Tractor Supply Company

Good morning ladies and gentlemen and welcome to Tractor Supply Company's conference call to discuss second 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 Wynne Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Wynne, please go ahead.

Thank you, Carol, and good morning, everyone. On the call today are Hal Walton, 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 question and answer 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 its forward-looking statements are reasonable, it can give no assurance that such explanations or its 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'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 undertakes no obligation to update any information discussed in this call. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick related follow-up. I appreciate your cooperation. We will be available after the call for follow-up. Now it is my pleasure to turn the call over to Hal.

Thank you, Mary Gwen, and thank you to everyone for joining us this morning. Before we address our results for the second quarter, I thought I'd just step back, take a moment, acknowledge the environment in the United States right now. There's no doubt we're in a generational moment. Before the quarter began and for the entirety of this quarter, we've continued to deal with the COVID-19 pandemic and really all that's come along with it. And then towards the end of the quarter, we've seen widespread protests and a focus on racial inequality in America. We're a purpose-driven company at Tractor Supply, and through all these times, We've stepped back and led with our values, and I'm incredibly proud of that. Been so impressed and inspired how our team has come together and responded. And in all situations and across all functions, the team has moved with speed and focus to address this dynamic environment while also executing and delivering on record-breaking sales. Start out by just talking about team member health and safety. We've taken extensive and proactive measures in this area. Masks are required for all team members and customers in all stores. Each day, all of our team members take their temperature and go through a symptom screening before coming to work. We are in the process of implementing biweekly testing for over 500 team members who travel, and we will be conducting sample testing within all our DCEs to stay on top of that robust, large population. Additionally, we've arranged for robust case management to conduct contact tracing and provide healthcare support for all team members who are impacted by COVID-19. And also, I thought I'd add, in areas where there's been widespread community outbreaks, such as in Waco, Texas, and Casa Grande, Arizona, where we have distribution centers, In those areas over the last six weeks, individually each, we sent in rapid response teams to conduct facility-wide testing in concert with contact tracing and case management. In summary, just want to reinforce how committed we are at Tractor Supply to being a safe place to work and shop, and how committed we are to implementing industry-leading best practices across all parameters of safety. We're also committed to advancing a diverse and inclusive culture built on our core value of respect. To promote social progress, we invested in a dedicated time of reflection for all 38,000 team members to discuss the importance of diversity and inclusion in our company. We did this team by team by team. Additionally, over the last few weeks, we published our first ESG report. We hired a director of diversity and inclusion. and we donated to causes that support equality and strengthen our local communities. And you can expect many more actions from us on the diversity inclusion front moving forward. Now, turning to the results of the quarter. We experienced unprecedented sales. Notably, they were strong the entire quarter, all three months. We had consistent, elevated levels of sales each week, and we had record growth across all channels, product categories, and geographic regions. Kind of turning to the numbers. Net sales grew approximately 35%, with comparable store sales plus 30.5%, driven by a comparable transaction count increase of 14.6%, and a comparable average ticket increase of 15.8%. Diluted earnings per share grew 61% to $2.90. And e-commerce. saw significant growth, strong triple-digit growth, and increased significantly as a percentage of our overall sales. The work we did in the quarter to improve our e-commerce capabilities has certainly resonated with our customers. Kurt will walk you through greater details on the quarter and our outlook and walk you through some more numbers here in a moment when I turn it over to him. But I thought now what I'd do is shift to some operational highlights. During the second quarter, we announced several strategic investments in our team members who are at the heart of our relationship with our customers. Early responses to the pandemic included paid sick leave and expanded benefits and appreciation bonuses. The benefits and appreciation bonuses totaled $35 million in Q2. And then as we progressed through the quarter, it became clear that we were moving to a new normal, really operating for the foreseeable future with COVID-19, and I'll talk more about that later. And so consequently, we made the decision to permanently enhance our compensation and benefits, including wage increases across all of our stores and distribution centers of a minimum $1 per hour for all hourly team members. In addition to the wage increases, More than 2,000 frontline managers at our stores and distribution centers are now receiving annual restricted stock units with the goal of helping fuel their entrepreneurial spirit and allowing them to benefit in the company's long-term success. We also took the opportunity to ensure we're supporting the health and wellness of our team members. And what we did was we chose to offer health care and benefits to our part-time team members. We're committed to investing in our team members as we believe they are a key competitive differentiator with our customers. Operating in elevated comps for 13 weeks presents a number of challenges. During the second quarter, we added over 5,000 net new team members, primarily across our stores and distribution centers. These team members were critical in our ability to service our customers at these elevated volumes. Also, to facilitate our distribution network's capacity, we opened a new mixing center in Florida. And also, we work closely with our vendor partners. They've been key contributors to our success and supported our supply chain with speed and nimbleness. We'd like to express our sincere appreciation for their collaboration and support of our mutual customers. Our focus remains on working together to ensure we remain in stock for merchandising categories that make us the dependable supplier for products our customers need to support their lifestyle. During the quarter, we rolled out curbside pickup, same-day, next-day delivery, relaunched our website, and in early July, we rolled out our new mobile app. And we've seen acceleration in adoption rates of technology