Nice to see everyone here for our 30th annual Goldman Sachs Retail Conference. We're here with the Tractor Supply team, who I'll introduce properly in a minute. I just have to read some disclosures very quickly. If I can just scroll here and find them. We are required to make certain disclosures and public appearances about Goldman Sachs' relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received, or 1% or more ownership. We're prepared to read aloud these disclosures, ready to share upon request. However, these disclosures are available in our most recent report, available to you as clients on our firm portal. Disclosures and updates to those disclosures are also available by ticker on the firm's public website at www.gs.com. So with that out of the way, thank you so much for joining us today. We are very happy to have Hal Lawton, President and Chief Executive of Tractor Supply, and Kurt Barton, Executive Vice President and Chief Financial Officer. Thank you again for joining and for being the first fireside chat today, kicking off our conference. So one question we're kind of kicking it off with, because we haven't really lived in normal times now for a while. Just in terms of 2023, what would you say were some of the bigger wins for the company and maybe what were some of the bigger challenges? Yeah. Well, thanks, Kate, for having us here today, and good morning, everybody. It's a pleasure to see everybody, and thanks for joining us first thing in the morning. Certainly 2023 has had its twists and turns this year, like several of the past years, and all years really do. For us, I'd say maybe three reflections. First, on the macro environment, it's certainly been more challenging than we anticipated at the beginning of the year. So I'd kind of call that out as something that's a little, little different. There were a number of retail earnings over the last few weeks, and I think everybody got a good taste of kind of the environment that we're all operating in now. We can elaborate on that further. But on the plus side, you know, two things I'd call out. First off, we continue to make a significant amount of progress in our Life Out Here strategy. We'll have remodeled several hundred more stores this year, integrated our Orscheln acquisition, continued to make progress on our supply chain with the opening of our Navarre, Ohio, facility. We're in the process of building our Maumelle, Arkansas, facility, which will open next year, and continue to make progress on our Neighbor's Club program and digital and improving our features and benefits there. So from a strategy perspective, a lot of good progress and really right on plan for the year. And then, you know, the other thing I'd comment on the business, just the continued evolution of our overall team and how that's evolving as well. So, really pleased with the year in terms of what we can control and how that's evolving. And then, obviously, the environment's been a little different than we anticipated at the beginning of the year, but pleased about how the team's navigating it. Great. So if we could maybe talk about the environment a little bit more. I think one thing that retailers have been dealing with across the board is just pressure on big ticket categories, which has been now for several quarters. So, could you maybe walk us through how much bigger ticket categories actually represent for Tractor Supply? And what are your thoughts on the stabilization and possible inflection of this category? Yeah. The big ticket for us, or discretionary businesses are about 15% of our total revenue, so a smaller portion as a percentage. If we were to step back, really, you know, kind of probably 12, 15 months ago, the consumer began to shift back their spend to services. Kind of pre-COVID, services as a percent of consumer spend hovered around 69%, just south of 70%, with goods being kind of the resulting 31%. You know, through COVID, the goods as a percent of PCE purchases really got up to, like, 35 and almost 36%, and now that's kind of migrating back towards 31%. I think we're about halfway there now at about 33%. So as consumers have shifted back to services, some things have had to give, so to speak, in goods. Then you compound that with all the other pressures that consumers have, declining savings rates, higher credit balances, some early signs of default, as well as other things like school loan payments beginning to kick in, higher mortgage rates. I think all that's compounding with the shift, plus those to really put pressure on, mostly discretionary in the retail side of things, because consumers still need to buy those consumables that they need, whether it's groceries or dog food or animal feed to live their lives. And so that kind of pullback is happening in the discretionary. You know, if you, as you look forward, it's I think there's a lot of, t here's a range of outcomes on how when discretionary starts to kind of lap itself, and and does that kind of come back to flat and maybe positive, or does it continue to stay negative? And there's a number of new pressures that are just hitting right now, particularly around, as I said earlier, around college loans and those sorts of things. And so we'll see as those new pressures evolve, how they contribute to any continuing pressure on discretionary, or does it lap itself? But I think there's a range of