Q2 2021 Tractor Supply Co Earnings Call
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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's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed investors should not assume.
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Morning, and now it's my pleasure to turn the call over to Hal. Thank.
Thank you Mary Winn and thank you to everyone for joining us this morning.
Thanks go out to the more than 45000 tractor supply team members for their ongoing commitment to each other our customers and the out here lifestyle.
Jim has been through a lot together over the last 15 months as an essential needs based retailer.
Adding necessary, but cumbersome health and safety measures surging volume the rollout of our life out of your strategy.
Hi chain disruptions numerous digital investments and more.
The team has risen to each challenge to be there at the dependable supplier to our customers and the communities we call home.
Due to the team for another great quarter.
I would also like to say, thank you to our vendor and supply chain partners as we work together to overcome the challenges and the global supply chain network.
Together, we were able to support our customers as the dependable supplier for their out here lifestyle.
Over the first 12 months of the pandemic through the first quarter of 2021, our sales grew approximately 35% or $3 billion.
And the second quarter of 2021.
As we are now comping the comp we were pleased this momentum and all of the underlying trends have remained and continue to sustain.
Looking at the second quarter of tractor supply team delivered a very strong performance that exceeded our expectations as we achieved a 10, 5% comparable store sales growth for the quarter and of 41% 2 year stack.
And our results proved yet again tractor supply has unique competitive advantages.
Our relentless focus on being the dependable supplier for the out here lifestyle is embedded in our purpose as a company of.
Life out here strategy is still in the early days, we are seeing positive trends from our initiatives.
We're excited by the momentum.
We remain committed to investing and our team members as we believe they are a key competitive differentiator with our customers just last month, we increased pay for nearly 27000 of our tenured hourly store team members and also raised our minimum wage to $11.25 per hour.
Our key members continue to make tractor supply the special place that it is and.
Investing and our team members is not only the right thing to do but it is also a way to recognize their role and driving our business forward.
Now turning to our results for the second quarter of 2021.
Our net sales grew approximately 13, 4%.
Comparable store sales grew 10, 5% driven by a comparable average ticket increase of 6% and transaction count increase of 4.5%.
Diluted earnings per share increased 10% to $3.19.
Importantly, the underlying foundation of our business is robust.
For the quarter every week had positive comps our growth was broad based across regions and product categories.
We continue to gain share across all categories online and in stores.
And Q2, we experienced comparable store growth and our consumable usable and edible categories. It was well above our overall comparable store sales.
E Commerce recorded its largest ever quarter of sales.
At work, we've done over the last year to improve our ecommerce capabilities has certainly resonated with our customers and.
And just under a year, our mobile App already has more than $1.6 million downloads and now represents over 10% of our E Commerce sales.
Given our strong performance year to date, coupled with our outlook for the balance of the year, we are raising our sales and earnings guidance for the year.
Kirk will share more details on our revised outlook later in the call.
Regarding our pending acquisition of <unk> and farm and home that we announced in February we are working cooperatively with the FTC on their second request, we look forward to the benefits. This transaction will offer customers with improved products and competitive pricing.
We have previously shared key observations of our customer behaviors based on our market data and research and I would like to update you on that today.
Overall, our customer metrics remained very healthy.
Both traffic and spending increasing at a balanced right.
So let's run through some of the insights that are most relevant.
First we are seeing broad continued strength across our customer base.
More customers than ever of shopping tractor supply.
And these customers are making more trips than ever and are spending more money per trip than ever.
We are seeing strong retention of customers that of shop visits over the last 12 months.
Our retention rates continue to run above historical trends.
The conversion of our Neighbor's club loyalty program to a points based rewards is resonating with our customers.
Year over year, we've added nearly 5 million new members to the program.
And our Neighbor's club members they are spending about 3 times the rate of non members.
And they are comping at a rate well above the chain average.
David Club members accounted for about 65% of our sales and that's a step up from where we've been running prior to the relaunch of the program.
We've grown our high value customer base and the program by about 15% year to date with customers migrating upward and spending significantly outpacing any downward spending.
The retention rate of our most valuable customers is running north of 95%.
New customers are joining the neighbor's club program at a rate of nearly 30%.
<unk> above the rate from last year.
And the new customers, we are acquiring as compared to our core customers are continuing to skew younger we're seeing significant growth and our millennial shoppers.
And our trends this quarter for the customer age cohorts of 18 years to 45 years old were in line with the first quarter.
And we continue to believe that the growth and this customer segment has staying power.
It looks like last quarter the types of trends, we're seeing can simply be described as once the net generation.
We believe key aspects to our customer service such as at convenient place to shop product assortment legendary customer service and in stock levels are important to keeping these existing and new customers engaged with our brand.
On the macro front the economy remains strong.
And key trends continue to work in our favor such as rural revitalization trip consolidation Omnichannel.
<unk> adoption and of self reliant lifestyle movement, including DIY trends and hobbies like gardening backyard poultry and pet adoptions.
While the cost of <unk> environment remains elevated across import domestic freight commodities.
And labor wages, the merchant team has been aggressively advocating for our customers.
