Tractor Supply Company (TSCO) Earnings Call Transcript & Summary

Good morning, everyone. So I am Scot Ciccarelli, Senior Hardline and Broadline analyst at RBC. I wanted to thank everyone for taking time out of their busy schedule to dial into our virtual consumer conference. Although I'm calling in from my basement, New Jersey, instead of having cocktails in a hotel bar in Boston, I still think we have a couple of really productive days for everyone that's dialed in here. So with us this morning for the session, we have the senior management team of Tractor Supply, including CEO, Hal Lawton; CFO, Kurt Barton; and of course, Mary Winn Pilkington from Investor Relations. So everyone, we really appreciate the time that you've provided to us and our investor partners here. So how -- I know you've been in your seat since early January. I guess, calling the last few months, eventful probably doesn't do it justice. And I know you want to say a few words to kind of get it started.

Hi Scot, thanks so much for having us on today. And we're pleased to be here. And as you said, it definitely has been an eventful last few months. And -- but we're just thrilled to be here, and thanks for having us on and look forward to having a discussion today about our business and Tractor Supply and all the accomplishments that the organization has made during this unprecedented time. And just would open up by just saying, I hope everybody that's on the call today is doing well, safe, healthy, you and your loved ones. These are certainly unprecedented times. But thanks for having us on today, Scot, and we're excited to be here.

Excellent. Yes. Thank you for being on. So obviously, you guys had a pretty big announcement last night, now expecting comp growth to be up 20% to 25% for the quarter, even though we have an entire month left. I guess one of the first questions I'd like to start with is, can you just kind of walk us through how demands changed really since early March? And related to that, what has changed with the mindset of your consumer? I mean what we've heard pretty broadly is rural areas have been much less affected or impacted from COVID-19 and more urban or suburban areas. And yet you continue to see this stockpiling of goods through Tractor Supply. So if you can kind of walk us through the demand trends and kind of the change of the mindset would be -- that you think is happening with the consumer, I think that will be a good place to start.

Yes, certainly. As you mentioned, we did make an announcement after market close yesterday. We announced really 3 or 4 big things. The first was we gave an update on our business. As you mentioned, we have -- we're 8 weeks into our quarter, and we felt like it was appropriate from a transparency perspective to provide visibility into our business, particularly in light of the fact that us, like many other companies had withdrawn guidance at the conclusion of Q1. In addition to the -- an update on our business performance and providing an outlook, we also made an announcement on a number of strategic investments, including the continuation of our appreciation bonus, including some permanent benefits and compensation increases in our team members as well as the relaunch of our website and the launch of our first-ever mobile app. And I'm sure, Scot, we can come back and revisit some of those latter points. Specifically on the demand, as you mentioned, in our release yesterday, we provided guidance of 20% to 25% comps for the quarter with net revenues, 24% to 29% growth for the quarter. I'd say just a few things. First off, the demand has really been stable throughout the quarter. We've seen sustained and elevated comps across almost really every day of the 8 weeks. With the exception of the first few days as we were starting the quarter out as we saw a bit of a giveback from the stock up activity that happened in late March. As it relates to kind of where the demand is coming from, all geographies, all business categories and all channels are strong. So we're seeing performance strong across really all elements of the business. In terms of drivers, certainly, kind of this kind of rural revitalization is a tailwind for us as well as kind of just customers are more in their yards right now and in their -- out in their land. And so categories like home standing, poultry, DIY projects, those sorts of things. I think just the participation rate of people across the country is just much higher in those activities right now. And a lot of that's just because people are staying in. They're not spending money on travel. They're not spending money on entertainment. And so they're shifting their spend. The good news for us on that is that it's not just our existing customers that are driving these elevated comps. We are seeing really an unprecedented level of new customers and reacquired customers. And so really, it's working across existing customers, new customers and reacquired. And the good news on the reacquired customers is that we're seeing strong second and third shopping trips from them. So they -- the data would suggest, and in fact, we're seeing the second and third shopping trips are outpacing what has been our historical average for new customers. So not only are we seeing more new customers, but they're coming back with higher frequency levels. And then qualitatively, we've asked our customers about their consideration of coming back to shop at Tractor Supply, and it's very, very, very strong, over 80% of our customers. So they have an inclination of continuing to shop and track supply and kind of changing their purchasing behavior. So we're very pleased with that as well. So strong growth in customers. That's leading to a balance of transactions and tickets. So we feel good about that part as well. And I'd also just acknowledge, I mean it's been an excellent spring so far. So we do feel very -- like that's contributing. It's been -- the weather has been nice, both the right level of temperature and the right level of moisture. So we think that's helping to play part of it as well. I'd also say the team has done an excellent job rolling out and executing a number of initiatives, though that are also contributing and helping support the demand. We rolled out our first national advertising campaign in over 10 years. It's been very well received. We've rolled out curbside pickup for Buy Online and Pickup In Store, and that has been incredibly well received. We've rolled out same day, next-day delivery and seeing nice adoption there. So we've rolled out a number of initiatives as well that are encouraging customers to shop with us and also providing new services. And the last thing I would say is the health and safety of our team members and customers continues to be first and foremost from a priority perspective. And I do think that the format, the size of our box, the convenience of our locations, and our commitment to the health and safety of our team members and customers has created a shopping environment that our customers are finding attractive and compelling during this unprecedented crisis.

