Tractor Supply Company (TSCO) Earnings Call Transcript & Summary

Great. Good morning. Thank you, everyone. So my name is Peter Keith, senior research analyst at Piper Sandler covering broadlines and hardlines. I'm very happy to have Tractor Supply with us today, who is Nashville-based. And so just for a quick introduction who's on stage with me, we have Seth Estep, Chief Merchandising Officer; Kurt Barton, CFO; and then we have the famous Mary Winn Pilkington in the back; and Rena Clayton Rolfe, also sitting next to her, Manager of Investor Relations. So welcome, everyone. Thanks for coming.

Thanks for having us.

Yes. Thank you, Peter.

All right. So let's kick off. I think one thing that's great about Tractor Supply is you guys have this very big niche kind of rural customer base, hobby farmer customer. So it's a big segment, but it's also unique in the landscape of retail. So maybe, Kurt, if you could just talk about how you feel about your consumer health right now. What are you seeing with spending trends and overall maybe home balance sheet health?

Yes, we have seen the customer behave very consistent throughout 2025. And I would describe our customer as stable, healthy, continuing to engage in the needs-based business and the rural lifestyle. I'll give you a couple of examples of consumer behavior in what we see and the demand for our business. We've had consistently -- even prior to 2025, we just continue to see throughout this year consistency in the number of transactions. And we often look at the volume of transactions and the consumable business being the biggest indicator of the health of our business, the health of our customer, their engagement in the lifestyle. And as you saw in both Q1, Q2, we even indicated the strength of how Q3 was starting out that the transactions have been consistent. The consumable business is strong and been really a driver of our business. So best that we see our customer today on the -- on what we see for the demand, we'd say continue to be very healthy and stable. The broad consumer sentiment data but even some of the individual consumer sentiment information we get as we routinely pulse our customers just shows an increased view on their sentiment and their view of their personal finances continue to be stronger as the year has progressed.

Okay. That's great. And so there is some emerging optimism around housing. You guys are in a direct housing play. But how do you think about maybe the impact of housing on your business the last couple of years as we've been in a relatively soft market?

Yes. Peter, as you said it, Tractor Supply is not as direct of a recipient of demand based on housing market either strength or softness. But no doubt, as customers engage, move into and shift out of some markets into the rural communities, we're a benefactor of that. And just as a point of reference, while there was a significant growth in rural migration and the movement out of urban and suburban into ex-urban and rural markets where a vast majority of our stores are that growth in 2020 through 2022 was unprecedented. But still in the last 3 years, we've continued to see net migration into our markets. And so we would like to be able to -- we look forward to and like to see the housing market show signs of growth. I think we're starting to see some of that. There's some momentum, the belief that we've seen the trough and the lowest part of that in 2024 and early 2025, I think, is well supported. So there's a bit of a halo effect and an indirect benefit to Tractor Supply from fencing and lawn and garden. And as big barns or big farms, should I say, may get purchased and larger subdivisions move in, there's certainly a customer that we benefit from. So there's a benefit to our business as interest rates lower and housing market begins to grow again, but not an area where it's a key driver for our business.

Fair enough, yes. We were just looking at some data through mid-2024 and it's on that rural migration, and it still remains nicely intact. So it seems like something that could accelerate as housing starts to pick up.

Certainly, it's an area where housing is cheaper, and mobility allows the consumer to be able to move a little bit further out. And as the millennials and other cohorts begin to have that first home buy, there's a stronger percentage moving into where the cost of living is a little bit lower, and that's right in that ex urban and rural markets where we serve.

Yes, 100%. Everyone wants to get the big house, the yard, get a dog and some chicken, right? So let's pivot next question to Seth. So as you guys may have heard there are some tariffs to talk about. So maybe just talk about the process so far how your team has been managing through tariffs, how those price increases are starting to roll in and any consumer reaction thus far?

Yes. So what we indicated earlier in the last call as well and have been consistent throughout the year is that the first half this year was kind of minimal impacts from tariffs, with a little bit of a modest pickup as we went into Q3 and then more of the impact from a P&L perspective would flow into Q4 and then 2026. Our team, I would say, right away, we stood up to what we call the tariff task force, really looking at the implications, how we need to look to navigate the sourcing, resourcing requirements, making sure that we have product on shelf that we can have programs intact and also make sure that we could be that value dependable supplier that we're known to be. As we're going through Q3, Q4, we're starting to see costs start to flow through some. Kurt's mentioned a few times our C.U.E. business, our consumable, usable and edible, it's 40%, 45% of our sales. It's obviously minimally impacted. We're leveraging that to drive footsteps, making sure we're getting customers in there. But where we're starting to see some costs flow through more in those import type items, we're starting to see some of that cost start to pass through on select items as we navigate. We've got a ton of tools in place from competitive price intelligence, et cetera that we're able to monitor those type of things and make sure that we're priced accordingly. But we've seen minimal consumer reaction at this point to anything that we've taken price on. So I just commend the team on to be able to navigate at this time and we feel confident that we'll have the ability to navigate and deliver the sell side as well as deliver the margin that we're looking to deliver at the same time.

