Tractor Supply Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2021

There are 12 speakers on the call.

Operator

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 prepared remarks, we will open Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release.

Operator

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 risks and uncertainties, 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.

Operator

Important risk factors that could cause actual results to differ materially And 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 at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. This morning, we shortened the prepared remarks So allow more time for Q and A.

Operator

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 for the call for follow-up. Thank you for your time and attention this morning.

Operator

Now it's my pleasure to turn the call over to Hal.

Speaker 1

Thank you, Mary Anne, and thank you to everyone for joining us this morning. The Tractor Supply team delivered strong results for the Q3 with net sales up 15.8%, Comparable store sales increased 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 What we see is very structurally sound. We have strength in our customer base.

Speaker 1

We're gaining market share across our categories. We continue to advance our Life Out Here strategy. Our business has never been stronger, 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.

Speaker 1

They kept each other safe as we went through another COVID-nineteen 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 Persever to deliver strong customer satisfaction scores, including all time high gurah 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 DCs. Back in June, we raised our minimum opening wage to $11.25 per hour.

Speaker 1

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. 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 work 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.

Speaker 1

And the team has done a great job addressing issues 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.

Speaker 1

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 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 In 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.

Speaker 1

And even then, we'll very likely be in a hybrid environment at most And at this point, our customers will have been ingrained for over 2 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 Q3. Like the Q2, every week had positive comps. Also like the Q2, our growth was broad based across regions and product categories.

Speaker 1

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 2,000,000 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. This 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 Our core Farm and Ranch, which is the largest and most important of our customer base.

Speaker 1

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 market 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 Neighbor's Club loyalty program continues to exceed our expectations with year over year sales growth of these members north of 20%.

Speaker 1

We exited the quarter with more than 22,000,000 Neighbor's Club members. These members are spending more than about 3x the rate of nonmembers, With Neighbor's 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 Q2 of this year. The number of high value 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 Neighbor's Club continue to gain traction with our customers.

Speaker 1

Given our robust performance through the Q3, along with our outlook for the Q4, we are again raising our sales and earnings guidance for 2021, And Kurt will share more details on our improved outlook later in the call. Regarding our pending acquisition of Orson 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 As 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.

Speaker 1

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 an even stronger and better positioned as we execute our strategy. And with that, I'll now turn the call over to Kurt.

Speaker 2

Thank you, Hal, and hello to everyone on the call. Once again, Our Q3 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. 3rd quarter comp store sales of 13.1 Representing a 39.9 percent 2 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.

Speaker 2

Our Queue 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 6th consecutive quarter in a row, Q had comp sales growth atorabove15%. Key subcategories such as poultry, livestock feed and dried dog food We're among the strongest categories with broad based strength. Our big ticket categories, which continue to have solid comp store sales performance In line with the chain average, Inflation contributed about 700 basis points to comparable store sales.

Speaker 2

As you've heard from the retail sector and others, The cost environment remains elevated across imports, domestic freight, commodities and labor wages. Our merchant team has been aggressively advocating for our customers. Where necessary, Some of the cost pressures that we cannot offset. Our merchant and supply chain teams are currently navigating this challenging and disruptive environment extremely well. As we closely monitor our customers' purchasing behaviors, we are focused on our business and are committed to being priced right every day.

Speaker 2

Our 3rd quarter gross margin rate was 36%, a decrease of 41 basis points versus last year. For comparison, our gross margin was above our Q3 20 2019 rate of 35%. Year over year, the gross margin drove 2nd, elevated freight costs and import costs And 3rd, a more normalized product mix shift in Q. All of retail is working through the drivers of inflation and freight costs.

Speaker 1

The We continue to And we're pleased to announce that we're making a low

Speaker 2

pricing strategy and a continued Strong demand for our product categories. The benefit from vendor funding for the field activity support teams for our FAST initiative, Which was launched in the second half of last year was consistent with our guidance. Our 3rd quarter SG and A expense ratio, including depreciation and amortization Improved by 58 basis points versus last year to 26.1%. 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 stores, lower COVID-nineteen pandemic response costs And decreased incentive compensation. Partially offsetting this leverage were higher wage rates, incremental store labor hours to ensure we are providing and investments in our Life Out Here strategic initiatives.