initiatives with multiple years of consumer adoption being compressed into 10 or 12 weeks' time. Our e-commerce results were impressive with triple-digit growth increases. And this triple-digit growth increase included buy online, pick up, and store orders. This sharp acceleration in consumer shopping preferences is becoming ingrained in our customers' behaviors. And we're fostering this relationship in a digital way through frequent communications, whether it's in digital marketing or in email. And we're accelerating our focus on the transformation of our digital platforms and services. We have an opportunity to create deeper customer relationships of scale, and we're laser focused on that opportunity. Speaking of customers, during the quarter, another investment we made was in our brand building initiatives. Given the current dynamic, we capitalized on the opportunity to shift our marketing spin, which had been traditionally print media, to more digital and national TV. And notably, we launched our first national advertising campaign in over a decade. We launched the initial campaign in March during the early weeks of the COVID pandemic. And the campaign has continued to evolve. And what we're working on is matching the country's mood and the cycle of the pandemic. And we've done five different commercials in the last four months. Our most recent TV ad has been focused on reinforcing tractor supplies as a safe and convenient place to shop for all you need for your summer out here. Our research indicates that our unaided brand awareness and tractor supply being in the consideration set for shopping trips are both increasing. More importantly, we had more customers shop with us than ever before as we experienced robust growth in our customer base with increased sales across existing customers, new customers, and reacquired customers. And so what I thought I'd do is to share with you five kind of key observations of our customer behaviors based on the market data and research that we have. The first observation I'll mention is we're growing trips and our customers are spending and our existing customers are spending more with us. Our core customers, our existing customers are shopping more frequently and their baskets are larger as we benefit from their trip consolidation. And these customers are shopping more categories from us than they ever have before. And we finished the quarter with close to 17 million Neighbors Club members. The second observation I'll share is that we're gaining new customers at the fastest rate in the history of the company. For the second quarter, we saw 3.3 million identifiable new customers, and that represents almost over a 14% year-over-year increase. The third observation is that we're reengaging our lapsed customers, and they're returning to shop with us at a higher rate than ever before. For the quarter, we reactivated almost 2 million customers, which was an increase of 42% year over year. The fourth observation that I'll share is that the new customers we're acquiring, as compared to our core customers, they're skewing younger, higher income, and closer to 50% female, which is an increase of 10 percentage points compared to our historical trends of 60% male. And the fifth and last observation that I'll share is that the new customers are becoming repeat customers at the fastest rate ever. This is at a time when our overall customer satisfaction scores are at an all-time high. We believe key aspects to our customer service, such as being a convenient place to shop, a tailored lifestyle-oriented product category, our legendary customer service, and our strong in-stock levels are important to keep these new customers engaged with our brand. That's what's attracting them to us. Notably, purchasing patterns for our new and re-engaged customers are very similar to our existing customer behaviors and product category engagement. Looking ahead, we know our opportunities to capitalize on these trends and to nurture these customers and to gain market share. And we have strong plans in place to retain these customers with marketing and product offerings, continuation of our national advertising campaign, but robust digital onboarding CRM toolkits. are being executed. Taking a step back from our Q2 results and actions, I want to share broadly what we're seeing from a macro perspective. Key trends we're seeing that are working to our favor include rural revitalization, trip consolidation, omnichannel adoption, self-reliant lifestyle movement, including DIY trends, Consumer spending shifting from travel and entertainment, that kind of trapped spend, is now being spent on home and land. And of course, pet adoptions, they're at an all-time high. In addition, we believe our business benefited from the government stimulus, an activity that helped bolster the economy. And while we're not planning for this government stimulus activity to continue, many of the other trends I mentioned, such as pet adoption and trip consolidation and rural revitalization, We definitely expect those to continue and to be prevalent with our customers over the next few quarters. Speaking of that, as we look ahead, we believe many of these consumer behaviors that we saw over the last three or four months are going to continue in the second half. But there's gonna be some nuances and some differences. For instance, we expect, we definitely expect consumers to still be very in tune with their land and their homes. It is their safe oasis. But the things that they will do will be different. As an example, in the spring, Customers were buying lawnmowers and kayaks and working in their yard on their fencing and their gates. And we think in the fall, some of that will continue. But instead of lawnmowers and kayaks, they're going to shift to buying things like patio heaters and firewood and fire pits. But they're still going to be working on their land and on their homes. They're also going to continue to do things that are more outdoor related, that are fall and winter oriented, such as things like raking leaves and winterizing their gardens. Overall, we believe there will be a higher level of category participation in the fall and the winter categories, just like there was in the spring. It's just going to be different, and it'll be higher than it's been in the past, and we believe that's going to continue into the second half. Now, looking at it even further, while we can't predict the future and there is a significant amount of uncertainty, our team is operating under the premise that we will still be dealing with the pandemic in the first half of next year. We're buying to that assumption and we're orienting our planning around that assumption. Over the past few months, we have navigated unprecedented conditions. We believe that our purposeful actions will allow us to emerge from it stronger and better than ever before. We have an opportunity to create and define our future and extend our leadership for years to come. And with that, I'll turn now the call over to Kurt to review the quarter in more depth and our outlook. before I come back to give some insights on our strategic growth initiatives and other drivers of Q3.

