Q1 2020 Earnings Call
Good morning, ladies and gentlemen, and welcome to tractor supply Companys conference call to discuss first quarter 2020 results. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, we ask that all participants limit themselves to one quick.
And then one related follow up please be advised that reproduction of this call in whole or in part is not permitted without written authorization of tractor supply company and as a reminder, this call is being recorded.
I would now like to introduce your host for today's call.
Mrs. Mary Winn Pilkington senior Vice President of Investor and public relations for tractor supply company Mary Winn. Please go ahead.
Thank you Christina good morning, everyone on the call today are held our CEO and Curt Barton our CFO after our prepared remarks, well open the call that for your question Seth eased up our SVP and Chief merchandising officer will join us for the QNX Sasha.
Now, let me reference the Safe Harbor provisions under the private Securities Litigation Reform Act is 1995. This call may contain certain forward looking statements that are subject to significant risk 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 really reflected in our forward looking statements are reasonable we can give no assurance that such expectations or any of our forward looking statements. We proved to be correct and actual results may materially differ from expectations important risk factors that could cause actual results could differ materially from does.
Like that in the forward looking statements that 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 today Scott investors should not assume that statements will remain operative at a later time tractor supply takes no.
Obligation to update any information discussed in this call.
Given the time constraints in the number of people want to participate we ask that you. Please limit your questions to one with a quick related follow up I. Appreciate your cooperation we will be available after the call for follow up now it's my pleasure to turn the call over to help.
Thank you Mary Winn and thank you to everyone for joining us. This morning want to start off by recognizing this is an extraordinary time [noise].
First and foremost this is a human health crisis and secondarily, a global economic crisis, we hope your loved ones and your family are healthy and safe.
We are living in a generational moment that it's unprecedented.
Each day requires a close inspection of the very dynamic external environment and a clear determination of how will respond.
Well our call. This morning is about our first quarter results will focus more on updating your where we all with the crisis at hand, how we're navigating the uncertainty and how we're responding to strengthen our business.
Let's start by taking the entire tractor supply team, who has truly come together to ensure we are taking care of the health safety and well being of each other and our customers. This is our absolute sole number one focus priority.
The culture and purpose driven nature of tractor supply has served us well in response to get this critical time and it's never been more clear a more evident what an advantage. This strong foundation is to the company I'm incredibly proud of how the tractor supply team and our vendor partners have stepped up to every challenge.
Our goal is to make sure we come out of this pandemic stronger stepping back let me share with you how we've approached this crisis.
As the virus began to gain traction in China, we put together a cross functional team. It was dominantly focused on our supply chain. This team worked with each of our factory partners had a purchase order level to identify issues and coordinate substitution products and other merchandising actions that we needed to take to ensure we had product to support the spring.
In summer seasons.
As the Cobot 19 evolved and it became more clear the it would impact the United States in our retail operations here, we chartered a global pandemic response team. It was grounded in our previous business continuity planning processes that we put in to get put together.
This team has a broad reaching cross functional team did its been meeting twice a day seven days per week. Since late February did this included not only with tractor supply team members, but also supplemental third party MEMP members are they can stick can help us odd, but medical as well as risk in liability.
They are empowered to move fast and make decisions. They have served as the NIM central nervous system for the bulk of our response.
As an essential needs based retailer we are focused on being there for our team members customers and communities in this unprecedented and uncertain time.
I'd like to take some time to highlight some of the ways that we've responded to the cobot 19.
Starting on March 16th for our frontline team members, we began awarding appreciation bonuses for example, hourly team members receive an incremental $2 per hour.
Early on we extended sick pay leave my two weeks for both full and part time team member team members, who self report contagious flu or cobot 19 like symptoms.
We do not want anyone to come to work, who is sick and we've been very clear on that with our team members. If they're sick, we want them to stay home and get better to date, we've had over 1500 team members utilize this sick pay benefits.
We recently announced 100% coverage of Kobin 19 medical treatment for team members under the company's medical plan and we're also waving cost sharing fees for telehealth visits we have increased personal protective equipment for team members along with installing plexiglass barriers that cashiers stands in stores and expedited the rollout.
Of contactless payment options.
We embarked on her most ambitious hiring drive ever with plans to fill more than 5000 full time in part time team member positions across our stores and distribution centers.
Since our announcement, we're seeing significant increases in applications and hiring an all time, a hiring week highs.
They continue to would enhance the safety of our in store shopping experience. We've added dedicated grieder at every store to drive awareness of social distancing monitor the number of customers and our store and provide additional cleaning supports particularly carts.
We also have modified or store operating hours and added a designated shopping our for high risk in senior 16 older while adding store labor hours to improve customer service and safety.
We've added incremental inventory to support high velocity consumable skews that our customers count on us to have in stock as their to fit dependable and essential supplier.
We also launched our first national advertising campaign in over a decade to say, thank you to our team members and customers.
Over the first 10 days that our first TV commercial was shown it was seen by over 2200 times, where the reach of approximately 700 million impressions.
