Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss the first quarter 2022 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. We ask that all participants limit themselves to one question and return to the queue for additional questions. Please be advised that the re-reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mrs. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.
Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today, and I hope you're all doing well. On the call today are Hal Lawton, our CEO, Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer will join us for the question-and-answer session. Please note that we've 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. We shortened the 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 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. 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. I'd like to begin by thanking the Tractor Supply team for again delivering strong results. You know, in some ways, this quarter may have been our best relative performance over the course of the last two years. The team demonstrated grit and determination as they overcame the lapping of last year's robust performance, the impacts of the Omicron variant, particularly in January, the significant inflationary pressures and the ongoing supply chain constraints, the last two of which were both exacerbated by the tragic conflict in Ukraine. No matter what came at the team, they stepped up to the challenge to be there for our customers as a dependable supplier for the Out Here lifestyle.
Our team members, our vendors, and other supply chain partners have continued to rise to the occasion as we strive to live our mission and values every day. Speaking of our mission and values, in recognition of Earth Week this week, we issued our Stewards of Life Out Here sustainability report. This comprehensive report provides detailed information and progress on our ESG efforts. It significantly enhances our transparency and disclosure related to our environmental sustainability actions. Of note, in the report is the establishment of a new water usage goal to reduce on an absolute level our water footprint by 25 million gallons by 2025. ESG makes great business sense for Tractor Supply, and setting targets for ourselves in these areas creates long-term value and allows us to have a positive impact on the world and the communities that we call home.
As a purpose-driven company, we remain committed to constant improvement on this journey. Now let's turn to a review of the business for the first quarter of 2022. The year started out on a strong note. We grew net sales by 8.3%, with comparable store sales up 5.2%. Diluted EPS was $1.65, an increase of 6.5% year-over-year. Our comparable store sales growth was driven by strong ticket growth of 6.7%, offset by a decline in transactions of 1.4%. Given the remarkable strength in our business last year, and as a reminder, we had a 38.6% comp in Q1 last year, we are very pleased with our sales growth.
Last year, we shared with you that we materially benefited in the quarter from a combination of factors, in particular stimulus spending, favorable weather, and inflation. This quarter, we successfully navigated the lapping of these factors despite the spring season getting off to a slow start. On inflation, it benefited sales in the quarter by about 10 percentage points. As we shared in our last earnings call, we thought there was more pressure to the upside on inflation as we entered the quarter, and that is certainly what we saw. We continue to see increasing costs in the commodity inputs in our product categories, as well as the underlying variables like higher labor wage rates and transport costs that are impacting our vendor partners. Shifting to C.U.E.. We experienced impressive demand in our consumable, usable, and edible categories.
As a reminder, these products are needs-based and demand-driven, and they're what drive trips into our stores. Our C.U.E. sales growth was almost three times our overall sales growth rate. Our C.U.E. customer trends have never been stronger. Kind of rounding out the business, seasonal category performance was mixed as we had solid performance in our winter season categories during a much colder January. Our spring season categories performed below average due to colder weather temperatures in the month of March. Shifting to e-commerce. E-commerce again saw double-digit growth, and this represented our 39th consecutive quarter of double-digit or better growth in e-commerce. We are making great strides in expanding our digital presence. Of note, our mobile app now represents more than 15% of our digital sales.
This quarter, we crossed 3 million downloads of the Tractor Supply app, and this is a major milestone in our One Tractor strategy and our ability to offer our customers a more seamless shopping experience. Our Neighbor's Club program reached a record 24.8 million members in the quarter, an increase of 24% from last year's first quarter. It seems like much longer than a year ago, but we recently celebrated the one-year anniversary of the relaunch of Neighbor's Club to a points-based loyalty program. The relaunch has been an overwhelming success, as it has measurably encouraged customers to migrate their spending upwards. Our Neighbor's Club members are comping at a faster overall rate than our overall company performance, and we're seeing strong growth and retention in our high-value customers. We are confident in our business short-term and long-term.
Last quarter, we shared with you several structural trends from which we're benefiting, including rural revitalization, increased pet ownership, homesteading, and the rise in self-reliance. As the market leader, we are well-positioned to continue to benefit from these structural trends. Additionally, we are seeing increasing momentum from our Life Out Here strategic initiatives, enabling us to continue to gain share. As we look forward, we believe we have many vectors for growth, and our business has never been stronger. That said, we acknowledge that there is significant uncertainty in the macro environment. We have a lot of the year still ahead of us, and in keeping with our long-standing practices prior to the pandemic, we continue to believe that the best way to look at this business is on the halves.
On the heels of last year's record performance and a strong start to the year, we are reiterating our guidance for fiscal year 2022. We continue to see significant opportunities for growth ahead of us. I'll briefly address the Orscheln acquisition. We continue to work collaboratively with the FTC towards a positive resolution and hope to have an update in the coming months. Accordingly, we are limited in the comments we can make about the transaction at this time. Now I'll turn the call over to Kurt to discuss some of the details of the first quarter and our outlook for the rest of the year.
