Q4 2020 Tractor Supply Co Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to tractor supply company's conference call to discuss the fourth quarter and fiscal year 2020 results. At this time all participants are in a listen only mode. Later, we will conduct the question and answer session and instructions will follow at that time.
We asked at all participants limit themselves to one question and one related follow up please be advised that reproduction of this call in whole or in part is not permitted without written authorization of tractor supply company and as a reminder, this call is being recorded.
I would now like to introduce your host for today's call and this is Mary Winn Pilkington Senior Vice President of Investor Relations at the Investor and public relations for.
And for tractor supply company Mary Winn. Please go ahead.
Thank you operator, good morning, everyone. Thanks for taking the time to join US today and I do hope, you're all staying safe and well on the call today are Hal Lawton, our CEO and Kurt Barton our CFO. After our prepared remarks, we will open the call up for your questions Southeast at R. E.
P and Chief merchandising officer will join US for the question and answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release.
Now, let me reference the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995. This call may contain certain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company in many cases these risks and uncertainties of the.
And our control, although the company believes the expectations reflected in its forward looking statements of reasonable at can give no assurance that such expectations or any of its forward looking statements will prove to be correct and actual results may differ materially from expectation and put at risk factors that could cause actual results to differ materially from the.
Those are reflected in the forward looking statements are included at the end of the press release issued today and the company's filings with the Securities and Exchange Commission.
Amazing contained in this call is accurate only as of the date discussed and investors should not assume the statements will remain operative at a later time tractor supply undertakes no obligation to update any information discussed in this call. Additionally, we will be discussing certain non-GAAP financial measures a reconciliation.
And of these items to U S. GAAP are included in today's press release and presentation, which are posted on our Investor Relations website.
Given the time constraints and the number of people who want to participate we ask that you. Please limit your questions to one with the quick related follow up I. Appreciate your cooperation we will be available after the call for follow up. Thank you for your time and attention. This morning before we get started and I ask you to please turn your attention to our year end <unk>.
D video that can be seen on our webcast.
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Good morning, and thank you everyone for joining us today I hope you enjoyed the opening video.
We will all always remember 2020.
And I will never recall of the year with anything close to fondness.
Tractor supply 2020 will you remember with the small measure pride as we reflect on our efforts to take care of our fellow team members and support our customers and invest in the future.
None of these results would have been possible without the hard work and dedication of our team and I want to express my sincere appreciation and gratitude to the more than 42000 tractor supply team members for how the have lived our mission and values and work together to take care of each other and our customers.
Thanks also go out to our supply chain and vendor partners, who have done an excellent job supporting our business.
The environment continues to be uncertain and challenging.
Vaccines are on the rise and our country is still very much in the midst of the pandemic.
Given the pace of the vaccine rollout it will be at least for before we're back at some form of normality.
Throughout the pandemic, our utmost priority has been to take care of the health and safety and wellbeing of our team members and customers.
We spent tens of millions of dollars on cleaning and masks plexiglass and sanitizer.
We provided at almost 700000 hours of Covid sick pay we've conducted nearly 20000 Covid test and.
And we rolled out company wide of contact tracing wearable devices for all team members to use.
We will continue to spare no expense in this area and 2021.
In addition to rolling out of industry, leading safety protocols. We've also shown on our commitment to our team members through appreciation bonuses increased wages and broader benefits offerings.
At tractor supply, we are committed to being a part of the solution for our team members and our customers and our communities and we remain steadfast and that commitment going forward.
As we talk now shifting and talking about 2021.
We believe there is much uncertainty this year as there was in 2020, how fast will vaccines rollout how would the derivatives of COVID-19 impact transmission rates and antibody effectiveness will there be another stimulus.
How will consumers spending evolved through the year.
Given these questions and they're all the other elements of uncertainty we're planning for fiscal 2021 based on a range of potential outcomes.
The initial guidance, we're providing today is consistent with our long term algorithm that we shared with you at our enhanced earnings event in October.
Importantly, our 2021 outlook reflects the strategic initiatives that are foundational to our life out here strategy.
The actions, we're taking we're committed to emerging from the pandemic stronger than before.
Now, let's shift to the business review section for the fourth quarter of 2020 and the fiscal year.
We delivered another strong quarter that exceeded our expectations in the fourth quarter. We had strong net sales gains of 31, 3% with comparable store sales up 27, 3%.
We continued to gain market share and benefited from customer shopping with us with larger baskets.
All customer segments, and all of value segment experienced growth.
For the fiscal year, we added over $2 billion and revenue.
And we reached over 10 billion and sales for the year of significant milestone for the company.
Once again, our quarterly results were remarkably consistent.
Ross all periods of the quarter across all product categories across all geographic regions of the country.
Also bodes our transactions and ticket growth, we're seeing and at where a very balanced.
For the third quarter E Commerce saw strong triple digit growth and increased significantly as the percentage of our overall sales.
The work, we did this year and improve our omnichannel capabilities and certainly resonated with our customers as we've seen several years of digital adoption accelerate and just a matter of months.
For the year of about 75% of our Omnichannel sales were picked up at the tractor supply store further reinforcing the importance of our stores to our customers.
As we've experienced and the last several quarters, we continue to have strong performance and market share gains and our consumable usable and edible categories.
With growth exceeding 20% and for the quarter.
And 2020, we had more customers shop with us than ever before with the increased sales across our existing customer groups, new customers and reacquired customers.
Now shifting to talk about a few other operational highlights for 2020.
We added more than 10000 team members to support the growth of our business. These new team members were critical and our ability to service our customers at these elevated levels and also flow volumes through our supply chain.
We've pivoted, our marketing spending for more traditional print media to digital and National TV, and we launched our first national advertising campaign and over a decade.