Well, it sounds like there's a lot in there, a lot that's really going well for you guys right now. Do you think this is what you're experiencing now would you characterize it as pull forward demand, i.e., it could have potentially negative ramifications at all on the latter quarters? Or do you think this is incremental because people are kind of stuck at home at this point?

Yes. I think I'll hit that in 3 ways. The first is, as it relates to, say, our Q2 versus Q3 pull forward, I don't -- I don't see that. The types of products that our customers are purchasing right now are just what we call C.U.E., consumable, usable and edible, and that business is very strong right now. And we aren't seeing kind of stock up behavior anymore. The purchasing behavior we're seeing is really just for the everyday needs that people have for their pets and animals. And then we're seeing strong activity in areas like garden and poultry, grilling, things that go outside and outdoors. And a lot of that, I think, is just in the moment purchases. As it relates to -- the second thing I'd say is, I think that there's a ton of uncertainty still out there in the economy. And whether there's going to be a recession, a second kind of reemergence of the virus, how's holiday going to play out. But from our perspective, we feel like that the -- all the benefits and the value proposition Tractor Supply will continue to provide for a resilient business and an attractive business really throughout the pandemic. And then for us, the third thing, I'd say, is just a long, long-term kind of post pandemic. Our focus is really about investing now, big believers that the strong will become stronger through the pandemic, and our goal is to emerge a better business, a more robust business, a business with more customers as we emerge out of the pandemic, whenever that may be. And our goal is to hold on to all these new customers we have and these reacquired customers and continue to create a compelling shopping experience for them and our existing customers.

So you talked a couple of times about the new customers that are coming in or even kind of reacquired. What's the profile of a new customer? I mean in theory, they were already kind of around Tractor Supply. Why did they start coming into Tractor Supply over the last couple of months, whereas that maybe they were in that area for 3 years, 5 years, whatever it happened to be?

Yes. Scot, I think you and I in one of our first sessions, we talked about Tractor Supply being kind of one of the country's best kept secrets. And while we have millions and millions of customers that shop with us every single day and are very loyal, and as an example, in our Neighbor's Club, we have 16 million members there's still a lot of America that we still have opportunity to build our brand with and to build awareness of and to drive consideration and ultimately to shift their purchasing behavior to us. And so we've really taken the pandemic as an opportunity to do that. So that's one of the reasons we've been investing in our brand, with our national advertising. We've been really ramping up our digital marketing efforts all to go out and really drive awareness and consideration of customers to shop with us. I do very much believe -- we very much believe that customers are more open-minded to trying different shopping -- different retailers out at this moment. Normally, people only have a slight openness to try different retailers and just different things in general. And I think right now, there's a strong openness to that. And we want to put our brand very much in that consideration set in that -- out there for our customers. And so -- but the customer profile is reasonably similar to our existing customers, still strong rural orientation or suburban orientation, really reflective of America broadly and with strong pet ownership and animal ownership and nice sized land that they want to spend time in their backyard and their gardens, et cetera.