outcomes there still to be determined. Yeah, so that kind of leads into my next question, just about deflation or disinflation. It's, I think, a big concern for anyone who's selling consumables, but at the same time, if you kind of flip that, it does alleviate some pressure on the consumer, which may return them back to discretionary. So, how do you think about pricing, what Tractor Supply has done in the last couple of years? And if we were to enter into a period of more disinflation, which I guess we're here now, or deflation, what are you expecting for pricing, and what do you expect for the rest of your business as a result? Yeah, to start with, we are committed to being priced right every day in the market. First and foremost, being that advocate for value with our customers, and also just being everyday low price in the market is our value proposition to our customers and where we're committed to be from a competitive perspective. The second thing I'd say is there has been a significant amount of cost that's come through over the last couple of years. Different though than previous inflationary periods, this one has not just been commodity-based, but it's had other elements like freight costs and fuel costs. It could get, for a period of time, higher container costs, and then certainly a significant amount of wage pressure that's happened as well. In addition, you know, if you look at U.S. productivity having fallen off the last couple of years, you know, there's kind of an underlying lack of productivity that's fueling cost takeout as well in the manufacturing sector. So all that comes up to play. We have had a period of significantly high inflation, really across the board, and given the heavy amount of consumables that we sell, we've kind of been outsized on that, particularly last year. Certainly beginning to lap that, starting to see kind of annual average unit revenue start to come down. We are seeing that kind of moderate and level out, and really, the bigger pressures right now for us are on units per transaction, as consumers are just being very mindful of where they're, you know, what they're spending. Okay. And I think at your fourth quarter 2021 investor update, you had expanded your TAM to address about $180 billion, of which you have 8% market share. Do you have a goal that you've set, you know, in terms of what percentage of that TAM you want in the next few years? And, how do you think about expanding that with new categories or different customer segments? Yeah. So, to your point, in October of 2020, we provided an update and said our TAM was $110 billion, and then, kind of 18 months later, updated that to $180 billion. There was two pieces of that increase. The first piece was just growth in our market that happened over those 18 months, two years, driven bit by the change in customer behavior related to COVID and other, other elements around that. So that went from $110 million to $140 million. And then a big piece of our strategy right now is to build out of garden centers, and so we added to our TAM live goods and a few other type things like pet services to get to the $180 billion TAM. Feel really good about that TAM at this point. It's we call it $15 billion of revenue this year, we'll have 7%-ish, 8%-ish of that, of that TAM. There's still a lot of opportunity as we look forward to grow. And one of those, an example of that opportunity we have ahead of us was most recently in our last earnings call, we updated our long-term store target from 2,800 to 3,000, reflective of not only the larger TAM that we're participating in now, but also the attractive financials of our new store. And as we look forward, we just see a significant amount of opportunity, not only building new stores, but also in continuing to grow comp sales in our existing stores and continuing to gain share. At high- single digits, there's a lot of opportunity ahead of us. That's great. My next question was on the stores, so maybe we can spend a little bit of time there because I have a few questions there. As you mentioned, you added 200 stores to y our long-term target. You talked a little bit about how you reached the conclusion. I wondered if we could hear a little bit more there, maybe, in terms of what kinds of new markets maybe you're targeting with these new stores, and how you're thinking through any kind of cannibalization as you embark on opening more stores. Kate, I'll take the real estate question there. We announced, as Hal mentioned, a target increase from 2,800 to 3,000 stores in the U.S. We've had a history of increasing the target number of stores as we've received more information, data to support those customers, the consumers that live our lifestyle. And it's been a few years since we were able to take all that data, certainly all the new customer data, those new customers that have moved into our markets, that have adopted more of a rural, you know, lifestyle. And it's exciting to be able to take from the previous study, where there was 14 million or 15 million Neighbor's Club members, to over 30 million Neighbor's Club members, take that information and be able to really put that through our very consistent, robust real estate model. And that gave us the confidence that not only in new markets, but really fill in markets that where there's just been tremendous growth. And it's been a pretty