Okay, thank you. Good morning, everyone. Thank you for joining us for the fireside chat with Tractor Supply this morning. For those of you who don't know, Tractor Supply is a DIY rural lifestyle retailer, lifestyle retailer in the U.S., with more than 50,000 team members, and serves all the needs of those enjoying life out here. It operates 2,200 stores, generating revenue of $14 billion a year. We today have Hal Lawton, President and Chief Executive Officer of Tractor Supply. Hal has served as President and CEO since January 2020, and is a member of the company's board of directors. We also have with us Kurt Barton, Executive Vice President and Chief Financial Officer and Treasurer of Tractor Supply. Kurt has served in this role since February 2019, and is also a member of the company's executive committee.
Thank you so much for joining us today.
Thanks for having us.
We appreciate it. Unlike some of the other companies we're speaking with today, we haven't heard from you in a little while. You reported earlier in the cycle, so we wondered if we could maybe start out talking with your view on the health of the consumer. Just your updated view about, you know, how you're feeling about the consumer. Maybe you could walk us through what you've seen throughout the year up until now and how you're expecting the back half to play out.
Yeah, absolutely. Thanks, Kate, and good morning, everybody. You know, our view on the consumer is that they are stable. They have been very resilient, and that the economy is overall in good shape. That said, there's a... As always, there's a bunch of nuances. And, you know, start with at the highest level, you think about GDP, call it two and a half-ish, perhaps even 3%. So you've got strong economic activity in the United States. For us, as a retailer, where the nuance is, is when it clicks down one level below that. You know, start with consumer expenditures, which are obviously the bulk of our GDP here in the United States, and those continue to run at, call it 3%-ish as well, right in line, perhaps even slightly above overall GDP.
But then when you click into that and you look, that's really where it starts to get nuanced for retailers, because you've got services up 7%, really, year to date, and you've got goods up, call it 1-1.5% year to date. You've got this big divergence inside of consumer expenditures right now. Obviously, on the services side, it's you know things like entertainment and travel, but it's a lot of rent, insurance, those sorts of things that are also driving up that. If you look at pre-COVID, it was about 69% services. We're roughly 100 basis points off of that. At some point, you would think that divergence would start to moderate and start to narrow back.
But for us in retail right now, I think that's some of the narrative in retail: the consumer's strong, the economy is solid. Obviously, there's some nuance on inflation and unemployment underneath, but it's really more of a services goods, I think. That's you know, a consistent theme probably here across all of retail. But from our view, given our earnings two and a half months ago, two months ago, it really hasn't changed much since then. The consumer keeps navigating through it. Net wealth levels are at all-time highs for a large portion of the population. You know, and from our consumer, we don't have a lot of the lower-end consumer, and so some of the documented difficulties in that segment really haven't affected us.
So it's the share of wallet, which I know, you know, many retailers have talked about, whether it be, you know, maybe at the lower end, consumables versus discretionary, and certainly at the higher end, more discretionary versus services. There also was, I think, you know, the pivot to services came as a result of just how many goods people did buy-
Right
... you know, during the pandemic. So do you have a view on how much digestion has taken place, I guess, now that we're almost five years post-pandemic, and when you could expect to see maybe some of that stabilization in the share of wallet?
Yeah. So as it relates to share of wallet, say it's a goods to services, you know, we've been kind of outspoken that, you know, unclear when that's gonna stabilize and come back, you know, kind of narrow that gap. But one would think if it followed normal trends, maybe another year, if you just look at how much of that gap versus pre-COVID goods, services made up over the last 18 months. And then as it relates to kind of this notion of pull forward on goods, that has not been... I think there's certainly elements of that, particularly in the retail segments, but for us, that's really not been as much of a factor or consideration.
We've commented this year that big ticket has been very strong, as an example, which is, you know, categories like riding lawn mowers, UTVs, all-terrain vehicles, those sorts of things. And you know, I think that's indicative of the strength of the consumer on the higher end. When people want to buy something, their ability to do so, and also would point to the fact. And the units that we're selling on both of those categories, for example, are well above 2019 levels. So, you know, it would be indicative of if there was any pull forward in those types of categories, that it's certainly passed itself by now. And the rest of our business really doesn't have that kind of consideration.
