Q1 2021 Tractor Supply Co Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the tractor supply Company conference call to discuss first quarter 2021 results.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time and you asked that all participants limit themselves to one question and one related follow up please be advised that reproduction of this call and whole or and part is not permitted without written authorization of tractor supply.
My company and as a reminder of this call is being recorded I would now like to introduce your host for today's call Mis and.
MS Mary Winn Pilkington and hope you can say asking and vice president of Investor and public relations for tractor supply company at Mary Winn. Please go ahead.
Thank you operator, good morning, everyone and thanks for taking the time to join US today and I do hope, you're all day safe and Wale on the call today are Hal Walton and our CEO and Kurt Barton our CFO. After our prepared remarks, we'll open the call up for your questions Seth ACF, our EVP and Chief merchandising officer will join.
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 net.
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.
And many cases these risks and uncertainties are beyond 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 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 company filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed investors should not assume that store.
<unk> will remain operative at a later time tractor supply undertakes no obligation to update any information discussed in this call given the time constraints and the number of people who want to participate we ask that you. Please limit your questions to one with a quick related follow up I. Appreciate your cooperation we will be available after the call.
All of our follow up thank you for your time and attention. This morning, and now it's my pleasure to turn the call over to Hal.
Thank you Mary Winn and good morning, everyone and thank you for joining us today.
2021 is off to them.
2000, tractor supply and <unk> team.
Team members.
And once again, they took care of each other and tirelessly served our customers who depend on us to live the out here lifestyle.
I also want to thank all of our supply chain and vendor partners, we've been operating and the COVID-19 environment for over a year now and the tractor supply system has more than risen to the occasion as they strive to serve our mission and values every single day.
While we anticipated that we would have our strongest growth of the year and the first quarter. Our results were significantly ahead of our expectations. When you couple of this performance with a continuing momentum we are seeing and the second quarter, the positive macro environment and our strong customer trends, we are adjusting our comp outlook to mid to high single digit growth in 2000 and.
'twenty one.
Kirk will share more details on the improved financial outlook for the year across our key financial metrics.
Throughout the pandemic, our utmost priority has been the health and safety of our team members and customers.
We continue to incur significant incremental expense for items like paid time off mask and testing we remain committed to following the advice of the CDC and other medical professionals to protect our team and customers.
As we enter the vaccination face we are committed to helping our team members who choose to get vaccinated to do so.
We are providing of onetime payment of $50 and allowing time off of needed for all team members, who elect to receive of COVID-19 vaccine.
To further alleviate the barriers to receiving of vaccine. We are partnering with a third party provider to facilitate onsite vaccination at our eight distribution centers and store support center.
During the quarter, we also announced our entry into an agreement to acquire <unk> and farm and home a retailer with 167 stores across 11 states.
This is an exciting step for tractor supply and we look to expand our footprint and the Midwest with the high quality assets of Orcel and farm and home.
We've always had great respect for Berry and <unk> and the team for the strong connection they have with customers and the communities they serve along with their industry knowledge and capabilities.
And with our shared values and passion for the out here lifestyle, we look forward to bringing together our highly complementary cultures and teams to realize the long term value of benefit that we expect this acquisition to deliver overtime.
As we previously disclosed we received a second request from the FTC as part of their review of the transaction and of cooperating with that confidential review and Accordingly, we are limited and the comments, we can make about the transaction at this time.
I Hope you all saw our release this week with our update at ESG tear sheet for 2020, which provides new and updated performance metrics and context related to our environmental sustainability efforts, our commitment to our team members and communities and corporate governance. This report helps us provide detailed information and progress on our ESG.
Ernie in addition, we laid out our commitment to provide new targets and the fall of this year as it relates to our greenhouse gas emission plan and our aspirational goals for diversity equity inclusion.
These initiatives make great business sense for tractor supply as a purpose driven company setting targets for ourselves creates long term value and our potential to have a positive impact on the world.
We remain committed to constant improvement on this journey.
Now, let's turn to the business review for the first quarter of 2021.
We had exceptional net sales gains of 42, 5% with comparable store sales up 38, 6%.
We materially benefited in the quarter from transitory factors such as underlying foundation of our business is robust and we're gaining share across all categories online and in stores and also with existing customers and new of our neighbor's club membership reached $20 million.
Number of strong this is an important.
As we know that they are customers that shop us more frequently and they spend more money with us.
We saw at $2 5 million, new customers shop, with us and the quarter and that's an increase of over 30% over last year.
Re engage customers also exhibited strong growth up over 12% from the first quarter of 2020.
And customer retention for both our new and re engage customers continues to.
Run above last year.
We saw strong growth across all product categories and geographic regions of the country.
Comps for each month of the quarter were above 30%.
And our growth was well balanced between transaction and ticket growth.
The business.
For the fourth quarter, our E Commerce, Austria.
Strong triple digit growth ex.
And as you of our overall sales the work we did last year to improve our omni channel capabilities continue.
Mr resonate with our customers.
Ongoing improvements of the customer experience.
As for better search capabilities and enhanced personalization are being recognized by our customers.
As we've experienced and the last several quarters, we continued to see strong performance and market share gains and our consumable usable and edible categories with growth and the mid 20% range.
More specifically, we continue to be very encouraged by the trends, we're seeing within our pet and poultry category, where we're driving shopping frequency and market share gains.
Over the last 15 months, our unaided brand awareness scores are up 17 percentage points.