Thank you, Hal, and hello to everyone on the call. The Tractor Supply team has started fiscal 2022 with strong performance that came in ahead of our expectations. On a two-year stack, our comparable store sales were 43.8%. Looking at the cadence of the quarter, January and February were the strongest months, with March positive, albeit not at the rate earlier in the quarter. We benefited from cold weather trends early in the quarter, while spring is late to break across most of the country. Please keep in mind we were comping ideal weather conditions in the first quarter of last year with an early spring across many of our markets. This quarter, retail price inflation contributed about 10 points to our comparable store sales as the team continues to navigate the ongoing cost pressures across the supply chain.
As we shared with you last quarter, we anticipated this would be the toughest compare on transactions as we cycled the largest transaction gain since the beginning of the pandemic in Q1 of last year of 21%. To illustrate, we were experiencing positive comp transactions until we cycled the last two weeks of the quarter, where we clearly saw the benefits of stimulus on transactions in the prior- year. As we expected, big-ticket declined given the robust performance we were cycling, driven by stimulus and an early start to the spring selling season. Last year, as we reported, big ticket comps significantly outperformed the chain average comps, and on a two-year stack, our big ticket performance exceeded the 43.8% comp growth of the chain. We continue to see strong Q performance, with strength in categories such as dry dog food, poultry, feed, and heating fuel.
For instance, dry dog food achieved over a 20% comp. Petsense performed above the company average, which was in line with our pet performance. Overall, we are very pleased with our top-line performance. Turning now to gross margin, which outperformed our expectations. For the first quarter, our gross margin declined by 29 basis points to 34.9% of sales. The decrease in gross margin is primarily attributable to three factors, significant product cost inflation, higher transportation costs, and to a lesser extent, product mix. We continue to experience broad-based inflation while also seeing a step-up during the quarter in key commodities such as grains and oil. Domestic and import freight costs have increased substantially year- over- year, as well as fuel costs. We expect many of these trends in product costs and freight to continue throughout 2022.
The robust growth in our C categories, which have a lower gross profit rate, did put some pressure on gross margin. The team did a remarkable job of managing these cost increases through our price management actions and other margin-driving initiatives. Examples include capturing 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 26.9%, an improvement of 11 basis points. This improvement was primarily attributable to the normalization of incentive compensation, moderation of COVID-19 response costs, and leverage and occupancy and other costs from the increase in comparable store sales. These items were partially offset by investments to store wages and incremental costs related to our Life Out Here strategic investments for growth.
This includes a step-up in our depreciation and amortization. Please also keep in mind, given our results last year, we were cycling strong SG&A leverage, which benefited from 38.6% comp sales in the first quarter of 2021. Net income was $187 million, and diluted EPS was $1.65 compared to $1.55 in the first quarter of 2021. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases. Last quarter, we increased our quarterly dividend by 77% from $0.52 a share to $0.92. During the quarter, we returned $400 million to shareholders through the combination of share repurchases and cash dividends. Turning now to our balance sheet, which remains strong and provides us the ability to invest in our business for the long term.
Merchandise inventories were $2.6 billion at the end of the first quarter, representing an increase of about 21% in average inventory per store. This increase is primarily attributable to inflation, along with our investment in inventory to support the growing demand. Moving now to our guidance for 2022, which is unchanged. As Hal mentioned earlier, we are reconfirming our guidance for the year. This includes net sales in the range of $13.6 billion-$13.8 billion with comparable store sales growth of 3%-4.5%. For the year, we forecast an operating margin of 10.1%-10.3% of sales. We continue to expect diluted EPS in a range of $9.20-$9.50.
We acknowledge that we beat our own expectations for the first quarter and that ongoing inflation should benefit our top line. With the dynamic macro environment as a backdrop, we believe it's prudent to maintain our outlook for the year. Keep in mind, Q1 is our smallest quarter of the year, and it's great to start out the year ahead of our expectations. We recognize that flowing the first quarter performance through may put pressure toward the top end of our guidance ranges. For those of you who've followed us for some time, this is not a new convention to guidance and is in line with how we provided guidance historically prior to the pandemic. We continue to believe the best way to look at our business is not by the quarter, but by the halves of the year.
With as much inflation pressures we're seeing in our business, we are closely watching comparable average ticket and transactions. We anticipate that the breakdown of growth may be a bit different than our prior expectations, given the high level of inflation benefiting average ticket with transactions seeing incremental pressure. Historically, we've experienced trip consolidation by consumers during strong inflationary times. As inflation pressures persist, it puts higher pressure on gross margin, yet provides an offsetting benefit to SG&A leverage. As such, we're maintaining our expectations on our operating margin. As a reminder, the prospective acquisition of Orscheln Farm & Home is not included in our guidance. In summary, we are very pleased with our performance in the first quarter and our outlook for 2022. The team is executing at a very high level.