You know, it's animal driven, it's pet driven, or discretionary or seasonal oriented.
Speaking of that, the CUE categories are about half your business or over half your business. And I know there had been, at least last year at this time, a lot of concern about deflation. So I wondered if you could maybe talk us through what you are seeing from a pricing standpoint, how you are focusing on conveying value and promoting the CUE categories, and what the elasticity response has been-
Yeah
... as a result of that?
... I'll start out with CUE, as Kate's mentioning, stands for Consumable, Usable, and Edible Products. So in many ways, we're much like the grocery store for our customers, animals, and pets. We have between 20% and 25%, somewhere in that range, market share of bagged animal feed in the United States, so far and away the largest player in that space, and we're top five in pet. And so there's a lot of consumables happening in our business. But also, we sell a lot of things like lubricants for our customers' tractors and vehicles. And then certainly in the seasonal side, like during the summertime, fertilizer and grass seed are big, big categories for us.
Things like propane all year round, and then in the wintertime, things like wood pellets for secondary heat for our customers. All those products have an underlying element of commodity exposure. And in 2022 and the back half of 2021, we saw some significant inflation due to commodities, but also wage rate increases and supply chain increases. The majority of those goods have stabilized at this point, aren't seeing dramatic inflation. Those that aren't seeing further inflation. The majority of those saw deflation during 2023, so things that were steel-related, fertilizer-related, et cetera. Pet food has really been stable on pricing, and it's really animal feed that's been the majority of our deflation this year.
We started the price reductions in those businesses last year at the very end of the third quarter, beginning of the fourth quarter, so we're about to cycle those. Other than that, really don't see much inflation further deflation risk in our business. We're obviously watching corn pricing, and that has a major influence on animal feed. But we don't see any further deflation on the horizon, and we're starting to lap last year's inflation, you know, right around the corner.
Great, thank you. And then, if I could maybe just ask another thing that we've been hearing from retailers recently, well, actually, more than recently, is just how much newness is driving the consumer decision. But also you're hearing a lot about consumers leaning into occasions or holidays. And I know you do have business around all of that, so I wondered if you could maybe talk to any newness that we can expect to see in Tractor Supply in the back half and how you're thinking and what you've seen from some of the holiday spend this year.
Yeah, maybe I'll make three points on that. First off, in the first half of the year, to your point, we called that out on our earnings call as well, that things that are new, where you're seeing innovation, new brands, new products introduced to the market this year, those have all sold incredibly well. We commented earlier on the strength we've had in riding lawnmowers this year. We had several new items in the lineup this year. Similarly, on grills, we've had really strong performance in grills this year. We brought Weber into our lineup this year on grills, in addition to innovated on several of our key items, and so anywhere we've sprinkled newness into the business, it's done incredibly well.
As we're looking towards the back half of the year, second thing I'd say is we're seeing similar trends. So as we start getting into the fall season, where we're bringing newness in, we're seeing that sell really well across the business. And like an interesting fun note is, like, Halloween this year, for us, has been very, very strong. We're not obviously a large player on, like, say, the costume side or even the candy side, but more on the home decoration side, and you know, that has been a really strong business for us. It's been encouraging to see that off to a good start.
And then as it relates to holiday, I think this is going to be a very interesting holiday for retail for a number of reasons. You know, first off, as we all know, we've got the national election on November fifth, the federal elections. I think you're going to see most consumers wait to purchase their holiday goods until after the election. And that's compounded by the fact that this year there's five less shopping days in the holiday selling season. It's the latest Thanksgiving that you can have, and obviously, Christmas is always on the twenty-fifth. So there's five less shopping days than last year.
So if you start the season late because of the federal election and you've got a narrow shopping season, it's gonna put a lot of pressure on the month of December. And so I think, you know, the consumer's in a good spot. Hopefully, we have good weather during that time, so everybody can get out and shop and, you know, hopefully other conditions are ripe during that time. But it is gonna be a very tight Q4.
