Tractor Supply Company (TSCO) Q4 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Fourth Quarter and Fiscal Year 2020 Results. At this time, all participants are in a listen-only. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Mary Winn Pilkington, Senior Vice President of Investor Relations of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today. And I do hope you're all staying safe and well. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we will open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release. Now, let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant 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. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and 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 offered at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP are included in today's press release and presentation, which are posted on our Investor Relations website. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick related follow-up. I appreciate your corporation. We will be available after the call for follow-up. Thank you for your time and attention this morning. Before we get started, may I ask you to please turn your attention to our year-end review video that can be seen on our webcast. [Video Presentation]

Good morning. And thank you, everyone, for joining us today. I hope you enjoy the opening video. We will all, always remember 2020. And while we'll never recall the year with anything close to fondness, at Tractor Supply, 2020 will be remembered with a small measure of pride, as we reflect on our efforts to take care of our fellow team members, support our customers and invest in the future. None of these results would have been possible without the hard work and dedication of our team. And I want to express my sincere appreciation and gratitude to the more than 42,000 Tractor Supply team members, for how they have lived our mission values and work together to take care of each other and our customers. My thanks also go out to our supply chain and vendor partners, who've done an excellent job supporting our business. The environment continues to be uncertain and challenging. Vaccines are on the rise, but our country is still very much in the midst of a pandemic. Given the pace of the vaccine rollout, it will be at least fall, before we're back to some form of normality. Throughout the pandemic, our utmost priority has been to take care of the health, and safety and well-being of our team members and customers. We spent tens of millions of dollars on cleaning and mask, plexiglass and sanitizer. We provided almost 700,000 hours of COVID sick pay. We have conducted nearly 20,000 COVID tests. And we rolled out company-wide a contact tracing wearable devices for all team members to use. We will continue to spare no expense in this area in 2021. In addition to rolling out industry-leading safety protocols, we've also shown our commitment to our team members through appreciation bonuses, increased wages, and broader benefits offerings. At Tractor Supply, we are committed to being a part the solution for our team members, our customers and our communities. And we remain steadfast in that commitment going forward. As we talk now shifting and talking about 2021, we believe there is as much uncertainty this year, as there was in 2020. How fast will vaccines roll out? How are the derivatives of COVID impact transmission rates and antibody effectiveness? Will there be another stimulus? How will consumer spending evolve through the year? Given these questions and there are all the other elements of uncertainty, we're planning for fiscal 2021, based on a range of potential outcomes. The initial guidance we're providing today is consistent with our long-term algorithm that we shared with you, at our Enhanced Earnings Event in October. Importantly, our 2021 outlook reflects the strategic initiatives that are foundational to our Life Out Here Strategy. With the actions we're taking, we are committed to emerging from the pandemic, stronger than before. Now let's shift to the business review section for the fourth quarter of 2020 in the fiscal year. We delivered another strong quarter that exceeded our expectations. In the fourth quarter, we had strong net sales gains of 31.3%, with comparable store sales up 27.3%. We continue to gain market share and benefited from customer shopping with us with larger baskets. All customer segments and all value segments experienced growth. For the fiscal year, we added over $2 billion in revenue, and we reached over $10 billion in sales for the year, a significant milestone for the company. Once again, our quarterly results were remarkably consistent, across all periods of the quarter, across all product categories, across all geographic regions of the country. Also, both our transactions and ticket growth were seeing and were very balanced. For the third quarter, e-commerce saw strong triple-digit growth and increased significantly as a percentage of our overall sales. The work we did this year to improve our omnichannel capabilities has certainly resonated with our customers as we've seen several years of digital adoption accelerate in just a matter of months. For the year, about 75% of our omnichannel sales were picked up at a Tractor Supply store, further reinforcing the importance of our stores to our customers. As we have experienced in the last several quarters, we continue to have strong performance and market share gains in our consumable, usable and edible categories, with growth exceeding 20% for the quarter. In 2020, we had more customers shop with us than ever before, with increased sales across our existing customer groups, new customers and reacquired customers. Now shifting to talk about a few other operational highlights for 2020. We added more than 10,000 team members to support the growth of our business. These new team members were critical in our ability to service our customers at these elevated levels and also flow volumes through our supply chain. We pivoted our marketing spending for more traditional print media, digital and national TV. We launched our first national advertising campaign in over a decade. Our research indicates that Tractor Supply has become more top of mind with consumers, as our unaided brand awareness increased over 800 basis points. We expanded our in-store and digital capabilities to make it easier and safer to shop at Tractor Supply. We were nimble and agile in offering curbside pickup and same-day next day delivery. We also re-launched our website, and we rolled out a new mobile app, which already has over one million downloads. We celebrated the opening of our 1,900 store in Oakhurst, California and announced plans for a new distribution center in Navarre, Ohio that is expected to be operational by the fall of 2022. We reinforced our long-standing commitment to ESG through improved disclosure and transparency. We also surpassed our original target of a 25% reduction in carbon emissions, 5 years ahead of plan. We just step back, overall, 2020 really highlighted the resiliency of the Tractor Supply team and illuminated the potential for the business. We participate in a large, attractive market. We have momentum. We're investing in our business through our Life Out Here Strategy. We have the opportunity to create and define our future and extend our leadership for years to come. Before I hand the call over to Kurt, I'd like to address the impairment charge we took for the Petsense business. We recently completed a strategic review of Petsense. Although Petsense had solid sales performance in 2020, we reached the conclusion to reduce the number of new store openings planned over the long-term and identified some underperforming stores to close. We expect to close 10 to 15 stores in 2021. Combined, this resulted in a pre-tax charge of about $74.1 million or $0.49 per diluted share after tax. Petsense offers a differentiated shopping experience to the suburban and rural pet owner [ph] As mentioned, the business is currently doing well overall. We remain committed to growing and investing Petsense. Earlier this week, we named Matthew Rubin as SVP and General Manager for Petsense. Matthew brings a strong retail background, and I'm confident that he'll be an immediate asset to the business. I look forward to sharing more about our plans with you over time. Now Kurt will walk you through greater details of the quarter and the year, along with our 2021 outlook, before I return to give you an update on our Life Out Here Strategy.

