Q2 2020 Tractor Supply Co Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to tractor supply Companys Conference call. Just go second 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 question and one related follow up.
Please be advised that reproduction of this call in whole or in part it's not permitted without written authorization.
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.
Everyone. Please go ahead.
Thank you Carol and good morning, everyone on the call today, or how Walton art CEO and Curt part in our CFO. After our prepared remarks, well open the call up for your question Seth East at our EVP and Chief Merchandising Officer will join US for the question answer session now, let me reference to say car.
Her provisions under the private Securities Litigation Reform Act of 1995.
This call may contain certain forward looking statements that are subject to significant risk and uncertainties, including future operating and financial performance at 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 explanation or any our its expectations or any of its forward looking statements will prove to be correct and actual results may differ materially from expectations important risk factors that could cause actual results could differ materially from does reflected in the forward. Looking statements are included at the end of the press.
Please 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 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 given the time constraints in the number of people who want to participate we ask that you. Please limit your questions too.
One with a quick related follow up I. Appreciate your cooperation we will be available after the call for follow up now what is my pleasure to turn the call over to help.
Thank you very when they get everyone for joining us this morning a.
Before we address our results for the second quarter well, the just step back to take a moment acknowledge the environment in the United States right now.
There's no doubt we're in a generational moment.
Before the quarter began in for the entirety of this quarter, we continue to deal with the Kobin 19, pandemic and really all that's come along with it and then towards the end the quarter, we've seen widespread protests and a focus on racial inequality in America.
We're purpose driven company a tractor supply through all these times, we've stepped back and led with our values and I'm incredibly proud of that then so impressed inspired her team has come together and responded.
And it all situations that occurred across all functions. The team has made the speed and focus to address this dynamic environment.
While also executing and delivering on a record breaking sales.
[noise] startup I, just talking about team member health and safety, we've taken extensive and proactive measures in this area masco required for all team members and customers in all stores.
Each day all of our team members take their temperature and go through a symptoms screening before coming to work.
We are in the process of implementing biweekly testing for over 500 team members, who travel and will and we will be conducting sample testing within all our dcs to stay on top of that robust large population.
Additionally, we've arranged for robust case management to conduct contact tracing and provide health care support for all team members, who are impacted by coven 90.
And also I thought I'd add where theyre in areas, where there's been widespread community outbreak such as in Waco, Texas and cost Degrande, Arizona, where we have distribution centers in those areas over the last six weeks each individually each we sit in rapid response teams to conduct facility wide testing in concert with contact tracing and case.
Management.
In summary, just want to reinforce how committed we are a tractor supply to being a safe place to work and shop and how committed we are implementing industry, leading best practices across all parameters of safety.
We're also committed to advancing a diverse inclusive culture built on our core value of respect.
To promote social progress we invested we invested in a dedicated time of reflection for all 38000 team members to discuss the importance of diversity and inclusion in our company. We did this team by team by team. Additionally over the last few weeks, we published our first SG report we hired.
Good director did a diversity inclusion and we donated to causes the supporting quality and strengthen our local communities and you can expect many more actions from us on the diversity inclusion front moving forward.
Now turning to the results of the quarter, we expect notably they were strong the entire quarter. All three months, we consider that we had consistent elevated levels of sales each week and we had record growth across all channels product categories and geographic regions kind of turning to the number.
First net sales grew approximately 35% with comparable store sales plus 30 by a comparable transaction count increase of 14.6% and a comparable average ticket increase of 15.8%.
Diluted earnings per share grew 61% to $2 a 90 cents.
And E commerce saw significant growth strong triple digit growth and increased significantly the work we did in the quarter to improve our ecommerce capabilities has certainly resonated with our customers.
Kurt will walk you through greater details on the quarter and our outlook and walk you through some more numbers here in a moment when I turn it over to it.
But I thought now what to do is shifted some operational highlights during the second quarter, we announced several strategic investments in our team members who are at the heart of our relationship with our customers early responses to the pandemic included paid sick leave and expanded benefits and appreciation bonuses totaling that the benefit.
Depreciation bonuses totaled $35 million in Q2.
And then as we progressed through the quarter. It became clear that we are moving to a new normal really about operating for the foreseeable future with Kobin 19, and I will talk more about that later.
And so consequently, we made the decision to permanently enhance our compensation and benefits, including wage increases across all of our stores and distribution centers of a minimum one dollar per hour for all hourly team members.
In addition to the wage increases more than 2000 frontline managers that are stores in distribution centers are now receiving annual restricted stock units with the goal of helping fuel their entrepreneurial spirit and allowing them to benefit in the company is long term success.
We also took the opportunity to ensure we are supporting the health and wellness of our team members and what we did was we chose to offer health care benefits to our part time team members. We're committed to investing our team members as we believe they are a key competitive differentiator with our customers.
Operating an elevated comps for 13 weeks presents a number of challenges during the second quarter. We added over 5000 net new team members, primarily across our stores and distribution centers. These team members were critical in our ability to service our customers at this.
Good volumes.
Also to facilitate our distribution networks capacity, we opened a new mixing center in Florida.
And also we thought we work closely with our vendor partners. They have been key contributors to our success and supported our supply chain with speed and nimbleness, we'd like to express our sincere appreciation for their collaboration and support of our mutual customers.
Our focus remains on working together to sure we remain in stock for merchandising categories that make us the dependable supplier for products, our customers need to support their lifestyle.
During the quarter, we rolled out curbside pickup same day next day delivery relaunched our website and early.
Mobile App and we've seen accelerate mission in adoption rates of technology initiatives with multiple years of consumer adoption being compressed into 10 or 12 weeks time.
