Q3 2021 Tractor Supply Co Earnings Call
Thank you operator, good morning, everyone. Thanks for taking the time to join US today, and we do hope everyone is staying safe and well on the call today are Hal Lawton, our CEO, Kurt Barton our CFO after our prepared remarks, we will open up.
The call up for your questions Southeast <unk> our EVP.
And Chief Merchandising officer will join US for the question and answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release.
Now, let me reference the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995 this call.
Contains certain forward looking statements that are subject to significant risks and uncertainties, including the future operating financial performance of the company in many cases these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward looking statements are reasonable it can.
Give no assurance that such expectations or any of its 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.
Company's filings with the Securities and Exchange Commission.
Formation contained in this call is accurate only as of the date discussed investors should not assume that statements will remain operative at a later time tractor supply undertakes no obligation to update any information discussed in this call.
This morning, we shortened the prepared remarks to allow.
More time for Q&A, given the number of people who want to participate we respectfully ask that you limit yourself to one question. If you have additional questions. Please feel free to get back in the queue. I. Appreciate your cooperation on this we will be available after the call for follow up. Thank you for your time and attention. This morning now it's my pleasure to turn the call.
Allow me Hal.
Thank you Mary Winn and thank you to everyone for joining us this morning.
Tractor supply team delivered strong results for the third quarter with net sales up 15, 8%.
Comparable store sales increase of 13, 1% and diluted earnings per share of 24%.
Team is doing an outstanding job navigating a very dynamic and challenging operating environment.
We continue to benefit for many market trends that we see as very structurally sound.
We have strengthened our customer base.
Gaining market share across our categories, we continue to advance our.
Our life out your strategy.
Our business has never been stronger and.
And we see tremendous opportunities for growth ahead of us.
As we've consistently shared with you over the last 18 months.
Our strong results are a testament to our 45000 plus team members.
And I'd like to thank them for.
For all of their efforts in the quarter. They kept each other safe as we went through another COVID-19 wave and.
They navigated through broad based supply chain disruptions and cost of goods increases in.
Navigated and manage through a tight labor market.
Through it all they have been resilient and persevere to deliver.
Over strong customer satisfaction scores, including all time high <unk> scores.
Our team members are our greatest strategic asset and a key competitive differentiator with our customers are loyal and highly engaged team members have helped us fare better than most as far as staffing across our stores and Dcs.
Back in June we raised our minimum opening wage to $11 25 per hour.
Our recent wage actions bring our average hourly wage rate at our stores to nearly $15 per hour as we exit the year with our DC at a higher rate.
The investments we have made in store labor are being recognized.
Our customers buy the overall customer satisfaction scores that I just mentioned.
I'd also like to say, thank you to our vendors and supply chain partners as we work together to overcome challenges and the global supply chain network and.
And together, we've been very focused on controlling what we can control to deliver these results.
Across our network, we've been nimble and being able to navigate the unprecedented supply chain environment and macro issues, including inflationary pressures.
And the team has done a great job addressing issues ranging from import container shortages and port delays driver shortages higher freight rates and a multitude of other supply chain constraints.
To mitigate these challenges the team has leveraged dedicated containership pop.
Pop up DC.
Expansion of mixing centers and direct store shipments.
Spite these challenges our inventories in good shape and our in stock rates finished above last year at the end of the quarter.
Our diversified vendor base with only about.
12% direct import is a strong point of differentiation for us during the supply chain times.
Given our scale and sophistication, we believe that our network is a competitive advantage to being the dependable supplier for the out here lifestyle.
Categories in which we participate in the out.
<unk>, although we serve continued at elevated consumer spending levels, well above pre COVID-19 levels.
We fully anticipate is the environment. We're in is going to continue for the foreseeable future.
And consequently, we think that the sales growth that we've seen is structurally sound given the changes in consumer behavior.
Your line of lifestyle investments that are now much more ingrained in the consumer psyche.
These structural trends that continue to work in our favor include things like world revitalization trip consolidation Omnichannel adoption.
And a self reliant lifestyle movement, including DIY trends and investments.
Obviously like gardening backyard poultry and of course pet ownership.
For many workers to return to office has been pushed out until next year and even in will very likely be in a hybrid environment at most employers.
And at this point, our customers will have been in grain for over two years.
As such we anticipate.
Dissipate that their behaviors are much more sustainable and structural.
Provide some color on our results, let me share a few other highlights of the third quarter.
Like the second quarter every week had positive comps.
Also like the second quarter, our growth was broad based across regions and product categories.
<unk> and <unk> E Commerce business continues to experience strong momentum with double digit sales increases of over 40%.
And in just under a year, our mobile App already has more than 2 million downloads and now represents over 10% of our E Commerce sales week.
We continue to.
Air Cross all categories. This has been a consistent trend for multiple quarters now and this share gain has been both online and in stores.
This share gain has been aided by the increase in our unaided brand awareness, which has improved by 21 percentage points since November of 2019.
<unk> shipped improvement combined with positive trend in our overall customer satisfaction are significant contributor to the share gains we're experiencing.
Also consistent from previous quarters, all customer segments were strong with notable strength in our core farm and ranch, which is the largest and most important of our customer base.
At the same time, our digital AD campaigns to target millennials to supporting the significant growth we are seeing in this important demographic.
