Tractor Supply Company

Good morning ladies and gentlemen and welcome to Tractor Supply Company's conference call to discuss first quarter 2020 results. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. We ask that all participants limit themselves to one question and one related follow-up. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mrs. Mary Wynn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Wynn, please go ahead.

Thank you, Christina. Good morning, everyone. On the call today are Hal Lawton, our CEO, and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the Q&A session. Now let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risk and uncertainties. including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct, and actual results made materially differ from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements that 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 that statements will remain operative at a later time. Tractor Supply takes no obligation to update any information discussed in this call. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick related follow-up. I appreciate your cooperation. We will be available after the call for follow-up. Now it's my pleasure to turn the call over to Hal.

Thank you, Mary Wynn, and thank you to everyone for joining us this morning. I want to start off by recognizing this is an extraordinary time. First and foremost, this is a human health crisis, and secondarily, a global economic crisis. We hope your loved ones and your family are healthy and safe. We are living in a generational moment that is unprecedented. Each day requires a close inspection of a very dynamic external environment and a clear determination of how we'll respond. While our call this morning is about our first quarter results, we will focus more on updating you on where we are with the crisis at hand, how we're navigating the uncertainty, and how we're responding to strengthen our business. I want to start by thanking the entire tractor supply team who has truly come together to ensure we are taking care of the health, safety, and well-being of each other and our customers. This is our absolute sole number one focus priority. The culture and purpose-driven nature of Tractor Supply has served us well in responding at this critical time. It has never been more clear or more evident what an advantage this strong foundation is to the company. I'm incredibly proud of how the Tractor Supply team and our vendor partners have stepped up to every challenge. Our goal is to make sure we come out of this pandemic stronger. Stepping back, let me share with you how we've approached this crisis. As the virus began to gain traction in China, we put together a cross-functional team that was dominantly focused on our supply chain. This team worked with each of our factory partners at a purchase order level to identify issues and coordinate substitution products and other merchandising actions that we needed to take to ensure we had product to support the spring and summer seasons. As the COVID-19 evolved and it became more clear that it would impact the United States and our retail operations here, we chartered a global pandemic response team that was grounded in our previous business continuity planning processes that we'd put together. This team is a broad-reaching, cross-functional team that has been meeting twice a day, seven days per week since late February, It is included not only with tractor supply team members, but also supplemental third-party members that can help us on both medical as well as risk and liability. They are empowered to move fast and make decisions. They have served as the central nervous system for the bulk of our response. As an essential needs-based retailer, we are focused on being there for our team members, customers, and communities in this unprecedented and uncertain time. I'd like to take some time to highlight some of the ways that we've responded to the COVID-19. Starting on March 16th, for our frontline team members, we began awarding appreciation bonuses. For example, hourly team members receive an incremental $2 per hour. Early on, we extended sick pay leave by two weeks for both full and part-time team members who self-report contagious flu or COVID-19-like symptoms. We do not want anyone to come to work who is sick, and we've been very clear on that with our team members. If they're sick, we want them to stay home and get better. To date, we've had over 1,500 team members utilize this sick pay benefit. We recently announced 100% coverage of COVID-19 medical treatment for team members under the company's medical plan, and we're also waiving cost-sharing fees for telehealth visits. We have increased personal protective equipment for team members, along with installing plexiglass barriers at cashier stands and stores, and expedited the rollout of contactless payment options. We embarked on our most ambitious hiring drive ever with plans to fill more than 5,000 full-time and part-time team member positions across our stores and distribution centers. Since our announcement, we're seeing significant increases in applications and hiring and all-time hiring week highs. To continue to enhance the safety of our in-store shopping experience, we've added a dedicated greeter at every store to drive awareness of social distancing, monitor the number of customers in our store, and provide additional cleaning support, particularly carts. We also have modified our store operating hours and added a designated shopping hour for high risk and seniors 16 and older while adding store labor hours to improve customer service and safety. We've added incremental inventory to support high velocity consumable SKUs that our customers count on us to have in stock as their dependable and essential supplier. We also launched our first national advertising campaign in over a decade to say thank you to our team members and customers. Over the first 10 days that our first TV commercial was shown, it was seen by over 2,200 times with a reach of approximately 700 million impressions. And then just last week released our second ad as a part of this campaign. To support our team members and communities, we've made a commitment of $2 million. This includes a half a million dollars to the existing Tractor Supply Employee Assistance Fund, to assist team members most impacted by COVID-19, and $1.5 million for the establishment of the Tractor Supply Company Foundation. And this foundation will be committed to the growth and development of our rural areas with an initial focus on the COVID-19 recovery efforts in these rural markets. This is a highly fluid crisis, and these are historically unprecedented times. There are a broad range of outcomes of how our business will perform in the coming weeks and months, depending on how the crisis evolves. We're doing everything we can to think through how the next several months will play out. We're leveraging our past experiences. We're leveraging numerous third-party resources, all to assess the uncertainties and to take very calculated actions. Some of the uncertainties we're thinking about are how the macroeconomic factors will evolve, including unemployment and GDP, the impact of the crisis on consumer shopping patterns, the impact of legislation such as the CARES Act on consumer and small businesses, the degree of quarantine measures that may still occur either in the near term or in the fall season, and then the degree of uncertainty in the economy for the rest of 2020, as well as the incremental cost of doing business as an