consistent journey that every three to four years, we refine that, take the new customer data and all of that growth, the structural changes, those that have moved into our market, gives us that confidence. To your other questions, it's a mixture of markets where there's just been a tremendous influx of new consumers in the Southeast, in particular, where we've got a heavy presence of stores, but there's many states where it's just continuing to grow, and we're able to put in a store 20 miles away from an existing store and still, you know, be able to hurdle a pretty sizable hurdle rate that we expect out of our new stores. That really leads to your last question on cannibalization. When we consider a new market, when we consider is it 3,000 stores, we certainly consider what level of cannibalization may come from existing stores to be able to pass the pro forma to give us the confidence that we'll add a store. We've seen tremendous, positive results from adding a second store. Oftentimes, when we have a store that's really hit its capacity, where we feel like it could be constrained, put another store just, you know, 20 mi away, that store jumps out of the gate. There's great brand recognition, but the other store rebounds better than we've seen. A lot of excitement with this new customer data that we've had over the last three years that gives us that confidence to move it from 2,800 to 3,000. Okay, and the second part of the real estate question, Kurt, then is the announcement to execute the sale-leaseback of company-owned stores. And again, could you maybe walk us through what led you to that conclusion? That is a newer strategy, I think, for Tractor Supply, and why this is the right time to be doing it. Yes, certainly. So for the group, we announced on our last call that we are shifting a new store real estate strategy from previously 100% built to suit, where the developer, they have all the risk, they infuse all the capital, and then, in turn, lease it from them. So what's really new to us, but still a best practice common in retail, is if you've got the expertise and you've got the team, you can begin to have a mix of what is a fixed fee or self-developed store versus the built- to- suit. And over the last year, we've built our real estate team. We've brought in, over a year ago, a new leader of real estate that has that expertise. So while we announced it a few months ago, it's something we've been working on for about a year and building the right team to do it. And here's the reasons why. Y ou can have a fixed fee development, take some of that risk of the developer out. We all know that commercial real estate's under higher risk, higher challenges. It takes some of the mitigation out of your confidence to build 80-90 stores a year. But we take those costs, and we're able to build a store 10%-20% at a lower fee, and that gives us the ability to then reduce rent. So we've always seen this as, if we can have the expertise in-house to do it, we can take some of the cost out of new store. Ultimately, it's part of our operating margin improvement. So we announced that once we had the confidence we were going to do that, the team said we could do a few of those stores. We've got five to seven stores already launched on a fixed fee development. We'll do 30+ stores next year. So it was the right time to announce that we were going to shift into a good mix of fixed fee, lower cost new stores. That then, it goes in tangent as to how do you source that? Why do we announce even the sale of existing stores? We have about 5% of our stores, a really small percent that we own. We've accumulated those over the years of acquisition or other reasons, and it really doesn't fit our strategy of being an asset-light retailer. So it's a great opportunity to take existing stores and be able to use that to fund the investments on a new store development. So they really go hand in hand. And ultimately, as we start to build all of our new stores under a lower cost model, that is gonna drive an incremental operating margin improvement, lower occupancy costs. So we're excited that we've got the ability, the strong balance sheet, stores that we can use to really keep our capital very consistent, you know, at a net capital level, which I'll be talking more about commonly, is that we can keep our net capital pretty consistent. We'll utilize those stores to be able to fund that process. Great. Thank you. Thank you for that. Going back to just opening stores, I'm sure you've seen that other retailers have been very vocal about opening stores in rural locations, and it seems like they're just taking advantage of this rural revitalization you guys have talked about for a while now, including retailers that you overlap with. So we just wondered how you're viewing this potential for increased competition, and how you look towards the future. Yeah, first of all, our market, $180 billion, as you said, so it's a large market. As well, though, it's also a very attractive market. And additionally, over the last couple of years, it's a market that's seen a lot of growth, just given the changing behaviors that we're seeing in customer demographics and customer trends. I'd say, you know, the way I always think about this is our big focus is just staying ahead of the customer. We're maniacal at our business, in our business about just focusing on the