We think the relevancy of tractor supply to the millennial customers has staying power given the structural changes in the market and our customer behaviors and we're certainly seeing that consistently quarter after quarter in.
Our data as our average age of customer trends down.
For the year more customers than ever have shopped at tractor supply.
These customers are making more trips and are spending more money per trip and.
And our new customer retention remains very strong.
Our neighbor's club loyalty program.
<unk> to exceed our expectations with year over year sales growth that these members north of 20%.
We exited the quarter with more than 22 million Neighbor's club members.
These members are spending more than about three times the rate of non members with Neighbor's club members now accounting for nearly 70% of.
This.
To be a step up from where we've been running prior to the relaunch of the program and sequential improvement over the second quarter of this year.
The number of high value per customers and the program grew almost 30% for the quarter and we continued to experience retention rate in excess of 95%.
Some of our high value customers.
These strong results demonstrate that the changes to neighbor's club continued to gain traction with our customers given our robust performance through the third quarter, along with our outlook for the fourth quarter. We are again, raising our sales and earning guidance for 2021, and Curt will share more detail on our improved.
Improved outlook later in the call.
Regarding our pending acquisition of <unk> farm and home, we continue to work cooperatively with the FTC as it continues to review the proposed transaction. We look forward to the benefits. This transaction will offer customers with improved product offering and competitive pricing.
As has been the case over the last 18 months.
I'm incredibly proud of the way our entire tractor supply team has managed to stay focused on taking care of each other and our customers.
Our long term opportunities remain very exciting our goal has been to emerge from the pandemic stronger over the course of the last year since rolling out our life out here strategy, we have gotten stronger.
Stronger through this pandemic and we believe that we're going to emerge from it even stronger and better positioned as we execute our strategy.
And with that I'll now turn the call over to Kirk.
Thank you Hal and Hello to everyone on the call.
Once again, our third quarter results demonstrate the strength and resilience of our.
And our strategic initiatives at.
As Hal shared we continue to believe the underlying health of our business is very strong.
Third quarter comp store sales of 13, 1%, representing a 39, 9% two year stack were driven by a comparable average ticket increase.
<unk> of nine 5% and transaction count increase of three 6%.
An example of the structural advantage, we have is the ongoing strength in our consumable usable and edible products.
Our key products represent the strength of our core business and what drives trips to the store.
<unk> Q outperformed the chain average comp sales and for the sixth consecutive quarter in a row Q had comp sales growth at or above 15%.
Key subcategories, such as poultry livestock feed and dry dog food were among the strongest categories with broad based strength.
Once they are big ticket categories, which were going against significant growth in the prior year continued to have solid comp store sales performance in line with the chain average.
This was driven by strength in trailers recreational and utility vehicles.
<unk> and zero turn mowers.
Inflation.
Contributed about 700 basis points to comparable store sales.
As you've heard from the retail sector and others the cost environment remains elevated across imports domestic freight commodities and labor wages.
Our merchant team has been aggressively advocating for our customers.
Our necessary.
We are taking price increases to pass through some of the cost pressures that we cannot offset.
Our merchant and supply chain teams are currently navigating this challenging and disruptive environment extremely well.
As we closely monitor our customers' purchasing behaviors. We are focused on product unit trends and are committed to being.
Priced right every day.
Our third quarter gross margin rate was 36% a decrease of 41 basis points versus last year.
For comparison, our gross margin rate this quarter was still about 100 basis points above our Q3 2019 rate of 35%.
Year over year. The gross margin drivers were principally three items first higher product cost inflation second elevated freight costs inclusive of domestic and import costs and third a more normalized product mix shift in Q.
All of retailers working through the drivers of inflation and freight costs.
Tractor supply team effectively offset a significant portion through our price management program.
Additionally, we continue to see favorability in the frequency and depth of promotions.
This is due to our commitment to our everyday low pricing strategy.
And a continued strong demand for our product categories.
Cost the benefit from vendor funding for the field activity support teams for our fast initiative.
Which was launched in the second half of last year was consistent with our guidance.
Our third quarter, SG&A expense ratio, including depreciation and amortization improved by 58 basis points versus last year to 26 one.
This improvement as a percent of net sales was primarily attributable to good leverage in occupancy and other fixed costs from the increase in our comparable store sales.
Along with lower COVID-19, pandemic response costs and decreased incentive compensation.
Partially offsetting this leverage were higher.
<unk>.
Incremental store labor hours to ensure we are providing great customer service and investments in our life out here strategic initiatives.
Given the elevated volumes and current operating environment. We also incurred select discrete costs, such as incremental team member benefits pop up Dcs and the timing of our.
Wage rate sales meeting, which normally occurs in the first quarter.
The offset to our fast initiative benefit in gross margin was approximately 20 basis points of incremental SG&A expense for the labor cost for the team as we are now cycling the initial investment to launch the program last year.
Much like our gross.
Margin rate, our SG&A performance compares favorably to Q3 2019, we've.
We've had about 70 basis points favorable expense ratio since then.
Operating profit increased about 18% with operating profit margin of nearly 10% in the quarter.
Diluted EPS was $1 95.
Annual an increase of 24% from the third quarter of last year.
Our balance sheet remains incredibly strong at.
At the end of the quarter, our merchandise inventories were $2 2 billion reps.
Representing an 11, 7% increase year over year in average inventory per store.
The increased.
