Operator: Our next question comes from the line of Brian Nagel with Oppenheimer. Brian, your line is now open.
Brian Nagel: Hi, good morning. Great quarter, congratulations. So I have two quick questions. I’ll merge them into one. First off, with regard to the sort of say, the weather bump in sales late in Q4, should we think about that as incremental demand? Or does that potentially pull forward demand would have happened in Q1? And then the second question I have, Kurt, you mentioned in your script, that you’re seeing, I guess, price increases moderate and that’s from your suppliers. The first I have is, so then what action €“ that’s occurring, what action is Tractor Supply taking? Are you maintaining your retail prices? Or are you actually adjusting your retail prices to account for those now modeling input costs? Thanks.
Hal Lawton: Yes, hey, Brian, I’ll take the first part of it, and then Kurt will take the second part. On the weather bump, we don’t see that as pull forward from Q1. And we see it €“ dominantly, it’s just incremental in Q4. I’d go back to some of the comments we made, say, in our Q3 earnings call and our Q2 earnings call, where we said, our business has been very consistent in that 5% to 6% comp range all last year. And as Kurt said in his prepared remarks, and I think I did as well, we were trending towards the high end of our comp guidance for Q4 when the storm hit and then that put us well over. I’d equated a bit to what we said if we had gotten €“ if the drought hadn’t occurred, we think we would have been over our guidance.
If we’d had a better spring season, we think we would have been over our guidance for those quarters. I just get back to the point, our business is very consistent, very stable, very reliable right now in that kind of mid single-digits. And then if we get some good weather on top of that, that benefits us, we get that benefit. And that’s what we saw in Q4. When the weather is bad, we’re there for our customers. And it drives some sales. But otherwise, we continue to run very reliably and consistently in that mid single-digit comps.
Kurt Barton: Yes, Brian, good morning. And I’ll just add to that. On that winter storm, we view it very much like a discrete event like the hurricane events have been. You heard my commentary on there. The exciting thing though is, with those types of events, consistent with this storm is it introduces Tractor Supply as a needs-based business to other new customers. And that’s what we do as we capitalize on that, we see it as part of our opportunity in 2023 as new footsteps into the business. So great opportunity from that one event as we continue to serve our markets in a significant widespread winter storms such as that. In regards to your question about prices abating and how we manage that, one is, we will €“ those prices will take time to work through the system.
So we do very well at managing whether that be the product cost or the transportation to be able to manage as those flow through and balance between the competitive retail price that we have, gaining market share and how much we actually take to the bottom line. Specifically, the biggest item in the gross margin benefit in 2023 is the easing of the transportation cost. And as you look back even over the last two years, on our gross margin, we’ve been very specific as we’ve been able to find offsets or pass through some of those the transportation cost has been the primary one where we’ve absorbed some of that. And so we will €“ as those prices abate and ease through, it’s a key contributor to how we expect to see gross margin expansion throughout 2023.
Brian Nagel: Thanks guys, very helpful. Appreciate it.
Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon, your line is now open.
Simeon Gutman: Good morning, everyone. Nice results. My question, it’s a couple of parts, but it’s one topic. It’s how C.U.E. is comping 3x the company average. If you could speak to €“ if you can, maybe the price benefit there or what’s happening with the basket and the market share seems to be staggering because I don’t think some of the items in that category are growing that fast. And then I’ll flip it and say then why are you not converting or is it converting to the rest of the store? Are you seeing that conversion? Because it seems like it’s a pretty good halo to have on one side of the business.
Hal Lawton: Yes, hey Simeon, and thanks for joining the call. Good to speak to you this morning. On the C.U.E., I would say our AUR is in line with the rest of the market. So kind of high single-digits, generally speaking, across food and speed, but our market share is on a dollar basis, we’re running 2x the market. And on a pound basis, we’re running 3x the market in growth. And so it’s €“ the majority of our growth there well over half is transactions-based, unit-based and share gain. And dog dry food is the numbers I was just mentioning right there, those were specific to that to dog dry food. But we’re seeing similar type of numbers in poultry feed, in equine feed, in livestock, et cetera. And I would say it is pulling through to the rest of our business, in terms of driving positive footsteps and transactions into our store.
And then also, our average ticket continues to remain very solid with very modest reduction in our UPT. In fact, this was the lowest year-over-year in our UPT decline in 2022. And when you look at the customer €“ underlying customer cohorts in our Neighbor’s Club program, what you’re seeing and as was mentioned in the prepared remarks is that the millennials have moved out to kind of rural America and kind of that Sunbelt migration, they start in poultry and pet food with us and then very quickly are migrating into four to five other categories in terms of us being their destination. And so I’d say we’re seeing strong growth, its market share gains in C.U.E. that we’re taking. We’re confident we will be able to continue to take those gains.
We are the lowest cost to serve in the market, the fastest supply chain, the lowest price is the best customer service. And when they get in there, should they shop the whole lifestyle, and we’re seeing that in our average ticket and also in our on customer data.
Simeon Gutman: Thank you.
Operator: Our next question comes from the line of Zach Fadem with Wells Fargo. Zach, your line is now open.
Zach Fadem: Hey, thanks. Good morning. Couple of questions on the outlook. First of all, could you walk us through the quarterly comp impact from the calendar shift? And if there’s anything we need to keep in mind on a flow-through or margin basis for those sales. And then second, on your gross margin outlook. To what extent are you incorporating reinvestment to drive traffic growth versus flowing those lower freight input cost to the bottom line?
Kurt Barton: Zack, hey, this is Kurt. The first question in regards to cadence throughout the quarter, as I mentioned in my prepared remarks, the €“ all four quarters really would expect to be in line with our overall guidance. We don’t expect significant variation between the quarters. I would encourage you, as you reflect back on last year, as we talked about some of the headwinds we saw in the middle parts of the year, with the late start to the spring, the drought that impacted Q2 and Q3. We talked about how in those quarters, there were some headwinds that took some of the top side off of the comps in those quarters. So we see good opportunity to be able to capitalize comping up against those quarters. We obviously had a really strong Q4. We talked about the winter storm. So those are all things that factor into our model as we plan the comps. And on the gross margin question, maybe remind me again your question on the gross margin.
Zach Fadem: Yes. Are you incorporating any reinvestment to drive traffic growth versus just flowing the lower freight to the bottom line?
Kurt Barton: Got you. Yes. Well, of course, we always prioritize market share gains competitive in pricing. We are the lowest cost to serve. We’ve invested in our supply chain and distribution to be able to capitalize on this shift in the environment where transportations are coming down. So we’ll be able to take advantage of our own efficiencies that we can control. As there’s opportunities as prices decline, we will take some opportunity modest as we see it in our plan, opportunity to invest in the gross margin. And all of that is considered in our expectation that we could see gross margin growing 20 basis points to 40 basis points in 2023.
Zach Fadem: And Kurt, just to clarify, the calendar shift won’t be as pronounced as 2016 is what it sounds like.