We're at necessary, we are taking price increases to pass through some of the cost pressures that we cannot offset.
We are closely monitoring the price elasticity to ensure that we are focused on product unit trends. The team is doing an excellent job navigating this environment.
Over the past few months, we have navigated unprecedented conditions as the country opened back up the out here lifestyle remains incredibly relevant.
And with that I'll now turn the call over to Kurt to review the quarter and more depth and our outlook before I come back to give insight on our life out and your strategy and other drivers of the second half of 2021.
Thank you Hal and Hello to everyone on the call today.
At how shared many details on the second quarter in my time on the call today I'd like to go into some of the specifics around our financial performance and our increased outlook for the full year.
We are very pleased with our performance. These results demonstrate the strength and resilience of our business and our strategic initiatives.
For the quarterly cadence April and June were the strongest months of the comp store sales performance.
All geographic regions and all major merchandising categories had comp store sales growth.
We believe the underlying health of our business is structurally advantaged.
A great example of this is the strength and our consumable usable and edible products are key products represent the strength of our core business and what drives trips to the store.
For the fifth consecutive quarter in a row Q had comp store sales growth above 15%.
Subcategories, such as poultry livestock feed and dry dog food were among the strongest categories with comp sales all greater than 25%.
Of note, we are seeing strong retention rates of our new customers across every species of livestock and companion animal for.
And for example, poultry of Hallmark Homesteading category for tractor supply has the highest retention rate of the animal species for new customers and new to the category.
Our big ticket categories, which were going against significant growth and the prior year continued to have strong comp sales performance above the chain average and this was driven by strength of zero turn mowers safes utility vehicles and trailers.
Lastly inflation.
Tribute at about 350% of 400 basis points to comparable store sales in the quarter.
Our second quarter gross margin rate was 35, 8% of decrease of 67 basis points year over year of the gross margin drivers of principally 3 items first higher freight costs, but all of retail is experiencing second and initial impact from the relaunch of our neighbor's club loyalty program.
Ram and third a more normalized Q product mix.
Our price management program, partially offset these factors as we look to mitigate the impact of inflation and other cost pressures consistent.
Consistent with our guidance, we received approximately 40 basis points benefit from a vendor funding for the field activity support teams or fast initiative, which was launched in the second half last year.
Of note, we continue to see favorability and the frequency and depth of promotions as we are committed to being true to our everyday low pricing strategy and continue to see strong demand.
For our product categories.
For comparison, our gross margin rate this quarter was still about 90 basis points above our Q2.2019 rate of 34, 9%.
Our second quarter, SG&A expense ratio, including depreciation and amortization improved by 6 basis points to 22, 3%.
This improvement was primarily attributable to lower COVID-19, pandemic response costs and decreased incentive compensation as well as good leverage in occupancy and other fixed costs from the increase and our comparable store sales.
Partially offsetting this leverage where higher wage rates additional store labor hours to ensure we are providing great customer service and investments and our lifestyle here strategic initiatives.
The offset to our fast initiative benefiting gross margin was approximately 40 basis points of incremental SG&A expense for the labor cost for the team.
Much like our gross margin rate our SG&A performance compares favorably to Q2.2019, when our SG&A expense ratio was 22, 7%.
Operating profit increased 8.5% with operating profit margin of 13, 5% on the quarter.
Net income was $370 million and increase of 9.3% diluted EPS was $3.19 and increase of 10%.
Turning now to our balance sheet, which remains strong merchandise inventories were $1.99 billion at the end of the second quarter, representing a 14% increase and average inventory per store.
The increase principally reflects growth to support the robust sales trends along with the impact of inflation.
Our supply chain and our vendors are executing at a very high level to meet the customer's current demands.
We finished the quarter with $1.41 billion of cash and cash equivalents and no borrowings on our $500 million revolver at all of them.
Moving now to our updated guidance for fiscal 2021.
Looking ahead.
And all the trends and our business provide additional confidence and the structural nature of the tailwind and we remain aware of the COVID-19 pandemic and the vaccine rollout of all that going to have further impact on the broader economy, the consumer and our fiscal 2021 result of this.
There's still some measure of uncertainty we continue to plan for fiscal 2020, 1 based on a range of potential outcomes, and we'll remain nimble and adjust as necessary.
Our updated guidance reflects the strong result of more first half of the year and the positive momentum, we see and our businesses and continuing into the second half of 2021.
Please note that the prospective acquisition of porcelain and farm and home is not included in our guide at all.
So against the backdrop of what we know today, we are updating our guidance of net sales range of $12, $1.1.3 billion with comparable store sales growth in the range of 11% to 13%.
For the year, we forecast and operating margin of 9.7% to 9.9% of sales of step up from our prior guidance.
Diluted EPS is now forecast and a range of $7.70 to $8. This compares to our previous earnings range of $7.5 to.
And to $7.40 per diluted share.
We have a unique opportunity with the positive customer trends and momentum in the business we.
We are committed to investing and store and supply chain labor as we look to provide legendary customer service to meet our customers' expectations.
While we continue to lap challenging sales and earnings comps, we expect positive sales comp and both the third and fourth quarter with the third quarter of few points higher than the fourth quarter.
