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Tractor Supply Company misses on earnings expectations. Reported EPS is $0.31 EPS, expectations were $0.35.

Operator: Good morning, ladies and gentlemen, and welcome to Tractor Supply Company’s conference call to discuss first quarter 2026 results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today’s call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Mary Pilkington: Thank you, Victoria. Good morning, everyone. We appreciate your time and participation in today’s call. On the call today, participating in our prepared remarks are Hal Lawton, our CEO; Kurt Barton, our CFO; and Seth Estep, our Chief Merchandising Officer. In addition to Seth, we will also have Rob Mills, John Ordus and Colin Yankee, join the call for the question-and-answer portion. Following our prepared remarks, we will open the floor for questions. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company.

In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company’s filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time.

Tractor Supply undertakes no obligation to update any information discussed in this call. As we move into the Q&A session, please limit yourself to 1 question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation, we will also be available after the call for any further discussions. Now let me turn the call over to Hal.

Harry Lawton: Thank you, Mary Winn, and good morning, everyone. Before we begin, I want to thank our more than 52,000 Tractor Supply team members. Their commitment and passion for life out here continue to set us apart and their dedication to delivering legendary service remains the foundation of our leadership in rural retail. The retail environment remains cautious but stable, with spending focus on needs and small indulgences with some evidence of trip consolidation. Within farm and ranch, the broader market has slowed, though we continue to gain share. In fact, we estimate we had one of our best share performances in Q1. In Pet, the category remains pressured. And while we are holding our share, our performance is below our expectations.

A good example of the consumer spending is around their tax refund behavior. While refunds did come through and we captured our fair share, customers are using these dollars more cautiously. A significant portion is going towards essentials, savings and debt reduction rather than discretionary spending, consistent with the broader environment we’re seeing. Our needs-based model continues to perform as expected in this environment, demonstrating its resiliency. We are seeing that in consistent demand across our core categories and continued engagement from our customers. In the first quarter, that played out in distinct phases, driven by weather timing. We ended the year lapping 2 years of significant storms, which created a slower start, followed by a major storm event that drove a pickup in demand.

Trends then normalize through the middle of the quarter before a mixed finish with a good start to spring in the South more than offset by continued weather pressure in the North. Overall, weather was neutral to our performance in the quarter. Against that backdrop, I’m very pleased with our execution in the quarter. The team responded well to winter storms, activated strong events and around holidays and regionalized our marketing based on weather patterns. And we executed a clean transition into spring and chick days with encouraging early results. We remain focused on executing across the business. Advancing new store growth, expanding exclusive brands and maintaining disciplined SG&A control while continuing to make progress on our strategic initiatives.

Gross margin remained in line with our expectations with ongoing pressure from tariffs, cost inflation and freight, which we continue to actively manage. Turning to our customers. Growth was driven by new stores and our existing customer base with store traffic increasing in low single digits and conversion in their stores roughly flat. Active customer counts grew though visit frequency declined modestly. We saw continued strength in our high-value customers with solid retention and engagement, supported by continued growth in Neighbor’s Club penetration and higher engagement from our most valuable members, while new customer acquisition remains softer and was most reliant on new stores. Turning to our first quarter results. Net sales increased 3.6% to $3.59 billion, driven by new store openings.

We opened a record 40 traction supply stores in the quarter and new store productivity remained in the 65% to 70% range. New stores remain a hallmark of our performance. Diluted earnings per share were $0.31. Comparable store sales increased 0.5% with average ticket up 1.6% and transactions down 1%. Four of our 5 product categories were positive and 6 of our 7 geographic regions delivered positive results, reflecting the broad-based strength of the business. With the exception of companion animal, our consumable, usable and edible categories delivered consistent performance in line with our expectations, led by poultry feed, bedding, livestock feed and equine feed. Companion animal performance reflects a number of structural headwinds. Sales were below the chain average, reflecting these dynamics.

Dog ownership, particularly in larger breeds, has come under pressure, and our mix remains heavily weighted towards dog where we over-index by roughly 20 points. Cat ownership is growing and gaining share, and that’s where we under index. Both species are also shifting towards fresh and premium nutrition where again, we are under-indexed. And our pace of share gains in both dog and cat has slowed. All this said, we are taking clear and decisive actions to strengthen our position, include expanding our Freshpet offering, increasing cat assortment, and enhancing our services and Rx capabilities, and Seth will walk through these and more in detail. Seasonal categories developed more gradually early in the quarter with spring category strengthening as the season progressed.

Overall, we saw solid performance across both our winter and spring assortments. Big ticket categories performed above the chain average with strength in tractors and riders, generators and welding, partially offset by softness in chicken coops, trailers and recreational vehicles. Our digital business also continues to perform at a very high level with strong double-digit growth in the quarter. And we saw meaningful increases in traffic, along with improved conversion, reflecting the strength of our omnichannel experience. We’ve made targeted enhancements across our platform, including improvements to how customers shop and navigate our assortment as well as upgrades to our subscription offering as well as our order management and checkout experiences.