customer, delivering what we call legendary service. As I talked about earlier, just always being priced right on the shelf, you know, always being in stock, and then providing great technology to support those, those customer interactions and our Neighbor's Club loyalty program, and kind of tying all that together. And we do that well, and feel very confident in the, the future of Tractor Supply. It's an 85-year-old business that, you know, we're investing for the next 85 years. We compete against tens of thousands of locations across the, across the country. There's small mom-and-pop farm and ranch stores across the country, co-ops, regional chains. That's kind of our core competition that we compete head-to-head with on a reasonable like-for-like format. But, you know, we're a lifestyle retailer, and so outside of those, kind of competitive regional chains of farm and ranch, we compete against a lot of national chains on a category-by-category basis. And, you know, but I think for us, the big thing is just staying focused on our customer. We've got 2,200 stores, and, you know, we're building, you know, 80 next year and 90 the year after. And if we just stay focused on what we do well, you know, I'm confident that we'll continue to flourish. Great. One other subject that's come up quite a bit in the last two quarters is shrink, and this is something Kurt and I were talking about before the fireside today. And it seems like I don't want to characterize this wrong, but you've had a little bit more success in controlling shrink. And so I wondered if you could walk us through why you think that is, as we all try to understand what's happening in retail, and maybe your opinion on what you think the future of retail is with regards to this issue. Yeah. I'll start by saying there's no doubt, shrink and organized retail crime is a significant issue for the retail industry right now, and it's worse than I've ever seen it in my nearly 30 years in retail. We are a bit of an aberration, though, on that trend, and I think there's a variety of reasons why, but our shrink in 2022 was less than 2021, and our shrink results year to date in 2023 are less than they were in 2022. So again, we're an aberration. There are, I think, a number of reasons why that's the case. Certainly, our loss prevention team has done a number of things this year, working with our stores team to set ourselves up for success there. But in addition to that, there's a number of structural factors that play into it. First off, just the size of our store being 20,000 sq ft, and secondly, having really one entrance and exit, combined with the fact that our customer service hub, where our cashiers are, et cetera, are all right up front, in front of the store. You combine that again, also with our commitment to customer service and the fact that it's kind of a mainstay, and we have, I'd say, pretty significant staffing for a store of our size. And you kind of put all that together, and then also combined with where our stores are located in kind of more rural areas of the country, where there's kind of less organized retail crime and also less proclivity for, say, homelessness and those sorts of things, which kind of contribute to it. And as I said again, it's an issue facing the industry that's significant right now, but one that we, fortunately, to date, have not seen in our business. Thank you. Shifting back, Hal, to maybe my beginning question, you took the CEO role right at the beginning of 2020, so you maybe had six weeks of normalcy and thoughts about it. And you've obviously done a ton of work implementing new strategies like Project Fusion and the Side Lot, Neighbor's Club, Orscheln acquisition, but this was during a time of super high demand, really fraught supply chain and high inflation. So if 2024 were to be normal, how much more do you think you can accomplish on the productivity side of things now that maybe some of these shocks have kind of, maybe I hope I didn't just jinx it, are through the system? Yeah. We look forward to returning to our kind of long-term guidance formula. And you know, we shared it initially in October of 2020, and then again, did an update on it in January of 2022, where with basically that entails kind of mid-single-digit comps, two to three points of non-comp growth, getting us to kind of that kind of high-ish single-digit revenue growth. And then overlay that with some modest operating margin improvement on an annual basis, call it 5 or 10 basis points. So we're leveraging on the bottom line, reference leveraging it versus sales, and then buying back up 2%, maybe 3% of our shares, also with an attractive dividend of a 40% payout, and driving that kind of low double-digit, mid double-digit EPS growth a year. Yeah, we look back, you know, we had three years in a row where we significantly exceeded that. This year will be modestly underneath that, just as we lap some things and also given the pressures that, you know, retail is facing now. But as things normalize, we look forward to kind of getting back to that growth formula. Great. Thank you. Kurt, we talked a little bit about this at the beginning and how flagged as a potential macro headwind, but you've talked a lot about how the Millennial has become a larger percentage of your customer base during the pandemic. But the Millennial consumer might also be facing maybe