Tractor Supply Company

Good morning and welcome everyone to Tractor Supply's fourth quarter 2021 enhanced earnings event. The video we just shared I hope has you in a Tractor Supply state of mind. Thank you for taking the time to join us today. We look forward to the time we can host this event in person. We have a packed agenda today. Our executive team is excited to bring you many updates of where we've been since our last event in October 2020 and where we're headed in 2022 and beyond. To do that, we'll lead off our meeting with Hal Lawton, our CEO, and Kurt Barton, our CFO. They'll review our operational and financial highlights for the fourth quarter in 2021. Kurt will also provide more details on our 2022 financial outlook. Then Hal will provide an update of our multi-year Life Out Here strategy. It continues to be our North Star in our day-to-day operations and mindset. Our Senior Vice President of Marketing, Christy Korzekwa, will join us to discuss important insights we've learned about our core customer, as well as the new customers that we've gained. Then John Ortis, our EVP and Chief Stores Officer, will illustrate how Tractor Supply is a relationship retailer and share our approach to continue to deliver and elevate our legendary customer service. At this point, we'll have a quick break at around 1015 Central. After the break, Rob Mills, our EVP and Chief Technology, Digital Commerce and Strategy Officer, will share new capabilities we are introducing as we continue to enhance our customers' digital experience. If you've followed Tractor Supply over the last 20 months, you've heard us speak about our exciting changes in store layout with Project Fusion, along with our side lot remodels. Our EVP and Chief Merchandising Officer, Seth Estep, will give a quick tour of these revitalizing efforts inside of our stores, as well as a couple of other features that continue to allow Tractor Supply to lead the market. Up next, Colin Yankee. Our EVP of supply chain will provide insights on how we continue to evolve our supply chain and differentiate as the dependable supplier for our customers. Then Kurt will bring it all together and lay out our plan to deliver strong and sustainable total shareholder return. He will speak to our long-term growth outlook, the progress we have made with the execution of our strategic investments and our capital allocation priorities. Finally, Hal will wrap up the presentations, after which we will take a quick break before going into an extensive Q&A session with our executive team. Our goal is to allow at least an hour for the Q&A. But before we get too far down the road, I'd like to ask you to take note of our safe harbor statement. Please note, some of the discussions, presentations, and statements that we make today regarding our business operations and financial performance may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially. 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 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 Exchange Commission. Because we use select non-GAAP measures to describe our business performance, we've provided a reconciliation of these measures to the most directly comparable GAAP measures. which are included in the appendix of this presentation and will be posted on the IR section of our website as part of today's call. The information contained in this webcast is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a latter time. Tractor Supply undertakes no obligation to update any information discussed in this webcast. Please note this event is being recorded. It will be available for replay on our website at ir.tractorsupply.com under the events and presentations link. You can also find the slides from today's presentation there. Before Hal and Kurt join us, we wanted to share some of the big wins for Tractor Supply in 2021, many of which we'll be discussing later today in detail. Let's take a look.

Good morning, everyone. Thank you for joining us today. We're here in cold Nashville. We're excited to update you in greater detail on our life out here strategy that we first shared with you back in October 2020. As our year review video highlighted, we're just getting started. At Tractor Supply, we are very early on our journey to build on the momentum in our business and capture the tremendous growth opportunities that we see ahead of us. As we operated early through the early days of the pandemic back in 2020, we set our sights on ensuring that our business would emerge stronger than before. Today, our business has never been stronger. We have significant momentum. Our team is executing at a high level and our results demonstrate that our multi-year life out here strategy is working. We're operating from a position of strength. We have a lot of exciting news and progress we want to share with you today. Kurt and I will take you through our fourth quarter and fiscal year 2021 results and review our outlook for 2022 before the team provides an update on our strategic priorities. Retail is ever evolving, but our most important strategic asset remains constant in our team members. They nurture our relationship with our customers. And they make us who we are and what we stand for as a company. As a purpose-driven company, our team members create a sense of community in our stores and with each other. Our 46,000 team members are passionate about life out here. Over the last 22 months of the pandemic, they have lived our mission and values to ensure that Tractor Supply is the dependable supplier that our customers count on. This team has worked diligently with grit and determination to overcome the challenging operating environment. They've come together to support the increased sales volume through our DCs, to our