Tractor Supply Company (NASDAQ:TSCO) Q4 2022 Earnings Call Transcript

Tractor Supply Company (NASDAQ:TSCO) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Mary Winn, I will now pass the call back to you.

Mary Winn Pilkington: Thank you, operator. Good morning, everyone, and thanks for joining us. I hope you enjoyed watching the video of Tractor Supply’s year-end review. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we’ll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we’ve made available a supplemental slide presentation on our website to accompany today’s earnings release. 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. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up. Thank you for your time and attention this morning. Now it’s my pleasure to turn the call over to Hal.

Hal Lawton: Thanks, Mary Winn, and good morning, everyone, and thank you for joining our call this morning. I think the opening video was a great recap of the highlights of a record year for Tractor Supply. Year-end is when we reflect on our accomplishments, and I’m pleased to share the results from the team in 2022. We had sales growth of 11.6% and diluted earnings per share growth of almost 13% and this is on top of a record performance in 2021. We had solid market share gains across all our product categories, and these gains continue to contribute materially to our sales growth. At Tractor Supply, it all starts with the team. And my sincere thanks and appreciation goes out to the more than 50,000 team members of Tractor Supply who work diligently every day to live our mission and values.

Regardless of the operating challenges throughout the year and really over the last three years since we entered the pandemic, the team has delivered impressive results while also making significant progress on our Life Out Here strategy. I commend and thank the team for stepping up to every challenge that has come at us over this time period. Our team plus our business model are the reasons why we have a record of consistent and stable growth across all economic environments. With this year’s results, we’ve now posted three consecutive years of exceptional sales growth. The highlight of this phenomenal track record continues to be the consistency of our results and the broad-based strength of our performance. Including new stores in the 53rd week, our revenue on a three-year basis has increased about 70%, with a three-year comp stack of 46.5%.

Over the same period of time, we’ve invested nearly $1.7 billion in our stores, distribution centers, technology and other strategic initiatives as part of our Life Out Here strategy. We also have significantly improved our operating capabilities, including relaunching our Neighbor’s Club program, creating our field activity support team, expanding our mobile footprint, and delivering on the increased volume of our consumable, usable and edible products. We’ve remained focused on introducing new capabilities, improving the shopping journey and ensuring we have scalable platforms. All with the underlying goal to be the dependable supplier that our customers count on. As a company, we hit several significant billion dollar milestones in 2022.

We grew our sales to a record $14.2 billion, increased net income to over $1 billion, achieved $1 billion in private label credit card sales and returned more than $1 billion in capital to shareholders for the second consecutive year. This culminated with diluted earnings per share of $9.71. Now turning to our fourth quarter and fiscal 2022 performance. Our business continues to be incredibly resilient, and the quarter unfolded much like we anticipated. Albeit, comp sales performance was stronger than forecast as the late December winter storm provided a comp sales lift of approximately two percentage points. Excluding the impact of the winter storm, importantly, our underlying results were in line with the high end of our expectations for the quarter.

Now let’s go through some of the highlights for the quarter and the fiscal year. For the fourth quarter, our comparable store sales growth was 8.6%, and it was driven by strong ticket growth of 6.3% and transaction count increase of plus 2.3%. And importantly, even without the winter storm benefit, our comp transactions would have been positive for the quarter. All months of the quarter, comped positive. October, December were our strongest comp sales months. Both two and three-year comp stacks were relatively consistent across the quarter. On e-commerce, it achieved mid single-digit positive sales growth, and we continue to build out our ONETractor capabilities. As of year-end, the Tractor Supply app has had over 4.4 million downloads since it was launched mid-2020.

For the seventh consecutive quarter, we continued to see our consumable, usable and edible products outperform our overall comp sales results. And this is the fourth consecutive quarter for C.U.E. to run at about 3x the rate of overall comp sales growth. This strong performance was driven by dry dog food as well as feed for poultry, equine and wild birds. As we’ve talked about many times, C.U.E. is one of our structural advantages and the products represent the strength of our core business and they’re what drive trips to our stores. Our outperformance in year-round categories offset the declines in big ticket categories. And we continue to gain share across our categories, both online and in-store. Shifting now to Neighbor’s Club. Our Neighbor’s Club membership exceeded 28 million members and represented nearly 75% of our sales for the year.

