Tractor Supply Company

Good morning, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss first quarter 2021 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, Ms. Mary Wynne Pilkington, Senior Vice President of Investment 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 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. 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 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. Thank you for your time and attention this morning, and now it's my pleasure to turn the call over to Hal.

Thank you, MaryWen, and good morning, everyone, and thank you for joining us today. 2021 is off to a great start for Tractor Supply. I'm extremely proud and appreciative of the hard work by the more than 42,000 Tractor Supply and PetSense team members. Once again, they took care of each other and tirelessly served our customers who depend on us to live the out-here lifestyle. I also want to thank all of our supply chain and vendor partners. We've been operating in the COVID-19 environment for over a year now, and the tractor supply system has more than risen to the occasion as they strive to serve our mission and values every single day. While we anticipated that we would have our strongest growth of the year in the first quarter, our results were significantly ahead of our expectations. When you couple this performance with the continuing momentum we are seeing in the second quarter, the positive macro environment and our strong customer trends, we are adjusting our comp outlook to mid to high single-digit growth in 2021. Kurt will share more details on the improved financial outlook for the year across our key financial metrics. Throughout the pandemic, our utmost priority has been the health and safety of our team members and customers. We continue to incur significant incremental expense for items like paid time off, masks, and testing. We remain committed to following the advice of the CDC and other medical professionals to protect our team and customers. As we enter the vaccination phase, we are committed to helping our team members who choose to get vaccinated to do so. We are providing a one-time payment of $50 and allowing time off as needed for all team members who elect to receive a COVID-19 vaccine. To further alleviate the barriers to receiving a vaccine, we have partnered with a third-party provider to facilitate on-site vaccination at our eight distribution centers and store support center. During the quarter, we also announced our entry into an agreement to acquire Orcheland Farm and Home, a retailer with 167 stores across 11 states. This is an exciting step for tractor supply as we look to expand our footprint in the Midwest with the high-quality assets of Orcheland Farm and Home. We have always had great respect for Barry Orschel and the team for the strong connection they have with customers in the communities they serve, along with their industry knowledge and capabilities. With our shared values and passion for the out-here lifestyle, we look forward to bringing together our highly complementary cultures and teams to realize the long-term value and benefits that we expect this acquisition to deliver over time. As we previously disclosed, we received a second request from the FTC as part of their review of the transaction and are cooperating with that confidential review. Accordingly, we are limited in the comments we can make about the transaction at this time. I hope you all saw our release this week with our updated ESG tear sheet for 2020, which provides new and updated performance metrics and context related to our environmental sustainability efforts, our commitment to our team members and communities, and corporate governance. This report helps us provide detailed information and progress on our ESG journey. In addition, we laid out our commitment to provide new targets in the fall this year, as it relates to our greenhouse gas emission plans and our aspirational goals for diversity, equity, inclusion. These initiatives make great business sense for tractor supply. As a purpose-driven company, setting targets for ourselves creates long-term value and our potential to have a positive impact on the world. We remain committed to constant improvement on this journey. Now let's turn to the business review for the first quarter of 2021. We had exceptional net sales gains of 42.5%, with comparable store sales up 38.6%. We materially benefited in the quarter from transitory factors such as stimulus spending, favorable weather, and inflation. Importantly, however, the underlying foundation of our business is robots, and we're gaining share across all categories, online and in stores, and also with existing customers and new customers. Our Neighbors Club membership reached 20 million members strong. This is an important milestone for our loyalty program, as we know that they are customers that shop us more frequently, and they spend more money with us. We saw 2.5 million new customers shop with us in the quarter, and that's an increase of over 30% over last year. Re-engaged customers also exhibited strong growth, up over 12% from the first quarter of 2020. And customer retention for both our new and re-engaged customers continues to run above last year. We saw strong growth across all product categories and geographic regions of the country. Comps for each month of the quarter were above 30%. And our growth was well-balanced between transactions and ticket growth. The business, like the last few quarters, continues to be very consistent and stable. For the fourth quarter, our e-commerce saw strong triple-digit growth and increased significantly as a percentage of our overall sales. The work we did last year to improve our omni-channel capabilities continues to resonate with our customers. Ongoing improvements to the customer experience for better search capabilities and enhanced personalization are being recognized by our customers. As we've experienced in the last several quarters, we continue to see strong performance in market share gains in our consumable, usable, and edible categories, with growth in the mid-20% range. More specifically, we continue to be very encouraged by the trends we're seeing within our pet and poultry categories, where we're driving shopping frequency and market share gains. Over the last 15 months, our unaided brand awareness scores are up 17 percentage points, I believe these type of metrics serve as leading indicators of our brand health and future spending patterns of our customers. We continue to execute our shift away from print advertising to brand building and digital marketing. We're currently airing our national TV spring advertising campaign that highlights the strength of Tractor Supply's offering to serve the seasonal needs of our customers to take care of their land, pests, and animals. Overall, the strong first quarter highlighted the unique advantages that we have at Tractor Supply. our team members delivered exceptional results in a generation defining moment. Now I'll turn the call over to Kurt to discuss some of the details of the first quarter and our outlook for the rest of the year.

