1. Our business model of private brands, strong national and differentiated partners, club pack sizes and legendary customer service sets us up to continue gaining share, perhaps even more if we see the consumer more pressured for value. Moving on to our second largest…

Thank you, Seth, and hello to everyone on the call. I will add on to Hal's comments about the quarter and our outlook for the year. Let's start with our first quarter results. Regarding the cadence of comp sales for the quarter, we started out with a soft January. Last year's January was strong, so we expect it to start soft, but we did not anticipate that the month would be the second warmest in 30-plus years. February was more normalized and in line with our expectations, but the mild winter continued to pressure results. To put it in perspective, our heating categories were down nearly 50%, insulated outerwear was down over 30% and emergency response categories were also down significantly. As a result, our winter seasonal products were down double digits for the quarter. Our expectation was that as we moved through the quarter, we would see a more normalized spring selling season unfold, where we saw the majority of the shortfall was really in the last three weeks of March, which were abnormally wet and much cooler than normal, as well as winter weather continued in the Midwest and Northeast. To put it in historical context, March was the coldest in four years with below-average temperatures nationally, the wettest in eight years and the snowiest in 30 years. Correspondingly, our spring seasonal products were flat to the prior year, well below our expectations. Sales in the quarter benefited in the high-single digits from retail price inflation. Most of this inflation reflects retail price changes that were put in place in the second half of 2022 that we have not lapped as of yet. The benefit of price inflation to our average ticket growth was offset by three key factors: First, the majority of the pressure on average ticket…

Thanks, Kurt. Tractor Supply has a proven business model that has been resilient over many business cycles. Throughout our 85-year history, we have successfully navigated all types of business environments and have emerged stronger each time. We continue to see positive migration trends to our markets. This marks the third consecutive year of positive population growth in rural America. This reflects an increased desire to seek out more space and take advantage of the affordability that country suburban, exurban and rural markets offer with a lower cost of living and the ability to live Life Out Here. It is our view that the sense of community found in our markets, and perhaps more importantly, the ability to secure a piece of property at a reasonable price, has ensured the rural migration trend is one that's here to stay for the time being. The millennial generation has embraced Life Out Here. Our customers have been resilient thus far in the face of slower macroeconomic growth, elevated inflation and higher interest rates, and they prioritize their lifestyle and passions. With significant growth and market share opportunities, we are excited about the balance of the year and remain confident in our business. My thanks and appreciation go out to the team for their dedication to living our mission values every day. And now, we'd like to open up the call for questions. Thank you so much.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Steven Zaccone with Citigroup. You may proceed.

Great. Good morning, everyone. Thanks for taking my question. I wanted to start just thinking about the context of the year. So given the slightly weaker-than-expected same-store sales in the first quarter, can you just talk about the confidence to recover these spring sales over the balance of the year? It sounds like January can't be made up, but how material is that for the full year? And then just you sounded a bit more cautious on discretionary from what you've seen from your consumers. So just elaborate on how much that could be an impact to the full year. Thanks very much.