These efforts are driving a more seamless and efficient experience and supporting continued momentum in the business. As we look beyond the quarter, we continue to make progress on our Life Out Here 2030 priorities. On localization, results are encouraging as we tailor assortments to local needs with more than 200 stores now localized and delivering improved performance and stronger customer engagement. In direct sales, momentum continues to build as we expand our sales force and deepen relationships with our higher-value customers, and this is driving increased productivity, larger basket sizes and repeat engagement. In Final Mile, we’re scaling our delivery network, adding hubs and increasing delivery volume, supporting the continued strength in our digital business while improving efficiency and reducing our cost to serve.

Within pet and animal Rx, we’re seeing encouraging progress across both Allivet and tractorsupply.com as we expand our offering and enhance convenience for customers while driving engagement with new and reoccurring purchases. As we look ahead, we’re seeing our typical seasonal ramp take hold as we build towards Memorial Day with stronger seasonal penetration and improving trends in the North, we expect sequential improvement in comparable sales relative to the first quarter. We continue to see strength across our customer base and in the majority of our business. We’re taking targeted actions in areas of opportunity while continuing to execute on our strategic priorities. We remain focused on what we can control, investing with discipline, managing costs and most importantly, as always, serving our customers.

That approach continues to position us to drive market share gains and long-term value. Lastly, we are reaffirming our full year outlook. And with that, I’ll turn the call over to Kurt.

Kurt Barton: Thank you, Hal, and good morning, everyone. Let me complement Hal’s top line commentary by briefly covering the underlying drivers. Overall, our net sales performance was modestly below our expectations for the quarter. New store sales outperformed expectations in both timing and the number of new stores opened. This was offset by comp store sales performance below our expectations as we planned for Q1 comp sales to be at the low end of our 2026 guidance range. The primary driver of this performance was the softness in companion animal, which represented just over a 100 basis point drag on our comparable store sales. To further break down comp sales performance, average ticket increased 1.6%, driven primarily by higher average unit retail, reflecting a combination of inflation and category mix.

Retail price inflation was the primary driver to the average ticket increase at approximately 150 basis points contribution along with a category mix benefit, principally from big ticket sales growth. This was partially offset by a modest decline in units per transaction. The mid-single-digit growth in big ticket categories was generally in line with our expectations. The growth in average ticket was partially offset by a 1% decline in transactions, reflecting customers’ continued focus on value and prioritization of spending as Hal mentioned earlier, leading to reduced shopping frequency and trip consolidation. As expected, ticket outpaced transactions in the quarter. Turning to gross margin and SG&A. Gross margin was 36.2%, flat to prior year.

The gross margin rate was generally in line with our expectations and reflects supply chain efficiencies and continued execution of our everyday low price strategy, offset by a higher mix of digital and other delivery-related sales, along with the continued pressure of tariff costs. This stability reflects the team’s continued focus and cost management in a dynamic environment. And on tariffs, the impacts remained in line with our expectations with pressure largely contained and mitigated through our ongoing cost management efforts. SG&A increased 6.1% to $1.07 billion and as a percent of sales, was 29.7%, an increase of 70 basis points. There were 3 primary drivers of the deleverage. First, fixed cost deleverage given the level of comparable store sales below our 2% breakeven threshold.

Second, continued investment in strategic initiatives across the business as we do not begin to cycle the step-up in investments for direct sales in Final Mile until Q2. And third, an accelerated new store opening cadence with 40 stores opened in the quarter. These were partially offset by ongoing productivity initiatives and cost management. As we shared last quarter, we expected Q1 to carry a heavier SG&A burden and that played out in line with our expectations. Our inventory remains in good shape with the average inventory per store increase principally reflecting inflation, inclusive of tariff costs and the timing of spring seasonal purchases. We continue to manage inventory effectively, supporting in-stock levels in key categories while maintaining overall quality and balance across the network.

We also remain committed to returning capital to shareholders. Our dividend increase in February marked our 17th consecutive year of dividend increases. Turning to our outlook. We are reaffirming our full year 2026 guidance as outlined in this morning’s earnings release. We continue to target comp sales growth in the range of 1% to 3% for each of the remaining quarters. Please keep in mind that we manage the business on the halves and not the quarter. From a margin standpoint, we expect gross margin to strengthen in the second half as comparisons ease and benefits from our new distribution center begin to flow through. SG&A deleverage will be higher in the first half, driven by the timing of new store openings, more normalized incentive compensation and the lapping of prior strategic investments.

Our 11th distribution center remains on schedule, with shipping expected to begin in early Q4, and we expect approximately $10 million of incremental expense this year, primarily in the second half. Consistent with our outlook as we entered the year, we expect stronger EPS growth in Q2 and Q4 given the prior year’s compares. On tariffs, the current environment remains fluid. We are managing the business based on what we know today and have not assumed any incremental benefit from refunds in our outlook. In closing, the quarter reflects a resilient business with consistent performance across the majority of our categories. We remain confident in our ability to deliver on our full year expectations and drive long-term value for our shareholders.

With that, I’ll turn it over to Seth.

Seth Estep: Thanks, Kurt, and good morning, everyone. Tractor Supply’s merchandising strategy is focused on meeting customers where they are today while positioning the business for where demand is going. We are taking deliberate actions to drive relevance, expand our reach and strengthen our position as the dependable supplier for Life Out Here. I’ll start with our pet business, where we have a focused structured plan to accelerate performance and capture growth, then followed by key merchandising initiatives across the broader portfolio. As Hal mentioned, the category is evolving with macro trends in dog ownership, growth in cat and a continued shift toward premium fresh and more digitally enabled solutions. While our assortment has historically been well aligned to our core customer, particularly in dry kibble and larger dog formats, incremental growth is increasingly being driven by adjacent segments as we actively expand our presence.

