Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Third 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 note that the queue for our question-and-answer session did not open until the start of this call. 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, and good morning everyone. Thanks for taking the time to join us today. On the call today for our prepared remarks are Hal Lawton, our CEO, and Kurt Barton our CFO. Seth Estep our EVP and Chief Merchandising Officer will join us for the Q&A session. 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 risk 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 please 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-up. Now, it is my pleasure to turn the call over to Hal.

Thanks Mary Winn and thank you to everyone for taking the time to join us this morning. To start, I would like to express my sincere thanks and appreciation to my fellow 50,000 Tractor Supply and Petsense team members. As always they lived our mission and values, delivered legendary service to our customers, did a great job being nimble in the quarter, and continued to deliver against our strategic initiatives. At Tractor Supply the underlying health of our business remains strong. We continue to achieve substantial market share gains. Our customer trends and customer engagement are robust and our Life Out Here strategic initiatives remain on track. Entering the third quarter, we had a sharp focus on the impact of the evolving macro environment and the impact of that environment on our customers retail spending patterns. Despite this view, our quarter was more challenging than we initially expected. The primary drivers of our under performance were less than ideal weather conditions, as well as our customers continuing to be discerning with their spending. On the weather impact for the quarter, as we shared in our July earnings call, we anticipated that our compares would ease through the quarter as we were lapping one of the worst droughts in a decade. We were not assuming a significant benefit from the weather, but rather that it would not continue to be a drag on our performance. In fact, it was a drag. We estimate that the unfavorable weather conditions in the third quarter contributed more than one point of comp to our sales shortfall compared to our expectations. While we never like to call out the adverse impacts of the weather on our business, there is no doubt that the challenging conditions continued to weigh on our sales this year as it…

Thank you, Hal, and hello to everyone on the call. There are three key observations about our business that build on Hal's comments that I'd like to share before diving into the quarterly results. First, looking at the impact of weather. There are some years weather works to our favor and others where it clearly works against us. We've certainly tried to be transparent over the years as to the impact from the volatility related to weather, both in favorable and unfavorable events. No doubt 2023 will be a year where weather goes down as unfavorable for our business. From a warm January, a late start to the spring that never materialized over most of our markets, to a hot and dry summer across major markets like Texa-Homa and the Midwest, our seasonal businesses have been under pressure all year. Second, our execution continues to be strong. Our Life Out Here initiatives are performing well and are positively impacting our results. Neighbor’s Club, Project Fusion and Garden Centers, pet and digital initiatives are all driving top line growth. Third, we view the softness in our customers' retail spending to be unique to the macro challenges in the current environment. Our customer engagement is strong and our initiatives are driving positive results. We remain committed to investing for long-term growth, but we will be agile as we navigate the current environment. We are committed to continuing our track record of long-term value creation for our shareholders. Now, turning to our third quarter results. While our sales trends were below our expectations, the team managed the environment well, controlling what we can control. We also remain steadfast in our commitment to being the dependable supplier for Life Out Here. Our third quarter top-line results were driven by strong and consistent CUE growth,…

Thanks, Kurt. As the calendar shifts to the fall and winter season, our stores and online are ready for the change in typical Tractor Supply fashion. Our merchandising team has been working closely with our vendors on plans for the holiday season, with an emphasis on new products and innovation, and very notably with a focus on value. As the largest player in our sector, it is our obligation to be the advocate for value for our customers. And we are working hard to roll back the cost absorbed over the past two years. We will continue to be the destination for value and quality across our merchandising lineup. In key categories like heating and insulated apparel, our merchants have brought newness with compelling value, including exciting programs such as Columbia Performance Hunting Gear and our line of Grand Teton Pellet Stoves. In our CUE categories, we have the right selection at the right price, with a focus on value, and are committed to being in stock as we continue to support our customers' lifestyles. For example, you will see wood pallet stack outs in the majority of our stores in preparation for the winter season. And right now, our 400-plus garden centers are showcasing pumpkins, mums, and fall harvest decor. And this year we expanded our Halloween and harvest decor program with a great lineup to capitalize on our customers' love for decorating their homes with on-trend seasonal indoor and outdoor decor, including a skeleton cow that was a TikTok viral sensation. Additionally, and particularly in light of the continued warmer weather, we continue to be the destination for our customers' sporting goods, outdoor recreation, and outdoor wildlife interest, with products like our exclusive Royal Wing Bird Seed, Cannon Gun Safe, exclusive county line log splitters, and the Blackstone…

[Operator Instructions] Our first question comes from the line of Scot Ciccarelli with Truist. Your line is now open.