Great. If I could maybe move over to a question on competition, which I don't feel like you guys get asked too much about because what you're offering is so differentiated and specific. But we wondered if you could maybe talk about how the competitive environment has changed since the pandemic, and would you say there are more points of distribution in which you overlap categories today or less?
I'd say it's roughly the same as it relates to points of distribution. If we were to step back and talk about our market and the competition a little bit, so we estimate our total addressable market to be $180 billion in size. Our revenues this year will be approximately $15 billion, putting us just at an 8% share of our market. That has grown, both the market but also our share of the market, as we've been a significant share gainer over the last, you know, decades. If you look at how we think about our competition in that, kind of break it into two big buckets. About 40% of the market is core farm and ranch competitors.
These would be regional chains or co-ops, and there's about 8,000 co-ops across the country. Between our stores, there's another 2,250, call it, those 8,000 co-ops, and maybe about another 1,000 or so, I mean, regional and local chains. You know, there's, call it 11-12 thousand competitors on the farm and ranch side from points of distribution, to your point. Then the other 60% of our market is really, we compete against a whole range of competitors.
So on the apparel side, we, you know, where we carry brands like Carhartt, and Columbia, and Wrangler, plus our own private brands, you know, we'll compete against the, the, you know, the tens of thousands of apparel and footwear locations in the country. In pet food, you know, significant competition there as well. Animal feed, it's more against the core farm and ranch, but then you get into our tools and hardware business, and you're competing against home improvement there, or against mass merchandise, and then certainly seasonal, very similar, so it's a big market, one that we compete against a whole wide variety of competitors.
But if you step back, one of the things that I think is a unique, compelling investment opportunity around as it relates to Tractor Supply, is that in the farm and ranch channel, we're far and away the largest player, with our 2,200 plus 50 stores. No one has the national scale that we do. No one has the competitive advantages that we do on supply chain, on digital, on marketing, et cetera. And it puts us at a really, compelling, a competitive advantage, relative to the majority of our competitors.
Kurt, I wonder if I could throw some questions your way.
Sure.
Sorry, just to get to it now, but we wanted to talk to you a little bit about productivity. And just, you know, obviously, since 2020, I feel like there's been a lot of chase of demand, chase in the supply chain. Now you have a macro environment that's, you know, a little bit more challenging with higher interest rates. But if 2025 were to be a normal year-
Mm-hmm.
And you could operate how you'd want to operate, how would you think about your current investments? What would you speed up if you could, and what would that lead to in terms of productivity and margin enhancement?
Yeah, sure. Kate, if I could, let me first add one comment to the last topic that Hal talked about, and we've said for years, but I don't think we've said it recently enough when, on your question on competition. One of the unique things of Tractor Supply is that you can find everything within a Tractor Supply at other retailers, and most of it even online, but what's unique is you can't find everything within a Tractor Supply at any other one retailer, and we bring all of that together for that one unique lifestyle, so yes, there's competition. There's even scenarios of others trying to get into some of what Tractor Supply does well, but you really can't reproduce, or there's not a great reproduction of everything you can to supply the lifestyle of Tractor Supply in another retailer.
We think that's pretty neat, and we believe our customers do as well. On productivity, you have to step back and say, if you look at the last five years, 2020 through 2022, a tremendous amount of growth, 45%, three-year stack comp sales. In that period of time, there was a lot of inflation, but there was a lot of inefficiency in that process. If you think about how much we grew during that time frame, we muscled through that in regards to, you know, how do you move that much product through the same pipeline? We had to utilize 3PLs. We had to be at the highest level of volume going through our distribution center.
So there was a lot of great success during that time frame, but we're coming off of a lot of the inefficiencies.
Mm.