Principally reflects growth to support the robust sales trends along with the impact of inflation.
Moving now to our updated guidance for fiscal 2021.
We continue to operate in a time of heightened uncertainty regarding the pandemic.
Despite this uncertainty including product cost inflation and supply chain constraints.
We are raising our full year outlook.
Our updated guidance reflects the strong results for the first three quarters of the year and the positive structural momentum we see in our business continuing into the fourth quarter.
Against the backdrop of what we know today, we are forecasting fiscal 2021 net sales centered around 12 six.
William.
With comparable store sales growth of about 16%.
For the year, we forecast an operating margin of 10, 2% to 10, 3% a step up from our prior guidance.
Diluted EPS is now forecasting a range of $8 40 to $8 50.
This compares to a.
Previous earnings range of $7 70 to $8 per diluted share.
Within this updated guidance, we are forecasting comparable store sales growth for the fourth quarter of 8% to 10% to.
Two modeling points to keep in mind, the prospective acquisition of <unk> farm and home is not included in our guidance.
And as you start to roll forward. Your models for 2022. Please keep in mind that next year, we will have a 50 <unk> week for US. This week is typically a low volume week of sales given that it follows the Christmas holidays.
We have a unique opportunity with the positive customer trends and momentum in the business and with that we are committed.
To investing in store and supply chain labor as we look to provide a legendary customer experience across all channels.
The strength of our balance sheet and the consistency of our free cash flow continue to be a position of strength of tractor supply.
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 in a range of $750 to $800 million.
This year will mark a milestone with approximately $1 billion returned to shareholders through the combination of share repurchases and dividends.
In summary.
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 with that I will turn the call back over to Hal.
Take care now.
Now I'd like to share with you an update on our recent ESG announce.
As well as provide updates on our fusion inside <unk> strategic initiatives, which are key part.
Of our life out here strategy.
At a time of urgency and action on climate change and social Justice, We just announced new goals that are the next.
Step in our long standing commitment to sustain by 2040, we are committing to achieve net zero carbon emissions across all our operations as part of our social commitments, we're prioritizing and accelerating.
And our initiatives and actions for diversity equity.
<unk> mentioned.
At tractor supply we are focused on cultivating an environment of inclusion where diversity of all kinds is.
I appreciated in value.
I invite you to learn more on our dedicated ESG website.
Turning next to our life out here strategy.
As a reminder, we've been executing against five key strategic initiatives. This year as part of our overall strategy and those initiatives, our neighbor's club digital fast fusion inside lot.
The strategy and its initiatives are designed to capitalize on the attractive opportunity that we see in our nearly 110 billion.
<unk> total addressable market.
Our project fusion and sidelight model transformations represent significant investments in our stores.
These store level investments are designed to grow our market share and drive the productivity of both existing and new stores as part of our life out here strategy.
So let's start with our project fusion store remodel program.
As a quick reminder, project fusion as our state of the art base productivity program designed to enhance the customer experience in our mature store base.
And give customers that may not have shopped with us in the past more reasons to shop.
We anticipate having.
15% of our total store base in the new fusion lay out by year end.
We've reduced the time to complete fusion remodels by 50% since the beginning of the year and in turn allowing us to minimize the disruption to the store operations and our customers' shopping experience.
Our customer.
<unk> are taking note of the improved layout.
The ease of shopping and our new product offering.
Specifically in our customer intercept surveys they call out better organization.
Improved merchandise selection.
Leaner and brighter aisle and easier to navigate layout.
Category is seeing the strongest lifted.
Sales include areas like apparel companion animal in power tools.
Given the size of our store base. This is a multi year opportunity to continually refresh our store base and further drive comp sales through productivity.
Another significant component of our space productivity effort is the transformation.
<unk> of our sideline.
Again, as a reminder, typically theres as much space outside of our stores and the sidewalks as we have on the inside of our store and.
And the productivity of this space is substantially below the chain average.
We are in the midst of a multi year project to transform our sideline with an expanded.
With the offering and an enhanced shopping experience.
With this investment the sideline spaces leveraged to offer a wider product offering in the lawn and garden categories.
Enter new categories with a garden center and offer greater convenience through the expansion of our buy online pickup in store capabilities for drive.
<unk> through pickup.
In select locations that meet sales volume thresholds. We're also adding a feed room to help deliver the bag feed demand and as a reminder were the loan.
We also continue to see a positive halo effect from the Garden center to the existing store and vice versa.
Addition of product categories.
Good product creased ease of shopping and new services provides us with even more ways to continue to keep our existing customers engaged with tractor supply and attract new customers also to the brand.
Our ability to drive higher sales per square foot through the transformation of our sideline space remains a significant opportunity.
We anticipate.
Having about 150 <unk> complete across the chain as we exit 2021.
In these early Remodels, we're learning a great deal about our customers' appetite for an expanded lawn and garden assortment and we're even more excited than we were when we embarked on the initial test pilot late last year.
As with our fusion.
Remodels, we continue to reduce the project timeline also here by about 50%.
And minimizing the disruption to our customers and store teams as we implement our findings from our test and learn process.
While still early on we are very positive about the continued refinement and learnings.
While implementing.
And construction projects of this scope and scale has been very challenging in the current macro environment.
We're making progress in our ability to significantly reduce construction cost the construction time and the corresponding disruption at the store site.
