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.