To address this, our plan is centered on 4 key areas: first, assortment transformation; second, exclusive brand innovation; third, digital capabilities; and fourth, customer engagement, all supported by continued investment in talent and category leadership. Starting with assortment. We are expanding into the fastest-growing segments of the category. We are aggressively scaling fresh and frozen pet, moving from approximately 80 stores today to more than 250 stores by the end of May with a path to 700 stores by year-end. While still early, we are encouraged that approximately 1/3 of customers purchasing Freshpet in our pilots are either new or reactivated to the category at TSC, demonstrating the traffic-driving potential of this segment. In parallel, we are expanding our presence in cat.

Increasing space across our fusion stores, expanding both dry and wet assortments and improving presentation to better capture the opportunity in this rapidly growing segment. In dog, a comprehensive chain-wide upgrade of our food business in Q2 extends into key adjacencies, such as shreds, treats and meal enhancers, while introducing new brands like Stella and Chewy, and broadening the assortment of leading national and differentiated brands like Purina Pro Plan, Hill Science Diet, Victor and Sports Mix. We are also incorporating more localized assortment decisions to ensure relevance by market and customer. A second key pillar is accelerating innovation across our exclusive brands. For Health remains a cornerstone of our strategy with strong scale and continued share gains.

We’re expanding the brand across multiple formats, including the launch of New for Health shreds formulas and extending into higher growth segments, such as Ambient Fresh and meal enhancers with differentiated offerings. In addition, the Retriever portfolio will be relaunched in Q3 with enhanced formulations, expanded SKUs and updated packaging, further strengthening our value proposition across good, better and best years. Moving to our third pillar. We are accelerating our digital capabilities to better serve pet customers and capture reoccurring demand. Our online pet business grew mid-teens in Q1 led by subscription, which grew by triple digits driving new customer acquisition, strong retention and increasing repeat purchase behavior in core consumables.

In addition, we’ve expanded our Pet Rx offerings across both Allivet and tractorsupply.com, while leveraging our last-mile delivery network to improve the fulfillment experience and lower cost, particularly for large format pet food. Fourth, customer engagement is a key priority with enhanced engagement through Neighbor’s Club and continued leverage of our pet services ecosystem to drive higher frequency and lifetime value. Through Neighbor’s Club, we have the opportunity to deliver more personalized experiences, reactivate customers and acquire new customers through targeted outreach. We also see a meaningful opportunity to convert our large animal customers into pet customers, leveraging our highly engaged base. Our services offerings continue to play an important role.

In Pet wash, we have more than 1,200 locations with strong growth in usage, including double-digit increases in comparable units. This reflects the value customers are placing on this offering. And PetVet mobile clinics performance remains solid, with sales growth building on strong prior year trends with a 2-year stack of nearly 25%. We see continued opportunity to expand access and scale this offering with additional clinics planned in the near term. These services help us drive frequency, attract new customers and strengthen long-term relationships, reinforcing our competitive position in the pet category. We expect to continue expanding these capabilities over time. In supporting all these efforts, we are investing in talent and leadership across the pet category, ensuring we have the right expertise, focus and execution capabilities to drive sustained improvement.

All these actions in companion animal are designed to accelerate performance and position the pet business for improved growth and share gains. Importantly, beyond pet, we are very excited about our broader portfolio, which continues to perform with strength and building momentum. We are leaning into our seasonal moments, particularly as we transition into spring and summer. Chick Days is off to an encouraging start, with strong engagement from both new and existing customers, and we are on track to sell a record number of birds this season. This event continues to serve as a powerful traffic driver and a key entry point into our broader animal care ecosystem, driving demand across feed, coops and accessories. In our seasonal big-ticket categories, performance is exceeding expectations, led by live goods and our zero-turn mower lineup.

This lineup featuring brands such as Bad Boy, Cub Cadet, Toro and Husqvarna is performing well. And our new flagship stores are driving improved presentation, attachment and overall productivity. Our stores are ready for the spring planting season as we have nearly 50% of our stores with either a garden center or a live goods tenant. We’re well positioned for the season with the right assortment, the right presentation and the right momentum to capture the seasonal opportunity. Moving to livestock feed. We recently completed a comprehensive private label network review to ensure consistent quality at the lowest cost to serve, strengthening both our retail and our direct sales capabilities, we’ve been one of our most important heritage categories.

We’re also expanding our assortment with key regional brands such as Total Equine, Bluebonnet and Buckeye, allowing us to better localize our offering and meet customer needs across different geographies. We also continue to invest in our exclusive brand portfolio, a key differentiator for Tractor Supply. A great example of this is Field & Stream, where our new product introductions are performing well. The brand is on track to hit over $100 million in sales this year, joining the ranks of 13 other exclusive brands at this sales milestone. We’re excited about the continued launch of new programs across our wildlife and recreation department where the Field & Stream brand is helping anchor this strategy. Our in-store conversions of our dedicated wildlife and rec department are off and running, and we are pleased with the early results.