While the majority of the Remodels have been completed more recently, we are very pleased with the.
The early read on sales lift.
Post the disruption period, we're seeing lifts of low single digits for fusion remodel and mid single digits for combo stores, which had both fusion and <unk> remodels.
We expect continued improvements in these results as the stores normalized and.
Our forecasting year, one lift of mid single digits for fusion and high single digits for combo stores, which is on track with the expectations. We had as we began these projects.
Over the course of the last year. The team has done a great job operating the business at elevated levels navigating unprecedented.
And any challenges and also executing our transformational initiatives to support our life out to your strategy.
To wrap up our results clearly underscore that our strategies are working that.
But the team is navigating the challenges effectively and that we're emerging from the pandemic stronger than before.
Our extreme.
Optimistic about our future.
As we enter one of the busiest periods in retail I think since the seer appreciation go out to each of the more than 45000 tractor supply team members for their dedication and commitment to our mission and values.
And with that operator, we would like to open the lines for questions.
We will now begin the question and answer session at the end like to ask a question. Please press star followed by one on your Touchtone keypad.
Any reason you'd like term is that question. Please press star followed by tier again to ask a question press Star. One if you are a streaming today's call. Please dial in and two star one as a reminder, if you are using.
A speaker phone please remember to pick up your handset before asking your question.
We ask that you limit your questions to one question and return to the Cooper at any additional questions. We will pause briefly to allow questions to generic <unk>.
The first question is from the line of Oliver Winter mental.
Core ISI. Thank you you May proceed.
Yes, good morning, guys.
You mentioned a lot about the structural changes within the business.
And my question is regarding gross margins I think you said, it's a 100 basis points higher than before.
The pandemic in 2019.
So I was wondering if you have early indications of what you think is in gross margin structural.
Gains versus what you have to maybe give back when promotions.
Back on and maybe the comp decelerates from the very strong 40% to your comps. Thank you.
With every Oliver and Nick Good morning, Thanks for joining our call.
Gross margins were very pleased both with our short term results this past quarter on gross margin.
And also very optimistic about the long term nature of our gross margins.
On the short term.
Okay significant amount of cost.
Coming through our business, whether that's in cost of goods as it relates to raw.
Kind of.
Raw materials and commodity based goods.
Also vendors passing along costs related to labor and freight we've also seen freight cost increase as well.
<unk> as well as the cost related to imports.
<unk> done an excellent job navigating those costs.
Finding offsets productivity measures really being the advocate for the customer to keep prices as low as possible that said as Curt mentioned, we had we did have inflation to the tune of 7% in the quarter, which helped us offset.
Yes.
A lot of those costs and deliver the gross margin results that we did in the quarter, which sequentially from a gap to last year improved from Q2.
Long term as we've talked about on several of our call.
The question is really around the promotional intensity in the clearance intensity cleared at.
The in the business.
And those to remain at the same levels as they have over the last six quarters very low we remained very focused on everyday low price remained very focused on delivering value every single day to our customers.
And we see it playing.
Out that way for the foreseeable future we have no plans for significant promotional intensity in Q4.
And we think that will remain in a very supply constrained environment as we move into the first half of next year.
That too will continue to limit any sort of promotional intensity in the market.
A couple of years in now with the.
Minimal promotional intensity I think that that bodes well for being able to maintain.
Kind of a low promotional kind of structure going forward and so as I said again, we're very pleased with our short term gross margin results and also very optimistic about.
The structure.
Our nature of our long term gross margin.
Thanks very much good luck. Thank you.
Thank you Mr Winter mentor.
The next question is from the line of Karen short with Barclays. You May proceed.
Sure.
Hi, Thanks very much.
So based on all of those comments that you just provided.
Our next question would be on and obviously the longer term algorithm and.
We haven't had an update on that.
Little bit, but you are clearly trending well above that so wondering if you could maybe just give a little color on how you think about long term operating margin algorithm.
Algorithm more broadly versus.
Prior nine to nine five because that obviously doesn't.
Really realistic at this point.
Hey, Karen Ann and good morning, and thanks for joining the call.
We see significant growth opportunities ahead in our business as we've talked about several times 110 billion.
Total addressable market.
Super excited about our wipe out your strategy and the runway ahead, there and we're investing in that strategy to ensure we capture sustainable market share.
Absolutely to your point acknowledge that absent the write down on pet sense that we did.
A 10, 1% op profit in 2020, and our guidance for 2021 here at 10, 2% to 10, three that both of those exceed our long term targets.
We certainly don't want to get ahead of ourselves here in the third quarter.
What we commented on is that we are in the midst of our annual planning for 2022.
<unk>.
Yes.
At the same time, we're also just always looking at our long term target.
And it's very natural for us to be reviewing that over the next few months and so when we have more more news on that we'll certainly let folks know, but again I think we are in.
A period, where there's a significant amount of opportunity ahead.
And we're very pleased with the results we put up this quarter. The outlook, we have for the balance of the year and also excited about the long term opportunity that we still see out there in our $110 billion market is where we are gaining significant share in it and the team is executing on.
On all cylinders right now.
Great. Thanks very much.
The next question is from the line of Brian Nagel with Oppenheimer You May proceed.
Hi, good morning.
Congrats on another great quarter.
So my.
My question, maybe a bit repetitive here.
Prior to that.
The question I have is how.