Speaker 2

Given the elevated volumes and current Operating environment, we also encourage select discrete costs such as incremental team member benefits, pop up DCs And the timing of our annual sales meeting, which normally occurs in the Q1. The offset to our FAST initiative benefiting gross margin Was approximately 20 basis points of incremental SG and A expense for the labor cost for the team as we are now Cycling the initial investment to launch the program last year. Much like our gross margin rate, our SG and A We've had about 70 basis points favorable expense ratio since then. Operating profit margin of nearly 10% in the quarter. Diluted EPS was $1.95 an increase of 20.4% from the 3rd quarter of last year.

Speaker 2

Our balance sheet remains incredibly strong. At the end of the quarter, our merchandise inventories were $2,200,000,000 Representing an 11.7% increase year over year in average inventory per store. The increase principally reflects growth to support the robust sales trends along with the impact of inflation. Moving now to our updated guidance for fiscal 2021. We continue to operate in a time of heightened uncertainty regarding the pandemic.

Speaker 2

Despite this uncertainty, including Product cost inflation and supply chain constraints, we are raising our full year outlook. Our updated guidance reflects the strong results for the 1st 3 quarters of the year And the positive and structural momentum we see in our business continuing into the Q4. Against the backdrop of what we know today, we are forecasting Fiscal 2021 net sales centered around $12,600,000,000 with comparable store sales growth of about 16%. For the year, we forecast an operating margin of 10.2% to 10.3%, a step up from our prior guidance. Diluted EPS is now forecast in a range of $8.40 to $8.50 This compares to our previous earnings range Of $7.70 to $8 per diluted share.

Speaker 2

Within this updated guidance, we are forecasting comparable store sales growth for the Q4 of 8% to 10%. Two modeling points to keep in mind. The prospective acquisition of Orson Farm and Home is not included in our guidance. And as you start to roll forward your models for 2022, please keep in mind that next year We'll have a 53rd week for us. This week is typically a low volume week of sales given that it follows the Christmas holidays.

Speaker 2

We have a unique opportunity with the positive customer trends and momentum in the business. And with that, we are Committed to investing in store and supply chain labor as we look to provide a legendary customer experience across all channels. The strength of our balance sheet and the consistency of our free cash flow continue to be a position of strength for Tractor Supply. We remain committed to returning cash to Shareholders through the combination of a growing dividend and share repurchases. For 2021, we remain on track for anticipated share repurchases In a range of $750,000,000 to $800,000,000 This year will mark a milestone with approximately $1,000,000,000 In summary, our results proved yet again Tractor Supply's unique competitive advantages.

Speaker 2

Our relentless focus on being the dependable supplier for the out here lifestyle is embedded in our purpose as a company. With that, I'll turn the call

Speaker 1

back over to both provide updates on our Fusion and Sidelot strategic initiatives, which are key parts Just announced new goals that are the next step in our long standing commitment to sustainability, Stewardship and opportunity. By 2,040, we are committing to achieve net zero carbon emissions across All our operations. As part of our social commitments, we are prioritizing and accelerating our initiatives and actions for diversity, equity and While we are focused on cultivating an environment of all kinds is appreciated and valued. I invite you to learn more on our dedicated ESG website. Turning next to our Life Out Here strategy.

Speaker 1

As a reminder, we've been executing Against 5 key strategic initiatives this year as part of our overall strategy. And those initiatives are Neighbor's Club, Digital, Fast, Fusion and SideLock. The strategy and its initiatives are designed to capitalize on the attractive opportunity that we see in our nearly 100 $10,000,000,000 total addressable market. Our Project Fusion and sidelot model transformations represent significant investments in These store level investments are designed to grow our market share and drive the productivity of both existing and new stores as part of our Life Out Here strategy. So let's start with our Project Fusion store remodel program.

Speaker 1

As a quick reminder, Project Fusion is our state of the art space productivity program designed to enhance the customer experience in our mature store base And give customers that may not have shopped with us in the past more reasons to shop. We anticipate having about 15% of our total store base In the new Fusion layout by year end, we've reduced the time to complete Fusion remodels by 50% since the beginning of the year, And in turn allowing us to minimize the disruption to the store operations and our customers' shopping experience. Our customers are taking note of the improved layout, the ease of shopping and our new product offering. Specifically, in our customer intercept They call out better organization, improved merchandise selection, cleaner and brighter aisle and easier to navigate layout. Categories seeing the strongest lift in sales include areas like apparel, companion animal and power tools.