Thank you, Hal, and hello to everyone on the call. Before discussing our second quarter results, I'd like to recognize and thank our incredible team. I've personally been inspired watching everyone come together to face the current environment, embrace new ways of working, and decisively taking actions to serve our team and our customers in the face of unprecedented conditions. With more than 20 years with Tractor Supply, I could not be prouder to be a part of this team. This quarter was certainly exceptional and like no other in the history of Tractor Supply. The second quarter benefited from the macro trends Hal shared with you, while at the same time, we had a great spring. The weather was ideal across the country with favorable temperatures breaking early in the spring and consistent moisture providing a sustained spring-summer season. As we rank order our comparable store sales performance, the largest driver was our customers' desire for product categories that supported their out-here lifestyle as they shifted from other interests like travel, entertainment, and dining. From homesteading, land maintenance and fencing, backyard living, and caring for their animals and pets, our customers have clearly made the care and improvement in their homes and land a priority. This is also inclusive of living a more self-reliant lifestyle and adopting new hobbies like backyard poultry, gardening, and bird feeding. Now we believe brand awareness and the new customer performance that Hal discussed was the second largest driver of our comparable store sales performance. This was followed by tailwinds such as the favorable spring-summer weather that I mentioned earlier and the benefits from being an essential business that remained open during the early part of the quarter. Underlying these primary drivers, the government stimulus checks likely increased spending across the board in all categories. Now another way to look at this quarter's comparable store sales growth is to break down the comp between transitory factors, such as government stimulus checks and COVID-19-related sales, as compared to sustainable, more structural tailwinds like trip consolidation, the increase in new customers and reengaged customers, the rural revitalization trends, and the growth in companion animal ownership. While it is difficult to estimate the impact from each of these drivers, we believe that nearly half of the Q2 comparable store sales growth can be attributed to structural tailwinds, giving us a sustainable opportunity for growth. I'll wrap up my discussion on sales with a few other performance highlights. First, we had robust performance in our big ticket categories, which was generally in line with our overall comp sales growth. This was driven by strength in mowers, trailers, safes, pressure washers, and three-point equipment. Second, our Q products, consumable, usable, and edible, which is a representation of our strength of our core business had solid mid-teens comp sales growth. And lastly, commodity inflation was essentially flat for the quarter. Moving on to gross profit. Gross profit as a percentage of sales was 36.4% in the second quarter, an increase of 155 basis points. This increase was driven principally by reduction in the frequency and depth of promotion as a result of strong demand for our product categories. We also benefited from favorable product mix along with the lower transportation costs as a percentage of net sales. SG&A, including depreciation and amortization, as a percentage of net sales was 22.3%, a decrease of 33 basis points. This decrease was primarily attributable to significant leverage in occupancy and other fixed costs from the strong increase in comparable store sales. The leverage we achieved in these SG&A categories was partially offset by incremental costs related to the COVID-19 pandemic. increased store labor hours to support the significant increase in sales volume, and increased incentive compensation given our strong performance in the quarter. We incurred incremental costs related to the COVID-19 pandemic of approximately $55 million, including the appreciation wages for team members, PPE supplies, and incremental store labor hours dedicated to managing social distancing in the stores, as well as cleaning and sanitation. Operating profit increased nearly 56% with operating profit margin of 14.1%, an improvement of 188 basis points. Net income was $338.7 million, an increase of 55%. Diluted earnings per share was $2.90, an increase of 61%. Turning now to our balance sheet, which remains strong. Merchandise inventories were $1.69 billion at the end of the second quarter, representing an 8.4% decline in average inventory per store. The reduction in average inventory per store principally reflects the robust sales trends and the solid increase in inventory turns during the quarter. Our supply chain and our vendors are executing at a very high level to meet the customer's current demands. We finished the quarter with $1.2 billion of cash and cash equivalents and no borrowings on our $500 million revolver. Moving now to our guidance for the third quarter. To date, we continue to see the strong sales momentum in the business. We expect this momentum to continue, albeit at a lower level than the second quarter, as we forecast delivering strong sales and profitability for the third quarter. While we typically don't provide quarterly guidance, given the unique situation due to COVID-19, we are providing our view on the third quarter. Given the level of uncertainty, it is difficult to provide guidance beyond Q3 right now. Factors contributing to a heightened level of uncertainty include the duration and impact of shelter-in-place restrictions and social distancing measures, the tapering of government stimulus benefits, elevated unemployment levels, and even the November elections. With this backdrop, we would anticipate the strength in our comparable store sales trends to moderate as we move through Q3. Overall, we feel very good about our business leading up to the November election cycle, but as we all recognize, it just creates a significant level of uncertainty for the consumers. For the third quarter, we expect net sales growth of approximately 16 to 22% and comp sales growth in the range of 12 to 18%. Net income is forecast to be in the range of $136 to $162 million and diluted earnings per share of $1.15 to $1.35. Two factors to consider that are impacting our outlook for the third quarter include COVID-19 related costs of approximately $15 to $20 million to ensure the health and safety of our team members and our customers, and $15 million for the prioritization of our strategic growth initiatives. And please keep in mind, as we previously disclosed, our move to permanent wage and benefit changes will cost approximately $13 million this quarter as well. We are raising our capital spending outlook to support our strategic growth initiatives that Hal will discuss momentarily. Our previous estimate was $225 to $275 million. For 2020, we now anticipate capital spending in a range of $300 to $325 million. The vast majority of the capital spending increase is attributable to new in-store initiatives and supporting technology. Looking beyond the third quarter, we anticipate fourth quarter comp sales performance to be above our original expectations when we enter the year. As mentioned earlier, we expect the current trends to moderate throughout Q3 and we believe that moderation will continue into fourth quarter. As our outdoor seasonal sales become a lower concentration of our business and we get back to a higher mix of Q products. Additionally, we are planning for a more moderate holiday season than normal, but with stronger online growth. As always, we continue to be disciplined in how we manage our capital with the goal of delivering consistent, strong financial performance, while strategically investing in initiatives for long-term growth. We are taking actions to capitalize on the opportunity to capture and sustain a greater share of the market. Year to date, we have generated a significant increase in cash from operations. As Hal will discuss in a moment, we are reinvesting a meaningful portion of this incremental cash flow into our business with the strategic goal of emerging from this crisis stronger than before. The team at TractorSupply is excited about how we will continue to be an innovative leader in our channel. Now, I'll turn it back to Hal.