And then just last week released our second add as a part of this campaign.
To support our team members in communities Weve made a commitment of $2 million. This includes a half a million dollars to the existing tractor supply employee assistance bond to assist team members most impacted by cobot 19, and one of the half million dollars for the establishment of the tractor supply Company Foundation and this foundation.
We committed to the growth and development of our rural areas with initial focus on the cobot 19 recovery efforts in these rural markets.
This is a highly fluid crisis.
And these are historically unprecedented times there were a broad range of outcomes of how our business will perform in the coming weeks and months depending on the how the crisis evolves. We're doing everything we can to think through how the next several months will play out we're leveraging our past experiences we're leveraging numerous third party resources all.
To assess the uncertainties and it takes very calculated actions. So many uncertainties, we're thinking about or how the macro economic factors will evolve, including unemployment and GDP the impact of the crisis on consumer shopping patterns.
The impact of legislation such as the cares act on consumer and small businesses.
The degree of quarantine measures that may still occur either in the near term or in the fall season.
And then the degree of uncertainty in the economy for the rest of 2020.
As well as did degree the incremental cost of doing business as an essential needs based retailer in the current environment.
With these uncertainties, we've taken action to increase our cash on hand, we suspended our share buyback program Weve Reprioritized for capital spending we're controlling doesn't end to two and we're controlling discretionary costs all the while maintaining our dividend.
Now, let me talk about some of the other things we're seeing in experiencing.
We are seeing significant changes in consumer shopping behavior from trip consolidation to their preferences for contact list payments to their preferences for curbside pickup and home delivery.
And I believe the crisis represents an opportunity for us and we're moving rapidly to capitalize on those opportunities.
We are reprioritizing, our capital spend to reflect the changes were seeing at our consumer shopping behavior.
And a few things that we've announced recently three weeks ago, we launched curbside delivery for our buy online pickup in stores nationwide.
At the same time, we also established to dedicated parking spots at every store in the country that helpful Bottomline pickup in store or core curbside deliveries.
For curbside delivery all the customer has to do is order online when they get an email that says its billable to be picked up they drive to our store they Poland. One of these two conveniently located parking spots they call. The store and then we bring the items right out to their car in a very contact this way.
We've seen significant increase in buying online pickup in store orders and customer adoption of curbside pickup has been remarkable with more than 70% of our recent biomark pickup in store orders utilizing the curbside pickup option.
To enhance the safety of the customer shopping experience and provide greater convenience, we increased by 50% our mobile point of sale hardware capacity in our stores.
These additional devices allow our team members to to do a number of activities, including line breaking where we've got queuing occurring at our registers to conduct outside transactions that may be incremental orders occurring on a bops transaction order to help fill up propane and be able to allow the customer to pay right.
There are and they also allow us to execute curbside delivery, we've got an app that can fully check off the delivery all contact plus.
In less than three weeks, we expanded our same day next day delivery offering from about 400 stores or 20% of the chain to all stores.
This is a great example of how we're accelerating our capabilities to be more relevant to our customers. We realize this could become a point of differentiation for tractor supply and we move fast to capitalize on our customers' needs for delivery in partnership with ready we had plans over the coming year to skew continue to increase the number of stores that offered same day next stays a delivery option.
However, given the escalation of the cobot pandemic customers demand for delivery services became more pronounced and so we responded together with Rodis. The team worked and we accelerated the ramp up the same day delivery across the remaining 80% over stores again doing this all in about a three week timeframe.
Tractor supply now offers customers the safety and convenience of same day in next day delivery on almost all the inventory in our stores nearly 15000 items that our customers need to live the life out. There. This includes things like livestock feed dog food power tools Tillers riding lawn mowers she.
Second coops and even more they can order all these have havent picked out of our stores loaded into trucks and cars and brought to their homes, all without having to everly their farmer home.
We're now the nation's first major general merchandise retailer to offer same day delivery from 100% of our stores.
Overall during this pandemic our feedback from our customers has been very positive with improving customer satisfaction stores.
Scores when I'm visiting stores, our customer share with me, how important tractor supply's to them and their families. You can see it on all our social media like Facebook and Instagram upbeat customer feedback is very inspiring to the team and reinforcing of them to to do what they're doing which is service.
With our customers and take care of their team members.
To briefly touch on the first quarter the tractor supply team delivered strong comparable store sales and strategically invested in our operations as the Kobin 19 crisis evolved.
Importantly, and most importantly, we were there for our team members and customers as the dependable supplier of needs based essential.
Prior to early March we were on track for an estimated comparable store sales growth in the range of 1% to 1.5% for the quarter.
As one of the warmest winters on record impacted our seasonal businesses in January and February as well, we're lapping a strong 5% comp in the prior year.
Over the last three weeks of the quarter, though as co bid 19 rapidly evolving we experienced a strong increase in our sales volume as our customers relied on us, but the essential everyday products they needed in the face of this crisis.