a little, a few more headwinds than others come October with the student loans. So, can you maybe talk about how you've accounted for this in your guidance for this year and how you're thinking about it for your customer? Yeah, Kate. And as a reference point, over the last three years, we saw, as I mentioned earlier, significant growth in new customers, and we've mentioned that, you know, the largest cohort of that was the millennial customer, and it's been a real key aspect of our opportunity for growth and even some of the changes in our business model and the products that, you know, we offer. And there's no doubt there are some pressures, and we stay attuned to that, as Hal mentioned. The student loan repayment is certainly one that we watch. We're aware of, and anything that takes money out of the wallet, you know, it certainly is harder for the consumer and takes some of that spend away from, you know, the goods and services that they spend it on. So I think it's one to be very conscious of, but in our case, the particular Tractor Supply, as you think about the customers, we've learned more about this millennial customer in our Neighbor's Club. They're more affluent than our average customer. As you think about their journey over the last three years, they moved out of an urban or suburban environment, made the choice to buy, own property, have a mortgage, a lower cost of living in the area. So as we think about that customer, that hobbyist or someone that just wants to live out here- But yet has a solid job and is more affluent than our average customer, we believe there's, you know, while it's something to watch, we believe it's not, you know, a top, you know, challenge or headwind, but it is one of those things that we consider not only for 2023, but for 2024. But this is a customer that is committed to our lifestyle, has made that commitment in buying and owning now animals, and we're the needs-based solution. We're a solution to bring value to them. You know, there's an aspect that we often talked about our large bag good, that there's a bit of a warehouse-type approach to, you know, how we serve our customer and the value that we bring. So, we think we sit well in this situation with that particular potential pressure headwind. Okay. And sorry to jump around a little bit. I should have asked this earlier, but one thing that I don't think you guys get enough credit for is how well you've managed your gross. You get credit for it, but we don't talk about it as much as we should, is how well you've managed your gross margins over the last couple of years. And even though, you know, your key categories have been very strong, your gross margins have been somewhat steady, and we've recently seen better gross margin trends in the first half of 2023. So, can you talk about gross margins specifically as maybe some of the consumable growth normalizes into next year and the year after? Yes. Besides, you know, the last three years, besides the mid- or high-40% comp store sales growth that we've had, the gross margin performance is also equally a success. I think it's important to reflect back on that, to be able to answer that question. Over the last three years, nearly 100 basis points growth in gross margin. The puts and takes on that, we had a real commitment and a shift from promotional to everyday low pricing. The merchant team took advantage of our scale and size, and we've also been able to benefit from some of the investments in SG&A. For instance, our supply chain distribution costs, our field activity support team, we either have vendor funding or we've got efficiencies in gross margin. But those are some of the three biggest drivers of that growth in gross margin. The important thing is that was in spite of significant growth in Q, and our consumables, as we talk about lower margin rates and in the face of record inflation, where the margin rate is one of your toughest. So, I mean, the strength of gross margin during those times with those headwinds, yeah, I agree with you. I I think it's been one of the best stories as well. Going forward, we see more opportunity or more reason to have gross margin expansion than to be able to see any reversal of that, particularly because the consumables outpaced the rest of the business so much. As that begins to be more of a normalized rate, there's less pressure on that. As you come out of the peaks of inflation into disinflation in that environment, it really gives a bit of a relief on your gross margin rate. We're benefiting today on the investments we made in supply chain. So there's some real good internal structural initiatives that give us you know, give us excitement about the opportunity to be able to grow gross margin even going forward. Great. That's great. Well, this session has gone very quickly. We're up to kind of our lightning round, four questions that we're asking every company. Again, you guys are the first ones to go through this, but we're asking four questions so we can kind of get a sense of how everybody's thinking about maybe the next six months into 2024. And we've addressed some of this already in some of the questions I asked, but the first question is on the health of the consumer. Do you see the consumer facing more headwinds or less next year compared to 2023? I'd say it's gonna be about the same. We've talked about it. You've got