I think that's one of the reasons in the last two years that Tractor Supply, even though the demand has softened, coming out of there, that Tractor Supply has been able to maintain operating margins during a very heavy investment time period, is that while we're investing, we've been able to reinvest in our supply chain, reinvest in our people, in our stores, and be able to drive much more productivity. So, extremely pleased on the returns that we've been getting on these investments that sometimes don't get as much exposure as all the sales-driving initiatives. And we still have some more efficiencies to go in that. And we just opened up our tenth distribution center that has, for the next 12 months, a process of realigning supply chain and transportation lanes and productivity within our distribution centers.
And so as to your question, as if there's a bit more normalization in there, you know, where would we invest? I don't think that really changes our plan at this point. We've said we're going to invest in new stores at a greater extent, where we had 70 in 2023 new stores, 80 this year targeted, targeting 90 next year. Our new stores are coming out of the box stronger than ever. We'll continue to invest in our supply chain and all the technology and automation.
We believe in the Life Out Here strategy that we launched a few years ago, and believe that even during a time of deflation on the top-line pressure and even a softening on the discretionary, that there is some long-term growth and ability for us to widen the moat and even distance ourselves from competition. We've got a model that's needs-based, and we believe that our investments that we're making at our highest levels will drive greater productivity for the long term and give us additional market share. So, you know, our expectations for 2025 outlook, we see that we believe we're nearing, as a US economy, you know, some potential movement back to normalization, and we're investing right now to be able to continue to take advantage during that time.
You mentioned new stores in your answer, and I wondered if you could maybe walk us through how the store economics are looking for some of the newer stores you've opened. And, do they include the Project Fusion layout as well as the garden center, and how should we think about growth of these newer stores and what they look like?
Yeah
-over time?
As I mentioned, we're increasing the number of new stores we're opening. That has everything to do with the ability like we said in previous announcements, a goal, a target identified three thousand locations within the U.S. But our new stores continue to be a hallmark of Tractor Supply in regards to, you know, the best investments we can make. I'll give some of the data points pre-pandemic. So five years ago, a new store was coming out of the box about $3 million per store. While we've had 45% comp store sales growth during that time frame, our new stores are coming out of the box at, like, $4.5 million. So they've pretty much kept up to pace in the growth of the business as well.
And we've had about 60%-70% new store productivity, and they have about a five-year maturation period. All of that has pretty much stayed relatively consistent. So our new stores continue to have the top-line growth that we've seen overall in our market. They continue to be cash flow positive in year one, basically break even, returning on the investment within three years. And so we've made the investments in new stores that, like Fusion, garden centers. All of the new stores love Fusion.
Mm-hmm.
Most of the new stores love garden centers. A new store, if it's not going to have a garden center, it may be because we've taken advantage of a retrofit location, excuse me, that does not have maybe the side lot capacity to have that, but a vast majority will have garden centers as well. That also plays into the overall long-term or five-year growth opportunity for those stores. I couldn't be more thrilled about the investments, which is why we're increasing it-
Mm-hmm.
to 90 next year.
Just how do you think about cannibalization? You mentioned that it's 3,000 stores are accelerating the growth. What role does cannibalization, you know, play in this? How are you measuring it, and what's your view going-
Yeah
Forward as you open more?
Yeah, we've always had in most of our existing markets, some level of cannibalization on our existing stores. We view it that cannibalization that we're creating with a new store is typically a pretty healthy cannibalization. We are seeing stores in markets where we evaluate the holistic market that may, you know, have potential for 10 plus stores, as having much greater value when we look at it, and we've got to add more stores in to be able to take advantage of that. You have stores that were running pre-pandemic, six or seven million, now they're nine, ten, eleven million dollars. That's a lot for that box.
Mm-hmm.
And so, we may have stores that we open up, and they may cannibalize by $1 million, but be coming out of the box $4-5 million and adding incremental $3-4 million of sales right out of the box. And that other store had definitely a relief of some of the volume pressure. But the interesting thing is that just like anything else, when you relieve some of that volume pressure, they begin to comp as well, positively from that point as well. So, we have about roughly, probably about two-thirds of our stores that will open up, are in an existing market that'll have some level of cannibalization. We evaluate that.