As such, we are increasing our outlook from around 500 to approximately 700 store conversions by year-end. Together, all these initiatives are designed to drive near-term performance and strengthen our long-term position ensuring that we continue to meet our customers where they are and support the way they live and work. And with that, I’ll turn the call back over to Hal.

Harry Lawton: Thanks, Seth. Stepping back, what you’re hearing is a clear and focused approach. The fundamentals of our business remain strong with consistent customer engagement and continued strength across our needs-based categories. At the same time, we’re operating with discipline in a dynamic cost environment and taking decisive actions to improve performance in companion animal and accelerate growth across our strategic initiatives. We’re moving with urgency in areas where we see opportunity. As part of our Life Out Here 2030 strategy, we’re making meaningful progress in building capabilities to support long-term growth. We’re strengthening what we do best, while continuing to scale new initiatives that expand how we serve our customers and grow our share of wallet. As we look ahead, we expect to build momentum through the year, supported by these actions and continued execution across the business. With that, we’ll open the line for your questions.

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Operator: [Operator Instructions] Our first question comes from the line of Peter Keith with Piper Sandler.

Peter Keith: I think I just want to kick it off with companion animal since that was a focus here. Is that category getting worse? Like I guess if you could talk about the trend through the quarter. Then you’ve got a bunch of initiatives to help stabilize it. Do you think those are starting to kick in now? Or could things get worse before they get better?

Harry Lawton: Peter, it’s Hal, and thanks for joining the call this morning and appreciate your question. On pet, first off, I’d say a few things. As I mentioned in my opening remarks and Seth did as well, we view our share performance in pet to be stable, and it’s been in that kind of stable run rate really for the last 4 or 5 quarters, albeit it’s below our expectations. The overall structured dynamics in the industry continued to be under pressure as both Seth and I articulated. And then we also have some additional pressures given the mix and the structure in the industry given our weight on — towards dog and also our weight outside of the Fresh and Frozen. But as Seth mentioned, we’re taking actions on both of those dimensions, expanding our assortment in cat and then also aggressively getting into the fresh and frozen market.

More broadly on — and so I’d say our comp trends have been stable for really the better part of 6, 7 months now in that category, and as we roll into Q2 are stable in that range and then also our share performance stable. As we look forward, while Pet is a kind of headwind in the moment for us, a couple of things I’ll just comment. First off, I really, first I’ll articulate that we have a kind of broad portfolio inside of the business that we play against, whether it’s Q, seasonal, big ticket and certainly as our digital business, as we mentioned, exceeded expectations in Q1. So we do see multiple offsets throughout the balance of the year. The other thing I just want to highlight is the pet over indexes in Q1 by nearly 5 points relative to the average through the balance of the year, and it under-indexes in Q2 before kind of moderating in the back half.

So there is a kind of mix impact that we had in Q1 on that as well. But the guidance, and we reiterated guidance today, our plan and forecast assumes that we’ll have continued pressure for some time in that category, and then we’ll kind of see gradual improvement as those initiatives take hold. But again, a portfolio of categories that we play in [indiscernible] slate out a number of the actions were taken in pet, but also a number of the actions we’ve taken out — taken more broadly. We’re midway into Q2 now and feel good about the sequential improvement we’ve seen in the business as the season ramps. Thanks so much, Peter.

Operator: Our next question comes from the line of Michael Lasser with UBS.

Michael Lasser: It comes on the heels of your comments just now Hal, which is how long do you think it will take to effectuate an improvement within the pet category. And if we assume that Tractor Supply, the updated algorithm may be more like 2% to 3% comp growth rather than the expected range of 3% to 5%, what does that do to the earnings outlook for the business over the longer run?

Harry Lawton: Michael, and good to hear from you, and thanks for joining the call today. On the — how long the improvement, as I mentioned earlier, our plan for the balance of this year assumes continued pressure in that category. As I mentioned, we see number of offsets and a variety of ways that we’ll continue to operate in the context of our full year guidance. We are very much operating in that — the middle of our full year guidance range here kind of almost 4 weeks into Q2. So I feel good about our trends so far into Q2. Remind that no less than 2 quarters ago, we delivered a 4% comp, and our seasonal ramp and execution are building momentum. And so certainly, we have actions and plans around pet, but the performance, I think, will be both dictated by our actions, but also how the overall market continues to evolve.

There was 96 million dogs in the market in 2023, that dropped down to about 94 million in 2024. And then I think most folks thought it would kind of stabilize around there. And then in 2025, you had a couple of million more dogs of decline going down to approximately 92. So that will dictate some of the performance. That will dictate equally the performance as well as our actions as we look forward to the balance of the year. And then as it relates to our overall growth algorithm, we’re certainly not addressing that today. But I’d just say our business is need based. We do not see this as a structurally lower growth business. Right now, our customers are — they’re playing the macro. They’re stable. They’re performing. We continue to have strong share gains in farm and ranch, and our customers are shopping to their need now.

And we certainly don’t see it as a structurally low-growth business. We just see our business and customer shopping as they need right now, and it’s certainly a little bit more of a tepid consumer environment in the moment.

Operator: Our next question comes from the line of Peter Benedict with Baird.