Okay. Yes, that's interesting. I guess maybe to summarize, too, it's not the everyday items that are going up, it's infrequent purchases that maybe consumer doesn't know exactly what it should cost.

Correct, correct. I mean part of our merchandising philosophy is kind of that surprise and delight. As you walk in our store, we call it our drive aisle or center courts. Those are the types of things that are more impacted from the direct import side of the business. And so a lot of those are like onetime buys and things of that nature where you're establishing that retail. And you also have the ability to resource if need be to make sure you're delivering what the consumer is looking for.

Okay. Yes, great. Well, let me just follow up on that because surprise and delight is that we've heard that phrase for 20 years. I think it's a great way to describe Tractor Supply. Maybe, Seth, if you could hit on even just some of the merchandise initiatives that you and your team are working on, even like new product trends, new things you're bringing into the store that are providing that great customer experience.

Absolutely. So surprise and delight is something that's key to us, but there's really kind of like 3 core merchandising tenets that we always talk about. One is dependable supply, the other one is newness and innovation and the third is differentiation and exclusivity. And I'd kind of hit on all 3 of those with new programs and brands. Our C.U.E. business, again, we continue to talk about that, livestock feed, pet food, et cetera. The team has done really robust reset activity this year across those and introduced a lot of new items. And one of the things that we're continuing to see a lot of uptick on is like in our private label product there as well. So 4health is a very large national premium private label that we offer. We get some sub-brands on that with our UNTAMED and our Shreds that really consumers have really gravitated to. If we think about other core categories that are core to the lifestyle, welding's one of those. We are a leader in welding. We just launched Lincoln Electric, which is the #1 brand in welding and that is -- consumers have really gravitated to that, surpassing some of the expectations. And then you think about differentiation and as well as exclusivity. One of the things that we're very excited about earlier this year we announced a partnership we're launching with Field & Stream. We just launched our first handful of select products. Consumer reception has been very strong. And as we look to the back half, we're going to have some fairly large programs starting to launch under the Field & Stream brand, mostly in late November, December with another full lineup coming out of spring next year, which really goes to some of the category trends that we're seeing in like [ wildlife ], recreation. Everything we do is always centered around the lifestyle. And so from the merchant team's perspective, they're always just looking at what are the trends where consumers going and what are the right brands that we can kind of anchor on to make sure we're delivering the products they're looking for.

Okay. Well, in the last year, you had the 3-foot tall skeleton chicken for Halloween. If you could top that, it's probably setting up for a pretty good.

We've got a great Halloween selection. So if you go to one of our stores, you'll see some very unique items in there for sure. This year, it's a big skeleton, a buck like a dear. So it's -- consumers are loving it.

Outstanding. All right. Okay. So I go back to Kurt and this is more of a short-term question. You guys have already kind of set up the answer. But it's just on the second half comp outlook. And so I know that's a question point for investors where the full year range is 0 to 4%. First half of the year, I think on average, you were up about 0.5% or so. So it implies some stronger trends in the back half. Maybe just flesh out where that confidence comes from on this pickup on the comp growth.