Yes. Stephen. Good morning, it's Hal, and thanks for your question. Thanks for joining our call. We remain very confident in our sales guidance or in our earnings guidance for the year. As we've stated on the call, about 200 basis points of our -- we were below our sales comp expectations by about 200 basis points due to weather. About 80% of that was due to the spring/fall off in the last three weeks of the quarter with about 20% of that being in January. So January is a much smaller component, particularly when you look at it over the fullness of the year. As Kurt said, there are a number of ways that we see path to recovering not only the Spring sales but potentially the winter sales as the year progress. As we mentioned in the year 2013, and there are several other years that have similar profiles where you've got a cooler weather spring, that has pushed the season into the summer time as yards remain, kind of, remain green and growing, past years remain growing cultivation in farms continue to happen, and our business remains strong into those years into those months. In particular, if you recall last year, in the midst of summer, we had one in 10-year drought. So the lapping of that looks very promising. On the consumer more broadly, we've not seen a sequential change in consumer behavior from Q3 and Q4 last year into Q1 of this year. The same themes that we were sharing last year are the same themes that we would reiterate here on this call. Discretionary, which only represents 15% of our business, continues to perform under average. That -- the pace of that is about the same as it was in Q3 and Q4. Our units per transaction continued to face modest pressure, low single-digits as consumers continue to be judicious in their basket. But that's -- we've been calling that out for the last couple of quarters. But otherwise, we've really not seen any sequential change in consumer spending. There are some categories where we're seeing spend, consumer shift up in their spend in poultry, our organic fee continues to be the strongest kind of, segment in our feed. In dog food, we are seeing economy continue to be strong, but that's actually due to the increased customers that Seth called out. If you look at our core customer base from one year ago and two years ago, they haven't changed at all their food buying behavior. So really not a lot of change in the consumer behavior from last year. Big ticket continues to run about the same. The January falloff was measurable but small. And really, it came down to the last 3 weeks of the quarter, which were cooler, wetter and snowier than we anticipated on top of an underperforming spring last year.

Great. Thanks for all the detail. I’ll leave the floor.

Yes. Thanks, Steven

Thank you for your question. The next question comes from the line of Scot Ciccarelli with Truist. You may proceed.

Good morning, guys. It’s Scot Ciccarelli. And how this may be a function of my stating memory. But I don't recall you guys talking about customers buying closer to need before. So if I'm wrong about that, I apologize. But if that's the case, can you give us an idea of how much that has changed over the last, say, six months in terms of buying closer to need? And did you guys expect that behavioral shift when you provided your initial outlook?

Hey, Scott, so I'll reference that really just in the context of dominantly a big ticket and the fact that, historically, if you were to take out 2021, when you had the – the stimulus and you were to take out 2020 when there was a modest stimulus combined with, obviously, COVID, I think if you were to go back over like my 20-plus years history in retail and home improvement and the farm and ranch, Seth and Kurt, I think we'd all say that like things like riding lawn mowers, bigger ticket items like that, customers typically buy them when they need. The vast majority of those categories or purchases are needs based. And that's really what we were trying to signal is we're seeing more of that than we did kind of in 2020 and 2021, really more of reversion to kind of historic purchasing patterns of those sorts of categories, nothing otherwise intended to be implied.

Got it. Okay. So just the normalization of what you have historically seen prior to pandemic-related changes?

Exactly, exactly. Nothing otherwise intended to be implied. And thanks for the clarification.

Got it. Thank you.

Thank you for your question. The next question comes from the line of Chris Horvers with JPMorgan. You may proceed.

Thanks and good morning. So my follow-up question on the weather and the April trend is, April was pretty historically bad last year as well. And spring really broke in May and June. So I'm assuming May and June got a lot better for you. So how are you thinking about -- you talked about 2Q being at the high end of the range for the year. How you think about the current trend versus the harder compares? Is it just April still cold and wet, so the mid-single digit is not necessarily reflective of the potential despite the harder compares?

Hey, Chris, as we called out quarter-to-date, we're nearly done with April is mid-single-digit comps and low positive single-digit comp transactions. And so given the cool wet weather that's continued into April, we're relatively pleased with that performance. As a recollection from last year, June was not a strong spring selling season. The last year's spring only had a handful of really good weeks, and then it went very hot. And that's what I was referencing earlier about the drought. If you recall, on our Q2 call, we started to talk about the drought in the back half of -- kind of back half of June and into July. And then we reiterated that that we saw that impact us for the first six, eight weeks of Q3 as well. So, we are optimistic that we can have a solid May comp on top of a weaker June and have an extended selling season into July and August this year, particularly in core areas for us, like Florida, Texas, and California. California and Texas, in particular, were under extreme drought conditions by the time we got to mid-June last year and really extended into September. As we know, those areas have had extreme weather the first half -- the first quarter of this year. We're all reading about the flooding in California and such. And we think that will bode well for us as we get into the summertime in those areas of the country.