As the last several weeks to the quarter showed our customers view us as a critical as a critical need as critical to the needs of their animals and pets, just as the grocery store is to the needs of their family.
We experienced strength in key essential categories like livestock feed pet food heating fuel and other core consumable products as our customer stocked up for their anticipated needs.
Our E commerce business experienced remarkable growth as we move through March and that growth is continuing in the second quarter.
The importance of our store network is evident with the strong growth and buy online pickup in store and it's a more cost effective way for us to fulfill these online orders.
This is another area, we're seeing rapid adoption by customers in the latter half of March nearly 30% of our buy online pickup in stores were from new customers.
Along with that 65% of the orders were by customers that were using this service for the first time.
As we saw the stock up activity start to slow our sales activity has continued to say strong as we're now three weeks into the quarter.
Categories that involve a living more sustainable life and enjoying the outdoors are experiencing robust growth.
Our customers are engaging in activity such as backyard gardening lawn care landscaping homesteaded fencing and backyard poultry. All these categories are strong and they're playing to our strengths.
From a customer perspective, we're growing with existing customers, but also gaining new customers within our neighbor's club, we're seeing existing customers, making their first purchase in other categories in pet food in livestock feed poultry departments, starting to cross shop like they have not before in addition were reactivating members.
And we're experiencing record highs in our new customers.
In summary, the first quarter represented solid performance by the team and the second quarter is off to a strong start I'm incredibly grateful to our store teams, who are the heart of our relationship with our customers and our distribution centers, who keep the critical supply chain moving as we look forward to reopen the economy I'm very proud of the opportunity for track.
After supply to participate.
In the President's Great American Economic Revival Committee. It is an honor to represent the company and Rural America.
Now I'll turn the call over to Kirk to go through some financial highlights and I will come back to share more of what we're doing proactively.
Thank you how and good morning, everyone.
I Hope you your families and loved ones are safe and healthy.
I'll walk through the highlights of our results for the first quarter and then share what we're doing to respond to the challenges of covert 19 from a financial perspective.
For the first quarter of 2020 net sales increased 7.5% as we had strong comp store sales growth of 4.3%.
The comp store sales growth was driven by a 5.4% increase in comp average ticket and a 1.1% decrease in comp transactions.
The decline in comp transactions resulted principally from two factors first the difficult compares in January and February due to the prior year strong winter selling season.
And second we believe consumers consolidated shopping trips in March under the current environment as Hal discussed.
Our average ticket was driven by strong units per transaction growth as customer stocked up for essentials.
Commodity price inflation had a slight impact on average ticket as inflationary trends moderated during the quarter.
As we shared previously January and February and total tracked in line with our expectations with March up 12% given the stock up sales we experienced.
For the quarter, we had robust growth in our consumable usable inedible categories with declines in discretionary clothing, and footwear and to a lesser degree declines in our winter seasonal categories given the milder winter.
Big ticket sales increased in line with our overall comparable store sales growth.
Safes heating stoves tillers trailers in generators were drivers of this growth.
Partially offset by declines and snow blowers and compressors.
For the first quarter gross margin was essentially flat to prior year at 33.8%. The gross margin performance reflected a favorable benefit from transportation costs as a percentage of net sales.
Our efforts in 2019 helped drive lower year over year average carrier rates as well as reduced average stem miles fuel rates were modestly favorable compared to prior year.
The transportation benefit was offset by the strong sell through of consumable merchandise, which generally carry below chain average gross margin rates and greater markdowns of winter seasonal merchandise.
Including depreciation amortization SG nay as a percentage of net sales improved by seven basis points to 28%.
The decrease in as today as a percentage of sales was primarily attributable to leverage in occupancy and other fixed costs from the increase in comparable store sales and a net benefit from legal settlements primarily from the favorable settlement in the visa Mastercard interchange fee class action lawsuit.
Partially offsetting these favorable items.
Certain first quarter costs as a percentage of net sales were higher than the prior year.
These were driven by approximately $7 million incremental costs from cobot 19, such as investments in team member pay and benefits the impact of additional labor hours and supply cost dedicated to covert 19 cleaning actions.
And the charitable contributions through our tractor supply foundation to support our team members and our communities during this crisis.
Additionally, specific to the Frank for distribution Center, we estimate approximately 10 basis points of impact on SJ as we had not fully cycled the opening of this new DC until the latter part of the first quarter.
All in we are pleased with our performance, which helped to contribute to modest operating profit increase.
Diluted earnings per share was 71 cents an increase of 12.7%.
For the quarter, we repurchased approximately 2.9 million shares of our common stock for $263 million and paid quarterly cash dividends totaling about $41 million.
As we move into the second quarter demand for our products and services continues to be very strong. We believe tractor supply is benefiting from the favorable spring weather and the consumer trends associated with Covance 19.
As a team the stores and the distribution centers are well prepared for the spring the busy spring summer season, we're focused on capturing current opportunities while managing for the long term.
Turning now to how we're responding to the challenges of Coven 19, we are laser focused on what is within our control, we're looking to capitalize on opportunities and investing in the future, while balancing liquidity and cost mitigation.