Speaker 1

Given the size of our store base, This is a multiyear opportunity to continually refresh our store base and further drive comp sales through productivity. Another significant component of our space productivity efforts is the transformation of our sidewalk. Again, as a reminder, Typically, there's as much space outside of our stores in the sidewalk as we have on the inside of our store. And the productivity of this space is Substantially below the chain average. We're in the midst of a multiyear project to transform our side lot With an expanded product offering and an enhanced shopping experience.

Speaker 1

With this investment, the Sidelab space is leveraged To offer a wider product offering in the lawn and garden categories, enter new categories with a garden center And offer greater convenience through the expansion of our buy online, pickup in store capabilities for drive thru pickup. In select locations that meet sales volume threshold, we're also adding a feed room to help deliver The bagged feed demand. And as a reminder, we're the largest seller of bagged feed in the country. We also continue to see a positive halo We continue to see the growth of our product categories, increased ease of shopping and new service We continue to keep our existing customers engaged and attract new customers also to the Higher sales per square foot through the transformation of our sidewalk space remains a significant opportunity. We anticipate having about 150 side lots complete across the chain as we exit 2021.

Speaker 1

In these early remodels, we're learning a great deal about our customers' appetite for an expanded lawn and garden assortment. And we're even more excited than We continue to reduce the project timeline Also here by about 50% and minimizing the disruption to our customers and store While still early on, we are very positive about the continued refining environment, We're making progress in our ability to significantly reduce construction costs, The construction time and the corresponding disruption at the store site. While the majority of the remodels have been completed more recently, we are very pleased with the early read on the sales lift. Post the disruption And mid single digits for combo stores, which have both Fusion and Side Lot remodels. We expect continued improvements in these results, which is on track for the expectations we had as we began these projects.

Speaker 1

Over the course of The last year, the team has done a great job, operating the business, gaining unprecedented challenges and also executing Our transformational initiatives to support our life out here strategy. And to wrap up, our results clearly underscore that our strategy These are working, that the team is navigating the challenges effectively, and that we're emerging from the pandemic stronger than before. We're extremely optimistic about our future. As we enter one of the busiest periods in retail, my thanks and sincere appreciation go out to each of the more than 45,000 Trax Supply team members for their dedication and commitment to our mission and value. And with that operator, We'd like to open the lines for questions.

Speaker 3

The first question is from the line of Oliver Wintermantel with Evercore ISI. Thank you. You may proceed.

Speaker 4

Changes within the business. And my question is regarding gross margins. I think you said it's 100 basis points higher than before And then in 2019. So I was wondering if you have early indications of what you think is in gross margin structural Maybe give back when promotions come back on and maybe the comp decelerates from the very strong 40% to your comps?

Speaker 1

Thank you. Hey, Oliver and good morning. Thanks for joining our call. Yes, on gross margins, we're very pleased Both with our short term results, kind of this past quarter on gross margin, and also very optimistic about The long term nature of our gross margins, on the short term, we've had significant amount of cost Coming through our business, whether that's in cost of goods as it relates to Raw materials and commodity based goods, also vendors passing along costs related to labor and freight. We've also seen freight costs increase as well, as well as the costs related to imports.

Speaker 1

The team has done an excellent job navigating those costs, Finding offsets, productivity measures, really being the advocate for the customer to keep prices as low as possible. That said, as Curt mentioned, we did have inflation to 2% of 7% in the quarter, which helped us offset a lot of those Cost and deliver the gross margin results that we did in the quarter were sequentially from a gap to last year improved from Q2. Long term, as we talked about on several of our calls, the question is really around the promotional And the clearance intensity the clearance intensity in the business, and those 2 remain at the same levels as they have over the last 6 quarters, very low. We remain very focused on everyday low price. We remain very focused on Delivering value every single day to our customers, we see it playing out that way for the The plans for significant promotional intensity in Q4 and we think that we'll remain in a very supply constrained Drained environment as we move into the first half of next year.

Speaker 1

And that too will continue to limit any sort of promotional intensity in the market. And a couple of years in now with minimal promotional intensity, I think that bodes well Or being able to maintain kind of a low promotional kind of structure going forward. And So as I said again, we're very pleased with our short term gross margin results and also very optimistic about the structural

Speaker 4

Thanks very much. Good luck.

Speaker 3

Thank you, Ms.