Got it. And then as a follow-up on the margin line, historically, your first quarter gross margin is a decent indication of what the year looks like, but it also sounds like some things are breaking their way on the freight side and inventory is very clean. So, is there just a general bias upward over the year on the gross margin line? And could that lead to some potential operating margin upside as if sales come in line with plan?

Yes. And thanks for calling that out, Chris. As Kurt mentioned in his prepared remarks, we see a variety of ways for us to achieve our guidance this year, both on the sales side and on the earnings side. And as it relates to earnings, there's a number of expense opportunities that are starting to show up, if you will, particularly in our supply chain and in the Orscheln integration cost. On the gross margin side, look, this is the benefit of being a scaled player in our market. And when you start to see kind of just a little bit of moderation in pricing, we're able to take advantage of that and drive some upside in our gross margin rate and still remain incredibly price competitive and lead the market there. Additionally, we've seen container costs come down significantly, and that's starting to flow through. And it had some impact in Q1, but it will have more impact in Q2 and Q3. Also domestic freight is starting to trend down as well. There was a couple of, I think -- recently, one of the big freight companies mentioned that we were in a freight recession or depression, and that bodes well for us in terms of being able to leverage our scale to drive down freight costs, in particular because we've got new routes to market coming online with our new DC. And obviously, with the 150 stores we have that we're building plus with Orscheln. So, we feel really good about our gross margin rate performance. Do you feel like there's continued upside as we look towards the year? And that's one of the reasons that gives us strong confidence to be able to reinforce our guidance.

Thank you. Have a great finish this spring.

Thank you for your question. The next question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed.

Hey good morning everyone. A quick follow-up to the last question. Your Q1 gross margin, it looks like it's the highest ever. So, can we just talk about the conceptual drivers, not some of the seasonal movement, but why is it the best ever. And then the 200 basis points of weather, I think Hal called out in the prepared remarks. Is that a spread between certain markets? Was there anything in that regarding the judicious comment you made on the consumer, or is that pure weather?

Simeon, this is Kurt. I'll hit both of those. Why don't I start with the second then the first. It's a quick one. The -- the variation between geographies between weeks all reinforce what Hal was just saying. To your question, if you take like the Midwest, Northeast Commonwealth states, you compare that to the rest of the geographies. You did see a disparity because those states had a very mild winter, where it's really strong for them. And then they saw no spring, they basically saw more snowfall in March than they did in January. So we did see a very clear disparity between those low or mid-single-digit negative to mid-single-digit positive in the other geographies, which, again, just gives us the confidence in the trends of the business. On the gross margin question, I'll give the primary drivers, and I'll just give you the order of magnitude on what we're seeing in gross margin. And these are all areas of structural improvements. These are things that we planned for, but as Hal said, we see continued upside in gross margin. First is our price management was the biggest driver of that. That was offset by the second, which would have been a mix impact from CUE and then the third was benefit from freight. Freight is the one that we believe continues to have potential benefit going forward. On price management, just a couple of points on there. When we talk price management, it really includes more than just managing the retail price. It's the retail pricing, it's the management of everyday low pricing, our promos, and then even the cost negotiation and concessions. And Seth the team did an excellent job leveraging our scale, our size in this environment to produce a strong enough price management direct margin to offset -- more than offset the CUE. So between retail price management and pressure from CUE, that was about half the benefit. Transportation was about the other half.

Thank you. Good luck.

Thank you for your question. The next question comes from the line of Seth Sigman with Barclays. You may proceed.

Good morning. Thanks for taking the question. I wanted to follow up on a couple of the last point. So I think you raised the accretion by $0.05 for Orscheln, which is obviously encouraging. You did keep the full year guidance and probably appropriate just given the Q1 challenges. But can you just help frame what some of the underlying changes may be in that guidance? Because it sounds like the message is that you should be able to recoup a lot of the sales from Q1, maybe not January, but the bulk of the rest and then gross margin seems to be tracking ahead. SG&A, while it was elevated, it does seem to be as planned and maybe just we were all mis-modeling it. So is there anything else that you could sort of point to within that?

