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.