We remain committed to investing in the business to retain the loyalty of our long-time and newer customers. Our goals are to maintain our everyday low prices and improve customer service, strengthen our supply chain, and grow our digital commerce, all in support of our commitment to drive strong shareholder returns for the long term. With that, I'll turn the call back over to Hal.
Thanks, Kurt. Last quarter at an enhanced earnings event, we shared significant details on our Life Out Here strategy. We believe we have a robust, idiosyncratic drivers for growth over time. Our strategy is gaining traction and the team is executing well. For the remainder of my prepared remarks, I'm gonna provide an update on our customer, including our Neighbor's Club, and provide some highlights of our merchandising initiatives for the spring and summer season. Our customer trends are in great shape, and we're committed to capturing wallet share through legendary customer service, our numerous digital properties, our seamless shopping experience, and our Neighbor's Club loyalty program. Our customer base continues to be remarkably healthy and highly engaged with our brand.
In our Q2 2020 earnings call, nearly two years ago. We discussed that our goal was to nurture and capitalize on the generational growth we were seeing in our customer base, seizing on the opportunities to retain millions of new customers and expand share wallet with our core customers and expand the number of categories shopped by both customer sets. I'm pleased to share with you today that that's exactly what we're seeing in our customer base. Our active customer base is now much larger than coming into the pandemic, as we've retained the majority of the millions of new customers that shopped us the last couple of years. Our active customers are driving frequency and spending more money. On our new customers, we continue to see strong new customer acquisition with absolute run rates that are at pre-COVID levels and very stable.
Continuing on a theme since 2020, our new customers continue to skew younger. We're seeing ongoing growth in our millennial shoppers as there's been a net migration out of urban areas, largely driven by millennials. Since the start of the pandemic, the most robust homeownership growth is in the millennial cohort, with the growth coming in suburban and rural areas. We believe the growth in the millennial customer supports the vibrancy and relevance of the Tractor Supply brand well into the future. Another positive contributor to our strong sales growth has been our Neighbor's Club. As I mentioned earlier, the revamp of the program in April of last year from an infinity program to a tiered points-based loyalty program has been rapidly adopted by our customers. Neighbor's Club is a significant growth platform for us.
Notably, we reached our highest level of customers spending over $1,000 annually, and we also reached our highest level of customers ever spending over $2,000 annually. Transactions, total sales, and spend per active Neighbor's Club member all grew significantly in the quarter. These customer trends are an indication that we continue to benefit from the structural tailwinds I mentioned earlier, such as rural revitalization, pet ownership, homesteading, and self-reliance. Our brand momentum is stronger than ever, and we're investing to ensure we continue to play offense in the context of these trends. The overall health of our customer base contributes to our confidence in our outlook for the year. Let's shift to spring. Our stores and e-commerce are well positioned to take advantage of the seasonal change to serve our customers.
As of today, we have over 175 garden centers customer ready for spring. We continue to forecast having garden center transformations of our side lots in over 15% of our stores by the end of the year. Where spring has cooperated, we are very excited about our customers' response to the expanded product offering and layout. To capture incremental share of wallet in the lawn and garden category, we've expanded our offerings of battery-powered outdoor power equipment. Tractor Supply is the exclusive retailer of the Greenworks Pro 60-volt platform, which includes more than 75 battery-operated professional-grade residential tools, including zero-turn, riding and push mowers, chainsaws, trimmers, leaf blowers, snow throwers, and more. Tractor Supply began offering Greenworks Pro 60-volt products online earlier this year, and we've rolled them out in our stores the past few weeks.
Notably, the addition of battery-operated zero-turn mower from Greenworks strengthens our position as the zero-turn headquarters with our market-leading assortment from Toro, Bad Boy, and Cub Cadet. This past Saturday, we hosted a try before you buy event at our stores that allowed our customers an opportunity to test drive our market-leading assortment and the various models in our stores. Chick Days are always an exciting time in store and something that our customers look forward to with the change of seasons to spring. We sell millions of birds each year, and this year we've expanded our breed options as well as widened our coop, feed, and care assortment. This is a great example of a homesteading category for our new millennial customer who's adopting the outdoor lifestyle.
Importantly, our store teams have the knowledge to help a customer in the category, whether they are a novice or an expert. We have a leading lineup of top-selling, highest quality tools that are relevant to our customers. Last week, we announced the addition of Dremel and Bosch to our power tool lineup just in time for spring. As mentioned on several previous calls, a key component of Project Fusion is an expansion of our assortment in truck, tool, and hardware. Our lineup in tools now includes Makita, DeWalt, PORTER-CABLE exclusively, Bosch, and Dremel. We are much more of a destination now for our customers in this category. As an aside, we're also on track to have Project Fusion implemented in nearly 30% of our stores by year-end.