I believe these type of metric serve as leading indicators of our brand health and future spending patterns of our customers. We continue to execute our shift away from print advertising to brand building and digital marketing. We're currently airing our national TV spring advertising campaign that highlights the strength of tractor supply is offering to serve the seasonal needs.
Of our customers to take care of their land pets and animals.
Overall, the strong first quarter highlighted of unique advantages that we have at tractor supply.
Our team members delivered exceptional results and of generation defining moment.
Now I'll turn the call over to Kurt to discuss some of the details of the first quarter and our outlook for the rest of the year.
Thank you Hal and Hello to everyone on the call. We're excited to be starting fiscal 2021 on such a positive note as we performed well ahead of our expectations. Let me share. Some further color on our strong first quarter results and our upward revisions to our guidance for the year.
Our record first quarter earnings were driven by positive momentum in all areas of the business comp sales increased 38, 6% as the trends we experienced over the past year continued throughout the first quarter of 2021 traffic increased 21% and average ticket grew 17, 6% all geographic areas.
<unk> reported sales gains of at least 30% positive comparison to last year.
Big ticket purchases ahead of robust growth up strong double digits that well outpaced our average comp sales increase safe fencing utility vehicles trailers and outdoor power equipment, such as the zero turn mowers, where some of the notable gainers in the quarter as Hal mentioned, we did benefit from more transitory factors like <unk>.
<unk> payments favorable weather and inflation that had a positive impact on the sales and the quarter.
In total we estimate that about one third of our comparable store sales growth and the first quarter is attributable to these transitory factors.
Our best estimate is at more favorable weather for the quarter contributed about 400 basis points to comps.
Both January and February were colder than last year with February being the coldest month and 30 years.
And while the last few weeks of March turned to a favorable spring weather and many of our markets.
We also saw retail price inflation, primarily and commodities, which contributed around 300 basis points store comp sales performance.
The impact of stimulus payments is more difficult to quantify but we recognize that consumers have more cash to spend during the quarter and we believe tractor supply and benefited from this and Q1 <unk>.
Towards the end of the quarter in line with the timing of stimulus payments, we saw customer spending at elevated levels, especially in big ticket items are best estimate is that stimulus contributed somewhere in the mid single digits to our first quarter sales comps.
Even factoring in the transitory benefits, we believe the underlying health of our business is structurally advantaged.
Trends towards higher spending and consumables continued through the quarter with pet bird and livestock feed showing significant growth from last year.
We saw growth in the quarter, despite lapping last year's strong stock up buying that occurred late in the first quarter of 2020 at the start of the pandemic.
As we've said for the past few quarters, we see the growth and our key categories as more evidence of an enduring consumer shift to higher pet adoptions and ownership new customer hobbies, like backyard poultry and gardening along with trip consolidation.
For the first quarter, our gross margin increased by 148 basis points to 35, 2% of sales, which resulted in gross profit increasing to nearly $984 million and the first quarter.
This quarter marked the ninth consecutive quarter of year over year gross margin rate expansion.
<unk> with the trends since the beginning of the pandemic. This quarter's increase was primarily driven by a lower level of sales promotions and clearance activity. We also benefited from a positive product mix towards higher margin categories.
And consistent with our guidance, we received approximately 40 basis points of benefit from vendor funding for the field activity support teams or fast initiative.
These factors were partially offset by higher transportation costs, which was a headwind for gross margin <unk>.
Domestic and import freight costs have increased significantly as well as fuel cost and.
And we expect these trends to continue throughout 2021.
SG&A, including depreciation and amortization as a percent of net sales was 27% and an improvement of 103 basis points.
This improvement was primarily attributable to significant leverage and occupancy and other fixed costs from the strong increase and our comparable store sales.
This leverage was partially offset by three factors higher incentive compensation given the strong sales performance COVID-19 related costs and higher operating expenses to support the elevated volumes COVID-19 related costs were approximately $28 million generally in line with prior quarters as we continue to take appropriate actions to ensure.
The safety of our team members and customers.
Additional overtime temporary labor and other costs were also incurred to maintain high service levels.
Operating profit dollars more than doubled compared to prior year to $231 million and operating profit margin of eight 3% and improvement of 251 basis points net.
Net income was $181 million and increase of 117% diluted EPS was $1 55, representing an increase of 118% versus the first quarter of 2020.
During the first quarter, we returned $314 million to shareholders through the combination of our share repurchases and dividends.
Turning now to our balance sheet, which remains strong merchandise inventories were $2 1 billion at the end of the first quarter, representing an increase of about 2% and average inventory per store.
This level of inventory is still lighter than we would like given the momentum of the business and we are working with our suppliers and our vendors to build stock to support this momentum.
The added supply chain costs and freight expense necessary to rebuild inventory is reflected in our updated guidance we provided.
Moving now to our guidance for 2021.
The impact that the COVID-19, pandemic and the vaccine rollout will have on the broader economy, the consumer and our fiscal 2021 results remains uncertain.
We continue to plan for fiscal 2021 based on a range of potential outcomes remaining nimble and adjusting as necessary.
Our updated guidance reflects the strong results from the first quarter and the positive momentum we see in our business continuing into the second quarter.
While the current environment and momentum are both favorable and we recognize that COVID-19 pandemic is not completely behind us and that economic conditions can change quickly.
Please keep in mind at the prospective acquisition of <unk> and farm and home is not included in our guidance.
Against the backdrop of what we know today, we are updating our guidance to our net sales range of 11, 4% of 11 7 billion.