Thanks, Kurt. Let's look ahead. Because we think about our business, we have a unique opportunity to capitalize on the powerful customer trends that we're benefiting from now and to retain the record number of new and re-engaged customers we're seeing. And our goal is to capitalize on our ability to drive sales and higher productivity. Our financial strength allows us to stay focused on the long term, creating an even greater competitive advantage as we're investing to fuel long term growth. We continue to operate from a position of strength. And we're laying the groundwork for the future. And so today we're excited to introduce two new strategic initiatives that are being implemented across all stores within the company. The first is the build-out of our field activity support team, and that's focused on improving the productivity of in-store execution. And the second is the expansion of several technology and service enhancements to capitalize on consumer expectations. Turning to the field activity support team, this initiative is designed to improve our merchandising activities in-store, which represents the second largest body of work for our team members. This initiative builds on the successful rollout last year of the Tractor Way program, which addressed the largest area of work in our stores, the receiving and stocking of merchandise. And kind of stepping back, more broadly, our goal is to improve the productivity of our store payroll. And we want to shift hours away from tasking to customer-facing and keep finding ways to be as efficient as possible in what we do in tasking so that way we can drive customer-facing hours. And it's a very common retail approach. And so the work of the FAST team includes executing and merchandising programs like CenterCourt, NCAPS, planogram resets, seasonal programs, and sales driving initiatives. The FAST team, as mentioned, will allow the store teams to spend more time on customer service, help them improve their in-store execution, and ultimately lead to higher comparable store sales. These teams are in the process of ramping up, and we're hiring more than 1,500 FAST team members with one FAST team per district. These teams will be in the store starting in August, and the goal is for each FAST team to be in every store every week. And the focus of the team will be to improve store-specific measures and address sales driving activity. Over time, we would anticipate that these teams will receive support from our vendor partners, which is common in the industry, as the work is directly related to the on-shelf execution of their product. And also, the FAST team has the potential to help drive store-level efficiencies as the teams ramp up. This type of dedicated team is a proven strategy across sectors of retail, in particular in segments like home improvement. And they've been proven to drive customer satisfaction rates and sales, and they'll allow the store teams to prioritize customer service and continue to drive productivity through your labor in the store to get very efficient on your tasking. Our second initiative is building on our technology and services capabilities. And this includes the rollout of contactless payment in the quarter, expansion of our in-store Wi-Fi capabilities, enhanced ship-from-store online fulfillment, and increased delivery capabilities. Within the last few weeks, we had a soft launch of our new mobile app that allows for greater customer convenience and integration with our neighbors' clubs. We will begin to communicate more about the app to our customers in the upcoming weeks. We know mobile access is important to our customers and our new app makes shopping easier and more convenient. In addition, we're expanding our ship from store capabilities. We're adding subscriptions at the point of sale in our stores and implementing contactless payments at the registers in our stores. Further, we're substantially increasing wireless access in our stores as we move from two access points in each store to five access points in each store. This is all tied to supporting contactless payments and our mobile point of sale hardware that we doubled the capacity of earlier this year. Our technology capabilities are becoming a strategic advantage for tractor supply. In addition to these two chain wide activities, We're also focused on driving space productivity across our stores. The first initiative that we'd like to talk about today is driving the productivity of our side lot. Typically, there's as much space outside of our stores in the side lot as we have inside the store. And the productivity of this space is substantially below the chain average. Our ability to drive higher sales per square foot through reworking of the side lot is in progress and we're beginning some tests right now here in the third quarter. In total, we'll do about 75 stores this year in terms of transformation of our side lots. And we have the ability to transform our side lot with expanded product offerings in select categories, enhancing the shopping experience of categories that are already out there. And it can be leveraged to offer wider product assortment in select categories, enter new categories, and also offer the convenience through the expansion of buy online, pick up and store and really what will become is buy online drive through for pick up. This transformation can help us continue to keep our customers engaged with Tractor Supply and take our customer experience to the next level. During the third quarter we will also begin testing a new interior space productivity program for our mature stores. Project Fusion is our state-of-the-art space productivity program designed to enhance the customer experience in our mature store base and give new customers that may not have shopped with us in the past more reasons to visit. Much like the FAST teams, space productivity programs of mature stores have been proven across retail concepts to drive higher sales per square foot when deployed from a consumer's point of view. An active space productivity program is also important to protect the brand image of the tractor supply. Similar to our side lot test, we anticipate completing about 75 Fusion stores in 2020, and there will be some overlap between the two pilots. Given the size of our store base, both of these efforts are a multi-year opportunity to continue to refresh our store base, create new shopping categories for our customers, and further drive comp sales. As we look ahead, we have a robust new product innovation pipeline. One key introduction is the addition of power tools from Akita, a brand known for their reputation for high-quality power tools. In Companion Animal, we have a significant reset of our dog food offerings occurring right now here in August. This reset will reallocate space for winning brands along with exclusive and new brand introductions. This will also allow for the expansion of our exclusive line with Miranda Lambert's Mutt Nation on the Farm and the addition of the Victor dog food. Our customers have been asking us to carry the Victor brand for quite some time, and we're excited to add it to our dog food offering. We will be the first national retailer of Victor. Victor Dog Food is online available today with the limited SKU offering, and you can start to see the product is currently rolling out in our stores right now. Across all parts of the store, we have exciting products for the fall and winter as we adapt to serving our customers in the current environment. Our stores will be ready for the change of seasons as we begin to move into fall. On the marketing front, we're excited to announce our partnership with Turner Sports during the coverage of the upcoming restart of the NBA season. We will be very visible throughout the season with our Stronger Together ad campaign that launched on Tuesday. To wrap up, we're focused on our ability to improve the execution in our stores, enhance our legendary service, and transform our stores to make them even more productive and more compelling to our customers. Product innovation and category expansions play a key role in driving our space productivity improvements. Our technology enhancements and service offering expansions are reflective of the macro trends we're experiencing, and we believe this is a structural shift that will be going on for a long time. Despite the current operating backdrop in the U.S., we have confidence that our strategy and execution will allow us to continue to build a stronger tractor supply. I and the rest of the team remain confident that Tractor Supply will emerge from the pandemic a stronger and larger company. My sincere appreciation goes out to each and every one of our more than 38,000 team members for their dedication to our mission and values. And with that, operator, we'd like to now open the lines for questions.