Yeah. Hey, good morning. And thanks, Seth, for the question. I'll speak just about Orscheln integration for a moment. First off, it's -- the integration is going very well. Most importantly, it's being well received by the Orscheln team members as they are converting to Tractor Supply team members. And it's also being really well received by customers and even more so than I anticipated. Secondly, the team is doing a fantastic job cadencing the stores and transitioning them over to Tractor Supply banners. We have several done already. We've got almost 20 that are converted from a point-of-sale transaction. We're implementing the Fusion remodel on all of them, and we are on -- we are ahead of schedule on those transitions. And then what that allows us to do is to take our back half plan and optimize a bit how the expense structure that we had planned. And so, specifically, there's two elements that are driving that. The first is our IT integration cost. Our team is doing an excellent job integrating from an IT perspective, and we're finding some leverage there and some need to not have to spend what we previously anticipated. And the second is around the sale of the SSC and the DC. We previously planned that to the end of the year. We're now optimistic that we can pull that forward by maybe a month or two or three, and we'll save some dollars there as well from an operating cost perspective. So in general, the Orscheln acquisition is going very, very well. We're very pleased with how it's progressing and wanted to share that outlook today. More broadly, what I'd say is, I think like most companies that are reporting this weekly cycle, everyone is kind of -- you seem to see a lot of people holding guidance in spite of like what you just articulated, some upside for us on gross margin rate, on expense and others just in the spirit of -- because there's a lot of the year left to go.

Okay. Understood. Thanks very much.

Thank you for your question. The next question comes from the line of Brian Nagel with Oppenheimer. You may proceed

Hi. Good morning. Thanks for taking my question. Sorry for beating a dead horse here. But with regard to weather, I just want to make sure, I'm hearing this correctly. I mean so, clearly, there was a weather disruption here in Q1. It sounds like in early Q2, you've seen sales pick up -- comp sales pick up meaningfully. But in markets across the country where there was no weather disruption, are sales there tracking consistent with how you would expect them to track?

Hey, Brian, this is Kurt. Yes. On that, I'll give -- I'll just continue to give a few points. In areas where they're not as impacted by weather, you heard me mention to the previous question, the South, the Texas area, Far West, all those areas we saw performance in line with our expectations versus the areas of the North and Midwest where it was below our expectations. I'll also add in what also was so evident to us is that internally, when we look at the variation by categories in merchandising, the categories that we -- that are not impacted by weather variations right in line with expectations. When we look at the weeks within it, you can look at the first few weeks and the last three weeks, and you see which weeks are not like the others. And then when we look at our external measurements, where we've utilized market industry information on that, it also confirms that Tractor Supply outperformed the market. In farm and ranch, we've seen in market industries, it's running negative in those, especially in those areas where there is a lot of farm and ranch competition. So from all the data points that we see for -- I mean, for Q1, the -- any of the softness was seasonal and then as we look throughout the rest of this quarter, it's really a matter of when does spring start. It's not if, but when. And it's a matter of whether it's ideal, typical, poor, but Tractor Supply has been able to pivot and be able to manage each of those quarters. And to house point, it's very much shaping up like one of those years where it gives us the opportunity for a good extended selling season.

And Brian, this is Hal. Just to add on to that. I mean, if you go back and look at weeks eight, nine and 10, where we were starting to comp on some tougher weather from last year, and kind of, late spring, early March was actually good weather, kind of, reasonably across the country, we had high single-digit comps those three weeks. And then as you get into the last three weeks, we had negative comps those three weeks, and it was driven by the geographies that Kurt mentioned, kind of, from the State of Virginia all the way up to the Northeast through the Midwest. And they were comping on top of tough weather from last year, and it was worse weather than they had -- than we had this year. You know, if you look at areas like Kurt said, in Florida and Texas and elsewhere, we had good seasonal spring seasonal businesses in those areas. So really, we just point to those three weeks. And then as we said, as we bounce back here in April at the mid single-digit comp rate.

