Tractor Supply Company

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today, and we do hope everyone is staying safe and well. On the call today are Hal Lawton, our CEO, Kurt Barton, our CFO. After our prayer of remarks, we will open the call up for your questions. Seth Eastep, 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. This morning, we shortened the prepared remarks to allow more time for Q&A. Given the number of people who want to participate, we respectfully ask that you limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation on this. We will be available after the call for follow-up. Thank you for your time and attention this morning. Now it's my pleasure to turn the call over to Hal.

Thank you, Mary Wynn, and thank you to everyone for joining us this morning. The Tractor Supply Team delivered strong results for the third quarter, with net sales of 15.8%, comparable store sales increase of 13.1%, and diluted earnings per share of 20.4%. The team is doing an outstanding job navigating a very dynamic and challenging operating environment. We continue to benefit from many market trends that we see as very structurally sound. We have strength in our customer base. We're gaining market share across our categories. We continue to advance our life out here strategy. Our business has never been stronger, and we see tremendous opportunities for growth ahead of us. As we've consistently shared with you over the last 18 months, our strong results are a testament to our 45,000 plus team members. And I'd like to thank them for all their efforts in the quarter. They kept each other safe as we went through another COVID-19 wave and navigated through broad-based supply chain disruptions and cost of goods increases and navigated and managed through a tight labor market. Through it all, they've been resilient and persevere to deliver strong customer satisfaction scores, including all-time high Gura scores. Our team members are our greatest strategic asset and a key competitive differentiator with our customers. Our loyal and highly engaged team members have helped us fare better than most as far as staffing across our stores and VCs. Back in June, we raised our minimum opening wage to $11.25 per hour. Our recent wage actions bring our average hourly wage rate at our stores to nearly $15 per hour as we exit the year, with our DC at a higher rate. The investments we have made in store labor are being recognized by our customers by the overall customer satisfaction scores that I just mentioned. I'd also like to say thank you to our vendors and supply chain partners, as we've worked together to overcome challenges in the global supply chain network. And together, we've been very focused on controlling what we can control to deliver these results. Across our network, we've been nimble and been able to navigate the unprecedented supply chain environment and macro issues, including inflationary pressures. And the team has done a great job addressing issues ranging from import container shortages and port delays, driver shortages, higher freight rates, and a multitude of other supply chain constraints. To mitigate these challenges, the team has leveraged dedicated container ships, pop-up DCs, expansion of mixing centers, and direct-to-store shipment. Despite these challenges, our inventory is in good shape, and our in-stock rates finished above last year at the end of the quarter. Our diversified vendor base with only about 12% direct import is a strong point of differentiation for us during these supply chain times. Given our scale and sophistication, We believe that our network is a competitive advantage to being the dependable supplier for the out here lifestyle. Categories in which we participate and the out here lifestyle that we serve continue to have elevated consumer spending levels well above pre-COVID levels. We fully anticipate that the environment we're in is going to continue for the foreseeable future. And consequently, we think that the sales growth that we've seen is structurally sound given the changes in consumer behavior and the lifestyle investments that are now much more ingrained in the consumer psyche. These structural trends that continue to work in our favor include things like rural revitalization, trip consolidation, omni-channel adoption, and a self-reliant lifestyle movement, including DIY trends and investments in hobbies like gardening, backyard poultry, and, of course, pet ownership. For many workers, the return to office has been pushed out until next year, and even then will very likely be in a hybrid environment at most employers. And at this point, our customers will have been ingrained for over two years. As such, we anticipate that their behaviors are much more sustainable and structural. To provide some color on our results, let me share a few other highlights of the third quarter. Like the second quarter, every week had positive comps. Also, like the second quarter, our growth was broad-based across regions and product categories. Our e-commerce business continues to experience strong momentum with double-digit sales increases of over 40%. And in just under a year, our mobile app already has more than 2 million downloads and now represents over 10% of our e-commerce sales. We continue to gain share across all categories. This has been a consistent trend for multiple quarters now. And this share gain has been both online and in stores. The share gain has been aided by the increase in our unaided brand awareness, which has improved by 21 percentage points since November of 2019. This improvement combined with positive trends in our overall customer satisfaction are significant contributor to the share gains we are experiencing. Also consistent from previous quarters, all customer segments were strong with notable strength in our core farm and ranch, which is the largest and most important of our customer base. At the same time, our digital ad campaign to target millennials is supporting the significant growth we are seeing in this important demographic. We think the relevancy of traction supply to the millennial customers has staying power, given the structural changes in the markets and our customer behaviors, and we're certainly seeing that consistently quarter after quarter in our data as our average age of customer trends down. For the year, more customers than ever have shopped at Tractor Supply. These customers are making more trips and are spending more money per trip, and our new customer retention remains very strong. Our Neighbors Club loyalty program continues to exceed our expectations. with year-over-year sales growth of these members north of 20%. We exited the quarter with more than 22 million Neighbors Club members. These members are spending more than about three times the rate of non-members, with Neighbors Club members now accounting for nearly 70% of our sales. This continues to be a step up from where we've been running prior to the relaunch of the program and sequential improvement over the second quarter of this year. The number of high value per customers in the program grew almost 30% for the quarter. And we continue to experience retention rate in excess of 95% for our high value customers. These strong results demonstrate that the changes to neighbors club continue to gain traction with our customers. Given our robust performance through the third quarter, along with our outlook for the fourth quarter, we are again, raising our sales and earning guidance for 2021. and Kurt will share more details on our improved outlook later in the call. Regarding our pending acquisition of Orsola Farm and Home, we continue to work cooperatively with the FTC as it continues to review the proposed transaction. We look forward to the benefits this transaction will offer customers with improved product offering and competitive pricing. As has been the case over the last 18 months, I'm incredibly proud of the way our entire tractor supply team has managed to stay focused on taking care of each other and our customers. our long-term opportunities remain very exciting. Our goal has been to emerge from the pandemic stronger. Over the course of the last year, since rolling out our Life Out Here strategy, we have gotten stronger through this pandemic. And we believe that we're going to emerge from it even stronger and better positioned as we execute our strategy. And with that, I'll now turn the call over to Kurt.

Thank you, Hal. And hello to everyone on the call. Once again, Our third quarter results demonstrate the strength and resilience of our business and our strategic initiatives. As Hal shared, we continue to believe the underlying health of our business is very strong. Third quarter comp store sales of 13.1%, representing a 39.9% two-year stack, were driven by a comparable average ticket increase of 9.5% and transaction count increase of 3.6%. An example of the structural advantage we have is the ongoing strength in our consumable, usable, and edible products. Our Q products represent the strength of our core business and what drives trips to the store. Once again, Q outperformed the chain average comp sales, and for the sixth consecutive quarter in a row, Q had comp sales growth at or above 15%. Key subcategories such as poultry, livestock feed, and dry dog food were among the strongest categories with broad base strength. Continued to have solid comp store sales performance in line with the chain average.