Neighbor’s Club is successfully helping us migrate customers to a higher threshold of spending with us. During the quarter, we reached a new record in the number of high-value customers. Overall, our best customers are shopping with us more frequently and spending more money per transaction. On Petsense, the rebranding of Petsense, the Petsense by Tractor Supply along with our expansion of our Neighbor’s Club program to Petsense by Tractor Supply is really resonating with our customers. This expansion is allowing us to deepen relationships with existing customers in our enterprise and help attract new pet customers to both brands. Our customers’ response to these initiatives is very encouraging, with Neighbor’s Club membership already representing nearly 50% of sales at Petsense.

During the quarter, we launched Tractor Supply, Visa Credit Card. This new co-brand credit card allows our customers to earn more on their everyday purchases, both in-store and anywhere Visa is accepted. This marks exciting progress on our journey to drive sales, build loyalty and reduce tender expense through our credit offerings. And as I mentioned earlier, this past year, we crossed over $1 billion in private label credit card sales. For the fourth consecutive quarter, our overall customer satisfaction score hit a new all-time high as we continue to invest in our team to provide best-in-class customer service. Our team continued to make advancements in our supply chain through the expansion of our mixing centers to a total now of 15 as well as the grand opening of our ninth distribution center just last week.

During the quarter, we also broke ground on our tenth distribution center in Maumelle, Arkansas to support for the higher volumes of our existing stores, the continued build-out of our new stores as well as the acquisition of Orscheln. Our supply chain continues to be a competitive advantage for us. In 2022, we moved more than 8 billion pounds of consumable, usable and edible products through our supply chain as we are the world’s largest seller of back feed and food for livestock in campaign and animals. Our scale and reach provide us with the cost to serve that is lower than our competition. We continue to advance on our commitment to be stewards of Life Out Here. We’re making progress on our absolute carbon reduction goals to further reduce emissions from our operations by 20% by 2025 and by 50% by 2030 from our 2020 baseline.

We are committed to achieving net 0 emissions across all operations by 2040. Additionally, in 2022 of April, we announced an ambitious three-year water conservation goal to conserve 25 million gallons of water by 2025. These commitments to the climate and society reinforce our vision that a healthy environment, properly managed resources and vibrant communities are key to secure and prosperous future for Life Out Here. As a result, our efforts to enhance our sustainable business practices have been recognized by various third parties. We now have nearly 30% of our store base that are in our Project Fusion layout and our Garden Center build out is now active in over 300 locations. With nearly 1,800 team members, our field activity support team has made powerful contributions to our in-stock performance and execution of our sales-driving initiatives.

We continue to be pleased with the strategic benefits and financial returns of these store-level investments. This was a year that we made significant progress on our Life Out Here strategy. And building on our performance for 2022, our outlook for 2023 is right in line with our long-term guidance. And Kurt will share more details on our outlook as well as more details on our performance in 2022 in just a moment. Now shifting a bit to 2023. As we planned for the year, we anticipate continuing to operate in an ever-challenging and changing macro environment. Our operating assumption is that the economy in the near to medium-term will remain resilient with flat to modestly positive real growth. Wages are increasing and consumers continue to tap pent-up savings to support spending.

We expect consumers will continue to be judicious in their spend, but resilient, while prioritizing needs over discretionary. We believe inflation has peaked, but will remain sticky as we move through the year. It is our view that an orderly loosening of the labor market will be a key determiner of the country’s ability to return our economy to sustainable conditions in the second half and 2024. The effects of secondary markets on our consumer spending in areas such as housing, agriculture and oil markets are expected to be collectively neutral and individually modest. Whatever economic environment plays out this year or any year for that matter, we’re confident that our business will remain resilient and build on our strong track record of consistent and stable growth across all economic environments.