essential needs-based retailer in the current environment. With these uncertainties, we've taken action to increase our cash on hand. We've suspended our share buyback program. We've reprioritized our capital spending. We're controlling discretionary costs, all the while maintaining our dividend. Now let me talk about some of the other things we're seeing and experiencing. We are seeing significant changes in consumer shopping behavior, from trip consolidation to their preferences for contactless payments, to their preferences for curbside pickup, and home delivery. And I believe the crisis represents an opportunity for us, and we are moving rapidly to capitalize on those opportunities. We are reprioritizing our capital spend to reflect the changes we're seeing in our consumer shopping behavior. And a few things that we've announced recently. Three weeks ago, we launched curbside delivery for our buy online pickup in stores nationwide. At the same time, we also establish two dedicated parking spots at every store in the country for buy online, pick up in store, or court curbside deliveries. For curbside delivery, all a customer has to do is order online. When they get an email that says it's available to be picked up, they drive to our store, they pull into one of these two conveniently located parking spots, they call the store, and then we bring the items right out to their car in a very contactless way. We've seen significant increase in buy online pickup and store orders and customer adoption of curbside pickup has been remarkable. With more than 70% of our recent buy online pickup and store orders utilizing the curbside pickup option. To enhance the safety of the customer shopping experience and provide greater convenience, we increased by 50% our mobile point of sale hardware capacity in our stores. These additional devices allow our team members to do a number of activities, including line breaking, where we've got queuing occurring at our registers, to conduct outside transactions that may be incremental orders occurring on a box transaction, or to help fill up propane and be able to allow the customer to pay right there. And they also allow us to execute curbside delivery. We've got an app that can fully check off the delivery all contactless. In less than three weeks, we expanded our same-day, next-day delivery offering from about 400 stores, or 20% of the chain, to all stores. This is a great example of how we're accelerating our capabilities to be more relevant to our customers. We realized this could become a point of differentiation for Tractor Supply, and we moved fast to capitalize on our customers' needs for delivery. In partnership with Rhody, we had plans over the coming year to continue to increase the number of stores that offered same-day and next-day as a delivery option. However, given the escalation of the COVID pandemic, customers' demand for delivery services became more pronounced, and so we responded. Together with Rhody, the team worked, and we accelerated the ramp up of same-day delivery across the remaining 80% of our stores, again, doing this all in about a three-week time frame. Tractor Supply now offers customers the safety and convenience of same-day and next-day delivery on almost all the inventory in our stores, nearly 15,000 items that our customers need to live the life out there. This includes things like livestock feed, dog food, power tools, tillers, rotting lawnmowers, chicken coops, and even more. They can order all these, have them picked out of our stores, loaded into trucks and cars, and brought to their homes, all without having to ever leave their farm or home. We are now the nation's first major general merchandise retailer to offer same-day delivery from 100% of our stores. Overall, during this pandemic, our feedback from our customers has been very positive with improving customer satisfaction scores. When I am visiting stores, our customers share with me how important tractor supply is to them and their families. You can see it on all our social media, like Facebook and Instagram. This upbeat customer feedback is very inspiring to the team and reinforcing of them to do what they're doing, which is service our customers and take care of their team members. To briefly touch on the first quarter, the tractor supply team delivered strong comparable store sales and strategically invested in our operations as the COVID-19 crisis evolved. Importantly, and most importantly, we were there for our team members and customers as the dependable supplier of needs-based essentials. Prior to early March, we were on track for an estimated comparable store sales growth in the range of 1% to 1.5% for the quarter. As one of the warmest winters on record impacted our seasonal businesses in January and February, as well we were lapping a strong 5% comp in the prior year. Over the last three weeks of the quarter, though, as COVID-19 rapidly evolved, we experienced a strong increase in our sales volume as our customers relied on us for the essential everyday products they needed in the face of this crisis. As the last several weeks of the quarter showed, our customers view us as a critical need, as critical to the needs of their animals and pets, just as the grocery store is to the needs of their family. We experienced strength in key essential categories like livestock feed, pet food, heating fuel, and other core consumable products as our customers stocked up for their anticipated needs. Our e-commerce business experienced remarkable growth as we moved through March, and that growth is continuing in the second quarter. The importance of our store network is evident with the strong growth in buy online, pick up in store, and it's a more cost-effective way for us to fulfill these online orders. This is another area we're seeing rapid adoption by customers. In the latter half of March, nearly 30% of our buy-online pickup and store orders were from new customers. Along with that, 65% of the orders were by customers that were using this service for the first time. As we saw the stock-up activity start to slow, our sales activity has continued to stay strong as we're now three weeks into the quarter. Categories that involve living a more sustainable life and enjoying the outdoors are experiencing robust growth. Our customers are engaging in activities such as backyard gardening, lawn care, landscaping, homesteading, fencing, and backyard poultry. All these categories are strong and they're playing to our strengths. From a customer perspective, we're growing with existing customers but also gaining new customers. Within our neighbors club, we're seeing existing customers making their first purchase in other categories, in pet food, in livestock feed, poultry departments, starting to cross shop like they have not before. In addition, we're reactivating members, and we're experiencing record highs in our new customers. In summary, the first quarter represented solid performance by the team, and the second quarter is off to a strong start. I'm incredibly grateful to our store teams who are the heart of our relationship with our customers and our distribution centers who keep the critical supply chain moving. As we look forward to the reopening of the economy, I'm very proud of the opportunity for Tractor Supply to participate in the President's Great American Economic Revival Committee. It is an honor to represent the company and rural America. Now I will turn the call over to Kurt to go through some financial highlights and I will come back to share more of what we're doing proactively.