No, that's very, very helpful. And just one quick follow-up. So again, I'm asking you necessarily to be a meteorologist, but as you look at the dynamic here, as we've had this, what seems to be a very wet late winter, early spring, going historically, has that ever not led to an extended spring or in the spring that was actually better for Tractor Supply?

We'd love to be a weather predictor and be good at it. As you know, most of the weather forecast you get are either 12 months out and then like three weeks out. But the reason we brought up 2013. 2014, by the way, was a kind of reasonably similar year pattern, where you had a similar -- in fact, we went back and pulled our earnings transcripts from those dates and looked at them. And we almost had a very similar earnings call where we talked about weather in Q1, cold, wetter, could potentially lead to an extended selling season into the summer, and that's sure enough is exactly what happened in both of those years. And that's why we brought it up to say there is very much a precedent for it. And in particular, this year we'll be comping on top of a one and 10-year drought last year. So we're cautiously optimistic that we can have an extended selling season this year, which would be on top of tougher comps -- I mean, easier comps from last year.

Got it. I appreciate it. Thank you.

Yes. Thanks, Brian.

Thank you for your question. The next question comes from the line of Kate McShane with Goldman Sachs. You may proceed.

Hi. Good morning. Thanks for taking our question. We wanted to ask about market share. There seems to be a lot of commentary on this. And I wondered if you could remind us what assumption you're making for market share in your guide for this year? Was it something you saw an acceleration of in the first quarter? And with some of the changes you're highlighting with the new leadership and merchandising, in those categories, are you expecting more of a lift in market share than maybe originally planned, or is that more for 2024?

Kate, hey, this is Kurt. Our original expectation and guidance, just to reiterate that, we see as we entered this year, GDP growing 1% to 2% was our assumption. And then Tractor Supply has historically been growing outside of that as we're grabbing market share, so another 1% or 2% of growth beyond that. And where Seth talked about -- where we're gaining market share, we are certainly gaining market share in categories like companion animal, in poultry, in other areas. And so that gain is part of what we expect to be able to do. But I'd also say, as we look at this year, where there may be any challenges in regards to the consumer, this is a great opportunity. Just like we saw where some discretionary, saw some softness, offset by a robust gain in market share. And I think that's the resiliency of the business, and that's -- one of the exciting things is that, if there is some softness in some categories, we've got opportunity in live goods, companion animal, others to gain market share. And we see upside to our market share gains compared to our standard model for this year and the next couple of years.

Hey, Kate, just to add a couple of points on that. Thanks for your question. This is Seth. Hey, in general, right now, if we look at our business and we think about where we're going to continue to grow market share, again, to Kurt's point, we are very excited to see market share gains, particularly like in our companion animal or our pet and our dog businesses as well as on the cat side. Our entire portfolio, if you call it like in pet food, is growing extremely strong. As Hal mentioned earlier, we're seeing our current customer base, our previous customer base really maintaining those categories in which they were purchasing, they're coming more often. And we're gaining a lot of new shoppers across the portfolio. And we think our merchandising strategy and our portfolio strategy, particularly in things like pet and pet food, is very much a strategic advantage for us to continue to gain market share. Newness and innovation is critical. Our merchants are continuing to drive comprehensive resets across the box and where they're planned. And if you also look at other items that are relative to lifestyle, whether that be like poultry, feed, forage, sporting goods, as we mentioned earlier, we are continuing to lead in those categories. So, for us, we are, by far, leading share in the industry and in farm and ranch, far away leading pet share gains. We don't anticipate that slowing down based on the activity that we're seeing and the customer response we're seeing in our database today.

Thank you.

Thank you for your question. The next question comes from the line of Scott Mushkin with R5 Capital. You may proceed.