stores and online, welcomed new customers into the lifestyle, onboarded new team members, and navigated the supply chain disruptions. We've enhanced our IT capabilities and done so much more. My thanks goes out to their hard work and dedication to each other, our customers, and the communities we call home. Thanks to the team, 2021 was a record year for our business as we successfully comped our record performance in 2020. And as we will share throughout today's presentation, we're benefiting from the many market trends that continue to be structurally sound. So let's recap a few of the milestones in 2021. We celebrated the opening of our 2000 store in December, right here in our home state of Tennessee. We announced the acquisition of Orchardland Farm and Home, and we remain committed to the acquisition, which continues to be reviewed by the FTC. And we hope to have an update soon. The strength in our customer base is supporting our market share gains across our categories. Our Neighbors Club program is growing with membership up 24% year over year as we transition from an affinity program to a tiered rewards program. We have robust retention rates and engagement, especially with our highest value tier members. We're committed to making Tractor Supply a household name. Through our targeted investments in marketing, we're seeing a remarkable increase of 21 points in our unaided brand awareness. We're also investing in our supply chain, as we announced the first of three new distribution centers over the next five years. And in September, we announced new robust ESG goals to further reduce our carbon emissions from our operations, as well as new diversity equity inclusion goals. And the team has done a remarkable job managing through the well-documented challenges across the global supply chain and dealt with an unprecedented level of inflation. We have tremendous strength, and it is broad-based. And now let me provide some specific color on our fourth quarter performance. Our comparable store sales grew a robust 12.7%, and this represents a 40% stack on a two-year basis. Continuing the trend, we've had several quarters now. Every week was positive with broad-based strength across all regions and all categories. We believe we are significantly outpacing the industry in our growth and continuing to gain market share, both online and in-store. Inflation. It contributed over 850 basis points to comparable store sales as we navigated the ongoing cost pressures across the supply chain. Where necessary, we are taking price increases to pass through some of the cost pressures that we cannot offset. and our merchants and supply chain teams are currently navigating this challenging and disruptive environment extremely well, and they're most focused on being that advocate for our customer to be everyday low price. As we closely monitor our customers' purchasing behaviors, we're focused on product unit trends, and as I said, we are committed to being priced right every day. Consumable, usable, and edible products. they continue to perform well with comps above the chain average. These categories, as we've discussed often, are needs-based, demand-driven, and they drive trips to tractor supply. And key categories in our queue area, dry dog food, livestock feed, equine health, and pet treats were among some of the strongest categories that continue to perform very well. While we were comping exceptional strength in the fourth quarter of last year for our big ticket categories, we had double digit growth again this quarter. Looking at the cadence for the quarter, December was modestly below October and November comp performance. And as a reminder, December was the warmest on record in 30 plus years. That said, we exited the quarter strong as weather normalized. And as we all know, January has started off quite cold. So to recap our sales performance, we had a remarkable year. with consistency that gives us confidence that the trends we're experiencing are more structural in nature. The execution by our team has been excellent. Our store teams and distribution centers, along with our supply chain partners, have navigated another challenging year with outstanding execution of our operational playbook. We have faced every challenge head on, focused on controlling what we control all the while staying true to being the dependable supplier for the out here lifestyle. The strength and diversity of our comp growth in 2021 on top of our record results in 2020 is very compelling. As evidenced in our share gains, the health of our customer continues to be very robust. All customer segments had strong growth with the fastest growth in our core farm and ranch segment. we continue to see stellar performance from our highest spending customers. Our retention rates remain higher than historical standards, and it's even higher from our neighbors club members. One in five or 20% of our new customers came to Tractor Supply through our digital channels in the fourth quarter, reinforcing the importance of the investments we're making in this area. We are supercharging how we serve customers with convenience and meeting them how they want to engage with us. To recap, we're experiencing more customers shopping us than ever before. They're visiting us more frequently, and when they come to shop with us, whether it's in our stores or online, they're spending more money per trip. Throughout the team's upcoming presentations today, you will learn much more about our plans to continue to build on this positive momentum that we have with our customers. Before we get to the update on our life out here strategy, Kurt will go through some of the key highlights of our fourth quarter and share more details around our 2022 financial outlook.