Speaker 5

Hi, thanks very much. So based on All those comments that you just provided, Hal. The question would be on obviously the longer Give a little color on how

Speaker 6

you think about long term broadly versus the prior 9% to 9.5% because that just obviously doesn't really

Speaker 1

And good morning and thanks for joining the call. We see significant growth opportunities ahead in our business, dollars 110,000,000,000 total addressable market, Super excited about our life out here strategy and the runway ahead there. And we're investing in that strategy to Sure, we capture sustainable market share. Absolute to your point, acknowledge That absent the write down on Petsense that we did a 10.1% op profit in 2020 and our guidance For 2021 here at 10.2 to 10.3 that both of those exceed our long term targets. We certainly don't want to get ahead of ourselves here in the Q3.

Speaker 1

What we commented on is that we're in the midst of our annual planning for 2022. It's at the same time, we're also just always looking at our long term targets, and it's very natural for us To be reviewing that over the next few months. And so when we have more news on that, we'll certainly let folks know. But again, I think we're in A period of where there's a significant amount of opportunity ahead, and we're very pleased with the results we put up this quarter. The outlook we have for the balance of the year and also excited about the long term opportunity that we still see out there in our $110,000,000,000 market as we're gaining Significant share in it and the team is just executing on all cylinders right now.

Speaker 6

Great. Thanks very much.

Speaker 3

The next question is from the line of Brian Nagel with Oppenheimer. You may proceed.

Speaker 7

Hi, good morning. Congrats on another great quarter. So I think my question may be a bit repetitive here So the prior to that, the question I have is, and Hal, you mentioned structural a lot in your prepared comments. From a demand side, Clearly, demand at Tractor in our last several quarters has been outstanding. There's still this very odd You put a unique dynamic within the overall consumer environment.

Speaker 7

I mean, what I want to I guess, the question I have is, what are you seeing in your business? How your consumers Are performing that gives you greater confidence that there is a structural shift in demand trends that will persist once the COVID crisis is completely behind us.

Speaker 1

Yes. Hey, Brian. I'd point to Three things in our business. First off, I'd talk about just kind of broad macro trends. Secondly, I think I'll talk about is the consistency of our business.

Speaker 1

And the third I'll talk about is share gain. In the broad macro trends, all the trends that we saw In Q2 of last year, really have all sustained themselves. And I think there are certain retailers and other business and that waned. And I think that's not been the case for us. Whether it's things like rural revitalization, which is a bit more of a permanent in as people move and Whether it's things like pet ownership and adoption, again, permanent and more so in nature, whether it's homesteading And on just kind of this self reliance mentality, we're seeing those as more permanent And really no matter what data set you look at, whether it's home purchases, whether it's mobility, Whether it's pet ownership, any sort of qualitative data on where people are spending their money, they all reinforce the structural nature of those trends.

Speaker 1

The second thing I'd point to is the consistency. As I mentioned, our business has been remarkably consistent Month to month, week to week, by category and by region. And that's been regardless of whether or not we've been in COVID surges Whether or not certain states have been more in lockdown or less in lockdown. And that I think just again speaks to the structural orientation. And lastly, we're gaining significant share really in almost every category in our business.

Speaker 1

And we're seeing that share gain in our Our customers who have long shopped us and as they come to us now with the confidence that we're in stock With the right level of customer service and at the right price, and then also new customers who are finding the lifestyle that we serve To be I'd point to those 3 things that give us real confidence in the structural orientation of our business. And as I said, I think there's a set of COVID winners that were early on that have seen some of that wane. And then there's another set that are seeing it much more Structural and sustained and I'd very much put it at the top of that second camp.

Speaker 7

That's very helpful. I appreciate it. Congrats again. Thank you.

Speaker 3

The next question is from the line of Peter Keith with Piper

Speaker 1

Hi, thanks. Good morning. Great results, everyone. Looking forward to the next couple of months or the winter here, looks like we're going to be seeing kind of record energy prices, home heating, Thinking back to 10, 12 years ago, some of the heating exposure you guys have, there sometimes can be a nice benefit for Tractor. So I guess the question is on a net basis, how do you feel about this elevated heating costs that we're going to see this winter?

Speaker 1

Is it Maybe elevating costs for your core consumer.