Thank you, Hal, and good morning, everyone. I hope you, your families, and loved ones are safe and healthy. I'll walk through the highlights of our results for the first quarter and then share what we are doing to respond to the challenges of COVID-19 from a financial perspective. For the first quarter of 2020, net sales increased 7.5%. as we had strong comp store sales growth of 4.3%. The comp store sales growth was driven by a 5.4% increase in comp average ticket and a 1.1% decrease in comp transactions. The decline in comp transactions resulted principally from two factors. First, the difficult compares in January and February due to the prior year's strong winter selling season. And second, We believe consumers consolidated shopping trips in March under the current environment as Hal discussed. Our average ticket was driven by strong units per transaction growth as customers stocked up for essentials. Commodity price inflation had a slight impact on average ticket as inflationary trends moderated during the quarter. As we shared previously, January and February in total tracked in line with our expectations with March up 12% given the stock up sales we experienced. For the quarter, we had robust growth in our consumable, usable, and edible categories, with declines in discretionary clothing and footwear, and to a lesser degree, declines in our winter seasonal categories given the milder winter. Big ticket sales increased in line with our overall comparable store sales growth. Safes, heating stoves, Tillers, trailers, and generators were drivers of this growth, partially offset by declines in snowblowers and compressors. For the first quarter, gross margin was essentially flat to prior year at 33.8%. The gross margin performance reflected a favorable benefit from transportation costs as a percentage of net sales. Our efforts in 2019 helped drive lower year-over-year average carrier rates, as well as reduced average stem miles. Fuel rates were modestly favorable compared to prior year. The transportation benefit was offset by the strong sell-through of consumable merchandise, which generally carried below chain average gross margin rates, and greater markdowns of winter seasonal merchandise. Including depreciation amortization, SG&A as a percentage of net sales improved by seven basis points to 28%. The decrease in SG&A as a percentage of net sales was primarily attributable to leverage in occupancy and other fixed costs from the increase in comparable store sales and a net benefit from legal settlements, primarily from the favorable settlement in the Visa MasterCard interchange fee class action lawsuit. Partially offsetting these favorable items, certain first quarter costs as a percentage of net sales were higher than the prior year. These were driven by approximately $7 million of incremental costs from COVID-19, such as investments in team member pay and benefits, the impact of additional labor hours and supply costs dedicated to COVID-19 cleaning actions, and the charitable contributions through our Tractor Supply Foundation to support our team members and our communities during this crisis. Additionally, Specific to the Frankfurt Distribution Center, we estimate approximately 10 basis points of impact on SG&A as we had not fully cycled the opening of this new DC until the latter part of the first quarter. All in, we are pleased with our performance, which helped to contribute to modest operating profit increase. Diluted earnings per share was 71 cents, an increase of 12.7%. For the quarter, we repurchased approximately 2.9 million shares of our common stock for $263 million and paid quarterly cash dividends totaling about $41 million. As we move into the second quarter, demand for our products and services continues to be very strong. We believe tractor supply is benefiting from the favorable spring weather and the consumer trends associated with COVID-19. As a team, the stores and the distribution centers are well prepared for the busy spring summer season. We are focused on capturing current opportunities while managing for the long term. Turning now to how we are responding to the challenges of COVID-19. We are laser focused on what is within our control. We are looking to capitalize on opportunities and investing in the future while balancing liquidity and cost mitigation. We are actively managing our supply chain and inventory levels to support key categories where there are strong sales trends. On cost management, we're reviewing all discretionary spending and reducing spending that isn't appropriate given the macroeconomic outlook. As an essential needs-based retailer, we are faced with an elevated cost outlook for the second quarter in the range of a net incremental cost of $30 to $50 million. These incremental costs are attributable to the appreciation bonus for our frontline team members, increased store labor, and higher safety and cleaning costs. As this is a very fluid situation, the degree of how these incremental costs will play out for the second quarter, as well as the second half of the year, will be determined by the length and depth of this crisis. We continue to forecast capital spending in the range of $225 to $275 million. We are deferring spending in certain areas while accelerating spending in digital and other more consumer-facing areas to capitalize on the trends that Hal mentioned. In regard to our new store openings, we remain confident in our 2,500 store target, and we are currently on track with our new store opening schedule for 2020. That said, Given the practical realities created by the disruption of COVID-19, we believe there is potential for the timing of some of our new store openings to be delayed. This could push some store openings to later in the year or even some into fiscal 2021. Finally, I'd like to take the opportunity to provide more insight into our ability to navigate COVID-19 from a liquidity standpoint. Given our financial strength, we are confident that we will be able to maintain appropriate liquidity as we manage through the current crisis. To free up additional liquidity within our existing credit facility, we executed an accordion loan of $200 million in March, and just this week we executed a $350 million loan within our existing bank group. We currently have over $800 million on hand in cash and cash equivalents, with approximately $165 million of additional liquidity available if needed. To further enhance our financial flexibility, we have also temporarily suspended our share repurchase program effective March 12th. While our quarterly cash dividend is determined each quarter, we do not anticipate suspending or reducing our dividend at this time. Given the unprecedented COVID-19 crisis, and the significant economic uncertainty it introduces, we made the decision on April 7th to withdraw guidance. Once we believe that we have sufficient visibility to reinstate guidance, we will do so. TractorSupply successfully weathered business cycles over time. I believe our strong financial position will continue to serve us well in the future, and we are taking the steps to position us to come out of this crisis a stronger company. As that completes our financial overview, I will turn it back to Hal.

