Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to tractor supply Companys conference call to discuss fourth quarter and full year 2019 results.
At this time all participants are in listen only mode. Later, we'll conduct a question answer session and instructions will follow with that time. We also all participants limit themselves to one question in one related follow up please be advised that reproduction of this call in whole or in park is not permitted without written authorization of tractors.
Like company as a reminder, this call is being recorded.
Now I'd like to introduce your host for todays call where are you went poking fun senior Vice president of Investor and public relations for tractor supply company everyone. Please go ahead.
Thank you David Good morning, everyone on the commentary or how well in our CEO , Greg Sandfort former CEO extra can you pick advisor and current Barton our CFO after our prepared remarks, well open the call that bigger question.
I think that's our SVP of merchandising will join US for the question answer session now let me work with the surplus position under the private Securities Litigation Reform Act of 1995. These called May contain certain forward looking statements that are subject to significant risk and uncertainties, including the future operating a sign.
On that but the company in many cases these risks and uncertainties are beyond our control.
Although the company believes the expectations reflected in that forward looking statements are reasonable I can give no assurance such expectations or any other <unk> looking statements proved to be correct and actual results may differ materially from expectation important risk factors that could cause actual results could differ materially from does reflect.
Good and forward looking statements are included at the end of the press release issued today and the company filings with the Securities Exchange Commission. The information contained in this call is accurate only as of the gate discussed investor should not have done that starts to coordinate all parties at a later time tractor supply takes no obligation to okay.
The information discussed in this call.
Discussing the results of operations will be providing adjusted net income and diluted earnings per share now, but excludes the impact as an executive transition agreement you can find additional information regarding non-GAAP financial measures in our earnings release.
Brian section of our website given the time constraints in the number of people who want to participate we ask that you. Please limit your questions to warn with a quick related follow up all right. Appreciate your block license.
As I wasn't call for follow up now it's my pleasure can turn the call over to Greg.
Thank you Mary Winn, good morning, everyone who's joining us on the call today.
Before we discuss our fourth quarter results.
What do you take a moment and update you on the CEO leadership change a tractor supply that we announced in December .
Oh Watson officially joined the company in mid January as President and CEO .
The board engaged in a girl when comprehensive search to identify the white leader.
Next chapter in the crop in the growth.
Hi, I'm very excited that the board shows how has the next CEO for our company called brings tremendous experience across multiple retailers, including home depot.
In basics.
More importantly, how is a great cultural fit and I believe he is the white leader for the future growth of tractor supply.
As we have previously communicated I will continue to be available as an advisor compiled and the company due August .
Well sure built my board term through May.
My expectation is that this will be a very smooth transition.
This will be my last earnings call.
To reiterate that it is good and honor and privilege to serve as the CEO tractor supply.
Tractor supply company gets a structural company with a unique culture like no other than retail.
I believe the company is in great hands with how that's CEO .
The company has a strong leadership team in place that is passionate about helping our customers live was out here.
Well the tractor supply chain has a tremendous.
Tremendous progress in recent years I believe there is considerable opportunity ahead.
Now I'll turn the call over to help for a few comments before we address our quarterly results and outlook.
Like so much Greg good morning, everyone. It's great to be a tractor supply for many years of my retail career I've watched and bar This company.
Greg's leadership, the gene has achieved remarkable results and I'm honored to follow in his footsteps.
If you were acutely aware of the retail industry is experiencing disruption and reinvention at an unprecedented speed.
Leading retailers need to excel at not only merchandising customer service and execution, but also a data technology flexible supply chains and productivity.
Gee for successful retailers. However, we'll continue to be to saying a differentiated customer experience.
With more than 2000 stores cop blended buyer online site tractor supply has substantial scale very high brand loyalty with our customers an incredible culture that as part of our secret Sol and a business model that is supported by a strong balance sheet and significant cash flow generation.
Tractor supply, we have a differentiated experience a robust set of competencies and are well positioned to becoming even more integral part of our customers' lives.
I'm excited about the opportunity do you continue to build on the one tracker foundation. The team has in place to drive the business Board, we're committed to executing on our 2020 initiative and delivering on our plan for the coming here.
Tractor supply team. It is very welcoming need since the transition was announced in the coming weeks in line I'll be out in our stores and distribution centers listening and learning as I spent time with our team members and customers.
I look forward engaging with you in the future and now I'll turn the call back over to Greg.
Thank you how they're now let's move onto their results.
Overall 20 luxury was a solid year for tractor supply with record sales and earnings.
Well the fourth quarter, its wondering like trying not to beat our expectations on the topline.
The team did a great job of controlling those things, we could manage and as a result, we delivered operating profit margin expansion for both the quarter ended the year.
The most significant dr. weighing on our sales results in the fourth quarter was unfavorable seasonal wasn't trends.
Across many of our markets, we were negatively impacted in the quarter with unseasonably warm temperatures, which hampered our ability to drive topline sales in numerous seasonal categories.
As I've shared with you consistently over time.
Tractor supply customer because they need based demand driven shopper and there was relatively little that will influence to customers purchasing decision if that.
Doesn't exist.
Given the stronger traffic trends the softer traffic trends, we weren't able to capitalize on impulse or ancillary purchases.