Yes. We said in our most recent guidance that we see a range of possibilities of -- for the year, a comp in the 0% to 4% for the year. It's -- first, I'd say there's a wideness certainly to recognize the impact on tariffs. It could be from ticket to the impact on the downside of the consumers' response. But we also indicated we feel really strong about our ability to navigate and center around the middle of that comp range. But that, to your point, implies an uptick in the comp sales in the back half of this year. We also saw as we entered into this year and described it as a transitional year, the 2 real headwinds on our comp sales over the last 18 months have really been the shift of -- on PCE from goods to services. And as that balances back out as the consumer is shifting their priorities of spend more back to a historical norm on PCE. And in our case, that's mostly how -- that's where it impacts some of the discretionary parts of our business. As that normalizes out, that allows us to be able to be more in line with our long-term algo and then really the level of deflation shifting from inflation where we've been seeing some of the significant pressure on the consumable side of the business on deflation. We're seeing both of those shift away from the pressure points to more neutral to even signs of positive. As an example, even in Q2, we exited Q2 on more of an inflationary benefit on the consumable side rather than deflationary. So what you see in the second half of the year is less pressure and in some cases even some benefit from those 2. But really the comparables on the back half of the year what we're going up against are a little bit better. There was -- we're cycling in Q3 significant heat and drought last year, so it was not ideal for the third quarter for demand of -- from the consumer who lives and works outside of the land. And then there was minimal hurricane or emergency response demand last year. There was a soft mild winter and in our business, we are in the business of helping customers in cold weather. And so the comparables are better in the second half than the first half. So we anticipate still consistent growth in transactions where ticket was a bit of a pressure in the first half. In the second half of the year, we're expecting a balance of both growth in transactions and ticket.

Okay. Sounds good. Yes, it does seem -- the weather data we look at, it looks like September has been a little bit cooler for a good chunk of the country so far. Okay. So to either one of you, I did want to ask about the competitive backdrop. What's kind of great about the business, you don't have natural brand name competitors, certainly nothing national scale, maybe some regionals. But how do you feel about that competitive landscape today? Is it intensifying? There's been some concern that a few big box home improvement players might be getting into your space. Anything that's on your radar right now?

I'd start by saying both Seth and I have been with the company and seen over 20 years each in our business and the rural market and supporting Life Out Here. And we've been through times where our peers and competitors will engage in parts of the Life Out Here product assortment, et cetera, whether that's equine, pet, poultry, et cetera and so forth. We keep our eye and our pulse on all the activity of our peers. Our focus certainly is about the #1 thing that we offer is a full great assortment to serve the entire hobby and the entire Out Here lifestyle. That means what you need for your land, your animals, your pets, your equipment, we are a convenient but small and easy shop that offers our customers everything. And that's the most important thing is having what they need for all of the aspects of their lifestyle as well as great customer service. And we've seen -- like I said, we've seen a number of times where other retailers might dip their toe in or dabble into some of the areas. And the best thing that we do is play offense and continue to just have the most reliable and dependable inventory, the best assortment, great customer service. And as I indicated, we're having record years in the number of engaged Neighbor's Club members and retention, transactions strong. As I indicated, comp sales continuing to show signs of continued growth in there. So for us, we're mindful and keeping an eye on the competitor, but the most important thing for us right now and what's really been the differentiator in the years past in these situations is our ability to be able to meet the customers' needs and be best at serving this rural lifestyle.

Yes. Okay. Great. So next question to Seth, a little bit on Neighbor's Club and a little bit on the chicken. It's one of my favorite topics. But I think it's such a fascinating theme for you guys is this backyard chicken demand. The latest stat I think was chickens are now the third most popular companion animal pet effectively, right? So we've had some great chicken, backyard chicken strength in the first half of the year. We had it 2 years ago. What does the purchase cycle look like for a chicken owner? Someone who's getting into the hobby. Does that -- is it a big boom and then fades or do you think it kind of holds steady for a while?

No. It's one of our favorite categories to your point. It's like an exciting category for us that we continue to be incredibly focused on. A couple of quick stats on that and then specifically answer the final question there is around 1 in 5 of our shoppers actually own backyard flock. So about 20% of our customers are engaged in the category. We continue to have record years. One of the things that excites us about where the momentum is going in backyard flock is obviously we had the eggflation earlier in the year that got a lot of people thinking about it. . But even when egg prices came down, we have not seen a slowdown in the hobby and new entrants into the hobby. So this year, we're continuing that kind of record path. We're also seeing about half of the individuals that are buying backyard flock and chickens in our store are continuing the hobby and adding to their flock, and there's kind of a natural replacement cycle that goes along with it. And then the other half are new that we're seeing into the hobby as well, which is always great because when you see about that kind of half and half split, you're getting that repeat purchase, you're getting people coming in and buying their livestock feed, they're buying everything else that can go with it. While at the same time when people are new to the hobby, we love it because they need a coop, they need water, they need everything that goes to -- go with it. And in many cases, it's like a family activity, they're creating this experience. And it's just such a natural category that goes along with gardening, everything that we kind of support in that kind of backyard hobby. So for us, when you do those things, it's just like the full basket of those entrants. And then you have the others that are continuing on -- that kind of build their flock. We'll see our average customer actually continue to add, I mean, up to 10, 12 birds in their flock and many of them have names at that point. And to your point, they become their companion animal and our merchants continue to kind of push the envelope on how do you kind of think about premium products to the table like companion animal whether it be with backyard poultry treats or even things like believe it or not like toys, like instead of dog toys like things for chickens, and it is absolutely resonating with the customers. So it's a great category, one that we're -- we definitely plan to continue to own.