Please keep in mind, we will continue to cycle strong gross margin performance of the prior year, where we benefited from minimal promotional or clearance activity as well as favorable product mix, where Q products represented a smaller portion of sales.
Much like our results and the second quarter, we're expecting gross margin decline in the back half of the year due to higher transportation cost and continued strength and acute products.
Our guidance assumes promotional activity comparable to last year in Q3, with Q4 and seeing some shift back to normalizing promotions during the holiday season.
While we are dealing with significantly higher transportation cost of mix shift to Q and cost of goods increases we continue to see benefit from our pullback in promotions and are seeing less price elasticity from consumers as we adjust prices.
We believe we are effectively navigating impacts to our gross margin.
The strength of our balance sheet and the consistency of our free cash flow continued to be a hallmark of tractor supply.
We have raised our outlook for capital spending to now be and the range of $500 million to $600 million to.
Higher construction and raw material costs were store projects and increased technology investments for the customer experience.
We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases for 2021, we remain on track for anticipated share repurchases and a range of $700 million to $800 million.
This year will mark a milestone with approximately $1 billion returned to shareholders through the combination of share repurchases and dividends.
To wrap up we are very pleased with our performance in the first half of the year and see positive momentum carrying into the second half of 2021, we continue to build relevance and market share both today and over time. We're excited about the investments ahead of us to better serve our customers from new stores.
Project fusion Remodels and our side lot of transformation.
And we're strengthening our supply chain and growing 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.
Thanks Kurt.
Tractor supply has thrived over the last 15 months, we continue to operate from a position of strength and are committed to investing and the businesses.
Our lights out here strategies designed to capitalize on the attractive opportunity that we see and are nearly $110 billion total addressable market.
We are transforming our stores through our project fusion remodel and <unk> transformation Optum.
Optimizing our technology and store and online and investing and how we operate our stores.
I'm incredibly proud of the progress the team has made and advancing our strategic priorities.
Especially amid a global pandemic and running the business at an elevated rate.
So let me share with you and update on how a few of our top initiatives are progressing.
I'll start with of field activity support team at 200, plus person organization and is designed to improve store labor productivity.
Example, task of the fast team, including execution of merchandising programs like Center Court and.
And caps clip strips plant of Gram reset seasonal program and our sales driving initiatives.
Rolled out and the third quarter of last year. This team has made great progress and improving execution of our merchandising activity, which represent the second largest body of work for our store team members.
Year to date, the execution of tasked by the fast team is running at 97% or nearly 33 points higher than our base year of 2019.
The vast team is allowing the store teams to spend more time on customer service and improve their in store execution.
We believe the fast and will continue to contribute to comparable store sales well into the future.
Turning next to our project fusion store remodel program.
Call. Our project fusion is our state of the art space productivity program designed to enhance the customer experience at our mature store base and give new customers that made up of shop visits and the past more reasons to visit.
We now have more than 160 stores and the new layout and the customer feedback has been overwhelmingly positive.
Our customers are taking note of things like the improved shopping experience and our remodel and specifically and our customer intercept surveys, they're calling out better organization.
Improved merchandise selection.
Cleaner and brighter and easier to navigate factors.
While the majority of the Remodels have been completed more recently, we are very pleased with the early read of our customer response and the comp lift of the remodel is running in line with our expectations.
Given the size of our store base. This is a multi year opportunity to continually refresh our store base and further drive comp sales.
Another component of our space productivity program is the transformation of our sideline.
Typically there is as much space outside of our stores and the sideline as we had inside the store.
And the productivity of this space at substantially below the chain average.
We're in the midst of of multi year project to transform our sidewalk with an expanded product offerings and and enhanced shopping experience.
With this investment the sidelines space is leveraged to offer a wider product offering and of lawn and garden categories.
And our new categories and offer greater convenience through the expansion of our buy online pickup at store capabilities for drive thru pickup.
We also continued to see of positive Halo effect from the Garden center to the existing store and vice versa.
The addition of product categories increased ease of shopping and new services provides us with even more ways to continue to keep our existing customers engage at tractor supply and and attract new customers to the brand.
Our ability to drive higher sales per square foot through the transformation of our sidebar remains of significant opportunity.
We currently have about 60 sidelight transformation is completed and we anticipate having greater than 150 complete as we exit 2021.
And these early Remodels, we're learning a great deal about our customers' appetite for our expanded lawn and garden assortment and.
And more and more even more excited and we embarked on the initial test pilot.
The team has done a great job laying the foundation of our life at your strategy as we scale our transformational initiatives.
Beyond our multiyear strategic initiatives at tractor supply, we are always focused on having the seasonally appropriate offerings to support our customers.
Wrapping up the summer season, we're exiting the quarter with our with clean inventory with at seasonal changeover.
We continue to focus on enhancing our product offerings for the transition to the important fall and winter season.
Across all areas of the store and online we of false centric merchandising and marketing plans in place to keep our customers engaged.
Are there at the launch of our pet appreciation week in September so the rollout of our deer hunting <unk> debt or our focus on heating products of the change and temperature our customers know that they can count on tractor supply for the relevant products that they need to live life out here.