Kurt? Thanks, Hal. And hello, everyone. Thank you for joining us. We really appreciate your time and attention today to hear more about our substantial progress and our very bright future. As Hal covered a good bit about our top line results and impressive customer trends, I'll pick up with our gross margin performance. Our fourth quarter gross margin rate was 33.8%, a decrease of 83 basis points versus last year. This was generally in line with our expectation as we expected inflationary pressures to continue in both product and transportation costs. As has been very well documented, the cost environment remains elevated across imports and domestic freight, commodities and labor wages. Hal shared with you our approach to managing through the current environment. I commend our team for the great job they're doing in the current environment. The tractor supply team effectively offset a significant portion through our retail price management program. The fourth quarter comparable ticket growth included the benefit of approximately 850 basis points of inflation. For fiscal 2021, inflation benefited comp sales by approximately 550 basis points. Across the network, we have been nimble to navigate the unprecedented supply chain environment and macro issues, including inflationary pressures. Additionally, we continue to see favorability in the frequency and depth of promotions. This is due to our commitment to our everyday low pricing strategy and a continued strong demand for our product categories. Turning to SG&A, our fourth quarter adjusted SG&A expense ratio, including depreciation and amortization, improved by 68 basis points versus last year to 24.9%. This improvement as a percent of net sales was primarily attributable to good leverage in occupancy and other fixed costs from the increase in our comparable store sales, along with lower COVID-19 pandemic response costs and decreased incentive compensations. This leverage was partially offset by higher wage rates, incremental store labor hours to ensure we're providing a great customer service, and investments in our Life Out Here strategic initiatives. Moving to our profitability, adjusted operating profit increased 13.4%, adjusted net income increased 14.6%, and diluted earnings per share was $1.93, an increase of 17.7%. on an adjusted basis from the fourth quarter of last year. This slide recaps our record performance for the year, all on an adjusted basis. Our operating income increased 22% and for the fiscal year we had an operating profit margin of 10.3%. Net income was just under $1 billion with diluted EPS growth of over 25% for the year. Turning now to a few additional financial highlights. the strength of our balance sheet and the consistency of our free cash flow continue to be a position of strength for tractor supply. Fiscal 2021 was a year of strong cash flow from operations, which totaled $1.14 billion. Our balance sheet remains incredibly healthy, and we exited the year with a two times leverage ratio. At the end of the year, our merchandise inventories were $2.2 billion, and on a per store basis, Inventory increased about 15%. This increase reflects our commitment to support our strong sales trends and be in stock for our customers, along with an increase from inflation. In 2021, the team opened 80 new tractor supply stores. We continue to see very robust new store economics. For the full year, we returned a total of around $1 billion in capital to shareholders through the combination of share repurchases and cash dividends. With another year of remarkable performance in the books, let's now turn to our outlook for 2022. We detailed our 2022 guidance in our press release, but I want to take a few moments to comment on the highlights. We have momentum. We will continue to invest in the 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. And this team is committed to doing just that. We continue to operate in a time of heightened uncertainty regarding the pandemic. This uncertainty includes product cost inflation and supply chain constraints, as well as the impact that these factors will have on the broader economy and the consumer. As a needs-based business, tractor supply has a long history of resilience during volatility. Starting with sales, please keep in mind that we are cycling tailwinds from generally favorable weather and government stimulus, principally in the first half of the year. With that backdrop, we believe we can comp the comp, as our view is that our customer is healthy, even despite their concerns over the state of the broader economy. We anticipate the insights and initiatives you'll hear more about today, including neighbors club, digital, fusion and side lot, and investments in the customer experience to contribute to our positive comp range of three to four and a half percent. We are planning for positive comp transaction growth. We're also planning for positive ticket growth, which assumes an inflation benefit of approximately four percentage points. This is partially offset by an average ticket decline from lapping the strength in big ticket and other select categories from last year's stimulus benefit. The 53rd week adds about 1.5 percentage points of net sales growth for fiscal 2022 and about 15 cents of earnings per diluted share. Please keep in mind the prospective acquisition of Orsland Farm and Home is not included in our guidance. We believe gross margin and SG&A will remain flattish to the prior year. Key drivers for gross margin include assumptions that transportation and inflation pressures will continue, but at a slightly lesser pace, offset by our price management and continued limited promotions. Turning to SG&A, we are planning to make investments in strategic initiatives and wages, offset by leverage of fixed costs, normalized incentive compensation expense, reduced COVID costs, and operational efficiencies. As to the cadence of the business in 2022, Q1 is our toughest compare at 39% sales comp, benefiting from favorable weather and stimulus. In 2021, we estimated those two had nine points of comp benefit on the first quarter. The gross margin and overall operating margin are also the toughest compare in Q1, as we had favorable mix of product due to weather and strong leverage on comps and limited pressure from inflation. We anticipate comps to be flat to slightly positive in Q1, driven primarily from positive comp ticket. Q4 will have the strongest year-over-year sales growth due to the 53rd week. Sales comps are expected to be relatively consistent in Q2 through Q4, all within our guidance range. Our ninth distribution center is expected to begin operating in the fall. Our outlook is for capital spending in the range of 625 to $675 million with 70% for growth initiatives. Depreciation expense is estimated to increase approximately $70 million up about 25% year over year due to the investments in our business. We anticipate continuing our strong track record of returning capital to shareholders. We are planning on share repurchases of $700 to $800 million with an expected 2% net reduction in weighted shares outstanding. To wrap up, 2022 is positioned to be a great year for tractor supply. There is no doubt that tractor supply is stronger than we were entering the pandemic. We are delivering against our goals, and most importantly, we have a compelling and credible plan to continue to grow. I look forward to sharing more on our long-term outlook later in the presentation. Now, let me turn it back to Hal to share a broader update on our Life Out Here strategy. Hal?