You mentioned the structural lot in your prepared comments.
Demand for the demand side.
Clearly demanded tractor now last several quarters has been outstanding.
Youre still just very odd.
Pretty unique dynamic we can meet.
You brought it up I mean, I guess, it's a question I have is what are what are you seeing in your business. How your consumers or are performing that gives you greater confidence that there is a structural shift in demand trends that will persist once the COVID-19 crisis is completely behind us.
Yeah, Hey, Brian.
Brokerage I'd point to.
Three things.
In our business first off I'd talk about just kind of broad macro trends.
I'll talk about is the consistency of our business in the third I will talk about is share gain and.
The broad macro trends.
All the trends that we saw.
In Q2 of last year really of all sustain themselves, but I think there are certain.
Retailers and other businesses that had that saw the benefit as it relates to kind of COVID-19 behavior early to mid last year and that Wayne and I think that's not been the case for us.
Things like World revitalization, which is a bit more of a permanent.
If people move in.
Whether it's things like pet ownership and adoption again permanent and more so in nature, whether it's home setting.
And just kind of self reliance mentality, we're seeing is as more Permian.
Whether it behaviors and really no matter what data set you look at whether it.
Home purchases, whether it's mobility.
It's pet ownership.
Any sort of qualitative data on where people are spending their money. They all reinforced the structural nature of those of those trends.
I can add.
Permanent who is the consistency as I mentioned, our business has been remarkably consistent.
Month to month week to week by category and by region.
And that's been regardless of whether or not we've been in COVID-19 surges or whether or not certain states had been more locked down or lessen locked down.
And I think just again speaks to the structural orientation and.
And lastly, we're gaining significant share really in almost every category in our business.
And we're seeing that share gain in our core customers, who have long shopped us.
As they come to us now with.
Down confidence that we're in stock with the right level of customer service and at the right price and then also new customers who are finding the lifestyle that we serve.
B.
To those to those three things that give us real confidence in the structural orientation of our business and if that I think.
There's a set of Covid winters that were early on and have seen some of that Wayne and then theres. Another set that are seeing it much more structural and sustain and that very much put at the top of that second camp.
No that's very helpful. I appreciate it congrats again thank you.
The next question is from the line of Peter Keith with Piper Sandler Piper.
Hi, Thanks, Good morning, Great results everyone.
I'm looking forward to the next couple of months or the winter here it looks like we're going to be seeing.
Kind of a record energy prices home.
Heating sticking back to 10 12 years ago Southern heating exposure you guys have for sometimes can be a nice benefit for tractor. So I guess the question is on a net basis.
Just how do you feel about this elevated heating costs are we going to see this winter is it a.
Maybe elevating cost for your core consumer.
Peter This is that thanks for joining the call.
Hey, when we look ahead over the next couple of months, just a little bit more broadly.
Other than just outside of the energy cost as well.
We're really excited about the opportunity that lies ahead.
Based off a lot of the macro benefits of how just discussed.
Business you know over this holiday season, and then to med to maximize and capitalize on that opportunity.
When we think about that.
We are really excited about.
Executing our portfolio strategy.
Strategy.
Leveraging the SaaS team.
Throughout the year, not just call it pre holiday, but he as we go through the quarter.
And for holiday specifically over the next.
Really excited about the momentum we're seeing.
Our core customers.
<unk> that are coming to us for for categories more broadly than maybe they have in the past things like apparel and footwear.
And we're seeing expansion like in key brands that consumers are really resonating with.
From Braemar, rich cut where were expanding into the women's lineup where.
Shoppers now coming to us where they weren't in the past.
Where we can continue to drive market share in those categories.
We're also seeing that with that rule revitalization consumers come to us for outdoor activities even here in the fall so things like patio heaters grills evenly.
Bye.
Hyphen, utv's driving that demand.
We're still seeing strength across the board there.
And then we're going to continue to focus on our Q activity, where customers are coming to us for footsteps.
With a record number of pet adoptions over the last few years we.
Continue to be extremely.
Excited about the momentum that we have in our pet business holistically as well as the <unk> business.
And we're going to be looking to drive that throughout the whole holiday season, So and it's a little bit broader than just kind of the energy market question, there as well, but also.
Where we see it as we come through like.
We're seeing activity across our consumer base.
<unk> consistent with what we've seen over the last few quarters and they are really resonating with the.
The new items, new categories as well as the new partnerships that we're continuing to establish.
Okay. Thank you very much.
The next question is from Kate Mcshane with Goldman Goldman Sachs. You May proceed.
Hi, good morning, Thanks for taking our question.
Wanted to go back to inflation for one minute I wondered if you could talk to us about how much inflation you are expecting for the fourth quarter and when it comes to.
Actions that you took was it across most of the store or in certain categories and when do you expect or what has been the reaction from an elasticity standpoint.
Yes.
Hey, Hey, this is Kurt good morning, and good morning to everybody on the inflation side of it as.
How mentioned on the top on the top side, there was 700 basis points of inflation benefit on.
On the on the business we saw at that are slightly higher cost pressures in Q3 as we look ahead to Q4, we exited Q3 and into Q4 with continued levels of inflation.
Moderating at the levels compared to like what we saw coming out of Q2 into Q3.
But there continues to be some levels of inflation, that's factored into our guidance.
In regards to how we handled that it really is more of a portfolio approach we take a look at.