Good morning, guys. Thanks for the question, Scot Ciccarelli. Given the decline in same-skew inflation and growing concerns, we may see a deflationary environment in pet food and feed. Can you help us understand, at least generally, how you're thinking about the impact of inflation or deflation for ‘24, especially in your CUE categories?

Hey Scott. This is Kurt, and good morning. First, let me just start by saying, we still see an environment where there's some net inflation year-over-year while modest. Inflation is clearly slowing, but not turning to deflation at this point. And specific to some of the categories, we are seeing, there's areas this year where there's year-over-year deflation, particularly areas like bird feed, livestock feed, corn based. Yeah, there's some level of deflation. But there's areas like you mentioned, where we're still seeing some level of inflation still in the system, such as pet food. And then there's most of our areas in our product categories, what I describe as they've hit a plateau. It's stable, and we're running pretty consistent. And as that moves to the pipeline, very much consistent with our outlook for this year and beyond, was that we start to moderate down to a low single digit level of inflation in 2023. Too early to really say for 2024, but the general call would be that things begin to stabilize. Inflation, deflation is not as much of a factor in the average ticket that it's been over the past few years, and it's more stabilized and neutralish. And we're certainly focused on it. This team works consistently in environments of change and inflation, deflation, have a history performing very well. Know that we're monitoring it. I'll be able to share more information on that in the fourth quarter call when we give our outlook for 2024.

That's really helpful. And then just for clarification, if we were to get same skew deflation, should we expect it to result in gross margin expansion? I think that used to be a general rule of thumb for you guys as we go back to pre-pandemic days. Thanks.

Yes, in general, our history has been that in a deflationary environment we're able to leverage our scale, manage our retail pricing. It generally produces a benefit on the rate, just like inflation did over the last few years, put a bit of pressure on that rate. And we managed both environments very well, and historically it's been as you described it.

Very helpful. Thanks.

Thank you. The next question comes from the line of Steven Forbes with Guggenheim Partners. Your line is now open.

Good morning, Hal, Kurt, Seth. Maybe just a focus on capital spending plans for next year. I think you guys mentioned sort of in the $600 million range. I was curious Kurt, if you can maybe help us explain the year-over-year change, and if there's any part of the strategic investment plan that you're pulling back on for any particular reason.

Yeah. Hey, Steven. The biggest change, very much consistent with what we expect when we said peak years of 2022 and 2023, are those big investments in the distribution centers. We will open that second new distribution center next year in 2024, but a majority of that capital is in 2023. So on a net capital spend that we're forecasting in the $725 to $775, if you back off of that into the $600’s, the biggest majority of that is supply chain. There's other efficiencies in there, such as we continue on our investments in the stores, such as Fusion and Garden Centers to re-engineer and find efficiencies in our investments. Really excited about the two newest formats that we are rolling out in the stores that we've been able to re-engineer and drive costs out of our Garden Center, and that's giving us even lower cost debt. And then maybe the third thing would be the investments we made in 2023 on integration and remodeling the Orscheln stores. We'll be rolling off of that. I think those three things are the biggest difference, but no shift in our strategic investments.

Thank you.

Thank you. The next question comes from the line of Peter Benedict with Baird. Your line is now open.

Hey guys, thanks. Kurt, just leveraging off Steve's question there, the prudent investment approach on the CapEx side. Can you walk that over to the SG&A side of the P&L and talk about what it kind of means? You've spoken to 85% of the growth in SG&A coming from some of these investments. How does that kind of – maybe that growth cadence inflect next year? And then secondly, your ability to kind of manage the core bucket, I guess the non-investment related bucket in the event that your comps remain challenged, let's say through ‘24. Let's just call it flat for argument's sake. Thank you.