Tractor Supply is a unique, highly differentiated retailer. We are the leader in a large, fragmented market. We’re a need-based business that is tailored to the Out Here lifestyle. Our customers have a passion for the Out Here lifestyle and over-indexes homeowners, landowners, pet owners and animal owners. We live our mission and values and our culture defines our relationship with our customers. We’re celebrating our 85th anniversary this year. As we begin the year, we take great pride in our path and are equally excited about our future. And with that, I’ll turn the call over to Kurt.

Kurt Barton: Thank you, Hal, and hello to everyone on the call. Let me build on how sentiment for 2022. As we start out the year, we anticipated that our business would continue to exhibit consistent performance as we have a proven business model that has stood the test of time. The team delivered against our goals and exceeded our expectations. The impact of the 53rd week on our performance is detailed in our press release. To recap, the 53rd week added about $225 million to our net sales in the fourth quarter representing 6.8 points of our net sales growth. On a full year basis, it represented 1.8 points of the 11.6% growth year-over-year. Diluted EPS benefited by $0.16 for the quarter and the year. For the fourth quarter, all regions of the country once again delivered positive sales comp.

All months were comp positive. As for the cadence of the quarter, our comp store sales were performing at the high end of our outlook as we move into mid-December. Then as Winter Storm Elliott moved across the country, our sales accelerated given the storm’s impact on our customers’ needs for heat, insulated outerwear, livestock feed and forage and some load up of other C.U.E. products. As Hal shared, we estimate the storm provided about 2 percentage point benefit to our comp sales. Much like any emergency response events such as hurricanes, the profitability of these sales from winter storm events of this magnitude is lower due to the mix of products and higher incremental operating costs. Our commitment to being the dependable supplier for Life Out Here was exhibited during this historic storm.

Looking back, when excluding the December winter storm comparable store sales have been remarkably consistent across all four quarters of the year. Similar to trends through the year, retail price inflation contributed about 11 points to our comparable store sales in Q4 as the team continues to navigate the ongoing cost pressures across the supply chain. The comparable average ticket growth of 6.3% benefited from inflation, partially offset by a shift in sales mix to needs-based consumables versus the larger ticket items. Demand for C.U.E. categories was nearly 3 times the chain average, while big ticket sales performance was down mid-single digits. We did see strong performance in winter needs-based items such as heaters, snow throwers and log splitters.

The performance in these big ticket categories somewhat offset the declines we saw in more discretionary categories like utility and recreational vehicles and trailers. Moving on to gross margin. For the fourth quarter, our gross margin improved by 28 basis points to an even 34% of sales. Our price management actions and other margin-driving initiatives were able to offset the pressures from year-over-year product cost inflation, higher transportation costs and product mix due to the strength of C.U.E. categories. During the quarter, we experienced a significant moderation in the rate of price increases from our vendors, but by no means are we seeing deflation. Our promotional activity was in line with the prior year and we are seeing moderation in transportation costs that we expect to flow through in 2023.

Of note, it’s our belief that transportation costs most likely peaked in the fourth quarter. As a percent of net sales, SG&A expenses, including depreciation and amortization, increased 14 basis points year-over-year to 25.1%. As we indicated in Q3, this increase was primarily attributable to three factors: one, the impact of transaction expenses and early integration costs associated with our acquisition of Orscheln Farm and Home; two, our strategic growth initiatives, including depreciation and amortization; and three, our investments in team member compensation and benefits. These items were partially offset by a reduction in COVID-19 response costs and leverage in occupancy and other costs from the increase in comparable store sales. Diluted EPS was $2.43, an increase of 25.9% from the fourth quarter of last year.

Our balance sheet remains incredibly strong. At the end of the quarter, merchandise inventories were $2.7 billion, representing an 18% increase year-over-year in average inventory per store. Overall, we continue to believe that our inventory position is in good shape. Today, we believe we are better positioned to drive sustainable long-term growth than we were before the pandemic. Our structural tailwinds such as rural revitalization, home setting, self-reliance and pet ownership continue to benefit us. Our Life Out Here strategic investments have made us stronger. Adjusting for the impact of the 53rd week, our outlook for 2023 is right in line with our long-term targets as we continue to see the power of compounding from our compelling top line growth, operating margin outlook and consistent capital return to shareholders through the dividends and share repurchases.