To wrap up, the Tractor Supply team continues to thrive through the dynamic macroeconomic environment while making incredible progress for laying the foundations of the future. Tractor Supply has a proven business model that has been resilient over numerous different types of business cycles. With significant growth and market share opportunities ahead of us, it's an exciting time to be at Tractor Supply. My thanks and appreciation go out to the team for their dedication to living our mission and values every day. Now we'd like to open up the call for questions.
Our first question is from Scot Ciccarelli from Truist. Scott, please go ahead.
Good morning, guys. Scot Ciccarelli. I guess my question is, with the 10% impact from pricing in the comp, what kind of, if any, demand destruction are you guys seeing? Kinda related to that, how should we think about the impact on the top line from inflation as we get later in the year? Because obviously we're gonna be cycling larger impact as we go. Thanks.
Hey, Scott. Good morning, and thanks for joining our call. Appreciate the question. You know, to start out just at the highest level, consumer is very healthy. As Kurt mentioned, we exceeded our expectations in Q1. You know, kind of a few nuances on that. In the business, where we're lapping the stimulus from last year, notably in big ticket, you know, we saw some fall off there, but it was very much in line with what we expected and what we had foreshadowed at our enhanced earnings event when we talked about some pressure from big ticket, dominantly in the last part of Q1 and early part of Q2.
As Kurt mentioned and I mentioned also in the prepared remarks, you know, we've seen a little bit of a slow start to spring, but it's been in the categories you would expect. Spring always comes. We've, you know, had it play out many different ways over the last couple decades on spring. Otherwise we really see no elasticity in the customer. You know, I'd point to our consumables business as an indication of that. You know, it's comp three times our overall comp rate, dry dog food above 20% comps. In fact, the month of March was our highest dollar volume ever in dry dog food. You know, if I just step back, we, you know, we serve a lifestyle.
It's a, you know, demand driven, needs based kind of product categories for the most part, and have a track record of consistency and resiliency really across all different types of economic cycles. You know, in addition to that track record of consistency in the demand-driven business model, you know, two additional factors going for us now. One are the, you know, continued kinda macro tailwinds, things like rural revitalization and pet adoption that I mentioned earlier. and then also our Life Out Here strategy. With 175 garden centers and by the end of the year, nearly 30% of our stores remodel with Fusion. You know, we've got a lot of tailwinds right now.
You know, as it relates to the consumer, you know, we've really not seen much reaction to inflation or any other kinda economic elements. As far as the impact on inflation, to your second point of your question, you know, I'd kinda point to Kurt's comments in his prepared remarks around, you know, we did exceed our expectations in Q1. Just given our historic conviction of sticking to the halves and also just, you know, given the macro environment, we thought it was prudent to reiterate our guidance. But certainly if you roll through the beat in the first quarter, you know, it would take you towards the high end of our guidance for the year.
You know, if we were to exceed performance for the rest of the year, you know, and continue to do that, we'd end up having a nice year. I do think inflation continues to be persistent. You know, we continue to see it come through. You know, we continue to be able to navigate it very effectively.
Very helpful. Thanks, guys.
The next question is from Simeon Gutman of Morgan Stanley. Simeon, please go ahead.
Hello. Hey, everyone. Good morning. It's Simeon. I'll ask the two questions now in the interest of time. The first is, the business' mix of needs versus wants. We used to talk about this a while ago. How should we think about the percentage of the business that's discretionary if the consumer slows? And then the second question is a little more tactical. If you look at the earnings complexion for the rest of the year, margins were down a little in the first quarter, but it looks like the incremental margins for the rest of the year look like they're higher, you know, given the per point in comp. What's, I guess, the bridge? Is there less investment? Is there not enough cost, et cetera? Thank you.
Yes, Simeon. Hey, this is Kurt. I'll hit both of those questions. If I understood the questions, your first question generally is around needs versus discretionary versus a needs-based business, which we're predominantly. Really more of a how do you reconcile and how do you manage the cost, the operating margin throughout the rest of the year. Our business continues to be strong in a needs-based, demand-driven versus the discretionary. As you've heard from us in the past, while there is some less needs-based discretionary, the discretionary piece of our business has fairly consistently been a low percentage. Roughly, like, 15% of our business we'd attribute to those more discretionary pieces of it.
As Hal just mentioned, some of those areas we, as we expected and saw lifts last year with stimulus, we expected and saw some of that trade-off in the back end of Q1.
You know, in regards to our outlook for the year and how we really manage the margins, you know, we expect our gross margin as inflation persists to have some level of pressure on the business. We're gonna see pressure from those three primary categories, product inflation, the supply chain costs, and even considering the strength of Q, as we continue to take market share, puts a little bit of pressure from mix. As we manage through this, we really see the opportunity to take both levers of gross margin and SG&A, and in each quarter could be a bit different. As inflation puts pressure on gross margin, we also do see the opportunity for that to help us leverage in SG&A.
