Q3 2020 Tractor Supply Co Earnings Call

[music].

Thanks for taking the time today to join Us and I do hope, you're all staying safe and well and on behalf of all of US at tractor supply I also want to thank frontline workers around the country, including our own team members, who worked so hard to ensure that our stores can continue to provide our products and services to the communities week.

Call home.

Today, we have a packed agenda.

First we are here to discuss our third quarter results with how Lawton, our CEO and Kurt Barton our CFO. After that we will be joined by members of T. essays executive team, who will go into greater detail on sound like tractor Supply's key initiatives to support our company's long term plans following their presentations there will be an.

Extensive QNX period, when they will take your questions.

Our goal is to allow about an hour for the Q and a session and we plan to conclude our advanced by noon central time.

A replay of the webcast as well as the QNX session will be available on our website at IR tractor supply dotcom under events and presentations.

But before we get too far down the road I'd like to ask you to take note of our Safe Harbor statement. Please note some of the discussions presentations and statements that we make today regarding our business operations and financial performance may be considered forward looking.

Such statements involve a number of risks and uncertainties that could cause actual results to differ materially in many cases. These risks 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 expectations or any of it.

Forward looking statements will prove to be correct and actual results may differ materially from expectations important risk factors that could cause actual results to differ materially from those reflected in the forward. Looking statements are included at the end of the press release issued today and in the Companys filings with the Securities and Exchange Commission, because we you select non.

GAAP measures to describe our business performance, we provided a reconciliation of these measures to the most directly comparable GAAP measures, which is included in the appendix of this presentation and will be posted on the IR section of our website as part of today's call.

The information contained in this webcast 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 webcast. Thank you for your time and attention.

Now, we'd like to share videos, featuring one of our many team members who lives our lifestyle and brings a tractor supply story to lie.

[noise], they make us who we are.

They are farmers.

[noise] their husbands in line.

[noise] their family.

Your friend [noise].

Again, it's early.

He comes online.

[noise] they do whatever it takes to get the work done.

And get it done right [noise].

[noise] horse people [noise] and good.

And good people [noise].

[noise] Trafton [noise].

No seat [noise].

[noise] are hard working [noise].

In hard planning.

[noise], we depend on them to keep the doors open [noise].

[noise] they are tractor supply.

[noise] me to 10, and then to keep the doors open.

They are hard working.

In hard playing.

They know tractors and they knew feed.

They are horse people.

Good people.

They do whatever it takes to get the work done and get it done right they get.

They get up early and come home late.

Their family and friends.

Where farmers there has been like.

They make us who we are [noise].

[noise] tractor.

Hi.

Hello, everyone and thank you for joining us today.

When I first of all the video that we just shared with you I thought a really captured the essence of tractor supply as a purpose driven company. It is who we are it is what we do in retail today, having knee and purpose with customers makes all the difference it is a pleasure to speak with everyone today.

Not only about our third quarter results will also about our wipe out if your strategy.

We see opportunities to capture tremendous growth ahead of us.

As we're in the midst of a global health crisis, and all that comes along with that you didn't feel that it was appropriate to do a full investor community day rather.

Rather it's our goal today to share our life thought here strategic framework and provide greater insights on our initiative as we plan for 2021 and beyond.

Overtime as the World Normalizes, our goal would be to host another then the future as appropriate.

Tractor supply is well positioned to leverage our stores and capitalize on our omni channel capabilities.

We have a large total addressable market women attractive position and are gaining market share.

We're focused on operational excellence execution discipline, and making investments from a position of strength for long term value creation.

We're on a multi year journey to evolve the future of our company we.

We are thriving as their second and third quarter results indicate what the.

And with the actions were taking were committed to emerging from the pandemic stronger than before.

Licensee or thinks the depreciation go out to our more than 40000 team members of tractor supply that delivered these strong results there.

This is the team that's been operating during a global pandemic supporting recovery from multiple natural disasters and executing at elevated sales levels. While at the same time laying the foundation for our future growth comes.

Coming into the quarter, we recognized it would continue to be a challenging time and our team certainly stepped up to the challenge throughout all the organization has lived up to our mission and values and all.

And also want to thank our vendor and supply chain partners, who have done a tremendous job supporting us in this challenging operating environment.

I'm incredibly proud to be a part of this team the results that we reported for the third quarter would not be possible without the team's inspiring efforts over the last several months. The tractor supply team has been fully committed to adapting to the uncertainty brought on by the pandemic.

Our utmost priority has been the health and safety of our team members and customers, we're committed to being a safe place to work and a safe place to shop, and we continue to implement industry, leading best practices across all parameters of safety.

Our team member engagement scores continue to rank among the best in class.

We have taken steps to reinforce our appreciation of the hard work of our teams that enhance and build on our culture.

We're also committed to supporting in strengthening the local communities that we call home.

Before we get into our lives on your strategy, then I'm very excited to share with you let's cover off on some of our third quarter performance.

The third quarter was another exceptional quarter for tractor supply.

Our results were very much a continuation of the trends we experienced in the second quarter.

For Q3, we had robust and consistent growth across all periods.

All product categories, and all geographic regions.

Our brand awareness campaign, along with our new customer growth.

We used to be a significant driver of our performance.

Our E Commerce business continued to drive ripple digit comps with nearly 80% of our omni sales picked up in our stores.

And E Commerce continued to increase significantly as a percentage of our overall sales doubling its penetration year over year.

The work we have done to improve our E. Commerce capabilities has certainly resonated with our customers. For example, our recently launched customer App has had almost 500000 downloads since our launch in July.

For the third quarter, our business continued to perform at record levels as an essential needs based retailer we are supporting our customers the products they need to take care of their families their animals their land and pets.

Net sales for us in the third quarter was up 31% over last year with comparable store sales up 26.8%.

Much like second quarter, we had good balance across both our transactions and our ticket growth.

The top performing categories were in our core competencies of pet food being forage agricultural fencing poultry in bird feeding a.

Along with seasonal categories like zero turn tractor outdoor power equipment, and lawn and garden as we had an excellent extended selling season for these categories.

And we had robust performance in our big ticket sales driven by strength in zero turns they generators trailers and front engine writers are.

Our Q products consumable usable and edible categories, which represent the strength of our core recurring business had comp sales growth in the high 20% range and acceleration from our mid teens performance in the second quarter.

We're gaining share in these businesses and across the board, including Pet food.

We continue to engage with new and Reengage customers at among the fastest rate in the company's history on a combined basis more than 10 million identified new and Reengage customers have shop with tractor supply since the start of the pandemic These new customers skew younger.

Were higher income and slightly more female and they represent significant incremental growth opportunities for us to unlock more customers shopping with us than ever and they have larger basket.

The feedback from our customers on their shopping patterns at tractor supply include positive comments, such as convenient locations.

Selection of products and more import most importantly pre.

Previous positive shopping experiences that our stores.

Our opportunities to capitalize on these trends as we look to nurture these customers and gain market share.

We're working hard to retain these customers with marketing products and service offerings and will continue to make investments to do so.

Before we turn to our strategic framework for life out here Curt will now take you through some greater detail on our performance and share our outlook for the fourth quarter. Thank you Hello, and good morning, everyone I will.

I will go through more of the third quarter financial highlights and then come back as part of our strategy update.

At that time I'll share with you greater details on our focus to generate shareholder value.

First I want to build on the overview of our sales that Hal shared earlier and provide a couple of additional highlights.

We did have marginal sales benefit from emergency response products as our teams work to support the communities impacted by him from multiple hurricanes and the wildfires out west.

In addition, much like the second quarter, we had ideal weather conditions for the quarter also contributing to the comp sales performance.

Another highlight for the quarter is that we continue to achieve strong year over year growth in our private label credit card sales the large.

The largest growth in our plc tender came from standard financing, while also seeing strength in our big ticket sales.

We continue to see strong growth in this program, providing us the confidence that our 5% reward program is resonating with our customers.

Gross profit as a percentage of sales was 36.4% in the third quarter, that's an increase of 138 basis points. This.

This increase was driven principally by a reduction in frequency and depth of promotions and a lower level of clearance both of them as a result of strong demand for our product categories and our focus on everyday low price we.

We also benefited from lower transportation costs as a percentage of net sales as most of our cost inputs were favorable to the prior year, such as domestic carrier cost imports and fuel costs.

We did begin to see a meaningful shift in the domestic and import carrier costs beginning in the third quarter, which will begin to flow through the personnel during the fourth quarter and I'll speak to that in a bit later.

Selling general administrative expenses, including depreciation and amortization increased 30.7% compared to the prior years third quarter.

As a percentage of net sales estimate expenses improved 14 basis points the.

The robust comp sales performance drove over 250 basis points of leverage in our core SGN expenses inclusive of the permanent wage and benefit increases effective in July of this year.

Now the strong leverage was partially offset by incremental costs related to the COVID-19 pandemic.

Investments in strategic initiatives, including incremental advertising initiatives and.

And increased incentive compensation with the majority of that incentive compensation for the benefit of the frontline store teams given the record sales and profit performance in the quarter.

You commented costs related to COVID-19 pandemic was in line with our expectations, albeit at the higher end of the range and it included additional labor hours and supply costs dedicated to the cleaning and sanitation to enhance the health and safety of our team members and our customers.

The three incremental cost factors I just pointed out represented the vast majority of the offset to the 250 basis points of leverage.

Turning to profitability, our operating profit dollars increased $90.4 million over the prior year with operating profit margin of 9.7% an improvement of 152 basis points net income was $190.6 million an increase of 56%.

Diluted EPS was $1.62 an increase of nearly 59%.

When it comes back up later in the event I'll give you a greater perspective on our cash flow liquidity and capital allocation priorities all of which builds on the current strength and health of our balance sheet.

Moving now to our guidance for the fourth quarter.

Looking forward, our view assumes no significant worsening of the pandemic or any dramatic re closing of the economy.

To date, we continue to see the strong sales momentum in the business. We expect this momentum to continue, albeit at a lower level than the third quarter as we forecast delivering strong sales and profitability for the fourth quarter.

We continue to believe it's always better to look at our business by the halves of the year.

Due to the unique situation related to COVID-19, we are providing our view on the fourth quarter similar to how we did last quarter.

Factors contributing to a heightened level of uncertainty include the door.

The duration and impact of shelter in place restrictions and social distancing measures the potential for incremental government stimulus benefits elevated unemployment levels and the November elections.

Additionally, the fourth quarter sensitive to shifts in weather trends and seasonal holiday shopping patterns.

With this backdrop, we would anticipate the strength in our comparable sales trends to moderate as we move through the fourth quarter.

For the fourth quarter, we expect net sales to be in the range of $2.6 billion to $2.7 billion and comp sales growth in the range of 15% to 20%.

Net income is forecasted to be in the range of $163 million to $175 million.

And diluted EPS of $1.37 to $1.47 wins.

We anticipate gross margin in the fourth quarter to be in the range of flat to a modest increase compared to the prior year.

There are three factors driving the shift from the more favorable trends of the two most recent quarters.

One we are cycling strong prior year gross margin performance in the fourth quarter, which benefited from strong direct margin performance as our merchant teams partnered with our vendors on achieving a solid overall landed margin and then.

And then two we anticipate the transportation cost to be higher as a percentage of sales due to rising costs in both domestic and import transportation and allow.