With comparable store sales growth of 5% to 8% for the year, we forecast and operating margin of nine 4% to nine 7% of sales of step up from our prior guidance.
Diluted EPS is now forecast and a range of $7 five to $7 40.
This compares to our previous earnings range of $6 50 to $6 90 per diluted share.
Compared to our initial outlook for the year, our forecast does reflect higher transportation costs and product inflation.
We experienced increasing pressures from these factors during the first quarter and expect them to continue to be of headwind throughout 2021.
In addition, we have a unique opportunity with the positive customer trends and momentum and the business. We are committed to investing and store and supply chain labor as we look to provide legendary customer service to meet our customers' expectations.
I want to share some additional context on our outlook for the second quarter, while we begin to lap more challenging sales and earnings comps. We currently see sales momentum continue partially fueled by stimulus payments, we expect of positive sales comp in the second quarter in the mid single digit range.
Please keep in mind, we'll be cycling our strongest gross margin performance of the prior year in Q2, where we benefited from minimal promotional or clearance activity as well as a favorable product mix.
We are expecting gross margin decline in Q2 due to higher transportation costs, a less favorable product mix and a slight return to promotional activity.
We also anticipate a modest one time headwind in the second quarter relating to the rollout of our enhanced neighbor's club loyalty program.
In terms of SG&A for the second quarter Covid related expenses are expected to moderate from the Q1 levels, but are forecasted to be slightly higher than original expectations entering the year, along with higher labor cost to support these elevated volumes.
For the second half of 2021, we anticipate tailwind such as stimulus payments to moderate and performance to be more in line with our original guidance expecting a modest decline and comp sales <unk>.
Longer term, we continue to believe the best way to look at our business is not by the quarter, but by the halves of the year.
As Ive stated before a key component of our financial model is the strength of our balance sheet and the consistency of our free cash flow. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases and January we increased our annual dividend by 30% from 40.
A share to 52.
For 2021, we anticipate share repurchases and a range of $700 million to $800 million and.
In summary at is an exciting time at tractor supply. We are very pleased with our performance and the first quarter and see positive momentum carrying into the second quarter, we see an opportunity to retain the loyalty of our longtime and newer customers by investing and our business to maintain and everyday low prices and improved customer service.
This strengthened our supply chain and grow our digital commerce all in support of our commitment to driving strong shareholder returns for the long term.
With that I'll turn the call back over to Hal.
Thank you Kurt I'd like to spend the next portion of the call covering some of the key customer trends, we're seeing and the business, providing an update on our life out here strategy and highlighting our spring programs.
Our customer base is experiencing robust broad based shopping patterns that provide significant opportunities for growth. These.
These types of trends can simply be described as once and of generation.
We're seeing growth in all of our customer segment and across all value tiers of spending with strong retention of existing and new customers.
The fastest growth customer segment as our core farm and ranch. This segment is very healthy as rural economies for the most part were less impacted by the pandemic and of recovering at a steeper and more robust rate.
Importantly, we're gaining wallet share with our core customer as our highest and medium spend customer tiers are outpacing our lower spend customer tier.
As mentioned earlier, we continue to see strong new customer growth and notably are also seeing strong customer retention.
As an example for our new customers from the first quarter of 2020 last year more than 50% have returned to shop with tractor supply.
This is about 300 basis points higher than the cohort from the first quarter of 2019.
We are seeing significant growth and our millennial shoppers over the last 12 months, we've seen of 400 basis points shift and the customer age cohort of 18% to 45 years old.
This demographic has long resisted many of the traditional generational norms things like as household formation and homeownership.
But the pandemic has shocked of this generation and accelerated of Embracement of these types of activities.
There continues to be of net migration out of urban areas largely driven by the millennial segment.
The most robust homeownership growth is and the millennial cohort with the growth coming in suburban and rural areas.
We believe the growth and this customer segment has staying power and could be of structural game changer for us.
Another structural customer trend and it's working to our advantage is the significant increase and pet owning households, and number of pets adopted <unk>.
Compared to the overall U S household pet ownership of approximately two third our customers over index and pet ownership by about 10 points.
And our current survey work with our customers indicate 25% have recently acquired and adopted a new pad.
New companion animal ownership axes, and annuity for our business at the puppies and kittens grow up and have growing lifecycle needs.
We're also uniquely positioned to offer a growing menu of services, such as pet wash vet clinics prescriptions and tell of that services.
Whether it is more food treat toys containment and more the humanization of pet provides us with future opportunities for growth.
These customer trends are an indication that we continue to benefit from the numerous tailwind such as pet ownership and millennial urban exited backyard poultry homesteading and homes and Oasis we.
We believe many of these consumer trends will be enduring shifts well into the future.
Our brand momentum is stronger than ever and we're investing to ensure we continue to play offense and the context of these trends.
We are making excellent progress on our life out here strategy and initiatives at the beginning of April we announced the relaunch of our Neighbor's club program to be even bigger and better.
When we launched Neighbor's club nationwide in 2017, our vision was to create a unique adhere community for our customers and a place for them to connect with us.
The Neighbor's club has permitted us to show appreciation to our loyal customers and you accumulate actionable customer data that has allowed us to deliver to our customers more relevant and personalized communications.
Over the last four years, our loyalty program of service well to be able to thank participating customers for being loyal customers provide rewards and special offers they value learn more about their purchasing trends and interest and ultimately increase customer loyalty to tractor supply stores.
Today, our Neighbor's club program has over 20 million members and is comprised of our most valuable customers.
