Q2 2019 Earnings Call
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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 Mary Winn Pilkington, Vice President of Investor and public relations for tractor supply Company Mary Winn. Please go ahead.
Thank you Greg Good morning, everyone on the call today are Greg Sandfort, our CEO , Steve Barbarick, President and Chief operating Officer, Kurt Barton Our C. S fab.
Now, let me reference the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995. This call may contain certain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company in many cases these risk and uncertainties are beyond our control.
Although the company believes the expectations reflected in its forward looking statements are reasonable it can give no assurance that such expectations or any of its forward looking statements will prove to be correct and actual results may differ materially from expectation.
Important risk factors that could cause actual results to differ materially from those reflected in the board looking statements are included at the end of the press release issued today in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed investors should not assume that statements will remain operative at a later time tractor supply undertakes no obligation to update any information discussed in this call.
After our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one related follow up question if necessary.
I appreciate your cooperation we will be available for the call for follow up after the call now it's my pleasure to turn the call over to Greg.
[noise]. Thank you Mary Winn and good morning to everyone joining us on the call today.
Overall tractor supply at a very solid second quarter, which allowed for a strong first half performance for the company.
Our second quarter results were driven by sales strength across.
All geographic regions as well as bolt in comparable average ticket.
And traffic.
We saw broad based strength across our merchandising categories with notable strength in our core year round categories, and solid sales growth and our spring and summer Assortments.
Our second quarter results represent the eighth consecutive quarter of comparable store sales above 3%.
And during the quarter the tractor supply team was very nimble across store operations merchandising and our supply chain, which enabled us to capitalize on the shifting consumer demand for products across the many markets that we serve.
At the same time, we were in stock for our customers for their everyday basic assortments that we know our customers rely on us to have so that they may continue to live the out here lifestyle.
Now that we are half way and that's the halfway mark of the year, we are updating our outlook for the full year.
And as we enter the third quarter, we believe our merchandising and marketing initiatives a company with our one tractor strategy initiatives have us well positioned to drive our business for the second half of the year.
Now, let me touch on a few highlights from the second quarter as compared to the second quarter a year ago.
We delivered a strong comparable store sales increase of 3.2% in the second quarter with comp average ticket, increasing 2.2% and transactions growing.
At 1% in the quarter.
This marks over a decade of annual positive traffic growth.
Net sales.
Plus 6.3% to $2.4 billion for the quarter as we continued our strategy to open new stores at both tractor supply and Petsense.
Diluted EPS was $1.80 an increase of 6.5%.
And year to date, we have returned $414 million to shareholders through a combination of share repurchases and cash dividends.
During the second quarter as a demonstration of our confidence in our business.
Our board increased our dividend by 12.9%.
This marks the ninth consecutive year of dividend increases.
In addition.
Our share repurchase authorization was increased by $1.5 billion.
As we remain committed to maintaining a disciplined capital allocation strategy to create long term value for our shareholders.
And based upon our performance year to date, we are raising the low end of our full year earnings guidance by five cents.
Bringing our new range to $4.65.
Two $4.75 per share.
Now, let's review several of the operational highlights for the second quarter.
We opened 15, new tractor supply stores.
And to Petsense locations.
Our newest distribution center in Frankfurt, New York received LEED Silver certification from the U.S. Green building Council reinforcing our commitment to sustainable business practices.
Our grew right at high five programs, which are part of our unique selling process for our store teams continue to drive sales through legendary customer service.
This quarter, we continued strong double digit sales growth in our E Commerce business.
And during the second quarter, we continued to experience solid growth with our buy online pickup in store programs.
Our customers appreciate the relevance of our stores in the rural community and between the combination of our buy online pickup in store and direct delivery to stores greater than 70% of our E. Commerce orders are being fulfilled at our stores.
This continues to illustrate the importance of our store assets and their key role in the fulfillment.
Our e-commerce business and more importantly, this is a very cost effective way to fulfill our customers' orders for the products that they need with greater speed and efficiency.
We believe that our capabilities of buy online pickup in store.
Mobile point of sale Neighbor's club and stockyard ordering.
Position us uniquely to serve this customer base better than anyone else in this highly fragmented market.
And we see significant opportunities to broaden our customer reach and increase our market share as our store base and digital capabilities mature over time.
As we've said our one tractor strategy remains focused on four objectives.
Driving profitable growth.
Building customer centric engagement.
Offering the most relevant products and services and enhancing our core and foundational infrastructure capabilities.
We are building a solid we're building solid momentum behind our one tractor strategy.
That serves our customers anytime anywhere in any way they choose.
And I believe our one tractor strategy positions us to meet the unique preferences that our customers have for demand driven immediate need products in an easy and seamless shopping experience.
We also believe that to continued convergence of our physical and digital store fronts and the updates to our in store and online shopping experiences are not only resonating with our customers, but they are defensible.
It is an exciting time for tractor supply and as we grow larger we believe we have developed superior capabilities to better serve the out here lifestyle customer.
Now, let me turn the call over to Steve.
Thanks, Greg and good morning, everyone.
I wanted to take a moment. This morning to give you a brief update on product performance during the quarter.
The progress, we're making on building out our capabilities and I'll look forward to the second half of the year.