Our ecommerce results were impressive with triple digit growth increases and this triple digit growth increase included biomarkers that pickup in store orders.
This sharp acceleration in consumer shopping preferences, becoming ingrained in our concern customers behaviors and were fostering this relationship in the digital way through frequent communications, whether it's in digital marketing or an E mail and we're accelerating our focus on the transformation of our digital platforms and services, we have an opportunity to two key.
Deeper customer relationships with scale and we're laser focused on that opportunity.
Quarter. Another investment we made was than our brand building initiatives given the current dynamic we capitalized on the opportunity to shift our marketing spend which have been traditionally print media to more digital and now.
Launched our first national advertising campaign in over a decade.
We launched the initial campaign in March during the early weeks of decoded pandemic.
And the campaign has continued to evolve and what we're working on is matching the.
Countries nude and the cycle that pandemic and we've done five different spot different commercials in the last four months. Our most recent TV AD has been focused on reinforcing tractor supply's, a safe and convenient place to shop for all you need for your summer out here.
Our research indicates that our unaided brand awareness and tractor supply being in the consideration set for shopping trips are both increasing more importantly, we had our customers shop, we had more customers shop with us than ever before as we experienced robust growth in our customer base with increased sales across existing customers.
Mers and reacquire customers and so what I thought I'd do us a share with you five kind of key observations of our customer behaviors based on the market data and research that we have.
So the first observation on mentioned is we're growing trips and worse and our customers are spending and our existing customers are spending more with us our core customers our existing customers are shopping more frequently and their baskets are larger as we benefit from their trip consolidations and these customers are shopping more categories from us in the Ebrahim.
Before and we finished the quarter with close to $17 million Neighbor's club members.
The second observation all shares that were gaining new customers at the fastest rate in the comes in the history of the company for the court for the fourth for the second quarter, we saw $3.3 million identifiable new customers and that represents almost over a 14% year over year increase.
The third observations that were reengaging, our lapsed customers and they're returning to shop with us at a higher rate than ever before for the for the quarter, we reactivated almost $2 million.
2% year over year.
The fourth observation that will shares that the new customers were reacquaint, we're acquiring.
As compared to our core customers. They are skewing younger higher income and closer to 50% female which has an increase of 10 percentage points compared to our historical trends of 60% mail.
And the fits in last observation that all shares that the new customers are becoming repeat customers at the fastest rate ever. This is at a time when our overall customer satisfaction scores are at an all time high.
We believe key aspects to our customer service, such as being a convenient place to shop.
A tailored lifestyle oriented product category.
Our legendary customer service and our strong in stock levels are important to keep these new customers engaged with our brands thats whats attracting them to us.
Notably purchasing patterns for our new and Reengage customers are very similar to our existing customer behaviors and product category engagement.
Looking ahead, we know our opportunities to capitalize on these trends and to nurture these customers and to gain market share and we have strong plans in place to retain these customers with marketing and product offerings continuation of our national advertising campaign, but robust digital onboarding.
CRM tool kits are being executed.
Taking a step back from our Q2 results in actions I want to share broadly what we're seeing from a macro perspective.
Key trends, we're seeing that are that are working to our favorite include rural revitalization.
Trip consolidation omnichannel opt opt adoption self reliant lifestyle movement, including DIY trends.
Consumer spending shifting from travel and entertainment that kind of trap spend is now being spent on home and land and of course pet adoptions. They are at an all time high.
In addition, we believe our business benefited from the government stimulus and activity that helped bolster the economy.
And while we're not planning for this government stimulus activity to continue many other trends I mentioned, such as pet pet adoption and trip consolidation or rural revitalization, we definitely expect those to continue and to be prevalent with our customers over the next few quarters.
Speaking of that as we look ahead, we believe many of these consumer behaviors that we saw over the last three or four months are going to continue in the second half, but there's going to be some nuances. Some differences for instance, we expect we definitely expect consumers still be very in tune with our land and our homes. It is they're safe oasis, but the things that they will.
Do will be different as an example in the spring.
Customers were by Patty customers, we're buying lawnmowers, and kayaks and working in their yard on their fencing in their gates and we think in the in the fall some of that will continue but instead of lawnmowers and kayaks, they're going to shift the buying things like patio heaters, and firewood and fire pits, but they're still going to be working on their land and on their homes there.
Also going to continue to do things that are more outdoor related but our fall and winter oriented such as things like raking leaves in winterizing their gardens.
Overall, we believe there will be a higher level of category participations all in the winter categories. Just like there was in the spring, it's just going to be different and it will be higher than it's been in the path and we will do that is going to continue into the second half.
Now looking out even further.
While we can't predict the future and there is significant amount of uncertainty our team is operating under the premise that we will still be dealing with the pandemic in the first half of next year, we're buying that assumption and were orienting our planning around that assumption.
Over the past few months, we have navigated unprecedented conditions, we believe that our purposeful actions will allow us to emerge from its stronger and better than ever before we have an opportunity to create and define our future and extend our leadership for years to come.
And with that I'll turn now the call over to Curt to review the quarter more depth and our outlook before I come back to give some insights on our strategic growth initiatives and other drivers of Q3.
Thank you Hal and Hello to everyone on the call before discussing our second quarter results I'd like to recognize and thank our incredible team.
Personally been inspired watching everyone come together to face the current environment embrace new ways of working and decisively taking actions to serve our team and our customers in the face of unprecedented conditions.
With more than 20 years with tractor supply I could not be prouder to be a part of this team.
This quarter was certainly exceptional and like no other in the history of tractor supply.
The second quarter benefited from the macro trends how shared with you while at the same time, we had a great spring, but weather was ideal across the country with favorable temperatures breaking early in the spring and consistent moisture, providing a sustained spring summer season.