As you have heard from other retailers I believe the six fewer days between Thanksgiving and Christmas over the prior year impacted our customers gift, giving purchase activity to a greater degree than we had anticipated.
Overall, our 12 years with tractor supply private spirits be seasonal impacts before the fourth quarter 2015, and again in the first quarter of 27 thing.
And as always wants the kids with Jeffrey Church arrived with seasonal change the sales demand also return.
Despite the softness in our comps for sales.
Underlying health of our business remains solid as evidenced by the continued strength of our core your round farm and ranch categories, which generated overall solid comp sales increases in line with our expectations and historical norms.
The teams executed well across two operations merchandising supply chain plugging and placement.
It seems manage inventories affectively and minimize our clearance exposure.
Leveraged our retail price optimization capabilities to preserve margins and we had disciplined cost control throughout the quarter.
Hi, I'm very proud of how this gene reacted to and effectively managed our fourth quarter business.
Now, let me talk in a few financial highlights for the quarter and the full year.
For the year net sales increased 5.6% and comparable store sales increased 2.7% to reach a record $8.35 billion in sales.
In the fourth quarter comparable store sales continued positive as we lap a strong 5.7% increase in the prior year War.
For the fourth quarter diluted EPS increased 9% to $1.21.
For the full year diluted EPS was $4.66, an adjusted diluted EPS was $4.68.
We returned $696 million to shareholders through the combination of share repurchases and quarterly cash dividends for the year and this was the ninth consecutive year that we increased our quarterly cash dividend for our shareholders.
In terms of operational highlights for 20 like.
We opened 80, new tractor supply stores and pencils locations, increasing our store count to over 2000 stores.
We made solid progress on many of our one tractors strategic initiatives, we completed the rollout of stockyard installed kiosk and mobile Pos technologies to all stores across the chain.
We continue to experience a robust neighbor's club loyalty program with membership approaching nearly 15000 members as we exited the year.
On a rejection rate of approximately 80%.
In addition, we also made great progress to improve our targeting of high value customers and OOCL why customers throughout various digital channels.
We continue to invest in our dot com business and sales once again grew strong double digits for the quarter a year.
Our private label credit card program with significantly enhanced with the new 5% back reward to our Neighbor's club members and we completed the ramp up a brand new distribution center in Frankfurt, New York to support our continued store growth in the northeast.
We also achieved LEED silver certification for this facility.
In this third LEED silver certification facility and our fleet.
Tractor supply was named to bear and 100, most sustainable U.S. companies for the second year in a row.
So to summarize 20 like humans with solid year for tractor supply.
And the team has a good handle on the business and has built a robust plan for 2020.
Then over 80 years time tractor supply has grown from a mail order catalog business to the largest farm and ranch retailer in the country and are passionate commitment to our customers team members communities as well as our shareholders is the foundation of our growth.
Although it's been accomplished over my 12 your tenure at tractor supply that's been a total team effort.
What's your express my appreciation in gratitude to the nearly 34000 team members across tractor supply and Petsense for a job well done.
And I'm excited to watch the progress and role for tractor supply that how on the team will provide in the coming years.
I will now turn the call over to Kirk who will provide more details on our financial results for 29 gene.
And our outlook for 2020.
Thanks, Craig.
Please accept my many thanks for your friendship and her leadership.
On behalf of the entire team. Thank you for all you've gone for tractor supply for the last 12 years.
Now, let's get right into the results for the fourth quarter and a year.
Sometimes weather driven demand can help sales growth and then sometimes it works against US every quarter can be a little different at tractor supply.
What does that the core of our mission is that we are there for our customers with the white products they need at the right time at the right price.
To build on what Greg shared with you our comparable store sales performance was driven by continued strength in our core farm and ranch categories, such as livestock feed fencing four inch an animal health.
Offsetting that strength the softness in categories, such as generators rubber footwear heating equipment safes insulated outerwear and toys.
We've been consumables, our pet food category average unit retail was impacted by the industry trend of trade down from grain free products.
Of significance our data shows that we are retaining our customers given the sales trends across the breadth of our product category offering.
In the quarter, we continued to drive comp increased tonnage or pounds sold as total pounds of cut it.
As well our pet supplies category categories were up mid single digits on a comparable store basis.
We would anticipate the trade down trend to continue in the first half of 2020 until we cycle in the third quarter.
Yeah stable trends grade mention coupled with lapping the hurricanes benefit from emergency response categories in the fourth quarter of 2018 impacted our big Big ticket performance.
Experienced softer results across generators safes stoves and air compressors.
Last year in the fourth quarter, we shared with you that we believed comp sales benefited by about 100 basis points from the weather.
This year, we estimate the negative impact from warmer weather represented about two thirds of the cost Miss versus our expectation.
Moving down the income statement.
For the fourth quarter gross margin increased 26 basis points to 33.8%.
This increase was primarily driven by a reduction in freight expense as a percentage of net sales.
Our cost reduction initiatives and the overall market.
And to a lesser extent the teams effective management of our direct product margins as they work to mitigate the impact of tariffs.
Including depreciation and amortization X today as a percentage of sales for the fourth quarter increased three basis points to 25.2%.
The increase was primarily attributable to de leverage in store personnel occupancy and other costs given the comparable store sales performance and incremental costs associated with the new distribution facility in Frankfurt New York.