And along with that higher seasonal surcharges for small package parcels related to our strong and growing ecommerce business.

And then three in comparison to the previous two quarters, we are planning more promotional events. During this always promotional holiday shopping season.

In regards to US today, there are two incremental cost to the business factored into our guidance.

First the COVID-19 related costs of approximately $17 million to $20 million to ensure the health and safety of our team members and customers.

And then second an incremental $12 million to $15 million for the prioritization of our strategic growth initiatives.

And as a reminder, consistent with our third quarter, our move to permanent wage and benefit changes will represent an incremental $13 million in the quarter.

And for modeling purposes, as a percentage of sales, we estimate 40 to 50 basis points impact from incremental incentive compensation based on the strong performance of the quarter and the full year.

Lastly, we are forecasting our net income growth for the quarter to be generally in line with the sales growth.

To wrap up our recent results reinforce the confidence and optimism of our future we are.

We are moving fast to capitalize on the exciting opportunities. We see ahead of us I look.

I look forward to coming back here to discuss with you our plans for delivering sustainable shareholder value and with that let me turn it back over to you how.

Thanks Kurt.

We've been operating in this challenging environment for more than seven months now and our team continues to show great resilience determination and commitment wants to.

Once again I'd like to express my deepest gratitude and appreciation for the remarkable performance across the entire tractor supply team.

Thank you.

Thank you Howard cart I believed that our results year to date create an environment, where we can continue to strengthen and grow our business well into the future now let.

Now lets turn our focus to our life out here strategy. This approach built on tractor supply strong heritage of the over 80 years as a dependable and convenient supplier for the out here lifestyle, how will now share more details around the strategy and his insight.

The next hour so you'll hear from myself John orders set these step Rob Nils and Kurt Barton on our life out here strategy.

As mentioned these presentations will be followed by Q today.

So lets jump into it.

Tractor supply has a strong heritage of being the dependable and convenient supplier for the out here lifestyle. We're a purpose driven company, we're deeply rooted in our mission and values we ever.

We have a resilient business model and a track record of performance and importantly, we see an exciting future with compelling opportunities for growth and value creation.

We are an integral part of our customers' lives.

We equip a way of life a way of life that we respect love and often live ourselves.

We served the lifestyle needs of recreational farmers and ranchers as all those he simply enjoy the rural lifestyle.

We have a diversified retail footprint of over 1900 stores across 49 states are.

Our footprint is a competitive advantage for us and it allows us to address the needs of our customers better than anyone else in this fragmented market.

Our size also allows us to have strong relationships with our vendor partners and to efficiently invest in technology and supply chain infrastructure.

One of our special sauce is our ability to leverage this footprint and be net while being nationally strong also being able to tailor to the needs of our local community.

Our culture is a competitive advantage our mission is work hard have fun and make money.

This mission is supported by 10 value combined they serve as the underpinning of our culture and guiding principles for how we conduct our business our FFO.

Our focus on life out here in combination with our culture and our store footprint has been our foundation for our business model. This business model is proven to be very resilient as wouldn't need based and demand driven this has allowed us to expand from 200 stores to over 1900 stores in the last 20.

Years with trailing 12 months revenue nearing $10 billion, we have consistently delivered strong results over the last decade, we have a track record of positive traffic and same store sales growth, we generated strong free cash flow, while maintaining a disciplined.

On the use of financial leverage.

We are strongly committed to environmental sustainability efforts. This is important to our team members our customers the communities, we call home and our investors.

As an example, we saved 138 million kilowatt hours since 2013, and we recycled 3.3 million wood pallets last year and.

In 2018, we announced our goal to reduce carbon emissions from our facilities by 25% by 2025, and we've made great progress towards achieving that goal.

We are also a strong proponent of diversity equality in inclusion in our workforce with over 49% of our team members being female we.

We also published our first ever SG tear sheet. This year, along with completing our inaugural submission to CDP in August.

And hopefully you all saw our announcement last week that tractor supply was designated as a great place to work with.

We compete in an attractive market that is benefiting from numerous tailwinds.

Consumers have always invest in their homes and they are doing so now like never before.

Head ownership is at an all time high and pets have evolved into a true family member.

Also we've seen the migration of our of the United States population out of dense urban areas out into the rural and suburb of America and homes standing activities in self reliance are very much in though.

And additionally, because of our lifestyle and our 15500 square foot format. We are also benefiting from trends like trip consolidation as we look ahead, we see significant opportunities for growth and we're committed to investing gain share and create value in a large relatively.

Fragmented market.

We estimate that our total addressable market to be nearly $110 billion and we believe that our share to be approximately 10% and this provides us significant upside potential to expand our share of this large market.

To capture this growth will continue to invest in new stores with a target of 75 to 80 stores per year, we feel very good about our long term market potential for 2500 tractor supply stores, our new store economics continue to be strong with robust returns.

The other way will grow is investment in our life out here strategy we.

We are all about bolt out here lifestyle and our strategy is being focused on being an integral part of our customers' lives and their five pillars to this strategy.

The first is deliver legendary customer service.

Second is to advance our one tractor capabilities.

The third is to operate the tractor away the four.

The fourth is to go the country mile for our team and the fifth is to generate healthy shareholder return so.

So lets review them in a little more detail first delivering legendary service is a core component of our mission.

This strategic component includes activities such as our brand campaign CRM activities and the evolution of our Neighbor's club.

The objective of this pillar is to expand and deepen our customer base.

Second advance our one tractor capabilities, we launched our one tractor strategy in 2017 and have made significant progress. Since then you'll hear later from Rod mill on our actions in this area, which includes our mobile app omni fulfillment options and web site enhancements the.

The objective of this pillars to ensure that our digital capabilities stay ahead of our customer expectations.

Excellent and operations has always been a hallmark of tractor supply.

We call this the tractor way our third pillar.

The three main areas of focus for this pillar, our space productivity store labor productivity and supply chain capabilities and you'll hear.

And you'll hear more from staff on project fusion and our store Remodels and on our side light transformation.

And from John He's going to share with you some insights on our fast initiative and how we're using it to drive labor productivity.

Our fourth strategy is that we go the country mile for our team. Our team members are a source of competitive advantage for us we have.

We have a highly passionate engaged team.

In many instances, we hire our customers who bring their lifestyle expertise to work every day.

And we continue to invest in our team members their wellbeing and their workplace experience, we're committed to a safe respectful and inclusive workplace.

We have industry, leading store and DC manager retention.

We provide significant opportunities for growth for our team members.

And finally, our last pillar, it's our goal to generate healthy shareholder return given our.

Given our strong financial performance and resources will continue to make investments that you'll hear about today to grow our business.

We believe we can set an even stronger foundation that will enable us to emerge from the pandemic stronger with the goal of generating healthy shareholder return.

We believe our key strategic in East initiative will be meaningfully accretive to our financial profile and you'll hear more detail from occur later on how the life out here strategy purposely aligned our business and our financial strategy.

The leadership that drives the execution of these five pillars is an experienced management team with a strong track record in retail.

Hurt that John in bed, they bring 65 years of experience with tractor supply.

We've got Rob Kristine Kolon, they each have five years of tractor supply, but bring experience from Ulta and home depot and target and.

Melissa Kersey recently joined us as our CFO Gerardo after experiences at Walmart and Mcdonald's idle.

I've never been more excited to be part of such a dynamic team who will lead our strategy in the years to come.

To wrap up tractor supply has a resilient business model with a differentiated and loyal and growing customer base.

We are moving at a fast pace with our life out here strategy, we're creating tractor supply 2.0 to ensure we continue as a strong relevant company for the future.

Now is the time for us to invest as we look to drive sustainable growth and long term value for our shareholders.

Thank you Hal for more details on how we are executing the life out here strategy, let's hear from our deep and experienced executive team first that executive Vice President and Chief Merchandising Officer, Sathi Stat, Seth will share some exciting developments within our product portfolio and provide updates on several initiative.

This focus on driving productivity at the space inside and outside of our stores.

Thank you Mary Winn and Hello, everyone.

I'm excited to be here today to share with you some of the key merchandising initiatives to drive sustained top and bottom line performance.

We believe we have a significant opportunity to add science enhanced analytics and category expansions to drive sales and become an even more integral part of the out here lifestyle.

Specifically as we look to drive consistent mid single digit comp sales.

Maniacal focus must be given to drive new space productivity.

As you can see when looking at the productivity of our stores versus other retailers in the peer group. We believe we have considerable opportunity to close the gap.

And we have several key initiatives that we'd like to share with you today on how we can ship these metrics up into the right.

At tractor supply, we have a lot of exciting merchandising programs in the works, but there are three initiatives I want to highlight for you today that we believe will help drive our space productivity in our stores.

First we recently implemented new technology that dramatically enhances our ability to leverage AI and data analytics to optimize our product assortments and meet the local and regional needs of our customers.

This technology on lots vast amounts of data and insights to help us make decisions that both the store category and SKU level.

Second is project fusion.

Tractor Supply's first true remodel program that will help enhance our customer shopping experience drive.

Dr. convenience and brief fourth our latest merchandising initiatives to our existing store base.

And third we have a sidelight transformation project that we believe is a significant opportunity to grow sales increased trips and improved convenience by leveraging our outdoor selling space to live up to our commitment to have everything our customers need to live life out here.

Through these initiatives, we believe we will grow sales per square foot increase.

Increased market share improve customer retention and acquisition as well as grow the market basket and profitability.

I'm excited to share with you more about these programs today.

We have completed several technology and analytic initiatives that will drive space productivity across all 900 plus stores.

First we are currently implementing our new channel clustering and assortment optimization tools.

These new tools will elevate the way, we allocate product in space as we blend science with the Arden merchandising.

These systems take into account a wide range of data sources and combined them with the overall merchant product strategies to generate optimal product recommendations.

We believe these new capabilities will result in growing market share achieving higher profit margins with improved inventory precision and supporting more regional and localized assortments to be the dependable supplier for our customers.

All of which will drive greater sales per foot and store productivity.

For instance, the seasonal Division store clustering example, combined stores with similar customer demographics.

Pos purchasing data and other data points to optimize our seasonal product assortment to fit what they need.

This data tells US that group won in this example, primarily dominant in the deep south aligns with the past story will pride mosaic.

A proud working class customer who lives in rural communities that.

The data tells us that key product categories for this group our track turn riders wrecked vehicles and tractor maintenance so.

So using this information we will tailor the seasonal assortment in these groupon stores to meet those customers' needs to drive sales and enhance productivity.

Our goal is to be locally great and nationally strong by optimizing our use of space and localizing our product assortments to meet the market needs.

Project Fusion is our second primary initiative to drive space productivity.

We project fusion, our goals to remodel our existing store base, bringing programs to life with new fixtures layouts and products that truly enhance the customer shopping experience.

The site level space as they analyze category by category and re allocated as needed to align with current merchandising strategies and to drive space productivity.

When reviewing the age distribution of our current store portfolio. We believe we have an opportunity to rollout project fusion across 60% to 70% of our store base over time.

In addition to these remodels, we will continue to implement our best in class merchandising programs to non fusion stores through product resets as well as new store openings.

By the end of 2020, our target is to rollout project fusion to 75 stores and we plan to accelerate this initiative to 150 to 200 stores next year.

Our third major space productivity initiative is our sidelight transformation.

Many of our stores have an equivalent amount of outdoor selling space as they do inside.