As Greg mentioned during the quarter, we had a solid comp store sales performance driven by both average ticket as well as continued increases in traffic.
The team was nimble and well prepared to capitalize on the spring selling season with a great lineup of merchandise in our stores as well as online.
Our strong average ticket growth of 2.2% was positively impacted by several factors including product mix.
Overall retail price management.
We were able to capitalize on seasonal trends during the quarter.
Our updated assortment of outdoor power equipment produced positive results.
Tractor supply continues to be a shopping destination for this important category.
Turning traffic, we benefitted from consistent performance in our everyday merchandise, otherwise known as consumable usable and edible or few products.
During the quarter, we were pleased with our sales dollars and unit growth across these consumable categories. For example, we experienced strength in product line, such as pet food and supplies.
Animal feed.
Live goods grass seed and forge to name a few.
As a company our mission is to be a dependable supplier of basic maintenance products and its these products to drive repeat traffic to our stores.
Turning to big ticket sales, we had strengthened zero turn mowers welders and three point equipment.
Given the seasonal trends in the second quarter, especially in the northeast and Midwest, We did experience some softness in our front engined motors cooling products as well as trailers.
We were lapping significant significant big ticket growth in the second quarter of last year and as a result, our big ticket sales were down slightly.
Lastly, we were pleased that all major product categories delivered positive comp store sales in the second quarter.
Our supply chain did an excellent job staying nimble and managing to the needs of the business our ability to capitalize on geographic weather trends as a core competency and strength of tractor supply.
Now, let me turn to the progress, we're making on building out our capabilities.
Consistent with what we communicate communicated at our May investment community day, we continue to be pleased with the traction we're gaining with our key initiatives.
Specific examples include capabilities, such as growing our neighbor's club engagement.
The chain wide rollout of our stockyard kiosk and mobile point of sale technology, enhancing our tractor supply credit card offering and investments in our supply chain.
As part of a one tractor strategy, we are actually seeing the rich customer data, we're receiving from our loyalty program.
The data allows us to target specific customer groups based on their frequency and category specific spending.
This personalized approach is allowing us to drive engagement and build share of wallet over time.
By using our customer data to identify people who shop in specific categories, we're able to target potential new customers and social channels. We then use targeted messaging to these customers because our modeling gives us confidence that they are more likely to purchase and whatever category that we're targeting.
This years spring marketing campaign for power crewmen equipment was a great example of how we are leveraging our data.
We knew we wanted to make a bold statement about our great lineup the power equipment.
Our goal is to stay top of mind with our current customers who were in the outdoor power equipment market. While also introducing the tractor supply brand to new look alike customers.
The team created a series of videos featuring brands such as Bad Boy Cub Cadet and hosts foreigner to ensure customers knew that we carry these brands.
We then use machine learning to digitally market. These videos across multiple online sites to existing customers and potential new customers that had an affinity towards the outdoor power equipment business.
We geo targeted these ads around each of our stores.
These videos reviewed over 8 million times and linked to more than 300000 store visits.
These are significant measurable results and we were able to unlock the power of our customer data and be highly efficient with our digital marketing campaigns.
Our neighbor's club membership growth continues to be a transformational and growing asset to drive brand loyalty with a one year retention rate at nearly 90%.
Our customer feedback continues to be overwhelmingly positive.
The use of Neighbor's club data to drive sales by improving customer targeting and personalization continues to evolve based on customer insights.
Using our new campaign management tool thousands of versions of each campaign are being deployed as compared to a limited manual process in the past.
As a result of more relevant messaging, our personalized campaigns are outperforming the control group.
The rollout of our stockyard kiosks will allow us to provide even more customers with the long tail product assortment.
As we have well over 100000 skews on our web site.
At the store level stockyard kiosks are proven tool for driving incremental sales.
The rollout of these kiosks along with the expansion of mobile point of sale technology is anticipated to be completed by the end of the third quarter.
The tractor supply credit card offerings supports or one tractor strategy by driving sales and building loyalty.
We have seen the use of our private label credit card increase across the board as a result of more compelling financing offers.
We know that our credit card customers visit our stores more frequently and have a higher average spend.
Starting in the fourth quarter of this year cardholders will be able to on $5 a neighbor's club rewards for every $100 they spend on the card.
Essentially a 5% reward.
This compares to $5 for every $150 under the existing program.
Overtime, we anticipate that this will become a key tool and deepening our relationship with our customers drive loyalty and increase our share of wallet.
Let me now briefly highlight a few merchandising initiatives, we have for the back half of this year.
To build on our portfolio of exclusive brands next month, we will be introducing a new work wear line call bridge cut.
We recognize that we have an opportunity to close the gap in our assortment in the workwear category.
The brand.
Standards, we compared risk to include two new trading.
Philson and carhartt.
The risk of product line is designed for exceptional quality and durability with a great value proposition.
The product line will retail at 20% to 30% less than the national brands.
We are very excited about this brand launch as we transition into the fall season.
We have two additional brands, we will be launching in the third quarter.
First up.
As our partnership with Miranda Lambert Mcneish Foundation.
We will offer an exclusive assortment of branded dog beds toys and supplies.