Yes. Scot, this is Kurt. To Hal's point, while we have a portion of our customers that are that core farm and ranch that know us really well, there's still a wide variety of that customer that is the rural customer that enjoys their land, their animals, their pets that may not have frequented or had shopped Tractor Supply. And in this environment, to Hal's point, as we engage on a national TV campaign for brand awareness with Tractor Supply at this point, we also combined with that the investment in our people. And I think what's really resonating with these new customers, our existing customers, is Tractor Supply is a very convenient box to shop. Even under the new definitions of convenience, where it's contactless, curbside. So they tried us out. And we made the decision to invest in extra labor and invest in our team members. So that when these customers come in, and they see team members with masks, and they see them washing the carts. And they see them contactless running out to the curbside we wanted to make sure the best foot was pushed forward. And we really think that our teams out in the field, both in our distribution centers and our stores hit on all cylinders with this. And we believe it's resonating with these new customers.

That's really helpful, guys. And so how -- you did mention the C.U.E. product. That was something that had spiked pretty meaningfully for you guys. So on your last -- that you highlighted at your last earnings report in March. Have you seen a more normalization in mix from maybe what you saw during that stock up period in March? Or has that really -- has the C.U.E. product really kind of maintained the, let's call it, the main sales driver in the store at this point?

Yes. So our C.U.E. business continues to perform very well. As we commented on our Q1 earnings call, we did see a stock up in our C.U.E. products at the -- significant amount of stock up behavior at the end of the first quarter, so kind of mid- to late March. We're the largest seller of bagged feed in the United States. No one sells more equine, cow, goat, poultry, pig feed than we do. And our customers came to us in the first quarter to shop for their animals and food for their animals just like they did for their families at a grocery store. We certainly saw a little bit of give back on that in the first few days of the second quarter. But once we worked through that, the C.U.E. business for really 7.5 weeks, has been very strong and resilient and kind of in the low double-digit comp range really for the almost every single week kind of consistently. There's definitely certain categories that are really outperforming like poultry right now. But really across the board, if you look at whether it's dog food, whether you look at any of the feed categories, they're all performing very strong in addition to categories like fencing and others that are a big part of our C.U.E. business.

Got it. Okay. And just in the interest of time, I'm going to start shifting the questions a little bit. We talked about C.U.E., but if that's comping in that low double-digit range, but you're thinking 20% plus for the quarter, that by definition means other stuff got a lot better. And so I guess what I'm wondering is, do you think you saw like a sizable impact from the stimulus funds on your business? Because I know a lot of other retailers have been kind of citing the impact of stimulus. Their business got better justice as those funds were heading.

Yes. What I'd say is the attached products to C.U.E. are performing very strong. So for instance, let's take dog food, as an example, we're seeing really nice comps in our dog food business, units and sales comps and overall tonnage comps. Pet adoptions are at an all-time high right now. And so we're pleased to be able to be that kind of essential destination for customers, whether it's an existing pet that they have or a new pet. What we are also seeing, though, is as they come in to buy their food, they're buying a lot of accessories for their pets. So we're seeing whether it's things like toys, whether it's things like dog beds, whether it's things like kennels for their dogs we're seeing a lot of activity there. And the same goes with -- on the animal side. In addition on -- we're seeing strength in garden with whether it's live goods, whether it's things like long-handled tools. You see a lot of people out in their yard right now planting. You see a lot of people out in their yard working right now. We definitely are on -- as it relates to outdoor power, seeing nice strength in outdoor power and there's no doubt that the stimulus checks are supporting that business some. But I wouldn't say that the growth in that business is outsized compared to -- and kind of a material driver of our overall business any more so than some of the other categories that I've mentioned this morning. I don't know, Kurt, if you want to add anything to that?