We are actively managing our supply chain and inventory levels to support key categories, where there are strong sales trends.
On cost management, we're reviewing all discretionary spending and reducing spending that isn't appropriate given the macroeconomic outlook.
As an essential needs based retailer, we're faced with an elevated cost outlook for the second quarter in the range of a net incremental cost of $30 million to $50 million.
These incremental costs are attributable to the appreciation bonus for frontline team members increased store labor and higher safety and cleaning costs.
As this is a very fluid situation. The degree of how these incremental costs will play out for the second quarter as well as the second half of the year will be determined by the length and depth of this crisis.
We continue to forecast capital spending in the range of $225 million to $275 million.
We are deferring spending in certain areas, while accelerating spending in digital and other more consumer facing areas to capitalize on the trends, but how mentioned.
In regard to our new store openings, we remain confident in our 2500 store target and we are currently on track with our new store openings scheduled for 2020.
That said given the practical realities created by the disruption of Cobot 19, we believe there is potential for the timing of some of our new store openings to be delayed this could push some store openings to later in the year or even some into fiscal 2021.
Finally, I'd like to take the opportunity to provide more insight into our ability to navigate cobot 19 from a liquidity standpoint.
Given our financial strength, we are confident that we'll be able to maintain appropriate liquidity as we manage through the current crisis.
To free up additional liquidity within our existing credit facility, we executed an accordion loan of $200 million in March and just this week, we executed a 350 million dollar loan within our existing bank group.
We currently have over $800 million on hand in cash and cash equivalents with approximately 165 billion of additional liquidity available if needed.
To further enhance our financial flexibility. We have also temporarily suspended our share repurchase program effective March 12.
While our quarterly cash dividend is determined each quarter, we do not anticipate suspending or reducing our dividend at this time.
Given the unprecedented cobot 19 crisis and the significant economic uncertainty. It introduces we made the decision on April 7th to withdraw guidance. Once we believe that we have sufficient visibility to reinstate guidance, we'll do so.
Tractor supply successfully weathered business cycles overtime, I believe our strong financial position will continue to serve us well in the future and we're taking the steps to position us to come out of this crisis a stronger company.
That completes our financial overview I will turn it back to Hell.
Thank you Kurt.
Our top priority is the safety and health of our team members and customers.
In the current environment, we are more relevant relevant than ever to our existing customer base.
At the same time, we are cry, acquiring new customers and seeing market share gains as a result.
We are taking this opportunity to invest in the business.
Due to the right thing to support our team members, but also to strengthen our position it seems like a long time ago that many of US we're together on March 10th.
During that time, we share with you some of our early insights on the business and all those items that we discussed all still are true and are very relevant and you've heard many of them sprinkled through our comments today, we will certainly be leaning into those as we make our investment decisions through the second quarter and the second half of the year we're not.
Losing sight of the long term.
During these times, we will focus on the strategic opportunities to serve our existing customers. While also expanding our reach I believe that the strength of accompany as shown in a time of crisis.
Im confident this company we're navigating this one by leveraging our strengths and pursuing opportunities that will help us thrive over the long term.
Tractor supply is very resilient business with a proven business model in closing my thanks, and gratitude go to the entire tractor supply team. Thank you.
With that Mary when we're ready for acuity.
Great Kristina will open up the lines for questions.
Certainly at this time I would like everyone, who would like to ask a question to press star one on your telephone keypad Star one on your telephone keypad to ask a question.
Your first question comes from semi on Goodman from Morgan Stanley. Your line is open. Please go ahead.
Thanks. Good morning, everyone. My first question is on.
Thing about demand realizing in respecting that theres no guidance and we're in a fluid situation.
Thinking about the stocking up in your business, maybe a hangover period and then some normalization how are you thinking about it and can glean anything since you have a pretty diverse store base, yes Europe.
More or less opened but states of different restrictions and so maybe you have some insight around timing.
But just trying to think if we're going to see some peaks and valleys here as we move through the next few months sort of quarters.
Hi, Steve and good morning.
Talent.
Yes so.
Maybe I'll just kind of walk through a little bit around kind of the three phases that we have seen in our business and then just talk about how we're thinking about it.
So the first phase is exactly as you articulated the last three weeks of March we saw subsidy to stock up behavior material stock up behavior as we said our them in the month of March our comps were 20%.
For those three weeks Arca sorry, my apologies for those three weeks arc month, our comps were 20% with a cup of Mark the comp of March 12%.
And that was really driven in areas like livestock feed and pet food and things like propane. These very essential elements grocery like categories that our customers rely on this for.
As the first kind of weak of quarantine really took hold across the country that first week of April we did see some some early give back across the hasnt really more than just just a few days.
And then.
Really both for the full three weeks of April here as we set our sales have been very strong and they've really transitioned from kind of livestock and pet foods.
Stock up too much more of the things that I shared earlier on around.
The lights out here lifestyle things from home Steadying, and Vince management and fins building, two poultry and chickens in coops.