Our research indicates the tractor supply has become more top of mind with consumers as our unaided brand awareness increased over 800 basis points.
We expanded our in store and digital capabilities to make it easier and safer to shop at tractor supply.
We were nimble and agile and offering curbside pickup and same day next day delivery and we also relaunched our web site and we rolled out of new mobile App, which already has over 1 million downloads.
We celebrated the opening of our 19th hundreds of store and <unk>, California, and announced plans for a new distribution center and Navarro, Ohio and is expected to be operational by the fall of 'twenty and 'twenty two.
We reinforced our long standing commitment to ESG through improved disclosure and transparency.
We also surpassed our original target of the 25 per cent reduction and carbon emissions five years ahead of plan.
If we just step back overall 2020 really highlighted the resiliency of the tractor supply team and illuminated the potential for the business.
We participate and a large attractive market we have momentum.
We're investing and our business through our life out of your strategy.
We had the opportunity to create and define our future and extend our leadership for years to come.
Before I hand, the call over to current I'd like to address the impairment charge, we took for the <unk> business. We recently completed a strategic review of past net.
All of the persons had solid sales performance in 2020, we reached the conclusion to reduce the number of new store openings planned over the long term and identified some underperforming stores to close.
We expect to close 10 to 15 stores and 2021.
Combined this resulted in a pretax charge of about $74 $1 million of.
Of 49 cents per diluted share after tax.
<unk> offers a differentiated shopping experience to the suburban and rural pet owner at.
As mentioned the business is currently doing well overall, we remain committed to growing and investing pets at.
Earlier this week, we named Matthew Ruben as SVP and general manager for Pet sense, Matthew brings a strong retail background and I'm confident that he will be an immediate assets of the business.
I look forward to sharing more about our plans with you overtime.
Now current will walk you through greater details of the quarter and the year along with our 2021 outlook before I return to give you an update on our life out here strategy.
Thank you Hal and Hello to everyone on the call. This year was like no other and the history of tractor supply as we delivered record sales and financial performance for the year.
The fourth quarter continued to benefit from the macro trends that I've worked to our favor.
And as we rank order our comparable store sales performance the trends that I shared with you from the second and third quarter continue to play out and our sales performance.
The largest driver continued to be our customer's desire for product categories that support the out here lifestyle as they shifted spending away from travel entertainment and dining to creating their own experiences for tractor supply. This included purchases such as outdoor recreation and living like new Tvs and at <unk>.
Outdoor fire pits, along with all of those indoor projects and minimizing their homes and equipment.
This trend also includes living a more self reliant lifestyle and the adoption of new hobbies like backyard poultry hunting gardening and bird feeding had continued and we believe these hobbies and trends are becoming more ingrained in our customers behavior.
The strong brand awareness and new customer performance that Hal discussed was the second largest driver of our comparable store sales performance.
This was then followed by tailwind and such as emergency response related demand due to the hurricane activity and various strategic initiatives such as our investments in digital and the Omnichannel experience same day delivery and our private label credit card.
Exclusive of the modest hurricane activity benefit the weather impact was generally neutral compared to the prior year.
We had robust performance and our big ticket categories, which exceeded our overall comp sales growth. This is driven by broad based strength with safe and recreational vehicles utility vehicles trailers and generators, representing the top five product categories.
Fourth quarter gross profit exceeded our expectations due to higher demand for our products and a reduction and promotional and clearance activities.
These factors were partially offset by higher transportation costs as a percentage of net sales the bridge.
So with that gross margin as the percentage of sales was 34, 6% and the fourth quarter and increase of 75 basis points.
Moving on to SG&A the.
46 basis point increase and adjusted SG&A as a percent of net sales was attributable to three primary factors first incremental costs related to the COVID-19 pandemic second increased incentive compensation due to record sales and profit performance and the quarter and then third and <unk>.
<unk> and our strategic initiatives.
The additional costs incurred due to the COVID-19 pandemic included appreciation bonuses the team members across stores and distribution centers.
As well as additional labor hours and supply costs dedicated of cleaning and sanitation to enhance the health and safety of team members and our customers.
COVID-19 related incremental costs were approximately $33 million and the quarter and.
That compares to our estimate of $15 million to $20 million going into the quarter, which resulted from an unexpected resurgence of COVID-19 cases late in the year.
For the quarter adjusted operating profit increased nearly 36% with operating profit margin of 9% and improvement of 29 basis points. Adjusted net income was $193 2 million and increase of 34% adjusted diluted EPS was $1 60 for.
For an increase of nearly 36% for the year, we reach and adjusted operating profit margin of 10, 1% and had strong growth and adjusted diluted EPS of <unk> 47, 4%.
Turning now to our balance sheet, which remains strong merchandise inventories were $1 8 billion at the end of the fourth quarter, representing an increase of five 6% and the average inventory per store. This.
This level of inventory is still a bit lighter than we would like given the momentum of the business and we are working with our suppliers and vendors to build our staff to support this momentum.
During the quarter, we issued our first ever public offering of debt and we received investment grade ratings from both Moody's and S&P given our strong credit metrics, we issued $650 million and 10 year notes at a coupon rate of 175%. The proceeds from the debt issuance were used for refined.
Canceling and repayment of term loans as we plan to maintain a leverage ratio below two five times.
Fiscal 2020 was a year of strong cash flow from operations, which totaled $1 $39 billion.
And increase of 582 million for 72%.
For the full year, we returned a total of $518 million and capital to our shareholders through the combination of share repurchases and cash dividends and.
We currently have approximately $1 1 billion remaining on our authorization for share repurchases.
A day, a board reconfirmed our commitment to returning cash to shareholders through a 30% increase and our quarterly dividend, which puts our dividend payments in line with our target of at least for a 30% payout ratio.