It is a perfect time to upgrade the program with the introduction of point and three tiers. This data.
Now neighbors can earn points on their purchases and redeem them for more rewards they can earn their way to different levels. So that they when they spend they earn more.
With the new features of Neighbor's club, we believe we have more tools and features than ever to help facilitate upward migration and spending and mitigate downward migration of spending by our members.
The changes day, Neighbor's club, where specifically based on our customers' feedback the.
And the new rewards and benefits of Neighbor's club are relevant to the customer's lifestyle, such as trailer rentals and shipping benefits.
We believe at the new Neighbor's club benefits, we have an opportunity to support our customers and a more meaningful way. This in turn will provide us a platform for multi year trajectory for growth as a clear business driver for us.
More broadly we are aggressively advancing our life out here strategy. The vast team is at scale and providing significant improvement and the execution of our merchandising initiatives.
We continue to forecast of about 150 to 200 dialogue transformations to occur this year as of today, we have over 40 stores operating and continue to refine our learnings for future build out of which 35 are currently under construction.
Project Fusion store Remodels are also on track for completion of 150 to 200 stores this year in.
In addition, new stores are being built this fusion stores with improved layout signage SKU expansion and adjacency.
While still early we are very pleased with our customers' response to both of <unk> transformation.
And the project fusion store layout.
Now turning to spring.
Our stores and e-commerce are well positioned to take advantage of the seasonal change to serve our customers.
We remain committed to being the zero turn headquarters with our market leading <expletive>ortment from tour of Bad Boy Cub Cadet.
We have substantially expanded our <expletive>ortment and grilling raised bed garden and other backyard category.
And to capture share of wallet and the lawn and garden category, we've expanded our offerings on core product like long handle tools wheelbarrows trailers and pillars and.
And Chick days are underway with millions of customers relying on us for their poultry p<expletive>ion.
Leveraging our localization efforts, we're expanding our tool corral to an additional 400 stores.
And on the product innovation front, we're partnering with carhartt to opened a new store within a store concept. This concept was created with our customer at the center of the shopping experience.
And by partnering with carhartt to double our selection our stores have even more of what makes tractor supply of destination for workwear.
The new store then of store concept will rollout and more than 100 tractor supply stores and 2021.
With additional stores to be added next year.
To wrap up I couldn't be prouder of the tractor supply team as they've remained agile and the face of a very challenging operating environment.
My Thanks, and appreciation go out to each of them for helping to take care of each other and our customers while operating at a record setting pace.
We have an incredibly strong business and foundation, we see more positive macro factors and we did at the beginning of the year customers of shopping with us and record numbers, and we're investing and multiple initiatives to retain them and provide more reasons to shop with us and the future.
We participate and a large and attractive market that were working to expand further with initiatives such as sidelined that will add to our product offering.
By doing the right thing for our team members and customers, we're executing our life out here strategy and building a stronger company for our shareholders.
Now, we'd like to open up the call for questions.
Ladies and gentlemen to ask a question. Please press star followed by one on your telephone keypad to Australia Your question.
And.
As a reminder, we ask all of them.
And so Q1 question and one follow up related to your first question comes from Michael L<expletive>er with UBS. Your line is open.
Good morning, Thanks, a lot for taking my question and all of the new customer statistics are very helpful. Can you give us a sense for where you think those customers were shopping before tractor supply or is it more likely theyre, just new to the farm and ranch.
Total industry and as a result, youre grabbing a disproportionate share of of those incremental new customers and as part of that can you give us a sense for how many of those new customers are shopping in the key categories.
Such that you think you'll be able to get those customers and the sustainable patterns of repeat purchases.
Yes, good morning, Michael and at.
Thanks for your question.
And as you mentioned, we've seen a significant amount of new customers.
Shopping with us over the last 12 plus months with above average retention rates.
And continuing to hold.
And as we mentioned over 50% of the Q1 2020 cohort has shop, just again and the last 12 months of very strong growth strong retention.
When we look at the additional customer data.
And I'd highlight two main drivers of of the new customers.
First would be in the core farm and ranch and.
And that at very much is as of market share gain.
And we're in.
These are customers that have land have animals.
Have had.
Our value proposition and appeal to them over time and for a variety of reasons, they're choosing to now shop with tractor supply and it has a lot to do with the investments we've made in technology and the investments, we've made and safety and health and cleanliness and our stores and.
And certainly the focus we've had on inventory and customer service.
And then the second thing I'd bring up is.
And kind of the millennial customer, which we highlighted in our prepared remarks.
This segment had a very large increase as a percentage of our sales in Q1 at.
And really when we look at the data it really is around and the migration of of <unk>.
People out of urban environments into suburban and rural environments.
And that generation starting to.
Kind of take.
And at form households buy homes.
And as part of that the out here lifestyle is part of the aspiration that they have when they move when they moved out to the suburbia or when they moved out to rural America and.
We do really feel like this is a structural trend.
That will continue.
And to provide growth for us as we look out the balance of this year and beyond.
Okay.
My follow up question is if you unpack the m<expletive> of.
And of your.
And 5% to 8% comp guidance for the year of coupled with a mid single digit comp for the second quarter and suggest that you run down call. It 10% in the back half of that at the midpoint of the range, which would be about 1000 basis point differential from where youre going to run in the second quarter of at least at.
Arithmetic, two year stack basis, even though the math gets all confusing at this point at.
Is it right to think that you're at.
