Q4 2023 Earnings Summary
- Tractor Supply's Garden Center initiative is expected to significantly boost comparable store sales in 2024, as they enter spring with over 450 garden centers, aiming to capture part of the over $20 billion lawn and garden market, contributing approximately 1% comp sales within their guidance range.
- The Companion Animal category remains a strong growth driver, delivering positive unit and sales comps, with significant market share opportunities ahead in 2024 and beyond. Notably, approximately 75% of their customers own a pet, and about half of those own more than one pet, positioning them well for continued growth.
- The company's loyalty program, Neighbor's Club, is driving increased customer engagement and spending, contributing to growth in active customers and positive transactions. This supports strong performance in needs-based consumable categories, such as livestock feed, equine feed, poultry feed, wildlife supplies, cat and dog food, and positions Tractor Supply for continued market share gains.
- The company's performance is highly dependent on weather conditions, and unseasonably warm weather negatively impacted comparable store sales by approximately 400 basis points in Q4 2023, indicating vulnerability to weather disruptions.
- Management acknowledges a "time of uncertainty" and has provided a wider guidance range than historically, recognizing macroeconomic pressures that could negatively affect performance.
- The gross margin has expanded by about 150 basis points since 2019, which could potentially invite more competition and impact future profitability.
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Gross Margin Outlook and Competition
Q: What are your expectations for input cost relief and gross margins in 2024?
A: We expect continued benefits from freight costs, particularly in the first half of the year, and have been working with vendors to reduce costs where commodity prices have declined. Our gross margin has structurally improved by about 150 basis points since 2019 due to shifts like our Field Activity Support Team and supply chain efficiencies. We're confident in our price position and don't see increased competition despite higher gross margins. -
SG&A, Wage Growth, and Incentive Compensation
Q: How are you thinking about wage growth and incentive compensation in 2024?
A: We anticipate wage rate growth of around 3% to 4%, slightly above pre-pandemic levels. In 2023, our performance underperformed original expectations, leading to some modest leverage in incentive compensation. For 2024, we expect a normalization of incentive comp, resulting in a modest 10 to 15 basis point deleverage, all factored into our guidance. -
Garden Centers' Impact on Comps
Q: What's the expected comp lift from garden centers in 2024?
A: Our Fusion and Garden Center initiatives are expected to contribute roughly 1 point of comp in our guidance range. We're adding 150 to 200 garden centers this year, tapping into a $20 billion addressable market. With over 450 garden centers heading into spring, we believe this is the year we'll see significant sales growth from these programs. -
Orscheln Acquisition Impact
Q: What's the outlook for Orscheln converted stores' sales productivity and margins?
A: The Orscheln conversions went well, and all 81 stores are now branded Tractor Supply. We expect them to follow a new store maturation curve, contributing to comp growth in 2024 and 2025. These markets should align with our average Midwest store performance, with room for growth over time. -
EBIT Margin and Guidance Range
Q: How would EBIT margins change if comps are outside your guidance range?
A: EBIT margin movement within our sales range isn't linear. Factors like gross margin levels and deflationary environments can influence margins differently. Outside the range, elements like incentive compensation make the relationship non-linear, but we believe all plausible scenarios are factored into our guidance. -
Deflation Impact and Comparison to 2015-17
Q: How do you view deflation's impact in 2024 compared to past periods?
A: We expect overall deflation to be roughly neutral for the year, with slight deflation in the first half. Unlike 2015-2017, many commodities have already come off their peaks, and there's limited movement left. We see limited risk from deflation and believe it's adequately considered in our guidance. -
Underlying Run Rate and Internal Drivers
Q: What's the underlying run rate and path back to long-term growth?
A: Our consumable, needs-based business remains solid, with categories like livestock feed and pet supplies running unit-positive comps in the fourth quarter. Growth in active customers and contributions from initiatives like Neighbor's Club give us confidence in the consistency of our business. -
New Store Productivity Expectations
Q: What are your expectations for new store productivity in 2024?
A: We expect the 80 new stores planned for 2024 to perform consistently with historical trends, targeting new store productivity of 65% to 70% over a 4- to 5-year maturation process. In 2023, new stores ran at 67% productivity, and we believe 2024 will be similar. -
Companion Animal Category Performance
Q: How is the companion animal category performing?
A: The companion animal category continues to drive comps, with growth in both units and top line. Approximately 75% of our customers own a pet, with about half owning more than one. We see substantial market share opportunities ahead. -
Big Ticket Items Outlook
Q: Why do you believe big ticket sales will be positive in 2024?
A: We're introducing new products and innovations in big ticket categories, like the exclusive Toro Havoc and an expanded grill lineup. We're also lapping two consecutive years of negative big ticket comps and have seen retail rebounding in big ticket items. -
First Quarter Guidance
Q: How is the first quarter shaping up relative to guidance?
A: January benefited from favorable weather but is our smallest month. March will be key for Q1, and we're optimistic with a strong spring setup and high in-stock rates. We're expecting a positive comp for Q1 and are focused on having a win in March. -
Weather Not Included in Guidance
Q: Why not include weather as a potential benefit in 2024 guidance?
A: We've chosen to be prudent and not factor weather into our guidance, focusing instead on factors like continued market share gains and disinflation. While weather could influence sales, we based our guidance on elements we believe will have the most impact.