To sustainable living to gardening to landscaping.
To lawn care all those things are really what are driving our business right now and what we're finding is that.
Our existing customers are shopping us Theyre cross shopping categories.
A more and an increased way, we're seeing reacquire re activated customers customers that have a shop with us and over 12 month in the store.
And we're seeing that new customers in our store at an all time high.
What I'd say is now going to transition a little bit talk about how we're thinking about it.
There are a variety of goes ins and goes out that are impacting our business and we are monitoring all the data on a minute by minute hourly basis to take very calculated decisions on how we're driving the business one big.
Theres several factors and I'll hit each one of them quickly one big factor is the fact that 50% of retail is closed.
And so pick your number even if GDP is down 20, or 25% and there is a much smaller pie.
But there is only 50% or retailers so while it's a smaller pie there is a bigger piece of the pie for four of those retailers that are that are open.
And how that plays out as there has been a big category shift to spend during that time, if you look at things like foodservice and retail and.
Clothing, and apparel and and entertainment and travel all those are way down significantly down and I think theres a big there's there's a significant amount of category shift happening across consumer spending right now that we're benefiting from.
The second thing is I would say is where our stores are located.
I think youre seeing is widely and talked about in in media and you can see in the case loads that are reported publicly but we can also see in our results that the more rural the store is the better the performance of that store is and.
As we all know just the decoded cases are as a percent of population not as dense in those areas.
And also the are the rural areas. The country have remained kind of more so open during this during this.
During this time.
The third thing I talked about is convenience.
Our stores both the format size.
The work we've done on our website to create convenient fulfillment options.
And our added the location of our stores typically with a very accessible parking lot.
I think have benefited us from a convenience and being in inviting perspective no now those are a lot of the things that are positive some of those could have some shifts that go against us I'd say on the flip side. We are absolutely watching how are the reopenings occurring how as GDP occurring its consumer spending starting to shift as things start to reopen and what is.
Is that going to mean for US. We're also just watching unemployment overall, we're starting to watch unemployment, how it might affect rural areas and with some of that rural benefits start to give itself back if certain Mitch.
Industrials industries that are in rural areas don't reopened or continue to stay close.
We're watching all those all those nuances Newbury very closely and I'd say collectively up until now they've been very favorable for us.
But.
It's very uncertain, how they'll play out over the next.
Month.
Back half of the year and really until we reach to either a new normal or a vaccine we get back to normal but those are many of the things that we're looking at in a lot of goes as it goes out.
Up until now very.
Going our way, but we're being very calculated in all the actions, we're taking for anything you'd want to add no I think you hit that and we're recognizing that.
The favorable items and Tailwinds today can shift at any one point in time and it's just there's a lot of uncertainty and that's I think what's reflected in the prepared remarks in the release that we issued today.
That's fair my one related follow up is anything to glean positive or negative yet in oil markets. You can understand the premise of that question.
Yes, I mean this is this is correct I mean, certainly the oil market is a very fluid situation. So we're watching it very closely.
And right now.
Our data showing us that we're seeing limited impact or decline, but we recognize.
How quickly and how fluid the situation is so.
Two points, maybe to give you on that on how we're looking at it.
First I'd say, we do anticipate based on the forecast and the fact that there was such a strong supply with a real.
Softness in the demand for oil that Theres got to be some supply taken out and so the pressure on that local economy will likely exist.
We do believe though this is still somewhat different than historical experiences that impacted tractor supply like in 2016 and as an example in 2016, we saw after coming off a peak.
1800 rig counts went down to about 400, and an 18 month period of time.
In 2020, we're seeing that the rig counts of sustained over the last year. So around seven to 900 little over 700 today.
Various forecast shows that that may be cut in half and you could be seeing 700 down to 350, so quite a bit different in regard to the decline.
The second point is just remind around our exposure.
Our about 10% to 12% of our stores are in markets, where there is oil economy, and historically only a percentage of our products have been impacted so it's a percentage of product in a small percentage of our stores.
And we will be flexible nimble on our.
And flexing in our product.
But while this could prove to be.
A headwind in the near term. It again is a small percentage of stores and we believe that the strength of our business model is need space can can certainly performed well in the situation.
Thank you good luck.
Your next question comes from Michael Baker from Instinet. Your line is open. Please go ahead.
Hi, a couple of follow ups, there and what have time to start to see but I commend you on on the job doing I'm wondering if you can quantify some things for instance, the.
The spread between some of your more rural stores or stores that aren't in as world Rural locations.
Or even quantify April to date relative to the 20% you're running towards the end of March.
And I guess, Alaska upfront to the extent that you pass on quantifying, although I think it would be helpful. I.
I did want to ask about the cost why why are we looking at 30 to 50 million in.
Second quarter versus only 7 million in the first quarter understanding about the impact in terms of the number of months in the second quarter could be longer horses only started towards the end of March but still it seems like big increase opex.
Hi, This is how long and I'll answer the first.