And the difference is all going to come from getting about 1000 basis points of stimulus benefit.
And <unk> and you probably won't get that.
In <unk> and <unk> or is it more inflation weather. How are you think about what's unique around the second quarter versus not.
Selling and the back half.
Yes, Michael this is Kurt in regards to your question and I'd really point to two things. We just finished first quarter and as I mentioned in my remarks, and we recognize that in this environment. There's just a lot of uncertainty we've got better visibility on the second quarter.
And still less visibility on certain factors and the second half and we don't have significantly greater visibility than we had from our original guidance and so that's one factor as well as second quarter as I mentioned, we believe that has some benefit from stimulus and that begins.
To moderate and the back half so.
Our guidance does not have significant shift from our of original guidance on the back half of the year for those reasons.
Thank you for the color and good luck with the rest of the year.
Thanks, Mike.
Your next question comes from.
And then with Morgan Stanley Your line is open.
Hey, everyone and good morning, nice quarter and my first question is on the sideline infusion and then second will be a financial question. So the first.
I know, it's early and it might even be early of early to ask some of these questions on fusion and sideline I don't know how many real examples you have yet, but thinking about 'twenty two and beyond.
Any any read that you can provide and.
How much more productive and even some of the handful of of stores that you have or how they performed if any if any better and the first quarter then.
Stores that havent been touched at all.
Thanks, Tim and good morning. This is Hal and thanks for your question.
And I'd start by just saying we are the life out here strategy is.
Off to an excellent start.
We are at across all of the initiatives that we have.
They're all underway and getting excellent traction as we highlighted the two.
Neighbor's club relaunched a month ago off to an excellent start there of the SaaS team at multiple months of maturation, there, having a big impact fusion and side, but our early days as we noted in our prepared remarks, we have.
Handmade implemented them in a large number of stores already.
<unk> had good customer reactions early on and.
And the sales performance is as we expected and at.
Our Q2 call and beyond and you can expect to hear more on performance of those from US as we get through the all important spring time and.
And we're able to fully.
Evaluate the results.
Okay. Thanks for that and then the follow up financial is on second quarter gross margin.
Assuming the environment in terms of lack of markdown continues.
That should still be a good source of year over year, but Curt you mentioned the pressure that you expect is there any way you can quantify.
And relative to our direction in terms of freight expense and some of the other headwinds just so we can gauge order of magnitude.
Yes Simeon.
To address gross margin at.
First point to a great basis point to look at is where.
<unk> back to the drivers of Q2 last year that we're comping and then even reflecting on the Q1 drivers.
And that's really a great way to reconcile to it and the reason I point that out of last year. Some of the drivers and Q2 that we're about to lap or with the pandemic you saw transportation costs and certain commodity prices actually declining and so that was really a favorable item and.
And there we are now lapping that first quarter, where there was really no promotional or clearance activity in Q1. The factors that were drivers that we pointed out in Q1, such as the favorable product mix as the last quarter, where.
Before we start lapping some of that favorable product mix, where the discretionary higher margin items, where a big portion of the mix. So to give you a level of quantity.
Quantifying of it.
Coming off of that basis, I'd give you the four key factors and I'll put in and the order of.
Magnitude.
Lapping those lower transportation costs with higher transportation costs right.
Right now would be the first.
Lapping a favorable product mix and Q2 last year, where the discretion of our higher margin items were a much higher percent and Q would be second the inflation impact.
And then followed by as I mentioned, the one time neighbor's club impact for launching the points and rewards based program is a great way of summarizing it.
Okay. Thanks, everyone. Good luck.
Okay.
Your next question comes from Scot Ciccarelli with RBC capital markets. Your line is open.
And.
I have a follow up on the new customer cohort and my question is simply can you guys quantified that at the comp impact that you've been receiving from new and existing customers whether it's.
Past quarter or now the last couple of.
Yes, Scott this is Kurt we started the pandemic seeing.
<unk> seen a very strong growth and new customers and we've talked about that over.
The last three quarters, we continue to see a meaningful portion of our growth coming from new customers and for the first quarter when looking at the strength of our business.
<unk> new customers, both new customers that.
Entered transacting with tractor supply in 2020, as well as new in first quarter really represent.
A key portion of the first of first quarter results in the high single digit range of our mix of the 38, 6% comp.
That's fantastic and just wanted to clarify one other comment that you made earlier and current so.
And so basically you guys had much better than much better than expected results from <unk> racing to Q you Havent changed at back half from what your original anticipation loans is at the right way to read it.
Scott There is no real significant change and top line or other factors on the second half.
We have certainly considered and recognized some key factors that we pointed out such as inflation and some of the cost of doing the business. So we've factored that into our overall guidance, but no real meaningful shift in tailwind or headwinds and our second half of algorithm.
Got it alright, thanks, a lot guys.
Your next question comes from Kate Mcshane with Goldman Sachs. Your line is open.
Hi, Good morning, Thanks for taking my question I Wonder if I could switch gears, a little bit and just ask.
About.
And your test at all.
And I wondered if you could talk a little bit more about how customers are using your same day fulfillment and focus I know theres been a lot that's been turned on and changed during the pandemic to make it easier.
To fulfill.
I'm just wondering if theres any way to break down how the customer is getting their orders now.
From digital and where do you see that going longer term and then finally and the same context and working towards pushing customers.
Same day fulfillment and and both of the options and away from two day shipping.
Yeah, Hey, Kate and good morning, and thanks for your question.
We are very pleased with the performance of our online business as we noted down and our net.