For years, we've used our side lot primarily for financing.

Our AG supplies as well as storage by re fix stream the products currently in the sidelines, we can maintain our current outdoor assortment and add significantly more products in categories that are meaningful for our customers to care for their home and their land.

Our goal is to leverage this underutilized outdoor space to be out here lawn and garden authority and to enhance our relationship with our customers to be the indispensable supplier for the lifestyle they choose to live.

There are several ways that we're going to leverage this outdoor space. We're excited to build out a four to 5000 square foot Garden Center side lives.

Based on our customer research outdoor lawn and garden is the number one category that our customer customer base plays in that we currently aren't a destination for.

We are implementing a drive to pick a plane for buy online pickup at store orders to give new and existing customers the convenience and picking up their feet on the go and giving them that contact list customer experience.

This sidelight transformation will enable us to become the out here lawn and Garden authority.

By the end of 2020, our target is to transform the side lives of 55 to 65 stores either completely or under final construction as we enter 2021.

And we plan to accelerate this initiative to an additional 150 to 200 stores next year.

We will also start to open up new stores with our new side lot prototype in the back half of 2021.

We've already identified growers that could support more than 75% of our current store base and overtime, we anticipate transforming the sidelines and 60% to 70% of our stores.

Now that you know a little bit about these initiatives I'm going to take you on a really quick tour of our fusion and sidelight transformation that we recently completed at our Rome, Georgia store.

The rone stores representative of a typical store for our chain with around 15500 square feet of indoor selling space and also an attach sidelines with an equivalent amount of selling space. This.

This store opened up in 2005 and as you can see it has an opportunity to improve how we are presenting the brand to our customers over the next few minutes I am going to take you on a virtual tour and walk you through several of the updates to improve the brand experience and drive space productivity.

It all starts when a customer enters our stores at tractor supply, we want everyone to feel welcome and really connect to the out of your lifestyle, we want to be an inviting experience with open sightlines across the store and one of the big changes of this layout and boss trading one central customer service and checkout hub.

Offers can really use as the heart and soul of our store.

When you move to apparel, we've reallocated merchandising space debris and new brands like Colombia, expand winning brands like carhartt area, particularly in women's apparel.

Pair area has a fresh new appearance and layout.

Next up is total truck in hardware like apparel, we create a store within a store expansion Utilizer air rights of new fixtures completely re tumbled be adjacent fees and category space to improve productivity. We know we have an opportunity to grow market share and tools and DIY and with these changes were also introducing brands such as makita.

That resonate with our customers and the lifestyle.

In our updated feed area customers to shop by species, whether it be livestock poultry or equine in home setting categories, where we can differentiate retail today here.

Here you can see just our new router tower solidifying TSV as the destination for poultry.

Tractor supply customers love their animals and in our Pet Department, we've also increased space, allowing more holding power as well of allocating additional footage for categories like pet food and pet accessories, while improving the sight lines and shopping experience.

This is such an important category for us and we continue to see opportunity to gain share.

CSC is also a great place to have an outing with your dog and we've introduced new services for customers such as our pet wash. This new feature has been really well received by our shoppers we.

We also plan to incorporate pilot wellness centers in select stores in partnership with our mobile clinic provider.

Gardening and landscape, our significant destination categories for tractor supply, but we think we are only scratching the surface as we mentioned earlier, we recognize we have an opportunity to really leverage these categories to grow within our existing customers, while attracting and retaining new shoppers for our seasonal department, we actually shifted to the other side of it.

The work to align the adjacent fee with our sideline. So we could cohesively, bringing the insight department in the Garden Center to life.

Now, let's move to the sideline area, where you can see a remarkable change in the utilization of space with one of the biggest transformational things. We did was the creation of our Garden Center.

All of our new category highlights in the Garden Center includes outdoor living and drilling bestselling annuals perennials shrubs and trees with a primary focus on fruit and garden, which are very meaningful to the out here customer. We also believe is somewhat soften to store to filter more female shopper base, as well, which could drive sales and other categories like.

Apparel decor and Pat.

We've added color another live goods really focusing in on items and products that we know our customers one as we want to be the destination for all things garden related for our customers.

Beyond the Garden Center, our drive to pickup Lane allows for contact list customer service and convenience.

Customers picking up buy online pickup at store orders stuff at the first bank and at our second Bay, we have our new drive thru barn that allows our team members to load heavy animal feed financing and other core categories directly into their vehicle convenience that we know our customers want.

This is a tire side lot of transformation was completed without losing any products out of our original sidelines. We just improved the merchandising through new fixtures that we say truly enhance the shopping experience and that will drive space productivity.

For my time in the store I have seen first hand, the overwhelmingly positive response from our customers across all departments of the store with the improved shopping experience assortment and creation of the Garden Center.

We hope you enjoyed this virtual walk around the store highlighting just a few of the changes that will bring our existing stores their product assortments and shopping experiences to best in class standards by combining the art and the science of merchandising we believe.

We believe these initiatives will have a meaningful impact to driving space productivity and will be one of the catalyst for sustainable comp store sales as we roll out these initiatives out to the chain overtime.

I hope you enjoyed seeing or project fusion inside lot transformation initiatives through our through the life of our Rome, Georgia store.

We look forward to bringing enhanced format to more stores across America in the coming months in years ahead.

And as we wrap up today, a few key takeaways I want to leave you with first.

First we have significant significant initiatives to drive sustainable sales for space productivity.

Second we believe that our growth investments in technology project fusion and sidelight transformation will allow us to gain market share and drive comparable store sales overtime and.

And third our merchandising and shopping experience initiatives are designed to grow attract and retain customers.

Over the past 82 years tractor supply has worked hard to position our business as the most dependable supplier of basic maintenance products to farm <unk> Ranch and rural customers we.

We built a legacy on our ability to help our customers care for their home their land their pets and their animals, but the story isn't over yet with it.

With these initiatives, we are strategically poised to grow our business and continue to enhance our customers' in store shopping experience, while tailoring our assortment to serve their unique needs.

Thank you very much I appreciate your time today.

Thank you Sam you know tractor supply has become the largest rural lifestyle retailer in the U.S. by focusing on the continued improvement of our customers experience inside our stores, we call it operating factor way and its how TSC drive productivity and efficiencies to elevate customer service here.

Here to tell us more about operating detract away and its positive impact across all 1900 store is executive Vice President and Chief stores Alphatec John Order.

Thank you Mary Winn, it's great to talk to you all today about operating the tractor way.

Before we talk about tractor way I'm going to talk to you about our opportunity.

Tractor supply we have a solid operating foundation in place across our more than 9100 stores.

At the same time, we believe there's an opportunity to increase labor productivity.

Based on our industry benchmarking, we know we have room to grow to be best in class on customer facing sales driving initiatives.

Our teams have made progress over the last couple of years was a nearly 400 basis point improvement in customer service by adding workforce planning.

Pest management and the.

And the rollover of our tractor way program.

There's still a lot more that we can do to help drive efficiency in our operating processes and structure free of hours the focus on customer service.

We're going to continue to reinvest and labor efficiencies and the customer experience. We're also going to continue to invest in new stores with a target of 75 to 80, new stores a year dry.

Drive productivity productivity of our existing stores.

Take task work out of our stores and used.

And use technology like initiatives like in store communication Labor management.

Interfaces I give team members actionable information and capabilities and optimizing payroll by store.

The foundation of our strategic pillar operate the tractor way is the tractor way program we.

We first launched chain wide in 2019, as a way to make our freight and recovery process more efficient and reinvest the hours from operational efficiency into customer experience.

Our initial program focused on our most time intensive and high customer impact processes things like freight recovery daily maintenance zero and feed the floor.

The focus was to drive value to the customers through more time for customer service improve.

Improved in stock position.

And recovered store that is easy to shop.

To provide more time for customer service, we drill efficiency in our key processes through designated roles like our assistant manager is now our freight team leader.

Smart process design that remove waste of stuffs.

We invested a new carts totes and scanners.

And clear finish line goals and schedules to motivate the team to make sure all stores are following the same process.

We have excellent training support and a process built to support all stores and account for normal retail disruptions.

With this foundation, we have built some strong muscle in the world to productivity I have never seem to feel take other program execute like they did with the tractor way program. They love This program.

The outcome of the process improvements allowed us to roll out the gross sales leader in all stores.

I'll talk more about this position in just a minute but.

But the key point is the position works our racetrack in stores engaging with every customer.

We have the best team members, we hired our customers and they love to talk about our products because they live that out here lifestyle. We're.

We're relationship retailer our CFO.

Our customers have responded to the changes we made with attractively initiatives.

We measure customer experience in our stores by Gurus scores.

Who run stands for greet uncover recommend and assessed and we also measure overall satisfaction.

Our customer score our stores a treacherous plus that is who we want to hear from that as who should square stores.

Even though we are already top box on both metrics as you can see we improved our already high scores. This.

This chart highlights the strong improvements in availability assistance and product availability.

Adding the gross sales leader in every store helps us engage with the customer faster and as you can see a buildup assistance has increased 250 basis points.

After seeing success with freight recovery the most labor intensive activity in our stores, we're now applying the tractor away to other areas of store.

Our field activity support teams are another example of applying the tractor way philosophy to remove test work from the stores and make that work more efficient for the teams that are doing it.

By removing this highly variable work from the stores and giving it to a specialized team. We have again provided more time for our store team members to execute euro.

The purpose of the fast is to support the stores and creating a legendary in store experience for our customers through best in class merchandising execution.

Fast those us through consistency speed them.

Speed to market quality accountability and flexibility we.

We launched fast companywide at September 2020.

Let's take a look at our faster remember studying an uncapped as you.

As you can see the festina reuse of tools, we have provided to be efficient as they footsteps when they.

When they are finished the planogram is completely set and the store manager signs off.

Feedback from the stores has been great so far.

I wasn't stores right after the leather boots, and the fasting do it faster and more accurately than in years past.

The store teams are giving very positive feedback.

In the first four weeks of the program, we have seen a significant year over year improvement in Planograms.

This leads the higher sales and much better shopping experience.

We now are executing plenary ramps at over 95% compliance, which is 40 plus percent better than last year. This is.

This is an industry, leading best practice that we will continue to leverage.

With the launch of fast in 2020, we have built cross functional alignment and support we are.

We are already seeing the benefits of the fasting and how we are going to be able to complete more research on time with a higher level of execution, bringing benefit to our customers our store teams and our vendors.

We believe fast can do even more to benefit our customers and our stores as the program matures and the team's gain even more speed and efficiency. So again.

So examples or assembly.

Stop start recovery promotions, physical inventories and a whole lot more.

And we will continue to evolve the fasting capabilities over time.

Now, let's talk about do rock the tractor way is driven by the commitment to provide a legendary customer experience for our customers, we do that by executing Bureau.

Who runs the foundation of our customer experience grief.

Greek timber welcomes the customer upon entering the store.

Serves their name and ask an open ended question about their trip income.

Uncover a team member and covers a customer's needs by building a relationship and asking for their questions.

Recommend team ever leverages understanding of customer needs and resources available to them.

These things like the stock just to make sure that we can provide the product recommendations and it's one of the customers everything they need to complete the entire project.

This is where our team members really stand out as they live that out here lifestyle and have deep experience.

And ESS team members have us several techniques for closing out the sale.

