Tractor Supply Company

Good morning ladies and gentlemen and welcome to Tractor Supplies Company's conference call to discuss fourth quarter and fiscal year 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, operator. Good morning, everyone. Thanks for taking the time to join us today. And I do hope you're all staying safe and well. 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 question and answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, This call may contain certain forward-looking statements that are subject to significant risk and uncertainty, 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 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 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. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP are included in today's press release and presentation, which are posted on our investor relations website. 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. Thank you for your time and attention this morning. Before we get started, may I ask you to please turn your attention to our year in review video that can be seen on our webcast.

Good morning, and thank you everyone for joining us today. I hope you enjoyed the opening video. We will all always remember 2020. And while we'll never recall the year with anything close to fondness, at Tractor Supply, 2020 will be remembered with a small measure of pride as we reflect on our efforts to take care of our fellow team members, support our customers, and invest in the future. None of these results would have been possible without the hard work and dedication of our team. And I want to express my sincere appreciation and gratitude to the more than 42,000 tractor supply team members for how they have lived our mission and values and worked together to take care of each other and our customers. My thanks also go out to our supply chain and vendor partners who've done an excellent job supporting our business. The environment continues to be uncertain and challenging. Vaccines are on the rise, but our country is still very much in the midst of a pandemic. Given the pace of the vaccine rollout, it will be at least fall before we're back to some form of normality. Throughout the pandemic, our utmost priority has been to take care of the health and safety and well-being of our team members and customers. We spent tens of millions of dollars on cleaning and masks, plexiglass and sanitizer. We've provided almost 700,000 hours of COVID sick pay. We've conducted nearly 20,000 COVID tests, and we rolled out company-wide a contact tracing wearable devices for all team members to use. We will continue to spare no expense in this area in 2021. In addition to rolling out industry-leading safety protocols, we've also shown our commitment to our team members through appreciation bonuses, increased wages, and broader benefits offerings. At Tractor Supply, we are committed to being a part of the solution for our team members, our customers, and our communities. And we remain steadfast in that commitment going forward. As we talk now shifting and talking about 2021, we believe there is as much uncertainty this year as there was in 2020. How fast will vaccines roll out? How will the derivatives of COVID impact transmission rates and antibody effectiveness? Will there be another stimulus? How will consumer spending evolve through the year? Given these questions and all the other elements of uncertainty, we're planning for fiscal 2021 based on a range of potential outcomes. The initial guidance we're providing today is consistent with our long-term algorithm that we shared with you at our enhanced earnings event in October. Importantly, our 2021 outlook reflects the strategic initiatives that are foundational to our Life Out Here strategy. With the actions we're taking, we are committed to emerging from the pandemic stronger than before. Now let's shift to the business review section for the fourth quarter of 2020 in the fiscal year. We delivered another strong quarter that exceeded our expectations. In the fourth quarter, we had strong net sales gains of 31.3%, with comparable store sales up 27.3%. We continued to gain market share and benefited from customer shopping with us with larger baskets. All customer segments and all value segments experienced growth. For the fiscal year, we added over $2 billion in revenue. and we reached over $10 billion in sales for the year, a significant milestone for the company. Once again, our quarterly results were remarkably consistent across all periods of the quarter, across all product categories, across all geographic regions of the country. Also, both our transactions and ticket growth were seen and were very balanced. For the third quarter, e-commerce saw strong triple-digit growth and increased significantly as the percentage of our overall sales. The work we did this year to improve our omnichannel capabilities has certainly resonated with our customers, as we've seen several years of digital adoption accelerate into just a matter of months. For the year, about 75% of our omnichannel sales were picked up at a tractor supply store, further reinforcing the importance of our stores to our customers. As we've experienced in the last several quarters, we continue to have strong performance and market share gains in our consumable, usable, and edible categories, with growth exceeding 20% for the quarter. In 2020, we had more customers shop with us than ever before, with increased sales across our existing customer groups, new customers, and reacquired customers. Now shifting to talk about a few other operational highlights for 2020. We added more than 10,000 team members to support the growth of our business. These new team members were critical in our ability to service our customers at these elevated levels and also flow volumes through our supply chain. We've pivoted our marketing spending for more traditional print media, digital and national TV. We launched our first national advertising campaign in over a decade. Our research indicates that Tractor Supply has become more top of mind with consumers as our unaided brand awareness increased over 800 basis points. We expanded our in-store and digital capabilities to make it easier and safer to shop at Tractor Supply. We were nimble and agile in offering curbside pickup and same day, next day delivery. We also relaunched our website and we rolled out a new mobile app, which already has over a million downloads. We celebrated the opening of our 1900 store in Oakhurst, California, and announced plans for a new distribution center in Navarro, Ohio, that is expected to be operational by the fall of 2022. We reinforced our longstanding commitment to ESG through improved disclosure and transparency. We also surpassed our original target of a 25% reduction in carbon emissions five years ahead of plan. If we just step back, overall, 2020 really highlighted the resiliency of the tractor supply team and illuminated the potential for the business. We participate in a large, attractive market. We have momentum. We're investing in our business through our Life Out Here strategy. We have the opportunity to create and define our future and extend our leadership for years to come. Before I hand the call over to Kurt, I'd like to address the impairment charge we took for the PetSense business. We recently completed a strategic review of PetSense. Although PetSense had solid sales performance in 2020, we reached the conclusion to reduce the number of new store openings planned over the long term and identified some underperforming stores to close. We expect to close 10 to 15 stores in 2021. Combined, this resulted in a pre-tax charge of about $74.1 million, or 49 cents per diluted share after tax. PetSense offers a differentiated shopping experience to the suburban and rural pet owner. As mentioned, the business is currently doing well overall. We remain committed to growing and investing PetSense. Earlier this week, we named Matthew Rubin as FTP and General Manager for PetSense. Matthew brings a strong retail background, and I'm confident that he'll be an immediate asset to the business. I look forward to sharing more about our plans with you over time. Now, Kurt will walk you through greater details of the quarter and the year, along with our 2021 outlook, before I return to give you an update on our Life Out Here strategy.