Were those costs.
Our contributing both in transportation product costs, and we look at our portfolio up Seth and the merchant team manages the.
The shopping patterns for from the customers as well as making sure that in key traffic driving areas, we've got great everyday low prices.
Pricing, so we leverage our pricing tools really well and make sure that from a portfolio standpoint that we can balance from a retail side as well as what we can do to leverage the strength of our mature supply chain to keep cost as low as possible and again our team is just managed through this brand.
And we we are forecasting our guidance for Q4 expects that they are able to manage that in a similar pattern.
Thank you.
The next question is from the line of Michael Lasser with UBS you May proceed.
<unk>.
Good morning, Thanks for taking my question Kirk can you just clarify what you intended to stay with the response to that last question.
In terms of the inflation contribution moderated relative to the 700 basis points or the inflation contribution that you're expecting in <unk> moderated relative to the 300.
<unk> to 400 basis points that I hopefully that wasn't my question dilutive below confusing that was the answered my question really is.
Moving forward, you still need a 3% comp or so took to lever your expenses and your prepared remarks, you noted that SG&A has leveraged 70 basis points.
Relative to 'twenty.
19, and given the sheer magnitude.
The volume increase your stores have had there.
There would be some.
Opportunity to right size or manage your cost structure is such that you might be able to lever on a more moderate comp moving forward.
<unk> ranking.
Yeah, Michael I'll hit the two questions in response to clarification on Kates question for Q4.
The inflation pressures in the business will be fairly similar to what we described in saw in Q3 flattish to potentially slightly.
Up in.
In regards to Q4 in regards to our leverage point.
Where we're at right now with the business the elevated levels of revenue growth as well as our focus on our investments really makes the whole algorithm different than just saying is at a 3% comp that you leverage.
And to your point right now where we are.
We're seeing really strong momentum in the business.
And that does elevate our ability to leverage on the cost, but we're also using that to the point that Hal made and that I made in our prepared remarks that we definitely see this as a tremendous opportunity we're investing from a position.
John Frank So our continued outlook about managing SG&A to flattish.
Over time, we will still be our our outlook and the way we're managing this business great opportunity to just continue to gain market share and drive traffic into the stores.
Thank you very much.
The next question is from the line of.
Chris <unk> with Jpmorgan you May proceed.
<unk>.
If we can just move on to the next question.
Christina.
Hello.
Hey, Bob.
Thank you Mary Lynne.
So.
Seth.
With your commentary around <unk>.
Let me say soft lines, a lot of the Asian sourcing I'm guessing the heating business and okay. So it sounds like Youre feeling good from an in stock level. There is that accurate and then how are you.
Are you thinking about.
Next spring.
At this point Youre, probably making the orders for that so we'll be ordering for next spring.
Hey, Chris.
Yes. So we're we always say we're not we're not.
We always want more but we're satisfied with where we are right now.
As we manage through the supply chain with both our supplier partners and our supply chain team and merchants to get the products, where we are we feel really good where we are heading into the holiday season is as products flowing in.
As we manage through this throughout the course of the whole year youre spot on.
We've looked at every piece of our process were given earlier forecast or our key supplier partners.
We are.
Working with our overseas factories to give commitments.
And Ah earlier lead time than we have his.
In quickly so that we can properly plan within plan through the supply chain look for alternative ways to source product where need be to make sure that we can have product hit shelf and we're taking it will we will be able to take it when we can get it even earlier than we have in the past as well so that we can be locked and loaded and ready for the spring business. So.
Store I really feel good about the planning that's going on across the team across with our supplier base to.
To make sure that we can continue to navigate this supply global supply chain challenge has been out there.
Got it thank you.
Yes.
The next question is from.
From the line of Peter Benedict with Baird. Thank you you May proceed.
Hi, guys. Thanks for taking the question.
I guess back on to the expense stuff.
The investments you guys are making obviously the capex has been up so I'm curious just on DNA.
And how we're thinking about that.
Kurt for this year and then next year. It would seem this year is probably up 25% year over year, maybe it's $270 million of DNA, how do we think about that as you kind of pencil through <unk>.
<unk> 2022 should we see a similar growth rate.
Or how should we think about that that's my question. Thank you.
Sir Peter so for this year, the depreciation growth year over year.
Throughout the quarters mid to high 20% growth rate is very much in line with our expectations.
The investments we've made this year the incremental incremental ones principally with the new distribution center build as well as the.
The fusion and Sidelock remodel has us right, where we expected to be on depreciation and for 2022 at this point with our plan. We would expect very much similar in the low 20% growth rate likely likely and that's very much what we framed out when we launched the life out here strategy.
Yes, Okay got you. Thanks, so much Greg.
The next question is from the line of Simon Gutman with Morgan Stanley You May proceed.
Hey, everyone. Good morning.
Harlem, Kurt maybe ill take another stab at.
Longer term margin question.
Think the math would suggest that your business could be running above that level. The question is philosophically do you, let it run above that level and how in that regard are there things.
Along the <unk> strategy that you can accelerate or their price investments that you.
I would think about.
Are there any other reinvestments that.
Later in the second or third layers of the plan where you could.
Lean in and just say Hey, we don't want to run the business at a higher margin. So that we can keep building on the growth I'm curious how you think about that.
He came in and get to talk.
Talk to you this morning, and thanks for joining us.