Thank you, Kurt. Our top priority is the safety and health of our team members and customers. In the current environment, we are more relevant than ever to our existing customer base. At the same time, we are acquiring new customers and seeing market share gains as a result. We are taking this opportunity to invest in the business, do the right thing to support our team members, but also to strengthen our position. It seems like a long time ago, but many of us were together on March 10th. And during that time, we shared with you some of our early insights on the business. And all those items that we discussed all still are true and are very relevant. And you've heard many of them sprinkled through our comments today. We will certainly be leaning into those as we make our investment decisions through the second quarter and the second half of the year. We are not losing sight of the long term. During these times, we will focus on the strategic opportunities to serve our existing customers while also expanding our reach. I believe that the strength of a company is shown in a time of crisis. I am confident in this company. We are navigating this one by leveraging our strengths and pursuing opportunities that will help us thrive over the long term. Tractor Supply is very resilient business with a proven business model. In closing, my thanks and gratitude go to the entire Tractor Supply team. Thank you. With that, Mary Wynn, we're ready for our Q&A.

Great. Christina, we'll open up the line for questions.

Certainly. At this time, I would like everyone who would like to ask a question to press star 1 on your telephone keypad. That is star one on your telephone keypad to ask a question. Your first question comes from Simeon Gudeman from Morgan Stanley. Your line is open. Please go ahead.

Thanks. Good morning, everyone. My first question is on thinking about demand, realizing and respecting that there's no guidance and we're in a fluid situation. Thinking about the stocking up in your business, maybe a hangover period and then some normalization. How are you thinking about it, and can you glean anything since you have a pretty diverse store base? Yes, you're more or less open, but states have different restrictions, and so maybe you have some insight around timing. But just trying to think if we're going to see some peaks and valleys here as we move through the next few months or quarters.