Yeah, Peter. On SG&A, as I mentioned in my prepared remarks, I felt one of the highlights was how the team managed pivoting off of a number of years and quarters with strong top line sales, to scale to the appropriate level of volume for Q3. And it just shows our ability to be agile in that case. To your point on the 85% was growth, some of the things that really played out to help drive the core SG&A to a really low growth level. First area, supply chain, and I mentioned this in the previous last couple quarters. We had built the supply chain almost through muscle, 3PL, other areas that distribution centers were running at max capacity or above that level and that was inefficient. We've been able to shut off some of the 3PL higher costs. The team is running at some of the highest level of productivity. So one of our biggest areas of leverage in a flat to slight negative comp sales environment was our distribution supply chain, as they actually leveraged as a percent of sales because of productivity. John and team focusing on scaling down task or non-customer service work to modestly drive hours down, that also reflects some of the SG&A benefits. In general, in an environment that there is softer demand at Tractor Supply, as we look ahead to even future quarters and next year, we'll plan and scale our core levels of investments and our operating expenses in line with our sales growth. And then from there, this team will continue to claw back inflationary pressures, even in operating expenses that have embedded over the last few years. And this is a team that's been built with lean management, continuous improvement in our DNA, and we have profit improvement goals. And those are all things as we plan ahead to 2024 that gives us confidence in our ability to manage and still hold to our long-term algorithm and targets on operating margin.

Thank you very much.

Thank you. The next question comes from the line of Michael Baker with DA Davidson. Your line is now open.

Excuse me, thanks. Two-part question, I guess. I wanted to ask about your discretionary and seasonal business. You talk about your discretionary business being 15% of sales, but why wouldn't you consider the seasonal business to be discretionary, as well as that seems to be able to ebb and flow based on the seasons? And I guess the second part of that is, you said the fall/early winter businesses start off slow. Are those loss sales or just delayed? Like, if it does eventually get cold, which presumably it will, how do you think those sales pick back up?

Yeah, hey Michael, good morning. Thanks for the question. Appreciate your participation in the call. You know, as it relates to discretionary, just one would acknowledge 15%-ish of our business kind of big ticket discretionary, mid-single digit negative comps, a slight improvement from sequentially from what we saw in the first half of the year, kind of in line with what we expected. The myth throughout the entirety of this year for us has been our seasonal businesses. Our CUE business continues to perform very strong, with comps well above our reported total company comp performance with significant share gains happening in our CUE business. On our Q2 call or Q1 and Q2 calls, when we talked about seasonal, we acknowledged that there could be an element of the consumer spending discretionary piece that kind of seeps into that seasonal business. I would characterize the fall and winter business, though, more demand driven needs based than even spring, because in the winter, the businesses that are really strong for us and large and robust are things like wood pellets and propane. In fact, three of our top 10 skews during the winter season are two wood pellet skews and the propane skew. Those are demand driven needs based. When it's cold, people, are burning the pellets in their wood stoves or they are using propane for heating other homes or supplemental heating. And when it's not cold, they are not. And this time last year, actually as we entered Q3, the last week of Q2 and as we entered Q3, it was we had cooler weather and then that continued throughout the balance of Q3. We didn't, have that at all this year. And then even as we're heading into Q4 here, it's going to be 80 degrees this weekend…

Excuse me. Thanks. That's helpful. So it sounds like those seasonal categories are non-discretionary, but only if the weather cooperates. Is that a fair way to put it?

Yeah, I think that's a fair way to – that's an absolutely fair way to say it.

Excellent! I appreciate the time. Thank you.

Thank you. The next question comes from the line of Michael Lasser with UBS. Your line is now open.

Good morning. Thank you so much for taking my question. One of the debates on the Tractor Supply Story over the long term is the company has a gross margin right now that's 150 basis points. That's higher than it was prior to the pandemic. So what gives you confidence on the long-term outlook, especially as this has become a more profitable business? What's a realistic expectation that you can hold on to this increased profitability? And then I have one quick follow-up.