Moving now to our guidance for 2021 that is detailed on page 11 of the supplemental deck.
The impact of the COVID-19 pandemic will have on the broader economy the.
Consumer and our fiscal 2021 results remains uncertain.
Given that backdrop, we are planning our for fiscal 2021 based on a range of potential outcomes.
To date, while still very early in the first quarter, we continued to see strong sales momentum and the business for fiscal 2021, we expect net sales and the range of 10, 7% to $11 billion.
Comp store sales for anticipated to be and the range of down 2% to up 1%.
For the year, we anticipate operating profit margin to be and the range of nine 3% to nine 6% a significant step up when compared to our baseline 2019 performance.
And fiscal 2020, approximately 90% of the operating margin year over year gain was driven by gross margin improvement for.
For fiscal 2021, we anticipate some give backs and gross margin and SG&A to slightly increase as a percentage of sales compared to fiscal 2020 on an adjusted basis now.
Now, let's go into a little more detail on each of these areas.
Our expectation is for modest gross margin contraction in 2021, as we anticipate incremental promotional activity.
Along with higher freight costs.
Partially offsetting these pressures are and expected benefits from vendor funding for our field activities support 14 program.
While the fast program expenses will be reported and SG&A with the year over year impact of about 40 basis points on each.
Breaking down SG&A.
The leverage from reduced COVID-19 costs and more normalized incentive compensation is expected to be offset by ongoing wage pressures investments and our supply chain and digital space and higher depreciation and amortization expense.
And as a reminder, the fast program costs are reported and SG&A. As a result, we are forecasting SG&A as a percentage of sales to slightly deleverage.
Adjusted for normalization of the fast program costs SG&A is expected to remain relatively flat as a percentage of sales.
As always we would encourage you to think about our business between the first half of the year and the second half and this is in line with how we manage the business as.
As the model 'twenty and 'twenty, one I want to point out a few items that will impact comparability.
Depreciation and bonuses impact the second and fourth quarters of 2020, while wage increases of about $13 million per quarter took effect and the third quarter of 2020.
Costs related to the COVID-19, pandemic remain and uncertainty for us in 2020, as our utmost priority remains the health and safety of our team members and our customers.
For the first quarter, we anticipate costs related to the pandemic will continue at elevated levels.
Additionally, as you think about the cadence of 'twenty 'twenty one on.
Our business performance is expected to be stronger and the first quarter as a comparison step up starting in the second quarter.
The first quarter of 2021 is forecast to have the highest comp performance of the year and correspondingly the highest operating profit growth rate.
The second quarter is likely to be our most difficult earnings comparison of the year due to a couple of factors.
Please recall at the second quarter of 2020 experienced the strongest gross margin performance driven by the least sales promotional activity. In addition, we expect incremental cost in Q2 of this year as we support the launch of the upgrade to our Neighbor's club loyalty program.
Moving to below the line, we expect total interest expense for 2021 to be approximately $27 million, while our effective tax rate is anticipated to be in the range of 22, 5% to 22, 8%.
Our capital spending is anticipated to range from $450 million to $550 million with more than 80% of that spending going towards growth initiatives. The vast majority of the capital spending increase is attributable to new in store initiatives and supporting technology for a life out here strategy dip.
Depreciation expense is estimated to increase approximately $50 million. This is above our recent run rate as we accelerate our investments and the business for the year, we expect share repurchases to reduce our diluted weighted average shares outstanding by about 1% to 2% for modeling purposes, we've assumed weighted average shares outstanding.
And about 116 million shares and 2021 net.
Net income is forecast and the range of $750 million to $801 million.
For $6 50.
To $6 90 per diluted share.
With our strong performance in 2020, and the current momentum and our business. The team at tractor supply is excited about the life out of your strategy.
Our clear focus enables us to continue to be the innovation leader and our channel and emerge from the pandemic stronger than before and now.
Now I'll turn it back to Hal.
Thanks Kurt.
And that will shift into 2021.
And as Curt said, we're laser focused and we're focused on continuing to gain market share moving.
And to do this in three different ways, one is capitalizing on our numerous macro trends benefiting us.
And as nurturing our existing new and re engage customers.
And the third of executing our life out of your strategy. So let's talk about each one of those and a little more detail.
We believe that many of the consumer behaviors that we've seen over the last nine months will continue through most or all of 2021.
These trends we've mentioned before but they include rural revitalization trip consolidation omnichannel adoption of self reliant lifestyle movement.
Sumer spending at shifting from travel and entertainment to home and land at.
And and all time high pet ownership.
We exited the year with nearly $19 million and neighbor's club members for.
For the full year over $11 million at new identified customers and more than 6 million reactivated customers shop with us at tractor supply.
We're seeing strong retention with these customers and we have plans in place to engage them with new capabilities marketing and product offerings.
The third way, we are going to be focused on gaining the share this year as our life out of your strategy and it really positions us to strengthen and transform the company.
As we shared last quarter, there are five pillars to our life out of your strategy.
The vs deliver legendary customer service.
The second is the advance our one tractor capabilities, the third and to operate the tractor way.
The fourth is go the country mile for our team and lastly, it's generate healthy shareholder return.
So let me highlight some of our planned efforts that we have this year in support of our strategy.
And 2021, we plan to opened 80, new tractor supply stores and 10 10 stores.
Additionally, we plan to remodel of 150 to 200 stores with project fusion.
And to execute projects sidelined in 150 to 200 of our stores that brings our total construction activity for the year to $4 to 500 projects. This is the significant step up and the team's workloads and also is being executed in the midst of COVID-19.
Our project fusion remodel program is designed to drive space productivity and to enhance the customer experience and our mature store base.