Thank you, Hal. And hello to everyone on the call. We're excited to be starting fiscal 2021 on such a positive note as we performed well ahead of our expectations. Let me share some further color on our strong first quarter results and our upward revisions to our guidance for the year. Our record first quarter earnings were driven by positive momentum in all areas of the business. Comp sales increased 38.6% as the trends we experienced over the past year continued throughout the first quarter of 2021. Traffic increased 21%. An average ticket grew 17.6%. All geographic areas reported sales gains of at least 30% positive comparison to last year. Big-ticket purchases had robust growth, up strong double digits that well outpaced our average comp sales increase. Safes, fencing, utility vehicles, trailers, and outdoor power equipment, such as the zero-turn mowers, were some of the notable gainers in the quarter. As Hal mentioned, we did benefit from more transitory factors like stimulus payments, favorable weather, and inflation that had a positive impact on the sales in the quarter. In total, we estimate that about one-third of our comparable store sales growth in the first quarter is attributable to these transitory factors. Our best estimate is that more favorable weather for the quarter contributed about 400 basis points to comps. Both January and February were colder than last year, with February being the coldest month in 30 years, while the last few weeks of March turned to a favorable spring weather in many of our markets. We also saw retail price inflation, primarily in commodities, which contributed around 300 basis points to our comp sales performance. The impact of stimulus payments is more difficult to quantify, but we recognize that consumers had more cash to spend during the quarter, and we believe tractor supply benefited from this in Q1. Towards the end of the quarter, in line with the timing of stimulus payments, we saw customer spending at elevated levels, especially in big-ticket items. Our best estimate is that stimulus contributed somewhere in the mid-single digits to our first quarter sales comps. Even factoring in the transitory benefits, we believe the underlying health of our business is structurally advantaged. Trends towards higher spending and consumables continued through the quarter, with pet, bird, and livestock feeds showing significant growth from last year. We saw growth in the quarter despite lapping last year's strong stock up buying that occurred late in the first quarter of 2020 at the start of the pandemic. As we've said for the past few quarters, we see the growth in our Q categories as more evidence of an enduring consumer shift to higher pet adoptions and ownership, new customer hobbies like backyard poultry and gardening, along with trip consolidation. For the first quarter, our gross margin increased by 148 basis points to 35.2% of sales, which resulted in gross profit increasing to nearly $984 million in the first quarter. This quarter marked the ninth consecutive quarter of year-over-year gross margin rate expansion. Consistent with the trends since the beginning of the pandemic, this quarter's increase was primarily driven by a lower level of sales promotions and clearance activity. We also benefited from a positive product mix towards higher margin categories. And consistent with our guidance, we received approximately 40 basis points of benefit from vendor funding for the field activity support teams, or FAST initiative. These factors were partially offset by higher transportation costs, which was a headwind for gross margin. Domestic and import freight costs have increased significantly, as well as fuel costs. and we expect these trends to continue throughout 2021. SG&A, including depreciation and amortization, as a percent of net sales was 27%, an improvement of 103 basis points. This improvement was primarily attributable to significant leverage in occupancy and other fixed costs from the strong increase in our comparable store sales. This leverage was partially offset by three factors, higher incentive compensation given the strong sales performance, COVID-related costs, and higher operating expenses to support the elevated volumes. COVID-related costs were approximately $28 million, generally in line with prior quarters, as we continue to take appropriate actions to ensure the safety of our team members and customers. Additional overtime, temporary labor, and other costs were also incurred to maintain high service levels. Operating profit dollars more than doubled compared to prior year to $231 million, an operating profit margin of 8.3%, an improvement of 251 basis points. Net income was $181 million, an increase of 117%. Diluted EPS was $1.55, representing an increase of 118% versus the first quarter of 2020. During the first quarter, we returned $314 million to shareholders through the combination of our share repurchases and dividends. Turning now to our balance sheet, which remains strong, merchandise inventories were $2.1 billion at the end of the first quarter, representing an increase of about 2% in average inventory per store. This level of inventory is still lighter than we would like, given the momentum of the business, and we are working with our suppliers and our vendors to build stock to support this momentum. The added supply chain costs and freight expense necessary to rebuild inventory is reflected in our updated guidance we provided. Moving now to our guidance for 2021. The impact of that the COVID-19 pandemic and the vaccine rollout will have on the broader economy, the consumer and our fiscal 2021 results remains uncertain. We continue to plan for fiscal 2021 based on a range of potential outcomes, remaining nimble and adjusting as necessary. Our updated guidance reflects the strong results from the first quarter and the positive momentum we see in our business continuing into the second quarter. While the current environment and momentum are both favorable, we recognize that COVID-19 pandemic is not completely behind us and that economic conditions can change quickly. Please keep in mind that the prospective acquisition of Orson Farm and Home is not included in our guidance. Against the backdrop of what we know today, we are updating our guidance to a net sales range of $11.4 to $11.7 billion, with comparable store sales growth of 5% to 8%. For the year, we forecast an operating margin of 9.4 to 9.7% of sales, a step up from our prior guidance. Diluted EPS is now forecast in a range of $7.05 to $7.40. This compares to our previous earnings range of $6.50 to $6.90 per diluted share. Compared to our initial outlook for the year, our forecast does reflect higher transportation costs and product inflation. We experienced increasing pressures from these factors during the first quarter and expect them to continue to be a headwind throughout 2021. In addition, we have a unique opportunity with the positive customer trends and momentum in the business. We are committed to investing in store and supply chain labor as we look to provide legendary customer service to meet our customers' expectations. I want to share some additional context on our outlook for the second quarter. While we begin to lap more challenging sales and earnings comps, we currently see sales momentum continue, partially fueled by stimulus payments. We expect a positive sales comp in the second quarter in the mid-single-digit range. Please keep in mind, we'll be cycling our strongest gross margin performance of the prior year in Q2, where we benefited from minimal promotional or clearance activity, as well as a favorable product mix. we are expecting gross margin decline in Q2 due to higher transportation costs, a less favorable product mix, and a slight return to promotional activity. We also anticipate a modest one-time headwind in the second quarter relating to the rollout of our enhanced Neighbors Club loyalty program. In terms of SG&A for the second quarter, COVID-related expenses are expected to moderate from the Q1 levels, but are forecast to be slightly higher than original expectations entering the year along with higher labor costs to support these elevated volumes. For the second half of 2021, we anticipate tailwinds such as stimulus payments to moderate and performance to be more in line with our original guidance, expecting a modest decline in comp sales. Longer term, we continue to believe the best way to look at our business is not by the quarter, but by the halves of the year. As I've stated before, a key component of our financial model is the strength of our balance sheet and the consistency of our free cash flow. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases. In January, we increased our annual dividend by 30%, from $0.40 a share to $0.52. For 2021, we anticipate share repurchases in a range of $700 to $800 million. In summary, it is an exciting time at Tractor Supply. We are very pleased with our performance in the first quarter and see positive momentum carrying into the second quarter. we see an opportunity to retain the loyalty of our longtime and newer customers by investing in our business to maintain everyday low prices and improve customer service, strengthen our supply chain, and grow our digital commerce, all in support of our commitment to driving strong shareholder returns for the long term. With that, I'll turn the call back over to Hal.