In the first half of the year, where inflation year- over- year has a more of an impact and not as much stronger compares, whereas the back half of the year, we're really starting to see inflation tick up. You could see, as you did in Q1, stronger inflation, but we have opportunity to leverage on SG&A. That's how we're gonna view this business. We're gonna manage this as we have the last couple years through a number of different scenarios, and we do see a scenario where there's higher inflation, and we've got the leverage to be able to manage gross margin and SG&A. It could differ by quarters, but that's what gives us the confidence to be able to land a target for the year of 10.1%-10.3% on the operating margin.
Okay. Thank you.
Our next question is from Kate McShane from Goldman Sachs. Kate, you may proceed.
Hi. Good morning. Thanks for taking our question. Thank you again for the detail around the change in composition of the guide. I was just wondering how we should think about potentially the upside and downside risks to the guide. Where do you think there could be elements of where you could be being particularly conservative?
Yes, Kate. Hey, good morning. This is Kurt. In regards to your question on the guide, let me give you a couple perspectives, really how we see the business and how we look at it going forward. First, I'll just reiterate what Hal and I've said. We're coming off of Q1, great start to the year where there's a strong performance, hitting on all metrics. Just to point out, Q1 on a two-year stack basis from the strength in new customers, the strength in Neighbor's Club, our transactions were the highest two-year stack of any of the four quarters. The core of the business is strong and healthy. That said, as I just mentioned earlier, it is right and consistent even in the last two years, we're managing the business in multiple scenarios.
To your point in your question, there are various scenarios. Under one scenario, there's inflation that drives the comps outside of even the initial expectations. With that inflation, it puts pressure on margins that leverage in SG&A. We certainly see that with inflation, it could impact some of the transactions. We've seen trip consolidation. We've seen customers. That can help us leverage our SG&A. The number of various scenarios that we see playing out, we feel very comfortable that in the next three quarters as we manage that we can still meet our expectations and our guidance and very confident in the demand of the business and the strength right now going into the rest of the year.
Thank you.
Our next question is from Michael Baker of D.A. Davidson. Michael, you may proceed.
Hey, how are you? One question and a follow-up, kind of, short term, then long term. On the short term aspect of it, just the weather being a little subpar in March, so you've lost some sales presumably, so we should expect to gain that back in the second quarter, I assume, but how has April been in terms of the weather? The longer term question, can you remind us how you think about housing and the impact to your business? You know, rates are up, housing's probably gonna slow. Existing home sales have been down six or seven months in a row, although prices have been up.
How do you think about that longer term, for your business? Thanks.
Yeah. Hey, Michael, it's Hal. Then I'm gonna take the second part of your question first on housing, and then have Seth talk a little bit about spring. You know what? On housing, you know, we don't have as much of a direct correlation to, you know, new home starts and existing home sales like other segments of retail. You know, that said, one of the trends we have been benefiting from is the notion of homesteading and people investing in their homes and in their land and also of the, you know, rural revitalization as well as we've had kind of a shift out of urban and even suburban areas into exurban and rural.
I think all the datasets, you know, still suggest that you know those trends are continuing. Even if you look at the existing home sales and new home sales, which have come out the last few days, while there were some year-over-year reductions, you know, still very strong absolute numbers. If you look at the amount of housing stock that we're short in the United States, I think you're gonna continue to see very strong absolute numbers for many years, many quarters and years to come. I think you're gonna see more of that, you know, outside of the cities, and we'll continue to benefit from that.
You know, most of our customers own their land, own their homes, and, as you know, they've seen home and land appreciation, particularly out in rural, which has had outsize gains versus urban. You know, they're benefiting from that, and there's been a bit of a wealth effect. You know, certainly feel like that homesteading trend and that rural revitalization trend are still very strong macroeconomic tailwinds for us. On spring, as Kurt mentioned, you know, spring has been slow to start, but we are very excited about our spring plans. Inventory's in a great spot. Marketing and merchandising are primed. You know, cues driving foot traffic.
I'm gonna turn it over to Seth to talk a little bit about some of our spring plans in more detail.
Yeah. Hey, thanks, Al. Thanks, Mike, for the question. Hey, first and foremost, as Al mentioned, you know, obviously a little bit of delay here to the start of spring. As we've seen the weather start to break off the southernmost areas, the last couple of weeks, we are very encouraged with seeing our game plan come to life. First and foremost, I would just say, I was in Texas last week and visited several garden centers, and I would tell you both our customers and our team members could not be more excited about us really going deeper into live goods and gardening, which we know it has been historically the number one categories where we were not first in top of mind for them and becoming more of that top of mind.
We are seeing very good positive results, particularly in those garden center stores and being set up for 175 plus as we enter spring here. But it's also not just about live goods, right? We believe we have the best-in-class zero-turn lineup that's out there. We spoke a little bit about big-ticket at the end of Q1, but what I would tell you is where we're seeing weather break, we're seeing very strong demand across the entire zero-turn lineup, both in brands and price point, where our consumer responding with that merchandising. We've spoken some obviously about Greenworks Pro and that exclusive partnership that we have this year.