Partially offsetting these SG nine increases would decrease in incentive compensation as well as disciplined cost management by the team.
Looking at our balance sheet, we believe our inventories in good shape and we're very comfortable with its quality as we enter the year, we're well positioned to wrap up the winter months and transition into the coming spring season.
In 2019, we generated cash from operations of $812 million, an increase of about 17% over the prior year.
Capital expenditures were $217 billion with approximately 35% this being maintenance related and the remaining 65% being growth oriented in areas, such as new stores digital capability investments and supply chain infrastructure.
We remain committed to returning cash to our shareholders through our share repurchases in dividends, while maintaining a disciplined approach to capital allocation, we're managing to a leverage ratio of approximately two times adjusted debt to EBITDA are the majority of our debt is a very low fixed rate, we're comfortable with their debt maturity ladder.
For the fiscal year, we repurchased nearly 5.4 million shares of our common stock.
Since the inception of our share repurchase program to 2007, we've repurchased just over $3 billion of our common stock.
Remaining share repurchase authorization was approximately $1.5 billion out of here and.
Turning now to 20 Twond.
We will continue to build on our strong foundation for long term success across the business. Our strategic initiatives are focused on allowing us to exceed our customers ever evolving expectation and position us for further growth.
The offering of relevant products and services for a rural lifestyle customer is that the core of our merchandising plans.
Continue the introduction of industry, leading and differentiated brands.
Coming into the spring season. The team is very energized about the launch of poor as this brand has a strong reputation for quality that really resonates with our customers.
The total brand provides us with the opportunity to attract new customers and be more relevant with our existing customers.
We're also expanding our product assortment with a broader lineup Cub cadet and the addition of choice.
Combined these brands will help solidify our position as a premier destination in the lawn and garden category and enhance our already industry leading lineup.
Equine feet, we have added the premium brand triple crown across the majority of our stores to further round out our strong offering in this category.
New space productivity technology for skew localization and assortment will be implemented across the chain to help drive specific growth plant by category and refine our product mix.
In addition, we'll be looking to enhance the shopping experience through selective store within a store expansions with an emphasis on winning brands such as carhartt in workwear Purina livestock feed and Husqvarna for outdoor power equipment.
Overall, it is imperative that we merchandise our stores with the products and brands at everyday low price our customers expect.
Exclusive brands continue to play an important low and our offerings you can expect to see newness through brand refreshes and line extensions across our exclusive brand portfolio.
For example, rich got our new exclusive work were Brent will be expanded into footwear and accessories.
Our initiatives to drive loyalty through our Neighbor's club program play an important role in connecting with our customers on a more personal level.
Our loyalty program as its transformational asset to tractor supply that we will continue to elevate to drive greater relevance engagement and loyalty.
Yeah actually me the rich customer data, we're receiving from our Neighbor's club loyalty program.
The health of our program continues to be very robust as measured by membership growth increased penetration of sales radio frequency and higher average ticket sales by these customers.
In addition, our core farm and ranch customer, which is our largest group by sales continues to be a strong to be strong across growth retention rates and spending.
Looking ahead, our artificial intelligence enabled tools allow us to scale, our marketing efforts to target communication on a one on one basis.
Our neighbor's club communication is being customized to offer products and service to an existing customer engage a lapse customer or welcoming new customer to the program.
Our private label credit card continues to be a win for US with the addition of a 5% reward that we rolled out at the end of September 2019, cardholders are now able to earn $5 can neighbor's club rewards for every $100 they spend on the card.
The loyalty proposition is more competitive and easier for our team members to communicate.
We exited 2019 with an annual tender penetration rate approaching 5%.
All metrics since the rollout of the reward positive we've seen robust growth across applications sales and tend to penetration.
2020, we anticipate capitalizing on the program enhancements to expand the tractor supply credit card penetration as we know that our credit card customers visit our stores more frequently and have a higher average spend.
Across the organization there is much work underway to support our strategic initiatives and to extend our leadership position in our markets.
What I've shared with you today are just some of the areas where the team's focus to drive the business.
Let's now turn to our financial outlook for 2020, we expect net sales in the range of $8.75 billion to $8.9 billion, an increase of approximately 5% to 6.5%.
Comp store sales growth is anticipated to be in the range of 1.5% to 3%.
We anticipate opening about 80, new tractor supply stores and 10 to 15, new Petsense locations.
The cadence of new store openings this year should be more in line with our historical trends as we anticipate more balanced openings in the perhaps first half of the year.
Our expectation is for modest gross margin improvement in 2020, we're forecasting slight pressure and has today due to ongoing wage pressures and investments in our supply chain and digital space.
Our outlook includes progress on our profit improvement plans to help mitigate cost pressures and our ability to reinvest back into business over time.
We are committed to ensuring our spending is directed to our highest strategic priorities all on a sustainable basis.
For the year, we anticipate operating profit margin to be centered around 8.9%.
With a clear emphasis on maintaining our margin rate.
Net income is forecast in the range of $575 million to $595 million or $4, a 90 cents to $5 in 10 cents per diluted share.
As always we would encourage you think about our business between the first half of year and the second half as this is in line with how we manage the business.
As you model 2020, please keep in mind key factors to the cadence of our year.