Hi, Timmy. Good morning. This is Hal. Good morning. Maybe I'll just kind of walk through a little bit around kind of the three phases that we have seen in our business and then just talk about how we're thinking about it. So the first phase is exactly as you articulated. The last three weeks of March, we saw substantive stock-up behavior, material stock-up behavior. As we said, in the month of March, our comps were 20%. Or for those three weeks, sorry, my apologies. For those three weeks, our comps were 20%, the comp of March 12%. And that was really driven in areas like livestock feed and pet food and things like propane, these very essential, most grocery-like categories that our customers rely on us for. As the first kind of week of quarantine really took hold across the country that first week of April, we did see some early give back across a hand, really more than just a few days. And then really for the full three weeks of April here, as we've said, our sales have been very strong. And they've really transitioned from kind of livestock and pet food feed stock up to much more of the things that I shared earlier on around the life out here lifestyle. Things from homesteading and fence management and fence building to poultry and chickens and coops to sustainable living to gardening to landscaping to lawn care. All those things are really what are driving our business right now. And what we're finding is that You know, our existing customers are shopping us. They're cross-shopping categories in an increased way. We're seeing re-activated customers, customers that haven't shopped with us in over 12 months in the store. And we're seeing new customers in our store at an all-time high. What I'd say is now I'm going to transition a little bit and talk about how we're thinking about it. There are a variety of goes-ins and goes-outs that are impacting our business. And we are monitoring all the data on a minute-by-minute, hourly basis to take very calculated decisions on how we're driving the business. There's several factors, and I'll hook each one of them quickly. One big factor is the fact that 50% of retail is closed. And so pick your number. Even if GDP is down 20% or 25% and there's a much smaller pie, But there's only 50% of retailers, so while it's a smaller pie, there's a bigger piece of the pie for those retailers that are open. And how that plays out as there's been a big category shift of spend during that time. If you look at things like food service and retail and clothing and apparel and entertainment and travel, all those are way down, significantly down. and I think there's a significant amount of category shift happening across consumer spending right now that we're benefiting from. The second thing I would say is where our stores are located. I think you're seeing this widely talked about in media, and you can see in the caseloads that are reported publicly, but we can also see in our results that The more rural the store is, the better the performance of that store is. And as we all know, just the COVID cases are, as a percent of population, not as dense in those areas. And also the rural areas of the country have remained kind of more so open during this time. The third thing I talk about is convenience. Our stores, both the format size the work we've done on our website to create convenient fulfillment options, and the location of our stores, typically with a very accessible parking lot, I think have benefited us from a convenience and being an inviting perspective. Now, those are a lot of the things that are positive. Some of those could have some shifts that go against us. I'd say on the flip side, you know, we're absolutely watching how are the reopenings occurring. How is GDP occurring? Is consumer spending starting to shift as things start to reopen? And what is that going to mean for us? We're also just watching unemployment overall. We're starting to watch unemployment, how it might affect rural areas. And would some of that rural benefit start to give itself back if certain industrial industries that are in rural areas don't reopen or continue to stay closed? We're watching all those nuances very, very closely. And I'd say Collectively, up until now, they've been very favorable for us, but it's very uncertain how they'll play out over the next, you know, months, back half of the year, and really until, you know, we reach to either a new normal or a vaccine and we get back to normal. Those are many of the things that we're looking at, and a lot of it goes in and goes out. Up until now, it's going our way, but we're being very calculated in all the actions we're taking. Kurt, anything you'd want to add?

No, I think you hit that, and we're recognizing that the favorable items and tailwinds today can shift at any one point in time, and it's just there's a lot of uncertainty, and that's, I think, what's reflected in the prepared remarks and the release that we issued today.

That's fair. My one related follow-up is, anything to glean positive or negative yet in oil markets? And, you know, you can understand the premise of that question.

Yeah, I mean, this is Kirk. I mean, certainly the oil market is a very fluid situation, so we're watching it very closely. And right now, our data is showing us that we're seeing limited impact or decline, but we recognize how quickly and how fluid the situation is. So two points maybe to give you on that, on how we're looking at it. First, I'd say we do anticipate, based on the forecast and the fact that there is such a strong supply with a real softness in the demand for oil, that there's got to be some supply taken out. And so the pressure on that local economy will likely exist. We do believe though, this is still somewhat different than historical experiences that impacted tractor supply like in 2016. And as an example, in 2016, we saw after coming off a peak, 1800 rig counts went down to about 400 in an 18 month period of time. In 2020, We're seeing that the rig counts have sustained over the last year or so around 700 to 900, a little over 700 today. Various forecasts show that that may be cut in half, and you could be seeing 700 down to 350. So it's quite a bit different in regards to the decline. The second point is just a reminder on our exposure. About 10 to 12 percent of our stores are in markets where there's oil economy. And historically, only a percentage of our products have been impacted. So it's a percentage of product in a small percentage of our stores. And we will be flexible and nimble in flexing in our product. But while this could prove to be a headwind in the near term, it, again, is a small percentage of stores. And we believe that the strength of our business model as needs-based can certainly perform well in this situation.

Thank you. Good luck.

Your next question comes from Michael Baker from Instanet. Your line is open. Please go ahead.

Hi. A couple of follow-ups there, and Hal, what a time to start as CEO, but I commend you on the job you're doing. I'm wondering if you can quantify some things, for instance, the spread between some of your more rural stores or stores that aren't in rural locations and or even quantify April to date relative to the 20% you're running towards the end of March. And I guess I'll ask up front to the extent that you pass on quantifying, although I think it would be helpful. I did want to ask about the cost. Why are we looking at $30 million to $50 million in the second quarter versus only $7 million in the first quarter, understanding that The impact in terms of the number of months in the second quarter could be longer, whereas this only started towards the end of March, but still that seems like a big increase. Thanks.