Yeah, Michael, this is Kurt. Gross margin has certainly been not only a high point for this quarter, this year, but to your point, what we've been able to accomplish, leveraging our scale and size in the last years has been a real testament to the team. I'll give you a few examples of why we believe this is a sustainable gross margin, and most of it is around the structural nature of it. As you think ahead, I'll first acknowledge, as we continue to grow in CUE and take market share, it puts a little bit of pressure from product mix. And we've been cycling and absorbing those gross margin expansions with higher pressure from CUE mix in the past few years, more than we would see going forward. Supply chain benefits have really been one of the top two areas of gross margin expansion. And we've seen and come off some of the highest supply chain costs. We've absorbed some of the inefficiencies in the robust, fast growth period. So the supply chain costs, declining transportation costs, improvement in the reduced miles from new distribution centers are all structural. And as you think about transportation costs, you think about it as in this particular time, we are still in an environment where transportation costs, both domestic and import, are higher than the pre-pandemic levels. I'm not saying that we expect to revert back to pre-pandemic norms, but I think the important thing is that we're not coming off of a new extreme low, but yet coming off of some of the highs. And then the second most impactful piece of gross margin is the structural sustained difference of coming off promotionals that were embedded into our normal programs and really leveraging EDLP and Neighbor’s Clubs. So the biggest drivers are structural. We expect to be able to change those. And the benefit that our fast team has driven in our production, not only in sales, but the funding from our vendors is structurally in there as well. So we anticipate to be able to have continued gross margin expansion. And even next year, as you think about seasonal, it may be able to bounce back and that has higher margins. So we have a lot of expectations on our ability to sustain and even expand gross margin for those reasons.

Got you. My follow-up question is you provided some initial observations on next year. Macro is going to be tough, we'll see what happens with the weather, less inflation benefit. So in light of all those comments, how low can your comp be and you still maintain flat overall EPS next year versus this year?

Yeah. I'll take that one. I mean, I'd have to just go to this is still very early in our planning cycle. This business has been resilient in regards to our ability to maintain our comp sales. It's so much of a needs based core business in there that we are planning for some uncertainty. There are some headwinds on the consumer, but we got strong strategic initiatives. We're lapping some difficult challenges from the seasonal business. And we can be nimble, but I'm just not going to try to predict or go down a path of what level of comps or how low it could be because this business has a track record. In 30 years we've had one year of negative comps and it was ever so slightly. And we're confident in our ability to produce strong sales performance.

And the only thing that I would add is.

Thank you very much.

Hey Michael, the only thing I would add is, Kurt’s prepared remarks talked about our commitment to our long-term operating margin guidance, inclusive of next year. I'd also add, we see a lot of opportunities for continued operating expense control next year, namely as Kurt mentioned, freight and a number of other levers. And I think we've demonstrated this year that we have a number of levers that we can pull to continue to support the underlying profitability of the business, and also can control what we can control. We certainly don't see an outlook next year as you implied, as potential for negative decline in EPS. I mean, if you look at the underlying strength of our business, whether it's in consumer, our number of shoppers in our stores, our customer satisfaction, our market share gains, all those sorts of things, we've never been more confident in the underlying foundation of our business.

Thank you so much.

Thank you. The next question comes from the line of Oliver Wintermantel with Evercore. Your line is now open.

Yeah, thanks. I was looking for your guidance for the fourth quarter comp, the low single digits to mid-single digit decline. Kurt, how do you expect transactions versus ticket are performing in that kind of environment in regards of last year's, the winter storm? Is it mostly in transactions that are going to decline in the fourth quarter?

Oliver, yeah, I'd frame it up as it's going to be a mix of both of those. We had, a slight average ticket decline in Q3. Some of those pressures on average ticket will, we expect to persist into Q4. But transactions are what gets impacted and did get impacted by the monumental winter storm last year. With our expectations, as we mentioned, this is not framing up to be an ideal fourth quarter weather. That demand would play out in transactions, and in our evaluation, it's going to be a mix of both transactions and ticket. And implied in our guidance would be a negative comp transaction for that reason.

Okay. Thanks very much. Good luck.

Thank you. The next question comes from the line of Scott Mushkin with R5 Capital. Your line is now open.

Good morning. This is Ryan on for Scott. Thanks for taking our question. Our research would suggest that there is an opportunity to have stores get deliveries from the distribution centers more frequently. Do you agree? And if so, what do you think the sales opportunity may be? Thanks.