Thank you, Hal. And hello to everyone on the call. This year was like no other in the history of Tractor Supply, as we delivered record sales and financial performance for the year. The fourth quarter continued to benefit from the macro trends that have worked to our favor. As we rank order our comparable store sales performance, the trends that I shared with you in the second and third quarter continue to play out in our sales performance. The largest driver continued to be our customer’s desire for product categories that support the Out Here Lifestyle, as they shifted spending away from travel, entertainment and dining to creating their own experiences. For Tractor Supply, this included purchases such as outdoor recreation and living, like UTVs and outdoor fire pits, along with all those indoor projects and winterizing their homes and equipment. This trend also includes living a more self-reliant lifestyle. The adoption of new hobbies like backyard poultry, hunting, gardening and bird feeding had continued. And we believe these hobbies and trends are becoming more ingrained in our customer’s behavior. The strong brand awareness and new customer performance that Hal discussed was the second largest driver of our comparable store sales performance. This was then followed by tailwinds such as emergency response related demand due to the hurricane activity and various strategic initiatives, such as our investments in digital and the omnichannel experience, same-day delivery and our private label credit card. Exclusive of the modest hurricane activity benefit, the weather impact was generally neutral compared to the prior year. We had robust performance in our big ticket categories, which exceeded our overall comp sales growth. This was driven by broad based strength, with safe, recreational vehicles, utility vehicles, trailers and generators representing the top 5 product categories. Fourth quarter gross profit exceeded our expectations due to higher demand for our products and a reduction in promotional and clearance activities. These factors were partially offset by higher transportation costs as a percentage of net sales. The result was that gross margin as a percentage of sales was 34.6% in the fourth quarter, an increase of 75 basis points. Moving on to SG&A. The 46 basis point increase in adjusted SG&A as a percent of net sales was attributable to 3 primary factors. First, incremental costs related to the COVID-19 pandemic, second, increased incentive compensation due to record sales and profit performance in the quarter, and then third, investments in our strategic initiatives. The additional costs incurred due to the COVID-19 pandemic included appreciation bonuses to team members across stores and distribution centers, as well as additional labor hours and supply cost dedicated to cleaning and sanitation to enhance the health and safety of team members and our customers. COVID-19 related incremental costs were approximately $33 million in the quarter, and that compares to our estimate of $15 million to $20 million going into the quarter, which resulted from an unexpected resurgence of COVID-19 cases late in the year. For the quarter, adjusted operating profit increased nearly 36% with operating profit margin of 9%, an improvement of 29 basis points. Adjusted net income was $193.2 million, an increase of 34%. Adjusted diluted EPS was $1.64, an increase of nearly 36%. For the year, we reached an adjusted operating profit margin of 10.1% and had strong growth in adjusted diluted EPS of 47.4%. Turning now to our balance sheet, which remains strong, merchandise inventories were $1.8 billion at the end of the fourth quarter, representing an increase of 5.6% in average inventory per store. This level of inventory is still a bit lighter than we would like, given the momentum of the business, and we are working with our suppliers and vendors to build our stock to support this momentum. During the quarter, we issued our first ever public offering of debt, and we received investment-grade ratings from both Moody's and S&P given our strong credit metrics. We issued $650 million in 10 year notes at a coupon rate of 1.75%. The proceeds from the debt issues were used for refinancing and repayment of term loans as we plan to maintain a leverage ratio below 2.5 times. Fiscal 2020 was a year of strong cash flow from operations, which totaled $1.39 billion, an increase of $582 million or 72%. For the full year, we returned a total of $518 million in capital to our shareholders through the combination of share repurchases and cash dividends. We currently have approximately $1.1 billion remaining on our authorization for share repurchases. Today, our Board reconfirmed our commitment to returning cash to shareholders through a 30% increase in our quarterly dividend, which puts our dividend payments in line with our target of at least a 30% payout ratio. Moving now to our guidance for 2021 that is detailed on page 11 of the supplemental deck. The impact that the COVID-19 pandemic will have on the broader economy, the consumer and our fiscal 2021 results remains uncertain. Given that backdrop, we are planning our – for fiscal 2021 based on a range of potential outcomes. To date, while still very early in the first quarter, we continue to see strong sales momentum in the business. For fiscal 2021, we expect net sales in the range of $10.7 billion to $11 billion. Comp store sales are anticipated to be in