To kick off this partnership we will be hosting a nationwide pet adoption is that in our stores as a part of our month long out here with animal celebration.
This event aligns perfectly with what nations mission to promote and facilitate the adoption of shelter pets.
Just in time for deer season will be launching the catch Endears brand of apparel. This is a fun lifestyle brand for our hunters with a sense of humor.
We are the first to partner with this brand that was co founded by Mike Fisher, a former hockey player.
Our product assortment will be exclusive to tractor supply.
We've talked a lot about the importance of retail theater and during the third quarter. In addition to our month long out here with animals campaign.
We will also be having or fall chick days event across the vast majority of the chain.
To wrap up.
We believe we are well positioned to support our customers need in the second half of the year with our in store and online product offerings complemented with our store engagement initiatives.
All supported by a nimble supply chain.
I will now.
Turn the call over to Kurt.
Thank you, Steve and good morning, everyone.
Overall, we delivered a very balanced quarter that came in much in line with our expectations.
For the second quarter of 2019, we had solid comp store sales growth of 3.2%.
April in June were the strongest month of the quarter.
With moisture levels and cooler conditions impacting our performance in may and to a lesser extent the early part of June in select markets.
Petsense stores continue to have positive comp store sales increases in line with our chain average.
For the second quarter gross profit dollars increased 6.7% to $820.7 million gross margin improved by 11 basis points to 34.9%.
The increase resulted principally from product mix and effective price management initiatives.
Our merchandising and pricing teams did an excellent job both planning for and reacting to the shifting timeline relating to tariffs.
In addition for the first time in a few years freight headwinds moderated and along with the favorable impact of our efficiency initiatives freight costs were essentially neutral year over year.
Including depreciation and amortization SGN, a as a percentage of net sales increased 24 basis points to 22.7%.
The increase in SG nay as a percentage of net sales was primarily attributable to incremental costs associated with the new distribution Center in Frankfurt New York.
And to a lesser extent investment in team member wages.
Partially offsetting these increases were leverage and occupancy and other costs from the increase in comparable store sales.
Specific to our Frankfurt distribution center, we estimate that about 20 basis points of our SG may increase as a percentage of sales is attributable to the ramp up of the DC in the second quarter.
As the distribution center increases the number of stores. It serves in the back half of the year, we anticipate the de leverage to be slightly less in the back half.
Excluding the impact of DC ramp up we had good underlying SG in a performance.
For the quarter, our effective tax rate was 22.4% as we received incremental nonrecurring tax benefits from share based compensation.
Now to our balance sheet and cash flow, we have a strong balance sheet and we continue our track record of generating robust cash flows from operations.
At quarter end, our merchandise inventories were $1.73 billion, an increase of 3.5% on a per store basis from the 2018 second quarter.
The increase is principally due to inflation inclusive of the impact of tariffs as well as growth and fast turning queue merchandise to support the positive trends in the business.
We believe our inventory is in great shape, and we're very comfortable with its quality.
As we enter the second half of the year, we are well positioned to take advantage of the change of the seasons.
We remain committed to returning cash to our shareholders through our share repurchases and dividends, while maintaining a disciplined approach to capital allocation.
Through the first half of the year, we repurchased about 3.5 million shares of our common stock for $334.2 million and paid quarterly cash dividends totaling $79.7 million.
Since the inception of our share repurchase program in 2007, we have repurchased approximately $2.8 billion of our common stock.
With the increased share repurchase authorization from our board in May.
Our remaining share repurchase authorization was approximately $1.7 billion as of the quarter end.
Let's now turn to our guidance.
Given our performance year to date, we are updating our financial outlook for 2019.
For the year, we now anticipate net sales in the range of $8.4 billion to $8.46 billion, an increase of 6% to 7% over fiscal 2018.
Comparable store sales in the range of 3% to 4%.
Operating margin rate of 8.9% to 9%.
Net income in the range of $562 million to $575 million.
Earnings per diluted share a $4.65 to $4.75 compared to our previous guidance of $4 and 60 to $4.75 per diluted share.
We continue to forecast our annual effective tax rate to be in the range of 22.4% to 22.7% and our capital spending in the range of $225 million to $250 million for the year.
While the timing of our new store openings is behind our original forecast. We continue to anticipate opening about 80, new tractor supply stores and 10 to 15, new Petsense stores.
The shift in timing of new store openings does have a modest unfavorable impact on the top line sales as well as operating profit.
This has been factored into our revised guidance for the year.
We have taken steps to correct the executional issues impacting this timing.
We continue to believe that our real estate model is a core strength of tractor supply and our pipeline for new stores in 2020 is healthy.
Our profit improvement plan, Workstreams, which are focused on driving supply chain efficiencies store productivity and indirect procurement savings remain on track.
And we are committed to ensuring our spending is directed to our highest strategic priorities all on a sustainable basis.
Our profit improvement plan is designed to help mitigate cost pressures and enhance our ability to reinvest back in the business over time.
As you model the remainder of the year. Please keep in mind key factors to the cadence of our profitability growth.
We continue to anticipate operating profit performance and earnings growth to be stronger in the second half of the year.