As we rank order our comparable store sales performance the largest driver was our customers desire for product categories that supported their out here lifestyle as they shifted from other interest like travel entertainment and dining.
From home setting land maintenance and fencing backyard living and caring for their animals and pet our customers have clearly made the care and improvement in their homes and land a priority.
This is also inclusive of living a more self reliant lifestyle and adopting new hobbies like backyard poultry gardening and bird feeding.
Now, we believe brand awareness and the new customer performance that help discussed was the second largest driver of our comparable store sales performance.
This was followed by Tailwinds, such as the favorable spring summer weather that I mentioned earlier and the benefits from being an essential business that remained open during the early part of the quarter.
Underlying these primary drivers the government stimulus checks likely increase spending across the board in all categories.
Now another way to look at this quarter's comparable store sales growth is to break down the comp between transitory factors such as government stimulus checks and cobot 19 related sales as compared to sustainable more structural tailwinds like trip consolidations, the increase in new customers and Reengaged.
Customers, the rural Revitalisation trends and the growth and companion animal ownership.
Estimate the impact from each of these drivers first we believe that nearly half of the Q2 comparable store sales growth can be attributed to structural tailwinds, giving us a sustainable opportunity for growth.
I'll wrap up my discussion on sales with a few other performance highlights.
First we had robust performance and our big ticket categories.
Which was generally in line with our overall comp sales growth. This was driven by strength in mowers trailers safes pressure washers and three point equipment.
Second our Q products consumable usable in edible which is a representation of our strength of our core business had solid mid teens comp sales growth.
And lastly, commodity inflation was essentially flat for the quarter.
Moving on to gross profit gross profit as a percentage of sales was 36.4% in the second quarter, an increase of 155 basis points.
This increase was driven principally by reduction in the frequency and depth of promotion as a result of strong demand for our product categories. We also benefited from favorable product mix, along with the lower transportation costs as a percentage of net sales.
As China, including depreciation and amortization as a percentage of net sales was 22.3% a decrease of 33 basis points.
This decrease was primarily attributable to significant leverage and occupancy and other fixed costs from the strong increase and comparable store sales.
The leverage was achieved the leverage achieved we achieved in these ethnic categories was partially offset by incremental costs related to the cobot 19 pandemic.
Increased store labor hours to support the significant increase in sales volumes and increased incentive compensation given our strong performance in the quarter.
We incurred incremental costs related to covert 19 pandemic of approximately $55 million, including the appreciation wages for team members PPD supplies and incremental store labor hours dedicated to managing social distancing in the stores as well as cleaning and sanitation.
Operating profit increased nearly 56% with operating profit margin of 14.1% an improvement of 188 basis points.
Net income was $338.7 million, an increase of 55% diluted earnings per share was $2, a 90 cents an increase of 61%.
Turning now to our balance sheet, which remains strong merchandise inventories were $1.69 billion at the end of the second quarter, representing an 8.4% decline in average inventory per store the reduction in average inventory per store principally reflects the robust sales trends and the solid increase and inventory turns.
During the quarter, our supply chain and our vendors are executing at a very high level to meet the customers current demands.
We finished the quarter with $1.2 billion of cash and cash equivalents and no borrowings on our 500 million dollar revolver.
Moving now to our guidance for the third quarter.
To date, we continued to see the strong sales momentum in the business. We expect this momentum to continue.
Albeit at a lower level than the second quarter, as we forecast delivering strong sales and profitability for the third quarter.
While we typically don't provide quarterly guidance given the unique situation due to cope with 19 third quarter.
Given the level of uncertainty it is difficult to provide guidance beyond Q3 right now.
Factors contributing to a heightened level of uncertainty include the duration impact of shelter in place restrictions and social distancing measures the tapering of government stimulus benefits.
Elevated unemployment levels and even the November elections.
With this backdrop, we would anticipate the strengthen our comparable store sales trends to moderate as we move through Q3.
Overall, we feel very good at about our business, leading up to the November election cycle, but as we all recognize it just creates significant level of uncertainty for the consumer.
For the third quarter, we expect net sales growth of approximately 60% to 22% and comp sales growth in the range of 12% to 18% net income is forecasted to be in the range of 136 $262 million and diluted earnings per share of $1.15 to $1.35.
Two factors to consider that are impacting our outlook for the third quarter include coated 19 related costs of approximately 15% $20 million to ensure the health and safety of our team members and our customers.
And $50 million for the prioritization of our strategic growth initiatives.
And please keep in mind as we previously disclosed our move to permanent wage and benefit changes will cost approximately $13 million this quarter as well.
We are raising our capital spending outlook to support our strategic growth initiatives that how we'll discuss momentarily.
Our previous estimate was 225 at $275 million were 2020, we now anticipate capital spending in a range of $300 million to $325 million vast majority of the capital spending increase is attributable to new in store initiatives and supporting technology.
Looking beyond the third quarter, we anticipate fourth quarter comp sales performance to be above our original expectations. When we entered the year as mentioned earlier, we expect the current trends to moderate throughout Q3, and we believe that moderation will continue into fourth quarter as our outdoor seasonal sales become a lower console.
Duration of our business and we get back to a higher mix of Q products.
Additionally, we are planning for a more moderate holiday season than normal, but with stronger online growth.
As always we continue to be disciplined in how we manage our capital with the goal of delivering consistent strong financial performance, while strategically investing and initiatives for long term growth.
We are taking actions to capitalize on the opportunity to capture and sustain a greater share of the market.
Year to date, we have generated a significant increase in cash from operations as how will discuss in a moment, we're reinvesting a meaningful portion of this incremental cash flow into our business with the strategic goal of emerging from this crisis stronger than before.