Thank you. If you would like to ask a question, please press star followed by number one on your telephone. As a reminder, we do ask that you limit yourself to one question and one related follow-up. Our first question today comes from Kate McShane from Goldman Sachs. Please go ahead.

Hi, thank you. Good morning. My question is centered around inventory. Inventory was down per store at a pretty strong flip versus your very, very strong comp. I know it's based on very strong demand, but how are you managing this and how do you expect the inventory piece to evolve over the next couple of quarters?

Hey, Kate. Absolutely. Thanks for the question. As I mentioned in my prepared remarks, operating at kind of 20%, 25%, 30% comps plus for 13-plus weeks. put some strains on the business that we've not seen historically and really proud of how the team worked through all those challenges to meet the needs of our customers. And inventory has certainly been one of those challenges. And we've taken a number of actions to lean into that in terms of increasing the visibility of forecasts with our vendors, obviously increasing receipts. and working very closely with them. In a minute, I'll ask Seth to talk a little bit more about our vendor interactions. But what I'd say is we would like to have more inventory in our stores. We would like for inventory levels and stock levels to be higher right now. And we're working very closely with our vendors to do that. In many cases, we're selling product right when it comes off the back of a truck. As an example, we are, I think, the largest seller of stock tanks in the United States. We're selling close to 2,500 of those a week. Our manufacturer is able to make 3,000 a week. As soon as we get a truck, they hit the floor or hit the outside and the side lot, and we've got wheel calls and customers taking them immediately off the lot. Again, we wish we had more inventory. We're very focused on getting more in our stores. We're very focused on getting our in-stock levels, and we're working very closely with our vendors on that. And I'll turn it over to Seth to maybe just make a few more comments on that front.

Thanks, Hal. Good morning, Kate. Yeah, so as Hal mentioned, obviously it's our desire to get as much inventory as possible. And one of the things that the merchant team has been doing each and every day is partnering with our supplier base and What I can tell you is that our suppliers are stepping up in ways in which how can we make sure that we can get each of the products that we sell today, but also looking for opportunity buys. And the team has been really nimble in looking at ways to reallocate space in our center court to product that's available when things are supporting the lifestyle that's out there, whether that be around backyard and activity and homesteading, things of that nature. So really pivoting to new items and new categories. And as we've gone that route, one of the benefits that we've also had is strong sell-throughs. So we have our replenished items that Hal talked about, but also when you look at our drive-out programs as well, we're sitting on about 30% less clearance inventory today than we were this time last year. just based on the overall strength of the business. So it's in a couple folds. It's number one, it's that we want to make sure that we can have that product in stock to drive each and every day bids for year-round programs. But then number two, we also have seen the benefit of strong sell-throughs, which have benefited in less clearance inventory, which has allowed us to go after opportunity buys, which are driving some significant comps right now as well.

Thank you. Our next question comes from Peter Keith from Piper Sandler. Please go ahead.

Hey, thanks. Good morning, everyone. Great results, and thanks for the thorough prepared remarks. Maybe a guidance question for Kurt. Given the solid gross margin that you guys posted in Q2, could you help us understand the potential continuation of some of these drivers with Q3 and what's guided via strong sales backdrops?

Yes, certainly, Peter. This is Kurt. And in regards to gross margin and the continuation of that, I'll first start by reflecting back on Q2, where we saw several factors that were favorable and across the board very ideal, and we were able to capitalize on that. And our priority will always be to continue to gain market share. while trying to balance good solid gross margin. So as we compare Q2 versus looking ahead, for Q3 and forward, we'll continue to stay focused on EDLP, which does support less promotions. As you just heard Seth mention, our inventory is in its cleanest shape, and so we anticipate some less out-of-season transition or clearance. And then We did see some benefit in Q2 on transportation efficiencies. We think that'll continue, but albeit at a more moderated level as we start to cycle some of the benefits. We anticipate strong gross margin performance year over year. The key drivers of product mix And promotional may not have as strong of a benefit in the second half, but we do continue to think that there's benefit from both of those and the opportunity we have with good, solid, clean inventory going into it. So you'll see from our guide that we anticipate momentum and continued year-over-year strong growth or performance in gross margin.

Okay, that's helpful, Kurt. Maybe another question just for Al. The new customer acquisition numbers that you gave were quite impressive. Now that you're several months into what seems to be elevated acquisition, do you have any observations in recent months on the ability to retain the people that have come into the stores perhaps in March and April?

Hi, yes. So we are monitoring repeat purchase rates. of all of our new customers and our reacquired customers. It's a regular muscle and analytical skills that we have set up. It was part of all the work the team did in Q1 of this year and into Q4 last year as we migrated the platform to Microsoft Azure and were able to leverage the analytical tool set that comes along with that. And what we are seeing is that we're continuously strong new customer counts. We're continuously strong reacquired customer counts. And we're seeing them shop with us a second and third time at a higher rate than they have historically with us. And those trends have been very consistent from the early days of the pandemic up until now. And as I mentioned, early on, they were probably slightly more rural. I'd say now it's slightly more suburban. Now it's kind of moderated. It's kind of reasonably mixed between suburban and rural. It does have a tendency to be a little more female, as I mentioned in the prepared remarks. And then online, whether it's direct ship sales or buy online pickup in store with curbside pickup, does over-penetrate some with those new customers there. But they're giving us a strong customer satisfaction scores. And in their surveys are saying they intend to repeat shopping with us. And then in their actions, they are continuing to shop with us as well. And our aspiration is to invest significantly in digital and national marketing. as well as specifically in our CRM toolkit to continue to engage those customers. And, of course, that's one of the reasons we hired 5,000 new team members this quarter, net new team members, was to provide that legendary customer service that we're known for and ensuring that we can serve effectively the increased counts of customers we have in our stores.

Our next question comes from Peter Benedict from Baird. Please go ahead.