Couple of components of the question and then turn it over it occurred to handle the last part of the question.
We're not prepared today to share specific numbers, but what I would say as we are seeing.
Material differences it first let's start with all of our stores are generally kind of rural or suburban.
And we have kind of shades of gray even in the context of that the way, we evaluate and look at our stores and I guess, what I'd say is the more world. The story is the better the store is performing it speaking generically.
And then the closer to the city is to an urban area. The lesser the stores performing is kind of speaking generically, we can kind of math that out and really see the gradients that those sales performance across almost any any category and so.
As you all know the bulk of our stores are enroll America and core Rural America. So that is benefited us favorably and I do think many other companies have been talking about a very similar trend.
And then on April to date, I think what we've just say is the.
The growth in the strength that we saw in March has continued into into April and we're very pleased with our April results. So far as we said the the what customers category behavior has changed significantly.
And in my view in a very positive way.
Into category, demonstrating the essential needs an orientation of our business.
And into the kind of People's lives and their livelihood and their families and their needs and it's gotten very broad across landscaping gardening sustainable living.
Fencing homestead thing.
Home care.
Things that are really speak to the fullness of the product offering that we as a business carry so role stores very strong April today continues to continuing the momentum for March and alternative it occurred and talk about the cost.
Q1 versus Q2 sure. Michael. This is this has occurred and in regards to the range of these additional expenses and and the difference between Q1 in Q2 first let me just point out the differences.
Between the quarters.
You recognize from some of the business updates and releases we started to produce in.
In the mid part of March and later that the efforts that we took in regards to wages labor.
And safety and cleaning began in those last three weeks of the quarter. So.
Those expenses that we pointed out for Q1 were principally in the last few weeks of first quarter and the expectation as Weve continued do that and more just extends throughout the second quarter.
Let me just talk about what these cost represent and then how it plays out.
The bulk of these costs about 80% roughly is labor related or benefits related and how spoke to much of those in his prepared remarks. The most of the remaining 20% is for supplies and safety and cleaning.
And how that plays out throughout the quarter or even into second half as I mentioned really depends on the extent in depth of this crisis specific to Q2 below ended the range assumes that these efforts play out through all of April and May the high end.
At that range would assume that we extend all of the wage the benefits or cleaning if the crisis would require that all the way throughout the second quarter. So thats. The way you can think about the cost and how would impact into the second quarter.
Thank you talked about a related follow up with how sounds like some of the sale trends in April strong, but different mix. So I presume that would have a less.
Negative impact on your gross margins.
That being less dominated.
More bye.
Outdoor areas, which I would think would have better margins than Q product is that a fair assessment.
Yes, I think thats roughly fair the other the other thing I'll add is and again, we will see how the next few months play out.
But like most other retailers that are open we have pulled back on discounting on coupons on promotions.
In the spirit of not trying to drive.
Too much traffic on one day driving queuing just trying to have more of an everyday ongoing.
Really what's the core of us anyway in everyday low price business, which is what we do well everyday.
And so I think.
We'll see how the next couple of months play out and whether or not we you know how we need to manage that going forward that be thats something else that.
As part of our strategy that we've been trying to implement.
Great I appreciate all the time thank you.
And we ask that all participants limit themselves to one question and one related follow up. Thank you. Your next question comes from Steven Forbes Guggenheim Securities. Your line is open. Please go ahead.
Good morning.
Well I wanted to.
I wanted to start with the already partnership right clearly a significant accomplishment right to roll up the program in such a short period of time.
What about how could you are same day next day delivery offering of all right. I believe you were have been testing a few options over the past couple of years. So what made rodis the right choice today.
And or should we expect incremental investments to maybe alternative forms.
We're options throughout this year as you as you test and learn.
From that from this initiative.
Hi, Stephen is how big is so much for your question have you are doing well.
Yes start at the highest level I'd, just say our aspiration is that.
Customers can buy anywhere anytime and get it delivered or picked up or shop with us in any way they want and we talked a little bit up its in early March and continuing the digitization and omnichannel efforts for for tractor supply.
Given the coven 19.
We rapidly accelerated.
The rollout of same day next day delivery and I'm, just I can't say enough about the flexibility and the speed of urgency and just the of the implementation precision of Rodis of our stores and our technology team.
Really get this executed.
And in a really good way I wrote has been a partner of ours for some time.
I have a really high regard for them I work to then when I was at home depot over five years ago now.
They are they serve a large number retailers in a similar similar capacity.
And since we already had.
400 stores rolled out with them.
From a speed perspective.
Moving national with them made the most sense and they do an excellent job I've had several orders in the last couple of weeks delivered myself as has hurt.
What I would say as though we know that we need to have a best in class solution and that requires us to test a variety of options.
And so we're in the process of doing that we had the rodis solution.
As they have kind of built out and it's kind of their normal ready solution in all of our stores right. Now. We then have taken a subset of stores. We have two different subsets of stores. Each 250 in size. We're over the next two mines, we will start rolling out some different pile pilots.