Our business performance is expected to be strong during the second half of the year as our compares.
The first quarter 2020 is forecasted to have the lowest cost performance of the year and correspondingly the most pressure on operating profit.
As such we anticipate first quarter net income and diluted earnings per share to be flat to the prior year quarter.
Significant factors driving this performance include a discrete executive transition costs of about two cents per share.
Incremental costs from the Frankfurt distribution center that we do not lap until the latter portion of Q1 and cycling our toughest comps of the year.
Although we are seeing the unseasonably warm weather trends continued into January there is a significant amount of the first quarter end of year ahead of us.
Moving to two below the line our effective tax rate is anticipated in the range of 22.4% to 22.7% as we do not expect discrete tax benefits that we received in 2019 to reoccur this year.
Interest expense is forecast to be approximately $20 million to $25 million.
Depreciation expense is estimated to increase 4% to 7%.
This is below our recent run rate as we cycle that step up in depreciation from the addition of our new distribution center in the first quarter of 2019.
As such the growth rate will be towards the higher end of the range first half of the year with the lower growth in the second half of either.
Through the year, our share repurchases are anticipated to range from $450 million to $550 million.
For modeling purposes, we've assumed weighted average shares outstanding about 117 to 118 million shares in 2020.
Our capital spending is anticipated to range from $225 million to $275 million.
With roughly two thirds of that spending going towards initiatives to support long term growth.
We remain committed to a disciplined capital allocation strategy. Our first priority remains investing in the business to support long term growth or the opening of new stores and our growth initiatives.
Also our committed to creating lasting value for our shareholders through anticipate a quarterly dividends and share repurchases.
Now concludes our prepared remarks.
Thank you Okay, David will now open the lines for questions.
Thank you the question and answer session will be conducted electronically if you'd like to ask a question. Please do so by pressing the star Keith followed by the digital why don't you touched on telephone if he has no speakerphone. Please be sure. Your mute function is turned off the lawyers signal to reach our equipment. As a reminder, we ask that all participants limit themselves to one question one.
Related follow up once again, please press star one to ask a question and we'll take our first question from a Michael Lasser with you'd be S.
Good morning, Thanks, a lot for taking my question, then Greg Congratulations and how best of luck.
Machine.
<unk>.
My question is on traffic.
You are suggesting that the year will improve.
As it goes on to when can we really expect that traffic is going to get better.
Michael This is Kurt.
Tropic trends for tractor supply as Greg mentioned, the core of the business has been very consistent throughout 2019 and really the significant.
Headwinds that we faced in a particular quarter or more about the compares as we saw in 2019.
And as we look at fourth quarter and transition into 2020.
The traffic headwinds were more related to the.
Whether it's seasonal trends. So looking ahead to 2020 I pointed out to you. The toughest compares in first quarter and even indicated what we've seen thus far in January from less than ideal weather conditions outside of that we anticipate to be able to drive comps in both traffic and.
Ticket in the compares on traffic due east more in the second half of the year [noise].
<unk> increased my I really follow up question is putting the wanting to have to 3% comp guidance for this year in the context of 3% plus long term Comped Guy guide target.
The markets can you stores, we relied on maybe 1% to 2% growth and traffic in 1% to 2% growth in ticket is that you own a reasonable expectation over the long run.
So may argue that given how much how many initiatives have been in place.
The traffic from from a quarter the fourth quarter may signal that.
Traffic growth.
Moving forward might be a little slower.
<unk> for the long term Michael you would anticipate that we'll continue to have a balance of bolt trying to be more specific on either one of those in any particular lear for the long term not reasonable, but I would say that our plans from the initiatives that we talked about expected to be able to drive traffic and market share.
But we also see with the merchandising initiatives that tickets kind of play a key part being 2020 and long term as well.
Thank you very much and good luck again.
And next we'll go to Kate Mcshane with Goldman Sachs.
Hi, This is John neither Sean bit hospice keep machine. Thank you for taking my question.
I guess you wanted to ask about you know understanding the margin opportunity at both ends so feel stop guidance or is it safe to assume that there could be more margin opportunity I pity you know centuries, and do you have to capture unless you need to keep margins flat at the low end ashar.
On page thank you.
Sure. This is correct.
The operating margin rate as I mentioned, we're very focused on maintaining the margin rate in 20 Twond.
Low end and top end of the range. There's a number of variables that can play into the drivers of that and we believe we've got the flexibility and strong plans in place that allow us at both ends of those range of theirs at the top and bottom in their sales mix that can play into that as well.
Well as the team's ability to drive benefit from profit improvement, but even as we've shown in fourth quarter. The team can flex down and managed expenses well. So we we believe we've got plans that will be very focused on either end of that range to maintain our operating margin for 2020.
Centered around 8.9%.
Thank you on off it if I could quickly follow up in terms. This you know just the health of the consumer are you seeing any signs of weakness from the energy economy. Thank you so much.
I'll take that when this is Greg we've seen really no significant overhang.
From the chain and in the oil markets and its only about 10% of our mix anyway.
And so I would tell you that no nothing significant and yeah, we always look for indicators.
Trading down of different things like put in feed in such a that's a pretty good indicator of what may be happening with consumers overall I'm confident we're not saying it out so for right now I'd say steady as she goes.
