Tractor Supply Company (TSCO) Earnings Call Transcript & Summary

Yes. Hal, I'll take that question. Scot, we'd agree. I mean as we've gone further through this year, there's little doubt that we are in an inflationary environment, and we're seeing the inflationary pressures in the areas you mentioned. We're seeing, as we expected, but at higher levels, we're seeing inflation in the grains, steel, most of our commodity ingredients in our products. And then you add to that, that transportation and fuel has a level of inflation. And then beyond that, just to meet the cost of labor. So it's unique in a way that when we look back at times of inflationary, it's hard to find the time where you've got most of the key cost pressures having inflation. And for Tractor Supply, to your question of what we're doing, the 3 points that I'd really point out as to how we think about and manage this is one that's it's an area that we manage routinely being heavy commodity based. Our merchants and our business is driven towards managing through inflation, deflation. So there's a muscle that we have and we build that we lean on during this times. And so we're going to leverage first our size and scale the muscle that we've built. Secondly, it's one of those times where we'll lean in on our investments on the pricing tools. And as we've mentioned in years past with inflation, we'll leverage our pricing tools and our competitive intelligence. We're going to continue to focus on maintaining market share. And so for the third thing is, in this environment, we believe we can make the right adjustments where appropriate to pass those costs on to our customers, manage the gross profit dollars in this environment. And with the ticket increases, there is some leverage in SG&A you gain from that. We believe that's the right approach for us is to maintain the gross profit dollars, get some leverage on the ticket and really make sure that we have that fine balance between the profitability but maintaining good competitive market share. And this is an environment where Tractor Supply has been in the past, and we believe we can manage through those.

And I think related to that, guys, is just supply chain disruptions everywhere, right? Everyone's talking about shortages, whether it's sporting goods, home improvement, certain sectors for you guys. I mean, what are you seeing? Or do you still -- are you seeing supply shortages in any specific categories? And then how would you compare your able to -- your ability to access product versus some of your smaller competitors?

Yes. Certainly, I think we're in the midst of a global -- very disruptive global supply chain right now, whether it's containers being in the right place across the globe, whether it's ships being able to get into port, getting product unloaded, also just drivers to move product, railway to move product and then not to mention labor to do assembly and even labor to move product through your distribution centers. I mean, all that's got a level of disruption in it. I think we are starting to see it moderate a bit. But I think we're in a -- it's -- 6 to 12 months before, I think you've gotten a lot of that really ironed out, just given the volatility that's been created here over the last -- that's occurring right now. As it relates to us, I think we're pleased but not satisfied with our inventory position. We would like to have more inventory, but we feel like our in-stock position and our inventory levels in total are in okay shape. And we do feel like we're in a better position than many of our competitors. With the investments we've made over many, many years in our distribution network, in our technology and systems, in our integration with our suppliers, and then given the scale and size and importance that we are to many of our -- to most of our suppliers, I think we're able to leverage all that to stay in stock and be that dependable supplier that our customers count on us for.

We've been talking a while about how we think the big will keep getting bigger. And we're one of those seminal moments in economic history, where, what, if you've got the size of scale technology, you're just hard to compete with for a smaller operation. So I do want to bring this back to -- you mentioned the enhanced earnings day, then the Analyst Day, if you will. You guys had set a multiyear EBIT margin target of 9% to 9.5%. Last year, you had a 10.1% margin. This year, at least as of your last earnings guidance, you're kind of at the top end of that range, 9.4% to 9.7%. But the truth is, you should be more profitable, right? Like all your stores are generating over $1 million in sales more than they were. You went from $4.5 million to $5.5 million, rough math. So how are you thinking about kind of that go-forward profitability without obviously updating guidance on this event?

Yes, Scot, as we've talked about in the past, we really see that long-term target of 9.0% to 9.5% right now as the right sweet spot for Tractor Supply to balance out our opportunity to gain market share, to continue to capture of the new customer and this demand and embracement of the Out Here Lifestyle. So when you think about how to compare the long-term targets to performance in 2020 or expectations in 2021, I'll hit really the 2 key points, which is what are we seeing and expecting in gross margin and then the SG&A cost. In 2020 and through the pandemic, the biggest gain in operating margin came from the gross margin side of the business, where we saw a significant shift in promotions, clearance activity really driving somewhat of a transitory benefit on the gross margin side of the business. And in 2021, we're seeing some of that giveback even with mix in there from the 10.1% down to the 9.4% to 9.7%. Over time, as we move from feeding like hand to mouth on the inventory, we believe there's going to be more normalized competitive environment. And so there's a shifting back with some, not all, of the gross margin benefit and we think that's the primary factor of driving -- we're comparing a 10.1% to even a 9.4%, 9.7% or our long-term targets of 9.0% to 9.5%. On the SG&A side, it's really more of a neutral balancing over time. There was significant cost during the peak of the pandemic, there's significant cost right now. We're investing in the business, whether that be labor or new investments in the business that are offsetting the cycling of the release of some of the onetime costs. But even today, at the level of growth and the supply chain disruptions, labor demands and overtime, transportation costs, even moving around and through our supply chain to get that product to our stores, puts a burden on the business. And some of those costs are offsetting the release of some of the offsets of the onetime cost last year. So we believe in the near term, long term, our SG&A has the opportunity to be relatively flattish as a percentage of sales, while we're making these investments in the business. So the net of normalizing on gross margin and balancing and managing the SG&A, we really feel like the right point over the near term or our long-term targets is to still be focused on that 9.0% to 9.5%.