It is the combination of both changes and the store layout and imagery that creates a greater of lifestyle impression and drive space allocation for product assortment.
Fusion stores help create a more welcoming destination and offer compelling showcase for our brands.
Our <unk> program is a full transformation of the space from primarily of storage location for agriculture equipment to the state of the art outside Garden feed and farm shopping center and it also provides for greater convenience through the expansion of buy online pick up at store.
While still very early with both of these projects. We continue to be very excited about the sales trends, we're seeing from the first tranche of fusion remodels and side lot of transformation projects.
And importantly, the customer feedback has been overwhelmingly positive.
Given the size of the store of our store base. These initiatives represent a multi year opportunity to continually refresh our store base and drive further comp sales.
Another initiative, we have is our fast team and they are already having a significant impact on the business since youre of implementation and August they've taken on execution programs like executing merchandising programs like center court and caps plan and Graham <unk> seasonal programs and sales driving initiatives and what this is due.
It's really allowing our store teams to focus more on customer service and improve their in store execution, and then really ultimately allow us to focus more on the customer and driving comparable sales and we're very pleased with the fast rollout.
We're also committed to ensuring our digital capability stay ahead of our customer expectations. We did this in 2020 and we will continue to do this in 2021 and be on the.
Areas of focus for us and the first half of ship from store search engine optimization payment options like Apple pay and Google pay subscriptions.
Subscriptions, both online and in store and also the recent launch of our pet Rx platform.
As Curt mentioned, we have plans in place for an upgrade and our neighbor's club loyalty program by mid year.
And we anticipate that this new program will really drive incremental customer retention and also provide strong incentives to allow us to grow our share of wallet with our customers.
As we get closer to the launch of our New Neighbor's Club program and look forward to sharing more of the details about the changes with you.
Now just stepping back we're excited about spring we.
We believe our customers will continue to be focused on their homes as the oasis and creating their own experiences whether that through things like gardening grilling, our homesteading with their family and friends and neighbors.
Spring Chick days create great retail theater, and support existing and new customers, who want to expand their flocks.
This was the big category for Us last year, and we expect it to be so this year and we will have a broader selection that we have historically of chicken coops.
Tractor supply is the clear destination for this on trend category.
Given the strong trends, we're seeing and our companion animal categories and the recent growth and pet ownership, we're focused on being a more complete resource for pet parents and store. This includes relevant product assortment and brands.
Ancient of self serve pet wash locations across 150 to 200 stores and the build out of 50% to 75 additional pet wellness centers.
Currently about 600 stores had debt services in store through our mobile debt clinics.
Turning this corner pet prescriptions can be fulfilled online and tractor supply as I mentioned earlier.
And our App, we're now offering on demand veterinary advice from a team of experienced veterinary professionals, our customers can call chat or E mail of team of veterinary professionals to get all of their pet health questions answered.
These expanded and new services allow tractor supply and the offer a complete solution to care for our customers at whether in store or online.
Our stores will be ready for the change of seasons as we move into spring.
In closing, we had a unique opportunity we compete in and attractive and fragmented market. We have a track record of success and outperformance and our business, we see a unique opportunity to capitalize on the powerful customer trends, we are benefiting from and to emerge from the pandemic stronger transform.
Company.
Our goal is to make strategic investments and enable us to create greater competitive advantage.
Capture the opportunity, we've discussed and generate shareholder value.
With that operator, we would now like to open the lines for questions.
Thank you I would like to remind anyone who would like to ask the question. Please press star one on your telephone keypad at this.
And one on your telephone keypad and as a reminder, please kick the question to one and one related follow up. The first question comes from Scot Ciccarelli from RBC capital markets. Your line is open.
Good morning, guys Scot Ciccarelli.
Hope everyone is well and healthy for the first of all second do I. Appreciate you guys, providing guidance, obviously not easy given the amount of uncertainty of the environment, but with that being said I was hoping you guys could help us better understand how you went about constructing your top line expectations and maybe outline a couple of your key inputs are assumptions. Thanks.
Hey, Scott catalog net debt could speak of this morning.
I think the arc of the guidance that we provided is very consistent with the commentary that we had at the end of the third quarter.
And I think at aligned with the spirit of the dialogue on our opening remarks, which is the we expect COVID-19 to remain a large kind of consumer driving force.
For the foreseeable future certainly into the fall if not for the balance of the year.
And as the consequence of that many of the macro trends, which have benefited us. We will continue we also think of number of these macro trends.
Are sticky and regardless of Covid and so we kind of see those two coming together and of <unk>.
Way that shapes of the year as follows the first quarter. We're in now we expect.
Momentum and this quarter end and our results and this quarter will be much like what we saw on Q2, and Q3 and Q4 with elevated sales levels.
And then as we start to comp on top of those and in the Q2 of Q3 and Q4. This year, we do expect debt the comps will.
We'll start to turn to more normal levels.
And the collective net of that will kind of co.
Compiled of the.
And at between minus two and a plus one so it is at.
It is a heavily weighted and the first quarter with.
On a kind of Q2 Q3, Q4 recognized and it will be comping on top of last year's elevated levels, but with still likely strong underlying momentum.
Supporting those quarters.
I appreciate that how and how much you know obviously, the macro trends and we actually agree with that assessment, but how much of your expectation is from some of the company specific initiatives.
Aside what's kind of the.
The store Remodels or is it just kind of of all thrown together and the mixing bowl of there. Thanks.
Yes, we're certainly looking to piece apart our various initiatives and we have some pretty sophisticated analytics.
And the tools that allow us to do that at these more elevated volume levels. It is a little bit harder to see.
And then what you might see in and of normal mid single digit comp environment.
I will say that we are.
It's our view that we are gaining share.