Hey guys, good morning. So two questions. First, just maybe just on the cadence, you mentioned pretty consistent top line across 2Q and that that's continued in 3Q. So as you're looking forward, you mentioned expecting some moderation, which makes sense. Just trying to understand maybe what level of moderation you're thinking about there. I mean, you said in 2Q you thought maybe half of the comp was kind of sustainable, structural stuff. Is that a good benchmark for us to think about how maybe you're planning the balance of 3Q and then obviously with some more moderation in 4Q. That's my first question.

Peter, this is Kurt. Thanks for the question. In regards to the comp sales, I'll address the point you made on the second quarter first and then pivot from there to kind of help with the third quarter. We saw, while unprecedented volumes, amazingly consistent performance throughout the second quarter, all three months at a fairly strong elevated level. And even when we look at the two-year stack month to month, just continue to show the consistency between April, May, and June. And as I mentioned, the level of performance continues through July. We do anticipate that as with what we can see today and having a volatile and uncertainty in there that the reasons I mentioned in the prepared remarks, we could anticipate seeing some moderation. And to your point earlier, I believe the strength of the core business is a good indicator of where we would see the third quarter and the last half of the third quarter potentially more falling in the range. So we're giving some prudent evidence um evaluation to some of the tailwinds that could have less benefit um causing us in the third quarter while starting off strong to really end in the range that we gave in our overall guidance okay that's fair thank you and then just a question maybe for how or or stuff just around the animal ownership trends and you mentioned the dog adoption

but also I know the backyard poultry trend has been particularly robust. Maybe if you could rank order maybe the importance of those businesses within your overall animal business. You guys are serving equine, other large animals. So just so we can understand which are the most important categories. And then just what you're doing to kind of capitalize on that backyard poultry trend that's continuing to surge here. Thank you.

Hey Peter, this is Seth. You know, when you look at our overall pet and animal businesses, I'm talking about rank order of the two, I would kind of look at each of those a little bit independently. So, you know, for us, you know, we have a primary desire, obviously, to own the pet customer in the rural marketplace. And a lot of efforts are going in place, whether that be on our pet supplies resets, and continue to make sure that we have the product there as we're seeing these record adoption rates. The pet supplies business just showed incredible strength in the quarter, and we'll continue to see that strength. Obviously, Hal mentioned the pet food reset that's coming up as we continue to go where kind of the customer's going and where those trends are. And so, you know, pet for us is something we want to make sure that when we look at that, whether it be on the tractor side as well as with PetSense, that we want to own that category, obviously, in the real marketplace. Animal is obviously the other category on its own, and with those obviously it's multi-species approach. You talked about backyard poultry, you talked about equine, and the merchant team really puts together independent strategies to really attack each of those areas of the merchant categories. As we talk about localization and regionalization, the animal side is one of the areas that we see some of the most localized and regional differences at times, so that we can go after these categories. The team, you know, our feed rack is actually done on a store-by-store basis relative to the local assortment. And we obviously want to go after these things, and we're continuing to go after sales here. Backyard poultry is something that we have seen some really nice strength in. And just to give an example of some of the nimbleness that has occurred throughout the year, Our Chick Days, what we call Chick Days, which is one of our big center court events in the spring, is typically about a nine-week event. That event actually has not ended. So as we've seen the strength and the momentum in that category, the team was able to be nimble, reallocate center court space. Most of our stores are continuing on with that, and we'll continue with that throughout the fall as we want to make sure that not only we can capitalize on these trends but also be that dependable supplier as we're seeing new customers come into the category as well as current customers adding to the flock. So pet and animal both, I would just say, are going to be two of the primary pillars as we look forward not only this year but for the years to come to drive comp and drive the overall business.

Y'all, this is Mary Nguyen. I am GOACIP. Everyone, please keep to one question and one follow-up. We have a lot of people in the queue and would like to be able to get to as many people as possible. So thank you.

Our next question comes from Michael Losser from UBS. Please go ahead.

Good morning. Thanks a lot for taking my question, Hal. You've had a remarkable start to your tenure at Tractor Supply, but you are setting yourself up for a tough act to follow next year. So with all these productive initiatives in place, the significant amount of new customer acquisition, and knowing what you know today, do you think Tractor Supply can count positive in 2021?

Hi, good morning. Great question. And I don't think I've got the crystal ball in front of me on that one, and I would acknowledge just the wide range of uncertainties over the next 18 to 24 months. But I'll start by referencing what we talked about in our prepared remarks, is that we're planning for the COVID-19 pandemic to be a significant factor in the United States and in consumer shopping behavior at least through the middle of next year. And we're buying to that. We're building our assortment plans around that. And we're putting in place our operational plans to support that. As we look beyond that, that's why we're talking about growth initiatives today. We truly are focused on emerging as a stronger company than we entered this pandemic. And we're investing in things like our FAST team to make us more operationally efficient. We're investing in technology to make it easier to do business with. And importantly, we're looking at our format and our store and saying, how do we make it more productive? And for those of you that have followed our business for quite some time, it's been a while since we've gone on a strong space productivity improvement initiative inside of our stores. And we are very, we're very, it's early days, but we like what we see in terms of the initial actions we're taking on the space productivity program, Project Fusion in our stores. And we're doing 75 of those this year. And then the side lot has always been a, I think by all accounts, a big opportunity for us. We've got anywhere between 15 to 20,000 square feet in our side lot. that's kind of concrete slab. Typically it just holds most of our agricultural products out there. And you think about a lot of other retailers that have a similar side lot and how much more efficient they use that. And so we've got 75 stores that we're standing up this year that radically, radically transform our side lot. And our goal is to see how those two different 75 store tests play out as we get through the fall and then more to come from us on how we would expand that into next year and the years beyond. Like I said, we're investing from a position of strength right now. We're not sitting on our laurels. We want to lock in these new customers. We want to transform our business, make it a more attractive company to come shop at, and also a more efficient retailer as well. So, you know, at this point in time, I'm not sure I could predict the comp for Q3 of next year, but what I can tell you is we're leaning in to make sure that as we exit the pandemic that we've taken all the time we have here to make our company a better company exiting the pandemic.