Speaker 8

Hey, Peter, this is Seth. Thanks for joining the call. Hey, when we look ahead over the next couple of months, just a little bit more broadly, other than just outside of, call it, the energy And I'd love to just highlight a couple of things that we look to see to drive our Business over this holiday season and then to maximize and capitalize on that opportunity. When we think about that, We are really excited about how the team executed on our portfolio strategy, leveraging the FAST team And for holidays specifically over the next couple of weeks, we're really excited about the momentum we're seeing Our core customers that are coming to us for categories more broadly than maybe they have in the past, things like apparel and footwear. And we're seeing expansions like in key brands that consumers are really resonating with brand like Ridgecut where we're expanding into the women's lineup, we've learned in the past where we can continue to drive market share in those categories.

Speaker 8

We're also seeing that with that rural revitalization consumers come to us for outdoor activities even here in the fall. So Things like even like wildlife and UTVs driving that demand. We're still seeing strength across the board there. And then we're going to continue to focus on our queue activity where customers are coming to us for footsteps. So with a record number of adoptions over the last few years, we continue to be extremely excited about the momentum that we have in our pet business holistically as well as the Q business, and we're going to be looking to drive that throughout the whole holiday season.

Speaker 8

So I know it's a little bit broader than, just kind of the energy market Question there as well, but also where we see it as we come through, like we're seeing activity across our consumer base Be very consistent with what we've seen over the last few quarters and they're really resonating with the new items, the new categories as well As a new partnership that we're continuing to establish.

Speaker 1

Okay. Thank you very much, Seth.

Speaker 3

The next question is from Kate McShane with Goldman Sachs. You may proceed.

Speaker 6

Hi, good morning. Thanks for taking our question. I just wanted to go back to inflation for 1 minute. I wondered if you could talk to us about how much inflation you are expecting for the Q4. And when it comes to the pricing actions that you took, was it across most of the store or in certain categories.

Speaker 6

And when do you expect or what has been the reaction from an elasticity standpoint?

Speaker 2

Hey, this is Kurt. Good morning and good morning to everybody. Yes, on the inflation side of it, as Hal mentioned, On the top side, there was 700 basis points of inflation benefit on the business. We saw at that are slightly higher Cost pressures in Q3. As we look ahead to Q4, we exited Q3 and into Q4 with continued levels of inflation, Moderating at the levels compared to like what we saw coming out of Q2 into Q3, but there continues to be some levels of inflation that's Factored into our guidance.

Speaker 2

In regards to how we handle that, it really is more of a portfolio approach. We take a look at Where those costs are contributing both in transportation product costs and we look at our portfolio, Seth and the merchant team manages the shopping patterns From the customers as well as making sure that in key traffic driving areas, we've got great everyday low pricing. So We leverage our pricing tools really well and make sure that from the portfolio standpoint that we can balance from a retail side As well as what we can do to leverage the strength of our mature supply chain to keep costs as low as possible. And again, our team has just Managed through this great. And we our forecast and our guidance for Q4 expects that they're able to manage that in a similar pattern.

Speaker 6

Thank you.

Speaker 3

The next question is from the line of Michael Lasser with UBS. You may proceed.

Speaker 2

Good morning. Thanks all

Speaker 8

for taking my question. Kirk, can you just clarify what you intended to say with the response to that last question in terms of The inflation contribution moderated relative to the 700 basis points or in the inflation contribution that you're expecting in 4Q moderated relative to the 350 basis points to 400 basis points. And hopefully, that wasn't my question because it's just a little confusing how that was answered. My question really is, Moving forward, you still need a 3% comp or so to lever your expenses. In your prepared remarks, you noted that SG and A has levered 70 basis points relative to 2019 and given the sheer magnitude of the volume increase your stores have had, There would be some opportunity to right size or manage your cost structure such That you might be able to lever on a more moderate comp moving forward.

Speaker 8

Thank you.

Speaker 2

Yes, Michael, I'll hit the 2 questions. In response to clarification on Kate's question, for Q4, The inflation pressures in the business will be fairly similar to what we described and saw in Q3, flattish Potentially slightly up in regards to Q4. In regards to our leverage point, Where we're at right now with the business, the elevated levels of revenue growth as well as our focus on our investments really Makes the whole algorithm different than just saying is it a 3% comp that you leverage on. And to your point, right now, We're seeing really strong momentum in the business and that does elevate our ability to leverage on the cost. But we're also using that to the point that Hal made and that I made in our prepared remarks that we definitely see this as a tremendous opportunity.

Speaker 2

We're investing from a position of strength. So our continued outlook about managing SG and A to flattish Over time, we'll still be our outlook and the way we're managing this business. Great opportunity to just continue to gain market share and drive traffic

Speaker 3

The next question is from the line of Chris Horvers with JPMorgan. You may proceed.