Good morning and thank you for your question. First off, I'd say this is an area that we have been focused on for the last few years. We've gone from roughly five mixing centers to 15 mixing centers over the last three years. That has given us the ability to have more replenishment going into the stores of full pallet quantities of our big moving SKUs. The second thing is the expansion of our DCs from eight to nine and the next year 10. Also gives us additional outbound capacity to be able to deliver more frequently to our stores. We now have over, I think it's 500 or 600 stores now that receive shipments twice a week from our distribution centers. The remaining stores all receive shipments once a week. So it's not that we have stores receiving it less than that. But yeah, we're constantly looking at ways we can drive in stock. What I would leave you with is, our in stock rate right now is the best it's been, as Kurt said in his prepared remarks, really since the pandemic began. We feel very good about our in stock rates right now. Our team's done an excellent job, I think, managing inventory. If you look at our inventory growth, it's in control. If you look at our in stock rates, they are excellent. You look at our shrink numbers below last year and that last year was below two years ago. So I think on all sides of inventory, quality, quantity, in stock rates, we feel very good. But continue to challenge yourself to increase frequency and get smarter and smarter in our tools, like our new RELEX replenishment and allocation system to be able to keep improving our performance on inventory. But, I feel very good about it. As I said, our in stock rates are the best they've been really since the pandemic.

Thank you so much.

Thank you. The next question comes from the line of Chris Horvers with J.P. Morgan. Your line is now open.

Thanks very much. So following up on some of the prior questions, you are assuming comps are down roughly 4% in the fourth quarter. And you also said that your business has a long history of positive comp, sort of alluding that ‘24 would be positive. So, I guess what's unique to the fourth quarter? I understand there's two points of weather lap year-over-year. Why wouldn't the business be positive in that quarter if weather is sort of the only variable that's been the unknown?

Hey, good morning, Chris. And thanks for your question and participation in the call. I would just reiterate what we said in our prepared remarks, that we continue to see the consumer being discerning in their spend, particularly in discretionary. I mean, I think we've all seen the charts on PCE spend and the shift from goods to services. We've all been looked at how good spending is occurring and how that's shifting across the various retail sectors. The sector we play in is the most sticky, the least impacted by that. You go look at electronics and appliances. You look at furniture. You look at home improvement. You look at all the other categories. They are all performing well below kind of our normal, our sector. But nonetheless, we are seeing some modest impact from the discerning spend. We also said weather is not off to a great start for us in Q4. There's a very strong El Nino pattern occurring. That typically is a warmer winter season. It's 80 degrees this weekend in Boston. And then as you said, we're lapping the strong storm from last year, which we recorded two points to. So we just think you put all that together and it's appropriate to be prudent in our outlook for the fourth quarter in that kind of mid-single digit, low to mid-single digit current negative, and I don't think it's indicative of anything structural in the business. We see it as very transitory to the current moment. And as I said in my prepared remarks, we had active customer growth in Q3. We had new customer growth in Q3. We had reactivated customer growth in Q3. Our customer satisfaction scores are at all-time highs. Our market share gains are very strong right now across the board. In PET, this past quarter, our share gains were as strong as they've been since the pandemic. And again, our underlying business is very strong. I'm confident that in the context of retail goods spending, even though the tide is shifting out for all, that we're going to be standing tall amongst that.

Got it. And then my follow-up is just on the consumer broadly. It is a needs-based business. How is the consumer changing? Because I think if you look across retail right now, you're not the only one who is seeing weakness, and it seems like it has deteriorated a bit. So are some of the things that you're talking about in terms of units per transaction and the usage of credit, is your view that there has been some degree of deterioration in the consumer over the past six months or so?

I'd start by saying what is our value proposition? And our value proposition is to be that dependable supplier for life out here. And again, I'd reiterate, we're seeing the customers in our stores. They are shopping us at record levels. That said, when they are shopping us, they are spending a little bit less items per basket, right, kind of to the tune of a low single-digit headwind, and they are pulling back a little bit on discretionary. Those are consistent themes that we've had really for the last few quarters. We haven't really seen any acceleration in that. It's really been more of a consistent theme. But again, for us, the seasonal weather, the seasonal businesses have been a huge departure from what our outlook and expectations have been all year long. But nonetheless, I think you're going to continue to see for the near term, the consumer spend continuing to shift to services from goods and kind of rebalancing. And I think you're going to see discretionary retail businesses continuing to take the brunt of that as we turn the quarter of this year into next year.

Got it. Thanks very much.

As we've hit the top of the hour – Melissa [ph], as we've hit the top of the hour, I think this wraps up our call. So thank you everyone for joining us and I'm available for follow-up, and we'll look forward to speaking to you on our fourth quarter earnings call.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.