Hi, this is Hal Lawton, and I'll answer the first couple components of the question and then turn it over to Kurt to handle the last part of the question. We're not prepared today to share specific numbers, but what I would say is we are seeing material differences. First off, I'd start with all of our stores are generally kind of rural or suburban. And we have kind of shades of gray even in the context of that, the way we evaluate and look at our stores. And I guess what I'd say is the more rural the store is, the better the store is performing, speaking generically. And then the closer the city is to an urban area, the lesser the store's performing is. kind of speaking generically, and we can kind of map that out and really see the gradients of those sales performance across almost any category. And so, you know, as you all know, the bulk of our stores are in rural America and core rural America. So that has benefited us favorably. And I do think many other companies have been talking about a very similar trend. And then on April to date, I think what we would just say is the growth and the strength that we saw in March has continued into April. And we're very pleased with our April results so far. As we've said, the customer's category behavior has changed significantly. And in my view, in a very positive way, demonstrating the essential needs and orientation of our business and to the kind of people's lives and their livelihood and their families and their needs. And it's gotten very broad across landscaping, gardening, sustainable living, fencing, homesteading, home care. Things that really speak to the fullness of the product offering that we as a business carry. So, roll store is very strong. April to date continues to continue the momentum for March. And I'll turn it over to Kurt to talk about the cost Q1 versus Q2.

Sure. Michael, this is Kurt. And in regards to the range of these additional expenses and the difference between Q1 and Q2, first let me just point out the differences between between the quarters. You recognize from some of the business updates and releases we started to produce in the mid part of March and later that the efforts that we took in regards to wages, labor, and safety and cleaning began in those last three weeks of the quarter. Those expenses that we pointed out for Q1 were principally in the last few weeks of first quarter, and the expectation as we continue to do that and more just extends throughout the second quarter. Let me just talk about what these costs represent and then how it plays out. The bulk of these costs, about 80% roughly, is labor-related or benefits-related, and Hal spoke to much of those in his prepared remarks. Most of the remaining 20% is for supplies and safety and cleaning. And how that plays out throughout the quarter or even in the second half, as I mentioned, really depends on the extent and depth of this crisis. Specific to Q2, the low end of the range assumes that these efforts play out through all of April and May. The high end of that range would assume that we extend all of the wage, the benefits, or cleaning if the crisis were to require that all the way throughout the second quarter. So that's a way you can think about the cost and how it would impact into the second quarter.

Thanks. I'd like to ask a related follow-up with how it sounds like some of the sales trends in April are strong but different mix. So I presume that would have a less negative impact on your gross margins as it seems like it's being less dominated by Q and more by some of these outdoor areas, which I would think would have better margins than Q products. Is that a fair assessment?

Yeah, I think that's roughly fair. The other thing I'll add is, and again, We'll see how the next two months play out. But like most other retailers that are open, we have pulled back on discounting, on coupons, on promotions, in the spirit of not trying to drive too much traffic on one day, driving, queuing, just trying to have more of an everyday, ongoing, really what's the core of us anyway, an everyday low-priced business, which is what we do well every day. And so I think we'll see how the next couple months play out and how we need to manage that going forward. But that's something else that is part of our strategy that we've been trying to implement.

Great. I appreciate all the time. Thank you.

And we ask that all participants limit themselves to one question and one related follow-up. Thank you. Your next question comes from Stephen Forbes from Guggenheim Securities. Your line is open. Please go ahead.

Good morning. I wanted to start with the Rhody partnership, right? Clearly a significant accomplishment, right, to roll out the program in such a short period of time. But how could your same-day, next-day delivery offering evolve, right? As I believe you were or have been testing a few options over the past couple years, what made Rhody the right choice today and or should we expect incremental investments to you know, maybe alternative forms or options throughout this year as you test and learn from this initiative?

Hi, Steven. It's Hal. Thank you so much for your question. I hope you're doing well. Yeah, to start at the highest level and just say our aspiration is that customers can buy anywhere, anytime, and get it delivered or picked up or shop with us in any way they want. And we talked a little bit about this in early March in continuing the digitization and omnichannel efforts for tractor supply. Given the COVID-19, we rapidly accelerated the rollout of same-day and next-day delivery. And I can't say enough about the flexibility and the speed of urgency and just the implementation precision of Rhody, of our stores, and our technology team to really get this executed in a really good way. Rhody's been a partner of ours for some time. I have a really high regard for them. I worked with them when I was at Home Depot over five years ago now, and they serve a large number of retailers in a similar capacity. And since we already had 400 stores rolled out with them, from a speed perspective, moving national with them made the most sense. And they do an excellent job. I've had several orders in the last couple of weeks delivered myself, as has Kurt. What I would say is, though, we know that we need to have a best-in-class solution, and that requires us to test a variety of options. And so we're in the process of doing that. We have the Rody solution as they have kind of built out, and it's kind of their normal Rody solution in all of our stores right now. We then have taken a subset of stores. We have two different subsets of stores, each 250 in size, where over the next two months, we will start rolling out some different pilots. One of those will be a dedicated truck and a dedicated trailer and a dedicated driver that are all owned and operated and staffed with a tractor supply team member. So it'll be a tractor supply-branded truck, a tractor supply-branded trailer and also truck supply team member who will be responsible for the deliveries. They also will work our stores to do additional B2B intercepts and to drive kind of that more Salesforce-oriented-like delivery model. And then in another 250 stores, we're working with Rody to replicate something that's in between their offering and what we're doing with our own branded trucks to have a dedicated truck and a dedicated trailer that It expands the offering of products that they can deliver, also slightly lowers the cost. And we'll evaluate those three offerings over the next few months and then provide a further update and then, of course, roll out the solution that we think is the most needed by our customers. Again, in summary, we know that this is where we have to go. Incredibly pleased with the speed at which we moved. And we're continuing to test and pilot to make sure we've got the right solution. And at the end of the day, we're committed to taking advantage of this opportunity. And as we get to our new normal and then hopefully back to normal, for tractor supply to have emerged in a much stronger place than we were when we started the coronavirus.