We feel it's the right and the healthy investment, but about a third of them are going to markets where there's no real cannibalization of an existing store. And maybe last thing to add, new store maturation continues to drive comp sales, and it's part of our algorithm on a five-year maturation, that it's part of the comp sales driver. We always look at that net of cannibalization. It continues to be a net positive to-
Mm-hmm.
You know, pretty consistent with what we've seen in the past, a net positive to our overall comp growth, you know, year after year.
Okay, thank you. Hal, I wanted to ask you something that we haven't heard too much about from Tractor Supply yet, but we were curious. You know, we've heard from other retailers having success at monetizing on their omni-channel with media, subscriptions, marketplace. Do you see this as an opportunity for Tractor Supply as well?
It's a great question. Now, I'll start, maybe a bit on Neighbor's Club-
Yeah
just to talk about the foundation we have around our customers and how then that can play into retail media. So for those that aren't familiar, our loyalty program is called Neighbor's Club. And we have over 34-35 million members of our Neighbor's Club program. The sales within that program represent nearly 80% of our sales. And it's a thriving part and a key component of Tractor Supply's value proposition with our customers. We've continued to make enhancements to our Neighbor's Club almost on a yearly basis, just to make sure we're staying out there as a best-in-class membership program. And I would put our...
I mean, a loyalty program, and I would put our loyalty program up against anyone else out there in retail or food service, in the United States. If you look at, as an example for that, we converted when we launched it. It was just a basic loyalty program. In two thousand and twenty, in twenty twenty, we added, made it a tiered-based, rewards-based loyalty program. Earlier this year, we tweaked the kind of tier levels a little bit to allow people to earn higher percentages earlier. And we also changed the way you can redeem to get to $1 and $2 and $5 increments of redemption, not just a minimum of $10.
So this is a program that we keep reinvigorating and keep incrementing on, to make it even more value-added for our customers. And most recently, we just added a component called Hometown Heroes. One of the things most folks may not be aware of, but, so, we have 0% of our stores in urban America, 8% of our stores in suburban America, and 92% of our stores in either ex-urban or rural America. Twenty percent, rural America represents 20% of America's population, but 50% of our military. And, one of the things we launched, as I was mentioning earlier, right in conjunction with July Fourth, is Hometown Heroes.
If you're a veteran, active military, first responder, police, fire, or EMS, and you're a member of our loyalty program, Neighbor's Club, you can be part of the Hometown Heroes piece of that, and you earn our top-tiered status in our loyalty program. Plus, we provide percent off on July Fourth, Veterans Day, and also First Responders Day. In addition, we have a quarterly coupon and such. This is a vibrant membership loyalty program that we continue to increment on and make better and better. And to your point, it serves as a great, you know, data set.
It provides an immense amount of data, and customer understanding and depth of customer detail that it would allow us to be able to then monetize on top of that at a, in a way where our advertisers would see the real value add, right? Because they can get really targeted. To date, we do... So we do offer ads on our website now. It's modest millions of dollars, but in the, you know, millions, in terms of net income, its contribution, and we do see opportunities for that down the road. More broadly, I would say, we also see other opportunities to continue to build on our membership program and add more value-added features there, some of which that could be also monetized.
Great. Just one last question before we go into our lightning round. Just around inventory growth. Just, you know, with the backdrop being what it is, with, you know, the holiday being shortened and, the prospect of rising ocean freight and maybe tariffs, you know, how are you thinking about managing your inventory, in the face of some of those challenges?
Yeah. We have been investing this year for what's really driving the business. And so, you've seen even in our Q2 announcement, inventory is up year over year, 10%. I'd point out really three things that was, you know, a key driver there, and it's really gonna be about the consistent three things for the remainder of this year. One, we talked about the success of our big tickets and the newness and the innovation there. Our vendor partners have done an excellent job bringing innovation, and our customers are responding. We've made investments in that. Secondly, consumables, the CUE categories. While there's deflation in there, that's putting pressure on the AUR, the units continue to grow. We're taking market share in there. Last year, there was actually spots where we wanted and needed more inventory.