Thank you, Kurt. I'd like to spend the next portion of the call covering some of the key customer trends we're seeing in the business, providing an update on our Life Out Here strategy, and highlighting our spring programs. Our customer base is experiencing robust, broad-based shopping patterns that provide significant opportunities for growth. These types of trends can simply be described as once in a generation. We're seeing growth in all our customer segments. and across all value tiers of spending with strong retention of existing and new customers. The fastest growth customer segment is our core farm and ranch. This segment is very healthy as rural economies for the most part were less impacted by the pandemic and are recovering at a steeper and more robust rate. Importantly, we're gaining wallet share with our core customer as our highest and medium spend customer tiers are outpacing our lower spend customer tier. As mentioned earlier, we continue to see strong new customer growth and notably are also seeing strong customer retention. As an example, for our new customers from the first quarter of 2020 last year, more than 50% have returned to shop with Tractor Supply. This is about 300 basis points higher than the cohort from the first quarter of 2019. We are seeing significant growth in our millennial shoppers. Over the last 12 months, we've seen a 400 basis point shift in the customer age cohorts of 18 to 45 years old. This demographic has long resisted many of the traditional generational norms, things like household formation and home ownership. But the pandemic has shocked this generation and accelerated their embracement of these types of activities. There continues to be a net migration out of urban areas, largely driven by the millennial segments. The most robust homeownership growth is in the millennial cohort, with the growth coming in suburban and rural areas. We believe that growth in this customer segment has staying power and could be a structural game changer for us. Another structural customer trend that is working to our advantage is the significant increase in pet-owning households and number of pets adopted. Compared to the overall U.S. household pet ownership of approximately two-thirds, Our customers over-index in pet ownership by about 10 points. And our current survey work with our customers indicate 25% have recently acquired and adopted a new pet. New companion animal ownership acts as an annuity for our business as these puppies and kittens grow up and have growing lifecycle needs. We're also uniquely positioned to offer a growing menu of services such as pet wash, vet clinics, prescriptions, and tele-vet services. Whether it is more food, treats, toys, containment, and more, the humanization of pet provides us with future opportunities for growth. These customer trends are an indication that we continue to benefit from the numerous tailwinds such as pet ownership, the millennial urban exodus, backyard poultry, homesteading, and home as an oasis. We believe many of these consumer trends will be enduring shifts well into the future. Our brand momentum is stronger than ever, and we're investing to ensure we continue to play offense in the context of these trends. We are making excellent progress on our Life Out Here strategy and initiatives. At the beginning of April, we announced the relaunch of our Neighbors Club program to be even bigger and better. When we launched Neighbors Club nationwide in 2017, our vision was to create a unique out-here community for our customers and a place for them to connect with us. The Neighbors Club has permitted us to show appreciation to our loyal customers and to accumulate actionable customer data that has allowed us to deliver to our customers more relevant and personalized communications. Over the last four years, our loyalty program has served us well to be able to thank participating customers for being loyal customers, provide rewards and special offers they value, learn more about their purchasing trends and interests, and ultimately increase customer loyalty to track the supply stores. Today, our Neighbors Club program has over 20 million members, and it's comprised of our most valuable customers. It is a perfect time to upgrade the program with the introduction of points and three tiers of status. Now, neighbors can earn points on their purchases and redeem them for more rewards. They can earn their way to different levels so that when they spend, they earn more. With the new features of Neighbors Club, we believe we have more tools and features than ever to help facilitate upward migration in spending and mitigate downward migration of spending by our members. The changes to Neighbors Club were specifically based on our customers' feedback. The new rewards and benefits of Neighbors Club are relevant to the customer's lifestyle, such as trailer rentals and shipping benefits. We believe with the new Neighbors Club benefits, we have an opportunity to support our customers in a more meaningful way. This, in turn, will provide us a platform for multi-year trajectory for growth as a clear business driver for us. More broadly, we are aggressively advancing our life out here strategy. The FAST team is at scale and providing significant improvement in the execution of our merchandising initiatives. We continue to forecast about 150 to 200 side lot transformations to occur this year. As of today, we have over 40 stores operating and continue to refine our learnings for future build-outs, of which 35 are currently under construction. Project fusion store remodels are also on track for completion of 150 to 200 stores this year. In addition, new stores are being built as fusion stores with improved layout, signage, SKU expansion, and adjacencies. While still early, we're very pleased with our customers' response to both the side lot transformation and the Project Fusion store layout. Now turning to spring. Our stores and e-commerce are well positioned to take advantage of the seasonal change to serve our customers. We remain committed to being the zero-turn headquarters with our market-leading assortment from Toro, Bad Boy, and Cub Cadets. we have substantially expanded our assortment in grilling, raised bed gardens, and other backyard categories. And to capture share of Wallen in the lawn and garden category, we've expanded our offerings on core products like long-handled tools, wheelbarrows, trailers, and tillers. And Chick Days are underway, with millions of customers relying on us for their poultry passions. Leveraging our localization efforts, we're expanding our tool corral to an additional 400 stores. And on the product innovation front, we're partnering with Carhartt to open a new store-within-a-store concept. This concept was created with our customer at the center of the shopping experience. And by partnering with Carhartt to double our selection, our stores have even more of what makes tractor supply a destination for workwear. The new store-within-a-store concept will roll out in more than 100 tractor supply stores in 2021, with additional stores to be added next year. To wrap up, I couldn't be prouder of the tractor supply team as they've remained agile in the face of a very challenging operating environment. My thanks and appreciation go out to each of them for helping to take care of each other and our customers while operating at a record-setting pace. We have an incredibly strong business and foundation. We see more positive macro factors than we did at the beginning of the year. Customers are shopping with us in record numbers, and we're investing in multiple initiatives to retain them and provide more reasons to shop with us in the future. We participate in a large and attractive market that we're working to expand further with initiatives such as Sidelight that will add to our product offering. By doing the right thing for our team members and customers, we're executing our Life Out Here strategy and building a stronger company for our shareholders. Now we'd like to open up the call for questions.