Got it. Okay. So I know we talked about a lot of big picture stuff, but -- how you mentioned earlier that you have all these company-specific initiatives, the side lots, the remodels, the technology investments, et cetera. Which of those initiatives do you think can have, let's call it, the biggest short-term impact versus what could be the most beneficial over a longer stretch of time?

Yes. To your point, Scot, when we kind of unveiled our Life Out Here Strategy in October that really was built off of our previous strategies. We highlighted 5 key initiatives: our Neighbor's Club loyalty program; digital; our FAST team; our Fusion remodels; and our Side Lot Transformation. What I -- the way I'd kind of articulate is it's really a portfolio of initiatives that each has kind of different time lines for impact. And on the very near-term side, the FAST program is already at scale and having meaningful impact in our business. We stood that team up in August of last year. 1,200 new team members, a 1,200-person new organization with significant support from a funding perspective from our vendors. And that team has been operating now for the better part of 3 quarters. And if you're in our stores right now, you can see the impact that they're having on the business in terms of merchandising execution. So great -- that one's having impact right now and has been having an impact. Our Neighbor's Club Program, 20-plus million members of the program, a very active loyal customer base and membership group. We just updated at the beginning of April that program to now create a tiered loyalty system. Basically, at the opening level at our Neighbor's Club level, membership level, you get a point for every dollar of spend. At the next level of the preferred membership, you get 1.5 points. And then at the highest level, the preferred plus membership level, you get 2 points. And if you use our private label credit card, you get 5 points back. You can redeem those points against goods or services. If you're in our preferred plus, you also get free shipping every day online, plus you get a free trailer rental and also like a free same-day next-day delivery once a quarter. So it's been a significant upgrade to the program. And what that's going to do is drive upward migration and encourage kind of ongoing loyalty. We implemented that in April. We're seeing excellent results already with it. The consumer -- the customer is behaving exactly as we anticipated they would. That's going to have an impact for the balance of the year. And digital is one, we've had 4 straight quarters of 100% plus growth. We continue to launch new features, new functionality on an ongoing basis. That's one that continues to give now. And then the Fusion remodels which is the remodel of the inside of our store and the Side Lot Transformation, which is the remodel of the outside of our stores, those are a multiyear remodel program. We'll have about 150 to 200 of each one of those done this year. And then we've talked about 1,500 store target for each one of those 2 programs over the next handful of years. So those will be programs to kind of give over time as the remodels are implemented. So a real portfolio of initiatives with varying degrees of timing in terms of their impact, but all impactful to the company's performance.

That's helpful. And I know we're getting closer to the end here. So I do have a question from the audience. Could you touch on the advantage of your multichannel offering in the pet vertical? And why won't pure-play e-com weigh into that market?

Yes. So I'd start with 75% of our online orders are picked up in our stores. Our customers enjoy the location and access that they have to our stores, and they use them just like you would an online delivery from a same-day next-day delivery. Our -- the types of animals and pets that our customers have are larger-sized dogs. And our customers are typically buying 50-pound bags of food and feed. And those are just more difficult to -- more difficult to ship online and do in a profitable way and to do in a fast way. And our -- the animals that our customers have, the pets that our customers have are just very different than that urban kind of 10-pound pet. Our pets are -- that our customers have, and they have more than 1 typically, they're indoor/outdoor animals that are 50, 100, 150 pounds in size. And our stores and our multichannel offering for them is -- sets them up quite well. We do have same day, next-day delivery, if that's a feature that they want. We obviously ship directly to a customer's home as well. And we leverage all of our distribution centers that we've invested heavily in to do so. So we feel like if there's a need for that, our customers have that option. But the vast majority of our customers is just a different purchase occasion, a different customer segment than kind of that online pure-play shipping directly into urban and even somewhat suburban homes.

Got it. And then with the last 2 minutes here, we did have Mary Winn jump on for help on our ESG conference not too long ago. She did a fabulous job. But I guess the question for you on the ESG front is what do you think the company is doing on the ESG front that may be a little less appreciated by investors?

Yes. ESG is a significant priority for us. It's an expectation that our customers have of us. It's an expectation that our team members have of us. And certainly, our investors and shareholders have of us and on the environmental side, we just recently updated our ESG tear sheet. We've accomplished all of our environmental goals that we announced a handful of years ago. Towards the end of this year, we'll be updating our next set of environmental goals and providing new long-term targets. But we've had a very marked sustainable reduction in our carbon footprint over the last 5 to 10 years. And we'll be making -- setting a set of goals to even make further progress over that. We're doing things like our new distribution center that we're building will be completely carbon neutral with the solar footprint for the DC. And then on the social side, we've made marked progress on our diversity, equality and inclusion activities over the last year and also heavily invested in our team members, including wage rates, access to benefits for our part-time team members, the granting of restricted stock for our store managers. And if we look at our ISS scores, our Glass Lewis scores on ESG, we have excellent, excellent scores in our -- and we're committed to maintaining and improving on those as we move forward. But this is a priority for us and one that we're committed to.

Excellent. With that, guys, as we are at time. As I mentioned at the outset, like I think you guys have done a fabulous job. It remains one of the stocks we're most excited about, just given what we view as sustainable trends on a broader level, but obviously, all the company-specific improvements as well. So I hope you have a great rest of the day with the meetings with our RBC's clients. And thank you again for spending time with us.

Thanks, Scot, for hosting us.

All right, guys.

Thank you.

All right. Bye.