And press release and in our prepared remarks, our fourth quarter now of over 100% growth in the business.
And its penetration rates continue to increase and overall percent of our sales.
Buy online pickup and store continues to remain approximately 75%.
Of our digital of our digital sales.
And with.
Curbside pickup.
Being about 75% of that buy online pickup in store. So that's.
So the customer behavior, even with the growth continues to.
And kind of stay similar to what it has been in the past and but what we are seeing is just a much more of our execution both from the customer order all the way through to customer pickup is just much more efficient than it was this time last year and.
And that's really due to all of the investments that that we've made and just the outstanding execution by the team and.
Ill give a brief example of that we rolled out our first mobile app last year and the summertime. We now have over 1 million downloads of that App, and it's becoming a material portion of our digital sales.
As the customer does of biomarker pickup and store order in that and our App. They can note there the type of vehicle. They are driving the model of the color and then any special pickup requirements. They have like maybe opening up the back of the of and SUV and putting it in there without even engaging with the customer then as soon as the order is placed.
At the Acura headset and our stores for every single team member that task within moments after the orders placed to sit down to that store the team member acknowledges and and well over 90% of our orders are now being picked and less than an hour as soon as the order day at.
The order is completed by the team member data and check it in with our mobile handheld, which we doubled the capacity of those and our stores last year and then they take the order up to both of US lockers, which we just rolled out in November of last year. The average store has three.
And then the customer gets of notification, saying, it's ready on their way into our store, we have and on my way functionality that customer can hit that as soon as the customer enters our parking lots of team member get the notification, saying they are ready for the order to be picked up and then in there at theatrical headset at will actually tell them.
Barton and of White Ford F 150 is ready for their order and they'll walk right out and they will drop the order and the back of the SUV as it was indicated we're doing well over 90% of that and minutes now.
And.
And then they take the handheld device out there complete the order because we've rolled out and additional Wi Fi access points on the front.
And the customer drives off and that is a big percentage of our orders the customer scenario I, just articulated and the vast majority of the technology as well as the operational components of that are all new from last year and so just real kudos.
Kudos to the team for really just implementing at large number of technologies last year as well as operational procedures.
Thank you.
Okay.
Your next question comes from Peter Benedict with Baird. Your line is open.
Okay.
Alright, thanks, guys.
And I was wondering I wanted to circle back to the.
Total revitalization theme you were talking about and just curious if you had any more data around that and have you guys learned more about.
Maybe what the populations are doing and your markets at any data that kind of speak to that I understand you've talked to more generally about it but is there anything else you can share.
Yeah, Hey, Peter.
I would say our datasets that we're looking at as it relates to kind of the.
The kind of the urban.
<unk> departure, and the rural and suburban is really a combination of our own data plus what we're pulling in from.
And from external data sources, and if you look at the millennial population in general.
And this is one that forever.
At almost 10 15 years now I think all of US have been wondering if that generation will eventually conform to normal generational.
Activities like household ing and buying homes, and such and I do think that the pandemic really shocked that generation and you're pulling forward now three or four years of those sorts of activities into a year and if you look at home home purchases if.
If you look at household formations.
At generation is spiking above all of the other generations in those and those activities.
And the the urban home purchases that generation of declining, but rural and suburban are increasing and we see that and our data set as well as we talked about the millennial cohort increasing by four percentage points as a percent of our business and in the first quarter.
And.
We're seeing it and our stores and the products that they're buying and.
And in the way they are engaging and I think we've mentioned in the past, we sold 11 million birds last year and half of those birds went to new customers.
And it just shows you a category like poultry, which we're far and away of the market share leader in at.
And it's a category that really had a Renaissance light went through a Renaissance last year and its continuing this year and our stores and.
And you see a lot of new customers coming in by and coops buying birds and buying everything that goes along necessary for that p<expletive>ion and then they're taking it out to their new homes, and the suburban and rural areas and enjoying the out here lifestyle.
That's great. That's helpful. Thank you and then I guess just on the on.
And the competitive environment.
And I know you guys are joining up with <unk>, but just how are you how are you seeing.
Our traditional competitors beyond <unk>.
Kind of act and behave here and.
And then the non traditional competitors.
Anytime there is a market that gets the same great growth it'll attract at will track interest of others. So just curious what you are seeing any anything interesting evolving on the competitive front.
As we move here into the spring. Thank you.
Yes, I'd say.
<unk> been really really focus on our customer over the last 12 or 15 months and and are trying to make sure that the competitive we stay out ahead of them and we're creating a compelling kind of competitive advantage at whether that's in inventory and really pleased as Curt said wed like to have more inventory, but.
<unk> finished the first quarter two percentage points above last year, given our comp rate.
We were relatively pleased there.
10000 more team members and we had this time last year.
That's really at.
Indicative of our focus on customer service.
And then if you think about the digital enhancements. We've made that's really about staying ahead of the customer as well and then also the investment we have we've made and our brand over the last over.
Over the last year.
We'd be remiss, if I did point out of 17 point increase and our unaided brand awareness moving from 34 points unaided brand awareness of 51 points of unaided brand awareness over the last 15 months.
And I think all of that.
And kind of comes together to create a really compelling reason to shop tractor supply and <unk> and we're certainly seeing the footsteps in our stores and on and on our website.
And just staying focused on the customer.
Okay, great. Thanks, so much.
Our next question comes from Steven Forbes with Guggenheim Securities. Your line is open.