Thank you, Hal. And hello to everyone on the call. This year was like no other in the history of tractor supply as we delivered record sales and financial performance for the year. The fourth quarter continued to benefit from the macro trends that have worked to our favor. As we rank order our comparable store sales performance, the trends that I shared with you from the second and third quarter continue to play out in our sales performance. The largest driver continued to be our customers' desire for product categories that support their out-here lifestyle, as they shifted spending away from travel, entertainment, and dining to creating their own experiences. For tractor supply, this included purchases such as outdoor recreation and living, like UTVs and outdoor fire pits, along with all those indoor projects and winterizing their homes and equipment. This trend also includes living a more self-reliant lifestyle. The adoption of new hobbies like backyard poultry, hunting, gardening, and bird-finding had continued, and we believe these hobbies and trends are becoming more ingrained in our customers' behavior. The strong brand awareness and new customer performance that Hal discussed was the second largest driver of our comparable store sales performance. This was then followed by tailwinds such as emergency response-related demand due to the hurricane activity and various strategic initiatives such as our investments in digital and the omni-channel experience, same-day delivery, and our private label credit card. Exclusive of the modest hurricane activity benefit, the weather impact was generally neutral compared to the prior year. We had robust performance in our big ticket categories, which exceeded our overall comp sales growth. This was driven by broad-based strength, with safes, recreational vehicles, utility vehicles, trailers, and generators representing the top five product categories. Fourth quarter gross profit exceeded our expectations due to higher demand for our products and a reduction in promotional and clearance activities. These factors were partially offset by higher transportation costs as a percentage of net sales. The result was that gross margin as a percentage of sales was 34.6% in the fourth quarter, an increase of 75 basis points. Moving on to SG&A. The 46 basis point increase in adjusted SG&A as a percent of net sales was attributable to three primary factors. First, incremental costs related to the COVID-19 pandemic. Second, increased incentive compensation due to record sales and profit performance in the quarter. And then third, investments in our strategic initiatives. The additional costs incurred due to the COVID-19 pandemic included appreciation bonuses to team members across stores and distribution centers, as well as additional labor hours and supply costs dedicated to cleaning and sanitation to enhance the health and safety of team members and our customers. COVID-19 related incremental costs were approximately $33 million in the quarter And that compares to our estimate of $15 to $20 million going into the quarter, which resulted from an unexpected resurgence of COVID-19 cases late in the year. For the quarter, adjusted operating profit increased nearly 36% with operating profit margin of 9%, an improvement of 29 basis points. Adjusted net income was $193.2 million, an increase of 34%. Adjusted diluted EPS was $1.64, an increase of nearly 36%. For the year, we reached an adjusted operating profit margin of 10.1% and had strong growth in adjusted diluted EPS of 47.4%. Turning now to our balance sheet, which remains strong, merchandise inventories were $1.8 billion at the end of the fourth quarter, representing an increase of 5.6% in average inventory per store. This level of inventory is still a bit lighter than we would like, given the momentum of the business, and we are working with our suppliers and vendors to build our stock to support this momentum. During the quarter, we issued our first-ever public offering of debt, and we received investment-grade ratings from both Moody's and S&P, given our strong credit metrics. We issued $650 million in 10-year notes at a coupon rate of 1.75%. The proceeds from the debt issuance were used for refinancing and repayment of term loans as we plan to maintain a leverage ratio below 2.5 times. Fiscal 2020 was a year of strong cash flow from operations, which totaled $1.39 billion, an increase of $582 million, or 72%. For the full year, we returned a total of $518 million in capital to our shareholders through the combination of share repurchases and cash dividends. We currently have approximately $1.1 billion remaining on our authorization for share repurchases. Today, our board reconfirmed our commitment to returning cash to shareholders through a 30% increase in our quarterly dividend, which puts our dividend payments in line with our target of at least a 30% payout ratio. Moving now to our guidance for 2021 that is detailed on page 11 of the supplemental deck. The impact that the COVID-19 pandemic will have on the broader economy, the consumer, and our fiscal 2021 results remains uncertain. Given that backdrop, we are planning for fiscal 2021 based on a range of potential outcomes. To date, while still very early in the first quarter, we continue to see strong sales momentum in the business. For fiscal 2021, we expect net sales in the range of $10.7 to $11 billion. Comp store sales are anticipated to be in the range of down 2% to up 1%. For the year, we anticipate operating profit margin to be in the range of 9.3% to 9.6%, a significant step up when compared to our baseline 2019 performance. In fiscal 2020, approximately 90% of the operating margin year-over-year gain was driven by gross margin improvements. For fiscal 2021, we anticipate some giveback in gross margin and SG&A to slightly increase as a percentage of sales compared to fiscal 2020 on an adjusted basis. Now let's go into a little more detail on each of these areas. Our expectation is for modest gross margin contraction in 2021 as we anticipate incremental promotional activity along with higher freight costs. Partially offsetting these pressures are an expected benefit from vendor funding for our Field Activity Support Team program, while the FAS program expenses will be reported in SG&A, with a year-over-year impact of about 40 basis points on each. Breaking down SG&A. The leverage from reduced COVID-19 costs and more normalized incentive compensation is expected to be offset by ongoing wage pressures, investments in our supply chain and digital space, and higher depreciation and amortization expense. And as a reminder, the FAST program costs are reported in SG&A. As a result, we're forecasting SG&A as a percent of sales to slightly deleverage. Adjusted for normalization of the FAS program costs, SG&A is expected to remain relatively flat as a percent of sales. As always, we would encourage you to think about our business between the first half of the year and the second half, as this is in line with how we manage the business. As the model 2021, I want to point out a few items that will impact comparability. Appreciation bonuses impact the second and fourth quarters of 2020, while wage increases of about $13 million per quarter took effect in the third quarter of 2020. Costs related to the COVID-19 pandemic remain an uncertainty for us in 2020, as our utmost priority remains the health and safety of our team members and our customers. For the first quarter, we anticipate costs related to the pandemic will continue at elevated levels. Additionally, as you think about the cadence of 2021, our business performance is expected to be stronger in the first quarter as our comparisons step up starting in the second quarter. The first quarter of 2021 is forecast to have the highest comp performance of the year and, correspondingly, the highest operating profit growth rate. The second quarter is likely to be our most difficult earnings comparison of the year due to a couple factors. Please recall the second quarter of 2020 experienced the strongest gross margin performance driven by the least sales promotional activity. In addition, we expect incremental costs in Q2 of this year as we support the launch of an upgrade to our Neighbors Club loyalty program. Moving to below the line, we expect total interest expense for 2021 to be approximately $27 million, while our effective tax rate is anticipated to be in the range of 22.5% to 22.8%. Our capital spending is anticipated to range from $450 to $550 million, with more than 80% of that spending going towards growth initiatives. The vast majority of the capital spending increase is attributable to new in-store initiatives and supporting technology for a life out here strategy. Depreciation expense is estimated to increase approximately $50 million. This is above our recent run rate as we accelerate our investments in the business. For the year, we expect share repurchases to reduce our diluted weighted average shares outstanding by about 1% to 2%. For modeling purposes, we've assumed weighted average shares outstanding of about 116 million shares in 2021. That income is forecast in the range of $750 to $800 million, or $6.50 to $6.90 per diluted share. With our strong performance in 2020 and the current momentum in our business, the team at Tractor Supply is excited about the Life Out Here strategy. Our clear focus enables us to continue to be the innovation leader in our channel and emerge from the pandemic stronger than before. Now I'll turn it back to Hal.