For fiscal 2023, we are forecasting net sales of $15 billion to $15.3 billion, including at least $300 million in sales from Orscheln. Our outlook marks another milestone in our performance as annual sales are forecasted to be above $15 billion. Comparable store sales growth is anticipated to be in the range of 3.5% to 5.5%. We expect gross margin expansion of about 20 to 40 basis points from supply chain benefits and a moderation in both product cost increases and the mix impact of C.U.E. We anticipate SG&A will deleverage modestly due to a few factors. Depreciation amortization is anticipated increase by 17% to 20% relating to our strategic growth initiatives. Also, we opened our ninth distribution center just this month. As a reminder, the operating cost for the new DC are reflected in SG&A, while the supply chain benefits are reflected in gross margin.

We expect the incremental cost to pressure SG&A by approximately 15 to 20 basis points. The benefit in gross margin will not completely offset this pressure since it takes time for the new facility to fully ramp to maturity and realize the supply chain benefits. And lastly, the integration of Orscheln Farm and Home is expected to impact SG&A by approximately 5 basis points. These factors are partially offset by the normalization of incentive compensation and leverage occupancy and other operating costs from the increase in comparable store sales. And for the year, we forecast an operating margin of 10.1% to 10.3%. We are forecasting interest expense of approximately $55 million as we have increased borrowings to fund our capital allocation.

We plan to maintain a healthy leverage ratio of 2 times or below. We expect our effective tax rate to be in the range of 22.7% to 23%. We continue to expect the Orscheln acquisition to be accretive to diluted earnings per share by at least $0.10 in 2023. All in, diluted EPS is forecast in the range of $10.30 to $10.60. We continue to believe the best way to look at our business is not by the quarter, but by the half of the year. As you model 2023, I want to point out a few things that will impact comparability. And I’d like to give a little color on the flow across quarters. From a sales perspective, we are planning for all four quarters to have comp sales performance generally within our guidance range. We anticipate retail price inflation to benefit comp sales by 3 to 5 points with the benefit being higher in the first half than the second half as inflation pressures begin to moderate.

ESB Professional/Shutterstock.com

We are planning for positive comp transactions in 2023. As to earnings, we expect our EPS growth to be fairly balanced between first half and second half. There are a couple of discrete items that will impact operating margins in certain quarters. The first quarter will likely be our toughest comparison from an operating margin rate perspective. Start-up costs for the new distribution center will pressure the first quarter, while the supply chain benefits will not begin to be realized until the second quarter. Additionally, transportation costs are expected to continue to be higher year-over-year in Q1 and then begin to moderate through the remainder of the year with the second half expected to see favorable comparisons. As a reminder, the Orscheln stores will be added to the comp store calculation in October when we cycle the acquisition date.

Also keep in mind, the discrete items that impact our earnings comparability in 2023 are the lapping of the 53rd week benefit, partially offset by the accretion from the Orscheln acquisition. And when adjusting for the 2022 benefit from the 53rd week and the 2023 accretion from the Orscheln acquisition, our outlook for 2023 is consistent with our long-term EPS guidance of 8% to 11%. Capital expenditures are forecasted to be $700 million to $775 million, with about 80% for growth initiatives. We expect to open approximately 70 new Tractor Supply stores. We continue to be on track for 10 to 15 Petsense store openings in 2023. Our new store pipeline continues to be solid and we expect to improve the cadence of openings in 2023 with more balance throughout the year.

We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases. For 2023, we anticipate share purchases in a range of $575 million to $675 million, which is estimated to have a benefit of a net reduction in weighted average shares outstanding of approximately 2%. Our business model has to the test of time and is proven to be resilient. While we are closely monitoring consumer behavior and the impact of economic growth on consumer demand, we believe that we are well positioned for any consumer and economic environment. To wrap up, we are continuing to separate Tractor Supply from the competition. In prior cycles, we’ve made investments that strengthened the company. We believe the current environment is an opportunity for us to lean into our strength and further expand our lead for years to come.