We are leveraging new items and innovation across grilling safe and home and decor. In addition, rich cut our exclusive brand of performance workwear will be expanded across new categories and in the women's workwear These products.
Expansions are relevant to both new and existing customers and will help retain our growing customer base.
Across all parts of the store, we have exciting products for the fall and winter as we shift gears to ramp up for our customers need to care for their land home animals and pad as colder weather com.
On the marketing front, we're making continued investments to drive our brand awareness.
As part of our plans, we're excited to announce a new multiyear partnership with the official life out of your partner for the professional Bull riders effective this season.
The partnership includes of flagship presence on the PBR toward that hosts over 200 events per year.
Tractor supply branded broadcast booth during depreciate on CBS.
And in arena broadcast activation and local customer activation.
PBR will also produce and distribute custom content for our social media channels.
We're very excited to support our customers' passion for this dynamic and rapidly growing sport.
Again on marketing given the strong millennial trends, we had been experiencing we're investing in marketing to continue to attract and nurture this important demographic.
Given that the millennial customer cohort may not be as familiar with our brand. We are executing marketing plans to introduce tractor supply to this next generation of customers.
Just last month, we launched a new campaign targeting millennials and media channels like Pandora Youtube and other streaming services.
Campaigners called welcome to life out here and introduces this new audience to what lies ahead in our stores and of lifestyle, we help support.
It focuses on key categories, such as pet backyard, poultry gardening and re self reliance.
With the primary goal to drive awareness. The millennial campaign has delivered significant impression since the launch.
Early results show of best in class performance and AD recall and awareness relative traditional benchmarks.
We believe this indicates that we're resonating with this audience and it is driving consideration for tractor supply.
To summarize.
And we've delivered strong results year to date and made significant progress with our strategic initiatives.
We have confidence that our strategy and execution will allow us to continue to build a stronger tractor supply.
With our purposeful actions, we will emerge from the pandemic stronger company.
It's an exciting time at tractor supply.
My appreciation goes out to each and every 1 of our more than 45000 tractor supply team members for their dedication to our mission and values.
And with that operator, we would now like to open the line for questions.
Well pause for just a moment to come out of the Q&A roster and I can.
Ask a question please press star 1.
And your first question comes from Steven Forbes with Guggenheim Securities.
Good morning.
I wanted to focus on the Neighbor's club relaunch.
2 part question here.
If we look at the spending tiers right, that's our sort of defined by the program.
Curious if you can provide some context around how these tiers were determined.
And any sort of color right.
So you can provide to help us better understand.
Sort of what percentage of members today.
And would qualify right for the preferred of FERC plus peers.
Any color would be appreciated there.
8 of our now at $21 million, plus Neighbor's club members and.
And kind of of all loyalty program and credit.
It created in this case 3 tiers, we tried to kind of reasonably distributed with kind of of decreasing proportion.
For each of the 3 buckets.
And and we often try to create share levels and it was naturally encourage.
Upward migration and discourage downward migration.
And I would say if he thinks of as we talked about on the call. Our Neighbor's club members now account for over 65% of our sales.
Our retention rate on our neighbor's club members.
As over 80% very strong retention rate on an annualized basis.
And as we said our highest our third tier of spending which is the premium the neighbors at up.
Of course premiums.
<unk>.
And the retention rates there are over 95%.
We're seeing significant upward migration.
We're seeing reduced downward migration.
And final thing and I'll make a mention of is that our neighbor's club members.
Make 2 more trips.
<unk> on average and.
And then our non neighbor's club members at.
And our neighbor's club members and spend of over $1000 of year.
All of.
Most of 2.5 million at the end.
And that's increasing.
And then kind of on a daily basis, So I would say it's at.
A very robust program at its 21 plus million members.
And over 5 million members, joining us and the last 12 months, we're seeing outstanding retention, we're seeing excellent migration as we migrate them their retentions are holding and actually improving.
And we.
We've seen a significant response positive response to the rollout of the new program at.
I mentioned in our prepared remarks since the rollout.
Of the program our Neighbor's club members are significantly out comping, our overall chain average.
Thanks, and just a quick follow up all up.
If I think about the last day of orders you provided some context around our of repeating trends within the percentage of customers and accretive within 12 months.
And our rollout.
And it was 50% last month momentum sort of it of its running at a high so at.
And just any context around recent trends and we think about the growth and the customer base all of that you've experienced at 18 months and months.
Our customer repeat shopping trends continue to remain very high.
New customer retention rates continue to hover and that kind of ft.
The 80%.
Similar to <unk>.
The last quarter and previous quarters.
And our customer.
Our new customer counts.
We're only slightly below new customer counts from Q2.2020 and so.
For us.
And Theres a lot of good news on the customer side, we saw $11 million last year, we saw at $2.6 million nearly $3 million and Q1.
And we're seeing kind of 50% plus retention rates on those.
New customers.
The way of kind of an interesting way to think about it is on the.
11 million and new customers. We saw last year 6 million have shopped with us again and $3 million of those joined the Neighbor's Club program and so that just if you think about that walk just some outstanding metrics retention and conversion of the Neighbor's Club program and then again this quarter, we're seeing and customer new.