That's a new real category that we haven't been able to attack in years past that we know that we can go and take market share. A couple other quick things we think about spring and where we're excited to drive the business. It's not just about lawn and garden at Tractor Supply, but it's also about home setting. Chick Days is off to a great start, you know, whether it be through new coops, whether it be through new breeds, things of that nature. And then just continuing to dive into our key related businesses and introducing newness across the four walls. Excited about spring and what we have here in front of us and the plan come to life.
Thanks for the detailed response. Appreciate it.
Yeah.
Our next question is with Steven Zaccone of Citi. Steven, you may proceed.
Great. Thanks. Thanks very much for taking my question. Good morning, everyone. I guess, Hal, I was kind of curious for your sense on the broader macro backdrop. It sounds like you're comfortable the consumer's in a healthy position, but just curious your input on how you see the consumer environment shaping up over the balance of the year. It's topical with investors. I guess if we do get to a scenario where potentially in a recession, how do you think the business performs in that environment?
Yeah. Good morning, Steven, and thanks for joining our call. You know, if we step back and just talk about the macroeconomic environment, you know, what we're seeing is very consistent with, you know, what we're all reading in the headlines every day. You know, I'll start with persistent inflation. You know, we had the CPI of 8.5% in the month of March. You know, that's we've seen 0.5-point increases a month for the last handful of months. You know, it's tough to say if we're at peak inflation, you know, but the way I think about it is that we're seeing persistent inflation. I think we will see, you know, strong inflation not only through this year, but into next year.
You know, as it relates to the economy, so far the consumer has shown real strength and their ability to kind of navigate the inflation. You know, I think you're hearing that today in our earnings call, but also, you know, hearing it in many other earnings calls that have come out over the last week. There's a variety of reasons for that. I mean, you've had strong wage growth across the country. You've got $2 trillion plus of pent-up savings that people are starting to tap into now, and you can see that in savings rates.
You do see a little bit of credit card usage up, but I think if you dig into that, what you're seeing is people using their credit cards and then tapping into their savings to pay those down with default rates not yet moving up. I think the consumer's navigating this very well, and I think any talk of recession at this point is premature. You know, stepping back, if you look at our business, you know, we've had 30 straight years of positive comp transactions. You know, we've had 30 straight years of net sales growth. You know, 29 of the last 30 we've had positive comp sales growth. You know, this is a business that has been able to navigate
You know, all types of economic cycles, you know, whether it was the recession in 2020, the recession in 2007, 2008, and 2009, you know, whether it was COVID just a couple of years ago, all those sorts of scenarios, this business has been, you know, incredibly resilient, stable, and consistent through. As I mentioned earlier, you know, there's a number of macroeconomic tailwinds that are really benefiting us, that I think even accentuate the stability of our business. Then combine that with our Life Out Here strategy, which is just an, you know, indicative of just the next leg of growth for our company. You know, 40 years ago, we doubled down in animal feed. 20 years ago, we doubled down in pet food.
You know, now we're doubling down in live goods, combined with our Fusion remodel. You know, we've never had more customers shopping Tractor Supply. We've never had a stronger digital business at Tractor Supply. Our business is incredibly strong right now, and we're very much excited about the business from a short-term perspective and long term.
It's all very helpful. Thanks very much.
Our next question is with Brian Nagel. Brian, you may proceed.
Hi, good morning. Nice quarter.
Thanks, Brian.
I have two short questions that I'll merge into one. You know, the first question, I mean, I guess this is just more of a, kind of a, just a, you know, a logistics question. But you talk about, you know, the quarter tracking above your expectations, but then also some of the weather pressures. I guess my question there is, were you know, in your internal plan, were you planning for potentially more challenging weather? Or, you know, what drove, so to say, the upside in the quarter to your internal plans? And then my second question, we talked a lot about just inflation and how the consumer's managing that. You're kind of flipping that over.
As you look at some of your markets where maybe your consumers benefit more from either higher oil prices or higher commodity prices. Are you starting to see that you sort of see work its way into the health of the consumers shopping in your stores?
Yeah, Brian. Hey, good morning. This is Kurt. The two questions, one regards to some of the puts and takes in regards to our, in comparison to our expectations on Q1, and then the other one is, you know, some of the geo market areas such as oil industry, et cetera. Let me hit both of those. In the quarter, in Q1, weather from a perspective compared to last year, flattish to slightly modestly unfavorable. The point there is last year, we pointed out we had such an early start to the spring, and March is the biggest month, that we saw about 400 basis points last year in Q1 for weather, and we pointed that out.
This year, we had an early start to the quarter with good cold weather in January that we benefited from, but then we had the offset. Weather was neutral-ish from a perspective. Really, some of the strength came in how well Q performed and our ability to just continue to capture market share. You know, weather wasn't necessarily significantly beyond our expectations. We planned that there could be a scenario that we would not see as much early start to the spring. I hope that helps on that. In regards to some of the various microeconomies, all that, the two key ones that are asked a lot about oil industry, farm economy, in summary, I'd say right now it's still too early to tell.