And with that, I’ll turn the call back over to Hal.

Hal Lawton: Thank you, Kurt. As we celebrate our 85th anniversary this year, Tractor Supply is a business that continues to have significant opportunities for growth ahead of us. Our position in our customer spending is for stable, needs based and demand driven product categories. We are in defensive product categories for the lifestyle our customers live. At the same time, we are playing offense to capture organic growth opportunities. We have idiosyncratic growth drivers that are separating us from the competition. As a company, three words that really summarize Tractor Supply’s performance are: one consistent, two, reliable, and three, sustainable. And I’d like to walk through these three words and share what I see as structural tailwinds across them to support our future performance.

Let’s start first with consistent performance. We have a track record of delivering positive sales growth for over 30 consecutive years. 30 of the last 31 years have had positive comp sales. We’ve had consistent traffic growth across economic cycles and we’re planning for positive traffic growth in 2023. Our marketplace has shown consistent growth for decades and decades. Our total addressable market of $180 billion continues to benefit from numerous trends that we believe are structurally found. Additionally by all accounts, we are gaining substantial share in our market. For instance, our queue product categories are driven by livestock feed for cattle, equine and poultry and companion animal food. In addition to categories like heating fuel, wildlife feed, pest control and lubricants, we’re entering new product categories through our Garden Center transformations then open up new queue categories that provide a halo to the store as new and existing customers shop our expanded lawn and garden categories.

Our stores with a Fusion layout and Garden Center transformations are gaining more customers than the balance of the chain. In just over two years since we started our Life Out Here strategy, we have gained significant scale in our Fusion remodels and the transformation of our sidewalks to Garden Centers. We have a substantial runway for growth ahead of us as we still have 70% of the chain to convert to the Fusion layout and the opportunity for another 1,000 plus Garden Center transformations. The comp lift for the Fusion remodels continues to run in the mid-single digits. When we execute a combination Fusion remodel and a Garden Center transformation of our sidelight, we have a comp lift in the high single digits. These projects provide us with the opportunity to continue our track record of consistent growth.

The second word I would use to describe Tractor Supply is reliable. We are a need space, demand-driven business, and these product categories differentiate Tractor Supply from the bulk of retail. Our customers count on us for the products they need to deliver Life Out Here. Since relaunching our Neighbor’s Club program in April of 2021, we have increased our high value customers by nearly 50%. Additionally, our high value customers are shopping us more frequently and spending more money. Our retention rate for our high value customers is about 80% with our retention rate for our highest tier customers at over 95%. Our Neighbor’s Club program is a true competitive advantage for Tractor Supply. Once our customers in the flywheel of Neighbor’s Club, their spending becomes much more reliable.

Sustainable is the third key word to characterize our company. We’ve had tens of millions of new customers shop us the past three years. We have retained the majority of these customers and a substantial portion have become active Neighbor’s Club members. We’ve added over 13 million members since 2019 with more than 5 million in 2022 alone. These strong results position us for sustainable growth ahead. Another important customer cohort that supports the sustainability of our outlook are the millennial customers and they continue to have more significant spending with us and in the years ahead of them. This group will make out nearly a quarter of the U.S. population by 2032, just 10 years from now. Our sales comps for millennials have outpaced non-millennials at Tractor Supply for five consecutive years, millennials over index and sales per customer, units per customer and average ticket.

We view this strength that our millennial customer, not as a pull board, but rather as a catch up, as this group delayed family formation and the pandemic really shifted their behaviors to be much like prior generations. This cohort of the population is showing accelerated rates of home ownership and household formation. Today, 50% of millennials own homes versus 30% just a decade ago. So while they may have started a little bit later, we see an inflection point in the pace of home ownership and household formation for millennials. We are focused on retaining these new millennial customers as our data shows that they are roughly double their spending at TSC in their second year of shopping. And if they continue shopping with us for five years, we experience a threefold increase in transactions and sales per customer within five years of their initial purchase.