Thanks, Kurt. So now we'll shift into 2021. As Kurt said, we're laser focused and we're focused on continuing to gain market share. We're going to do this in three different ways. One is capitalizing on our numerous macro trends benefiting us. Second is nurturing our existing new and re-engaged customers. And the third is executing our life out here strategy. So let's talk about each one of those in a little more detail. We believe that many of the consumer behaviors that we've seen over the last nine months will continue through most or all of 2021. These trends we've mentioned before, but they include rural revitalization, trip consolidation, omnichannel adoption, self-reliant lifestyle movement, consumer spending that's shifting from travel and entertainment to home and land, and an all-time high pet ownership. We exited the year with nearly 19 million neighbors club members. For the full year, over 11 million new identified customers and more than 6 million reactivated customers shopped with us at Tractor Supply. We're seeing strong retention with these customers, and we have plans in place to engage them with new capabilities, marketing, and product offerings. The third way we're going to be focused on gaining this share this year is our life out here strategy. And it really positions us to strengthen and transform the company. As we shared last quarter, there are five pillars to our Life Out Here strategy. The first is deliver legendary customer service. The second is advance our One Tractor capabilities. The third is operate the tractor way. The fourth is go the country mile for our team. And lastly, it's generate healthy shareholder return. So let me highlight some of our planned efforts that we have this year in support of our strategy. In 2021, we plan to open 80 new tractor supply stores and 10 pet cent stores. Additionally, we plan to remodel 150 to 200 stores with Project Fusion and to execute Project Sidelot in 150 to 200 of our stores. That brings our total construction activity for the year to 400 to 500 projects. This is a significant step up in the team's workload and also is being executed in the midst of COVID. Our Project Fusion remodel program is designed to drive space productivity and to enhance the customer experience in our mature store base. It is a combination of both changes in the store layout and imagery that creates a greater lifestyle impression and drives space allocation for product assortment. Fusion stores help create a more welcoming destination and offer a compelling showcase for our brands. Our sidelock program is a full transformation of the space, from primarily a storage location for agriculture equipment to a state-of-the-art outside garden, feed, and farm shopping center that also provides for greater convenience through the expansion of buy online, pick up at store. While still very early with both of these projects, we continue to be very excited about the sales trends we're seeing from the first tranche of fusion remodels and sidelock transformation projects. And importantly, the customer feedback has been overwhelmingly positive. Given the size of our store base, these initiatives represent a multi-year opportunity to continually refresh our store base and drive further comp sales. Another initiative we have is our FAF team. And they are already having a significant impact on the business. Since their implementation in August, they've taken on execution programs like executing merchandising programs like Center Court, end caps, planning around resets, seasonal programs, and sales driving initiatives. And what this is doing is it's really allowing our store teams to focus more on customer service and improve their Insta execution, and then really ultimately allow us to focus more on the customer and driving comparable sales. And we're very pleased with the fast rollout. We're also committed to ensuring our digital capabilities stay ahead of our customer expectations. We did this in 2020 and we'll continue to do this in 2021 and beyond. Big areas of focus for us in the first half are ship from store, search engine optimization, payment options like Apple Pay and Google Pay, subscriptions both online and in-store, and also the recent launch of our PetRX platform. As Kurt mentioned, we have plans in place for an upgrade in our Neighbors Club loyalty program by mid-year. And we anticipate that this new program will really drive incremental customer retention and also provide strong incentive to allow us to grow or share a wallet with our customers. As we get closer to the launch of our new Neighbors Club program, I look forward to sharing more of the details about the changes with you. Now, just stepping back, we're excited about spring. We believe our customers will continue to be focused on their homes as their oasis and creating their own experiences whether that's through things like gardening, grilling, or homesteading with their family and friends and neighbors. Spring Chick Days create great retail theater and support existing and new customers who want to expand their flocks. This was a big category for us last year, and we expect it to be so this year. And we will have a broader selection than we have historically of chicken coops. Tractor supply is the clear destination for this on-trend category. Given the strong trends we're seeing in our companion animal categories and the recent growth in pet ownership, we're focused on being a more complete resource for pet parents. In store, this includes relevant product assortment and brands, expansion of self-serve pet wash locations across 150 to 200 stores, and the build-out of 50 to 75 additional pet wellness centers. Currently, about 1,600 stores have vet services in-store through our mobile vet clinics. Starting this quarter, pet prescriptions can be fulfilled online at Tractor Supply, as I mentioned earlier. In our app, we're now offering on-demand veterinary advice from a team of experienced veterinary professionals. Our customers can call, chat, or email a team of veterinary professionals to get all their pet health questions answered. These expanded and new services allow Tractor Supply to offer a complete solution to care for our customers' pets, whether in-store or online. Our stores will be ready for the change of seasons as we move into spring. In closing, we have a unique opportunity. We compete in an attractive and fragmented market. We have a track record of success and outperformance in our business. We see a unique opportunity to capitalize on the powerful customer trends we are benefiting from and to emerge from the pandemic a stronger, transformed company. Our goal is to make strategic investments that enable us to create greater competitive advantage, capture the opportunity we've discussed, and generate shareholder value. With that operator, we would now like to open the lines for questions.