Operator

Operator, we can just move on to the next question. If Chris is in on.

Speaker 1

Hello?

Operator

Hey, there you are.

Speaker 9

Thank you, Mary Lynn.

Speaker 1

Thanks, Chris. Sure thing.

Speaker 2

So

Speaker 9

Seth, with your commentary around 4Q, obviously soft lines, a lot of agent sourcing, I'm guessing the heating business and OPE. So it sounds like you're feeling good from an in stock level there. Is that accurate? And then how are you thinking about Next spring, at this point, You're probably making orders for that. So will you be ordering up for next spring?

Speaker 8

Hey, Chris. Yes. So We always say we're not we always want more, but we're satisfied with where we are right now, as we've managed through the supply chain with both our As we've managed through this throughout the course of the whole year, we've looked at every piece of our process. We're giving earlier forecasts. We're working to with our overseas factories to give commitments.

Speaker 8

And then we have historically, so that we can properly plan with them, plan through the supply chain, Look for alternative ways to source product or need be to make sure that we can have product hit shelf. And we're taking it we'll be able to take it when we can I get it even earlier than we have in the past as well, so that we can be locked and loaded and ready for the spring business? So, really feel good about the Across with our supplier base, we're going to continue to mitigate this global supply chain challenge that's been out there.

Speaker 1

Got it. Thank you.

Speaker 3

The next question is from the line of Peter Benavitz with Baird. Thank you. You may proceed.

Speaker 2

Hi, guys. Thanks for taking the question. I guess back onto the expense stuff, the investments you guys are making, obviously, the CapEx has been up. So I'm And how we're thinking about that, Kurt, for the year, it would seem this year is probably up 25 And then, if you look at the 2% year over year, maybe it's $270,000,000 of D and A. How do we think about that as you kind of pencil through 2020 Or how

Speaker 1

should we think about that? That's my question. Thank you.

Speaker 2

So for this year, the depreciation growth year over year throughout the quarter's mid to high 20% growth rate is very much in line with our expectations. The investments we've made this year, The incremental ones principally with the new distribution center build, Remodel has us right where we expected to be on depreciation. And for 2022, at this point with our plan, we would Expect very much similar in the low 20% growth rate likely and that's very much What we framed out when we launched the Life Out Here strategy. Okay, got you. Thanks so much, Kurt.

Speaker 3

The next question is from the line of Simon Gutman with Morgan Stanley. You may proceed.

Speaker 10

Hey, everyone. Good morning. Hal and Kurt, maybe I'll take another stab That's a longer term margin question. I think the math would suggest that your business could be running above that level. The question Is philosophically, do you let it run above that level?

Speaker 10

And how in that regard, are there things along the out here strategy that you can accelerate? Are there price investments that you would think about? Are there any other reinvestments that layer 2nd or third layers of the plan where you could lean in, curious how you think about that?

Speaker 1

Hey, Tim Ian. Good to talk to you this morning, and thanks for joining us. I'd say, first First off, we see sizable opportunity ahead in our market. It's for

Speaker 4

those who followed us For

Speaker 1

a long period of time, it's a very attractive market. It's one that's very fragmented, one where we're very well And we're pleased with the size and relationships that we have historically. We think that there's Significant further opportunity as we look out to continue to grow in an outsized way and take share. And we're committed to going after that share and continuing to grow. That said, would acknowledge 2 straight years of performance above 10% op margin.

Speaker 1

It's above our long term guidance. And as we go through our 2022 annual planning process, we'll be looking that will help us Really think through our long term guidance and the relevance of that as we look forward. But right now, It is our long term guidance. What I would say is, As it relates to investments, we're very bullish on our investments. We're very focused on excellent capital allocation.

Speaker 1

We're seeing the results of our investments in the business. As we shared today, the Fusion stores and the Sidelot stores are performing very well. As they mature and begin to normalize, we're seeing the results right in line with Our kind of business model and business plan for them were. That said also our business is much continues to grow at an Size rate. And that gives us an opportunity to leverage and scale on our business, in a way that we didn't fully anticipate last year at this Time.

Speaker 1

And I think as we see how that continues to evolve into early next year, you can expect to hear more from us on that. But again, we remain very bullish on our opportunity, very pleased with our business. It's never been stronger. About both the short term and long term potential inside of it.

Speaker 3

Adam with Wells Fargo. You may proceed.