Ladies and gentlemen, to ask a question, please press star followed by one on your telephone keypad. To withdraw your question, press the pound key. As a reminder, we ask all participants to limit themselves to one question and one follow-up related. Your first question comes from Michael Lachlan, EBS. Your line is open.

Good morning. Thanks a lot for taking my question. All of the new customer statistics are very helpful. Can you give us a sense for where you think those customers were shopping before tractor supply? Or is it more likely they're just new to the farm and ranch retail industry? And as a result, you're grabbing a disproportionate share of those incremental new customers. And as part of that, can you give us a sense for how many of those new customers are shopping in the Q category's such that you think you'd be able to get those customers into sustainable patterns of repeat purchases?

Yeah, good morning, Michael, and thanks for your question. As you mentioned, we've seen a significant amount of new customers shopping with us over the last 12-plus months with above-average retention rates, continuing to hold. And as we mentioned, over 50% of the Q1 2020 cohort has shopped us again in the last 12 months, so very strong retention. When we look at the additional customer data, I'd highlight two big drivers of the new customers. First would be in the core farm and ranch. And that very much is a market share gain. These are customers that have land, have animals, our value proposition has appealed to them over time. For a variety of reasons, they're choosing to now shop with Tractor Supply. I think that has a lot to do with the investments we've made in technology, the investments we've made in safety and health and cleanliness in our stores. and certainly the focus we've had on inventory and customer service. And then the second thing I'd bring up is kind of the millennial customer, which we highlighted in our prepared remarks. This segment had a very large increase as a percentage of our sales in Q1. And really, when we look at the data, it really is around the migration of people out of urban environments into suburban and rural environments. And that generation is starting to, you know, kind of take – form households, buy homes. And as part of that, the out-here lifestyle is part of the aspiration that they have when they moved out to the suburbia or when they moved out to rural America. And we do really feel like this is a structural trend that will continue to provide growth for us as we look out the balance of this year and beyond.

My follow-up question is if you unpack the mass of your 5% to 8% comp guidance for the year coupled with a mid-single-digit comp for the second quarter, It suggests that you'll run down, call it 10% in the back half at the midpoint of the range, which would be about 1,000 basis point differential from where you're going to run in the second quarter, at least on an arithmetic two-year stack basis, even though the math gets all confusing at this point. Is it right to think that the difference is all going to come from you're getting about 1,000 basis points of stimulus benefit in 2Q and you probably won't get that in 3Q or 4Q, or is it more inflation? How are you thinking about what's unique around the second quarter versus not necessarily in the back half?