Customer counts and nearly the same as the second quarter of 2020 beginning.
Beginning of the pandemic.
Thank you.
Thanks, David.
And your next question comes from the line of align and mind Hickman with Morgan Stanley.
Hey, good morning, everyone nice quarter to quarter.
First question is.
And the stabilized 1 area that you outlined of enhancement and earnings day, and it hasn't really happened and yes, I guess and it has relative to last year, but the business and then growing from Covid.
Can you talk about the factors that would argue that we've looked at the.
And it doesn't need to digest, and therefore continued to grow and vice versa.
We are going to out of a digestion period, and we will have a deeper stabilization period.
<unk> the way, even without Covid affected us.
Hey, Damian how are you.
Sure.
And at the highest level I'd say, there's still continues to be a lot of uncertainty.
And in the United States of economy and globally.
And whether that's on.
Certainly as it relates to Covid.
And the delta various applications that ads on.
Mobility and on customer shopping behaviors.
I would say it would be true.
Back to October.
Earnings enhance earnings day last year.
Kind of implied of bid and the graphic heard showed with the day of a more of a.
And a return to normal mentality at some.
Point that was more abrupt in nature.
And I'd say I think as we're all watching out kind of is playing out.
Certainly not the case and.
And so I would also say that our business continues to evolve and.
And if you think back to them and we were talking about 50.50 on structural versus transitory in terms of trends and I think.
And we lean more towards.
Yeah.
Structural now and in the way we view our trends. If you think about if you think about the millennial customer and if you think about homesteading and kind of rural revitalization.
Categories like poultry at.
As an example, so last year as we've said several times, we sold of 11 million birds.
Those were to new customers, we're seeing as mentioned by her prepared remarks outstanding retention of those customers last year of the shop of the thought poultry coming back again. This year in fact net retention rate is higher than any other animal feed or Pat. So I mean, it just shows you that.
And the trends that began last year.
And are really resonating and resilient and that momentum that we're seeing with our customers and and our business and with the lifestyle of the out of your lifestyle that we.
Appeal to as holding incredibly strong and.
Yes.
I think and my prepared remarks, I talked about the fact that between Q2 of 2020 and Q1 of 2021, we have grown $3 billion and 34% comps and we.
We were kind of coming into Q2, I think like many companies. So that's certainly at wondering how we would comp the comp end.
We had guided to kind of flattish at the beginning of the year for that.
And perhaps even a little down and finish with a <unk> 10, and a half certainly exceeded our expectations.
And it's really all about the underlying trends the strength and our consumer behavior and new customers.
And the appeal of that out here lifestyle and.
I think there is still of lot of uncertainty and.
<unk>.
<unk> years and quarters.
But I would say, we feel more confident and the structural orientation of the trends and we did last October.
Thank you and <unk>.
And of Capex.
And I had mentioned and I think that if it was <unk>.
Relatively level and these out year end.
The steps up at from a couple of years ago does at peak in 2021 and do you see you.
And you spend further and accelerate elements of 2022, how should we think about gain out of Florida.
Assuming and Hey, this is Kurt on the cadence over the next few years as we pointed out back in October when we launched our new long term targets and the life out here strategy. We've said that we've got consistency and our investment in the existing stores and as we drive productivity with fusion Sidelock.
But where there may be some variation would be on the supply chain as we grow our supply chain, particularly new distribution centers and so.
As you've heard of from the last couple of quarters emphasized the importance of our investment and our supply chain, we are looking to accelerate and and would see us shifting some of the supply chain investments earlier in the next few years and so there may be.
A higher than average in 'twenty, 1 'twenty, 2 and 23, but over the period of time and still averages out about the 5 year expectation that we gave.
And the important thing is is the recognition of our confidence and the structural nature of this business and therefore, the importance of our timing of investments and the supply chain. So I'd say 'twenty, 1 and 'twenty, 2 pretty consistent and potential on capital as we emphasize ensuring day.
And the strength of our supply chain.
Thank you very much and ramp up.
And your next question comes from the line and a lack of lasser with UBS.
Good morning.
And for my question.
And where are you.
And there are initiatives given the number of implementing our new and moving director of supply.
Sure.
And when you were at positive margin.
And we're out of it looks like a country and lifestyle products.
Gross.
And.
Good day.
And if anything.
Accordingly.
And starting there.
And our rocket science.
And theyre going to be more of corrosion and there's no better known as standard of our aluminum.
And.
What point poised at this.
Net income at several quarter quarter.
Hey, Michael how are you and thanks for joining our call. This morning.
Yes, let's start with the fact that we're confident we're taking share really across every major category that we have and the business.
Growth in stores and online.
If you look at the profile between new customers existing customers both are.
Im showing strong comp transaction growth at.
Ticket growth and as I said and my.
Our prepared remarks, and workshop Morehouse ratio shopping track strong and ever they're visiting us more frequently and of shopping they're spending more when they're shopping us.
What I would say is yes, we participate at us.
And <unk>.
Very attractive large $110 billion market.