The team at tractor supply is excited about how we will continue to be an innovative leader in our channel.
Now I'll turn it I'll turn it back to how they start.
Let's look ahead.
We think about our business, we have a unique opportunity to capitalize on the powerful customer trends that we're benefiting from now and to retain the record number of new and Reengage customers, we're seeing and our goal is to capitalize on our ability to drive sales and higher productivity.
Our financial strength allows us to stay focused on the long term, creating an even greater competitive advantage as we're investing give fuel long term growth.
We continue to operate from a position of strength.
And we're laying the groundwork for the future and so today. We are excited introduced two new strategic initiatives that are being implemented across all stores within the company.
First is the buildout of our field activity support team and Thats focused on improving the productivity of in store execution and the second is the expansion of several technology and service enhancements to capitalize on consumer expectations.
Turning to the field activities supporting this initiative is designed to improve our merchandising activities in store, which represents the second largest body of work for our team members. This initiative builds on the successful rollout last year of the tractor way program, which address the largest area of work in our stores the risk.
Saving and stocking of merchandise.
And kind of stepping back more broadly our goal is to improve the productivity of our store payroll and we want to shift hours away from tasking to customer facing and keep finding ways to be as efficient as possible in what we do and tasking. So that way, we can drive customer facing ours is a very comment.
Retail approach.
And to the work and the fast team includes executing of merchandising programs like Center court and caps planning Graham reset seasonal programs in sales driving initiatives. The fast team has mentioned will allow the store teams to spend more time on customer service helped improve their in store execution and ultimately lead to higher comparable.
Store sales. These teams are in the process of re ramping up and we're hiring more than 1500 fast team members with one fast team per district. These teams will be in the stores starting in August and the goal is for each fast team to be in every store every week with and each each team will end is the focus of the team will be.
Improved store specific measures and address sales driving activity.
Overtime, we would anticipate that these teams will receive support from our vendor partners, which is common in the industry as the work is directly related to the on shelf execution their product and also the fast team has the potential to help drive store level efficiencies at the teams ramp up.
This type of dedicated dedicated team has a proven strategy across sectors of retail in particular into in in that cat in Nab parts segments like home improvement and they've been proven to drive customer cutter customer satisfaction rates and sales and allow the store teams to prioritize customer service and continue to drive productivity through year late.
In the store to get very efficient on year tasking.
Our second initiative is building on our technology and services capabilities and this includes the rollout of contacts payment in the quarter expansion of our in store Wi Fi capabilities enhanced ship from store online fulfillment and increased delivery capabilities.
Within the last few weeks, we had a soft launch of our new mobile App that allows for greater customer b convenience and integration with our neighbor's club.
We will begin to communicate more about the app to our customers in the cup coming weeks, we know mobile access is important for customers and our new app make shopping easier and more convenient.
In addition, we're expanding our ship from store capabilities, we're adding subscriptions at the point of sale in our stores and implementing contact list payments at the registers in our stores further were substantially increasing wireless access center stores as we moved from to access points in each store to five access points is each store.
This is all tied supporting contact lens payments and our mobile point of sale hardware that we doubled the capacity up earlier this year.
Our technology capabilities are becoming a strategic advantage for tractor supply.
In addition to these two chainwide activities, while we are focused on driving our so we're also focused on driving our space product.
Of driving space productivity across our stores.
First initiative that we'd like to talk about today is driving the productivity of our side lot.
Typically there's as much space outside of our stores in the side lot as we had inside the store and the productivity of this space is substantially below the chain average.
Our ability to drive higher sales per square foot through reworking of the side lot is in progress and we're beginning some test right now here in the third quarter.
Total will do about 75 stores. This year in terms of transformation of our side lots and we had the ability to transform our side lot with expanded product offerings in select category enhancing the shopping experience of categories that are already out there and it can be offered to it can be leveraged offer wider product assortment in select category.
Please enter new categories and also offer the convenience the expansion of buy online pickup in store and really what will become it by online drive through.
For pickup this transformation can help us continue our supply and take our customer experience to the next level.
During the third quarter, we will also begin testing in new interior space productivity program furniture stores.
Project fusion is our state of the art space productivity program designed to enhance the customer experience in our mature store base and give new customers that may not have shop with us in the past more reasons to visit.
Much like the fast teams space productivity programs of mature stores have proven and been proven across retail concepts to drop a higher sales per square foot when deployed from as consumers point of view and active space productivity program is also important to protect the brand image of tractor supply.
Similar to our sidelight test, we anticipate completing about 75 fusion stores in 2020, and there will be some overlap.
Size of our store base. Both of these efforts will our multiyear opportunity to continue the refresh our store base create new shopping categories for our customers and further to drive comp sales.
As we look ahead, we have a robust new product innovation pipeline.
One key introduction is addition of power tools for Makita, a brand known for their reputation for high quality power tools in companion animal we have a significant reset of our dog food offerings occurring right now here in August this reset will reallocate space for winning brands along with exclusive and new brand introductions. This will also allow for the.
Expansion of our of our exclusive line with Miranda Lambert's Mutton nation on the farm and the addition of the Victor Dog food, our customers have been asking us to carry the Victor brand for quite some time and we're excited to added to our dog food offerings, we will be the first national retailer of Victor Victor dog food launches on launches to debt.
Is online available today with limited SKU offering and you can start to see the product is currently rolling out in our stores right now.
Across all parts of the store, we had exciting products for the fall and winter as we adapt to serving our customers in the current environment, our stores will be ready for the change of seasons as we begin to move into fall.
On the marketing front, we're excited to announce our partnership with Turner sports during the coverage for the upcoming restarted the season.