We are not seeing any meaningful shift in those markets that indicate anything, and I'll illustrate why on some of that. You know, first, we don't view some of the rise in commodities or oil necessarily as a negative in those industries, but yet really more of a potential favorable tailwind to the business. Right now, the oil industry is a bit patient, lagging some of the growth and increase in the oil prices. The farm economy takes some time for farmers to get product out of the ground. Farmers are faced with higher input costs right now. I think it's a matter of something to watch. Overall, those markets are very healthy and consistent with all other markets.
We'll watch it closely, but we're certainly ready and prepared to support those industries if and when we begin to see, you know, specific lifts because of that.
Thanks, Kurt. It's very helpful. I appreciate it.
Our next question is with Karen Short from Barclays. Karen, please proceed.
Hi. Thanks very much. Two questions. One, I guess the first one is, in terms of inflation for the year, what is your actual updated expectation on inflation for the year? Then embedded within that, on traffic, you know, your traffic was only down 1% with 10% inflation, but on a two and three year basis, more or less held. Could you just clarify how you're thinking about traffic for the remainder of the year? Because presumably inflation will abate, so that should actually help the, you know, traffic overall on a one, two and three year basis. Thanks.
Yeah. Hey, Karen, how are you this morning? Thanks for joining our call and for the question. You know, on inflation, in our enhanced earnings call, we mentioned that our assumption was around 4% for the year, but that if anything, we saw potential for upside to that. And that's very much what we saw in the quarter.
We're not providing kind of an update on that 4% number today, but I would say that the potential for upside there still remains. Kind of my comment to an earlier question around inflation being persistent, I do think it will continue through the balance of the year and run at 4% or higher. On the traffic, we were very pleased with the traffic in the quarter that we had, and it exceeded our expectations. To your point on two and three year stacks, it was either in line or above sequentially and with our previous quarters.
In particular, if you think about the stimulus benefits from last year, but certainly the spring differences, the weather differences in the month of March, we were very pleased with how our comp transactions ran. You know, we've never had more customers shopping Tractor Supply than we have on a rolling 12 basis. We've done an excellent job maintaining the tens of millions of new customers that have shopped us over the last two years. Our active customer file is incredibly strong. Our Neighbor's Club membership program members have never been higher. The participation, active participation in the Neighbor's Club program has never been higher.
We feel really good about our customer trajectory, our transaction trajectory within those customers, and our customers kind of navigating inflation in our business, kind of in a demand-driven, needs-based type environment.
Sorry, can I just clarify? It was only in the context that I think Kurt made a comment that traffic would continue to be pressured or would be pressured in light of inflation, but that's not actually, I think I just wanna clarify. I mean, that's not what you're seeing.
Yeah, I think to clarify, you know, what we were trying to articulate there was there's a variety of scenarios that could play out for the balance of the year. One of those could be that inflation continues to run high, and if so, that might drive some different behavior in customer shopping patterns, notably that they might consolidate trips more. If they do that, what we might see is a higher basket size with slightly lower transactions. We just, you know, we're saying, look, that's one scenario that could play out and still very much within the context of our guidance.
The same thing on the margin profile side, the point is more around if inflation still runs high, we might see a little bit more pressure than what we had guided on gross margin rates. Still excellent margin rate performance, but we'd see a little bit less pressure on SG&A because our fixed costs would be running on higher sales dollars, and that would still deliver us the operating margin rate in line, you know, in the range of our guidance. You know, we're very pleased with our operating margin performance in the first quarter. We really, as Kurt mentioned, exceeded our expectations across all core metrics, traffic, sales, and operating margin and EPS.
Great. Thank you very much.
Thanks, Karen.
Our next question is with Michael Lasser of UBS. Michael, you may proceed.
Good morning. Thanks a lot for taking my question. There's a heightened focus on big ticket spending given some of the indications from others out there around connected fitness equipment, grills, mattresses. Your suggestion is that big ticket which persisted into the first few weeks of this quarter. What is driving the strength in big ticket growth for Tractor Supply, and how much is inflation contributing to that growth? Thanks.
Yeah, good morning, and thanks for the question, Michael. You know, I'd say probably three things on that, to kind of break big ticket up a bit. We saw fall off in big ticket sales directly attributable to stimulus very much in line with what we expected. And those were in non-seasonal categories, dominantly things like gun safes. In the seasonal businesses, big ticket, as Seth mentioned, where we've seen the spring weather break, we've seen excellent results in things like riders and grills, bigger ticket items. And then as it relates to inflation, we certainly are seeing inflation in those categories like we're seeing across the board. But I would say that we're also pleased with our unit movement, in those categories, not just sales driven by inflation.
Overall, we continue to be, you know, feel very confident in our business short-term and long-term, inclusive of big ticket, and, you know, excited about about the rest of the year.
Awesome. We'll go ahead and take the next question, please.