Hey, guys. Thanks for taking my question. A little bit focused on the merchandising management team. You're obviously beefing it up. And so I was wondering, what drove that decision? Do you see significant opportunities to expand the total addressable market? And if yes, where do you think those opportunities are?

Hey, Scott, yes, Seth, thanks for the question. Absolutely on those questions today. For us, kind of what we said earlier, for us, as we continue to grow rapidly over the course of the last few years, we saw an opportunity to continue to double down and drive at a greater scale, our merchandising activities, really driving towards innovation, really driving towards strategic partnerships, driving into categories, driving into regionalization, localization, so that we can really maximize all the work we're doing with like our Fusion, our Garden Centers, all those type things. So if we look at our portfolio strategy, we see share opportunities across many of the areas of our addressable market. We just mentioned pet. We see that we continue to have opportunities there. We reorganized our feed and our core livestock and equine division to species, where we're really driving a category management approach. We're basically taking the way in which we've managed our pet business over the course of the last few years and applying those same category management principles on new items, shopper insights, adjusting the flow, localization, regionalization to continue to make sure that we are offering the best-in-class shopper experience as we have new shoppers entering today. I mentioned we're going to be piloting some things like in Orscheln Farm and Home, Sporting goods did very well for us in Q1. And we're going to continue to lean in where we have our strengths. A lot of those categories today are just in our center core for six months. We think we have an opportunity to drive those businesses year-round. I can go on and on, but we think that the new structure that we're putting in place today is allowing us to have more agility, continue to move fast, operate at scale and continue to drive deeper partnerships and innovation. So very excited about this, and we're starting to really see some programs come to life under this new structure.

And do you see the data from the frequent shopper card helping you with the vendors and the relationship is getting stronger and more beneficial?

Absolutely. Leveraging our 30 million members in our database is such a strategic advantage for us, not only in farm and ranch, but just in broader retail in the categories in which we serve. We are continuing to deep dive into those categories, and we are partnering in a significant way with our vendor base to say, hey, where do we continue to end up where we have opportunities, what are those cohorts that we need to continue to go after? And how do we continue to drive regionalization, localization, and use that into our assortment planning process. So absolutely. It is -- Neighbor's Club is fundamental to everything we're doing not only from a marketing perspective, but it is a core driver of everything we're doing in merchandising because the customer is what we're looking to continue to drive to make sure we know where their needs are today, but where they're going in the future.

Thanks guys.

Thank you for your question. The next question comes from the line of Steven Forbes with Guggenheim Partners. You may proceed.

Good morning, Hal, Seth and Kurt. I wanted to revisit the side lot plus Fusion remodels in terms of cost versus sales lift as we approach the core of the spring selling season here. So two-part question. One, can you remind us of the net cost of such projects, and whether you've been able to improve the net spend behind these projects as you scale the initiative? And then, two, how has the spring selling season, albeit early, changed your expectation, right, for the overall sales lift or the ROIC that you expect to generate behind this spend as well?

Yeah, hey Steven, thanks so much for the question. I'll hit three things quickly and just in the sake of time. First off, the capital spend for both the garden center projects, kind of side lot transformations and the inside-the-store Fusion transformation continues to reduce. It's a key area of focus and one of our primary metrics that we're evaluating our performance on our strategic initiatives this year. The second thing is the performance of our Fusion and Side Lot remodels are continuing to perform at the same rate as they have in the last couple of years, which we're incredibly pleased with because we're now reaching significant scale on both inside of our company. The third thing is, we are very pleased with the live goods performance. I think it's strategically going to be big for us this year. It's a low-cost way for people to beautify their yards, kind of -- and there's going to be a lot of refreshing coming out of the December and November storms that happened and we are well-positioned for that. And one of the things we always talk about is you can now see live goods sales, “from space” in our daily and weekly sales reporting, which is exactly what the plan was at the beginning of the year now with 350 garden centers.

Thank you.