Thank you very much, and good luck.

Our next question comes from Simeon Gutman from Morgan Stanley. Please go ahead.

Thanks. Good morning. A little bit related maybe for Hal. I wanted to ask you about the outside space and then the improvement productivity. You're doing around $300 a foot. I think that still includes your e-comm. The home improvement retailer you used to work at does about $500. And I'm just doing this to illustrate the difference. I know you're not a home improvement store. And then Kurt mentioned some structural tailwinds. Curious if the opportunities that you're testing here to drive sales per foot are incremental or should we be thinking big? and any sense of where these store tests, where you think the store productivity or sales per foot could land?

Yeah, so we're not prepared to talk about targets and what we think our goals are yet. We've got these 75 stores in each of the pilots that we're standing up here in the fall. And as we get more data and see the performance of those, we'll certainly share that as appropriate today. What I would say is both of the tests are step changes in the company's value proposition and in our format. And notably, inside the store, it's a significant step forward in how we allocate space, cutting in new programs and new categories and brands, more room for lay-down areas to bulk out product and drive sales. and much more clarity around the connectivity of aisles and looking at all, every SKU has to earn its way, every program has to earn its way into the store. And Seth and the team have just done a fantastic job in leveraging data to really redefine what that store should look like. The side lot is a, it's hard to express it in a little way, the radical transformation. you were basically taking the 15,000 square feet that we have there now shifting it over to compressing it to about 5,000, 6,000, 7,000 square feet through racking that kind of merchandises products. If you've walked our store, you'll see stock tanks, you'll see corrals, you'll see gates, and typically a lot of times they're laying on the floor bundled together. We're now putting these up and racking. We're now merchandising them. They're shoppable. We're opening up the drive-thrus with automatic gates that allow customers to drive through and pick up. We're looking at certain categories like garden. We're looking at feed and how do you drive through and do drive through pickup on feed. We also selected high volume buy online pickup and store order so you can do drive through buy online pickup and store. You don't have to wait out front for it. We're dedicating staffing for outside. We're putting new Theatro headsets in all of the stores so that that way our team members can talk to each other and manage what will be really in essence moved from a 15 to 18,000 square foot store to a 30 to 35,000 square foot store. The side lot will now be covered going forward much like what you might see in some of the more larger mass and home center stores. So it is a significantly different store than it was before when we're done with these productivity program rollouts. And we're very excited about the opportunity. It gives us an opportunity to really transform the productivity of the outside to bring new categories in. Seth was very involved and kind of led our Q transformation in 2009, and we think this has an opportunity to serve as another step change for us going forward.

and the SKU count goes up, Hal?

There will be some modest SKU count, but certainly that would be more reflective of the outdoor area where we've got new square footage that we're merchandising. But we're still very focused on space productivity and inventory productivity. But there will be some add of SKUs and some add of inventory to support those higher sales volumes that we're anticipating.

Our next question comes from Stephen Forbes from Guggenheim. Please go ahead.

Good morning. Maybe I'll just put the two questions into one here. The focus on the field activity support team, Hal, I believe you mentioned 1,500 team members, right, organized at the district level. And maybe just correct me if I'm wrong here, that's about 8 to 10 per district. And as we think about, you know, the funding for these, you know, some of your... big box peers, right, have gotten some vendor support for these type of initiatives. Maybe just talk about your dialogue with the vendor community, whether there will be some form of vendor participation, either initially or after you prove out, right, some of the productivity gains. And then just real quickly, right, where servicing versus tasking hours are today versus where you think they should be.

Yeah, so... Let me kind of hit a few of those. First off, we are working methodically through the core task that we put on our stores and looking to make them more efficient such that we can shift those hours to customer facing. And as you mentioned, that's been a program that's tried and true and been executed across many other retailers very successfully. We started that last year with the Tractor Way program. That is our number one task that we ask our team members to do is to receive a truck and get the product to the shelves. And we implemented with technology and with process a significantly improved approach to that. The next biggest task that we have is the merchandising activity that happens in our stores, whether it's seasonal resets. in-cap executions, what we call FDIs, which are resets of certain categories at the completion of a line review, et cetera. And that's our second largest activity. And as you know right now, we use existing labor in our stores to execute that. It's, again, tried and true across retail. When you can aggregate a team and have them focus solely on those executions and those tasks, they are efficient. You get more efficient because they're doing the same reset across 15, 20 stores at a time. You also get more efficient in your processes and your systems to drive that execution, whether it's the way you build your planograms, whether it's the way that you load your product on the... as it comes into the store on pallets and gets set aside etc and so we are very committed to just driving tasks down in our stores making it more efficient and shifting it to our customer service and this is all about how do we make our company more productive how do we continue to make our company all resources count as it relates to the funding for those headcounts As you said, it is very common in the industry for the vendors to support that sort of program, and I was kind of implying that in my remarks, because the activities are directly related to the on-shelf execution of those vendors' programs. We have a vendor conference in a month, and this is one of the discussion points we'll be having with them. And then also, over time, as our stores get more efficient in their tasking, I do think there's opportunity for our payroll to be more efficient in the stores as well. In the long term, while we have some incremental investment we're making in this team in Q3, and it will slide a little bit into Q4, in the long term, we think of this cost as transitory, not structural.

Operator Carroll, we've reached the top of the hour, but given the number of people we have in the queue, we're going to let the call go for a few minutes longer. So maybe we'll move to the next question.