To see the most value from the tractor way when we created the Russell leader the group.

The girls field leaders the air traffic controller of the store there.

They are responsible for ensuring every customer experiences dre upper motivating and coaching team members throughout the store.

We cover all open hours with aggressive leader in every store.

Each grew Russell's leader has a shift goal and they're responsible for communicating that goal through the entire team.

This allows the day to be broken down into smaller segments increased competition to beat the goal each shift.

Bad trusted leader is connected to the entire team with heads up and hands free communication through our in store communication device.

This approves the gross sales leaders ability to increase the speed of service and be way more efficient.

Every team member in the store is equipped with a voice activated hands free device that is effectively serves as an intelligent assistant to offer instant communication and information for the customers needs.

We are continuing to provide enhanced training to equip our duracell leaders and our team members to be able to provide an even better customer experience.

In our stores, we live out the mission of tractors, but every single day. Our mission is to work hard have fun and make money by provide legendary service and great products that everyday low prices.

This is a good service oral cases assist legendary service our teams talking about legendary service and being a dependable supplier all the time.

To live up to legendary and to help fund we developed the HIF Phi program.

This program supports growth by nurturing, our selling culture and provide opportunities for store team members to have some friendly competition in their stores and what their stores in their district.

Hi Fi was all about selling.

Size, the only priorities give the team members some more specifics about add on site, which is part of recommend and asking era.

As you can see our team is really excited about this program.

We focused on categories like pet bird equine chicken and seasonally relevant categories team members are trained on what makes great add on sales for them in these categories. This ensures our customers have everything they need and hub store to reach their sales bonus.

I've also focuses on additional programs we have to offer the customer like our Powerplus protection plan Neighbor's club and our private label credit card or.

All of these areas are at all time highs in our company.

We have seen strong success from high five program and the store team members. This.

This program has been a place for about two and a half years, though.

As always energized when our teams share their customer success stories, when I'm out in the field visiting stores.

I also get a hundreds of success there is a month our team members taking care of customers we hear.

We hear from our customers and our team members.

This year, so far our great team members have had 743000 positive comments or 72% of all comments from our customers.

118000 of these positive comments mentioned a team member by name.

This is Greg that of legendary service.

To wrap up let me end with some key points.

A tractor supply we have an incredible strong foundation through our stores and our committed passionate team members who are proud to serve our customers. Our customer service is key to retain in the new customers that shop will transpire over the past seven months, we believe that we have significant opportunity to reinvest efficiencies from our labor productivity into our customer experience to drive more sales.

Our field activity support teams will allow us to enhance the quality of the in store experience for our customers all while driving more productivity.

Through new technology, and new applications, we can close the gap and customer facing hours in store with best in class retailers to drive more sales.

A differentiator for truck spot is our culture. It is clear competitive advantage to make contractors by a great place to work and a great place us up I've been with tractor supply for around 22 years, now and I'm incredibly passionate about our team members and our customers.

As relationship retailers the magic happens when our team member engages with our customer.

I love seeing our stores and I think you will too.

Thank you all for your time.

Thank you John now is a good time to practise and gave you a very quick Frank.

I will be retiring Chief Technology officer, Rob now will share details on digital expanding role in our life out here strategy and CFO, Kurt Barton will conclude our presentation with our strategy for delivering healthy shareholder return, we see that guarantee.

The back here at the minute.

Ditched a season to add a little warm so life out here and do the past year has been an unexpected one all 38000 of US are ready to help you make the most of this fall.

Everything at everyday low pricing.

You can take care of the ones you count.

Prepared for those shorter days.

Nine.

The Bakken warm up some more family size.

Prepare together enjoy together stronger together tractor supply out here, each new day as an opportunity to enjoy what's around deal to take pride in your land.

To fire up reasons to be together.

To collect new memories.

And grow in fresh ways with.

With all that changed you continue to live life out here to the far east.

So and more than 1800 communities.

Here with everything you need to bring on the new day.

Tractor supply everything you need.

For life out here.

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Welcome back we're glad you're with that now before we dive back in a quick reminder, and just a little over half an hour, we'll have a Q and a session with members of our management team simply stay with them at the top of today's presentation, our CEO how lot unexplained I live out here strategy and its commitment.

Our customer to deliver the product say, Nate however, whenever and wherever they need them.

Joining us now to share how investment in our digital platform is allowing us to honor that commitment both now and in the future here, Rob Nails are easy pay Chief technology Digital Commerce and strategy officer.

Hi, everyone, it's great to be here with you virtually today.

A few years ago, we introduce our one tractor strategy. This strategy drove significant progress for tractor supply, making great strides in providing a seamless customer experience further the capabilities, we introduce as a part of one tractor have help to fuel our growth during recent shifts in consumer behaviors and habits.

Many of our which that are here to say that.

The past six months of accelerated digital adoption across the retail sector are.

Our digital strategies are a key part of our plan to sustain and grow not only with our new and reengage customers, but with our core customers, who are more digitally engaged than ever our.

Our digital growth has been driven by introducing new capabilities and improving their shopping journey.

Even with the significant growth we are still have a tremendous opportunity ahead of us compared to other hardliners specialty retailers just a few years ago ecommerce represented less than 1% of our business and today, we are nearing 6% with continued plans to grow that share.

Our online conversion rates continue to improve with double digit growth in recent years as we evolve that shopping experience through new capabilities and have provided an intuitive checkout with efficient and fast fulfillment options. And example of this is how we introduce curbside pickup earlier this year.

Delivering legendary customer experience is our top priority, making certain that the customer experience as always ranked above our peer group leveraging industry benchmarks such as foreseen.

Well these capabilities, we have built our serving us well today, we will continue to invest in furthering those capabilities in three ways by implementing a best in class platform and technology hiring and developing the best technology team and growing our digital expertise across the company.

Our goal is to deliver a world class customer experience supported by efficient business processes and a strong fulfillment strategy.

We are transforming our business to be more digitally focused and we are connecting the customer experience together across ways, they want to shop and interact with us.

Our customers have told us they want to shop digitally the success of buying online pickup in store and ship to store programs have illustrated this representing over 80% of our online sales we saw a rapid adoption of our customer mobile app. This summer with customers leveraging the shopping experience curbside pickup notifications and managing.

Their neighbor's club loyalty program and our efforts to improve the online experience and drive traffic to the website are resulting in new customer acquisition the.

The goals of our advancing one tractor capabilities pillar are fairly simple.

There are three primary areas of focus accomplish us delivering legendary customer experiences anytime anywhere any way did you.

Digitizing, our business processes and furthering our omnichannel capabilities, let's talk about each of these.

We will continue to transform the customer experience with a focus on personalized content messaging and products that meet their needs in a fast and convenient way we are improving the online experience by optimizing search capabilities and navigation to ensure that our customers can easily find the products and services they require with.

With our newly released customer mobile App, we are able to further personalize those customer experiences and provide features that make the shopping experience simple and convenient.

Drawing insights by leveraging information that our customer share with us through our Neighbor's club program profiles and purchase histories. This allows us to provide product recommendations for their specific animals pets and property for example, a customer purchase baby chicks, a specific needs throughout the lifecycle of that Bert.

Using machine learning to identify shopping trends and needs, we can anticipate and serve our content specific to each stage of the chickens life from caring for checks during warm and cold periods to protecting the flock from predators with the right chicken coop well.

Once these trends and data points are identified we can leverage artificial intelligence to recommence specific products and content fulfillment options to fit the customer's lifestyle and even direct customers to on demand expert advice we.

We are taking steps to further the integration of the online and in store experiences, enabling our team members with information and digitizing the store digitizing the layout of our fleet of stores will empower us to drive improvements and sales per square foot enable team member efficiencies and provide new capabilities such as way finding charcas.

Mers.

Hi, Gena customers dwells in front of a riding lawn mower outside the store for several minutes, we can message them with a compelling financing offer our offer assistance through our mobile app, allowing them to notify in in store team member that they have a question. This is just one example of how we are digitizing the in store experience to convert.

To continue improving a seamless experience, we are investing and intelligent assistants device as John mentioned earlier for all of our store team members, allowing instant communication with one another and being informed of those customers needs by integrating this technology with customer facing capabilities, such as our mobile app, we can reduce wait times.

Times and improve the execution directly impacting the customer experience customer satisfaction and ultimately driving sales you've heard us talk about our expert product knowledge being the authority for the out here lifestyle leveraging this deep knowledge, we are able to cure rate a localized product assortment that meets our customers.

AIDS.

Positioning our in store assortment to me daily needs, then augmenting it with an expanded assortment on our website and mobile app that reaming localized and personalized in addition to having the right product mix. It's important that we provide rich content for our customers and our team members digitizing that deep knowledge I mentioned earlier, we can help them.

How to information when they run into problems on their property provide them data to make decisions about what product is best for their animal needs and make sure. They know what is needed to complete each project in advance.

Earlier, I referenced the customer purchasing baby chicks and understanding the lifecycle of the birds by knowing this information, we can offer them content and advice and relevant time, helping them understand when they need to change feet purchase supplements and other wellness needs that will improve and maintain the chicks help personalize the message isn't enough though.

We also have to offer that knowledge and ways, our customers prefer such as showing relevant content on their homepage, providing fast answers to common questions and problems powered by automation and offering live as the expert capabilities to share deep knowledge and understanding.

Our customers receive their products is a key satisfaction driving retail today, whether in store picked up or deliver how we execute the speed at which we do so in the costs are important factors over the years. Many retailers have accepted inefficient cost structure to accomplish this we have the opportunity to get in front of this leveraging a variety of ops.

Once to offer the value propositions, our customers want without sacrificing profitability.

We are working to align our fulfillment options to our skews and categories to drive this efficiency and profitability and combining this the leveraging of our store locations on inventory investments, we will be able to ensure we provide multiple options that meet the customers expectations with our wide assortment of products fulfillment is not a one size fits.

Saul by providing options to ship from our stores in Dcs offerings by online pickup in store and curbside and delivering products from our stores can help us aligned the right fulfillment method to each specific product a critical component of this strategy is how we leverage our order management systems to optimize how we route orders across our different fulfillment.

Channels, allowing us to deliver quickly and cost effectively to the customer.

Our goal is to provide one day delivery to 99% of our customers, while improving our profitability by investing in systems and artificial intelligence that we identify the right methods and optimize routing of the product. We can ensure we are choosing the best option actively leveraging our network of stores for that final mile My team.

Im is energized to help capture the growth opportunities ahead of US we have much more in the works and I look forward to sharing with you overtime today's framework shared with you and how is how we intend to further evolve our seamless customer experience advancing our one tractor capabilities in summary, I'm going to leave you with four key takeaways that will allow.

US to capture significant growth opportunities ahead of US we will continue to improve the customer shopping experience across all channels striving to be that best in class Omni channel retailer, we will have an extreme focus on digitizing our business processes by leveraging data and analytics and we will provide rich personalized content.

And digital interactions lastly, we will improve sales and profitability by providing efficient robust fulfillment options to fit any need at tractor supply were passion about our digital vision and I'm thrilled to be a part of this organization. Thanks for joining us today and don't forget to enjoy some holiday shopping on tractor supply dotcom.

There are certainly some exciting developments coming from our digital team. In addition to meeting the needs of our customers one of the pillars of our life out here strategy is to generate healthy investor retiring here's our CFO, Kurt Barton to take a deeper dive into that subject.