And where our share kind of based on our new guidance would be fairly above 10%. So there is a lot of share gain out there.
And also a lot of share.
Be competed with.
Dominantly very focused on our cost of our and just making sure that the initiatives and the actions that we take are out there to create the best customer experience that we can and whether that's investments and our team members to drive that legendary customer service.
Our investments and inventory to ensure we're in stock for our customers.
I would say as it relates to the promotional environment.
We've not at we've had very little to no promotions in Q1 and Q2 of this year.
And that's our expectation really for the balance of the year.
And I really expect.
The competitive environment to remain at similar.
If for no other reason because of the supply demand situation that's out there.
And the global the global supply chain.
And this disrupted as I've seen it and my 25 plus years and retail.
And everyone is working hard to just keep inventory in their stores.
And I think that mindset.
<unk> would prevail over any sort of promotional.
Hi.
Kind of share of kind of.
Pushed at any 1 AD and also.
And just comment that we don't directly compete with really any any primary.
At retailer and being of lifestyle retailer 1 of our benefits is that we play across.
A handful of large categories.
And that are uniquely tailored to our customer that typically.
And typically when were competing with other other companies, it's kind of it's at a 1 off category basis, and we really appeal to that whole lifestyle that I.
I don't anticipate a and increase in the promotional environment and the market or certainly for us.
Anywhere near at near or medium term horizon.
My following questions online.
Online.
And the 401 point to kind of accelerate.
Arena.
Second quarter orders.
And so.
A few quarters of corn.
Yes, Michael this is Kurt.
You stated the result factor it on the last quarter.
2 quick backdrop and that will lead towards the back half, but we entered the year.
<unk> of 102 hundred basis points of retail inflation throughout the year that quickly.
<unk> and Q1.
Closer to 300 basis points, principally from commodities and then as we shifted into Q2 at the 350 to 450 basis points of retail and benefit from inflation wanted demonstrates the ability as Hal mentioned to be able to adjust pricing.
And appropriately, but the increase from Q and Q2 over Q1, it was principally related to transportation costs and other non commodity type based cost increases we've seen in the back half of the year staying at elevated levels.
And we would anticipate at that at the numbers and Q2 and it'll be at that level and potentially at moderately higher levels.
And throughout the back half and and.
And this inflation environment, and I always and I always like to remind that our merchants and our business, we deal with inflation and deflation.
Every year and they are managing this excellent and we feel we've got the ability right now and the and this.
The consumer sentiment the less price elasticity and their behavior to be able to manage the inflation environment very well throughout this year.
Great.
And so on.
And your next question comes from Scott Frommer.
Wrong with Gordon.
Thanks, and good morning.
And so on July 1.
No amount of orders and you get out of your sales.
And some of the data on details of what else you will see and this hearing spring and any other and Andrew.
And youre, providing for the balance of the.
The stores Youre going to youre going to share and share in the side of my farm and.
Follow up.
And you're talking about I'll say about at the 70% of of a fleet of pension and holding all of that.
And I'm curious, how and when you think you guys accomplished all of our cycle.
Yes.
Yes, Hey, Chuck how are you and thanks for joining the call today.
And starting out with the fusion and sidelined we're very pleased of the results and we've made a lot of progress over the last 6 to 9 months on both of these efforts.
We've rolled out as we mentioned we've got over 60 feet of 160 of fusion as Don over 60 sideline transformation is done.
And.
In addition to the work on those individual stores, we've brought the project management and house.
We're reducing our construction times and lowering costs.
And we see lots of opportunity to continue to do that as we move forward.
Particularly on the sideline.
Weighted on.
Kind of.
The plants several times and keep optimizing of format every as we roll it out but we are very pleased with the results of it with the progress we've made at <unk>.
On the results what I'd say is.
Typically I think you know kind of historically and retail at the same at all of my.
<unk>.
Moving to really get at good feel for how the remodel.
<unk> is playing out kind of 3 of 4 months after the store kind of reopens and the Remodels day and complete.
And most of our remodel of had and then opened that long. So we're really kind of waiting over the next 3 to 6 months to start to see how that data at that plays out, but what I'd say at for the stores that have been opened kind of over that period of time and they are at.
At the levels that we anticipated.
And our initial business case, and we have more of those on the fusion and we do on the sidelines, but we're very pleased with the results of both both projects and as I mentioned in my prepared remarks.
Customer excitement around becoming more of a destination and garden has been.
And more significant than we even anticipated and we're even more bullish on that.
We move forward.
As it relates to the penetration.
And kind of how long.
Yes, I think you shouldn't expect to hear us share more of that over time, but I would say directionally over about a 5 year timeframe you should think about.
Kind of of the fusion stores for the most of the end of the vast majority of our stores, having fusion and on <unk> at really around that 60% to 70% I think were feeling.
More bullish around getting more of our store base gone with fusion and may be worried and 6 months ago at just the way that projects going the cost that we're doing at it and they were doing at for the early read on the lift we're seeing.
And then the need to continue to kind of remodel of our store base.
That's very helpful.
Following up on all of it and as it related at all.