Operator, we have time for more question.

Absolutely. The final question comes from the line of Peter Benedict with Baird. You may proceed.

Hello, guys. Thanks for squeezing in. So I guess I'll ask one about inflation. Kurt, just curious, I know high single-digit retail price inflation in the first quarter. Your thoughts on 2Q and then in the back half of the year, is that changing at all? And as you hear, you've talked a lot about some costs coming down, supply chain costs coming down. I'm curious if you're at a point where you're -- you're actually seeing some, kind of, all-in product costs coming lower year-over-year in certain areas and how you're dealing with that from a pricing standpoint? Are there areas of the business where you're actually seeing, let's call it, the price deflation at a retail level year-over-year, or is that not something that's gotten to that point yet. That's my question. Thank you.

Yes. Peter, I'll hit those. On the inflation, our outlook on the retail price inflation for the year hasn't changed much at all. A vast majority of retail price inflation, as I mentioned in Q1, was what was put in place in the second half of last year. And we're seeing a bit of a steady plateau. Maybe some categories like pet will continue to see some. So our expectation is high single-digit Q1 moving into the mid single-digit Q2 to maybe slightly lower in Q3 and then getting into low single-digit Q4. And we're not seeing significant cost deflation. So at this point, there may be some deflation in certain areas of the business. But overall, there's some disinflation that we have expected in there. The great thing is, this year, we expect to see comp transactions really being a key driver to it. And that's what we're seeing right now, as Hal mentioned. And our expectation, as the year unfolds, it really is a good balance between ticket and transactions. Lastly, I'd say what is exciting, you heard this from both Hal and I is in other parts of the business, in cost, in SG&A, we are taking advantage of our ability to use the scale where there's either excess capacity or there's cost coming down. The operating expenses have efficiencies there and you heard that in some of our messaging. So hopefully, that helps answer the question, a lot of great expectation. Our ability in any sales scenario to really have increased operating margin in 2023.

No. That's helpful. Just to follow up on something you mentioned that you've brought up transactions, and it's encouraging to see them up despite the soft seasonal stuff. I know that would not have been the case several years ago with this business. I'm just curious maybe if you guys can talk a little bit about the role that Neighbor's Club might be playing in this. I mean, just how those members are shopping more frequently, if they are? How you're expanding your wallet with those members and there's a lot of marketing initiatives underway on that front. So just maybe a little bit more on the behavior of your Neighbor's Club members and how that might be something that's helping maintain the traffic during periods of seasonal weakness? Thank you.

Yes, absolutely, Peter. Neighbor's Club has been an integral part of driving our business and enabling customer behavior, particularly on our consumables. More and more of our customers are signing up for our private label credit card. We announced last quarter that we reached for the first time $1 billion in sales on that credit card. You get a 5% discount when you use the credit card in your purchases, which drives kind of repeat behavior on food and feed in particular. As Seth talked about, we are outgrowing the feed market by 5 points repeatedly every single quarter. And we have a 20% share far and away the largest share in the market in that category. Same thing on dog food, I mean we are far and away the share leader in dog food. It doesn't matter what metric you look at, pounds, units, dollar growth and even new customer counts. Every single week, our new customer counts for dog food are going up. And those are what we can count on to drive our transactions. And I think one of the things you mentioned is the business has -- is kind of changing to some degree from kind of three, four, five years ago in terms of having the scale we have in pet food now to complement the scale we've always had in Animal Feed and that's driving positive comp transactions for us. As we said, even in March, where we had soft weather on the seasonal side, it still allowed us to have positive comp transactions.

Thank you, Peter. Operator, that will conclude our remarks today. Thank you to everyone for joining us. We look forward to speaking to you on our second quarter call in July. I'm around all day, so please reach out if there's anything that I can do, and I look forward to speaking to you. Thank you.

That concludes today's Tractor Supply Company's conference call to discuss first quarter 2023 results. Thank you for your participation. You may now disconnect your lines.