Great. Thanks, Greg Good luck.
Next we'll go to Scott Ciccarelli with RBC capital markets.
Hi, Good morning, this actually there's thousands dollars on for Scott today, Thanks for taking my question.
I guess just in regards to pet food and obviously you know the recent trend away from natural grain free products.
Her provide us any more based on what kind of hang in that segment and if anything you know kind of what you guys anyway to sort of combat that trend.
Yeah. This is that.
Similar to what current stated on the call earlier, and we mentioned last quarter, you know the green tree trends due to the D.C.N. announcement in early Q3 as last year.
Has caused a little bit of average unit retail decline that we've been very open about where you have got a very robust category management approach that we've been utilizing and actually next week over the course of the next two weeks in our stores.
Oh piece and significant recent activity has returned to respond to those trends will have over 80, new items get launch in the stores will also continue to be expanding upon the brands that are benefiting from the recent trends.
And we'll be launching new brands as well, so you'll see candidate come in or store.
We'll continue to see a new innovation through a four helpline up.
In a new sub brand called thrive.
Well, we're fully committed to continuing to evolve with the trends and Pat and we continue to see pet and pet food as a future growth engine for us.
Got it thanks, and I just one related follow up so it looks like you know our data kind of 0.2 general pet food kind of thing a pickup in inflation 2019 versus more of a deflationary trend over the past few years or so is that kind of something that has manifested in and the result, your results recently across that business.
And kind of what yeah, what would be your census, so what is driving that.
Yeah, I mean, when you look at a when you look at the industry trends that are out there I wouldn't see thing that inflationary trend I would see that's within the branded themselves. So if you look at from the introduction of the premium product in mass in grocery obviously, there were seeing some some price upticks as.
It relates to to their mix. However, when you look across our portfolio you know when you look at the back half year, we did see Sunday. The average unit retail declined just strictly due to the trade down and trade across than some of the Super premium Green products. If it's more the traditional premium products. So.
His point or we're not seeing anything or anything of too much in terms of inflation.
Got it there for me thanks, guys.
Next we'll go to a Simeon Gutman with Morgan Stanley .
Thank you everyone. Congratulations to walk you may dial back in my first question they won't be it's going to say what Rick So you guided.
Well in the Institute loans.
No that's not won't match.
The business given what you're seeing today as it relates to how I think it tends to look at the business to make an assessment and I just wanted to to send that and they didn't hear things have if there's any initial thoughts.
Investment with the business, we can make making over time and any initial thoughts he had been here Vicki can you sort of business.
Mm Hmm Mary.
We really are having a hard time hearing you on your line. So if you don't mind can we get you to written that question.
Yeah look up and said because that better.
Modestly.
Okay.
Yes. Good question was on the 20 <unk>.
That's right.
Flat margin.
You have like that.
Okay, I'll get back into the Q.
Okay. Thank you that's I guess well just moved on to the next question [laughter] clinics will go to a Christopher Horvers with JP Morgan.
Thanks, and good morning, and Greg it's been a pleasure all these years and and congratulations on a on a wonderful courier and how it's great to be working and what's really great to be working with you again, so I'm really excited about everybody's future here.
I wanted to you know so put at questions that both of you. So.
Yeah, even sort of how how do you think about the need to invest here you guys have put a lot of money into the business over the last few years stockyard kiosk roll out buying online pickup on store you know loyalty card and enhancements. So what do you think the big sort of investment buckets that are left is.
I was sort of click and collect something that you think is right for your customer and box size is there sort of like a big data sort of data science need that you'd like to build out just trying to get a sense as well you know what big things are left to do versus you know what you.
What we've accomplished so far and how maybe that could impact spending.
Chris This is Greg I'll start out by saying that you're right. We've made some investments it's a terrific foundation, but those investments or are they getting just to scale I mean, if these things take time and but what we're happy with what we're saying you know whether it'd be a neighbor's club where they'd be in you know that used to say.
Dockyard, the mobile Pos initiatives many of things that we put money into.
You know.
I would tell you that this is a wonderful jumping off point for me and a wonderful entry point for house or from there I think I'll, let you take it thanks Greg.
First off I, just say I'm incredibly excited to be yet to be a tractor at your through special retailer as I said Im opening remarks, where the real clear purpose.
And I'd start with to say, yes, I'm excited about the opportunity to continue to build on the foundation that the team already has in place to drive the business for its Greg said, there's a number of a really strong initiatives that are just starting to get scale.
We've incorporated those into our 2020 plan.
Well I think it's a it's a robust and realistic and prudent plan. The team has a track record of success and there is a strong management team in place I think as it relates to me you know I'm really spending my this is we've got three for me a I'm sitting a lot of time listening and learning right now with Greg.
With the management team spending time in our stores and our distribution centers and everything I'm seeing is only it's even better than what I had anticipated. So I'm really pleased with the first three weeks then.
And as I, you know as they learn more and the team and things of at our views evolved I look forward to sharing with investment committee over time.
Understood.
I'm sort of sort of lot of money put in and.
Figuring out where things are so in a sense a little bit TBD.
Okay Yeah.
[music].
But.
No go ahead of them, if you want to add there.