some things the consumer's lapping, and so it's kind of stabilizing on a few incremental pressures the consumer is starting to face. And then there's just, you know, a bit of an unknown that's still out there around interest rates, wage rates, unemployment. But I think by all of... Most economists today are calling for kind of softish landing, which should kind of normalize a bit consumer spending and create a, hopefully, at least by the end of next year, you know, a kind of optimistic tone on consumer spend. As a part B of this question, are you thinking any differently about the potential impact from trade up or trade down into 2024? We're not, and we talked about that. We really haven't seen a lot of trade up or trade down in our business, particularly on, you know, ongoing customers. We've certainly gained some share in a handful of categories and attracted customers in kind of our opening price point products. And we've got great pricing, market-leading pricing, and as Kurt said, kind of a warehouse model with big bags and great cost per pound. But in terms of that everyday customer who, you know, we can track through our Neighbor's Club program and monitor their purchases, you know, if they've had their dog on 4health dog food, they're sticking with that. If they've had it on, you know, particular equine feed or poultry feed, they're kind of sticking with that. And in many cases, actually, we've seen as much upgrading of product as we have kind of downshifting, particularly in areas like poultry feed, where we're seeing significant increases in the organic side. So, just more broadly, we haven't seen a lot of it in our business and kind of gone both ways. Okay, great. The second question is focused on share of wallet, which again, you talked through with the PCE numbers. But looking to next year, what is the one most important factor to drive higher spending in your general merchandise or discretionary categories? Yeah, I definitely think it's, you know, we're still in a macro environment right now, where you've got, what's the overall consumer spending level gonna be next year? How are they gonna split that across services and goods? What other draws do they have on their wallet? And then, you know, kind of what's the resulting that's left there? You know, for us, in our business, the one thing that I would comment about Tractor Supply, it's a resilient business, it's need-based, it's demand-driven. We have a customer base also that's typically kind of thrifty. They're even in boom cycles, they'll just kind of spend to their normal levels. In tougher cycles, because they haven't overspent in boom cycles, they've been pretty steady in their pace there. So we've got a really healthy customer base, and you know, feel good about our business on that. Okay. The third question is on ticket versus traffic into next year. Obviously, there's been a little bit more ticket with the amount of inflation, which we've already talked about. How do you see that playing out next year in terms of contribution to comp? We haven't given guidance for next year, but what I would say is, if you look back over the 35-year history, the last 35 years of our company, where we've had positive revenue growth all those years, we've been equally split between average ticket and transactions. And so that's over kind of a 35-year period. If you look over the last 3.5 to four years, where we've had this substantial growth that we've talked about on stage here today, and you look at the full body of that work, it's been almost half comp transactions and half average ticket. There's been some ins and outs by period of time during there, but the collective body of work, that's been about what it is. So at this point, it may be too early to say exactly how we see that playing for next year. But I do think over kind of the future horizon, call it two, three, five years, we would expect it to normalize. And if you look out over the future, that it'd be 50/50 as well. Okay, great. And then our last question is on destocking. Again, inventory hasn't necessarily been an issue for you all, but what is your opinion in terms of what inning you think you're in, in terms of managing your inventory and into next year? Yeah, our inventory's really run in line or below sales. For the last four years, and I think we've been on record numerous times saying we wish we had more inventory in our stores. Just given the supply chain disruptions, combined with the surge in the business that we saw, you know, we had less inventory in our stores than we would have liked. We're very comfortable with where our inventory levels are now. Feel really good when you're in our stores, the in-stock levels, the presentations that we have, our ability to, to meet customers' needs. And, you know, we're, the vast majority of our business is domestically sourced, kind of 83%, I think it is, domestically sourced. So we've got a pretty fast, responsive supply chain, nine distribution centers, 15 mixing centers. So we're able to really manage our business on a pretty real-time basis from an inventory perspective. We've invested a lot in the latest and greatest on replenishment systems and allocation systems. And we would expect our inventory to grow roughly in line with sales moving forward. Okay. All right. Thank you. Thank you so much for joining us. Thanks so much. Appreciate it.