Good morning again, everyone.

In these incredibly uncertain complex times the tractor supply team has found a way to truly thrive. It is a testament to each and every one of our team members and our resilient business model that we have found a way to really be there for our customers serving them with care and doing our best.

They have the right products and services for them at the right price and available anytime anywhere any way they choose to shop.

Our life out here strategy is grounded in our focus on delivering strong and sustainable total shareholder return we are.

We are humbled by our strong operating financial performance year to date.

Which is a true testament to our differentiated and durable core business.

And as you have heard from how and others given our extremely strong financial performance and resources, we plan to make significant investments to enable us to continue to gain market share.

We are confident that our planned growth and margin driving initiatives such as fusion side lot and fast will strengthen our foundation and enable us to emerge even stronger on the other side of the pandemic.

My goal is to provide deeper insights on how our disciplined capital stewardship supports our business strategy and can deliver strong and sustainable TSR.

I will first highlight our strong and durable financial performance and the free cash flows that enables us to make the critically important or organic investments that we have been discussing with you.

These investments will allow us to build on our strong growth platform and strengthen our advantage.

I will also highlight how we plan to return excess cash to our shareholders through both dividends and share repurchases and.

And then finally I will reinforce our commitment to a healthy and resilient balance sheet with investment grade credit rating we.

We believe the shifting consumer interest and behavior caused by the cobot pandemic has created a sustainable tailwind for tractor supply as shown by the Red line on this graph.

How long that lasts we don't know nobody has a crystal ball to really indicate when normalcy will return.

While the exact dates are uncertain, we view the revenue performance in three phases.

First the cobot Pandemics phase.

And then a one year post cobot period.

And then an extended normalized post covert period being beyond one year.

The one year post cobot period represents the period of time for us to call. The current exceptional an unprecedented performance.

The 12 months following the end of the pandemic will come with some level of uncertainty in our comp performance as it will for most retailers.

We do expect our CCOP revenue to be on a different and stronger trajectory post coded as a result of our strategic investments as this slide illustrates as you.

As you see in the pre cobot time period, we had a healthy trajectory line that was 2.5% to 3% comps.

Soon after Cove, it began significantly impacting us here in the U.S., we saw a major step change in our comps.

With the step up in growth, we have seen during this pandemic and given the important organic investments and broader macro trends that are favorable to life out here.

Our goal is to sustain the stepped up sales growth and to achieve an even stronger growth trend line then pre pandemic the year. After we see the environment return to normalcy and that's shown by the steeper slope in the Blue dashed line relative to the pre cobot trajectory.

When we reach the normalized post cobot period. The main improvement we expect to see is on comp sales, where our key strategic initiatives should be meaningfully accretive to our financial profile. So.

Specifically, we're targeting a sales comp in the 4% to 5% range and total net sales in the 6% to 7% range we.

We expect to remain consistent in our number of store openings in comparison to pre covert period with this.

With the step up in the base revenue the new stores contribute less to the overall sales growth that the pre covert period.

And to remind you we still have headroom to open another 600 locations.

Looking to margin, we believe that through our greater scale and improvements in efficiencies, we have the ability to deliver operating margin in the mid 9% range.

This would lead us to attractive ongoing 8% to 10% EPS growth post normalization.

All of that on a much higher base.

We will also focus on strong free cash flow generation and maintaining a healthy balance sheet all.

All while not losing sight of our goal of delivering strong and sustainable TSR.

Our key initiatives, our laser like focused on improving store productivity, leading to stronger comp growth as you've heard today, we're very excited about side lot and the significant amount of outside selling space that we will use more productively, bringing in an entirely new range of seasonal live goods.

And adding speed and convenience our customers want with drive through feed and drive through curbside pickup.

With project fusion, we're remodeling stores to bring an even more productive and relevant offering to each community.

The multi year rollout of side lot and project fusion initiatives are expected to provide ongoing benefits in the years ahead as we move quickly and thoughtfully store by store with the goal of an extended period of 4% to 5% comp store revenue growth.

As you heard from Rob continuing our one tractor initiatives will help to increase our omnichannel conversion.

Neighbors club program enhancements are well underway and the fast program is rolled out both expected to drive benefits starting in 2021.

One of our great strengths is strong free cash flow generation.

We currently expect to generate approximately $3.5 billion in free cash flow over the next five years.

Weve always exercise strong financial discipline, focusing on accretive investments to drive the topline margin dollars and free cash flow.

We are taking advantage of our current strong cash flow generation to make further investments for growth and investments to support our team.

Our increased focus on technology and training tools to support and strengthen our team members will continue to drive legendary customer service as defined by our customers today.

These investments.

When coupled with our ongoing profit improvement initiatives and our working capital improvements are expected to generate higher operating cash flow going forward versus pre coated.

Our strong balance sheet and our investment grade capital structure is a strength we can leverage further as you may.

As you may have seen yesterday, both moodys and S&P announced investment grade ratings for tractor supply.

This provides us additional levers in our capital structure to support growth investments.

In addition, with this performance our goal is to return to shareholders approximately $4 billion and total cash payouts through dividends and share repurchases through our strong free cash flow and excess cash on the balance sheet.

Additionally, we will have the financial capacity to consider opportunistic tuck in acquisitions.

We will continue to practice strong financial discipline always with the goal of delivering strong and sustainable TSR to our shareholders.

This chart put some dollars to what we just talked about as you see in this cash flow waterfall, our operating cash flow target over this period is approximately $6 billion. Our capital expenditures are expected to be a total of $2.5 billion over the next five years, reflecting approximately one bill.

In dollars in incremental growth capex to strengthen our advantage.

This increased level of spend is critical to continuing to gain market share.

And because of our strong operating model, we expect to be in a position to return through the combination of dividends and share repurchases approximately $4 billion to shareholders. During this time.

As I indicated earlier, our priority will be investing for growth does.

Doubling our organic investments to include significant gross.

We anticipate growing our dividend per share returning to a 30% dividend payout on a higher and faster growing aerospace.

We plan to continue to be active in share repurchases to offset dilution effect of equity grants and to opportunistically repurchase with excess cash.

We expect dividends and share repurchases to contribute 3% to 4% to our TSR delivery.

While not a key priority we are open to tuck in acquisitions at the right price.

Historically, our leverage ratio has been approximately two times during <unk>.

During coated we're able to maintain that ratio and we expect our leverage to remain at that level.

With the flexibility to use our strong balance sheet for incremental investment opportunities.

And we're targeting to maintaining a leverage ratio below 2.5 times.

And we are positioned well to take advantage of our investment grade rating and May look to refinance a portion of our debt when there was an attractive opportunity.

There's never been a more exciting time at tractor supply we are.

We're incredibly proud of our heritage there have been many key chapters in our amazing history. This is the beginning of a new chapter our.

Our solid foundation combined with shifts in the macro environment and our life out here strategy provide us with significant growth opportunities.

We are purposely aligning our business strategy and our financial strategy with the goal of delivering strong and sustainable total shareholder return.

With that I will turn it back over to Mary Winn.

Thank you Kat well, which certainly shared a lot of information with you today and our hope is that you've gained an insight into our life out here strategy now for a few takeaways in closing remark here how long.

We are all about the out here lifestyle our.

Our life out here strategy is focused on being an integral part of our customers' lives and.

As we close out our prepared remarks, I hope you take away that were market leader with strong omni channel capabilities.

That our culture is that competitive advantage.

That we have a resilient business model with compelling growth opportunities.

And we have the resources and are committed to allocating NAND to effectively execute our life out here strategy. Thank you.

Thank you for joining us today, and I look forward to answering your questions in just a bit.

Our executive panel QNX Ashland is right around the corner.

Yes, we'll step away for a quick break we'll be right back.

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Welcome back to the Q and a session of tractor Supply's enhanced earnings that we've assembled today's presenters and they are ready to take your question a couple of housekeeping Thats farce. Please limit your question to one per call with.

A clarifying question only if necessary we've been very proactive in trying to allow plenty of time for this Q and a session. So you're welcome to get back in the queue to ask any additional questions. If time allows for.

For anyone just tuning in a quick introduction of octane, president and CEO how lot.

CFO Treasurer, Kurt Barton.

Chief Merchandising officer, Seth Asap.

She stores the officer John orders.

Chief Technology Officer, Rob now.

We have a line that's outstanding by said lets take our first question.

First up.

As Zach Fadem from Wells Fargo.

Fact, please go ahead with your question.

Yes, Thanks for taking my question and thanks for hosting agreement today really well.

So first question for me on the long term.

Well.

3%.

Okay great.

Talk about how you quantify the impact that the initiatives discussed today and then what impact would you assign towards changes that are more structural like de urbanization rising pet ownership and other external factors due to covance.

Yes, great I'll I'll take that as that can say great to see this morning, and thanks for joining us for our enhanced earnings day.

The way I think what Curt in his presentation tried to kind of outline.

Outline is.

We anticipate that coded, we'll we'll be dealing with cove. It it will be part of the us economy and consumer mentality for the better part of next year.

And then as we start to comp on top of that that'll create some period of uncertainty really depending with a lot of a lot of purchase.

Parameters impacting that could be the pace of adoption of.

But other vaccine the effectiveness of the vaccine and then how user behavior changes afterwards.

What I would say is from our view the longer that you know kind of coated carbon pandemic is here, we think the longer the more structural a lot of the trends are that we're seeing on if you think about as an example.

Year to date, we sold 11 million birds eye pet adoption and ownership at an all time high those are annuity streams that are going to continue on work from home and kind of this investment in your home because you are there more frequently that's going to continue even post post code. It so as we think about.

Of the 12 month postcode, there's some period of kind of settling out.

But we are becoming more confident in that and then once we get to the end of that then we think we get back to a more normal routine run rate I and if our previous long term guidance had been about 3%. What we're starting to do is add on top of that 3%. The initiative that we are announcing today.

That would be initiatives of maintaining our new customer base that we've seen.

And starting to draw you know continuing to I had business from that group that sustaining our levels that were already operating at but also growing on top of it but it also comes down to our existing store base than the productivity, we're going to get from the existing store base, both inside the store as well as outside of the store and then the continued growth from our digital business as.

As you know we've got I think over 30 quarters of double digit growth and the last two quarters have been over 100% comps and so we see that continuing to play out. So we feel very good about the increase of our comp guidance from previously 3% to 4% to 5% based on kind of that waterfall.

Of the of initiatives.

Yes.

Moving to the long term EBIT margin of nine point, 9.5% it looks to be a bit of a step down from about 10%. This year, obviously, given the tough comparison next year any thoughts and investments.

Good thing, 99% margin is the right way to frame expectations. During this fiscal 21 22 transition period.

Or after the near term investments or both.

Yes, Zach this is Curt I'll take that question.

The.

Regarding our long term target we've been very specific in saying that this cobot pandemic theres uncertainty as to how long it lasts and when does this 12 month of a of a cycling begin and some of that may fall into 2021, and so there may be some noise on exactly the.

The level of performance on a top line that would certainly impacted what you've heard from us on our initiatives are that we believe that this business is got strong sustainable growth. We can begin to not only achieved top level sales growth, but sustain this level.

And as for 2021 on the operating margin that we gave you know could have a little bit of variability in it but a nine over the 9.5% in our long term target is a really good sweet spot for US, yes, we feel like the opportunity and our primary focus of gaining market share.