And winning in all of the categories that we participate yet at.
And and that's really consistent across the board, whether you're looking at industry level data or were talking with vendors.
And so.
That would lead us to believe that not only we are benefiting from the macro trends, but the but the work that we're doing to support the business is also helping with that and I'll call out of few things that kind of give at that.
Give us that sense first of all point to kind.
And some datasets around our customer.
Our unaided brand awareness.
Due in part due to our National television campaign that we launched last March is up eight points in the year that's a.
The very significant improvement in unaided brand awareness.
And then.
The benefit that we've seen of that is the signet at the most customers that we've ever had shop, our store and.
The one year of last year.
Including the 11 million and new customers and 6 million reacquired customers.
And those customers of shopping with us at repeat rates.
Debt are at kind of all time highs and those repeat shopping rates are for the new customers are holding.
Through the year, so whether it was the new customer we saw on March or April or May.
Or and new customer that we saw on October and November December all of those.
And as repeat shopping rates are holding at all time highs.
And then the last thing I'll talk about it if you look at our team members and you look like our customer sat scores.
Our if you look at the customer's perception of safety and health and well being and our stores.
Customers seem to be voting with their with their wallets and shopping at tractor supply and indicative of both our strong transactions, but also our strong ticket.
I think that would speak to the fact that customers are certainly aggregating their ticket.
We're hearing that from other retailers that.
More units per basket, driving basket up but a lot of of retailers are talking about negative comp transactions with us, it's very balanced with about half coming from comp transactions and about half coming from average ticket. So we're seeing that stock up and we're also seeing more transactions.
And the store so it's hard to kind of piece it together, but we do think the initiatives we're taking.
On the support we've given the business on inventory and adding staffing.
Our focus on cleanliness.
Our digital efforts and our early efforts around fusion and sidelight and fast.
Our adding.
To the share are creating helping us drive share gains and kind of add it sits at the macro trends per se.
And your next question will come from the Elizabeth Suzuki from Bank of America. Your line is open.
Great. Thank you could you just elaborate a little bit more on the strategic review of headsets and what came out of that review that resulted in the decision of slow the growth of new stores.
And it just seems like the patent ownership at all time highs.
And let the stores were significantly underperforming the company average day kind of wondering what some of the specifics of our of that review.
Yes, Hello, and good morning.
Yeah. This was just completed my first year at that.
C of tractor supply and so just kind of normal course.
You know kind of stepped back and did of <unk>.
Strategic review of pet sense.
Right at the beginning of the fourth quarter.
On the business and the net takeaways for the business is doing it's doing well.
But if you look at the.
And the broader landscape of pet and.
And where the shifts are coming and where things are growing.
And you look at the very at the kind.
Kind of whats playing out and specialty.
Through that work and then us revisiting our real estate model is the part of that.
We made the decision to reduce the long term store counts.
Expectations that we have for that business.
And in doing so on.
That led us to revisit.
The value that we had at that business on our balance sheet.
And so we've now kind of reset our expectations for the new store counts of that business.
The new leader for the pet business.
And we are we will continue to invest and pet sense.
As we see opportunity that we at <unk>.
As I said the business is doing well, we do think it's gaining share and the specialty space and we will continue to support that business.
And of moving for just at a lower long term store count.
The target.
Okay, and could you potentially shifts more of the sales of it and that business online. If you are not going to grow the store count the quite as much and he thought like any of this new of shifts towards that towards the end.
E Commerce side of the business.
The way to expand into new market.
Yeah. So I look forward to share them with you more about the pet sent strategy is Matthew comes in and.
Has the opportunity to engage in and the.
Chart, the future of the of the company and we're very pleased with the performance the stores are doing well.
The website is doing well.
As you said with the.
Do know pet online is doing for all you can look at the industry data and that's the certain certainly and that's something I know map you can at will be looking into is the way to to accelerate our efforts there the more to come.
Your next question comes from Karen short from Barclays. Your line is open.
Hi, Thanks very much.
Congratulations on a great year the next.
Just talk a little bit about the three of three to five year algorithm.
Originally called out at 99, 5% operating margins.
And your fiscal 'twenty, one and bottom end range, sorry, 30 basis points higher than that.
And algorithm and so I guess.
What would make the range I guess, the decrease from 22 and beyond and I guess, maybe ask for frankly different way when.
I look at 99, 5% range.
And that would imply flat operating profit growth and 22 and that doesn't seem like the likely scenario.
Hey, Karen this is Kurt yeah. Thank you for the question and.
Really the question as I understand it is about the the outlook on the.
Operating margin of the flow through going forward.
One important thing that I pointed out and our prepared remarks is we had tremendous.
Upside and benefit in 2020 from the gross margin.
Side of the business and the principal drivers with that was for the majority of the year, we had favorable transportation.
And the most significant was.
Unusually.
Levels of promotion and clearance and the inventory at some points really felt like it was going hand to mouth to the consumer and.
We anticipate this year in 2021, as we still have some of that.
Extended.
Endemic demand before we start to cycle into that that there's benefit on less promotion and clearance we will start to normalize on that the important thing is too.
To manage the business and.
Sharing that we are everyday low price, we're giving our customers.
Great.
Value and our product and our price and over the years, we're going to manage the operating margin ensuring that we continue to gain market share and the and the important thing is is that there may begin to be and the next couple of years at.
Inventory more normalizes and the.
And more clearance exposure normalizes theres some anticipated risk.
The risk with gross margin. So we'll continue to manage gross margin with our benefits of our are driving at staying at the DLP not anticipating too.
Revert back to the promotional activity of the past.
But with our investments in the business for the next couple of years to continue to gain the market share we anticipate still staying around that range. We think it's of great sweet spot to allow us to continue to hit those.