We are forecasting that our effective tax rate will be higher in the second half of the year as we don't anticipate that the discrete tax benefit from stock based compensation in the first half of the year will occur at the same rate.
Also recall that we are lapping an estimated 40 basis point benefit to comp sales growth from hurricanes in both the third and fourth quarter of 2018.
To wrap up the first half of the year with strong momentum in the business is solid and we are executing robust plans to continue to build the business for the long term.
Now I'd like to turn the call back to Greg.
Thank you Kurt and in closing I'd like to thank the nearly 30000 team members across our entire organization for their commitment to our mission and values and their focus on delivering a great experience every day to our out here lifestyle customers their passion for living our culture is a competitive advantage for us and while we've had a strong first half we know we have much work to do to finish this year.
As a team we are energized about our business and look forward to talking to you again later this year regarding our third quarter results and with that Mary Winn wed now like to open the lines for questions.
All right.
We can poll for questions. Please.
Wonderful, ladies and gentlemen, if youd like to ask a question. Please signal by pressing star one on your telephone keypad.
If you would just make sure that your mute function is turned off to allow us to receive.
Once again that star one for any questions.
And first from JP Morgan, we have Chris Horvers Horvers.
Thanks, Good morning, everybody.
So question for you.
As you think about the weather in the second quarter.
Do you think was a headwind in the quarter I mean, we know we added sort of a tough compare in may but.
April is it easier on the spring front so.
Do you think it was a headwind and could you quantify that and then as you look ahead interest looking at the map soil moisture levels are very high in many of your markets you've had that sort of recent heat wave. So do you think you'll have to sprint extended spring season.
That youd like you saw a few years ago.
Yes, Chris. This is this is Steve and I guess I would put it this way I mean, we're always navigating between year over year, what's normal it's not normal.
When I look at the totality of the business, Greg mentioned that we had strength in spring seasonal businesses that were positive for the quarter I believe I mentioned it as well.
What I would also say is when you look into Q3, because we're already several weeks into Q3 for us right now.
It's in line with what our expectations have been.
And so last thing I would mention is.
Our inventory is in good a good position to take advantage of any extended.
Summer selling season, we might have and while at the same time, we are well prepared to take care to take care of customers. If we have an early cold weather businesses in the quarter. So that's kind of how I see it shaping up where a nimble company and we can react pretty quickly.
And then as a follow up as you think about that.
The tariff.
How as you seen pricing play out in the market what have you done in and to what extent that how did that it expect your guidance for the back half of the year versus your original expectation.
Yes, let me start with that Chris. This is Steve and then maybe Curt you can follow through on that.
So we're a year into it believe it or not to the first wave of tariffs that we originally.
We are pass through.
And for tractor, we're running a little bit of a unique position.
Being a needs based company, which really served us well at a time like this.
You know over the years, we've made some key investments in the some pricing tools, whether they be web scraping that then feed into our pricing tool and allows us to know what's going on out there across the wide spectrum and manage our pricing accordingly.
As you are well aware our business has held up nicely in the past several quarters and.
If you look at the business I mean, it's it's working well within the four walls of the boxes woolas geographically, so we feel like our customers in a pretty healthy position right now.
And then the last thing I would say is we feel.
We are well prepared to manage the general uncertainties of these tariffs going forward Kurt.
Yeah, and Chris I'd add to that and that just tag on to what Steve said at the end.
One of the things we factored in to the back half guidance is just an overall consideration of the back half of the year. This is the time, where the consumer if you think from a macro standpoint. This is that this is a back half where the consumer is going to have all of the impact of these first three layers of tariffs and we felt it was prudent to make sure an overarching consideration was what does that do to the consumers.
Spend and how will they adjust to all in tariffs and I would just say from a broad overarching theme, we had that as a key consideration when we designed the guidance the updated guidance for the year.
So does that mean, some price a little less but some volume headwind and a little bit of gross margin tucked in there to headwind as well.
We were just aware that those are all factors whether they all go in that same direction, but those are those are adjustments or variables that could happen with a back half thats got some level of uncertainty.
Understood Best of luck in the back half.
Thank you. Thank you.
And next from Evercore ISI, we have Oliver Wintermantel.
Yes, good morning, guys.
My question was you mentioned the delay and the new store openings this year.
Could you give us a little bit more detailed split, but what's driving that.
Yeah Oliver this is Kurt we.
I'd summarize it pretty simple.
We pride ourselves on consistent execution and execution in this area includes adequately covering for the inherent risks in construction and opening of stores.
This year, we didn't execute well on coverage for those inherent risks and it shifted the timing of new stores a bit.
Weve addressed the issue this is specific to this year.
The existing pipeline is strong and we as I said, we continue to expect to hit our target goal of 80 stores. This year and continue to have confidence in our ability to open stores timely in 2020 with a robust pipeline of future future sites in progress at this point.
Got it thank you.
And.
Just for the back end of the year, if you look at the.
The first half right. So you comp ticket was certainly a lot stronger than your comp transactions.
I mean, both positive Fitch, which is great but.
Ticket was stronger.
Well, how do you expect that playing out into into into second end of the second half of the year.
Tickets going to grow faster than traffic or do you see that reversing thank you.
But first I'd say each quarter can be different but in general our assumption is that.