Unknown Analyst: This is [ Zach Back ] on for Peter. Maybe one on the macro kind of in 2 parts. Hal, I know you mentioned seeing consumers kind of use those tax refunds more cautiously. Just curious, any changes in behavior from your core customer, maybe observed since the start of the Iran conflict about 6 or 7 weeks ago. And then secondly, just on oil prices, can you give us a sense of what level of oil prices are embedded in guidance? Maybe what is the sensitivity around this? And how should we think about the impact on margins if oil would stay kind of in that higher range of around $100 a barrel?

Harry Lawton: Yes. Zach, and thanks for joining our call this morning. I’ll hit both of those topics. First, on the macro, I’d start by a little bit building off of the answer that I just had with Michael. Our customer remains very stable. They’re focused on needs-based spending in the moment. We have continued strength in Q more broadly across the business in our essential categories. I’d highlight our high-value customers as remaining very engaged and retained. I think you’re hearing that broadly across retail. Our active customer accounts are growing, albeit there’s a modest reduction in their frequency and also in their basket at this time. And I think that really just reflects a focus on value, not really demand deterioration when you look at the underlying fundamentals there.

So we feel good about our customer. As I said, they’re shopping to need. They’re engaged, and we’re retaining them. And as their spending habits improve, we expect our comps to moderate as well. On oil, our current forecast, their guidance, we’ve updated our internal numbers to reflect kind of the latest outlook on fuel pricing. And so kind of I would say we’re very conservative on that front in terms of having the higher fuel cost kind of forecasted certainly for the foreseeable future in the business, Q2 and into Q3. And then we’ll update more so as we get into the back half of the year. But we — we certainly have been cautious and conservative, and that’s incorporated overall guidance, which we reiterated today and feel very comfortable in our ability to manage gross margin in that context.

Operator: Our next question comes from the line of Kate McShane with Goldman Sachs.

Katharine McShane: We wanted to specifically ask about new customer acquisition remaining softer and that it’s being mainly driven by new stores. Could you maybe double-click on that a little bit more? And then just kind of in the same vein, what kind of comp performance are you seeing in the localized stores which you highlighted is about 200 stores at this point? And can you remind us — remind us for the rollout of this initiative?

Harry Lawton: Kate, and thanks for the question today. On new customers, as we mentioned in our prepared remarks, our new customer growth is really right now predominantly relying on new stores, not uncommon in retail, but certainly, we would like to be driving new customer growth in our existing stores as well. But in our existing stores right now, it’s mostly active customers that we’re retaining and driving the business with. More broadly, if we step back, well, the second part of the question was on — that’s right, localization, — sorry. If we step back more broadly on localization, I’d start really more with our store base. So we’re about 60% of our stores now are in the fusion format. About 400 to 500 of those are new stores that have been built in the last 5 years.

Those stores, as you can see in our new store performance curves are having outstanding comp results. Then you look at the balance of the remaining of our 60% of our stores that are in the Fusion format. Those stores are performing at or above the comp average. Certainly, the ones that we’ve done the localization treatment on in the last year to 1.5 years are now at 200 stores of localization are outperforming the rest of the Fusion store base. And then you take the remaining 40% of stores that are not infusion and not new stores. And those are the ones that are underperforming relative to our overall comp base. So not uncommon in what you see in a store base where you’re kind of older stores that have not been remodeled are kind of dragging the comp.

Your Fusion remodel stores are slightly above the overall comp and helping pull it up with the localization, meaning they’re outperforming, as we’ve talked about, by that low to mid-single-digit comp run rate and then you get the balance of that performance coming from our new stores. So feeling great about our fusion format, feeling very good about the benefits of localization. And obviously, our focus over the next few years is continuing to move about 175 to 200 stores a year into the Fusion format and continue to drive that improvement in our store base.

Operator: Our next question comes from the line of Chris Horvers with JPMorgan.

Christopher Horvers: So I want to follow up on companion pet to make sure I got the math right. You talked about the category being a 100 basis point headwind to comps in the first quarter, that would suggest it was down 3%, and that’s been a consistent trend over the past 6, 7 months. Guess more fundamentally, how do you think about the headwinds in the category between sort of like structural versus a mix sort of headwind related to what you’re assorting and — the dog, cat side and versus like online penetration. So think about Amazon pushing deeper into rural markets versus not a sorting fresh. And then on the cat side, appreciate that you’re expanding an effort to focus more on Cat. Do you think your core customer simply under indexes to the cat category and over-indexes to large dog and sort of so — perhaps the effort around cat faces some just inherent headwinds relative to who your customer is?

Harry Lawton: Yes, Chris. And just to reiterate maybe some of the points we made earlier. So we’re about 80% dog, 20% cat versus the market that’s 60-40. We’ve always talked about our customer owns — about 75% of our customers own a dog. Over 50% of our customers own a cat. And over 50% of our customers own more than 1 dog. So we have heavy pet population counts in our customer base. As we expand into cat, and we’ve been doing that now for about 6, 8 months, we started talking with you all about that middle of last year. We are seeing performance improvement in the stores that we expand our cat in. And as we roll out more fresh and kind of air drive and heavy nutritional products on the dog side, we’re seeing improved performance in that as well.