I'd say first off we see sizable opportunity ahead.
Marketed.
For those who followed us for a long period of time, you know, it's a very attractive market it's very.
Fragmented.
One, where we're very well positioned with our scale and size.
<unk> and relationships that we have and the investments we've made historically.
We think that there is significant further opportunity as we look out to continue to grow in an outsized way and take share and and we're committed to going after that share and continuing to grow.
No.
That said would acknowledge two straight years of performance above 10% op margin that's above our long term guidance.
And as we go through our 2022 annual planning process will be that will help us.
Really think through our long term guidance.
And the relevance of that as we look forward, but right now it is our long term guidance.
What I would say is as it relates to investments. We're very we're very bullish on our investments where we're very focused on excellent capital allocation, we're seeing the results of our investments in.
As we shared today the fusion stores and the satellite stores are performing very well very well as they mature and begin to normalize we're seeing the results right in line with what our expected.
Business model and business plan for them were.
That said also our businesses is much continues to grow at an outsized rate.
The business gives us an opportunity to leverage and scale on our business.
In a way that we didn't fully anticipate last year at this time.
As we see how that continues to evolve into early next year, you can expect to hear more from us on that.
But again, we remain very bullish on.
And that opportunity very pleased with our business has never been stronger and we're excited about both the short term and long term potential inside of it.
Thank you.
The next question is from Zach pattern with Wells Fargo. You May proceed.
On our hey, good morning, So Kurt another expense question as you're lapping a year of elevated COVID-19 costs incentive comp and strategic spend.
So first of all can you talk through the lingering impact of some of these items and then as we look to 'twenty two.
You mentioned an uptick in strategic.
And is there any detail you can provide there and then.
Separately on the 20% DNA growth is that with or without <unk>.
Yes, Zach this is Kurt.
A number of things in there let me just try to package that in this one I'll hit the last one first auris ones not.
<unk> not considered any of the numbers of the guidance that we've given.
In regards to the.
The depreciation expense structure, so COVID-19 expenses.
<unk> been elevated from the level that we entered the year in two just because of the pandemic with the Delta <unk> and others have lingered there at lower levels.
Level than we saw in comparable quarters last year.
But we continue to emphasize having a a safe and clean environment for our customers and our team members the incentive comp with the outperformance this year, while at lower levels than last year continued to be above target and so we should think.
About going forward those are items for us as in future years.
Those are leverage points and if like in this year, while there's incentive comp above target performance gives leverage above and beyond the level that we're paying and incentive comp.
And overall leverage this year and next year will those will be favorable items to compare against the depreciation expense.
As I mentioned earlier the growth rate that were that I quoted and referring to is very much in line with what we expected in our long range plan when we.
So its useful life out here strategy and talked about a three to five year plan and so with the elevated sales I mean, we feel very comfortable with a 20% growth rate in depreciation because that's where those investments are at does not include <unk> and again, we're very comfortable with the management we've got.
What we have visibility on our expenses for the fourth quarter and even the near term beyond that.
Got it thanks, Kurt what about the strategic side.
The strategic initiatives that we've had.
We haven't really specifically mentioned any incur.
Increased spend on strategic initiatives.
Got an outside of what.
What we had planned and in the life out here strategy on technology digital that we had this year and we will continue to execute the plan. So maybe just clarify what you're referring there.
Well you had mentioned you were going to continue to invest in 2022 so.
<unk> I'm curious if there was an uptick in strategic spend that we should anticipate.
Got you.
It is very much in line with what we said that our capital our capital expenditures over the next few years, we anticipate those still to be in that $4 50 to 550, some years could be higher because of launching.
So I was just distribution centers.
But the level of investment in the businesses is consistent with what we expected.
Got it appreciate the time today.
The next question is from the line of Seth Basham with Wedbush You May proceed.
Launching thanks, a lot and good morning. My question is just a clarification around the trends youre seeing in terms of the comp lift following the fusion and sidelight rollout I think you said, you're seeing low single digit confusion and mid single digit for combo stores.
And historically have been completed.
Your plan is for a full.
Tier list of mid single digit for fusion and high from Richard Thomas is that correct.
Hey, good morning, and yes that is what we said in our prepared remarks and it is accurate.
The AD that I'd make to that is just as is typical with.
For a store remodel.
There is a little bit of disruption there is disruption that happens during the remodel.
Particularly with the current supply chain environment Theres, a little disruption that's occurring still even after the remodel is some kind of fixtures and other types of things come in sometimes a little late.
And then we start to see the lift.
Happen as customers get used to shopping the new layout and find the new categories and the new brands and the new the new kind of the new remodel.
Is that what we're seeing is kind of what we would expect which is kind of every week every month that goes by post kind of the re grand opening of the remodel that the performance of the store.
<unk> can use to improve.
And Thats and Thats, the case of those combo stores and the fusion remodel the adder that I would make to that is as it relates to the sideline with with the with a garden center.
We have a couple of stores that are that went through kind of year or two of spring, we saw kind of outsized gains in.
Those.
As in line again with our expectation that we would see more of a maturity curve with the Garden Center.
Then we would be inside of the store fusion remodel, we think that we expect and what we're seeing in the fusion remodel is more of an immediate impact with kind of the maturity curve being more of that 3456.