One of those will be.
A dedicated truck and a dedicated trailer and a dedicated driver that are all owned and operated and staff with a tractor supply team member.
It will be a tractor supply branded truck tractor supply branded.
Trailer and also tracked by team member.
Who will be responsible for the deliveries. They also we'll work our stores to do.
Additional BTB intercepts and to drive kind of that.
That more salesforce oriented like delivery model and then in another 250 stores were working with Rodis to replicate.
Something in between their offering and what we're doing with our own branded truck.
To have a dedicated truck and a dedicated trailer expands the offering of products that they can deliver also slightly lowers the cost and we'll evaluate those three offer offerings over the next.
Few months and then provided further update and then of course rollout the solution that we think.
The most needed by our customers, but again in summary, we know that this is where we have to go incredibly pleased with the speed at which we moved.
And we're continuing to test and pilot to make sure. We've got the rights solution and at the end. The day, we're committed to taking advantage of this opportunity and as we get to our new normal and hopefully back to normal for tractor supply to have emerged in a much stronger place than we work when we started the current of ours.
Thank you for that and then just a quick follow up.
I think I caught you mentioned.
The strength in new customer growth. So I don't know if you can provide some color on how these customers.
Maybe weather demographic, where there are there baskets have compare to the average customer at our they are they shopping.
Multiple categories or or just just a few.
Then comment maybe on the initial initiatives right.
Around customer retention.
As you think about.
Growing your customer base.
As I said in my prepared remarks, we're seeing unprecedented really record breaking new customer shopping with tractor supply.
And those customers are shopping with us both on our ecommerce platform as well as in store, they're leveraging byline pickup in store curbside delivery as I mentioned earlier, there is a large percentage of new customers that are using that.
But as they shop with us inside of our stores, they're shopping across a whole range of categories.
And whether it be pet food or whether it be more sustainable lawn care landscaping type offerings, we're seeing broad shopping behavior from them and we're seeing him really engage in many of our new offerings that we rolled out in the last few weeks, including curbside curbside delivery.
As it relates to customer retention.
Really pleased with the efforts that the marketing team.
Has taken over the last few weeks as we've gone in and put in a welcome to tractor supply kind of customer kit in place and day One day seven day 14, what are we doing with these customers.
How are we touching them, how reminding them that we're here for them how are we continuing to engage with them, we're doing that and we're doing that not only just in the generic way, but we're also doing it based on the specific categories that they purchased and the way they purchase with us and so they bought online with this for the first time that way, we kind of say hey, one that great hope you enjoy your experience.
Let me tell you about some other things we're doing it they bought pet food, we're saying hey, thanks for buying pet due by the way Consigner subscription for US, but you also have a bunch of other categories you can shop with us So a really.
Textbook like kind of new customer Onboarding program that weve rapidly implemented over the last few weeks to make sure that these new customers are retained.
Thank you and say well everyone.
Your next question comes from Michael Lasser from U.S. Your line is open. Please go ahead.
Good morning, Thanks for taking my question, how you laid out a lot of the.
Macro and big picture uncertainty.
That are going to impact your business, but under what conditions do you think your comps will turn negative and when do you think that that critical point is when you will know.
Michael. This is this is curb let me take look take that how pointed out.
A number to the uncertainties certainly the things that are favorable to the business right now and.
And all the the potential for uncertainty in the near term and even in the back half. The key factors that we were looking at and he mentioned those were take we're keeping a close eye on unemployment and consumer sentiment.
The timing extent of the covert 19 health crisis could impact it.
And is there a shift to the the impact on rural markets.
And then whether always can play a bit of an impact if you just through that in their outside of some of the the crisis type items and those would be the primary ones that were watching most of those are tailwinds right now.
And if those were to flip any of those or a combination of those could have that level of impact on the business, but importantly, we are confident our business model and never been more evident then these times right now the strength of our model and being a needs based business in the.
Rural markets. So we as you can hear we've we've got a lot of confidence in our business model, our ability to whether those situations.
Just a follow up on that on the timing question at what point do you exit.
Traditionally exit the seasonal lawn and garden category is is it possible that all of that it's been pulled forward right now to this timeframe because folks are staying at home and do have some time on their hand, and then as part of that timing question.
Theres been some massive decline in a lot of commodity costs, not just oil but across the board. When do you expect to start to see that deflationary impact on your business and whats a reasonable expectation for dish deflation in the back half of the year.
Michael This is current why don't I first address the question on inflation and then I'll toss it over to Seth on timing of product sales.
On the on the inflationary side of it as I indicated we saw some slight inflationary benefit in first quarter. In those particular is as you mentioned we looked at it. Similarly, there are indications the near term on on both oil and corn that in the near term theres more indicators of deflationary pressures.
And the business and we would anticipate as it works its way through the supply chain that in both of those cases, we might start to see some modest deflation, even playing into second quarter and while hard to predict if following all the forecasts and both of those categories, we would see that that pressure.