And being able to have a nine to 9.5 operating margin range gives the most optimal overall earnings per share and value to our shareholders and so our focus is on the long term in both topline revenue and that operating margin.

Okay. We have our next question and that question is from Peter Benedict at Baird.

Hey, guys. Thank you for taking this question, but then also thanks for doing this or that.

Extremely well done very helpful.

Particularly with everything going on so thanks for thanks for doing this is my first question I guess, how you throughout the day and $110 billion Tam in your.

In your opinion remarks wondering if you could unpack that a bit.

Where you see kind of the most potential for gains the most opportunity and how does that the services play into that I know.

I know in the past you've talked a little bit about tool rental things like that but I'm, just curious if thats correct and thats part.

Part of the current thinking here as you move.

As you're moving through the next few years, that's my first question.

Yes, good morning, Peter and thanks for joining us on our enhanced earnings day here and I appreciate the comments.

Over the last six to nine nine as Weve been both you're dealing with coated.

Responding to numerous natural disasters and also dealing with the kind of operating at these elevated volume level. We've also been.

Preparing and kind of laying the foundation for the future of the company and part of that really started with what is our total addressable market and that allows us to understand where share gains can be had and where our opportunities are and so yeah. We spent we spent a good bit of time really digging in each of our categories.

Understanding where we participate each of those categories. What the size of those markets are and then really also thinking about those are the markets that we address that really it's really a rural suburban kind of cut of the categories that we participate in on and after.

After doing that work you know, we really we came to 110 billion dollar market a large market one with significant amount of opportunity one where we have nice share at kind of tenish percent, but one that presents a lot of opportunity for growth in front of us on and as we talked about we think there's a lot of opportunity to do more with.

Existing assets I think there's opportunity to continue to build stores to our 2500 dollar target and there is also opportunity to continue to grow our digital footprint, that's dominantly width and through our stores you know as it relates to the category because it's off into SAP and he can talk a little about some of the categories that were making big investments then.

And where we think there's some great yes, thanks al Thanks Peter.

Like the capped by the way.

Hey.

Yes, when we think about the total addressable market. That's one data point that the merchants have utilized.

Coming up of where we're really going to focus and as Hal mentioned, we're going to make some of these big investments to put it in perspective, you know we showed earlier today the investments in the Garden Center.

And you think about the size of the traditional lawn and garden category that's out there.

Putting a PE or have been strong and for a long time and that's over $20 billion industry. That's out there for so for every share point that we can go out and get were today were low single digits. When we think about where we are there that's $200 million of opportunity revenue growth. So as we think about these things in the data points, we've looked at that and tools and the iwai, obviously, where we are with pet and animal.

We've gone around the store and as we think about fusion and how we have laid out the category expansions, where we've looked at those footprints, we've really partner with our vendor base use all the different analytics points to really figure out where we're going to go invest in and out whether it'd be in lawn and garden again, Ravi pet and animal Libyan home setting categories.

Going after market share in those DIY areas and utilizing our drive aisle to really go after that backed yard that activity in that's what that drives really for today right take advantage of the current trends that's out there to build the basket. So hopefully that helps a little bit and kind of how were looking at the Tam and how we are building their category strategies accordingly.

No not that sure doesn't that stuff I guess sticking with a garden center just curious how you.

Are you guys are approaching that are you.

Going to own the live goods are you getting undergo consignment model just curious on kind of the margin and return profile, how youre going to attack that business.

Hey, Peter Yes, it's a variation so as we're rolling this out I mean, we're in the initial phases of this week.

We partner with some outside resources as well that are very much experts in this area again I think we mentioned earlier, we've we've identified growers for over 75% of our current store base that we know that we have an opportunity to go out there and build these garden centers. So.

So obviously white goods are one component it varies by different product segment of how.

With that we will be owning it or whether it would be.

Scan based type products have been also you know the other big thing in the garden centers as well, it's really going to open up other categories like grilling outdoor to core some of those other things that you know can be very margin accretive as well as we build not just the white goods themselves, but that's really kind of the footstep driver to then build the basket.

Okay. We'll go on to our next question and our next question comes from Steve Forbes at Guggenheim.

Good afternoon, and again really great to see the visual representation here. Thank you.

Yes.

I wanted to start with a multipart question as it pertains to the silence.

Maybe for our first half maybe you can speak to the cadence behind the initiatives is the goal to have 450 200 stores done by spring seasonal and should we expect the program to be completed by.

Within that five year time frame that you laid out.

25.

We should expect all 66, so the stores to be done.

Yes, Hey, Steven and thanks for.

Joining us on the enhanced 30 day to day in.

As it relates to the sidelines again, we're very bullish on the opportunity is significant.

Opportunity to expand our sales per square foot and better utilize the sideline the concrete had outside of our stores and I thought that really laid out that opportunity in his prepared remarks earlier very well as it relates to the cadence and stuff that were looking somewhere in that kind of 50 to 65 range.

Just stores that for this year to accomplish we're learning a lot as we go I think we've got a real we've got great muscle built around building new stores, and we're starting to adapt and tailor those muscles to being able to remodel stores on and doing that in the context of coded where you've got a lot of permitting you.

Got to do and you've got a town halls that have been.

I have been more virtual meetings now and those sorts of things, but we're working through that building those muscle building that flywheel and we feel very good about the progress we're making this year net.

Next year as we move forward, we do anticipate getting at least half of those stores up and running in advance of the spring season, and then the remainder or will happen through Q2, and Q3 and then as.

And then as it relates to the five year outlook.

Once we get through midway into next year, we'll have a better sense of what our capacity and capabilities are for roll out in 2022 and beyond we certainly have aspirations of addressing the acceptance and isn't prepared remarkably you said, 60% to 75% of our store.

Applicable for side lot and we have aspirations.

Addressing all those over a five year timeframe on but the what we do in years, two three and four and five will vary a little bit based on just kind of our learnings as we roll it out next year in terms of our capacity and capability.

Thank you.

A follow up on that.

[laughter] trends.

No you how would love to sort of either your thoughts on the importance of the category as you think about ongoing share gains.

At the local level.

But the sort of speak to.

They're both existing and new customer trends right in this particular category.

All the excitement around.

The post code.

Post Koedinger, yes, absolutely.

So first on on pad I want to be really clear, we are gaining share in pet food and gaining share in the pet category and.

Got that while that industry is certainly there is a rising tide. There we are gaining share in the context of that that rising tide. As you mentioned you've got both pet ownership at all time highs combined with the Humanization of pets really reinforced because people are in their homes more around their pets and so consequently, that's driving.

A significant volume in the category. It is a very strategically important category for us. It's a core part of what we call our shoe business and drive footsteps. It drives transactions and Bill helps it's a court starter to build the basket that are for our customers in the store.

And as we talked about our Q business I believe Curt mentioned it was in the mid double digit comps.

In Q2 up from high kind of teens in in Q2. So we did see a step up in our Q business.

And part of that improvement was driven by our pet business. We saw significant improvement in the trend in that business from Q2 to Q3 on it is being driven by both our new customers are we acquired customers and our existing customers, we're seeing increased transactions and larger baskets for.

Our existing customers, but we're also seeing a strong number of a new customers in the pet category shopping with us and they are repeats.

Our at much higher rate than we've seen in the past so it's not a one and done or even at two in Dunn and our qualitatively at those customers indicate the vast majority and that they plan on incorporating tractor supply in their future shopping patterns also online our pet business is one of the big drivers of our online.

Line Triple digit comp.

And Thats, both happening direct ship to People's homes, but also the pick up in store. So we feel like we've got a strong pet business, it's important to us strategically the business and that we are gaining share both in our stores and online across all the customer base.

All right well thank you.

Thank you very much will miss on to our next question, which is fun Simeon Gutman at Morgan Stanley.

Hi, everyone. Thanks for the presentation.

Great job this year by the way.

Mary Winn said my picture.

Hello, So just watch out.

My first question its strategic and financial.

The question is how how much of the spending that the this plan is influenced by coven and how well you've done.

Thinking of these investments irrespective.

No because it looks like you are spending a lot of additional capital at the moment. The business is growing very fast so it makes sense, but there's a big step up and so it looks like the incremental return, yes, maybe can't be as good as where they are today and yes, you're going to get better.

Faster revenue growth, but the EPS growth it looks like it's going to slow. So you can sort of take that altogether.

Yeah, Hey, Simeon.

So hit it hit a few things.

First off on it how much of this was stimulated by co that I'd say we were working.

We were working our strategy at the same time as we've been operating through the last nine months. So the two were really much more in parallel than inner related.

What I would say is we do recognize that we're investing from a position of strength, we're committed to emerging from the pandemic a much stronger company.

And we are confident that we will do so.

As it relates to kind of the the initiatives and the EPA asked what I would say two things one remind you were at a much higher base now that we're operating at a then we were nine months ago, and certainly two or three years ago. We did our long term guidance previously.

Then the second thing I'd say is every single one of our initiatives and Kennedy strategies that they kind of roll up into we've we've done business cases for every single one of those we know what the MPV and they are ours are we've modeled the TSR implications of those investments.

They are all kind of that in the numbers that we've delivered key today and everything.

Every single one of those investments were confident that they drive they generate healthy shareholder returns and.

And generate value.

In the business.

Thanks, and the shape of the.

EPS growth and margin the same throughout the investment cycle, where does it is it heavier upfront and then accelerate later on.

Yes go ahead go ahead I'll take it Simeon this is for in in regards to the timeframe first I'll just point out her mind that slide I gave on the trajectory you know theres a lot of uncertainty there's the cove. Its pandemic then there's that one year cycling in regard to the investments there's more consistency in regards to our X.

Spectators as to when to you know, though the cadence of that investment you know the impact on the timing, we're not going to try to go ahead and at this point try to peg overtime, but what we are confident is that we can achieve with these investments as Hal said investing right now in a position of strength.

We're making those investments now we've got the cash to be able to do that and these investments will begin to.

Provide that level of return the exciting thing about this is this level of EPS growth be.

EPS growth the art operating margin that we believe we can sustain to that is during this period of time, where we're committing to and making a stepped up investment in the business. That's exciting for the near term, it's really exciting for the long term and the overall total shareholder return.

All right, we'll move onto our next question place, it's got to Michael Lasser at yes.

Good morning, Thanks for taking my question and very nice job.

So comparing your current guidance.

From an operating margin perspective of 99% to that night 9.4 that you'd previously ruled out over it.

Unlike the summit.

The comp expectation.

Great. So profitability contribution from 900 200 basis points that you are presumably going to get from the initiatives like project fusion are going to come in at a lower than average profitability that youre off that was the incremental sales leverage.

Carl why wouldnt be margin higher given the incremental cope expectation.

Yes, Michael this is Kurt Thank you for the question.

[noise] build on the I'll build on the last.

Explanation I gave earlier the the important factor here is that we're making these investments. It's so it's a significant step up these investments are for the long term. These investments are the opportunity to achieve greater market share.

Staying the stepped up growth in and when you make this level investment in stores in particular, the side lot infusion or investments in our leasehold assets and so this you know these stores have five 710 year leases. There is a burden in that time frame that we baked into the financials and so we think its a.

Very compelling.

Algorithm to be able to produce.