No I was going to say I think that the that's a fair assessment of me personally I think as it relates to the business I were very executed a very focused on executing our 2020 plan as Greg said in his opening remarks, we're very committed to a seamless transition here you know, there's a very purposeful overlap oh can organized by him and myself.
Well, if the board and we had a a strategy to game plan in place for 2020 odd and as it relates to you know any updates that we may make in our long term strategy. Your targets you know we'll share more with you've added that evolves, but that we have a very clear 2020 plan.
Okay got it and then as a follow up you mentioned that you know two thirds of the of the calm shortfall was was weather. So call that you know maybe 150 basis points do you think the rest was the six days and you know does that suggest that you know you think the the underlying businesses is is it sort of that you did.
Two and a half that you had originally guided for in related to that do you think that do you expect you know one Q comps to be positive given you know the impact to the weather so far.
Chris This is Kurt so there was a number of points in there I'll just take the clarification on the fourth quarter, what was the impact we and we estimate based on the data that about two thirds of the missed our expectation was weather related we have very specific.
Pick weather related items that we sell and we also know when the customer comes in for those seasonal weather trends need based items, there's additional items. They purchase on their trip two thirds of although I'm sure.
Shift in the comp performance, we would package as well.
Weather related and those two categories. The remaining third is pretty well balanced between what we mentioned on we feel like there was a and expect.
In the impact from the six left shopping days and we also mentioned the eight you are shift and the pet side of it. So those two really round out that remain in third.
And at the core of the business as Greg mentioned is strong and the Q merchandise has consistently performed solid comps in all four quarters of 2019 and as you know we've talked but that's the core of our business. That's what I'm fundamental when we take into 2020 and we.
Capitalize on seasonal weather trends as the opportunity exists.
[noise] <unk> on one Q.
A quick on one Q like I said, we anticipate first quarter to be our toughest compare and.
January weather conditions are not ideal at this point, but as its the earliest part of our quarter. We felt a lot of the quarter ahead of us.
And I understand you know Q1 is a transitional quarter and you have us transitioning out of winter and then the spine and the timing of that transition can really shift between Q1 in Q2, so still so much about the quarter and the first half still ahead of us.
Got it thank you best of luck.
And next well go to at Chuck Grom with Gordon Haskett.
Good morning, Congrats and good to both Greg and I'll here, how one for you just kind of pivot off of course is question you know I know, it's only been you know 20 days or so but I guess just bigger picture. How are you thinking about the foundation of the company in terms of store targets, you know the optionality with loyal loyalty with with what you've seen at age.
Dan Macy's and I guess, you know ultimately do you think mate, 9% is the right operating margin for the business to succeed.
Hi, Good morning, I'm, not just start with what I said earlier is that I'm incredibly thrilled to be her tractor supply I. Just a few weeks then doing a lot of listening and learning right now I think probably the best way to answer that would be just explain what attracted me to to tractor supply you know I start with.
It is very much a differentiated leading retailer in the space.
The strong brand.
True reason for being in a differentiated customer base.
Very special culture and unique opportunities for growth I'd also comment that the team has made a number of investments in the last few years, a which are starting to scale, a and you're seeing the benefit today with our customers and we're confident that those will continue to deliver results in 2020.
I also do you think that there's as I said in my opening remarks, an opportunity to continue to become even more interval I into our customers' lives and things like the neighbors club and other other categories that we are pushing on and activities are going to help us do that but I'm very excited to be here.
And as I said earlier as.
I look forward engaging with the death, we community over time as appropriate.
Okay. So no initial thoughts on strict artists are marching to the sport.
We had died no updates to any of our long term targets at this time. This we're still those are still very much of what we're focused on and I think our 2020 guidances, it's consistent with it.
Okay Fair enough and then just on 20 Twond ought to think about what tractor control in terms of sales.
Of course, right, where you guys see the most optionality over the next four quarters in terms of Neighbor's club.
Operating the relationships that you've built up kiosks digital.
I know you got a couple of new brand sitting Toro just just help us conceptualize how are you pick up your in terms of what you guys kerfuffle. Thanks.
Chuck This is correct.
I've mentioned three things that we look at as the tractor supply controlled initiative that we believe benefit us in 2020, and we're going to lead on and we've made the investments first it's the relevant products and services as I mentioned in my prepared remarks, our outdoor power equipment lineup is strong.
Going into the spring summer season, So, we'll we'll lean on the the combination of those brands there as well as the introduction of Triple Crown.
In addition to that secondly, our private label credit card momentum is strong coming off the introduction of the 5% reward back and we'll carried that momentum out of the fourth quarter into 2020, and we believe it's up it's a sales driving asset that we've got and then I'd rank third with that as Neighbor's club.
And how what Actioning the data as we mentioned to be able to not only the pain and communicate with potential lapsed customers, but as a lifestyle. We tailor the ability to find look alike. Lifestyler and then digitally engaged with them is a completely.
New tool that we've got we've started to put that into place in the back half of 2019.
And I guess after those three I'd I'd throw when that we're excited about what John orders in the and the store operations team is dealing with the tractor weight program that came out of operational efficiency, they've taken work out of the back room, and they're moving it to selling cultures, and where we introduced to that.
Earlier in 2019 availability of product scores from our customers were up and cuss and customer service scores as well, let me know if those to increase its positive. The sales. So we also believe fundamentally are there some good traction in that program.