We will be very visible throughout the season with our stronger together AD campaign that launched on Tuesday.
To wrap up we're focused on our ability to improve the X.
Yes, our legendary service and transform our stores to make them even more.
First product innovation and category.
I think our space productivity improvements.
Our technology enhancements in server trends were experiencing and we believe this is a structural shift there will be going on for a long time.
Despite the current operating backdrop in the US we have confidence that our strategy next fusion will allow us to continue to build a stronger tractor supply.
Team remain confident that tractors.
Make a stronger and larger company.
My sincere appreciation goes out to each and every one of our more 30 more than 38000 team members for their dedication to our mission and values.
And with that operator, we'd like to open we'd like to now open the lines.
For questions.
Thank you if you would like to ask a question. Please press star followed by number one on your telephone.
As a reminder, we do have please limit yourself to one question.
Our first question today comes from Kate Mcshane from Goldman Sachs.
Please go ahead.
My corn and ticket.
Around inventory.
Inventory with down per store.
Had a pretty strong.
Versus your very very strong comp I know.
Based on very strong demand, but how are you managing that then how do you expect inventory piece to evolve over the next couple of quarters.
Okay.
Absolutely thanks for the for the question.
As I made of as I mentioned in my prepared remarks operating at kind of 2025, 30% comps plus for 13 plus weeks.
Put some strains on the business that we've not seen historically and really proud of how the team worked through all those challenges to meet the needs of our customers and inventory has certainly been one of those challenges and we've taken a number of actions.
To lean into that in terms of increasing our visibility visibility of forecast with our vendors, obviously increasing receipts.
And working very closely to them and in admitted I'll ask that that talk a little bit more about our vendor interactions.
But what I'd say is.
We would like for those that we would like like for inventory levels to be in stock levels to be higher right now and we're working very closely with our vendors to do that in many cases.
We're selling product example.
We are.
Stock tanks in the United States.
2500 of those a week our manufacturers able to make 3000 a week. So as soon as we get a truck they hit the full they hit the floor or hit the outside and inside lot and we've got we'll call then.
Customers taking them immediately.
Awful lot and so.
Again, we wish we had more inventory, we're very focused on getting more in our stores. We're very focused on getting our in stock levels and we're working very closely with our vendors on that and I will turn it over to to death, and maybe just make a few more comments on that front.
Excel.
Good morning, Cape Yes, so as Hal mentioned.
Obviously is our desire to get us.
But the merchant team has been doing each and everyday as partnering with our supplier base.
And what I can tell you is that stepping up in ways in which you know how come.
We've made sure that we can get.
Each of our opportunity buys and the team has been really nimble and looking at ways to reallocate space in our center court to product Thats available when things are supporting the lifestyle. That's out there would be around batch jarden activity in hone setting.
Because of that nature, so really pivoting to new items in new categories.
And as we going that route one of the benefits that we've also had it has strong sell throughs. So we have our each our replenished items, a hell talked about but also when you look at our drive our programs as well, we're sitting on about 30% less clearance inventory today than we have been where this time last year just based on the overall strength of the business. So it's a couple its.
In a couple of old and number one and said we want to make sure that we can have that product in stock to drive each and everyday lives for your own programs, but the number two we also seem the benefit of strong sell throughs, which have been a fitted in less clearance inventory, which has allowed us to go after opportunity buys which are driving significant contract now as well.
Okay.
Our next question comes from Peter Keith from Piper Sandler. Please go ahead.
Thanks, Good morning, everyone.
Great results and fix for the third our prepared remarks.
The guidance question for Kurt.
Given the solid gross margin that you guys posted in Q2 could you help us understand that continue the potential continuation of some of these drivers with with Q3 and whats guided via strong sales backdrop.
Yes, certainly appear this this is Kurt and in regards to gross margin and the continuation of that.
Ill first start by reflecting back on Q2, where we saw several factors that were favorable end across the board very ideal and we were able to capitalize on that and our priority will always be to continue to gain market share while trying to back.
Yes, good solid gross margin so as we compare Q2 versus looking ahead of for Q3 and forward. We'll continue to stay focused on LP, which does support less promotions.
You just heard Seth mentioned, our inventory isn't it's cleanest shape and so we anticipate some less apt season transition or clearance.
And then we did see some some benefit in Q2 on transportation efficiencies. We think that will can can pour moderated level as we start to cycle some of the benefits in the.
Strong gross margin performance year over year.
[music].
Mix and promotional may not have as strong of a benefit in the second half, but we do continue to think that theres benefit from both of those and the opportunity we have with good solid clean inventory going into it. So you will see from our guide that we anticipate momentum and.
Strong growth or performance in gross margin.
Okay. That's helpful curve.
The other question just for al.
New customer acquisition numbers that you gave were were quite impressive noninterest several months into what seems to be elevated acquisition.
Do you have any observations in recent months on on the.
In the ability to retain the people that have come into the stores, perhaps in March and April.
Hi, Yes. So we are mark we are monitoring repeat purchase rates.
Of all of our new customers in our reacquire customers, it's a regular muscle and analytical skills skills that we have all the work the team did turn into Q4 last year as we migrated.
Platform to Microsoft Azure and.
And the local tool set that comes along with that and what we are seeing is that we're continuously strong new customer counts or continue to seeing strong required customer counts.
And we're seeing Nams shop with US a second and third time at a higher rate than they have historically with us.
And those trends have been very consistent from the early days the pandemic up until now.
And as I mentioned Theyve had.
Early on.
So probably a slightly more rural I'd say, it's kind of moderate incentive.
A reasonably mixing suburban.
A little more female as I mentioned in the prepared.
Online whether its direct ship sales for buy online pickup and pickup in store with curbside pickup does over penetrate some with those with those new customers.