Thank you. I would like to remind anyone who would like to ask a question to please press star one on your telephone keypad. That is star one on your telephone keypad. And as a reminder, please keep your question to one and one related follow up. Your first question comes from Scott Ciccarelli from RBC Capital Markets. Your line is open.

Good morning, guys. Scott Ciccarelli. I hope everyone is well and healthy, first of all. Second, I do appreciate you guys providing guidance. Obviously, not easy given the amount of uncertainty in the environment. But with that being said, I was hoping you guys could help us better understand how you went about constructing your top line expectations and maybe outline a couple of your key inputs or assumptions. Thanks. Hey, Scott. It's Hal Lawton, and good to speak with you this morning. I think the guidance that we provided is very consistent with the commentary that we had at the end of the third quarter. And I think aligned with the spirit of the dialogue and our opening remarks, which is that we expect COVID to remain a large consumer driving force for the foreseeable future, certainly into the fall, if not for the balance of the year. And as a consequence of that, many of the macro trends which have benefited us will continue. We also think a number of these macro trends are sticky regardless of COVID. And so, you know, we kind of see those two coming together in a way that shapes the year as follows. The first quarter we're in now, we expect momentum in this quarter and our results in this quarter will be much like what we saw in Q2 and Q3 and Q4 with elevated sales levels. And then as we start to comp on top of those in Q2 and Q3 and Q4 this year, we do expect that the comps will start to turn to more normal levels. And the collectiveness of that will kind of compile to the guy I did between a minus two and a plus one. you know, kind of Q2, Q3, Q4, recognizing that we'll be topping on top of last year's elevated levels, but with still likely strong underlying momentum supporting those quarters. I appreciate that, Hal. And how much, you know, obviously the macro trends, we actually agree with that assessment, but how much of your expectation is from some of the company-specific initiatives, you know, the sidewalks, some of the store remodels, or is it just kind of all thrown together in a mixing bowl there? Thanks. Yeah, we're certainly looking to piece apart our various initiatives, and we have some pretty sophisticated analytics teams um, tools that allow us to do that, you know, at these more elevated volume levels, it is a little bit harder to see, uh, than what you might see in a, in a normal mid single digit comp environment. Um, but I will say that, you know, we we're, it's our view that we are gaining share, uh, and winning in all the categories that we participate in. And, um, And that's really consistent across the board, whether you're looking at industry-level data or we're talking with vendors. And so, you know, that would lead us to believe that not only are we benefiting from the macro trends, but the work that we're doing to support the business is also helping with that. And, you know, I'll call out a few things that kind of give us that sense. First off, you know, I'll point to kind of some data sets around our customer. Our unaided brand awareness, due in part due to our national television campaign that we launched last March, is up eight points in the year. That's a very significant improvement in unaided brand awareness. And then the benefit that we've seen of that is the most customers that we've ever had shop our store in one year last year. including 11 million new customers and 6 million reacquired customers. And those customers are shopping with us at repeat rates. um that are at kind of all-time highs and uh those repeat shopping rates are for new customers are holding have held through the year so whether it was a new customer we saw in march or april or may or a new customer that we saw in october november december all those um you know those repeat shopping rates are holding at all-time highs And then, you know, last thing I'll talk about is if you look at our team members and you look at our customer SAT scores, you know, if you look at the customer's perception of safety and health and well-being in our stores, you know, customers seem to be voting with their wallets and shopping and tractor supply indicative of both our strong transactions but also our strong ticket. You know, and I think that would speak to the fact that customers are certainly aggregating their ticket. You're hearing that from other retailers, more units per basket driving basket up. But a lot of retailers are talking about negative comp transactions. You know, with us, it's very balanced with about half coming from comp transactions and about half coming from average ticket. So we're seeing that stock up, but we're also seeing more transactions in the store. So It's hard to kind of piece it together, but we do think the initiatives we're taking, the support we've given the business on inventory and adding staffing, our focus on cleanliness, plus our digital efforts and our early efforts around Fusion and Sidelight and Fast are adding to the share, are creating, helping us drive share gains and kind of add it to the macro trends we're seeing.