Yeah, Michael, this is Kurt. In regards to your question, I'd really point to two things. We just finished first quarter, and as I mentioned in my remarks, we recognize that in this environment, there's just a lot of uncertainty. We've got better visibility on the second quarter. and still less visibility on certain factors in the second half. We don't have significantly greater visibility than we had from our original guidance. And so that's one factor, as well as second quarter. As I mentioned, we believe that has some benefit from stimulus, and that begins to moderate in the back half. Our guidance doesn't have significant shift from our original guidance on the back half of the year for those reasons.

Thank you for the color and good luck with the rest of the year.

Thanks, Michael.

Your next question comes from . Your line is open.

Hey, everyone. Good morning. Nice quarter. My first question is on side lot infusion and then second will be a financial question. So the first, I know it's early, and it might even be early of early to ask some of these questions on Fusion and SignLot. I don't know how many real examples you have yet, but thinking about 22 and beyond. Any read that you can provide in how much more productive even some of the handful of stores that you have are, how they performed, if any, if any better in the first quarter than the stores that haven't been touched at all?

Hey, Timmy, good morning. This is Hal, and thanks for your question. You know, I'd start by just saying we are, you know, the Life Out Here strategy is off to an excellent start. We are, across all of the initiatives that we have, they're all underway and getting excellent traction. As we highlighted, the two, you know, the two neighbors club relaunched a month ago, off to an excellent start there. The FAF team, multiple months of maturation there, having a big impact. Fusion and SideLot are early days, as we noted in our prepared remarks. We have implemented them in a large number of stores already. They've had good customer reactions early on, and the sales performance is as we expected. And in our Q2 call and beyond, you can expect to hear more on performance of those from us as we get through the all-important springtime and we're able to fully evaluate the results.

Okay. Thanks for that. And then the follow-up financial is on second quarter gross margins. Assuming the environment in terms of lack of markdown continues, that should still be a good source year over year. But, you know, Kurt, you mentioned the pressure that you expect. Is there any way you can quantify, you know, relative or direction in terms of freight expense and some of the other headwinds just so we can gauge order of magnitude?

Yes. I mean, to address gross margin, I'd first point to a great basis point to look at is referring back to the drivers of Q2 last year that were comping, and then even reflecting on the Q1 drivers. And that's really a great way to reconcile to it. And the reason I point that out is last year, some of the drivers in Q2 that were about to lap were With the pandemic, you saw transportation costs and certain commodity prices actually declining, and so that was really a favorable item in there. We are now lapping that first quarter where there was really no promotional or clearance activity. In Q1, the factors that were drivers that we pointed out in Q1, such as the favorable product mix, is the last quarter where, before we start lapping some of that favorable product mix where the discretionary higher margin items were a big portion of the mix. To give you a level of quantifying of it coming off of that basis, I'd give you the four key factors, and I'll put it in order of magnitude. Lapping those lower transportation costs with higher transportation costs right now would be the first. Lapping a favorable product mix in Q2 last year where the discretion or higher margin items were a much higher percent than Q would be second. The inflation impact and then followed by, as I mentioned, the one-time neighbor's club impact for launching the points and rewards-based program is a great way of summarizing it.

Okay. Thanks, everyone. Good luck.

Your next question comes from Scott Siccarelli with RBC Capital Markets. Your line is open.

I have a follow-up on the new customer cohort. My question is simply, can you guys quantify the comp impact that you've been receiving from new and existing customers, whether it's this past quarter or the last couple?

Yes, Scott, this is Kurt. You know, we started the pandemic seeing a strong growth in new customers, and we've talked about that over the last three quarters. We continue to see a meaningful portion of our growth coming from new customers. And for the first quarter, When looking at the strength of our business, the new customers, both new customers that entered transacting with Tractor Supply in 2020, as well as new in first quarter, really represent a key portion of first quarter results in the high single-digit range of our mix of the 38.6% comp. That's fantastic. Thank you.

And just wanted to clarify one other comment that you made earlier, Kurt. So basically you guys had much better than expected results on one cue. You're raising two cue. You haven't changed back half from what your original anticipation was. Is that the right way to read it?

Scott, there's no real significant change in top line or other factors on the second half. We have certainly considered and recognized some key factors that we pointed out, such as inflation and some of the cost of doing the business. So we've factored that into our overall guidance, but no real meaningful shift in tailwinds or headwinds in our second half algorithm.

Got it. All right. Thanks a lot, guys.

Your next question comes from Kate McShane with Goldman Sachs. Your line is open.

Hi, good morning. Thanks for taking my question. I wondered if I could switch gears a little bit and just ask about your digital business. I wondered if you could talk a little bit more about how customers are using your same-day fulfillment, the BOPIS. I know there's been a lot that's been turned on and changed during the pandemic to make it easier for to fulfill. I'm just wondering if there's any way to break down how the customer is getting their orders now from digital, and where do you see this going longer term? And then finally, in the same context, are you working towards pushing customers towards the same-day fulfillment and BOPUS options and away from two-day shipping?