But they are giving us a strong customer satisfaction scores.
And in their surveys are saying they intend to repeat shopping with US and then in their actions they are continuing to shop with us as well it.
Our aspiration is to invest significantly in digital and national marketing as well as specifically in the in our CRM tool kit to continue due to engage those customers and of course, that's one of the reasons. We hired 5000 new team members this quarter net new team members.
It was to provide that legendary customer service that we're known for.
And ensuring that we can serve.
Effectively the increase counts the customers we have in our stores.
Our next question comes from Peter Benedict from Baird. Please go ahead.
Hey, guys. Good morning, So two questions first just.
Hey, just on the cadence you mentioned pretty consistent top line across across through Q and that Thats continued in threeq. So.
As you are looking forward, you mentioned expecting some moderation which makes sense.
Trying to understand maybe what your what level of moderation you're thinking about there you said in twoq on behalf.
On the comp was kind of sustainable structural stuff.
Is that a good benchmark for us to think about how maybe you're planning the balance of three Q and.
And then obviously with some more moderation in Fourq you Thats My first question.
Peter This is Curt thanks for the question in regards to the comp sales I'll address the the point you made on the second quarter first and then pivot from there to kind of help with the the third quarter, we saw while unprecedented volumes amazingly consistent per.
Formants throughout the second quarter, all three months at a fairly strong elevated level and even when we look at the two year stack a month to month just continues to show the consistency between April May and June and as I mentioned the level of performance continues through.
July of we do anticipate that as with what we can see today and having a it's just of volatile and uncertainty in their.
I mentioned in the prepared remarks, we could anticipate seeing some moderation.
I believe the the strength of the core business.
As a good indicator of.
Third quarter and the last half of the third quarter potentially more falling in the range. So we're giving some prudent.
Evaluation to see.
Less benefit.
Causing us in the third quarter, while starting off strong to really and.
For all guidance.
Okay. That's fair. Thank you and then just a question maybe for out or accept just around the animal ownership trends, we mentioned the dog adoption.
But also I know the the backyard poultry trend has been.
Particularly robust.
Rank order may be the importance of those businesses within your overall.
Animal business you guys are server equine other large animals. So just so we can understand a gordy's.
And then just what you're doing the.
The kind of cap.
Accurate poultry trend thats, considering the searcher. Thanks.
When you look at our overall pet animal businesses in talking about rank order of the too.
I would kind of look at each of those.
We have a primary desire obviously to own the pet customer in the rule marketplace in a lot of efforts are going in place whether it be on our pet supplies resets and continue to make sure that we have the product there as we're seeing these record adoption rates the pet supplies businesses showed incredible strength in the quarter, there and continue to see that strength.
Obviously, Hal mentioned in the pet food reset thats coming up as we continue to go where kind of the coast comers going where those trends are.
And so.
As well as with pets, and so we want to own that.
We will marketplace animal was.
The LTL Espcs approach.
You talked about back to and poultry you talked about equine on the merchant team really puts together.
Independent strategy is to really attack each as each of those areas of the merchant categories and as we talk about localization and regionalization.
The animal side is when the areas that we see some of the most localized and regional differences at times. So that we can go after these categories. So the team you know our feed it.
Read our feeder rack is actually done on a store by store basis relative to the local assortment.
And we obviously want to go after these things are continuing to go with the AG.
To go after sales here.
Bechard poultry is something that we've seen some really nice nice strengthen and and just to put.
Throughout the fall as want to make sure that not only we can capitalize on.
Im into the category as well as current customers, adding to the flock. So.
There are going to be too.
The primary pillars as we look forward not only drive comp in driving overall business.
Yes. This is nearing when I am glad to have everyone. Please keep to.
One question and one follow up in a lot of people in the queue and we'd like to amputees newspapers path and thank you.
Our next question comes from Michael Lasser from Bbs. Please go ahead.
Good morning, Thanks, a lot for taking my question, how you've had a remarkable start to your 10 year, a tractor supply, but you are setting yourself up for yourself back to follow next year. So with all these productive initiatives in place to.
Significant amount of new customer acquisition, and knowing what you know today.
I think tractor supply can comped positive in 2021.
Hi, Good morning add great question and I.
I don't think I've got the Crystal ball in front of me on that one, but what I can and I would acknowledge just the wide.
Range of uncertainties over the next 18 to 20 front I'll start by referencing what we talked about in our prepared remarks is that we're planning for the cobot 19 pandemic.
To be a significant factor in the United States any consumer shopping behavior at least through the middle of next year and we're buying to that we're building our assortment and plans around that.
And we're putting in place our operational plans to support that.
As we look beyond that.
That's where we're told that's why we're talking about growth initiatives today.
We.
Truly.
Our focused on emerging as entered this pandemic and we're going it we're investing and things like our fab.
As team to make us more operationally of technology to make it easier to do business with and importantly, we're looking at our for our format and our store.
Great and seeing how do we make it more productive.
And for those of you that have followed our business for quite some time.
It's been a while since we've done on a strong as space productivity improvement improvement initiative inside of our stores.
And we are very we're we're very it's early days, but we like what we see in terms of the initial actions we're taking on the space productivity program project fusion in our stores and we're doing 75 of those this year and then decide lot has always been a I think by all accounts a big opportunity for us.
We've got anywhere between 15 to 20000 square feet in our sidelight that.
It's kind of concrete slab typically it's just holds most of our agricultural products out there.
And you think about a lot of other retailers that have a similar sidelight and how much more efficient they use that and so we've got 75 stores that were standing up this year that radically radically transform our sidelight and our goal is to see how those two different 75 store test play out as we get through the.