And your next question will come from Elizabeth Suzuki from Bank of America. Your line is open.

Great. Thank you. Could you just elaborate a little bit more on the strategic review of PetSense and what came out of that review that resulted in the decision to slow the growth of new stores? You know, it just seems like with patent ownership at all-time highs, you know, unless those stores were significantly underperforming the company average, just, you know, kind of wondering what some of the specifics were of that review.

Yeah, hi, Liz, and good morning. You know, this was just completing my first year as the CEO of Tractor Supply. And so just kind of normal course, you know, kind of steps back and did a strategic review of PetSense right at the beginning of the fourth quarter. The net takeaway is where the business is doing well. But if you look at the broader landscape of pet and where the shifts are coming, where things are growing, and you look at what's playing out in specialty, through that work and then us revisiting our real estate model as a part of that, we made the decision to reduce the long-term store count expectations that we have for that business. And in doing so, you know, that led us to revisit the value that we had of that business on our balance sheet. And so we've now kind of reset our expectations for the new store counts of that business. We've hired a new leader for the PetSense business. And we will continue to invest in PetSense. you know, as we see opportunities. And, you know, as I said, the business is doing well. We do think it's gaining share in the specialty space. And we will continue to support that business moving forward just at a lower long-term store count target.

Okay. And could you potentially shift more of the sales in that business online if you're not going to grow the store count to quite as much as you thought? Like, do you just view a shift

towards uh you know towards the e-commerce side of the business as a way to expand into new markets yes i look forward to sharing with you more about the pet cent strategy as uh matthew comes in and has an opportunity to engage and and uh chart the the future of the of the company and you know we're very pleased with the performance the stores are doing well um The website's doing well. As you said, Liz, we do know PET Online is doing well. You can look at the industry data, and that's certainly something I know Matthew will be looking into as a way to accelerate our efforts there. So more to come.

And your next question comes from Karen Short from Barclays. Your line is open.

Hi. Thanks very much. Congratulations on a great year. I wanted to just talk a little bit about this three or five-year algorithm. You had originally called out 9% to 9.5% operating margins. Your fiscal 21 bottom end range is already 30 basis points higher than that algorithm. So I guess what would make the range, I guess, decrease in 22 and beyond? And I guess maybe ask a slightly different way. When I look at 9% to 9.5% range, you know, that would imply flat operating profit growth in 22, and that doesn't seem like a likely scenario.

Hey, Karen, this is Kurt. Yeah, thank you for the question. And, you know, really the question, as I understand it, is about the outlook on the, you know, the operating margin, the flow through going forward. One important thing that I pointed out in our prepared remarks is we had tremendous upside and benefit in 2020 from the gross margin um side of the business and the principal drivers with that was for the majority of the year we had favorable transportation um and the most significant was um unusually of low levels of promotion and clearance i mean the inventory at some points really felt like it was going you know hand to mouth um to the consumer and uh We anticipate this year in 2021, as we still have some of that extended pandemic demand before we start to cycle into that, that there's benefit on less promotion and clearance. We'll start to normalize on that. The important thing is to manage the business, ensuring that we're everyday low price, we're giving our customers a great value in our product and our price. And over the years, we're going to manage the operating margin, ensuring that we continue to gain market share. And the important thing is that there may begin to be, in the next couple of years, as inventory more normalizes and more clearance exposure normalizes, there's some anticipated risk with gross margin. So we'll continue to manage gross margin with our benefits of our Our driving is staying at EDLP, not anticipating to revert back to the promotional activity of the past. But with our investments in the business in the next couple of years to continue to gain this market share, we anticipate still staying around that range. We think it's a great sweet spot to allow us to continue to hit those revenue growth targets and to continue to gain on the market share. So we want to manage to a reasonable operating margin to continue our opportunity to gain market share. And our outlook for 2021 and the long term really anticipates that. And, you know, as we progress, we'll continue to update you as we see more visibility as things change.