Rural revitalization also continues to be a strong structural benefit for us. Millennials are increasingly choosing to move out here. This is not just a phenomenon of the pandemic, but rather a decade long trend of net migration out of urban areas that skewed disproportionately among this younger generation. The rural lifestyle appeals to millennials and it offers greater affordability, safety, self-sufficiency of slower pace, and the ability to pursue hobbies and passions. Many of the hobbies pursued by the millennials fit with our Out Here lifestyle. Tractor Supply enables passions and hobbies pursued by millennials, whether it is a pursuit as simple as making memories with family and friends or caring for pets and animals, or getting outside to hunt fish or camp, or being more self-sufficient and sustainable.

Tractor Supply serves a key resource in our local communities for millennials to come to for trusted advice and expertise. Our passion for the lifestyle connects with our customers and allows us to serve them at scale. These three words, consistent, reliable and sustainable allow us to be an earnings growth compounder on both the top line and bottom line. As I started my remarks this morning, year-end is when we reflect on our accomplishments, but more importantly, this is a key moment to look ahead and to focus on the opportunities ahead of us. With our Life Out Here strategy, we have ignited Tractor Supply’s next horizon of strong and sustainable growth. 2023 is poised to be another great year for Tractor Supply. And with that operator, we now like to open the line for questions.

See also 10 Value Stocks with Big Buybacks and 25 Wealthiest Countries in the World by GDP per Capita.

Q&A Session

Operator: Our first question comes from the line of Scot Ciccarelli with Truist. Scot, your line is now open.

Joe Civello: Hi. This is Joe Civello on for Scot. Great quarter guys. I was just wondering if we could talk about your €“ the transaction growth you guys are projecting for 2023. Can you talk about how the expectations are driven by weaker comps, weather driven or other things like that, or potentially incremental visits driven by Garden Centers, Fusion remodels or the things you’re implementing in the store that’s helping to drive growth? Thank you.

Hal Lawton: Yes. Good morning and thanks for your question. Appreciate you joining the call today. We’re very pleased with the guidance we provided on our comp sales for 2023 to be between 3.5% and 5.5%, very much in line with our long-term guidance range as well. As Kurt said in his prepared remarks, we expect it’ll be a blend of transacts €“ positive comp transactions and ticket. We do expect inflation will be stronger in the first half, but moderate in the second half. And what I’d say more broadly is, our market that we participate in continues to run reasonably in line with GDP kind of flat to low single digit growth. And we are taking significant share in the marketplace. As we’ve said several times over the last three years, our sales growth, half of that can be attributable to share gain.

And we certainly are expecting that to continue in 2023. And the share gain is really a composition of the competitive advantages that we have as well as the investments we’re making in our Life Out Here strategy and the fact that we’re reaching scale on a number of those now, particularly our Fusion and Garden Centers. And they will continue to add material growth to our comps. But again, we’re very positive on our outlook for 2023 and expect the momentum that we exited 2022 to continue into the year.

Joe Civello: Got it. Thanks.

Operator: Our next question comes from the line of Karen Short with Credit Suisse. Karen, your line is now open.

Karen Short: Hi. Thanks for taking my question. Good to talk to you again. So just two questions if I could blend them in. So, just looking at your algorithm, obviously you’re looking for sales growth just on a one year basis to be lower than EBIT growth. And I guess I would argue that’s probably €“ sorry, sales growth to be higher than EBIT growth. And I would look at that as a good thing because you are one of the few companies that have invested and not harvested as it relates to the pandemic. So maybe just talk about that algorithm. And then the second question I just wanted to lump in there, when you look at your mix by category, obviously I kind of look at it at about 26% is discretionary. So how do you think about that going into potentially a weaker macro?