The same and stepped up level of operating margin. During this time of investment to be able to continue to grow. This this business as Hal mentioned the last.

The last long term targets that we set out back in 2018, you think about the size of the business see seven half billion dollar revenue business on a four dollar es, we're certainly well beyond those numbers and be able to have the level of EPS growth, while returning even greater share.

For greater cash to our shareholders a commitment to a.

A stronger level of dividends and a consistent share buyback overall.

I'll just continue to emphasize for the long term our focus is total shareholder return, we think its a very compelling much better compelling offer than a previous long term targets and Michael the the only thing I would kind of tactically I call out is that.

The new sales are not dilute is odd.

If you think about at Nineish to 99.4 on a 3% comp and then the investments were making sequence it relates to capital and the depreciation that comes along with that and then our target that we shared today of nine to nine and a half.

They really are flowing through basically at the same operating margin rate odd that the base business. So to speak was I just wanted to clarify that that's not the case when we model it out.

Okay.

And just to follow up on that.

Can you provide or.

On on the geography of how this is going to impact the gross margin presumably.

It is going to step up and so it will be.

Oh through to higher as they are today.

Part of that how should we think about what this adds to the operational complexity of running a tractor supply store either from incremental staffing for the strength.

David was having more advanced the phase.

Oh products that are more subject to the list yes.

Yes.

Thanks, Michael So let me ask John first and just talk about you know the operational models and the adjustments we've made in the side lot infusion stores that we've rolled out just to be clear.

Just to be clear those are reflected in the numbers that we shared today, but John maybe you could talk about that in the current you can come back to the broader geography question sure Hey, Michael So what we've done as we put together a store productivity team with a couple of years ago and what the team has done as they continue to look at how we can make things more efficient inside the store with doing that we're able to make sure that we have hours out inside.

For all open hours of the store. So we'll people out there to do the both the feed burn the curbside make sure. The propane think tariff and then also to make sure we have that greenhouse theft outside there. So as we continue to look at more efficiency inside the store. We can continue to make sure that we take hours reinvestment and customer service and continue with those all time customer service open high customer service scores we have.

Yes, Thanks, John and in regard to the geography of the.

Over a three to five year period of time, I'll stay rather directional and really hit three point starting with the gross margin that is an area that we believe we have growth opportunity.

When you compare to the previous guide or the base year of 2019 for a number of the things that you heard today, but just to hit a few key points on gross margin. We will continue to focus on our supply chain in our sourcing there's opportunity to be able to take costs out of that part of the business as well as leveraging the scale.

Well that we've got and from the fast program and from fusion and the productivity does drive some probably some outperformance in gross margin. So the opportunities in gross margin when it comes to the investments to your point that you pointed out the burden is principally in the <unk> from the depreciation from capital So thats going to hit that SGN eight.

Area and that is offset from very promising strong strategic initiatives on profit improvement. So we believe we can mostly offset the SGN a burden and we believe there is opportunity to achieve on the gross margin all of that plays out to growing the operating margin modestly over.

This period of time.

Thank you very much. Our next question comes from Karen short with Barclays.

Hi, Thanks, very much I wanted to ask a couple of questions just on the sidelines opportunity could you maybe give a little bit of color on what you think the possible sales per square foot could be on the sidelines and then maybe what you're seeing currently and are what the range is.

Then I had one other question.

Hey, Karen in say, great to see today and thanks, so much for joining us.

We are not disclosing at this time kind of the individual pieces of our strategic initiatives you can expect to hear more from us on that over time, but what I would say is the composition of our new customers.

And providing.

Providing that kind of retaining them.

Also our omni channel efforts combined with side lot infusion are reflected in our updated comp guidance on what I would say is we're very pleased with the early results of our of our other stores that we've implemented a sidelight that shows you the the Rome, Georgia store today and in a video and talk you through it but we're very pleased with the early.

Results and that's given us the conviction to on the zoo between 150, and 200 stores next year and you allocate the capital that is required to do that in the incremental capital dollars that we share with you today and more.

More to come but we think there's a big opportunity and garden as Seth mentioned, it's the number one category that we don't we're not a destination for that are our customers really.

Participate in and so big opportunity there in fee, where we had the feed drive through we are the largest player bags feeding in the country and.

And an opportunity for us always is to make that process more efficient for our customers and I really do think the time that it requires to load up a customer trucker trailer with speed as they begin their day is that does drive a different name people going left or right. So that will make a big difference in our in our ability to keep gaining share in a more.

I think that we're already the number one player and we're.

We're very excited bullish and.

And going to be investing into the sideline initiative.

Okay. That's helpful. And then I wanted to just ask about the digitization of the store.

I'm just wondering if you could give a little more color on how many stores are digitized and then how you think that would contribute to get sweating the assets because it seems like that.

Little bit more than newer nuance to the storing it you haven't talked that I mentioned the past yeah great.

Yes, great someone ask Seth to do that and specifically, what you're going to hear from the teeing up kind of the systems. We implementations we've done around macro and then.

And then the systems implementations, we've done around micro that kind of come together through our line review process to deliver.

Kind of a more optimal outcomes, yes think about hey, Karen.

Yes. So you know we talk a little bit earlier about some of the systems that we are currently implementing as Hal mentioned, it's both on a macro and micro level we're re.

We're really starting on the micro level right now as we are going through all of our line review processes, whether that be through our store clustering on each individual category as well as in that being the assortment optimization that comes with that and our tools that that the blue onto a tool that we have been implementing a space aware so it's integrated.

Throughout all of our merchandising processes and systems.

Really allow us to get smarter better more scientific and apply them merchandising art.

To that as well on each individual micro called Planograms space within the store next step of that as well as within the software.

As well as through some projects will be more the macro store clustering projects that will be embarking on as well.

So that we can again get better on a local or regional level and that we can start to tailor space Accordingly to what those store clusters look like you know what I'd been opening of new stores or as we got on this project fusion and side lives.

Journey those store clusters will will the macro store clusters will be a big part of that on call at what for playing goes in there. In addition to those two systems. We also have another so I know system, where it's the site level cabs were every store itself. You know we have a significant number of stores that aren't caught a prototype to stay.

And alone building that can have some nuances in there could be a little bit larger than the 15 five that we don't have great visibility to today on how much call. It flex plenty room space might be in a store. We've now got over 500 stores that we have site level qads that were out there today, where we can now identify what those flex spaces are.

Then as you just think about that imply the space productivity metrics to it overtime that can be a really good flywheel to drive comp knowing that there is a there is a big piece of the store base that has that flex space that now we can take and strategically drive plenty games space activity too.

Okay. Thank you next question is from Chuck Grom with Gordon Haskett.

Hey.

Hi, guys. Good afternoon. Thanks.

Thanks for putting this together very well great quarter. My question is on the customer adoption.

$10 million alone I believe in the summer.

Third quarter, but I'm curious on how that shoppers behaving.

Let's see.

As versus a more mature truck for shopper and how the maturation curve could play out over the next couple of years.

Yeah, Hey, Chuck in net good afternoon now to those on the East coast.

And.

As it relates to new customers to your point as we as we remarked in our opening comments I 10 million, new and re acquire customers between Q2, and Q3 and what I'd say is first off the pace of new customers I really did not slow up from Q2 to Q3 kind of the new cost.

Or accounts that we were seeing on a weekly basis.

With the exception of some modest seasonalization between Q2 and keep the real really continued at the same level.

Meaning that we are really attracting new customers at the same pace in Q3, some of that's driven by our our continued advertising, but I think a lot of it's driven by just the lifestyle that people are bringing to bring people embracing the audio lifestyle and finding tractor supply a very relevant shopping destination for them in that lifestyle.

Now and we are laser focused on retaining those customers, we're doing that through both our marketing efforts with robust CRM activities in digital marketing activities.

As well as bringing people into our neighbor's club, we continue to increase our number of millions of customers that are numbers. There, but also just center store then focusing on what's important to these new customers delivering that legendary service.

And they really focused on it there the as I mentioned earlier the re shop rates with these customers are exceeding the historic race, we have re shop rates of new customers not only on a second but also third time and that gives us more confidence in the structural Orient there's no.

There's more structure more structural versus transitory in those new customers on you know John I know I'll, let him speak a little bit in terms of having all time customer sat scores, but also to focus on cleanliness and safety that weve had in our stores to really maybe bring some of that the life. Yeah. So since Golden started Weve really spent a lot of time on.

Cleanliness inside of our stores, we want we saw it coming we wanted to make sure. We saw some benchmark there as well what we've done is we've invested in that we've invested in making sure that we're cleaning up happening throughout our stores all the time to a Monday through Friday, and then Saturday and Sunday on the weekends when our customers are in our stores, we want to make sure we had a clean environment form bathrooms everything throughout the store clean and.

We've seen that were over indexing compared to other retailers as far as where we're at and cleaning.

First customer experience goes I talked a little bit about it earlier today, just customer experience at high five that the goo rough when we rolled out best that allowed us to take some of our people that we've hired that are more test driven and move them over into a test driven environment now the other team members that we have inside of our stores what they do is they love to sell they live that lifestyle, they love talking about that.

So we hire for attitude with higher farmers welders ranchers horse owners and then they are inside the store and they're doing what they really love that grew us selling skills that are out there in our stores. We're also investing in training of them, but that's driven us throughout this year as our direct scores are up about 90 basis points over where they were last year over the last four years up about 700 basis points and then okay.

We're also assessing scores continue to go up as well.

Okay. Thank you that's great okay.

So I guess my follow up would be for Kurt.

You spoke to the operating operating environment until the third quarter of next year, maybe at a minimum so I guess, if that's the case I'm curious how you're thinking.

Ups could shake out in 2021, particularly in the cycle. Some of these big difference from our mature.

Yes, well I'll share a little bit of information the we're not going to begin to give guidance or any indication on our 2021 plan.

But we are we are beginning to and have been looking at and have multiple scenarios for 2021, we look at and in watch closely all of the indications on how the cobot pandemic is playing out and and certainly an important factor for US is when does this pandemic begin do.

Do you know but.

Bring a level of normalcy back to the consumer and vaccines and therapy therapeutics are going to be key and so I want to first say that the timing of when vaccines become available to the public.

Keep the therapeutic measurements improve we we believe as most that theres some level of normalcy that may return back to the consumer spending and consumer behavior and it's very hard to tell when you know as we try to plan. We plan that that may be mid to late 2021, and so in that environment.

We feel strong about the the first half of the year. The first quarter certainly in and I think we're planning on investing in being able to have a strong performance in the second quarter and then as I indicated that the chart that I showed.

Indicated as well that when emperor that one year period of time to comp.

Well there is some variability that we may have some positive growth still there may be flattish and there's potential for even some downside in those numbers and so we we plan that the first half of the year, there's still a lot of indications for the strength in demand in our business is based on all the the.

A macro social distancing an emphasis at home.

And then at some point in time that will begin to fade as there is a level of normalcy that returns and I think at this point that giving you guys a structure of how we think about it is about the best I can do at this point before we given a 2021 guidance.

And the only thing I'll add to Curt's comments is we are staffing and buying.

To a Q2 that is dealing with the code and pandemic and you know we.

We know we had elevated volume levels last year. We knew we were we were short on inventory in certain programs as we got into the middle of Q2 because.

Because we weren't anticipating obviously when we placed our import orders in the November December timeframe for.

For a 38% comp.