Okay, that's very helpful. And just my follow-up, it's looking at the comp in 2Q to 4Q. Obviously, as you have said and as we all see, you had very evenly kind of split composition on the comp from 2Q to 4Q. How do you think about when we start to lap those in 2021? Do you think the pressure will come more from ticket or traffic in terms of the comp comparisons?

Yeah, it's a great question. As we think about traffic and ticket in 2021, there's a lot of variables and still some uncertainty as we begin to lap that. We're going to be nimble. And have shown in the past that we can shift very well to that. So as we think about the business with ticket and traffic, I'll give you some thoughts on ticket drivers. Certainly some level of inflation that could be driving ticket. If there's continued trip consolidation, it helps in the ticket. But other aspects on traffic as well. know areas such as trip consolidation if there's a bit more normalization on trip consolidation as we begin to cycle some of the covet demand and if there's inflation it sometimes has an offset on the traffic so Point being, there's a number of variables in there. And as we cycle this, we see our opportunity in both categories. And there can be some risk and shift in both. And we've contemplated those aspects in our guidance for comp sales as we begin to cycle the COVID lift that we saw starting in Q2 of 2020. And we anticipate that there's not a meaningful shift from either one as we see it at this point. But both have variables that could drive it up or down.

And your next question will come from Steve Forbes from Guggenheim Partners. Your line is open.

Good morning. So I wanted to start, Hal, with the new and re-engaged customer trends, right? You mentioned repeat rates at all-time highs. I'm curious if you can provide more color here, right? Are these customers engaging at a level that's more comparable to your Neighbors Club members? Are they shopping across more categories, right, than the average customer? Shopping both channels, right? And why aren't we seeing greater, I guess, entrance into the Neighbors Club loyalty program, as I would imagine that's sort of a core initiative, right, for 2021?

Yeah. Hey, Steve, and good morning. A couple things I'll say. First of all, in the Neighbors Club program, Um, you know, we are very pleased with the growth in the ownership of that. Uh, I mean, the growth in the membership of that program, uh, reaching 19 million members representing approximately 60% of our total sales. Uh, we're seeing very strong, um, you know, engagement rates, uh, with those customers. And, um, you know, we have plans as we've talked about to reinvigorate that program, uh, in the first half of this year. which I think will drive a step change in engagement with those customers and also migration upward of their spend. So we're looking forward to that promotion and getting it out there and look forward to sharing more details with you at our next earnings call on it. As it relates to our new customers, we've mentioned in the past that we see approximately 20% of our new customers return and shop with us within 28 days. And that trend really hasn't changed since the beginning of the year. It's held very stable. And it's two or three points higher than what we would have seen in a historic period when we cohorted new customers. And then I would say, you know, it's not – we also continue to see strong repurchase rates as you get out to kind of two months at the 56-day count and at three months. And so we're very pleased with their reengagement. We see them engaging first in categories like poultry and dogs and pets. But then they start to broaden their purchases across things like apparel and garden. And, you know, if they started in pet, they might move to poultry or vice versa. And, you know, a higher percentage of these groups than our normal business starts online and does a pickup in-store, and then you'll see in their next purchase them coming into the store for purchase. And our new customer SAT scores are higher than historic as well. So, you know, I'd say all around we are pleased with the 19 million members. They represent the growth that we had this year. particularly in the midst of the pandemic. You know, our sign-up is really at the register there, face-to-face. People are really trying to check out much faster, as we all know. So the ability to still sign up those Neighbors Clubs members and gain the millions that we did this year, we're very pleased with. And then the new customers are exhibiting very strong, you know, re-engagement behavior.

Thanks, Hal.

And maybe just a quick follow-up as we try to conceptualize the opportunity here. How does the 11 million new customers and 6 million re-engaged customers compare to 2018, right, or 2019 levels?

I don't think we've disclosed that in the past, but what I will say is, and we'll give that some thought on whether to do so, but what I would say is they are material increases from previous years. Awesome. Thanks so much. Best of luck. Stay well. Thanks. Appreciate it.

And your next question will come from Peter Benedict from the RW Bears. Your line is open.

Oh, hey, guys. Thanks. I guess first question, Kurt, you kind of mentioned inflation in 21. I'm just curious where you're seeing that most acutely. I don't know if you can size it up, but which categories you're seeing inflation in. in the business? That's my first question.

Yeah. I'm going to let Seth take that.

Hey, Peter. Hey, Peter. As we look at some of the inflation of this coming year and what we're seeing kind of early on, if you just look at the kind of base commodity markets that are out there, I'd say early reads are, you know, steel-based product as well as some of the grain-based goods, if you look at those commodity markets. You know, feel really good about the handle that the team has on the business to be able to manage it accordingly with our tools that we have on the pricing side. But those would be the areas that, you know, I would say that we're starting to see those come through in the early reads.

Got it. Okay, that makes sense. And then maybe, Hal, one for you, just on the competitive environment out there, obviously it's been strong, but even with the strength in farm and ranch and in the pet area, we're seeing some reasonably large chains have trouble, even shut down within both of those areas. So I'm just curious, you've got a lot of strategic initiatives in place, but is the Is the competitive environment shifting in a way that maybe has you thinking differently on any maybe longer-term initiatives over the next couple years? Just kind of curious your view on that. I know you've got a lot on your plate, but just wanted to hear you out on that.