You may begin to increase a bit more in the second half of the year and we're going to be watching it carefully. This about the best we could probably indicate on prediction of this at this point.
Great. Thanks, Hey, Michael this is Seth.
Hey into in terms of your question as far as potential pull forward and just kind of lawn and garden.
As you look at the current consumer trends in the ships and spending activity that that how spoke to earlier, we believe that there continues to be a runway ahead ahead of us.
Because not only are we seeing the strength of this among our current customer base, but this is also one of those areas, we're seeing new customers engage at tractor supply.
With some of the new brands that we've launched the ability to partner with some of our key partners.
In these areas, we continue to focus on areas, such as gardening and increase those.
Hobbies over the last few years basically going just over 400 stores in certain key live goods to now over 1700 stores and then we will be shift into the summer months as well.
We believe that consumers will still.
Be around the house, and we're really starting to pivot some of our merchandising tactics and activities.
Leasing parts of our center core as well as go after some of these backyard activities.
No in that customers are going to continue to be around the house for the foreseeable future. So.
Really proud of the work that the merchants are doing not only getting product back in stock to make sure. We can be that essential retailer for our customers, but also as we look ahead to the future months to be able to go where the customers are going where we believe the hobbies and activity here and take place.
Thanks, a lot and best of luck.
Thank you.
Your next question comes from Kate Mcshane from Goldman Sachs. Your line is open. Please go ahead.
Hi, good morning, Thanks for taking my question.
I was just wondering if you could help us understand intake.
With regards to margin given the increased E commerce demand, you're seeing especially in light.
Your teams to one day delivery and increased.
Sure and how do you think this involves SCR Hassan.
Yes, Hey, Kate this is Curt in regards to the margins.
Just hit the gross margin quickly and then SJ, while we've seen strong growth as Hal mentioned the online. He also mentioned a real strong percentage of that being the buy online pickup in stores, which does carry which is really with the most effective efficient way for us to sell online merchandise.
And have not a significant pressure in Q1 on the gross margin more specifically the impact on gross margin.
We saw about.
20 basis point impact on the shift in mix in the last few weeks of of the of the quarter. So if you normalized for the mix shift in the last few weeks the flat gross margin on a more comparable basis outside of that was running about 20 basis points up but thats about in line with our AR.
Typically last few quarters.
From the expense side of the operating model.
Pointed out the 10 basis point deleverage from the new DC, which we've cycled.
Starting in Q2.
And the net impact of the incremental cobot expenses offset by the favorable settlements were a few basis points.
If you normalize that SG in a actually.
The seven basis point leverage.
Would be closer to more about a 20 basis point leverage on a comparable basis.
Okay. That's helpful. Thank you.
Your next question comes from Chuck Cerankosky from Northcoast Research. Your line is open. Please go ahead good morning, everyone.
Could you talk about how the balance sheet might normalize. After this crisis is over you built up that built up cash.
Is that an opportunity then to perhaps.
Quickly back into stock repurchase or dividend policy, what might happen there.
Yes, Chuck this is Kurt.
As as we mentioned we took some some precautionary measures in this environment and in our capital allocation strategy.
Shifted our priority to liquidity and cash that's the the right prudent thing to do the business is strong and as we work through this crisis and the.
The macroeconomic.
Factors and the uncertainties begin to become less uncertain and theres more normalized.
Business, we would anticipate shifting our capital structure back a little bit more to where we previously were we.
At this point, we're going to emphasize and for most precaution just maintain a structure with additional cash we believe that gives us a real strong position. If there were to be a worst case scenario.
And I would not anticipate reengaging on share repurchases while were borrowed on these these additional loans at this point. So we could see ourselves paying those down we have the ability to prepay whenever we want and upon pre paying down we would reevaluate our capital structure, particularly when the.
Reengage and share repurchases.
And finally, thanks for that occurred and finally could how could you discuss what categories are in the home setting purchase.
Group that you mentioned.
Yes so.
Hi, good to get to talking today Chuck.
I would reference those in terms just things people are really doing around their farm and their branches to just maintain in their home. So we're seeing if you think about in our stores if you want.
Fencing key post you know you're looking at Corral gates.
You are looking at chickens, you're looking at chicken coop.
You look at people, creating gardens in their back yard and inviting the vegetables and the rigs in the hose to tillers to create those it's really just all the things that our customers do every single day.
You know a.
The incredibly and terrible humanitarian crisis, but a byproduct of it is that families are spending more time at home and they're spending more time together outside and they're wanting to keep busy and we have really all the things were built to that we are built purposely built to enable people to do those sorts of activities around there.
Homes that are land their franchise in their farms and that's the sort of activity that we're seeing that's the sort of categories were seeing lift and drive the business.
Thank you very much good luck for the rest of the for 2020.
Thank you.
Kristina This is Mary we and that will now that we hit the top of that would that will wrap up our call. So everyone. Thanks for joining us today and the round if you need anything and we look forward to talking to you in July.
Ladies and gentlemen does concludes today's conference call. Thank you for participating you may now disconnect.
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