With the cost pressures it may be very similar in directionally in the back half of the year as you saw in the first half.
Got it thanks very much good luck.
Thank you.
Next we have Kate Mcshane with Goldman Sachs.
Hi, Good morning, Thanks for taking my question if I could just follow up on the tariff question posed earlier I wondered if you could talk through.
Just in terms of how successful you werent mitigating I guess some of the headwinds, especially in light with some of the products unless one two or three going from 10% earlier this year to 25% starting in June .
Sure Kate this is Steve.
For the quarter I believe.
We.
Showed that we were able to manage through that climate pretty well margin rates as Curt mentioned were were positive and so the tools and technology we have today.
Our really allowing us to use science to manage our business.
And thus far we've managed to pretty well and we feel like going into the back half and we've got a plan to mitigate whatever those tariffs may be understand one last thing here.
And that is is that we have built up a very large consumable side of our business over the years and so the tariffs don't have probably as significant of impact on tractor supply as other retailers that are out there and that's a benefit to us as we move forward.
Okay. Thank you and if I could just follow up on.
Ticket it seemed like it was a little bit lower than it's been in the last few quarters. I know you mentioned some big ticket softness.
In the quarter I, just wondered if you could talk to US about how you think about big ticket for the rest of the year and how it influences overall ticket.
At the company.
Yes. This is Steve again, Kate what I would say is you know.
In the quarter, we were up against some very strong big ticket sales from a year ago.
And as I went down the laundry list of some of the weather trends are seasonal trends that we experienced in the quarter.
Big ticket things like cooling and trailers some front engine riders tiller as they were all soft for us and I think that had probably an overarching impact for the first half and certainly in the in the quarter. There as we move forward every quarter is a little different weather has ER seasonal trends of a bit of a different impact on us. So.
I suspect that as we get into this and were able to use our.
Private label credit card with the new offering as I mentioned, the $5 for 100 spend.
No I think that we may see a shift backwards and we should hopefully see some improvement on big ticket.
Thank you.
Next from Piper Jaffray, we have Peter Keith.
Hi, Thanks, Good morning, Congrats on a good first half of the year I wanted to dig into those see up the private label in the direct sourcing a as a percent of sales. So those are trending down year on year in the second quarter.
Curious if you could address that if it's more of a seasonal dynamic if you're starting to see some impact from my tariffs and.
Yeah, certainly I don't expect you're capped out, but maybe a dress or if you think that that direction can be reversed.
You know Peter I will tell you that we still have an emphasis around growing exclusive brands.
But at the same time and you May have heard me say this before we're branded house.
That offers exclusive brands as well and the team has done a really nice job working with the folks like carhartt, Scotts and others to build out a broader portfolio of some of those strong national brands and we're seeing strength in those businesses. So what we've seen a slight decline in percentage of sales that wouldn't necessarily suggest that.
It's a concern.
Because we're growing the whole pie and so.
The team is still focused on that we talked about rich cut launching here shortly in some other categories. So that's not a real concern of mine in terms of direct sourcing.
There's ebbs and flows to that some of its receipt timing et cetera. So that's not a concern either.
Okay. Thank you for that.
On the maybe I guess, a little bit different topic, we heard some rumblings about.
Rising inflationary pressures I think it's a little bit tariff related but also.
Commodity related.
Maybe Curt could you give us your update on the inflation trends looking out to the back half and then related to that with the.
Multiyear highs in corn prices when you think some of that impact could start to show up in your results.
Yes, Peter this is Kurt we often in the quarters, we'll give you some.
Indication on commodity level inflation and as we've been seeing in the past few quarters. Some modest level of commodity inflation Q2 saw that as well. We did continue to see some level of impact we'd estimate around 50 basis points of commodity level inflation on the cost as well as to the top line average ticket.
And there's a number of variables in there and we would say based on our estimates.
You can see we anticipate the back half to probably stay similar to that range.
Of commodity level impact on the inflation frac.
And how about on a you think corn prices will eventually speaking to those numbers as we look out to next year.
Yes. This is Steve yes.
It's very interesting I'm not really sure right now we do see an increase in grains, mainly corn.
It depends on how the harvest goes I mean, if yields come out higher than than what was expected you will see corn prices decline.
And so were keeping close tabs on that now working with our suppliers, it's too hard to gauge I guess, we'll probably know here in a couple of months once they get into the field.
Okay sounds good thanks, a lot guys and good luck.
Thank you.
And we have Simeon Gutman with Morgan Stanley .
Okay.
Hey, good morning, Nice quarter guys. My question. My first question is on.
On the full year margin guide I think it's flat to up 10, bips or so to get to the midpoint I think it averages about 25 bips of positive in the second half does that spread evenly across Q3 and Q4.
I'd say the the way we factor.
Fourth quarter has more potential for the margin expansion in the Q3, but our our guidance says is that overall throughout the second half that we anticipate that with some.
As gene a de leverage at a lesser expense extend and gross margins modestly improving that we've got good upside throughout the back half.
Okay, and then my follow up I guess related is on freight.
You mentioned.