Yeah, thanks, Peter. And, you know, what I'd say is I think the dynamics that are playing out in the market right now, you know, whether it's with customers or these VR competitors, those dynamics are really playing to the sweet spots of tractors supply. Um, you know, first off, people are struggling within stocks, and I think you're going to see more of that, uh, as we get into the spring with the supply chain disruption that's out there. And, you know, our team has done an outstanding job managing inventory through the year. You saw how we ended the year with inventory above last year. And we're tracking to continue with that at those levels, if not higher, as Kurt mentioned in his opening remarks. We plan for our spring shipments to arrive earlier than they have historically. And so while we are seeing some container backlog, you know, we are going to be able to manage through that and get it kind of in on a normal timeframe. But that's to our benefit. So I think anywhere where you've made investments in inventory and you've leaned in there to anywhere where you're making investments in customer service, because right now that makes such a big difference in this environment. And we've certainly done that through the net hiring of 10,000 team members and providing appreciation bonuses and others and raises to drive their engagement. Also in technology, if you've invested in technology and you can do, you know, curbside pickup and you can do same-day, next-day delivery and you can do those with great customer service, that leads to advantages as well. So I think the scale that we have in our distribution systems, the scale that we have in technology, the leverage and scale that we have with our vendors – And then, of course, our advantage of our 42,000 team members, which wake up every day looking to provide legendary service, all that just plays well for us. I mean, you know, we're – and then you think about the convenience and location of our stores. And that's why if you go across every category, you know, we're confident that we're taking share in a significant way. I mean, if you look at our Q business being up, over 20% for the quarter. You know, that's, and you think about the proxy, using that as a proxy for the businesses that are in there around animal feed and pet food and others. You know, those rates are well above industry estimates for those categories and certainly a lot of other companies that are out there reporting that play in those categories. So, I think it really just speaks to the business model, the track of the resiliency of it and the foundation of it and then the investments that we're making day to day to ensure that our customers and our new customers are having a great experience.

Michelle, let me just say one thing, if I may. I know we're at the top of the hour, but we're going to let the call go about 10 minutes longer. Thank you.

Okay, so your next question comes from Scott Muskin from R5 Capital. Your line is open.

Hey, guys, and Mary Wynn, thanks for letting the call go on a little bit longer, and I'll try to be quick. So I was wondering if, and maybe I missed it, but the percentage of the new customers, I know we talked about this a little bit, that are purchasing Q, and then the percentage of those that are repeating. I'm not sure I got that data, if you're willing to give us that data.

Yeah. Hey, Scott, how are you? And good morning. Good morning. We have not mentioned what percent are buying Q in their first purchase. We did mention what percent are coming back and buying a second time. So about 20% of our new customers return and shop with us again within 28 days. And we said that's above historic run rates by several points. So we feel very good about our retention of these customers. And that's a proxy at one time marker, but it's the same if you look across seven, 14 days, two months, three months, et cetera. As it relates to what they're buying on their first purchase, the two dominant areas that they're buying on their first purchase are pet food or poultry.

um and uh or supplies and such around those two categories and so that's interesting that's going to be my follow-up i was going to actually ask something else but um you know 20 repeat rate sounds high but if it's skewing towards q you might think you could actually make make that number higher is there any initiatives to figure out how to make sure they're repeating at a higher rate if they're engaged in q and then i'll yield

Yeah, absolutely. So this is what the full focus of our marketing team is focused on. It's exactly this. We've invested over the last year and a half or two in our CRM capabilities, moving that platform to the Azure cloud, upgrading our analytical capabilities, adding new personalization tooling in place. and also looking at behaviors, whether on their site, on the site or inside of the store and then looking for kind of like comparing them to lookalike shoppers. And so whether it's emails that those new customers get, or whether it's digital banner ads, we're retargeting them. You know, all those sorts of kind of marketing channels and vehicles are being used to engage with these customers and encourage them to reshop with us. And, you know, in addition, obviously, we just have the investments we're making in our team members, the investments we're making in our store experience, the investments we're making in inventory, and those sorts of things that, you know, drive repeat behavior as well. One interesting anecdote that I'll give on this is we ask our customers in our checkout survey, kind of post-purchase survey, what their top criteria were for why they selected to shop with Tractor Supply. And, you know, typically the responses are similar to what any other retailer would have with price and location convenience, you know, having the right product, customer service, those sorts of things that, you know, are kind of the dominant criteria for shopping for retail. During the midst of the pandemic over the last six months, the number one and number two criteria have been cleanliness and safety. Never in my 20-plus years of retail have I seen those two criteria at the top of a customer's decision-making criteria. And so, that's why we've invested so much in those areas. And, you know, I highlighted the, you know, tens of millions of dollars we've spent on those areas, you know, in the last quarter.

And your next question will come from Peter Keith from Piper Sadler. Your line is open. Peter Keith, Piper Sadler, Hi, thanks.

Good morning.

Great results, guys. quick follow-up to peter benedict's question on the inflation certainly a lot of the commodities are ramping up to record levels we haven't seen in nine to ten years um would you have an inflation benefit factored into comp and if so could you provide that for us yeah hey peter this is kurt um in regards to inflation let me first start with what we've seen

here in 2020, we saw a bit of elevation as we worked our way through the year. In Q4, we still saw a bit of a modest level of inflation, less than 100 basis points of commodity inflation into the product cost. We anticipate that as all of the inflation information, as I know everyone's seen, is certainly at higher levels. We're anticipating that to accelerate in 2021. We've seen where inflation on commodities can rise as quickly as it did. It can also shift, as you know, just as quickly. So like we said in our prepared remarks, we're planning for 2021 under a number of scenarios. But in our guidance, we assume that over the year, a weighted average of about 1% to 2% inflation into the product costs. And that certainly could vary first half versus second half of the year. And right now we're seeing the points that Seth mentioned on grains and steel being primary drivers of some inflation at this point. So as we picked up an assumption, that range of about 1% to 2% is where we landed in our assumption.