But given some of your new growth, possibly at answering it is and has spoken very and iron ore and I'm curious if there isn't anything at any chomping at ultimately reach and regions.
And then simulations.
I'll start with our our business has over the last 15.18 months now.
<unk> remained incredibly consistent.
And we've said that on a number of calls consistent across regions consistently and category trends consistent week to week consistent month to month as we said all 13 weeks of this past quarter were positive comps, obviously, all 3 months were positive comps.
At June with strong momentum.
And even at <unk>.
We certainly as a nation as we've seen this delta variant pick up.
Hi.
And I have seen any any impact on our on our trends whether at a national level or at a.
Regional level and that's very similar to what we observed last year.
And I think it's.
It's almost day to day.
And I think that.
On the liability, sometimes driven by these operating actually place of the benefit of tractor supply.
I think it's demonstrated at when folks are spending more time at their homes with their families their pads their animals their land.
And if I and tractor supply to be kind of at 1 stop shop resource for them.
And to continue all of those hobbies of de La and they are just spending more time doing those hobbies and so while we're certainly.
And which the country.
Returned to normal as fast as possible.
The Delta variant, we don't see it as a potential threat if anything maybe some upside to it from our business results from our business results perspective.
Thank you Holly and good luck.
And your next question comes from the line of.
And now with Northcoast research.
Good morning, everyone here at home.
Sure.
Sales.
And if it.
Over the past 2 quarters and.
Could you tie to the.
Television advertising had been doing and and does that lead into this relationship with the PBR.
We don't want to own life out here and.
We think we have the credibility to do so and.
Our view that way by our customers and.
As I mentioned and we do.
And and awareness survey of our customers twice, a year and our last earning call as I mentioned, our unaided brand awareness in November of 2019 was 37% and and 18 months later right as we're exiting Q1.
It was up to 51%. So we've seen a 14 point and I'm sorry at 17 point of increased 34% to 51 of 17 point of increase in our unaided brand awareness.
Much of that and obviously, our core customer buy at a lot of it is also the millennial customer and as we mentioned last quarter. We saw a 4 point increase and our millennial customer penetration year over year and as I mentioned in my prepared remarks that trend continued in Q2. So we think the work we're doing and marketing.
Is broadening of the aperture of consumers understanding of of tractor supply and driving on aided and unaided and aided awareness and.
Hi.
And of driving footsteps into our stores as we said we continue to have strong comp transactions across the board.
And we're really excited about.
Partnership and PBR.
We think it's at.
And its category of that resonates well with our customer and 1 with over 200 activities of year that we can do a lot of activation across the areas of the country, where our customers are at.
And it'll be it'll be of Great partnership is also mentioned in my prepared remarks, we're at.
Also we have lots of large marketing campaign targeted towards the millennial and.
Up until now the majority of our above the line marketing has been at.
TB and kind of Facebook based.
And and on TV, and it's really been around news media and we think that's been very successful for our core customers those of the major places that they engage with media and the millennial customer at.
And as we all know engages and different types of media. They are on and your Spotify Youtube and so what it does do is ex accretive very different creative concept called welcome to life out here explaining of tractor supply is and then talk about the first 2.3 hobbies that they might engage at.
Backyard poultry and backyard gardening past things like that they're kind of starter categories. If you will end of life out here and we're very excited about that work.
And the initial feedback from customers is that.
Outstanding and I, just hopped off of the marketing team for all of the work they've done to really drive awareness of our business and drive footsteps into our store.
Thank you and scale.
Okay.
And your next question comes from the line of Peter Benedict.
And then they are there.
Hi, good morning number 1.
A question.
Question last year.
The first nations.
Second half plan and implies negative incremental margins.
I know you talked about some of the.
The investments, you're making et cetera, and just curious kind of your view on that how that comes about.
Maybe.
Give us an idea of maybe the magnitude of the gross margin decline or a division of <unk> relative to <unk>.
65% to 70% of decline my follow up.
Would be just about your P&L flexibility as we look longer term and the event of sales to slow or even turn down a bit what levers do you have to Paul.
In that environment.
Thanks, so much.
Hey, Peter Thanks for the question and.
2 questions margin second half and then our ability to be nimble and some of the profitability enhancement opportunity. So on the second half.
And we look at the operating margin, here's how we view it and and frame it up.
Our gross margin.
The pandemic was really the source of the beat and the operating margin and we need at the second half really about the gross margin performance.
We anticipate Q3's gross margin performance.
And we've got more visibility to Q3 at this point very much similar in line with of the performance of Q2.
As we get further into the second half of the year, we've taken a fairly prudent approach.
And theres more uncertainty.
And beyond 1 more quarter, and we've always given a little bit more certainty on the most recent for the most nearest quarter, but at the second half we recognized for the fourth quarter and recognize.
Supply chain disruptions inflation factors as well as the.
The holiday season, and what level of competitive nature, and so we've certainly reflected some of those uncertainties and the fourth quarter and the operating margin on the back half of the year really rights on our performance with the gross margin and as I said earlier and in second quarter shows we have.
Really been able to manage in this environment, very well and business of structurally very sound and we.