It was I guess, a little bit better than you expected I think I don't think it was supposed to really taper until the second half so what what's causing that is it is it just spot rates, which have come in or there's something about your process getting better and then does that mean, it's an incremental positive or good guide to the back half now that it's become a positive a little sooner.
Sure. This is Curt Simeon.
In regards to the performance in Q2, it's a mixture of both things that we're controlling as well as more the macro and on a macro standpoint, it's it's a bit more than just spot rates.
There is a improvement overall that we see in the capacity.
The average carrier rates are moderating and we've done a great job with our initiatives of renegotiations and in the process as well as controlling the use of spot rates. The things that we've done to reduce the stem miles and increase the capacity or the amount of value in the loads have also benefited and those are some of the things that we're real proud of the transportation team to jump on and address that ahead of our schedule and that benefited the second quarter.
Our anticipation, though was those types of benefits would start to hit in Q3 and Q4, So no real change to our expectation in the back half from transportation.
Okay. Thanks, guys I appreciate it.
Mm.
And next we have Daniel in Brazil with Stephens.
Yeah, Hey, good morning, guys. Thanks for taking my question.
Hey, Dan if you had a few questions on some of your geographic exposure in different markets I guess first kind of starting on your more I guess those markets given the delay we saw on the planting season, our sense from the industry was that many of those markets could end up facing actual headwinds this year, despite the spike in commodity prices.
Have you seen those markets often at all or what are some of your more accurate. So as mark is looking like through the second quarter given the warm rain.
Hey, Daniel This is Greg let me address that one.
If you.
Then the study of our business and the farm store business. You wouldn't you will know that most of these markets are in the upper Midwest of the country Theres, some in northern California, but primarily upper Midwest.
Those areas from a seasonal trend standpoint had been softer due to failed tremendous amounts of moisture.
And probably I would say I would say a little bit more on the basis of elongated you know cool weather.
And we anticipated that and as the weather is now drawing and as weather is warming were seeing those those those areas of the country.
Come back into.
The normal we'll call it normal performance of the business, but remember, we're not AG directly AG related.
The large production farming operations are not really who we address we address the more color casual.
Individual who has some properties some land and probably has a two or three acre garden, it's not the production side. So.
Yes, we will feel a little bit of that drag in those markets, but to be very honest with you as the weather's warmed and things have improved from a condition of moisture. We're very pleased with what we're seeing in the business.
Great. That's helpful. And then just on a similar related topic.
Moving geography thinking about the energy markets, obviously crude been volatile year to date, but how consistent of those markets held up obviously.
The last cycle him a little bit different than this one but just yet we'll have an update on those thanks.
Well this is Greg and it's quite a bit different than the last cycle.
Well, here's what I would tell you that theres been some modest level of commodity inflation, but not great.
Steve mentioned about our retail price management programs, which helps us to make sure that were you know pricing accordingly.
We're not seeing any current waning in the oil markets the rig counts unemployment seemed to be stable and those running around $60 a barrel so really not a major consideration.
It's more moderate today than it's ever been I think to oil companies had a great learning a few years ago.
From what they experienced and so graphic geographically it is somewhat limited now to say I would say the western Texas corridor.
So I think we're feeling pretty good about what we see and the performance of the business in those markets.
Great Okay.
Thank you. Thank you.
And from credit Suisse, we have segment.
Hey, guys. Good morning. Thank you for taking the question I wanted to follow up on the guidance and the implications for the second quarter. So I think you talked about Q1 coming in better than you expected. It sounds like Q2 is about in line I'm, just curious and maybe just to clarify have you made any changes to your assumptions for the back half of the year. I know you made that comment about the delayed openings wasn't sure if that implied maybe lower growth in the back half than you were expecting previously if you could just clarify that that would be helpful.
Yes. This is this is curt in regard.
Is your question is all it is a little bit about how do we frame up the guidance in the back half and.
I'd start by saying from an overarching view our guidance reflects.
The belief in the strength of the business and not only the first half.
The strength, but also what we expect for the back half back half and I think it's demonstrated.
Best buy our updated guidance of a annual 3% to 4% comp rate for the year.
But when considering the back half and the updated guidance. It reflects really three things.
First a solid performance in the first half as you mentioned with some upside results that we factored in particular rated related to Q1.
Second thing is on the back half as I mentioned, we did factor in the impact not only a topline, but the bottom line for the timing shift on new stores as well as the shift on the income tax rate, where as I mentioned, we believe some of that discrete benefit shifted into the first half of the year out of the first out of the second half and drives a higher tax rate in the second half.
And those two factors do impact our expectation on the bottom line for for the back half of the year and as I mentioned earlier, the third thing certainly a level of consideration for the macro issue that the consumer may be a face a be facing as they adjust to an all in tariffs.
Wrapping it all up.
The back half is very much in line with our original expectations with adjustment for there's those two items that I mentioned and consistent performance evidence with the strength of the business in the first half continuing into the second half.
Okay. That's helpful. And then maybe just a follow up here.
The bridge to the second half margin improvement, what you're guiding here.
Can you just talk about some of the areas, where you are making progress in driving operating efficiencies I think we talked a little about transportation already.
First quarter and second quarter, you had really good underlying ash in a performance can you maybe help isolate some of the buckets, where you're making progress and also what is expected to ramp as we move through the year to deliver that better flow through thank you.