Okay, very helpful. And maybe pivoting over to a question for Hal or Seth on the pet trends.

Everyone knows 2020 was a record year for pet adoption and acquisition. What are you guys seeing out there in the field? Are you seeing continued strength, and what would you expect in for 21? There's arguments that there's been a pull forward and the acquisitions will drop off, or there's other arguments that the same adoption trends are going to continue for the year. Yeah, we are planning for the pet category to continue to remain strong. and to overperform relative to our overall business in the year. I think on the last call we talked about poultry and chickens and flocks and how they're a bit of an annuity stream given that they have a seven, eight-year lifespan. Obviously, pets are very much the same way. With pet adoption up at an all-time high, Those pets, as they grow, they're going to move from puppy food to adult food. We're seeing that, by the way, in our trends. Typically with dogs, as they get a little older, they eat a little more as they get bigger. So we're actually seeing the benefit from that a little bit on the tonnage side. And we expect the humanization of pet will remain very strong this entire year. as people continue to work from home really for the foreseeable future, potentially all of 2021. And so they're around their pets. They're buying toys. They're buying snacks. You know, they're upgrading their bed. They're getting them a new bed. All those things I expect will continue this year. And as I said, we're very pleased with our pet business. We are confident we're gaining share in our pet business. We're seeing strong growth in our pet business, both in-store, just through brick-and-mortar channels, as well as online. And certainly the sweet spot for us on pet is our omni-channel, where we're seeing a significant amount of pet purchases online picked up in-store. And as I mentioned in my opening remarks, we're investing heavily in this category to remain a strong destination for our customers in it, whether it was the release recently of our new PetRx solution online, whether it's the rollout of Bopa subscriptions in-store in a similar way that we have it online, whether it's the addition of 150 to 200 more PetWatch stations this year, and then also the build-out of more pet wellness clinics in our stores to support customers the mobile pet clinics that we have that drive significant uh engagement with our stores uh from our customers so uh you know we feel really good about where we are in pet and we'll be continuing to invest here i i guess i neglected to also mention apologies because that's our marketing campaigns that we've been doing the past year you know we have a significant amount of dedicated marketing both tv and digital devoted to pet and it's it's um It's systemic, meaning it's always on, and we do spike it at certain periods, but it's a consistent program that we're doing now. It's the first time we've done that. We've been doing that for about six or nine months.

Michelle, we'll call this our final question as we wrap up the call.

Okay, perfect. So Chuck Grom is your final question for today. From Gordon Haskett, your line is open.

uh good morning a nice quarter great first year how um my questions are on sidelot um seems like a tremendous opportunity for you guys i'm curious how you plan to approach it from a marketing perspective and also how quickly you think it's going to take the ramp up to um optimal productivity levels yeah hey chuck we are uh you know remain very bullish on the sidelot project it's um as we as we uh remarked before

Garden is the category that our customers say they most participate in that we don't fully address their needs. And in the side lot that we have open, the customer engagement with the product and the purchase rates, it's kind of like an overnight switch. Once the project is complete, and the products in there, we saw really strong engagement with customers. And this is in the midst of, you know, fall and winter when, you know, live goods assortments are very limited and gardening activities is much less. So, you know, we've got over, you know, 50 of these side lots underway right now. Some, you know, we're in the process of applying for permits. You know, some we're in the final stages of getting a certificate of occupancy. We've got, you know, hundreds plus more, 100 plus more scheduled for the year. And, you know, we're very excited about their potential. And the team's doing an excellent job kind of navigating this environment to get those built. You know, in the context of COVID, you've got construction crews that at times will have to quarantine for, you know, a couple of weeks if one of the team members on the project tests positive. You've got city municipalities that, you know, getting permitting done is very difficult. Getting someone to come out and do a certificate of occupancy is much slower, and the team's just doing an excellent job managing through all those twists and turns. We remain very bullish on Sidelot, and like I said, a number of them underway. I just visited a handful of them the last week, and we're really excited to have our first batch of them open in time for the spring season.

That's great. And just as a follow-up, I believe that the garden center, Pat, is going to be about 4,000 square feet. When you compare that to – when you compare that productivity opportunity to what your stores typically do today, any sense for what you think that can eventually generate over time?

You know, it's very seasonal, and – In my experience elsewhere, the garden centers are very productive, if not more productive than the store during the core spring season. And then in the wintertime, the productivity falls off well below the core of the store. And so, you know, we're looking forward to having a full year ahead of us with these projects to be able to get a sense for what's the max productivity in the midst of spring. You know, how much can we prop the productivity up with things like Christmas trees and pumpkins and harvest-type stuff in the fall. And then we'll see where it plays out for the full year. But we are very confident that it will drive significant productivity relative to how the space is being used now and will drive strong shareholder returns. The question is to what magnitude. And we'll know more as we get into spring.

All right. Thank you, Operator. This will conclude our call today, and thank you to everyone for joining us. We look forward to speaking to you on our first quarter call in April.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.