Thank you for that. And then just a quick follow-up. I think I caught you mentioned strength in new customer growth. So I don't know if you can provide some color on how these customers, maybe whether it's demographic or their baskets, have compared to the average customer. Are they shopping multiple categories or just a few? And then comment maybe on the initial initiatives around customer retention as you think about growing your customer base.

As I said in my prepared remarks, we're seeing unprecedented, really record-breaking new customers shopping with Tractor Supply. And those customers are shopping with us both on our e-commerce platform as well as in-store. They're leveraging buy-on-line pickup and store curbside delivery. As I mentioned earlier, there's a large percentage of new customers that are using that. But as they shop with us inside of our stores, they're shopping across a whole range of categories, whether it be pet food or whether it be a more sustainable lawn care landscaping type offering. So we're seeing broad shopping behavior from them, and we're seeing them really engage in many of our new offerings that we've rolled out in the last few weeks, including curbside delivery. As it relates to customer retention, I'm really pleased with the efforts that the marketing team has taken over the last few weeks as we've gone in and put in a welcome to tractor supply kind of customer kit in place, and day one, day seven, day 14, what are we doing with these customers? How are we touching them? How are we reminding them that we're here for them? How are we continuing to engage with them? We're doing that, and we're doing that not only just in a generic way, but we're also doing it based on the specific categories that they purchased and the way they purchased with us. And so, If they bought online with us for the first time, that way we kind of say, hey, wasn't that great? Hope you enjoyed your experience. Let me tell you about some other things we're doing. If they bought pet food, we're saying, hey, thanks for buying pet food. By the way, you can sign up for a subscription for us, but you also have a bunch of other categories you can shop with us. So a really textbook-like kind of new customer onboarding program that we've rapidly implemented over the last few weeks to make sure that these new customers are retained.

Thank you, and stay well, everyone.

Your next question comes from Michael Lasser from UBS. Your line is open. Please go ahead.

Good morning. Thanks a lot for taking my question. Hal, you laid out a lot of the macro and big picture uncertainties that are going to impact your business. But under what conditions do you think your comps will turn negative? And when do you think that critical point is when you'll know?

Michael, this is Kirk. Let me take that. Hal pointed out a number of the uncertainties, certainly the things that are favorable to the business right now, and all the potential for uncertainty in the near term and even in the back half. The key factors that we're looking at, and he mentioned those, we're keeping a close eye on unemployment and consumer sentiment. The timing and extent of the COVID-19 health crisis could impact it. And is there a shift to the impact on rural markets? And then weather always can play a bit of an impact if you just threw that in there outside of some of the crisis type items. And those would be the primary ones that we're watching. Most of those are tailwinds right now. And if those were to flip, Any of those or a combination of those could have that level of impact on the business. But importantly, we're confident in our business model and never been more evident than these times right now the strength of our model and being a needs-based business in the rural market. So as you can hear, we've got a lot of confidence in our business model and our ability to weather those situations.

Yeah. Just to follow up on the timing question, at what point do you exit, traditionally exit the seasonal lawn and garden category? Is it possible that all of that's just been pulled forward right now to this timeframe because folks are staying at home and do have some time on their hands? And then as part of that timing question, there's been some massive decline in a lot of commodity costs, not just oil, but across the board. When do you expect to start to see that deflationary impact on your business, and what's a reasonable expectation for deflation in the back half of the year?

Yeah, Michael, this is Kurt. Why don't I first address the question on inflation, and then I'll toss it over to Seth on timing of product sales. On the inflationary side of it, as I indicated, we saw some slight inflationary benefit in first quarter. In those particulars, as you mentioned, we look at it similarly. There are indications the near term on both oil and corn that in the near term there's more indicators of deflationary pressures in the business and we would anticipate as it works its way through the supply chain that in both of those cases we might start to see some modest deflation even playing into second quarter. And while hard to predict If following all the forecasts in both of those categories, we would see that that pressure may begin to increase a bit more in the second half of the year. And we're going to be watching it carefully. This is about the best we could probably indicate on prediction of this at this point.