Sure.
The.
On the gross margin side the.
The assumptions are simply the strength of the merchandising team been able to manage through these varying costs with improving year over year freight costs as you move to the SG and eight area. We anticipate as I said earlier that the dish the new distribution center will have less of a deleverage impact in the back half than it did the first half and we're also recognizing we're facing some cost compares last year that we don't believe will repeat at the same level.
Lastly, the profit improvement initiatives are showing some traction, we're receiving and anticipating some benefits, particularly in areas of occupancy where some of the indirect procurement and managing the costs and things we can control our driving some benefit and those are things that we are putting in place and laying the foundation over the last six to nine months.
Okay, great. Thank you so much I appreciate it.
And next we have Steve Forbes with Guggenheim.
Good morning.
I wanted to start with.
I wanted to start with the 2019 class of stores. There I know I know, we're early here and you mentioned the delay in openings, but the initial productivity, thus far looks above trend. So maybe just comment on the outlook for this year's class as it pertains to the footprint right new versus existing and then sales productivity productivity outlook relative to the average.
Yes, Stephen this is Curt I agree with you. We are very excited proud of the new store productivity. The the model continues to be a strength of our business and the real estate team does a fantastic job of identifying sites and utilizing the greater customer data that we've got to make sure. We're opening strong stores in the right locations and we're pleased with new store productivity.
So far this year and we think 2019 will be a real strong class and it helps give us more confidence in the strength of the pipeline as well in regards to the overall performance on topline. We don't anticipate from a average sales standpoint that really varies significantly different from the history, particularly with what I showed and walked through at the Investor Community day, It's just a strength in the level of not only ramp up but the productivity of the new stores.
Thank you and then.
As a follow up right. If you think back to the analyst day, you specifically discuss various store productivity initiatives right and I think we're sort of in.
Test phase with a lot of those back in May So maybe update us on the anticipated timing of the rollout of these strategies right receiving et cetera.
And what the learnings are thus far.
Sure. This is Curt again, we're right on track with our plans as we mentioned back in May and just as a reminder, our store productivity initiative included a lot of reengineering of process, particularly back office or inventory handling and additionally, with some tools like mobility scheduling tools all of that gets packaged together and then introduced to the stores as they get trained and rolled out and so we're right on track with our plan to methodically go through the stores throughout the back half of the year with a target goal of completing the rollout by the end of the year what that means is it it's factored into our guidance theres not a lot of efficiency driven as in the back half as we're rolling this out but it puts us in a great position to be able to capitalize that in 2020 and beyond.
Thank you.
And next we have Chuck Grom with Gordon Haskett.
Hey, good morning, guys.
Can you.
And for US a little more on the gross margin puts and takes in the quarter and I guess, what factors were less of a headwind sorry less of a tailwind in the second quarter versus the first quarter and then how we should be framing up the third and fourth quarter.
Yes, Chuck this is Kurt.
Our performance on the gross margin side was very much in line with our expectations as we mentioned it benefited both from product mix and price management price management being the larger of those two team did an excellent job as we mentioned utilizing the pricing systems to manage the rising costs.
But compared to Q1.
We mentioned in Q1 that we benefited from some discrete opportunities whether it be mix or the pricing specific to coming out of the winter selling season and did a fantastic job of capturing sales at better marks.
The second quarter was really a matter of just executing to the plan and driving good pricing along with the benefit of some product mix and not having headwinds from the freight side of it.
We would anticipate that those are the primary factors in the back half of the year freight.
Moving from neutral to targeting to having some benefit from that and then utilizing the expertise of the merchant team and systems to drive some benefit from the pricing.
Okay, Great and then just bigger picture on the Neighbor's club and I think the 12 million members you have today as you as you map out the various customer life cycles I'm, just curious like what you're learning and what it's taught you about how to better engage with.
Both new and existing customers.
Yes. This is Steve.
I would tell you that the system has really benefited us in a lot of ways.
We're continuing to take the data segment. The data we can look at frequency now we can look at cross sell upsell as I mentioned earlier.
When we do a campaign now.
That campaign is no longer manually managed and kind of paint brush across a lot of customers. We can have thousands of different deployments of that exact campaign with different banner ads and whatnot. So.
You know as we dig deeper and deeper into the data. It's just a rich stream, that's coming back out and it's becoming more actionable across the entire organization.
Kurt even talked about the performance of new stores a lot of the data now we're able to use across the organization. So.
Whether it be tapping into a lapse customer that we haven't seen in several months, whether it be communicating and engaging a customer that we just on boarded.
The treasure trove of data is going to benefit as we go forward.
Great. Thanks, very much good luck.
And next from Wells Fargo, we have Zack Fadem.
Hey, good morning could we talk about private label.
Are we talking about the private label credit card impact in the quarter just given the financing offers.
Curious, how that's impacted ticket and your topline relative to last year, and then any color on the impact of new sign ups in the quarter versus existing card holders would also be helpful.
Zack Yes. This is curt.
Great question and we're excited about what the private label credit card is doing and believe it is a driver of the business all metrics continue to be showing solid growth in line with our expectations and what we targeted we saw growth in tender in both big ticket and broadly across the store. So we know it's resonating helping us in an environment of rising costs to show value added up the the level of.