We have no reason to believe that as we expand Cat moving forward that we won’t continue to drive performance there. To your point, it’s a very competitive industry. You see grocery channels starting to pick back up. Certainly, you see pet specialty trying to recover share, although they continue to lose share at a pretty decent clip. And as you said, you see the balance of the share shifting into online. But the category overall right now is kind of flat to negative in total growth. And certainly, that’s the case when you exclude the services piece of it, grooming and the bet element of the pet category.

Operator: Our next question comes from the line of Spencer Hanus with Wolfe Research.

Spencer Hanus: Just on new store growth. I’m curious what you’re seeing from a cannibalization effect. Have you seen any step-up in that? And is that driving any of the softness here? And how are you thinking about that longer term. And then just one more on companion animal. You gave us some interesting stats on the dog population. Do you invent that continuing to decline as we look out here? Or do you expect that to stabilize?

Kurt Barton: Spencer, this is Kurt. I’ll take the first question on new stores and cannibalization. I’ll flip it over to Seth on your follow-up question on dog population. Our new stores are performing really strong. You heard that in Hal’s prepared remarks. We continue to see even when we opened up 40 stores this year, averaging over 100 in the last 4 quarters that the new store productivity is performing at the high end of that range of 65% to 70%. Part of that — I’ll just follow up on the earlier question. Localization is also helping the store — new stores come out the gates strong as we ensure we’re offering the right best product assortment in those new markets and those new stores. Now in regards to your question on cannibalization.

Cannibalization continues to be modest. In many cases, we’ll look at some of that to be healthy cannibalization as we put a second store in a market that’s really strong. We look at and review and approve our new stores based on the IRR and incremental benefit net of cannibalization and our cannibalization level is pretty consistent with the last few years, and we measure our performance on our stores as to the net increment to comp sales, net of any level of cannibalization, and we continue to just have a modest and manageable level of cannibalization indicating our new store growth is still in a very healthy position. Seth, maybe turning it over to you on the follow-up question on dog.

Seth Estep: Yes. Just one follow-up question on the dog. Just in general, I would just say that we’re not currently assuming really any changes in the trend at this point. Obviously, it’s macro based a little bit. But obviously, we’re staying very close to where those trends are going. But more importantly, it’s more about the actions we’re taking to make sure that we can make sure that we’re not only like remaining in keeping our share, but returning to share growth. And that does go back to, again, our assortment transformation initiatives, our exclusive brand growth, our digital acceleration and all the things that we’re doing to work through our customer engagement, whether that be through pet services, Rx, Neighbor’s Club, et cetera.

We’ve continued to evolve with this category over time, and we’re very confident in what we’ve been piloting, and we believe that as these continue to roll out a little bit later here in Q2 and into Q3 and start to build all these initiatives to scale that at that point, we’ll start to see some kind of incremental and sequential improvement as we close the year and kind of move into next year.

Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley.

Simeon Gutman: Back to companion animal. Are you willing to share what level of comp growth you’re targeting? Should it be within the middle of this year’s comp range? Or is it in the long-term range? Or is it above the range? Curious what you’re targeting, if you’re willing to share how far off you are, I know someone offered a level of which you might be growing or shrinking at this point. And then any more on what’s gotten better thus far in Q2? Is it that mix effect on the total business? Is it some outdoor categories? Can you share some of those details.

Kurt Barton: Simeon, it’s Kurt. I can offer up some color on your question in regards to the expectation on companion animal and our guidance and then how we see that playing out. I’ll go back to Q1, and we made commentary in our Q4 call on the guidance that on our 1 to 3 comp, some of the stronger categories and some of the weaker categories, we said companion animal being under pressure in general at that time, would lag the chain average. And so for the year, we expected flat to slightly positive comps in companion animal. To the point that we made that 100 basis point pressure on the quarter definitely showed that we were running a negative comp in there. We anticipate that to be additionally pressured throughout this year.

So companion animal going forward, we believe there’s ability to see growth in that performance as the year progresses and our actions take hold. But we anticipate that companion animal will be under some modest pressure and likely to be at a flat or slight negative comp throughout this year. And that’s embedded in our expectation for the rest of this year and part of our consideration when we say that we still believe we can run the future quarters within our guidance range of 1% to 3%.

Seth Estep: Simeon, this is [indiscernible] second question on Q2 and whether some improvements. Just to recall to some of the commentary we had in Q1 as well. 4 of our 5 merchandise categories were positive. And as Hal mentioned as well, mix in Q1 is much heavier part of that mix than it is as we go into Q2. With that, we are very encouraged with the strength that we’re seeing right now in our seasonal business. Mentioned earlier around Live goods is performing very strong. Our Big Ticket categories and seasonal like with our zero-turn lineup, assortment continues to perform. And also like digital continues to be incredibly strong as well. So we’re leaning into the categories of strength. We talked about our wildlife and recreation area, some of our men’s and women’s apparel that we continue to evolve are doing well.

And obviously as well, things like our traditional businesses like in Ag, sprayers and chemicals are core areas are well are continuing to perform as we go into Q2. And we see those really being in that range and give us confidence in that 1% to 3% range for our comp guidance.

Operator: The next question comes from Chuck Grom with Gordon Haskett Research Advisors.