So we're in the best inventory position that we've ever been in our consumable part of the business, and we believe that's key to our business. I'll just pause there and just say, you know, as Hal mentioned, that it's a bit of the grocery store for the land and the animal. It's what drives traffic in, it's what gets customers in to see the newness in the other categories. And the third thing, as I mentioned, we opened up our new distribution center, and it really takes about six to nine months to normalize inventory after you've had to load in inventory for a new distribution center. Those three categories make up the overall growth of inventory, and so we feel very comfortable and plan for that.
And then in regards to any potential near term, like, geopolitical or tariffs, all that, it doesn't really change our inventory purchasing as much. For the last five years, we've done a lot since the first round of tariffs to really mitigate the risk and move inventory out of a primary country, such as China, into other Asian countries, Mexico, et cetera. And ultimately, we're probably more insulated by, you know, that exposure than most retailers, where only about 12% of our product is purchased, you know, direct sourced overseas. So we're a bit insulated with a heavy domestic purchase company.
But we've also mitigated that over the last few years and really feel like, while we managed well the previous, you know, round of that, if this were to come, it's a scenario that we're planning for, and we feel like we can manage it well.
Okay, thank you. And just the last couple of minutes, we have five questions that we're asking every company. I'm actually not quite sure we'll get to all of them, but we'll try, we'll try. Expectations for the environment in the second half of twenty-four versus the first half, do you think things will be same, better, or worse with the consumer?
The forecast we've given is that Q3 would be much the same as the first half, and that Q4 has a higher range of outcomes, a wider range of outcomes. Some of which could be very positive, and, and depending on some of the circumstances that I mentioned earlier, some of which could put some pressure. So wider range in the fourth quarter.
On the second question on the topic of margins, and this is more of a 2025 question: How are you thinking about cost pressures around materials, labor, freight? Same, better, or worse than 2025?
... Yeah, that one got some broad scenarios out there. I would as we've indicated, Hal mentioned earlier, we believe, you know, as pricing is stabilized, our base case assumes beyond twenty twenty-four, there's either steady or even potential for slight increase in the materials. 'Cause we're in our environment, we're running net deflation on cost. We expect that to either be flat or growing. I talked on tariffs, you know, earlier on that. Labor coming off of some of the highest years in twenty twenty-one through twenty twenty-three, I bet twenty twenty-five is probably a bit more like historical norms.
Mm-hmm. And then I'll skip over to the fifth question. You guys are EDLP.
Yeah.
But curious about how you're viewing the promotional environment in the back half either, you know, when you look at your own promotions year over year, or what you expect from the industry year over year?
Yeah, I, as you said, we're an EDLP retailer. As one of the ways we enable that is by not doing print ads. We'll do one print ad this year for Black Friday, but otherwise, you know, all of our marketing is digital or CRM, or above the line, kind of TV, radio type stuff. Because of that, it then doesn't really drive the need to do promotions, right? Whereas print ads have a tendency to do that, and we can focus on items and categories and real marketing. That said, certainly everybody is scratching and clawing for business right now, and so you'll see things like bonus buys, you'll see pack-ins, you know, you'll see some brands doing promotions, and we'll participate in that.
Certainly on holidays, I think you're seeing everybody kind of load up and try to take advantage of the holiday and drive traffic in. And I do think it's gonna be a competitive holiday season. As I said earlier, with the three and a half weeks, five days less than last year for holiday, and the fact that I expect holiday shopping will start later because of the election, I think you're gonna see a fast and furious holiday season. The good news is, we are not a huge holiday player. I mean, you know, the vast majority of our business is pet food and animal feed and things like wood pellets to keep people's homes warm. That's where we play more.
But I do think, you know, we do obviously have some holiday elements, whether it's decorations and giftable type stuff, and I think you'll see that go fast and furious this year.
Thank you so much for joining us. Appreciate the time.
Thanks, Kate.
Thank you.
Appreciate the time this morning. Thanks, everybody.