Very helpful. Thanks, Good luck.
The next I'll go to Steven Forbes with Guggenheim Securities.
Good morning.
I wanted to revisit the fourth quarter fourth quarter traffic performance that you could provide a little more color around maybe the cadence of traffic or with or if the weakness was concentrated during a specific period in the quarter.
It really is like if he could you compare December traffic trends versus the average means is very large call out or any any sort of quantification can provide us.
Yep.
Steven This is curve in regard to the traffic trends.
The.
First the primary drivers mentioned was weather related and I point that out because the two real factor is on both constant traffic, we're about comparing up against a strong hurricane in October of 2018, and then the expected positive.
Change and weather conditions in December or not actually occurring as expected and heavily forecasted.
In regards to the cadence an expectation October and November as we expected saw some decline in traffic because hurricanes drive a good heavy amount of traffic you even get the ancillary customer coming in for that destination November was extremely cold last year. So October November .
While traffic was down was not against our expectation. The expectation was we would see more normalize December cold weather and that's really in both total and traffic where the the missed expectation occurred is principally in the month of December .
A quick follow up right, maybe staying with the current if you can just help us better understand the monthly weights as we look out the fourth Corps first quarter. What is January represent as a percentage of the total as reconceptualize right the ongoing whether risk.
[noise] steel, we we don't give specifics, but as we've said in the past the quarter. It the month weight heavier as you move through the quarter. So January is the the weakest in total percentage of the three and marches the heaviest.
Thank you.
And next well go to Simeon Gutman with Morgan Stanley .
Thanks is evolving better now.
Yes patter. Thank you.
Okay. Thank you and ER and Greg Congratulations and good luck in retirement and welcome out like question. Yeah. The first one is on 2020, you talk a little bit historically about getting up leverage closer to 3% at the at the 3% level.
Getting to flattish margin with a little bit less than that in 2020 at least the midpoint of the guide.
You mentioned Curtis and some efficiency that you're getting but are you under spending in any one anyplace have cut back in any any spot.
[noise] Simeon this is Kurt so in regards to long term targets in 2020, our long term targets anticipate that overall in regards to our targets of continuing to invest in the business opening 80.
Ah tractor supply stores.
We can have we can have an assumed 3% plus CCOP and see operating margin improvement. What we also know isn't a year like 2020, where we anticipate that that number could shift below that we can make the necessary investments in the business and we can actually we can.
And control managed to manage the expenses like we did in Q4 to help us maintain that operating margin in a year like 2020, if we were too.
Fall towards the bottom end to that range the team will be as space controlled and nimble and we've done that in Q4 and he if that would be the scenario, we would actually have a lower than normal levels of incentive compensation. As an example, so we believe that we can maintain that margin and.
As we grow the business, we do think the long term plans continue to show opportunity to you could have operating margin improvement.
Okay, and then a quick follow up is on the pet category you mentioned, you're looking at the data and you're retaining your customers can you talk about are you still acquiring customers at the same rate I didn't know if you were careful with your comments because there is a change I mean retaining is good but are you still growing your customer base at a rate that you were before and the pets and.
In Q categories. Thanks.
This is Scott.
As you know when you look out of Q4, specifically like Q3 in Q4 of the ability for us to leverage our neighbor's club capabilities has been really really strong. So we're seeing a nice gains when it relates to a acquiring new customers through utilization of that tool specifically, what Curt was talking about a little bit indeed.
Look alike.
So, yes, we see us continuing to go out and acquire market share and getting a customer some category.
Thanks again thanks.
And next I'll go to Seth Sigman with credit Suisse.
You guys. Good morning, Thanks for taking the question Greg Best of luck in Hell, a welcome aboard a but wanted to follow up on the comp outlook. I guess, you know from our side, we're still not clear as to why if it's largely just weather and you're not really seeing any sort of change and the consumer a comp guidance for this year of wanting to have to three is below that long term algorithm that long term, 3% plus.
And so is that just because of the first quarter comparison or are we missing something so if you could just had a little bit more context on you know why are sitting a range, where you are for 20 comps and then I'll shut them related margin follow up thanks.
No that set this is curve as we.
As we plan to our 2020 year and the guidance that we shared with you. We look at all factors internal and external certainly first quarter. You know plays into some of that assumption, but as we look at the business. We're realistic as to 2020, the while our customer continues to show.
Signs of being healthy.
In 2020 would early signs you there's indications the GDP slowing it's an election year those types of things we had to consider in 2020 on that can play into the consumer. So we anticipate with our initiatives that we've got good momentum fundamentals are strong.
We can drive in the long term towards that target, but what were the what we're presenting to you is it is a reasonable prudent expectation for comp sales in 2020.
Okay. Thank you for that and then so just in light of that comp outlook why is flat the right margins set up for 2020 in other words, you know if you do think that comps could be a little bit more constrained than the longer term potential.
They're an opportunity maybe invest a bit more aggressively this year. If you go back to past periods, where comps are under threex. The margins haven't really been flat or up in those scenarios. So just love to get your perspective on that and then just the gross margin youre guiding to an improvement anymore color on that thank you.
Sure set this as Curt again and.