Yeah, hey, Kate, and good morning, and thanks for your question. We are very pleased with the performance of our online business. As we noted in our press release and in our prepared remarks, our fourth quarter now of over 100% growth in the business, and its penetration rates continue to increase as an overall percent of our sales. Buy online, pick up in store continues to remain approximately 75% of our digital sales. And with curbside pickup still being about 75% of that buy online, pick up in store. So, you know, that's, you know, so the customer behavior, even with the growth, continues to kind of stay similar to what it has been in the past. But what we are seeing is just a much more, our execution both from the customer order all the way through to customer pickup is just much more efficient than it was this time last year. And that's really due to all the investments that we've made and just the outstanding execution by the team. And I'll give a brief example of that. We rolled out our first mobile app last year in the summertime. We now have over a million downloads of that app, and it's becoming a material portion of our digital sales. As the customer does a buy online pickup and store order in our app, they can note the type of vehicle they're driving, the model, the color, and then any special pickup requirements they have, like maybe opening up the back of an SUV and putting it in there without even engaging with a customer. Then as soon as the order is placed, we have theatrical headsets in our stores for every single team member. That task within moments after the order is placed is sent down to that store. The team member acknowledges that in well over 90% of our orders are now being picked in less than an hour. As soon as the order is completed by the team member, they then check it in with our mobile handheld, which we doubled the capacity of those in our stores last year. And then they take the order up to Bopas Lockers, which we just rolled out in November of last year. The average store has three. And then the customer gets a notification saying it's ready. On their way into our store, we have an on-my-way functionality. The customer can hit that. As soon as the customer enters our parking lot, the team member gets a notification saying they're ready for the order to be picked up. And then in their theatrical headset, it will actually tell them, you know, Kurt Barton in a white Ford F-150 is ready for their order. And they'll walk right out, and they will drop the order in the back of the SUV, as it was indicated. We're doing well over 90% of that in minutes now. And... Then they take the handheld device out there, complete the order, because we've rolled out additional Wi-Fi access points on the front, and the customer drives off. And that is a big percentage of our orders, the customer scenario I just articulated. And the vast majority of the technology, as well as the operational components of that, are all new from last year. So just real kudos to the team for really just implementing a large number of technologies last year, as well as operational procedures.

Thank you. Your next question comes from Peter Benedict with Baird. Your line is open.

All right. Thanks, guys. Hal, I was wondering, I wanted to circle back to the rural revitalization theme you were talking about, and just curious if you had any more data around that. Have you guys learned more about maybe what the populations are doing in your markets. Any data that kind of speak to that? I understand you've talked more generally about it, but is there anything else you can share?

Yeah. Hey, Peter. You know, I think our data sets that we're looking at as it relates to kind of the, you know, the kind of the urban departure into rural and suburban is really a combination of our own data plus what we're pulling in, you know, from external data sources. And if you look at the millennial population in general, this is one that for over almost 10, 15 years now, I think all of us have been wondering if that generation will eventually conform to normal generational activities like householding and buying homes and such. And I do think that the pandemic really shocked that generation, and you're pulling forward now three or four years of those sorts of activities into a year. And if you look at home purchases, if you look at household formations, that generation is spiking above all the other generations in those activities. And the urban home purchases of that generation are declining, but rural and suburban are increasing. And we see that in our data set as well, as we talked about the millennial cohort increasing by four percentage points as a percent of our business in the first quarter. We're seeing it in our stores, in the products that they're buying and in the way they're engaging. I think we've mentioned in the past we sold 11 million birds last year, and half of those birds went to new customers. And it just shows you a category like poultry, which we're far and away the market share leader in. And it's a category that really went through a renaissance last year, and it's continuing this year in our stores. And you see a lot of new customers coming in, buying coops, buying birds, and buying everything that goes along necessary for that passion. And then they're taking it out to their new homes in the suburban and rural areas and enjoying the out-here lifestyle. That's great. That's helpful.

Thank you. And then I guess just on the competitive environment, we know you guys are joining up now with Orchland, but just how are you seeing your traditional competitors, you know, beyond Orchland, kind of act and behave here? And then the non-traditional competitors, you know, anytime there's a market that's seeing great growth, you know, it'll attract interest of others. So just curious what you're seeing, anything interesting evolving on the competitive front as you move here into the spring. Thank you.

Yeah, I'd say we've been really, really focused on our customer over the last 12 or 15 months. And with our trying to make sure that the competitive, you know, we stay out ahead of them and we're creating a compelling kind of competitive advantage, whether that's in inventory and really pleased. As Kurt said, we'd like to have more inventory, but to finish the first quarter two percentage points above last year given our comp rates. We were relatively pleased there. We have 10,000 more team members than we had this time last year. That's really indicative of our focus on customer service. And then if you think about the digital enhancements we made, that's really about staying ahead of the customer as well. And then also the investment we've made in our brand over the last over the last year. You know, we'd be remiss if I didn't point out the 17-point increase in our unaided brand awareness, moving from 34 points unaided brand awareness to 51 points of unaided brand awareness over the last 15 months. And I think all that kind of comes together to create a, you know, really compelling reason to shop tractor supply. And we're certainly seeing the footsteps in our stores and on our website. And just, you know, staying focused on the customer. Okay, great. Thanks so much.

Our next question comes from Stephen Forbes with Guggenheim Security. The line is open.

Good morning. I also wanted to sort of focus on customer trends, maybe more broadly. So, Hal, you mentioned 20 million or over 20 million members to date, but can you remind us how many members transacted during 2020? and then speak to sort of the differences in behavioral trends, right, maybe just spending trends or trip trends between those 20 million members, right, in the non-member customer base.