Revenue growth targets and the continued to gain on the market share. So we want to manage to a reasonable operating margin to continue our opportunity to gain market share.
And our outlook for 2021, and and the long term really anticipates that and as we progress we'll continue to update you as we see it.
More visibility as things change.
Okay. That's very helpful. On the just my follow up at looking at the comp in Q4, Q and obviously as you have said and as we all see you had very evenly and kind of split competition on the comp from Teekay to treat and Harris Teeter for camp. How do you think about when we start to lap those and in 'twenty and 'twenty. One do you think of pressure will come more from.
And the ticket or traffic in terms of.
The kind of comparison.
Yeah.
It's a great question as we think about traffic and ticket in 2021, there's a lot of variables.
Still some uncertainty as we get into the.
Lap that.
We're going to be nimble and have shown and the path that we can shift very well to that so as we think about the business with trip ticket and traffic I'll give you some thoughts on ticket drivers.
Certainly some level of inflation that could could be driving ticket.
And if Theres continued trip consolidation and it helps on the ticket but.
Other aspects on traffic.
<unk>.
Areas, such as trip consolidation, if theres a bit more normalization on.
Consolidation.
As we begin to cycle some of the Covid demand.
Theres inflation at sometimes out of an offset on the traffic. So point being there is a number of variables in there and.
And as we cycle. This we see our opportunity in both categories and there can be some some risk and shift and bolt and we've contemplated those aspects in our guidance for comp sales as we begin to cycle. The the COVID-19 lift that we saw starting in Q2 of 2020.
And we anticipate that there is not a meaningful shift for either one as we see at at this point, but both have variables that could drive it up or down.
And your next question will come from Steve Forbes from Guggenheim Partners. Your line is open.
Good morning, it's all of the start how at the new and re engage customer trends right you mentioned.
Repeat rates at all time highs, but curious if you could provide more color here are these customers engaging at a level that's more comparable to your neighbor's club members on a shopping across more categories right and the average customer shopping both channels right.
And why or why aren't we seeing greater.
Yeah, I guess entrants into the Neighbor's club loyalty program.
I would imagine that sort of of core initiative right for 2021.
Yeah.
Yeah, Hey, Steve and good morning.
Couple of things I'll say first of all on the Neighbor's Club program.
We are very pleased with the growth and the ownership of that I mean the.
And the membership of that program.
On a 19 million members, representing approximately 60% of our total sales we're seeing very strong.
Engagement rates with those customers and we have plans and so we've talked about to reinvigorate that program.
And the first half of this year.
Which I think will.
On drive step.
The step change in and engagement with the with those customers and also on <unk>.
Gration.
Upward of their spend so we're very we're looking forward to that promotion you're getting it out there and look forward to sharing more details with you at our next earnings call on it.
As it relates to our new customers.
We've mentioned in the past that we see approximately 20% of our new customers return and shop with the within 28 day.
And that that trend.
It really hasn't changed since the beginning of the year at its held very stable and at its two or three points higher than what we would've seen and his store and a historic period, and we cohort at new new customers.
And just and then I would say it's not we also continued to see strong strong.
Strong repurchase rates as you get out the kind of two months of at the 56 day count and at three months and so we're very pleased with the with their re engagement.
C than <unk>.
Engaging first and categories like poultry.
And dog and <unk>.
Pet.
But then they start to broaden their their purchases.
<unk> things like apparel and guard at.
And they started and Pat they might move the culture of vice versa.
And a higher percentage of this these groups and our normal business starts online and just the pickup and store and then Youll see and their next purchase and coming into the store for purchase.
And our new customer sat scores are higher than the historic as well. So that's the all around where we are pleased with the 19 million members and they represent at the growth that we had this year.
Typically in the midst of the pandemic our sign up is really at the register their face to face people are really trying to check out much faster as we all know the ability to still sign up those neighbor's club members and gain the the millions that we did this year. We're very pleased with and then the new customers are exhibiting very strong.
Reengagement behavior.
Thanks, Al and then I can just.
Quick follow up.
As we try to conceptualize the opportunity to be here.
How does the <unk> 11 million and new customers and $6 million re engage customers compare for 2018 or 2019 levels.
I don't think we disclose that and the past.
But what I will say is and we'll get that the thought whether to do so but what I would say is.
They are material increases for our previous years.
Awesome. Thanks, so much best of luck that day.
Wow.
Thanks I appreciate it.
And your next question will come from Peter Benedict from and archiving of Baird. Your line is open.
Oh, Hey, guys. Thanks.
I guess first question Curt you kind of mentioned the inflation at 'twenty one and.
Just curious where where youre seeing that most acute acutely off the size, it up but which categories you're seeing inflation.
And the business of my first question.
Yeah.
Yes.
Let's.
And take that.
Hey, Peter at the fed.
Hey, Peter as we look at some of the inflation of this coming year at and what we're seeing kind of early on and if you just look at the kind of base commodity markets that are out there I would tell you early reads.
Our steel based product as well as some of the Green base goods. If you look at those commodity markets.
We feel really good about the handle at the team have on the business to be able to manage at accordingly, with our tools that we have on the pricing side, but those would be the areas of I would say that we're starting to see those come through and the early reads.
Got it okay that makes sense and then maybe how on for you just just on the the competitive environment out there obviously, it's been it's been strong, but even with the strength and farm and ranch.
And in the pet area, we're seeing.
Some reasonably.
Large chains.
And I have trouble, even shut down within both of those per.
So I'm just curious as you know you've got a lot of strategic initiatives in place but is the.
Competitive environment shifting and a way that maybe has your thinking differently on any maybe longer term initiatives over the next couple of years, just kind of curious your view on that I know you've got a lot on your plate, but just wanted to hear you out on that.