Fall and then more to come from us on how we would expand that into next year and the years beyond.
And like I said, we're investing in from a position of strength right now we're not sitting on our Laurel we want to lock in these new customers, we want to transform our business, making them more attractive company to retail to come come shop at and also a more efficient retailer.
As well and.
So.
At this point I'm not sure I could predict the comp for Q3 of next year, but what I can tell you is we're leaning in to make sure that as we exit the pandemic.
That we've taken all the time, we have here to make our company a better company exiting the pandemic.
Thanks, very much and good luck.
Our next question comes from Simeon Gutman from Morgan Stanley. Please go ahead.
Thanks, Good morning, a little bit related maybe for how I wanted to ask you about the outside space and then the improving productivity you're doing around $300 a foot I think thats still includes your E com.
Home improvement retailers you used to work at does about 500 and I'm just doing this to illustrate the difference I know you're not a home improvement stores and then Curt mentioned some structural tailwinds curious if the opportunities that you're testing you will or should we be thinking big big and any sense of where these store test where you think the store product.
So we're not prepared to talk about targets and what we think our goals are yet we've got these 75 stores in each of the per in each of the pilots that we're standing up here in the in the fall and as we you get more data and see the performance of those we'll certainly share that as appropriate.
Yes.
What I would say is both of them are both of the tests are.
Step changes in.
In the company's I proposition in our format.
And notably in the inside the store, it's a significant step forward in how we allocate space.
Cutting in new programs in new categories and brands more room for lay down areas to bulk out product and drive drive sales.
And much more clarity around.
The connectivity vials.
And looking at all on every SKU has to earn its way every program has the earn its way into into the into the store.
And sets and team have just done a fantastic job leveraging data.
It's a really redefine what that store should look like the side lot is a it's hard to express it in a little away the radical transformation.
You were basically taking.
The 15000 square feet that we have there now.
Shifting it over to compressing it to about 567000 square feet through racking that kind of merchandise this product to be Walker store, you'll see.
Stock tanks, you'll see corral as you'll see gates is typically a lot of homes are laying on the floor bundled together, we're now putting these up and racking meaning that for.
Shoppable, we're opening up the the drive throughs with automatic gates that allow customers to drive thru and pick up.
We're looking at certain categories like guard and we're looking at speed and how you drive through in do and do drive through picks.
GAAP on feed we also selected high volume by online pickup in store order. So you can do drive through buying land pickup in store you would have to wait out front for it.
We're dedicating staffing for outside.
We're putting new theatrical headsets in all the stores so that that where we are team members can talk to each other manage what will be really in essence move from a 15 to 18000 square.
We'll now be Shelly will now be covered going forward much like what you might see in some of the more larger.
Mass and home center store. So it is a significantly different store.
Then it was before when we're done with the with these productivity per.
Graham Rollouts and we're very excited about the opportunity gives an opportunity to really transformed the the productivity of the outside to bring new categories in.
SAP was very involved and kind of led our Q transformation in 2009, and we think this is as.
It has an opportunity to serve as another.
Net change for us going forward and the SKU count goes up Hal.
There will be some modest SKU count.
But certainly that those additional that would be more reflective of the outdoor area, where we've got new square footage that were merchandising.
But we're still very focused on space productivity and.
Inventory productivity, but there will be some AD of skews in some AD inventory to support those higher sales volumes that were anticipating.
Our next question comes from Steven Forbes from Guggenheim. Please go ahead.
Good morning.
Maybe I'll just two questions into one here.
The focus on the field activity support team how I believe you mentioned 1500 team members right organized at the district level.
Maybe just correct me if longer that about a 10 per district.
And we think about.
Funding for the use some of some of your.
Big box peers right have gotten some vendor support for these type of initiatives, maybe just talk about.
Your dialogue with the vendor community, whether there will be some form of vendor participation either initially or are you prove out right. Some of the productivity gains and then just real quickly right, where we're servicing verse tasking hours are today versus where you think they should be.
Yes so.
Let me kind of hit a few of those.
First off as we.
We are working methodically through the core task that we put on our stores and looking to make them more efficient.
Such that we can shift those hours to customer facing and as you mentioned thats been a program that tried and true and been executed across many other retailers very successfully.
We started that last year with the tractor way program that is our number one tasks that we ask a cuts that we ask our team members to do is to receive a truck and get the product to the shelves and we implemented with with technology and with process.
Significantly improved approach to that the next biggest task that we had is the merchandising activity that happens in our stores, whether its seasonal resets in cap executions, we call Sci is which are resets of certain categories and the completion of a line review on on et cetera, and Thats, Our second largest act.
Tivity and as you know right now we use existing labor in our stores to execute that.
It's it's again tried and true across retail when you can aggregated team and have them focused solely on those executions and those tasks. They are efficient you get more efficient because they're putting together. They are doing the same reset across 15 20 stores at a time.
You also get more efficient your processes and your systems to drive that execution, whether it's the way you build your planet Graham whether it's the way that you load your product on the on the.
As it comes into the store on pallets and gets set aside a very committed to to just driving task down in our stores, making it more efficient and shifting it to our customers make our company more productive how do we could you need to make our company all.
Resources count as count.
As you said.
It is very common in the industry for the vendors to support that sort of program and I was kind of implying that in my remarks, because the activities are directly related to the on shelf execution to those vendors program. We haven't vendor conference in a month them. This is one of the discussion points will be having with them and then also overtime.
As our stores get more efficient in their tasking I do think there's opportunity for our payroll to be more efficient in the stores as well so in the long term our while we have.
Some incremental investment we're making in the team in Q3, and it will slide a little bit into Q4 in the long term we think at this.
Operator, Carol we certainly.