Sorry, could you repeat that second part of the question? It muffled on us. Apologize.

Sorry, Al. Just curious if you could sort of speak to the spending trends, how they differ, right, between the members neighbors club members customer base over 20 million members and those customers that you have that transact with you who aren't part of the loyalty member program just trying to better gauge right what the potential tailwind could be as the new loyalty member program ensures here yeah so i i'd start by first saying our neighbors club members represent over 60 of our sales and they shop us

much more frequently than our non-Neighbors Club members do. And we are seeing equivalent growth in our Neighbors Club sales as we are in our non-Neighbors Club sales. So they continue to be a very active, very vibrant group. And we're really excited about the rollout of our new loyalty program because what it does is creates three tiers and rewards our customers the more they spend and the more they earn. And we're excited about lifting their purchase rates from one tier to the next and kind of driving that upward migration. But they are, you know, it's a really strong customer group for us, and we're really pleased with the results we've had in the last year and excited about the ongoing developments in the program.

It may be just a follow-up or to ask that a different way. So, you know, over 20 million customers represent 60% of spend. How many customers account for the remaining 40?

Yeah, Stephen, it's Mary Lynn. We haven't given out some of that level of detail, but it's a highly engaged group in Neighbors Club. Retention rates are spectacular on it as well.

Yep.

Appreciate it, Collin. Yep, best of luck.

Thanks. Thank you.

Your next question comes from Elizabeth Suzuki with Bank of America. Your line is open.

Great. Thank you. As you had mentioned that inventory in general is a little lighter than you'd like, are there particular categories that are experiencing more acute shortages due to shipping delays or supply constraints? And could there be some pent-up demand or sales that were left on the table due to those inventory constraints?

Hey, Elizabeth. This is Seth. Thanks for the question. Yeah, as Kurt mentioned there, we really had strong momentum coming out of Q1 and exiting Q1. And while we would love more inventory, obviously, as we said there, to continue, obviously, to drive sales, we feel very good about our position to continue to drive these sales here in Q2. And I'd really bucket the inventory position that we think about really in kind of three primary buckets. The first bucket would be kind of our Q and our needs-based product. The team has done an absolutely excellent job making sure that we can continue to stay in stock and be that dependable supplier. And we feel that we can definitely continue to make sure that we can take care of that shopper and customer that's coming in. Big Ticket is really the second primary bucket, and that's where we really saw that strong demand exiting Q1. And so I would say early in Q2, that's where we were really focused on here, replanning that product so that we could bring that in to make sure that we could continue that momentum. And that product's flowing and has been flowing into stores. And then third is more on our import side. And the import side is where we did see a little bit more delays as it relates to our inventory position. Most of that is, and we call it our drive aisle type of category. So if you go in our store, some of the decor, some of the discretionary type areas, those items have been flowing in nicely. Actually, it's really putting us in a great position as we're entering here in the peak of Q2 to make sure our center courts are going to be locked and loaded and full and ready to drive sales. And we also talked about the quality of inventory is better than it's ever been. I mean, our clearance position is in an incredibly good spot So as you think about that 2% comp inventory, that's also doing it on healthy, quality inventory to drive future sales. So I feel really good about where we are to continue to drive that momentum here in Q2.

Great. And just one quick follow-up. I mean, if there are instances where your suppliers are starting to raise prices to you, are you generally able to pass through those cost increases without much pushback from the customer?

Elizabeth, we obviously have very robust pricing tools that's there. Most of our pricing inflation that we've seen have been coming from both the grain and steel markets, if you look at what the charts are showing out there. Grain markets have been moderately rising throughout the course of the back half of last year. It's been pretty steady above, call it the $5 mark early point this year. We've got a very talented team that's been managing this kind of inflationary environment in the past. and feel very confident in our ability, you know, to manage appropriately to make sure we drive market share, but also be able to pass along to drive a level of margin improvement that's needed as well.

Great. Thank you.

Yeah, thank you.

Your next question comes from Scott. Mr. R5 Capital, your line is open.

Thanks, guys, and thanks for taking my questions. So my first one is kind of a two-part question. question regarding the side lot and i guess i'm going to go back to what simeon was talking about i guess if you guys had more availability to do it would you speed up if you could hey scott um yeah so first off on the side lot i'd say we've learned a lot over the last

six months on the rollout of that program and are very pleased with the progress we've made. You know, the team's done just an excellent job navigating through permitting, navigating through COVID and construction crews. also navigating kind of access to steel fixtures and all those sorts of things that are, you know, kind of creating a very difficult operating environment. And we've done a lot of staffing and hiring of project managers, et cetera. Really pleased with the progress we're making. The team is working full out on the rollout of them this year. We're confident and kind of reaffirmed our guidance on 150 to 200 by the end of this year. And, you know, we'll update you on our plans for 2022 and beyond as we get further into the year. But we still feel very good about 1,500-plus of our stores being applicable to both Fusion and SideLot. and remain focused on that goal and executing those initiatives as quickly as possible, but also with outstanding precision of execution as well.

Okay, so you would speed up or you wouldn't?