Yeah. Thanks, Peter and you know what I'd say is the I think the dynamics that are playing out and the market right now.
And whether it's with customers or these are the our competitors.
And those dynamics of really playing to the sweet spot of of tractor supply.
First off people are struggling with in stocks and I think youre going to see more of that.
And as we get into the spring with the supply chain disruption that's out there and our team has done an outstanding job managing inventory through the year. We saw how we ended the year with the inventory above last year.
And we're tracking to continue with that at those for levels, if not higher at Curt mentioned in his opening remarks.
We plan for our spring shipments to arrive earlier than they have historically and so while we are seeing some container back backward.
The backlog.
At all we are going to able to manage through that and get it kind of been on a normal timeframe, but that's to our benefit and so I think anywhere where you've made investments in inventory and you've leaned in there anywhere where youre, making investments and customer service because right now that makes such a big difference in this environment and we certainly done that through the net hiring of 10000 team members.
And providing preciation bonuses and other some raises to drive their engagement also and technology, if you've invested in technology and you can do curbside pick up and you can do same day next day delivery and you can do those with great customer service that lead to advantages as well. So I think the scale that we have and our distribution.
Our systems the scale, but we have and technology.
The leverage and scale that we have with our vendors and then of course, our advantage of our 42000 team members, which wake up every day for looking to provide legendary service all of that just plays well for us.
And then you think about the convenience of the location of our stores.
And that's why if you go across every category.
We're confident that we're taking share and a significant way and if you look at our Q business being up over 20% for the quarter.
And.
And you think about the the proxy that using that as a proxy for the businesses that are in there around animal feed and pet food and others.
And those those rates are well above.
The industry estimates for the those categories and certainly any.
A lot of other companies that are out there reporting at play in those categories.
I think it really just speaks to the business model of the track of the resiliency of it.
And the foundation of it and then the investments that we're making day to day to ensure that our customers and our new customers are having a great experience.
And all of that.
And Michelle let me just add one thing if I may I know, we're at the day after the out of it we're going to let the cargo of about 10 minutes longer. Thank you.
Okay. Sir your next question comes from Scott much Ken kind of our five capital. Your line is opened.
Hey, guys, and Maryland, and thanks for a on the cargo on a little bit longer and I'll try to be quick. So I was wondering if and maybe I missed it but the percentage of the new customers and I know it talked about this a little bit that are purchased in Q and then the percentage of those that of repeat it and I'm not sure I got that data and if youre willing to give us that data.
And.
Yeah, Hey, Scott how are you and good morning, good morning.
We have not mentioned what percent are buying Q and their first purchase.
We did mentioned what percent are REIT are coming back and buying a second time, so about 20% of our new customers return and shop with US again within 28 day.
And we said that the board's historic run rates by several points. So we feel very good about our retention of these customers and that's the proxy at one.
The time marker, but it's the same if you look across 714 days two months three months et cetera.
As it relates to what they are buying on their first purchase the two dominant areas that they are buying on their first purchase our pets pet food or poultry.
And or supplies and such around those two categories.
And so the that's interesting and I should give me and my follow up of disconnect cash something else, but.
We're at 20% repeat rate sounds high but if the if it's skewing towards Q you might think you could actually.
And make that number higher or is there any initiatives to figure out how to make sure. The repeating at a higher rate of if theyre engaged and Q and then I'll yield.
Yeah, absolutely. So this is.
And what the full focus of our marketing team is focused on.
And is a it's exactly this is the word.
We've got we've invested over the last year and a half for two and our CRM capabilities moving that platform to the Azure Azure cloud upgrading our analytical capabilities, adding new personalization tooling in place.
And and also looking at behaviors, whether on their site on the site or inside of the store and then looking for kind of like comparing them to look alike shoppers.
And so whether it's E mails that those new customers get.
Or whether it's digital banner ads were re targeting them on.
And all of those sorts of.
Ah kind of marketing channels and vehicles are being used to a gauge of these customers and encourage them to re shop with us and.
In addition, obviously, we just have the investments, we're making and our team member of the investments, we're making our store experience the investments youre, making and inventory and those sorts of things.
At drive repeat behavior as well.
One interesting anecdote that I'll give on that is we ask our customers.
And our checkout.
<unk> kind of post post post purchase survey what their top criteria were for why they selected the shop at tractor supply.
And at <unk>.
And typically the responses are similar to what any of the retailer would have with price and location convenience.
At the having the right product customer service and those sorts of things that are kind of the dominant criteria for shopping for retail.
During the pandemic over the last six months of the number one and number two criteria.
Ben Cleanliness and safety never in my 20, plus years of retail at <unk>.
And those two criteria at the top of the customers' decision, making criteria and.
So that's why we've invested so much in those and those areas and are highlighted the tens of millions of dollars. We've spent.
On those areas and the lag.
Last quarter.
And your next question will come from Peter Keith from Piper Sandler Your line is open.
Hi, Thanks, good morning.
Great results guys.
Quick follow up to Peter better next question on the inflation and certainly a lot of the commodities are ramping up to record levels, we havent seen and nine to 10 years.
Do you have and inflation benefits factored into comp and and if so could you provide that for us.
Yeah, Hey, Peter this is Kurt.
In regards to in place and let me first start with what we've seen here in 2020, I mean, we saw a bit of elevation of worked our way through the year.
Q4, we still saw a bit of a modest level of in place and less than 100 basis points of of <unk>.
Commodity inflation into the product co.
<unk>.
We anticipate that as is all of the.
And.
Information as I know everyone's seen at certainly at at higher levels, we're anticipating that to accelerate in 2021.
We've seen where inflation on commodities can rise as quickly as it did it can it can also shift as you know just as quickly so.