Charles Grom: A question for Seth and maybe Rob too. Can we zoom in on Neighbor’s Club, Garden Centers and Direct Mile and maybe double click on the opportunities on each of these fronts. And then my follow-up is for Kurt. Can you remind us any mix implications as you lean into the — sorry, the category more? And should we be mindful of any investment in price that you may want to take across the Pet business to stimulate demand?

Mary Pilkington: Chuck, do you want to kind of narrow down maybe that first part of the question? I just said that we get it because it was kind of mixed in there.

Charles Grom: Yes, just maybe just zoom in on Neighbor’s Club, Garden Centers and Direct Mile. Just a little bit of an update on each of those fronts. And then just on the margin side for Kurt, any mix implications from the expansion into cat that we should be mindful of?

Harry Lawton: Thanks, Chuck. I’ll hit real quickly on Neighbor’s Club, Garden Center pricing, and then I’m going to turn it over to Colin to talk about Final Mile. Neighbor’s Club continues to perform very well. We have not been disclosing as a recent our Neighbor’s Club membership. I think it continues to grow at about the same pace as it has the last handful of quarters. So really straightforward there. Retention remains strong. Spend per member remains strong. As we commented several times, our active customer base remains very core and engaged in our business. On Garden Centers. Our Garden Centers are performing very well. Seth highlighted live goods as a — off to an excellent start for us this year. We are over 1,000 stores now collectively with garden centers and/or live good tents, and both concepts performing very well.

And then on pricing, really, nothing of — that I would call out from a mix difference between cat and dog, the margin structures are reasonably comparable in the food side of things, reasonably comparable on the snack side of things. So as we make assortment shifts there, it’s very manageable within the department. I’m going to shift it over to Colin now to talk about Final Mile, which is [indiscernible] a great first quarter and really is kind of one of the core underlying levers that’s driving that 20% plus digital growth this — in the first quarter and continuing here into the second quarter.

Colin Yankee: Thanks, Hal. Chuck, good to hear from you. As Hal mentioned, our Final Mile program is exceeding our expectations. Programs really resonating with our customers as they’re choosing to have more of their needs delivered, especially for those larger order quantities, and we’re lowering the cost per delivery across the entire portfolio as we roll out this program. Reminder, 2 big unlocks for Final Mile. First is enabling demand, whether that’s for direct sales or digital. And then the second is that more efficient and lower cost per delivery. We saw it in the volume in Q1, delivery volume was up double digits compared to last year. And I think what’s really unique about what we’re doing is how we’re orchestrating our inventory upstream.

So we’re making choices about how we deploy inventory, whether it flows through a DC to a store or resource that delivery through the store. And then the partners we’re using to get that product from the store out to the customer’s property. For those small and medium type items, we’re using a series of trusted delivery partners where we really want to get our team members delivering is in those large, extra large and huge kind of deliveries, it’s amazing. We’ll go to put a Final Mile delivery hub in and all of a sudden, we’ll see 250 bags of shavings get ordered, [indiscernible] 16-foot fence panels, just these big orders that nobody else can deliver at scale nationally like we can and something we’ve never been able to do, and our customers are really responding to it.

Last year, we stood up about 200 Final Mile hubs. This year, we’re on plan to open up 176 more, and those hubs are trending ahead on our utilization of our expectations. So really pleased. We know we have a lot of work to do still as we build out this program. But all signs point to this being a massive enabler for us digitally and on direct sales.

Operator: Our next question comes from the line of Seth Sigman with Barclays.

Seth Sigman: I wanted to ask about pricing. So inflation was 150 basis points in Q1. I think that’s actually down from where it was in the fourth quarter. Did you guys actually lower prices? Or is that just a mix dynamic this quarter versus last quarter? And then can you also speak to elasticity, the experience that you’ve had to date? And then just finally on pricing. A lot of the inflation has been tariff-related up until this point. What is your view on commodity-related inflation? How does that play out from here?

Seth Estep: Seth, this is Seth. Thanks for the question. As always, when you think about pricing, we’ve got a very experienced team. We’ve got all the tools in place set for years that we’ve been able to really have a good draft on the costs that are coming at us and flowing through the system as well as being able to monitor kind of, call it, the competitive index in our categories out there to ensure that we are priced right in the market. Our strategy on that has not changed. EDLP is our true north. We’re going to make sure that we are competitive and in a position to drive share. Relative to the current environment, I’ll tell you, though, like there’s a lot of dynamics that obviously you’re flowing through, whether that be to your point around some of the EDLP tariffs and how that, a little bit put some pressure on the inflationary environment.

But obviously, now we’re shifting and flowing into some other potential cost pressures relative to fuel, oil, some other inputs, et cetera. And we’re just monitoring those closely. I mean there’s a lot of uncertainty as we look ahead. But as of right now, we’re in a position to continue to operate within kind of our guided range and the expectation of that inflation, call it in that kind of 1% to 2%. And a lot of that would come from price relative to some of the cost pressures that had been there and there’s no change to that kind of expectation at that time.

Operator: Our next question comes from the line of Scot Ciccarelli with Truist.

Scot Ciccarelli: I believe PET is about 25% of total sales and it’s also your highest frequency segment. So assuming those statements are both correct. Contractors, comp transactions turn positive, if pet stays negative just given the frequency related to that category? And then secondly, just a clarification. Was overall Q above or below company average?