Well, we have in the queue, we're going to let the common.
For a few minutes longer.
Our next question comes from Scot Ciccarelli from RBC. Please go ahead.
Yes.
I had another Paula.
On the new customer front, just gets flat this year's trends.
Hello, I Wonder if you guys have any data on who you are in new customers are where they are coming from in other words are these customers new to the rural.
Environment, because they're moving out and urban and suburban areas or is it more that.
Wrapping it other venues and migrate a tractor supply and if it's the latter what channels are they leading to come to tractor supply.
Yes, hi, it's a it's a little bit of those Scott so.
Yes, we all read the same datasets on kind of about mobile data and seeing work where people are in the United States and you're seeing less density of mobile data and insights in cities and you're seeing more density in suburbia and even more density than past in rural.
And when we look at our customers and these new customers are required customers. We're seeing that its people have left the cities, where we don't have stores. They are moving in suburban the moving up in the suburbs of they're moving out to the rural communities on their embracing the out here lifestyle, some and their shopping tractor supply because we were the fit we are that lifestyle.
And then.
For the customer, but we also are gaining share.
With customers that are already out here so to speak.
And I think it's coming from ABR and it's.
Each of the categories just to give US an example, so in it.
And apparel, where our sales have been strong as we've said all categories were double digit comp Inc.
Yes.
Validation, there instead of customers going to a standalone apparel retailer.
And they had about that one or two items into they really want to kind of take on that kind of safety.
Kind of Ellen.
And there are going to be in there to Bob maybe pet food or or animal feed and they're picking up their picking up their closed while they're in there or boots or or any other items. We have any apparel area. Then you think about pet all time high pet adoption a lot of new customers in the market.
We're maybe customers that used to shop for pet food and say math.
Our store being 15 to 18.
Thousand square feet with big focus on safety and we've been very vocal about that I think we're a kind of convenient location, we're probably us in many might and many of our customers in fact, our number one customer shopping criteria. We do our survey results right now its safety and cleanliness and we have lean into that from a from.
Our actions and then also in our marketing.
And so we think we're capturing some of that share. We're just people more comfortable coming into our store.
And then you go around on pet feed.
There, we think we're taking share from some of our farm and ranch competitors, who maybe you're having more difficulty getting access to product right now.
As you all know some of the co op change there may be having a little more of a struggle.
And we think this is where the scale of tractor supply and being.
And being decides that we are in the connections that we have relied vendors have set talked about earlier really allows us to stay in stock and service that day central retailer up for those customers.
And we've been very focused as Curt mentioned earlier on everyday low price our pricing in pet food and animal feed right now as sharp as it's ever been.
And then you go all the way around into Garden, and we think we've gained a lot of sharing guard and this year.
And it's been a great spring it but we think even in the context of that spring. We've gained a lot of Sharon I think that speaks again to our format to tighten the merchandising team did a great job setting ourselves up regarding this year, we're planning on taking a big swing in that category. This year and it really worked out well for us as customers that had really really go to 13, 15 18000 square foot store.
I feel comfortable going in I can get in and out.
Not in overwhelmed parking lot.
And.
The products that we haven't our stores are equivalent to.
Really what out the other options they have elsewhere. So it's a little bit of both new customers existing customers and on existing customers think we're taking it from many to places you would think they would have historically shop last thing I'll mention is online we've been aggressive online mentioned the triple digit online growth that we had this quarter and we think we're here.
Having our own and taking share online as well from whether its multichannel players or from ecommerce only.
Our next question comes from Matt Mcclintock from Raymond James. Please go ahead.
Yes, good morning, everyone.
Asset congrats great job executing.
Mike Mike My main question here, how is really.
As we speak through everything that you just said on this call under a lot that you said on this call a lot of initiatives. I think you were already planning on focusing on space productivity for coated so I wanted to understand or better understand what initiatives.
You're talking about today, we're already in place before coded and what initiatives investments are you, making now that youre seeing how.
Fundamental consumer behavior might BTG because of cobot can you kind of maybe parse those two things out just so we can understand.
Please thanks.
Hey, Matt and thanks for the question.
Yes, I'd say two things I would say on that first off in in March and mid March when we had it kind of our meeting greed up in New York, We didn't talk about base productivity and I'd say that was kind of early days thinking if you recall that we are sharing with you in saying we thought this was an opportunity and we were going to go start to take.
Plans in place to attack the opportunity I. The first thing it's a it's just.
Just outstanding work by SASSA, and his team and John orders and his team and our construction teams for in the midst of a pandemic and we're doing all this activity to support our team members. All this activity to drive the business in the midst of it they're also putting in place plans to address base productivity stay.
CTG clean look out 18 months two years three years so.
So first off I'd say, we didn't really have a roadmap in place in March we talked about it was more of an idea and over the last three to four months. The team has kind of not only walk and chew gum at the same time, but jump rope and and.
Pulled together, what I think is a very compelling potentially transformative plan for the company.
The second thing I'd say as we are leaning into those tests in a more aggressive way given the strength of our business right now that we might have otherwise we are doing 75 of each one of those stores.
Which is a pretty aggressive swing for a pilot, but that just demonstrates the bullishness that we have in the solution and also the speed at which we want to execute once we get the data sets out of the pilots.
This concludes the Q and a portion of our call I would like to turn it back to marry win for final comments.
Thank you very much Carol and I'm glad we were able to get a few more people in there for the Q and I said. Thank you all for your cooperation. This does conclude our call today and thank you for joining as we look forward to speaking to you on our third quarter call in October and on a Randall Marianne if anyone in thanks. Thank you I will take care.
Thank you and once again this does conclude today's conference call. Thank you for your peak for your participation you may now disconnect.
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