Or could take surety curve, whereas with a garden center, we're seeing a nice strong immediate impact, but then we're also seeing kind of 12 to 18 months kind of continuation of that maturity curve.
But yeah. The results are very much in line nice positive with already even a few months into each of the remodel and then we see even continued lift.
Monthly as we complete kind of year one of those remodels.
It's fusion or the combo.
And thats helpful as a point of.
Clarification, when do you start measuring lift post disruption how many months after the completion.
The option period end.
Yes, we start measuring lift the day of the re grand opening.
<unk> so not.
To get too tactical, but theres, a sign off that the store manager and the project manager and the construction manager do.
That on the day that sign off Thats. When the project is complete the re grand opening happens reasonably quickly after that one week two weeks kind of thing and then we start measuring the lift.
From that re Grand opening date.
Yes.
Thank you.
Okay.
The next question is from the line of Chuck Grom with Gordon Haskett.
You May proceed.
Okay.
Thank you good morning, great quarter, how when we look at the site a lot of initiatives I'm curious.
What's been the biggest areas of upside surprise for you guys or said differently what do.
We learned in the course of 'twenty, one five blocks, where you'd look to apply to future.
Store efforts and then any sense for where you think the productivity longer term could be relative to your in store productivity.
Hey, Chuck.
And thanks for joining the call today.
Kind of three things on sidelines, and then I'll just briefly touch based on fusion productivity.
On the satellite the three deals to talk about it as the Garden Center I'll talk about <unk> and then I'll talk about our feed rooms. So first on the Garden Center.
We know our customers T data set is the category that we leased addressed from a destination perspective that they most engage in is live goods and garden.
And so that's really what the Garden Center strategy is all about is creating another cube destination category in our business.
And but we're seeing that in our results I'd say, where we're more excited now about the prospects for kind of adding to our fleet. The garden center than we were even this time last year.
And then just kind of tackling the behavior, we're seeing our customers exactly what you expect its a little left around beautification like what you might see in a more of a home improvement store in terms.
The core product and much more about fruits and vegetables, and shrubs and trees. All those sorts of things that really speak to life out here, whether it's the gardening you do in your backyard or whether it's the shrubs and the trees you're planning along your fence line and then also in your land.
And we have significant convenient bennett at kind of advantages.
As for our customers from a location perspective.
So the garden centers are performing very well and we're just getting started both on the build out of those obviously, but also with our relationships with our live goods vendors in the Assortments tailoring it by store the <unk>.
Second thing is on focus drive thru.
<unk>.
We are seeing incredibly.
<unk> high levels of drive through behavior from our customers and we're.
We are seeing in some of our stores that had been opened for 4568 months now we're seeing 50 60, 75%.
The buy online pickup in store being being drive through and just add extra convenience factor you are seeing.
Customers and then that's driving repeat behavior and so really pleased with how that's evolving and the behavior. We're seeing from our customers is consistent with what the the feature was when we rolled it out and then lastly is the feed room.
So we are the largest seller of bag feed in the country.
Free and if you think about our average store volumes and the growth we've seen in those store volumes combined with the outsized performance in Q, that's put a lot of stress on our stores as it relates to the receipt of bad good getting it out onto the store staying in stock for our customers and then being.
Are you able to.
You know kind of get that on the customer's trucks and out the out the towards get them on their way and the theater rooms have provided valuable capacity and also allowed us to effectively from a cost perspective.
That customer because we're not touching the back two and three or four times, we're able to leverage our mixing centers.
David.
That their design now and so it was all three of those things are really coming together, we're seeing excellent performance across all three exactly as we as we designed them and build them in.
Continue to use our test and learn to tweak it along the along the way.
If you think about.
Our productivity as we move forward.
We're still committed to our comps kind of out pay outpacing overall retail and outpacing the life out here market that we define as that $110 billion.
On a market and so you can expect continued productivity improvements.
Our same store sales.
There's no way in an outsized way as we move forward even in spite of six consecutive quarters now with double digit comps, we still have that expectation moving forward.
One other thing I, just while I've got the micro so to speak I would like to just step back in and referenced a bit about kind of our long term kind.
Kind of op margin leverage as Curt was talking about.
What I'd say is if you look at our long term guidance because there are several questions on this topic.
We ended our long term guidance that we announced last year had 6% to 7% sales growth and 8% to 10% earnings per diluted share, which implies continued leverage on the business as we move forward.
<unk>.
And we're not we admit we're not in a state of normalcy right now, obviously with our comps being the sixth consecutive quarters of double digit growth, but what I would say the spirit of the continued leverage you are seeing in our results and that is the expectation we have of our business, whether we're seeing outsized costs for labor and outside costs with freight.
And.
Cost of goods.
Whether that in a more normal environment, and so where we were.
Our holding ourselves accountable to executing in that way regardless of the environment that we're in and just wanted to clarify that I think <unk> point around 3% comp and whether that's a point of leverage is still accurate in a normal.
Environment.
But we still even in a kind of quote unquote normal environment still accept that same challenge.
Right. Thanks, Alan operator that will conclude our call today I really appreciate everybody's cooperation that allowed us to get through a lot more questions. So thank you all.
Look forward to it.
Speaking to you in January on our fourth quarter earnings call and Marianne and I will be around this afternoon for any questions and thank you all for your cooperation and have a great day.
That concludes today's conference call. Thank you for your participation and enjoy the rest of your day.