We now know how consumers behave and the myth, because and pandemic and we're working both on our impact with our import partners as well as our domestic partners to build.

Inventory levels to meet that demand. This coming Q2, and we also are still are building staffing plans to meet that demand as well.

It's a great question Thats, our way and going forward I would ask if we just keep it to one question place because we've got a lot of people in the queue and with that our next question is from Oliver Wintermantel at Evercore ISI.

Yes, Thanks, good afternoon, guys and thanks for the great presentation.

So Kurt maybe.

Maybe it's for you is the question about free cash flow you mentioned, three and a half billion over the next five years. So just wanted to see if there's any from the cadence is that more back end loaded or.

Have investments their impact and then on the share buyback.

You mentioned that you're going back into share buybacks.

Is there any timing and the size of that also have flattened over the next few years.

Hello. Thank you, Okay, Yep, Hey, thanks, Oliver good to hear from you. So there's two questions in there free cash flow overtime, and then buybacks I'll hit on the free cash flow.

Certainly as a reminder, the timing of the pandemic can play a bit into it but in general we've we've we've planned for a rather consistent.

Pattern on the free cash flow overtime, the investments may be a shift between years as to when a distribution centers is loaded but you know a 450 to 550 million dollar investments into the business overtime with a very continued strong level of operating cash flow.

From this business, we believe it will be relatively consistent throughout the period of time, and we think thats, a really strong compelling part of our business. It then leaves us the ability to.

To be able to return cash to our shareholders and that's a really a purposeful important part of the of the lights on your strategy for US is the capital allocation and US our first priority as Weve mentioned is investing organically in the business for all the things that we've just been talking about but it is it is exciting that in.

That period of time, we estimate are targeting returning $4 billion.

To our shareholders. The dividends are an important piece of our model, we're targeting to be able to get back.

Get back to a 30% payout ratio. So there's some some strong allocation to dividend, but on the buybacks. We need said in the beginning of the of the pandemic. We were temporarily pausing that and we did it was purposely planned temporary pause we.

We we do see that as we come.

Out over the last couple of quarters. The business is strong on that share buybacks as I indicated our plan in our in our capital allocation. So in the next couple of weeks, we'll be talking with our board about our plans to reengage on the share repurchases and we will have more information in the near term as to the timing of that.

Okay, we'll move onto our next question, which is from Peter Keith at Piper Sandler Please Peter.

Peter Please go ahead.

Hey, Thanks very win great presentation today guys.

Great quarter.

Ex U.S environment, but some really nice numbers today.

You guys have a lot of interesting things going on I was hoping it at a high level you could just talk about your.

Sure.

In addition to being an out these investments you feel might be structurally enhancing your competitive positioning relative.

Relative to the competition and maybe interested how you it might prioritize or rank those in order of importance and then as a follow on to that pet category. It's good to hear you are gaining share, but maybe specifically what are you doing there to enhance the competitive positioning.

Yes, Hey, Hey, Peter Ed Thanks for joining us today and appreciate your your remarks about our quarter on yeah. I'd first start out with we had the fortunate participating in incredibly attractive market you know a $110 billion in size fragmented very favorable profitability structure its demand for it.

The needs based on and we had that the benefit of being a scaled player in that with significant up opportunities still ahead of us.

As we think about a competitor.

A competitive positioning we think about it a little bit less about the competitive positioning and more about the customer and the whole focus and stay ahead of where the customers expectations are and that's the entire focus of life out here strategy is to address that lifestyle need that out here lifestyle needs and make sure that our offerings our capabilities our best in class.

Out there and surpassing what the customers' expectations are and we firmly believe that if we do that we will gain share in a very attractive market and we are confident right now across all the categories that we compete in no matter what the categories are stores that we are gaining substantive share.

Specifically as it relates to Pat as I said earlier.

We are gaining share in pet we know that when we look at the overall kind of industry level data and also we look at our data when we talk with our our customer Arkansas, our manufacturers and what I'll talk with and I'll, let Seth talk a little bit about kind of marketing and merchandising activity that we have going on there.

Yes, so thanks al So yes from the pet space. For example, obviously, we spend a tremendous amount of time analyzing space analyzing market trends.

You know from a product assortment standpoint, the team has actually done a fantastic job responding to the dynamics of the industry over the course of last year.

Actually in Q3.

Every single Pet consumable category was touched in reset and.

And really had the consumer obviously at the heart of all those resets going from a call. It a green tree assortment north of 40% prior to the August reset now sub 25%.

And really leaning into SMO science based brands, introducing new brands like Victor partnering with Miranda Lambert nation, and getting those type of exclusive partnerships out there that can really engage with our consumer base, but we're also continuing to go after things like you saw today like Pet watch Oh, we're we're looking at ways to be that convenient solution.

In a value oriented solution for mobile vet clinics, where we have that in over 1500 stores today, we partnered and have over 20 full blown wellness clinics now in pilot in some of our stores and we're talking to some of our part.

Some of our partners out there as well and how we can look to incorporate some of that in next year's pricing Isnt select project fusion layouts, and then obviously a lot of the investments that we're also making in the digital space.

Really really going after this consumer not only being there for their products, but try to really build that relationship with them in the digital space and then obviously with John and his team in the stores. So.

Okay. Our next question is from Chris Horvers at JP Morgan.

Thanks, Good afternoon, everybody and thanks for a great day, so I thought it was.

One question in two parts.

First can you talk about how much of that business that you would.

Classifies truly repeating in nature some of animal adoption includes crates and bad then that will per say repeat next year. So how do you think about it.

True short replacement cycle as a percentage of your mix at the same time, finding dyna riding mower is in short cycle and can you give the other side of it which is you know what is what portion mix would you create a sort of a multi year replacement cycle business and the.

And the second part of the question is you mentioned expecting positive.

Positive comps in the first half of next year, given cove, it sticks around and managing chasing demand into Q 20 would that suggest that you could potentially lap to Q.

Thanks very much.

Yes, Hey, Chris and again, thanks for joining us today.

As Kurt mentioned.

In his his remarks and also in last quarters remarks, we see about 50% of our elevated comps being more structural and about half of it being a little bit more transitory and theres a variety of kind of different ways that we look at it to kind of come to that conclusion, but we feel very good about that and at and I'd say if anything we're busy.

Coming more comfortable on the structural side as the as the pandemic progressive.

To your point say on on dog, certainly you might not buy that create again, but if he bought a small bad Nick then you're going to upgrade to a larger better he bought a small bowl for your puppy, then you're upgrading to a larger bowl for your puppy odd as and then the same thing goes with the types of food that they make is that the types of toys, the vast majority of that business.

Is very much an annuity type type business on and then on a on garden.

Well certainly we have very strong share in things like riders and there's a lot of opportunity assessed share for us to gain a broader a share in the garden business, whether it's in soil and fertilizers certainly live goods.

Outdoor power and more broadly and those are the sorts of categories that you can see us really emphasizing grilling you can see us leaning into those so as we start to cycle. Some of the bigger ticket purchases I were looking for those other categories to really offset that and drive those kind of comp sales in those sorts of businesses.

As it relates to Q2 I as I said, we're you know we're leaning in on it we're buying for it we're going to staff for it on and then we'll see how that how it evolves as we get into next year. You know, there's a lot of uncertain just hurts laid out not only the pandemic, but you know how the economy is going to be Oh, you know what the economic.

Since they're going to be a unemployment a stimulus those sorts of things. So well you know there is a lot of uncertainty out there, but know that we are leaning into Q2.

Okay, we'll move onto our next question, which is Brian Nagel at Oppenheimer. Brian. Please go ahead.

Hi, good afternoon.

Great. Thank you.

Thank you.

Great results fluctuations.

Great question.

Sure.

Third question is shorter term religious I apologize.

We talk a lot about potential for.

Correct.

Okay.

Monetization after code.

Results now.

Sure.

Each quarter.

Right.

First call.

Sure.

Sure.

Sure.

Pricing.

Sure.

Yes.

Sure.

Okay.

Fourth.

Yeah I'll take it.

Hi, how are you and good to speak with you today.

What I would say is our business has been remarkably consistent.

And we've seen that no trailing off of consumer behavior at all.

In fact, we're seeing right now simultaneous strength.

In even some extended spring goods in summer goods, they like riders as well as high strength in more seasonal goods like patio heater log splitters chain saws and out.

And outerwear as people are starting to think about the winter and as the fall and winter season approaches and they're really approaching it with the same mentality as they approach spray and in fact, we're seeing a little bit more immune to nevsun stock up behavior, where I think those who were last in line. So to speak in the spring and summer you know they didnt, they werent able to get and Ted patio furniture they.

We weren't able to get that pool put and they weren't able to do some of the things that they wanted to do to their backyard and they're not going to miss out on that here as they go into the fall and in the winter time. So you know our comps month by month in Q3 were very consistent our comps across geography, very consistent our comps across catty.

Door is very consistent we're seeing that continue into Q4 here on and we're seeing the same level of behavior from our customers as we saw in the previous two quarters with exception of it just moderating based on the types and categories that are in season right now.

All right keep moving down our questions, Let's say, we'll go to Scott Ciccarelli at RV thing.

Scott. Please go ahead, thanks Mary Lynne.

Hello, everyone.

So I guess another follow up question on the sidelines since that seems to be the niche. Initially you guys are expecting that to be.

Can you tell us what percent of sales today come from the sidelines and just related to that is your expectation that your sales productivity.

Which is your new store level or would you expect.

In nature.

To continue.

What you generate in store.

Yes, Hey, Scott this is curt of in the side line I think the important thing to remember is that the side lot today, you've walked it.

If it's productive it has a portion of it that you view as storage for that large bulky.

Agricultural type equipment and so.

Some of that product outside his insight other areas, we don't get specific to the productivity of the side lot pre or post on this initiative in there.

What what we see is a great opportunity for that product itself to be able to sell after at a greater pace in modified reduced space for the AG equipment, and then reallocate that space to create that that environment. That's a shopping actual pleasant shopping experience a can do.

Lenient shopping experienced leverage it even for the drive thru aspect of the business to capitalize on convenience and so it's one it's very early so it's hard for us to go in and say here's what it would the productivity like but it's also more of a holistic store productivity.

You for us and Thats, how we encourage you to look at it as the convenience that it drives and the new categories that set talks about and what you see in our projections of the stepped up comps in a normalized post post Cove. It is is a primary indicator as you work the number of stores that we roll this out.

You can see the level between fusion inside lot on what that's going to be doing to drive productivity and our existing space today, and we will certainly have more opportunity to share as these first rounds of stores really begin over the next six nine months to show us some true trends in that business, but you certainly.

You can see the excitement of what it does holistically for the store.

Hey, next step on our Q Vinay, its Matt Mcclintock with Raymond James Knapp. Please go ahead.

Hi.

Great everybody actually I was right.

Perfect.

So.

So my question is what are some of the buckets.

That you have the facility.

Sure significant upside for me to your current plan.

I ask this because it seems like flexible or.

On Park Center.

Orders and how quickly that help.

Right.

Thanks.

Hey, Matt.

I'm going to turn it over to Rob there just a minute to talk a lot about technology and I think that's one of the areas that we really shown a significant amount of flexibility. This year. As you mentioned another area is also in marketing at as soon as the pandemic kicked in we transition from a dominantly kind of more traditional.