Speaker 1

Hey, good morning. So Kurt, another exciting question. So first of all, can you talk through the lingering impact Some of these items. And then as we look to 2022, you mentioned an uptick in strategic spend. Is there any detail you can provide there?

Speaker 1

And then Separately on the 20% DNA growth, is that with or without oresilin?

Speaker 2

Yes, Zach, this is Kurt. And a number of things in there. Let me just try to package that in this. One, I'll hit the last one first. Orchlin is not considered in any of the numbers of the guidance that we've given.

Speaker 2

In regards to the depreciation expense structure, So COVID expenses have been elevated from the level that we entered the year into just because the pandemic with the Delta variant and others Have lingered there at the quarters last year, our team members have a And our team members, the incentive comp with the outperformance this year, while at lower Levels than last year continue to be above target. And so as you think about going forward, those are In future years, those are leverage points. And if like in this year, while There's incentive comp above target, the performance gives leverage above and beyond The average this year and next year will have those will be favorable items to compare against. The depreciation expense, as I mentioned earlier, the growth rate that we're That I quoted and referring to is very much in line with what we expected in our long range plan when we launched the Life Out has here strategy and talked about a 3 to 5 year plan. And so with the elevated sales, I mean, we feel very comfortable with A 20% growth rate in depreciation because that's where those investments are at, does not include Orsland.

Speaker 2

And again, we're very comfortable With the management we've got and what we have visibility on our expenses for the Q4 and even

Speaker 1

the near term beyond that. Got it. Thanks, Curt. What about the strategic side?

Speaker 2

The strategic initiatives that we've had, We haven't really specifically mentioned what we've put in our strategy on technology, digital, We continue to execute the plan. So maybe just clarify what you're referring there?

Speaker 1

Well, you mentioned you were going to continue to be in 2020. So I was just curious if there was an uptick in strategic spend that we should anticipate.

Speaker 2

Got you, Zach. No, it's very much in line with what we said that our capital expenditures over the next few years, We anticipate those still to be in that $450,000,000 to $550,000,000 some years could be higher because of launching of distribution centers. But the level of investment in the business is consistent with what we expect.

Speaker 1

Got it. Appreciate the time today.

Speaker 3

The next question is from the line of Seth Sachin with Wedbush, you may proceed.

Speaker 1

Thanks a lot and good morning. My question is just a clarification In terms of comp lift following the Fusion and sidelot rollout, I think you said You're seeing low single digit refusion in mid teens, but you're seeing low single digit refusion in the stores that have been completed. But your plan is for our full 1st year list of mid single digit. Is that correct? Hey, good morning.

Speaker 1

And it is accurate. The add that I'd make to that is just as is typical with a store remodel, There's a little bit of disruption that happens during the remodel. Particularly with the current supply chain environment, there's a little disruption that's Occurring still even after the remodel of some kind of fixtures and other types of things come in, sometimes a little late. That and then we start to see the lift Happened as customers get used to shopping, the new layout and find the new categories and the new brands and the new kind of the new remodel. And so what we're seeing is kind of what we would expect, which is kind of every week, every month that goes by post kind of the re grand opening of the remodel That the performance of the store continues to improve.

Speaker 1

And that's the case with both combo stores and the Fusion remodels. The adder that I would make to that is as it relates to the side lot with the garden center, we have A couple of stores that are that went through kind of year 2 of spring, we saw kind of outsized gains in those, Which is in line again with our expectation that we would see more of a maturity curve with the Garden Center That we would with the inside of the store Fusion remodel. We think that we expect and what we're seeing in the Fusion remodel is more of an immediate impact With kind of the maturity curve being more of that 3, 4, 5, 6 month maturity curve, whereas with The Garden Center, we're seeing a nice strong immediate impact, But then we're also seeing kind of 12, 18 months kind of continuation of that maturity curve. But yes, the results are very much in line, nice positive lift Already, even a few months into each of the remodels. And then we see even continued lift, as we complete kind of year 1 of those remodels, Whether it's Fusion or the combo.

Speaker 1

That's helpful. Just a point of clarification, when do you start measuring since the Disruption period end. We start measuring lift the day of the re grand opening. So not to get too tactical, but There's a sign off that the store manager and the project manager and the construction manager do, that on the Just complete. The re grand opening happens reasonably quickly after that, 1 week, 2 weeks kind of thing.