Great. Thanks, Kurt. Hey, Michael. This is Seth. Hey, Seth. Hey, in terms of your question as far as potential pull forward and just kind of lawn and garden, You know, as you look at the current consumer trends and the shifts in spending activity that Hal spoke to earlier, we believe that there continues to be a runway ahead of us. Because not only are we seeing the strength of this among our current customer base, but this is also one of those areas where we're seeing new customers engage at Tractor Supply with some of the new brands that we've launched, the ability to partner with some of our key partners in these areas. We've continued to focus on areas such as gardening and increased those hobbies over the last few years, basically going just over 400 stores in certain key live goods to now over 1,700 stores. And then when we shift into the summer months as well, you know, we believe that consumers will still be around the house. And we're really starting to pivot some of our merchandising tactics and activities to linking parts of our center court, as well as go after some of these backyard activities, knowing that customers are going to continue to be around the house for the foreseeable future. So, Really proud of the work that the merchants are doing, not only getting product back in stock to make sure we can be that essential retailer for our customers, but also as we look ahead to the future months to be able to go where the customers are going, where we believe the hobbies and activities are going to take place.

Thanks a lot, and best of luck.

Thank you.

Your next question comes from Kate McShane from Goldman Sachs. Your line is open. Please go ahead.

hi good morning thanks for taking my question i was just wondering if you could help us understand the puts and takes with regards to margins given the increased e-commerce demand you're seeing especially in light of your change to one day delivery and increased file line pickup and store and how do you think this evolves as the year goes on yeah hey kate this is kurt uh in regards to the margins

Let me just hit the gross margin quickly and then SG&A. While we've seen strong growth, as Hal mentioned, online, he also mentioned a real strong percentage of that being the buy online pickup in stores, which is really the most effective, efficient way for us to sell online merchandise and not a significant pressure in Q1 on the gross margin. More specifically, the impact on gross margin, We saw about a 20 basis point impact on the shift in mix in the last few weeks of the quarter. So if you normalized for the mix shift in the last few weeks, the flat gross margin on a more comparable basis outside of that was running about 20 basis points up. That's about in line with our typical last few quarters. From the expense side of the operating model, I pointed out the 10 basis point deleverage from the new DC, which we've cycled starting in Q2. And the net impact of the incremental COVID expenses offset by the favorable settlements were a few basis points. If you normalize that, SG&A actually, the seven basis point leverage would be closer to more about a 20 basis point leverage on a comparable basis.

Okay, that's helpful.

Thank you. Your next question comes from Chuck Sarenkoski from North Coast Research. Your line is open. Please go ahead.

Good morning, everyone. Could you talk about how the balance sheet might normalize after this crisis is over? You've built up debt, built up cash. Is that an opportunity then to perhaps get quickly back into stock repurchase or dividend policy? What might happen there?

Yeah, Chuck, this is Kurt. As we mentioned, we took some precautionary measures in this environment and in our capital allocation strategy. shifted our priority to liquidity and cash. That's the right prudent thing to do. The business is strong. And as we work through this crisis and the macroeconomic factors and the uncertainties begin to become less uncertain and there's more normalized business, we would anticipate shifting our capital structure back a little bit more to where we previously were. At this point, we're going to emphasize and for utmost precaution just maintain a structure with additional cash. We believe that gives us a real strong position if there were to be a worst-case scenario And I would not anticipate reengaging on share repurchases while we're borrowed on these additional loans at this point. So we could see ourselves paying those down. We have the ability to prepay whenever we want. And upon prepaying down, we would reevaluate our capital structure, particularly when to reengage in share repurchases.

And finally, thanks for that, Kurt. And finally, Hal, could you discuss what categories are in the homesteading purchase group that you mentioned?

Yeah, so it's good to talk to you today, Chuck. I would reference those in terms of just things people are really doing around their farm and their ranches to just maintain their homes. So, you know, we're seeing, if you think about in our stores, if you want fencing, T-posts, You know, you're looking at corral gates. You're looking at chickens. You're looking at chicken coops. You look at people creating gardens in their backyard and then buying the vegetables and the rakes and the hoes and the tillers to create those. It's really just all the things that our customers do every single day. You know, an incredibly terrible humanitarian crisis, but a byproduct of it is that families are spending more time at home, and they're spending more time together outside, and they're wanting to keep busy. And we have really all the things. We're built for that. We are purposely built to enable people to do those sorts of activities around their homes, their land, their ranches, and their farms. That's the sort of activity that we're seeing, that's the sort of categories we're seeing lift and drive the business.

Thank you very much. Good luck for the rest of 2020. Thank you.

Christina, this is Mary Wynn. Now that we've hit the top of the hour, that will wrap up our call. So, everyone, thanks for joining us today. I'm around if you need anything, and we look forward to talking to you in July.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.