I think chickens eat a surprising amount of food, right. They got to eat a lot of protein to make those eggs.

Exactly.

So what is a chicken customer you see in Neighbor's Club? Are they coming in at least once a month?

Most do. And it's -- because you think if they're owning anywhere between 6 and 12 birds, an average bird will eat around 80 to 100 pounds of [indiscernible] livestock feed per year. And you think about that kind of replacement -- that going in to buy their feed is kind of like that kind of grocery footsteps for us. So it's one of those things that drives repeat purchases like month over month over month and year over year as they're kind of replacing the flock as well.

Peter, a couple of things I'd add to that. Our Neighbor's Club data tells us 80% of our Neighbor's Club members own at least 1 pet. That's 4 in 5, 1 in 5 own chickens and. So the overlap in combination of dog, cat, poultry has got a high level of overlap there. And so for those reasons, the typical pet owner is coming in at least once or twice a month for their needs. And we're seeing that chicken customer, the -- we're seeing a high level of percentage moving into other categories. And we even have like exclusive brands like the Molly Yeh apparel and very prominent in -- on social media with chicken owners, et cetera. So we're able to continue to work through social media on our Neighbor's Club to be able to take that new customer and expand them across the store.

Yes. It does so. I think it's such a fascinating theme for you guys. It's a -- chickens live 5 years, people have to feed them, and they come into store, they start buying more products. So it's a great trend. Just in interest of time, we've got a couple of minutes. You've got some really nice longer-term initiatives in play with Allivet, Final Mile, the merchandise localization. It seems like Final Mile was one that got some attention on the last earnings call. Maybe just update us on that initiative, how it's going? And any metrics you could provide that's getting you excited?

Yes. Why don't -- I'll take that, Peter. First, I'd say there's Final Mile and then we also have our direct sales big barn customer and those often get talked consistently with each other, and they should because our Final Mile is the enabler for a number of sales opportunities and sales vectors that we've got between digital and the buy online, deliver from store but also the big barn direct sales in the large, palletized bulk goods. But our Final Mile is moving along really well. It started with for a few years 300 stores where we began to really test this where we have a hub of a driver and a truck trailer being able to serve 4 to 5 stores in that area and be able to take our own team member with high quality that knows our business and can build a relationship and be able to serve big bulk delivery or that Final Mile on a digital sale. That's moving along well. We've moved into markets like Florida, Texas, California. We've got at this point I think 50, 60 hub stores. So you think about that plus the 4 to 5 stores they're serving in place. We'll continue to roll that out later this year and then get on a real routine of growing that on a year-to-year basis. The direct sales is a field sales team that is driving business with ag centers, big barns that larger customer that we weren't able to service well on their big needs because they need palletized large bulk items being delivered and that group basically is a fast follower to our Final mile by, call it, 30 days after the Final Mile is in place. Our field team who has been trained and been given the tools with lead, like sales lead systems, et cetera, we use our Neighbor's Club and other purchase data to identify these customers. All of that is moving along just as we planned for this year. So we're excited about direct sales because it is a $1 billion business that we anticipate to be a 5-year growth plan, but one of the most exciting strategic initiatives and Final Mile is an enabler for it and also a way for us to be able to be even more efficient and more competitive in those Final Mile deliveries in rural America, which is one of the toughest ones to break into. And we've got nearly 2,400 locations today. So we are the closest to our customers and believe we can have the most efficient and the fastest delivery with our Final Mile team as we roll that out.

And you're building on a sales team then on the direct side to pull in some of those incremental new big customers.

Exactly. You think about a horse stable that may have 24 horses and oftentimes that may be 24 different owners that need their product delivered for the most expensive animal to own. And so those are customers that get deliveries versus come into the store. So it's unlocking one of the last final areas for us to be able to reach into in a greater -- it grew our TAM, and it gives us a greater opportunity to reach additional customers.

Okay. That's exciting. So we look forward to tracking that longer term. So we're going to wrap it up there. But Kurt, Seth, thank you very much for spending some time with us. And good luck with the rest of the year and keep up the good work.

Thank you, Peter.

Thank You.