Speaker 1

And then we start measuring the lift from that re grand opening.

Operator

Thank you.

Speaker 3

The next question is from Gordon Haskett. You may proceed.

Speaker 11

Hey, Thank you. Good morning. Great quarter. I'm curious what's been the biggest areas of What have you learned in the class of 'twenty one side box that you would look to apply to future Store efforts. And then any sense for where you think the productivity longer term could be relative to your in store productivity?

Speaker 1

Yes. Hey, Chuck, and thanks for joining the call today. I'll hit kind of three things on Sidelight, and then I'll just Briefly touch base on, fusion productivity. The 3 things we'll talk about is the Garden Center, I'll talk about BOPIS and then I'll talk about, our feed rooms. So first on the Garden Center, our customers' key data set is that the category that we least So that's really what the Garden Center strategy is all It's creating another queue destination category in our results.

Speaker 1

I'd say We're more excited now adding to our fleet at Garden Center than we were even this time last year. The behavior we're seeing our customers exactly what we'd expect. It's a little less around beautification Good store in terms of the core product, vegetables and shrubs and trees Speak to life out here, whether it's the gardening you do in your backyard or whether it's the shrubs and the trees you're planting along your fence line and in your land, And we have significant convenience Kind of advantages for our customers from a location perspective. So the garden centers are performing very well And we're just getting started both on the build out of those obviously, but also with our relationships with our live goods vendors and the Tailoring it by store. The second thing is on BOPIS drive thru.

Speaker 1

We are seeing incredibly high levels of Drive through behavior from our customers. And we're seeing in some of our stores that have been open for 4, 5, 6, 8 months now, we're seeing 50%, 60%, 75% of the buy online pickup in store Being drive through. And just that extra convenience factor you're seeing with customers, and then that's driving repeat behavior. And so really pleased With how that's evolving and the behavior we're seeing from our customers is consistent with what the feature was when we rolled it out. And then lastly is the feed room.

Speaker 1

So we are the largest seller of bagged feed in the And

Speaker 2

if you

Speaker 1

think about our average store volumes and the growth we've seen in those store volumes combined with The outsized performance in queue, that's put a lot of stress on our stores as it relates to the receipt of bad goods, getting it out onto the store, Staying in stock for our customers and then being able to kind of get that on to customers' trucks and out the towards Get them on their way. And the feed rooms have provided valuable capacity and also allowed us to effectively from a cost perspective Serve that customer, because we're not touching the bags 2, 3, 4 times. We're able to leverage our mixing centers in a way That they're designed now. And so all three of those things are really coming together. We're seeing excellent performance across all three exactly as we designed them and built them.

Speaker 1

And We're continuing to use our test and learn to tweak it along the way. And as you think about our productivity as we move forward, We're still committed to our comps kind of outpacing overall retail and outpacing The life out here market that we define as that $110,000,000,000 market. And so you can expect continued productivity improvements On our same store sales, in an outsized way as we move forward, even in spite of 6 consecutive quarters now with double digit comp, We still have that expectation moving forward. One other thing I just while I've got the mic here, so to speak, I'd like Just step back and reference, there's a bit about kind of our long term kind of op margin leverage as Kurt was talking about. What I'd say is if you look at our long term guidance, because there are several questions on this topic.

Speaker 1

We and our long term guidance We announced last year had 6% to 7% sales growth and 8% to 10% earnings per diluted share, which implies Continued leverage on the business as we move forward. And we're not we admit we're not in a state of normalcy right now, obviously, with our I'm seeing the 6th consecutive quarters of double digit growth. But what I would say the spirit of the continued leverage you are seeing in our results. And that is the expectation we have of our business, whether we're seeing outsized costs from labor and outsized costs from freight, and cost of goods, Or whether that's in a more normal environment. And so we're holding ourselves accountable to executing In that way, regardless of the environment that we're in.

Speaker 1

And just wanted to clarify that. I think Kurt's point around 3% comp and whether that's a point of leverage is still accurate in a normal environment, but we still even in a kind of non normal environment still

Operator

Great. Thanks, Hal. And operator, that will conclude our call today. I really appreciate everybody's cooperation that allowed us to get through a lot more questions. So thank you all.

Operator

Look forward to speaking to you In January, on our Q4 earnings call, and Mary Anne and I will be around this afternoon for any questions. So thank you all for your cooperation. Have a great day.

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Earnings Conference Call
Tractor Supply Q3 2021
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