Wonderful. Our next question comes from Scott Ciccarelli from RBC. Please go ahead.

Good morning, and thanks for squeezing me in there. I had another follow-up on the new customer front, just given its importance to your ability to kind of lap this year's trends. Hal, I was wondering if you guys have any data on who your new customers are and where they're coming from. In other words, are these customers new to the rural environment because they're moving out of urban and suburban areas, or is it more that They were shopping at other venues and migrated to Tractor Supply. And if it's the latter, what channels are they leaving to come to Tractor Supply?

Yeah, hi. It's a little bit of both, Scott. we all read the same data sets on kind of about mobile data and seeing where people are in the United States and you're seeing less density of mobile data in cities and you're seeing more density in suburbia and even more density than, you know, past in rural. And when we look at our customers and these new customers and reacquired customers, you know, we're seeing that. It's people have left the cities where, you know, we don't have stores. They're moving into suburban, they're moving out to the suburbs or they're moving out to the rural communities. They're embracing the out here lifestyle some and they're shopping tractor supply because we are that lifestyle. And then for the customer, but we also are gaining share with customers that are already out here, so to speak. And I think it's coming from a variety of places. And I'll hit each of the categories just to give you some examples. So in apparel, where our sales have been strong, as we said, all categories were double-digit comping. We think that we're benefiting from trip consolidation there. Instead of customers going to a standalone apparel retailer and they get about that one or two items and do they really want to kind of take on that kind of safety kind of element, They're coming into Tractor Supply. They're already going to be in there to buy maybe pet food or animal feed, and they're picking up their clothes while they're in there or boots or any other item that we have in the apparel area. Then you think about pet, all-time high pet adoption. A lot of new customers in the market were maybe customers that used to shop for pet food in, say, Mass. Our store being 15,000 to 18,000 square feet with a big focus on safety, and we've been very vocal about that. I think, you know, we're a kind of convenient location. We're probably, in many of our customers, in fact, our number one customer shopping criteria when we do our survey results right now is safety and cleanliness. And we have leaned into that from our actions and then also in our marketing. And so we think we're capturing some of that here. We're just people are more comfortable coming into our store. And then you go around on pet feed and You know, there we think we're taking share from some of our farm and ranch competitors who maybe are having more difficulty getting access to product right now. As you all know, some of the co-op chains are maybe having a little more of a struggle. And we think this is where the scale of Tractor Supply and being the size that we are and the connections that we have with our vendors, as Seth talked about earlier, really allows us to stay in stock and serve as that essential retailer for those customers. And we've been very focused, as Kurt was mentioning earlier, on everyday low price. Our pricing in pet food and animal feed right now is as sharp as it's ever been. And then you go all the way around into garden. And we think we've gained a lot of share in garden this year. And it's been a great spring, but we think even in the context of that spring, we've gained a lot of share. And I think that speaks again to our format. The merchandising team did a great job setting ourselves up for garden this year. We were planning on taking a big swing in that category this year. And it really worked out well for us as customers said, hey, I'd rather really go to a 13, 15, 18,000 square foot store where I feel comfortable going in. I can get in and out quickly, usually a standalone parking lot, not an overwhelmed parking lot. And the products that we have in our stores are equivalent to really what the other options they have elsewhere. It's a little bit of both, new customers, existing customers, and on existing customers, I think we're taking it from many of the places you would think they would have historically shopped. The last thing I'll mention is online. We've been aggressive online. I mentioned the triple-digit online growth that we had this quarter, and we think we're holding our own and taking share online as well, whether it's multi-channel players or from e-commerce only.

Our next question comes from Matt McClintock from Raymond James. Please go ahead.

Yes, good morning, everyone. And may I say congrats. Great job of executing. My main question here, Hal, is really as we think through everything that you just said on this call, and there's a lot that you said on this call, a lot of initiatives, I think you were already planning on focusing on space productivity before COVID. So I want to understand or better understand what initiatives, that you're talking about today were already in place before COVID, and what initiatives and investments are you making now that you're seeing how fundamental consumer behavior might be changing because of COVID? Can you kind of maybe parse those two things out just so we can understand the new things that you're putting in place?

Thank you. Hey, Matt, and thanks for the question. Yeah, I'd say two things I would say on that. First off, in March, mid-March, when we had kind of our meet and greet up in New York, we did talk about space productivity. And I'd say that was kind of early days thinking, if you recall, that we were sharing with you and saying we thought this was an opportunity and we were going to go start to put plans in place to attack the opportunity. The first thing I'd say is just outstanding work by Seth and his team and John Ortis and his team and our construction team. We're in the midst of a pandemic and we're doing all this activity to support our team members, all this activity to drive the business in the midst of it. They're also putting in place plans to address space productivity strategically and look out 18 months, two years, three years. So first off, I'd say we didn't really have a roadmap in place in March when we talked about it. It was more of an idea. And over the last three to four months, the team has kind of not only walked and chewed gum at the same time, but jumped rope and pulled together what I think is a very compelling, potentially transformative plan for the company. The second thing I'd say is we are leaning into those tests in a more aggressive way, given the strength of our business right now, though we might have otherwise. You know, we're doing 75 of each one of those stores. which is a pretty aggressive swing for a pilot, but that just demonstrates the bullishness that we have in the solution and also the speed at which we want to execute once we get the data sets out of the pilots.

This concludes the Q&A portion of our call, and I would like to turn it back to Mary Wynn for final comments.

Thank you very much, Carol. And I'm glad we were able to get a few more people in there for the Q&A. So thank you all for your cooperation. This does conclude our call today. And thank you for joining us. We look forward to speaking to you on our third quarter call in October. And I'm around along with Marianne if anyone needs anything. So thank you all. Take care.

Thank you. And once again, this does conclude today's conference call. Thank you for your participation. You may now disconnect.