Yes. The other thing, the way to look at it, Scot, is that as we came out of the second quarter, we talked about how the ticket was a strength with trip consolidation, traffic was down a bit, really because of the back half of the quarter. As the second quarter really continued to show some trip consolidation we see a nice balance between ticket and traffic. The transaction and traffic is supported by reengaged new customers. Reengaged and new customers as well as growth in our existing customers. And just remembering that our needs-based part of our business is not just C.U.E. So again, it's continued just fencing repair, anything from the pest control, the mindset of the consumer is focused on engaging hobbies, drilling, backyard-ing and all that. And there's so much of that Tractor Supply can offer to support the rural customer that isn't necessarily a consumable item. So across the board, it's a strong performance with needs-based product for those that live life out here.

That's great. That's about all you can ask for, balance geographically and category-wise. You guys were able to pull off a tremendous feat in terms of ramping up your same-day delivery capabilities in such a short period of time across your store base. I guess the question related to that is -- a couple of them. But do you think that the COVID-19 events have caused a permanent shift in e-commerce penetration in your sector, like for your customers that are just now more accepting of it and frankly, expecting that delivery capability?

Scot, yes, on that one, I mean, I definitely feel like we pulled forward the adoption curve on just kind of technology, broadly speaking, by 2 or 3 years. And I mean that just kind of as it relates to just consumers broadly as it relates to e-commerce, from a retail perspective and also as it relates to just specifically to Tractor Supply. And this is a curve, an adoption curve that's been really been going on for the last 20 years. You think about the introduction of e-commerce in 1998 and Amazon and eBay registering their URLs and really kind of launching into e commerce. And then you think about the mobile phone and kind of the iPhone being launched in 2007 and really everyone just really becoming attached to their phone and it becoming kind of the primary utility for them. And I think we were on this curve of e-commerce adoption and mobile adoption. Every business on a different curve, every customer type on a different curve, but no doubt, everybody adopting. And I think what we've done with -- what the coronavirus has done is really just accelerated that adoption curve by 2 or 3 years. And for us, it's really -- our -- we've been focused on a One Tractor strategy for the last few years. We announced 3 years ago some additional investments we were going to be making in technology, all to create a strong foundation for us to build from. And I think you see the fruit of those efforts right now. We were able to move rapidly to roll out curbside delivery. We're able to move rapidly to roll out same-day next-day delivery. We're able to pull up our mobile app launch by 3 months. And we're able to accelerate our website rollout relaunch as well all because of these foundational investments we've made 2 or 3 years ago, whether they're in building out services, moving our architecture to the cloud, kind of putting us on a more modern platform. And now we're able to move swiftly to deploy new features when necessary. And our customers have really voted with their wallets on that. We've seen really strong e-commerce sales, well above our kind of historic penetration rates. We've seen Buy Online, Pickup in Store continues to be kind of 75% or so of our online sales. And curbside delivery continues to run at almost 75% of our Buy Online Pickup in Store. And that's pretty remarkable for a feature that we rolled out less than 3 months ago. And on all those -- with all those rollouts and all those changes and all the new customers and the complications created, obviously, by the pandemic, our customer satisfaction scores are at all-time highs. And our Buy Online Pickup in Store scores are at all-time highs. And curbside pickup is even above our broader customer satisfaction score. So really pleased with the organization, the team's ability to respond rapidly with technology rollouts and then just the adoption of our customers. And we fully expect that those penetration rates, while they might moderate a bit that we pulled forward by 2 or 3 years what those penetration rates are.