Yeah, I mean, I think we're running at the right pace right now would be the thing. And if we can speed up as we get further into it, we will. But, you know, I think we're running at the right pace right now. We're certainly not constraining ourselves, you know, kind of from a kind of capital investment perspective or resourcing perspective. I think we're running at the rate that is appropriate for kind of our company right now.

Okay. And then my follow-up question, and basically I wonder if you guys had the data of new customers buying pet that are also Neighbors Club members.

That's cutting the data, Scott. I mean, we have all that data. We use it for insights and we use it for, you know, all of our digital communications in those areas. Yeah.

Do you guys have the ability to cut it that way, though, or do you not even have the ability?

I'd start by saying, first, I'll give you a couple data points on that, Scott. So around a third of our new customers join the Neighbors Club, and so we are seeing good movement of those new customers into the Neighbors Club program. And the two biggest drivers of new customers into our stores are pet and feed. And that kind of, to my comments earlier around core farm and ranch customer and kind of the millennial customer, you kind of, the trends are kind of applicable. The core farm and ranch customer is coming in and buying feed. The millennial customer is coming in and buying pet food or chicken feed to kind of fuel those passions and those habits. And then of those new customers, about a third are converting to our neighbor's club as they shop with us. And then, obviously, we would look for that pace to pick up over time, but feel really good about our customer trends and about PET as an attraction for those customer trends, but also poultry and feed, and then the conversion of those new customers into our loyal Neighbors Club members.

That's perfect. Thanks for the call. I appreciate it.

Your next question comes from Zach . Your line is open.

Hey, good morning. Thanks for fitting me in. You mentioned vendor funding and fast team benefits of 40 basis points to gross margin in Q1. And as you continue to step up the fast spend on the SG&A side, do you expect these vendor benefits to build through the year? And could these benefits be high enough to offset some of the headwinds from lower promo freight and the mix that you've called out in the back half?

Yeah, Zach, this is Kurt. I'll start and then I'll let Seth respond to the last part of your question in there. So our vendors have certainly been strong supporters of us to be able to fund the cost of the FAST program as we proceed with that. And that's really our commitment. This team is there to help merchandise and help ensure the sale of that product. And it has been a strong contributor, one of the areas that has been an early win in the Life Out Here strategy. And so our vendor funding that we anticipated, that funding has really began and started to flow through the P&L, pretty consistent about 40 basis points there. throughout all four quarters of the year on the gross margin side. The only thing I'll remind you is that we said in the back half of last year that we would begin to make the investments in the SG&A to build that team, and that cost actually went through the P&L unfunded. And so the SG&A cost today for FAST is larger than the funding. And as we begin to build this program, it will eventually neutralize over the years. But for this year, there will be starting to lap in the third and fourth quarter some costs on there. But again, for the year, it will average out about 40 basis points of incremental in SG&A with 40 basis points of benefit on vendor funding. It will differ between the quarters a bit. And then I know Seth can go ahead and talk about the investment.

Oh, yeah. Hey, Zach, just a couple other points there I'd just roll out. As Kurt mentioned, just one of the big early wins with our Life Out Here strategy. And I just think the timing of the FAST program could not have been better to roll this out with the record volumes that are going through our stores today. Execution has been absolutely excellent among the store teams. You know, our planogram resets right now are, you know, are on time, in full, north of 95%, which is a major improvement. It's a really good improvement from the past, and it's allowing our store teams really to focus on the cleanliness as well as to take care of our customers, which has also been a great win for our supplier partners as well. They're there to sell products, take care of them, and offer that customer service. And then finally, from the merchant perspective, you know, we plan to have record number of planogram resets occurring throughout the course of this year. And we were able to uptick that last year. And as we've been able to operate, and we have been operating in this record sales volume windows, our merchants in the past, we did not have a great avenue at times to go after opportunistic buys and things of that nature to really be able to fill in our drive aisles. And we've been able to leverage the FAST team as well as our supplier partners to go after those kind of opportunistic buys so that we can really maximize the sales trends that are out there. So I would just say overall just incredibly pleased by the FAST program and just really big high marks to the team that's out there for standing this up and taking care of our supplier base.

Okay, perfect. And on the loyalty program updates this month, I know it's early, but any feedback or customer response to reports thus far? And then also just quickly on gross margin, you mentioned a slight Q2 headwind to accrue for the elevated benefits or discounts. Is this just a one-quarter phenomenon or a headwind that should persist through the year?

Yes, so the Neighbors Club program is off to an – the relaunch is off to an excellent start. At this point, the customer comments are more anecdotal in nature in terms of their positive orientation around the tiers and the excitement about some of the special perks that come along with it around free same-day, next-day delivery for top-tier customers. as well as access to trailer rentals and such. And then I'd say we just had our first drop of points going to customers earlier this week, and so we're just starting to see some of those redemptions and such, and we'll be able to talk a bit more about migration of customers over the next couple of quarters. And then the gross margin impact and modest sales impact that Kurt mentioned in his prepared remarks is really more of a Q2 phenomenon that abates as we get further into the year. Great. Thanks, Hal.

Appreciate the time.

Given that we're past the top of the hour, let's go wrap up our call today. So, Denise, thank you for being our operator today, and this will conclude our call. And thank you to everyone for joining us. We look forward to speaking to you on our second quarter call in July. So thank you.