Applications and new sign ups continued to be strong double digit growth and helping us build the program.
Our team members in the stores are embracing it they are selling better than ever before.
And we continue to work on enhanced training and systems improvement.
Last thing is to say that between those and what Steve mentioned about the new value, we're driving in the back half with the 5% reward. We believe that's going to resonate in all four corners of the store helped drive comps and improve and be part of our whole Neighbor's club club derive loyalty with our consumers. So the lot of the data as I mentioned at the May Investor community is still applicable and we're moving in our progress rate towards our target of three to five years seeing this at about a 10% tender mix.
Great. Thanks, Curt and then quickly on your Q categories could you refresh us on the subscription efforts here you've called it out as an opportunity in the past I know you don't push it but but any commentary on progress and whether you still think this can be a meaningful opportunity going forward.
Yes. This is Steve.
No. We're a test and learn company and this is one of the capabilities, we put out there to better understand what our customers might be interested from us we did expand the assortment out to some more animal health products. So it's not just pet food and supplies related.
They are still low learning to be done.
And I would say at this point, we're going to continue to learn as we go the goal ultimately.
Not only to be able to serve our customer with convenience it might be a play down the road, where we're able to connect with customers that one pellet type deliveries in more business to business type aspects of what we might be able to use the tool for so as we're thinking forward.
The subscription of you know.
Beg a dog food or a tree is one thing we're trying to think and make this more global and really tie it back to our one tractor strategy.
Got it appreciate the color guys.
And next we have Peter Benedict with Baird.
Hi, guys I'm, just one just a clarification I mean, Kirk can you talk a little bit more the the the new store delay I was I'm just still little unclear as to what that was was that construction delays more broadly and just you guys weren't as on top of it as you normally our or was there an internal.
Issue I understand its transitory and it doesn't sound like it's going to be an issue going forward, but I just was.
I'm still confused as to what what drove that.
Yes, Peter appreciate the question I'll try to help clarify on it.
In the first half of the year.
There's there were.
Weather challenges there are often with new stores. There are challenges just with getting through planning and regulations in the local municipalities and we could point to all of those things and say that the weather or the regulatory items were there, but we have that and we in our view we say.
We are challenged and it's our job to offset those.
Headwinds and we faced a lot of those headwinds and probably more headwinds than normal.
And that was part of the challenge of getting stores open and for US as a team we look at that as an executional issue and say, we can do better at making sure that we can have the offsets that can can help us not have shift in timing of stores when those headwinds pop up like they did.
Okay now that that's helpful. And then just lastly, just on Neighbor's club I know you guys are not giving the full numbers anymore on that but as we think about it from a comp store basis do you feel like you've you've kind of reached the penetration at least in the existing stores.
In terms of the number of members for customer Army per store.
And that the growth from he'll just be basically new stores or are you continuing to see some some growth in members per store. Thanks.
Yes, Peter this is Steve Yes, we continue to see the program growing comp stores as well as new stores and.
It's still growing at a really good clip, which is exciting and then when you add on to that what we're doing with liquor talked about private label credit card I think we'll even see more engagement and more enrollments. So again it continues to expand the data continues to come in we're building out our CRM team and we're excited about what the future looks like in terms of being able to use that data in action it.
Great I appreciate that Steve Thanks, a lot guys.
Hey, Greg will try to slip in one more question. Please.
Okay and that case will take the final question from Brandon Fletcher with Bernstein.
Hey, guys great quarter.
Thanks, Brian .
I don't want to simplify your very complex business and all the hard work of everybody, but if we do what we do on the street and make this just to growth algorithm got 6% in the store growth maybe 3% of sales.
3% of buybacks and dividend you can adjust those however, you want half a point either way that gets you to 12 kind of the center point of your growth Algo. We were so impressed with the quality of the tail on that you have in those that you brought in to do some really awesome stuff on analytics and supply chain and finance et cetera.
It sounds to me if you have all these awesome people there must be some headwinds hiding in there that we'd love to have any color on so we know what all these great people are fighting against.
To debts Hawaii.
The algorithm is kind of comfortable at 12, and and that there isn't a reach higher beyond that thanks.
Yes sure. This is Curt I'll I'll start on that and we're.
We look at our guidance as confirming that we're doing what we said we'd do this year driving a strong comp sales performance driving great topline operating margin expansion with a real solid EPS growth rate and that continues into the back half of the year and for US we have a lot to be excited about what we're driving overall for the for the expectation and guidance, which is raising that a bit from our original expectation. So.
The business is strong there's a lot to be excited about it I mentioned it earlier, we're going to make sure halfway through the year with a consumer that is going to be facing a number of changes we're going to be really we're going to be realistic with what the outcome can be in this environment, but all that given tractor supply it's got a great.
Algorithm as you mentioned and great performance expected for 2019.
Okay, great. Thank you.
All right, Greg will wrap up our call.
Okay. Thank you to everyone for joining us and Mary.
Around today, if you have any questions or follow up and we report.
Thank you.
Good morning, gentlemen that does conclude our conference for today. Thank for joining US you may now disconnect.