Hal Lawton: Yes. Hey, Liz, good morning and thanks for taking the call. I’m sorry, Karen, I apologize, Karen. Karen, how are you this morning? Good morning. You all are right beside each other your name’s alphabetically on my list, so my apologies. But Karen good morning and thanks for your question for joining the call. On the sales growth, as you said, we are in an investment cycle in our business and the thing that we’re excited about is that we’re able to grow earnings as we did last year double digits, and we’re able to grow our sales as we did last year double digits even in the context of an earning cycle. And we anticipate to continue to grow sales at a significant rate next year as well as our earnings at a significant rate next year, even inclusive of all the capital expenditure and kind of underlying DNA that comes along with that, as well as all the other investments we’re making in the business.

But we’re very optimistic and confident in the outlook that we’ve provided. On the nix by category, we’ve roughly talked about discretionary being more like 15% of our business. Big ticket is kind of in the low double digits. There’s a few other categories that would be plus or minus in that discretionary area as well. And I think the way we think about that business is that some categories will have continue to be negative in their comps but there’s others when it’s seasonally relevant that will be positive. And an example of that is what Kurt articulated in his prepared remarks saying that, our big ticket sales were kind of mid-single digit negative comps. And it was really €“ there was two sets of categories in there. The kind of discretionary non-seasonal related ones were kind of negative double digits, but then you had ones that were seasonally relevant and there was a demand around those say like log splitters and snow throwers that are also big ticket and could be viewed as discretionary or in our kind of math for discretionary and those blended together to drive a negative single digit €“ mid single digit comp.

And we think it’ll play out that way much of this year. As an example, as we get into the end of Q1 and early Q2 when we had the drought last year that disproportionately affected as we commented last year, things like riders. And we expect those to come back as the drought is abetting in many areas of the country even in spite of the consumer shifting more towards needs based needs a spend. Anyway, thanks Karen, for joining the call. I appreciate the question.

Karen Short: Thank you.

Operator: Our next question comes on the line of Liz Suzuki with Bank of America. Liz, your line is now open.

Liz Suzuki: Thank you. And I don’t mind being confused for Karen because she dresses better than I do, so I appreciate it. Thanks for your time. Yes. So the guidance you gave for 2023 and in terms of the operating margin, I guess, it sounds like the investments in new DCs and in store transformations and sidewalks are probably the factors that would keep that margin towards the lower end at the long-term guidance. But what do you view as the opportunities for operating merchant to get to the top end of that guidance over time?

Hal Lawton: Yes, hey Liz. And good morning, and thanks for joining the call. As we’ve said several times, last year and this year are two biggest peaks in investments. And as we talked about in our enhanced earnings call a couple of years ago, the first part of this five-year cycle that we’re in for our Life Out Here strategy would be towards more the bottom end of our €“ middle end of our range. And then as we move towards the out years, call it, 2024, 2025, 2026, we see opportunities to increment up on our op margin towards that higher end and kind of get back to a nice leverage across our P&L, let’s say, 5 or 10 basis points a year. And really, the biggest determinant of the 10.1% to 10.3% this year would just be the sales range.

And if we’re up more towards the 5.5, we would expect to leverage more on some of our fixed costs and be more towards that 10.3%. If we’re down more towards the 3.5%, we think we’ll be more in that 10.1% to 10.2% range as there’s a little less leverage on some of our fixed costs. We pull some other levers to kind of manage the business. But certainly, as we look out towards the back half of this five-year investment cycle, we see opportunities for our margin rate to increment up.

Liz Suzuki: Got it. And just a follow-up, you may have mentioned this in the outlook for 2023, how many Project Fusion remodels and side lots do you have baked in?

Hal Lawton: Yes. So the mix of our remodels in 2023 will be a little different than last year because of the Orscheln acquisition. This year, as we shared in our opening remarks, it’s kind of 70 to 80-ish new stores that will open this year. We’ll also be integrating the 81 Orscheln stores. Those will be kind of basically a Fusion remodel. And then we’ll do around 150 more Fusion remodels as well. And that’s in line with what we did this year, kind of in that 200 to 250 range. It’s just the fact that 80 of those will be taken up by the Orscheln integration this year. We continue to be very excited about Fusion and very excited about our side lots. Go ahead, Liz.

Liz Suzuki: Yes, excited to see you next week. Thanks.

Hal Lawton: Yes, perfect. Look forward to seeing you.