Like we said in our prepared remarks, we're planning for 2021 of the number of scenarios.
But in our guidance, we assumed debt over the year of weighted average of about.
1% to 2% inflation into the product costs and that certainly could very first half versus second half of the year and right now we're seeing the points that Seth mentioned on grains and steel.
<unk> <unk>.
Primary drivers of some inflation at this point, so as we picked up and.
And assumption of debt range of 1% and 2% is where we landed and our assumption.
Okay, very helpful and and maybe pivoting over to at the crusher for Hal or Seth on the on the pet trends everyone knows 2020 was a record year for pet adoption and acquisition.
Are you guys seeing out there and the field is are you seeing continued strength and.
What would you expect and for 'twenty, one there's arguments at Theres been a pull forward and and the acquisitions will drop off or there's other arguments that the the same adoption trends are going to continue for the year.
Yes, we are planning for the pet category to continue to remain strong.
And to over perform relative to our overall business in the year.
I think on the last call, we talked about chicken poultry and chicken and flocks and how they're a bit of and annuity stream given the.
On the debt they have at seven eight year lifespan.
And obviously patch at the very much the same way.
And with pet adoption up at an all time high.
And those pets as they grow are only going at the theyre going to move from puppy food to adult food, we're seeing that by the way on our trends.
Typically on the dogs.
As they get a little of older. They eat a little more as they get bigger so we're actually seeing.
The benefit from that a little bit on the tonnage side.
And we expect the Humanization of pet will remain very strong this entire year on.
As people continue to work from home really for the foreseeable future potentially all of 2021.
And so they are around their pets, theyre buying toys, and theyre buying snacks, they're upgrading their bad theyre getting them on new bed all of those things I expect will continue on.
This year and as I said, we're very pleased with our pet business. We are confident we're gaining share and our pet business, we're seeing strong growth and our pet business. Both in store, just the brick and mortar channels as well as online and certainly the sweet spot for us on pet is our omni channel, where we're seeing significant and.
Out of pet purchases online and picked up in store.
And as I mentioned in my opening remarks, we're investing heavily in this category to remain a strong destination for our customers and at whether it was the release recently of our new Pet Rx solution online, whether it's the rollout of both of the subscriptions and store to support similar way that we have at online whether it's the addition of <unk>.
150 to 200 for pet wash stations this year.
And then also the build out of more pet wellness clinics in our stores to support the mobile pet clinics that we have the drive significant and.
Gage mint with our stores from our customers. So you know.
We feel really good about where we are and pet and we'll be continuing to invest here.
The neglected the ultimate apologies.
Marketing campaigns that we've been doing the past year, we have a significant amount of dedicated marketing both television and digital devoted to Pat and at it.
At systemic meaning it's always on and we do spike at at certain periods, but at that the ticket assistant.
Graham that we're doing now.
First time, we've done that would be doing that for about six or nine months.
Thank you and share will hold on.
On from.
Sorry, and who can have at least that you'll kind of this our final question and sleep and wrap up the call.
Okay perfect. So Chuck Grom is your final question for today from Gordon Haskett. Your line is open.
Good morning, and nice quarter, great for sure. How my questions are on sidelines seems like a tremendous opportunity for you guys. I'm curious how you plan to approach it from a marketing perspective and also how quickly do you think it's going to take the ramp up to optimal productivity levels.
Yeah, Hey, Chuck we are.
We remain very bullish on the sideline project at.
And as we.
The remarks before.
Gordon is the category that our customers say they most participate in that we don't fully address their needs.
And in the same.
<unk> that we have opened.
Hi.
The customer engagement with the product and the purchase rates are at.
It's kind of like and overnight switch once that's all the <unk>.
Project is complete and the products and there we saw really strong engagement of customers and end and this is in the midst of fall and winter when.
Live goods Assortments are very limited.
And gardening activities as much left.
So you know we've got.
Over 50.
<unk> 50 of the side lots.
And underway right now.
We're in the process of applying for permits some were in the final stages of getting the certificate of occupancy.
Got it.
100, plus more of 100, plus more scheduled for the year at.
And.
We're very excited about about their potential and the team is doing an excellent job kind of navigating this environment to get those built.
And the context of Covid, you've got the.
The construction crews and at times, we will have the quarantine for a couple of weeks at one of the team members on the project.
The test positive.
You've got the city municipalities that you know getting permitting.
And it's very difficult getting someone to come out and do at certificate of occupancy is much slower and the team's just doing an excellent job managing through all of those all of those twists and turns.
We're very bullish and we remain very bullish on side lot and like I said, a number of them underway I just visited a handful of them and the last week and really.
And we're really excited to have our first batch of them opened and time for the spring season.
That's great and and just as a follow up I believe the the Garden center part of it's going to be about 4000 square feet. When you compare that to when you compare the productivity opportunity to what your your stores typically do today and any sense of what you think that can eventually generate overtime.
It is very seasonal and.
And.
And my experience elsewhere. The garden centers are very productive and if not more productive and the main store during the core spring season, and then in the winter time.
And the productivity falls off well below the core of the store.
And so we're looking forward to having a full year ahead of us with these projects to be able to get a sense for what's the Max productivity in the midst of spring how much can be prop the productivity up with things like Christmas trees, and pumpkins, and harvest type stuff and the fall and then we'll see where it plays out for the full year, but we are we are very confident that it will.
Drive significant productivity relative to how the space that's being used now and will drive strong shareholder returns the question as to what magnitude and we'll know more as the as we get into spring.
Right.
Thank you operator, this will conclude our call today and thank you for everyone for joining US we look forward to speaking to you on our first quarter call in April.
Thank you everyone and this will conclude today's conference call you may now disconnect.
Okay.
[music].