Kurt Barton: Scot, this is Kurt. A couple of clarifications on that. Pet is a traffic driver in some cases, it is an add-on in other cases, to just kind of set the expectation on or at least clarification on the biggest frequency and traffic driver, it’s really the large animal. It’s the feed category that is the, by far, the biggest traffic driver. So just clarification on that. And then to your point on companion animal and the mix, as I was mentioned earlier, Q1 being a smaller sales quarter, that’s really more the routine. It overindexes in feed and pet food in those and lesser in other quarters. And so while it being not the primary traffic driver, and while it’s still a solid business for us with a lot of our strategic initiatives with in Q2, with it being a heavy seasonal type category.

And as a reference point, you see this in our disclosures, companion animals roughly like 21% in Q2 versus 27%, 28% in Q1. We’ve got the right drivers. And as Hal mentioned, a majority of our categories are solid in performing. A majority of the markets are performing well. So I wouldn’t over-index. We’re not over-indexing. We’re managing the halves. We believe the customer is still engaged. And to your question, we can comp positive and expect to be able to target that in future quarters even if there’s some softness in headwind in the pet companion animal category.

Operator: Our next question comes from the line of Steven Forbes with Guggenheim.

Steven Forbes: Hal, maybe a 2-part question on companion animal trends just to hit this topic again. The first is I’d be curious just to hear you speak to how you think rural migration household formation, existing housing turnover trends have impacted the outlook for pet as a whole as you see it today? And then secondarily, as you think about your member base, you commented that 50% of members have a dog and cat. So I’m curious if you can just maybe help explain to the group here what you’re seeing as it pertains to wallet share of movement across those key customer cohorts where you maybe don’t serve them to the level you need to be serving them? How long does it take to onboard them post localization? Like what gives you really the conviction that you can pull them back?

Harry Lawton: Yes. Steven, I appreciate the question. On rural migration, I’d say 2 things there. One, certainly the post COVID, so since 2020, when you look at mobility stats, there’s been a strong reversal of trends kind of versus pre-Covid. So kind of pre-COVID that you saw urban mobility increasing at the expense of ex-urban, rural and even to some degree, suburban. Post COVID, you’ve seen the exact opposite with urban exodus, I would say, through ’21, ’22 and ’23, that was — the Exodus was much stronger in ex-urban. I think now you’re seeing it more balance between suburban and ex-urban. But you’re still seeing mobility out of urban markets into suburban, ex-urban and rural. I’d also just add that when we look at our store base versus those sorts of geographic cuts, the more rural the store, the stronger the comp is, to a little insight there on our overall customer trends.

On our member base, I’d say that not — what we see with them on their pet purchases is very much a natural just ongoing evolution of the structure that’s out there right now. You’re seeing pet populations decline on dog, you’re seeing pet populations modestly increase on cat. And you’re seeing that play out in our business. So more broadly, like if you look at dog food, we were up somewhere in the mid- to high single basis points of comp share gain in Q1. If you look at cat similarly, we were up mid- to high single basis points in share gain in that category in the quarter. But because of mix because we have such a much lower share in cap versus dog, our overall share and overall food between dog and cat was flat. So share is stable. Actually, when you look at it by species, modestly growing.

Now what we — we were growing at about 20 basis points of overall share gain collectively across those categories back in ’23 and in ’22. So that’s the actions that we’re taking now to kind of step back into that overall share gain. But to be very clear, we are gaining share in dog food by itself in cat by itself, but when it mixes, it makes us to a flat share on food in total.

Operator: Our next question comes from the line of Chuck Cerankosky with Northcoast Research.

Charles Cerankosky: You mentioned that weather was neutral for the quarter, but we had some very distinct national weather trends, for example, lack of snow and warm in the Rockies and cold and snowy in the Northeast. How is that set up for the second quarter as we move into spring and when might it do to your salesman?

Harry Lawton: Yes. Chuck, I appreciate the question. As I mentioned in my prepared remarks, Q1 really unfolded in phases. And as we exited in March, you had an anomaly where you had kind of a cooler is north going and you had kind of the south warming up. As we mentioned, we saw strong spring sales in the South as we were exiting Q1, but kind of not yet the demand kicking in, in the north as we knew would [indiscernible] turned into April and kind of gotten past Easter and the lapping of Easter last year, you now see the north with the weather having improved, really kicking in. The South is holding. And we’re in the midst of that seasonal ramp right now. As Seth commented, we’ve seen strength in almost all of our garden businesses and all the related garden businesses.

So whether it’s things like agriculture, ag fencing, even some of the hard lines that are out in the agriculture space. Certainly, things like sprayers and chemicals, lawn and garden tools, live goods, riding lawnmowers, which is a critically important business for us right now as having an excellent year-to-date. So we feel really good about our business as we’ve turned the corner here into Q2, kind of 3.5 weeks in, as we mentioned, the business is running very much solidly in the range of our overall comp guidance for the year, and that’s our expectation for the quarter as well. Thanks so much, Chuck, for the question.

Mary Pilkington: So Victoria, that will wrap our call today. We will plan to release our earnings tentatively on Thursday, July 23 for our second quarter earnings. So please join us then. If you need anything, please don’t hesitate to reach out. Thank you very much.

Operator: Thank you. That will conclude today’s call. Thank you for your participation. You may now disconnect your lines.

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