Our next question is from Steven Forbes from Guggenheim Securities. Steven, you may proceed.
Good morning. Hal, Seth, I wanted to start with your in-market learnings, right? As it looks like you've both been on the road recently. Can you take us through some of your key learnings? What I mean by that is really the learnings from the store associates. You know, what are they saying about their own behaviors, and did you notice anything different among the regions that you visited, maybe outside of seasonal trends?
Yeah. Hey, Steven, thanks for the question, and we have all been on the road a lot recently, making sure, you know, it's a core tenet of Tractor Supply's mission and values and our culture and, you know, I think our team's in great shape. John Ordus and our field organization have just done a fantastic job in hiring. You know, we're nearly 47,000 team members now. Done an excellent job managing attrition. You know, our fast team continues to roll out some more stores in terms of kinda dedicated fast team members. We're rolling out new productivity programs, as John outlined in our last earnings call. I mean, if you walk our stores right now, they've never been in better shape. You know, we've got great service in our stores right now.
Product is well organized and on the shelves. We've got you know, they're very clean and orderly. You know, we've got really all the assembly done across grills and all across riders, and we are, you know, ready for spring, you know, ready for the second quarter. Then in terms of engagement, you know, we had our engagement survey towards the end of last year. Our store team member engagement was at an all-time high. As I mentioned earlier, we're doing an excellent job managing attrition. You know, our team members are really the glue of our company. You know, we pride ourselves on the customer service that we deliver inside of our stores.
You know, I think we're only continuing to make progress on that, even at an already high level, and I think it's gonna be a big benefit to us as we are in the second quarter now.
Thank you. Best of luck.
Our next question is from Chuck Grom of Gordon Haskett. Chuck, you may proceed.
Hey, thanks a lot. Thank you. Good morning. Kurt, can you provide a sense for how you see the rest of the year playing out on the comp front in order to arrive at that 3%-4.5% full- year view, particularly here in the second quarter? You know, just given the upside here that you posted for 1Q. Then on the stores front, can you talk about your confidence levels to open up the 75-80 stores, given that you weren't able to open up any here in 1Q? Thanks.
Yeah. Good morning, Chuck. Yeah, thanks for the questions. Two of them there. I'll just reiterate what, you know, Hal and I have talked about in regards to the comp performance and how that plays out for the year. Certainly, as we exceeded our expectations coming off of strong Q1 performance, as you roll that through the year, and we'll continue to say, as we have the last two years, we are managing this business through multiple scenarios. You could have comp sales at the high end of our guidance range. It's one quarter into the year. As we see the rest of the year, we've got good momentum in the business. As you play that out, we recognize that as you flow this through, this could be towards the high end of our guidance range.
As we've even indicated, it's early to predict on levels of inflation, but as inflation persists, it even puts upward pressure on that. At this point, the best we can do is tell you how we view the business and how we're managing that. Then in regards to our new store openings, I'll start by saying we have no concerns in regards to opening of new stores. We have confidence in our ability to hit our 70 stores-80 stores this year. We've got a solid track record of opening 70, 80 stores. Our process is solid. Our pipeline for new stores is really strong right now. Construction is not exempt from some of the challenges of supply chain, labor, et cetera. We put a lot of effort in to complete the 80 stores in fourth quarter.
Some of those scenarios that push stores out, you know, we saw some in Q1 as well. As those stores have been pushed out of Q1, by the way, Q1 is typically our smallest quarter of new stores. Those stores will open up, you know, in Q2, Q3. We still have a real strong pipeline and expect to hit our targets this year for new stores.
Okay. Thank you.
Austin, if we keep the top of the hour, maybe we'll sneak one more question in, and that'll wrap up our call after the next question, please.
Of course. Our final question will be from Chuck Cerankosky of Northcoast Research. Chuck, you may proceed.
Chuck, you may proceed.
Good morning, everyone. Nice quarter. When you look at the strong level of C.U.E. sales in the first quarter, as a percent of total, is there something else going on besides stimulus spending? How is that mix shaping up thus far into the second quarter?
Yeah. Hey, Chuck. How are you? Thanks for joining the call today. You know, on Q, I would attribute our strong growth to taking share. As we talked about in our enhanced earnings event, on a two-year stack, our total sales grew 52% relative to the market at 25%, which meant we outgrew the market by 27 points. You know, significant share gain. That is, you know, we're the market leader in animal feed. We're one of the market leaders in pet food. And we are gaining significant share in both of those categories. You know, it's attributable to our business model, our customer service, our Life Out Here strategy, you know.
That's one of the reasons we're just really excited about Q and the foot traffic it's driving into our stores and the setup that has for us for the balance of the year.
All right. Thank you very much.
Thank you. Thank you, Austin. This concludes our call today. We look forward to talking to you at our second quarter earnings call in July. Both Mary Winn and I are around today, so please feel free to reach out. Thank you very much for joining our call today.
That concludes the conference call. Thank you for your participation. You may now disconnect your line.