We anticipate these markets from our real estate study that there is upside to the historical performance in those stores to be able to run in line with Tractor Supply averages. Albeit we’ve said it’s very much in line with like a Midwest tractor supply average, which is a bit below the overall tractor supply average store level. So there’s room to have these grow over time. And we’re excited about our ability to capture new customers, bring them into Tractor Supply in these stores. And so overall, for 2024, even into 2025, we believe much like a new store, there’s a benefit from the maturation.
Operator: Thank you. The next question comes from the line of Michael Lasser with UBS. Your line is now open.
Michael Lasser : Good morning. Thank you so much for taking my question. What if you assumed for input cost relief in 2024, especially key variables like transportation costs and commodity costs? And then how does that inform your view of the gross margin outlook for this year? Because it seems like the gross margin has been expanding significantly in part because of this relief? And is there a risk that at some point, Tractor Supply could invite more competition as its gross margin is about 150 basis points higher than it was in 2019? Thank you so much.
Hal Lawton: Hey, Michael, good morning. Two things I’ll hit on this. First is the long-term structural nature of our gross margin, and then I’ll speak to the assumptions implied in 2024. On the long-term structural nature, there’s two big shifts that I want to remind folks about that really have transferred rate out of gross margin and expense out of gross margin and into SG&A. The first one of those is our field activity support team. As we’ve mentioned, it’s nearly a 1,800-person team that where the expense falls in our SG&A, but the offsetting support provided by our vendors falls in gross margin. As we’ve talked about that several times in the past, that’s roughly in the neighborhood of 40 to 50 basis points of shift. Secondly, I would call out the continued transformation of our supply chain.
From 2018 to 2023, our stem miles have reduced by 20%. And that basically means a truck going from a DC to a store. And so the impact of that is reduced freight cost on a like-for-like volume and rate basis versus, say, 2018, but there’s obviously operating costs embedded in our G&A to run the two DCs we’ve opened since then and the 11 mixing centers that we’ve opened since then. That is a benefit of roughly 60 to 70 basis points of the delta there. So when you add the fast difference and you add the supply chain difference kind of, call it, 75% of the gross margin difference that you quoted that 150 basis points is structural in nature and really a shift from SG&A to gross margin rate. Now looking forward, I would say the balance that you see there in gross margin rate, I would attribute to our scale.
As we talked about, we’re almost double the size of the business that we were in 2018 when I quoted those stem miles. And that’s accorded us the ability to obviously manage and run the business more productively, whether that’s in freight and our negotiations with our freight providers or whether that’s getting credit for our scale with our primary COGS vendors. As it relates to this year, we do see continued benefit in the freight market, particularly in the first half of the year, and we’ve talked about that, particularly in the back half of last year and also in the first and second quarter some, but we do see continued freight benefit. Also, as we’ve talked about in Q3 and Q4, and we also mentioned in our prepared remarks, we have been working very closely with our vendors on cost and have been rolling that cost where we’ve seen commodity prices come down and other cost impacts moderate or reduce.
We started that work, as we mentioned in past earnings calls, really in the summer time and the impact of those cost reductions are forecasted in our margin rate assumptions that Kurt laid out in his prepared remarks. The last thing I’ll mention is just on competition. We are as priced strongly in the market right now as we’ve been ever. And we have a number of initiatives that we have in place to really make sure we stand for value in the marketplace on our key, kind of, value indicating SKUs out there and feel really good about our price position and don’t see any encroachment from competition just the same competitive intensity that we’ve seen over the last few years.
Operator: Thank you. The next question comes from the line of Seth Basham with Wedbush. Your line is now open.
Seth Basham: Good morning. My question is on the companion animal category. And if you could comment on the performance of that category in the fourth quarter were comps up or down. And then specific to cat and dog food, you mentioned positive unit comps. What about sales comps? And how are you seeing the consumer respond to inflation broadly in that category?
Seth Estep: Hi, Seth, this is Seth. Relative to our companion animal business, we remain very excited about the opportunity that we have in companion animal and we’ve continued over the years to manage through multiple cycles and have a track record of this. What I’d say like relative to comp, companion animal continues to be a comp driver for us in both units as well as top line. When you look at trends in the industry, approximately for our customers, approximately 75% of our customers own a pet, and about half of those that own more than one pet. And so just structural to our customer base in general, it’s an area that we are highly committed to. We believe you think about like our convenient locations, our team members, our omnichannel capabilities, our robust and differentiated assortments.