As we framed up the the operating margin for 2020 trying to send around 8.9% a number of the things that you mentioned is certainly a part of our consideration as I answered earlier question. We believe we've got the.
The initiatives in place that can allow us to with profit improvement in efficiencies allow us to offset some of the pressures on the business, particularly wage pressures to be able to maintain that margin in other cases, we have initiatives in place that helped offset some of the investor.
Yes, we want to make in the business so.
The.
The way I'd frame it up for you is we've got a number of variables and levers, we're polling and allowing us to make the right investments if the comps were at the lower end, we made flex on it too to allow us to maintain around the 8.9 as well. So we're going to manage this real time and we're going to.
Worked with the levers and flexibility they have and I'll just point back to to Q4 again and just show our ability to manage that is being nimble as an example.
Thanks, very much and good luck everybody.
Thank you.
And next well go to Peter Benedict with Baird.
Well you guys. Thanks.
Congrats Greg and welcome to how look sort of working with you.
Bottom line had been asked here I'm just going to hit a couple of quick ones first just.
Maybe I'll just for except that the timing of the store within store set Rollouts and also the skew local localization efforts any color on has been a cadence and 20 twond.
Yeah. So first of stores in the store and you'll start to see those to come to life. As we do you said throughout the year, where we target tea brand. So you know, it's our goal not only to build a strong exclusive brands that also make sure we incurred with the leading brands in the industry and so as we do reset such as here in Q1, I mean, we'll see toiled come to life.
In the store as your Azure there will continue to see purina come to life as we do our free feedback resets. So those type of things will come through out the cadence of the full year as as we touched those programs a when you look at localization and store or localization.
We just now or in the process of finalizing standing up our assortment optimization platform. So we'll be rolling that out methodically, making sure that obviously, we do that that's proven as you can while at the same time. When you think about localization. The team has been really focused on partnering with some of our key suppliers as.
Well so you take the spring you take the spring season that were that we're rolling into here, we're going to make sure that were set and ready to go to capitalize a so you know partnerships, we have with key suppliers such as Scotts Miracle Gro leveraging their analytics team, making sure that we have the right products in the right store at the right debt that's another PTP.
So the localization of the team is focused on to make sure that we can capitalize on the traffic drug cells.
Okay. That's helpful. Thanks for the maybe one for occurred so like I I know looking at the business in house is really the way to do it.
For tractor supply, but as you think about the one after 3% comp range for the year does that envision maybe any the quarters being above or below that range may seem reasonable maybe one to below that but maybe more opportunity for Q and any color on just how you're thinking about it Kurt would be helpful. Thanks, So much.
Yes, Peter I'd say generally there's there's low end at high end up across the quarters and as I as I mentioned first quarter is gonna be our lowest but nothing of significance to call out beyond that range of of the 1.5 to three in any particular quarters.
Okay fair enough. Thanks, so much guys.
But I think at that time to slip one more question man.
All right well go next go to as Zach footing with Wells Fargo.
Thanks for fitting me in I'll keep my quick first question on the profit improvement plan, how much that come into play over the past two quarters, particularly with <unk> expansion on sub three comps and Im curious if you could talk about what's next for the plan and how do you think about 2020 opportunity to drive further furniture.
<unk>.
That this is Kurt.
On profit improvement in the back half of the year as you know we've been we've made investments in store in DC productivity indirect procurement and transportation.
In the back half of the year. The one area that really drove the key benefit coming out of it met would be the transportation side of it we're able to jump on that early and late 18 and back half of your as you know we saw benefit from transportation. We're excited about the other categories, but there's been a balance of what we've had to do invest.
To make the changes in engineered labor standards in the distribution center, we had to build an indirect procurement team and the work we've done to roll out all the tools and training in the stores. So the opportunity and those three other areas is now as we begin to roll that out and it matures and we train so.
These are multiyear benefits that just early in the maturity in a lot of runway in those three other categories.
Got it thanks today and then.
Sorry, just in the pending fee categories. Just question on your auto ship efforts do you think this has been offering it resonates with your customer base and they just given the economics.
This area, we should expect leaning on corn for.
So yes itself. So yeah, we've obviously a implemented from the subscription based services Oh throughout the year, we see it as an opportunity long term that will continue and to continue to test into and make sure that we do incorrectly so you'll hear more about that and you know in the future, but obviously the.
Capability that we brought to life, we do Oh, we do anticipate leveraging as we move forward to make sure we continue to drive market share.
Got it appreciate the time.
Great. Thank you, Doug Yeah, I never to have announced great. Thanks, Mary Winn and I think everyone for joining our call today I in closing I want to say once again, how delighted am they had the opportunity to lead this extraordinary retailer.
What is made tractor supply special is and what we've continued to make a special.
I believe our business is well positioned across the retail landscape as it a company that has a very clear reason for being in its relevant to our customers our commitment to provide legendary service and great products. It everyday low prices will continue to be the foundation of our growth I look forward to hearing more about our plans to strengthen our position in the coming months.
Thank you all for joining the call today that are wrapping that assaf Marianne you ran didnt have any crescent point, you're talking to you on our first quarter common April . Thank you for your interest in tractor supply and have a great day.
And that does go todays conference. We thank you for your participation you may now disconnect.
[noise] [noise].
[noise] mm.
[noise].