Good morning, I also wanted to sort of focus on customer trends, maybe more broadly. So how you mentioned $20 million of over 20 million members.
To date, but can you remind us how many members transacted during 2020.
And then speak to sort of the differences in behavior.
Trends right, maybe just spending trends trends between those 20 million members right and the non member customer base.
Sorry could you repeat that second part of the question and muffled honest I apologize.
Sorry, I'll, just just curious if you could sort of speak to the spending trends and how they differ between.
The members of the Neighbor's club member and customer base of over 20 million members and those customers that you have that transact with you.
And part of the loyalty program, just trying to better gauge right, what's the potential tailwind could be.
And as the new loyalty member program stores here.
Yes, so I'd start by first saying, our neighbor's club members represent over 60% of our sales and they shop at much more frequently than our non neighbor's club members do at.
And we.
We are seeing equivalent growth and our neighbor's club sales as we are and our non neighbor's club sales. So they continue to be very active very vibrant group.
And we're really excited about the rollout of our new loyalty program because of what it does is create three tiers and rewards our customers base the more they spend and the more they earn and we're excited about lifting or their purchase rates from the from one tier to the next and kind of driving that upward migration.
But they are.
Yes, it's a really strong customer group for us and we're really pleased of the results we've had and the last year and excited about the ongoing developments and the program.
And maybe as a follow up worked at a different way.
And over 20 million customers represent 60% of spend how many customers account for the remaining 40%.
Yes.
Larry Lee and we Havent given out some of that level of detail.
Days of highly engaged group of and Neighbor's club retention rates are spectacular one at as well and just.
Yes.
I appreciate the color best of luck.
Thank you.
Your next question comes from Elizabeth Suzuki with Bank of America. Your line is open.
Great. Thank you as you had mentioned net inventory in general is a little lighter than you'd like are there particular categories that are experiencing more acute shortages due to shipping delays and supply constraints and could there be some pent up demand of our sales that were left on the table.
Inventory constraints.
Hi, Elizabeth is a SaaS thinks of the question yes.
As Kurt mentioned, there, we really had strong momentum coming out of Q1, and exiting Q1 and <unk>.
While we would love more inventory, obviously as we said there to continue obviously to drive sales, we feel very good about our position and continue to drive. These sales here in Q2, and I'd really bucket the inventory position that we think about really and kind of three primary buckets.
The first bucket would be kind of a Q and a needs based product.
And the team has done an absolutely excellent job, making sure that we can continue to stay and stock can be that dependable supplier and.
And we feel that we can definitely continue to make sure that we can take care of that shopper and customers coming in.
Big ticket is really the second primary bucket and Thats, where we really saw that strong demand exiting Q1.
And so I would say early in Q2, that's where we're really focused on here re planning that product, we can bring that and to make sure that we can continue that momentum and that products flow and and have been flowing into stores and then third is more of our import side and the importance items, where we did see a little bit more delays as it relates to our.
Tori position most of that is and the call at our drive aisle type of category. So if you go and our stores some of the core some of the discretionary.
Type areas.
Those items have been slow and and nicely actually is really putting us in a great position as we're entering here in the peak of Q2 to make sure. Our set of courts are going to be locked and loaded and four and ready to drive sales and and we also talked about the quality of inventories veterans ever been I mean, our clearance position is an incredibly good spot. So as you think about that 2% comp.
Inventory at is also doing at Danone healthy quality inventory to drive future sales. So feel really good about where we are to continue to drive of momentum here in Q2.
Great and one quick follow up any net.
There are instances, where your suppliers are starting to raise prices.
And generally April of the p<expletive> through those cost increases at that much pushback from the customer.
Elizabeth.
We've obviously have very robust pricing tools at their most of our pricing and inflation that we've seen of them coming from both the green and the steel markets. If you look at what the.
And the charts are showing out there great markets have been moderately rising throughout the course of the back half of last year, it's been pretty steady above call. It $5. Mark early point. This year, we've got a very talented team that's been managing this kind of inflationary environment and.
And the past and from <unk>.
Very confident and our ability.
To manage appropriately to make sure we drive market share, but also be able to p<expletive> along to drive a level of margin improvement that is needed as well.
Great. Thank you.
Thank you.
Your next question comes from Todd Mitchell of RFID Capital. Your line is open.
Thanks, guys and thanks for taking my questions. So my first one is kind of a two part.
And <unk>.
Question regarding the sidewalk and I guess kind of go back to what Simeon.
We're talking about I guess, if you guys had more availability to do at would you speed up if you could.
Hey, Scott.
Yes, so first off on the sideline I'd say, we've learned a lot over the last six months.
On the rollout of that program and are very pleased with the progress we've made.
The team has done just an excellent job navigating through permitting and navigating through.
Kind of Covid and construction crews.
Also navigating.
And kind of access to steal fixtures and all of those sorts of things that are.
And kind of creating a very difficult operating environment.
And.
We've done a lot of staffing and hiring of project managers et cetera, and really pleased with the progress we're making the team is working.
Full out on the rollout of them. This year, we're confident and kind of reaffirmed our guidance on 150 to 200 by the end of this year.
And we will update you on our plans for 2022 and beyond at as we get further into the year, but we still feel very good about 500 plus of our stores being.
Applicable to both fusion and side lot and remain focused on that on that goal and executing those initiatives as quickly as possible, but also with outstanding ex.
Precision of execution as well.