A lot of confidence and our and our business and our back half and if some of the uncertainties don't play out we acknowledge there is potentially some upside to the guidance that we've given.
In regards to the flexibility as we always have strong profit improvement.
Process going on and a few of the factors that that we are focused on right now where we've got some ability to be able to adjust with the and the supply chain.
Work that we're doing to reduce stem miles and to continue to just lever the size of this organization drive efficiency and there as well as our ability to be nimble on variable cost.
If there's any sort of shift and the momentum of the business, we're able to shift very well and regards to variable costs and <unk>.
Both distribution and stores to be able to adjust on that we've got a solid.
Profit improvement initiative that is driving some of the efficiencies and these are these are the active offsets that we have going on to be able to help us maintain.
Operating margins well above the 2019 ranges, while we're making important investments and the business.
Alright, thanks, so much so much.
Operator.
And for 1 more call.
And alright, and Youre and you ladies and comes from the line of Adam and as well.
And Argo.
Hey, good morning. Thanks.
And today today so.
Suggesting at an attack and at a 100 basis points of gross margin expansion in 2020 was largely related to.
Muted promo low clearance environment and.
And now that we're halfway through this year and you've seen the environment more or less continue can you just talk us through the long term state.
Of the gross margin line and to what extent the current 35% plus margin is the right way to think about this business or are there reasons to believe that the historical 34% range is more appropriate at promos and clearance inevitably return.
And as we've said throughout this pandemic to your point.
And we've seen at over 100 basis points of our operating margin improvement over and over pre pandemic really coming from gross margin as you mentioned.
We said that we anticipate.
Overtime as we cycled at pandemic the expected somewhat normalization on some of those factors the promo that Clarence.
We do anticipate and are very disciplined and are holding to and everyday low pricing and giving our customers. The best price we can.
Our long term guidance assume some normalization and now we acknowledge that with our guidance shows that our second year and 2021, we will maintain operating margins above that long term target range and so as we go as we get further through 2021, we certainly as we manage this business.
And as things start to normalize.
Dress.
The long term expectations on gross margin, but we're going to always continue to offer strong everyday low pricing, we're going to focus on gaining market share and focus on driving unit growth.
So and price is going to be very important to us and leveraging the strength of the size of our business to have and.
Efficient and nimble supply chain, so as we get more visibility, we'll certainly acknowledge the gross margin operating margin trends compared to our long term target for right now.
We're not reaching beyond the visit.
Visibility and certainty of the next couple of quarters.
And a quick follow up at night, I mean, 92099, you had in hand, and $1 billion sales day last year that day.
And this year scanners that Bob and I work and work well well off of about balance.
<unk> advantage and at you to generate integrated and how that will translate and at a gross margin.
And more and operating operating and widens line.
Okay.
Hey, Zach Pal and <unk>.
And thanks for joining the call today, and I'd say, a few things first off on the scale advantage.
And I'd say at dominantly gives us an opportunity and the market.
With our 8 distribution centers moving towards 11.
And the relationships that we have our vendors and the meaningfulness of that with the technology investments, we're able to make as an example every single 1 of our team members, whereas the theatrical headset theyre really increase and optimal customer service experience and the stores were and the process of rolling out new handheld devices for every team member inside the store.
Ours as well.
Sorts of investments are enabled by our scale.
And they are enabled and are really focused on helping us great gain and capture market share and drive top line sales and as we've talked many times I mean are our main goal is to grow at a rate faster than the market. That's what's implied in our long term operating trends and that's how our business is performing now and.
And then on the operating profit rate.
And as we've said we've been able to our outlook is to hold SG&A flat or down and.
And we've been we've done that over the last 6 quarters.
And anticipate continuing to do so.
And so as we've as we've grown our sales and growing our sales base, we've been reinvesting in the business.
But doing it at a point, where we're not deleveraging there and it's.
Whether it's and the capital line or and our team member of line and we view our team members as a strategic asset.
Our of customer service driven retailer, we are not a retailer we're going to walk and pick the item you want and go to self checkout and never talk to someone loaded and your car yourself and drive away right. We're going to help you pick the item we're going to review, we're going to check you out and we're going to help you loaded and your car and that's that's kind of drive sustainable share gain for us.
And then on the gross margin rate side I think.
We continue to be very pleased that the promotional environment remains very little to none.
And of our inventory position, where it is requiring little to no clearance activity as well our hope is at the longer that sustains itself.
And more structural that becomes.
Right now we are in a high cost freight and import environment. That's reflected in our guidance and we're very pleased at the low promotional nature of allowing us to offset those freight and important to allow us to give the guidance that we've given right now and.
Fully acknowledge as Curt said that if sales.
At remain at the rates that they are and Q2.
And there would be upside to the guidance that we've given but we just thought it was prudent at this point.
To kind of provide the guidance that we have just given the continued level of uncertainty out there.
Makes sense I appreciate the kind of guys on guys.
Great. Thank you, everyone and that that will wrap up our call today and thank you for joining us and Marianne and I will be around for any questions number 1 before discontinued at Carlin and archive.
Ladies and gentlemen that does conclude today's conference call. Thank you for your patients and you may now disconnect. Your line at your line.
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