Got it. And just in the interest of time, trying to on to squeeze 2 more in here. First, it tends to be fairly topical. Kurt, you and I have talked about this a lot just in terms of your exposure to some of the energy production markets. Number one, could you kind of outline how you kind of think about your own exposure today to some of those markets? And then can you compare that to kind of what you guys experienced maybe 4, 5 years ago?

Yes, Scot. So let me give the typical background on that. A little over 10% of our stores, as we look at them, we label them and say, these are stores in markets that can be impacted by the oil industry. Now not all of them the same. And really, the markets for us that have a little bit more direct impact would be West Texas, Oklahoma are more directly impacted by the oil industry. As it stands today, our strong performance, as Hal's mentioned, is across all geographic areas and markets so these oil market stores for us continued to perform strong in this quarter, albeit showing some signs of below the chain average. Four years ago, as a comparison, Scot, to your question. You have to remember, we had a severe peak that drove active oil rigs up to a peak of about 1,800 oil rigs, and then it dropped severely in 18 months to 400. And that had a pretty significant impact in those stores and those markets back then. When you look at where we're at today, the last past 12 months, we've had active rig counts really hovering around 900, maybe dropping now to below 700. We could see that dropping again to 400, but the level of drop from the peaks is very different. So we expect to see -- have some impact in the near term, but not necessarily to an extent that we saw 4 years ago. And that's about the best way I can describe how we see it. And we'll watch it very carefully. But I hope that helps give a little bit of perspective on Tractor Supply's exposure with the shifting, changing oil industry.

Yes. No, that's very helpful. And it just remains an investor topic for your company. I wanted to make sure I squeeze one more in. ESG and sustainability has been a huge topic with a lot of investors over the last couple of years. And I guess the question is, for you guys, how important is ESG and sustainable to your corporate strategy? And are there any, let's call it, recent initiatives you'd like to highlight as particularly important to Tractor?

Yes. ESG is incredibly important to us. It's a strategically important set of topics one that we are committing a lot of resources to and a lot of focus and have maintained that focus even during the coronavirus pandemic. I'll kind of hit on a few of those pieces. Well, I'll maybe just start by saying, not only is it important to us and our -- but it's important when I say us, I mean, all of our stakeholders. So it means a lot to our team members, it means a lot to our investors. It means a lot, importantly, to our customers and the communities that we serve. We had a kind of long history of stewardship around sustainability. Supporting FFA, supporting 4-H. We've announced a commitment to 25% reduction in greenhouse emissions by 2025. And we absolutely believe that stewardship of our environment of kind of the rural communities really all in the preservation of life out here, it's very much connected to our brand. As it relates to kind of diversity and inclusion, acceptance, we would put our track record right there with anyone else. We have -- starting with our Board, very strong female and diversity representation on the board. And then if you look down into our organization, and if you look at our assistant store managers, over 50% of our assistant store managers are women. So it's an organization that's very embracing of diversity and inclusion and acceptance. It's a core part of our values. And we know it's something you've got to always continue to do better and better on. And even just during this pandemic, we've had numerous sessions, building out our diversity inclusion plan for this year, putting actions in place and continuing to drive and make progress on that. So just in summary, I'd just say, ESG is something we spend a lot of time on. It's a key priority for us. We know it's important to our stakeholders, and we continue to invest in it even during this crisis.

Yes. It seems like your customer base, I suspect, given the fact that they're living off their land is probably maybe more important than even some other of the big corporate titans out there. Unfortunately, that's all the time we had on our speed date here. But once again, really appreciate it. Congratulations on the very strong results that you guys just preannounced last night. Sounds like everything is clicking from a geographic perspective, category perspective. Now you've got transactions then tick it up like not a whole lot of holes to punch in the story from what I can tell. But once again, thank you very much, and we greatly appreciate your time.

Thank you.

Thanks, Scot.

Thank you, Scot. Take care.

Thanks a lot.