Okay. So you would speed up you would just yes, I mean, yes, I mean, I think we're running at the right pace right now would be the thing and if we can speed up as we get further into it we will but I think we're running at the right pace right now that there is we're not we're certainly not constraining ourselves.
And kind of from a kind of capital investment perspective, or Resourcing perspective, I think we're running at a rate that is appropriate for kind of our company right now.
Okay, and then my follow up question and basically I Wonder if you guys had the data of.
New customers buying pet.
That are also neighbor's club members.
Alright.
That cut and the data Scott and we have all of things at that.
The EBITDA for insight and we use it for all of our digital communications and those areas.
And.
Yes, Scott.
Scott I think you guys have the ability to cut at that way, though.
Yes.
I'd start by saying first a couple of I'll give a couple of data points on that Scott.
Over around a third of our new customers joined and Neighbor's club and.
And so we are seeing good movement of those new customers into the Neighbor's Club program.
And the two biggest drivers of new customers into our stores, our pet and feed.
And that kind of to my comments earlier around core farm and ranch customer and kind of the millennial customer you've kind of the trends.
Our.
End of applicable of the core farm and ranch customers coming in and buying.
Seed the millennial customers coming in and buying pet food or chicken feed.
Kind of fuel those p<expletive>ions and that habit those habits and then all of those new customers about a third are converting to our neighbor's club.
As they shop with US and then obviously, we would look for that to two that pace to pick up over time, but feel really good about.
At our customer trends and about pet ads and attraction for those customer trends, but also poultry and seed and then the conversion of those new customers into our loyal and Neighbor's club members.
That's perfect. Thanks for the color I appreciate it.
Your next question comes from Ross Carden with Wells Fargo and your line is open.
Hey, good morning, and thanks for fit me in.
And you mentioned vendor funding and best team benefits of 40 basis points to gross margin in Q1 and as it continued to step up at that spend on the SG&A side do you expect these vendor benefits to build through the year and could be benefits be high enough to offset some of the headwinds from lower promo freight and the mix at <unk>.
You've called out in the back half.
Yes.
Yes, Zach this is Kurt I'll start and then I'll, let Seth.
Sponsor of the last part of your question and there so our vendors.
<unk> certainly been strong supporters of us to be able to fund the cost of the fast program is as we proceed with that and that's really our commitment.
And this team is there to help merchandise and help ensure the sale of that product and it has been a.
A strong contributor one of one of the.
Areas that has been an early win and the life out here strategy and so our vendor funding that we anticipated that funding is really began and start to flow through the P&L pretty consistent about 40 basis points.
Core throughout all four quarters of the year on the gross margin side. The only thing I'll remind you is that we set and the back half of last year that we would begin to make the investments in the SG&A to build that team and that cost actually went through the P&L unfunded and so the <unk>.
SG&A cost today per fast is larger than the funding.
And as we begin to build this program at <unk>.
And we'll eventually neutralize over the years, but for this year, there will be starting to lap and the third and fourth quarter. Some costs on there, but again for the year it'll average out about 40 basis points of incremental and SG&A with 40 basis points of benefit on vendor funding it'll different.
At between the quarters of bit and then I know <expletive>essed and go ahead and talk about the investment.
Just a couple of other points there I just rollout as Curt mentioned, just one of the big early wins with our life out of your strategy and I would just say the timing of the fast program could not have been better and roll. This out with the record volumes that are going through our stores today execution has been absolutely excellent among the store teams.
Our plan of ground resets right now are on time and full of north of 95% which is of major.
Really good improvement from the past and it's allowing our store teams really to focus on the cleanliness as well as to take care of our customers, which has also been of great win for our supplier partners as well and they are there to sell products take care of them and offer.
No.
That customer service and then finally from a merchant perspective, we plan to have record number of plenty of them resets occurring throughout the course of this year and we were able to uptick that last year and as we've been able to operate and we have been operating and this record sales volume of Windows are merchants and the past we did not have a great Avenue at times to go after opportunistic.
Buys and things of that nature to really be able to fill and our drive aisles, and we've been able to leverage the fast team as well as our supplier partners to go after those kind of opportunistic buys so that we can really maximize of sales trends that are out there. So I would just say overall just incredibly pleased by the fast program and just really big high marks to the team that's out there.
For standing this up and taking care of our supplier base.
Okay, perfect and art and the loyalty program updates of this month I know, it's early but any feedback or of customer response to reports thus far and then also just quickly on gross margin you mentioned of slight Q2 headwind to accrue per the elevated benefits or discounts or is this just of one quarter phenomenon or a headwind.
Net should persist through the year.
Yes at the Neighbor's club program is off to and the relaunch is off to an excellent start.
At this point the customer comments are more anecdotal in nature.
In terms of their positive orientation around the tears.
And the excitement about some of the special perks that come along with at around free same day next day delivery for our top tier one.
As well as access to trailer rentals and such.
And then I'd say day, all we just had our first drop of points going to customers.
Earlier this week and.
And so we're just starting to see some of those redemptions and such and we'll be able to talk a bit more about migration of customers over the next couple of quarters and.
And then the gross margin impact and modest sales impacted Curt mentioned in his prepared remarks is really more of a Q2 phenomena that abates as we get further end of the year.
Great. Thanks, I appreciate the time.
And given that we're past the top of the hour that's going to wrap up our comp a day, so Denise and thank you for being our operator today and this will conclude our call and thank you and everyone for joining US we look forward to speaking to you on our second quarter call in July and thank you.
This concludes today's conference call you may now disconnect.
And.
And then.
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