the range of down 2% to up 1%. For the year, we anticipate operating profit margin to be in the range of 9.3% to 9.6%, a significant step up when compared to our baseline 2019 performance. In fiscal 2020, approximately 90% of the operating margin year-over-year gain was driven by gross margin improvement. For fiscal 2021, we anticipate some giveback in gross margin and SG&A to slightly increase as a percentage of sales compared to fiscal 2020 on an adjusted basis. Now let's go into a little more detail on each of these areas. Our expectation is for modest gross margin contraction in 2021, as we anticipate incremental promotional activity, along with higher freight costs. Partially offsetting these pressures are an expected benefit from vendor funding for our field activity support team program, while the fast program expenses will be reported in SG&A with a year-over-year impact of about 40 basis points on each. Breaking down SG&A, the leverage from reduced COVID-19 costs and more normalized incentive compensation is expected to be offset by ongoing wage pressures, investments in our supply chain and digital space and higher depreciation and amortization expense. And as a reminder, the FAST program costs are reported in SG&A. As a result, we are forecasting SG&A as a percent of sales to slightly deleverage. Adjusted for normalization of the FAST program costs, SG&A is expected to remain relatively flat as a percent of sales. As always, we would encourage you to think about our business between the first half of the year and the second half as this is in line with how we manage the business. As you model 2021, I want to point out a few items that will impact comparability. Appreciation bonuses impact the second and fourth quarters of 2020, while wage increases of about $13 million per quarter took effect in the third quarter of 2020. Costs related to the COVID-19 pandemic remain an uncertainty for us in 2020, as our utmost priority remains the health and safety of our team members and our customers. For the first quarter, we anticipate costs related to the pandemic will continue at elevated levels. Additionally, as you think about the cadence of 2021, our business performance is expected to be stronger in the first quarter, as our comparisons step up starting in the second quarter. The first quarter of 2021 is forecast to have the highest comp performance of the year and correspondingly the highest operating profit growth rate. The second quarter is likely to be our most difficult earnings comparison of the year due to a couple of factors. Please recall the second quarter of 2020 experienced the strongest gross margin performance, driven by the least sales promotional activity. In addition, we expect incremental cost in Q2 of this year as we support the launch of an upgrade to our Neighbor's Club loyalty program. Moving to below the line. We expect total interest expense for 2021 to be approximately $27 million, while our effective tax rate is anticipated to be in the range of 22.5% to 22.8%. Our capital spending is anticipated to range from $450 million to $550 million with more than 80% of that spending going towards growth initiatives. The vast majority of the capital spending increase is attributable to new in-store initiatives and supporting technology for our Life Out Here Strategy. Depreciation expense is estimated to increase approximately $50 million. This is above our recent run rate as we accelerate our investments in the business. For the year, we expect share repurchases to reduce our diluted weighted average shares outstanding by about 1% to 2%. For modeling purposes, we've assumed weighted average shares outstanding of about 116 million shares in 2021. Net income is forecast in the range of $750 million to $800 million or $6.50 to $6.90 per diluted share. With our strong performance in 2020 and the critical momentum in our business, the team at Tractor Supply is excited about the Life Out Here Strategy. Our clear focus enables us to continue to be the innovation leader in our channel and emerge from the pandemic stronger than before. Now I'll turn it back to Hal.

Thanks, Kurt. So now let's shift into 2021. As Kurt said, we're laser-focused, and we're focused on continuing to gain market share. We're going to do this in 3 different ways. One is capitalizing on our numerous macro trends benefiting us. Second is nurturing our existing new and reengaged customers, and the third is executing our Life Out Here Strategy. So let's talk about each one of those in a little more detail. We believe that many of the consumer behaviors that we've seen over the last 9 months will continue through most or all of 2021. These trends we've mentioned before, but they include rural revitalization, trip consolidation, omnichannel adoption, self reliant lifestyle movement, consumer spending that's shifting from travel and entertainment to home and land and an all-time high pet ownership. We exited the year with nearly 19 million Neighbor's Club members. For the full year, over 11 million new identified customers and more than 6 million reactivated customers shop with us at Tractor Supply. We're seeing strong retention with these customers, and we have plans in place to engage them with new capabilities, marketing and product offerings. The third way we're going to be focused on gaining share this year is our Life Out Here Strategy, and it really positions us to strengthen and transform the company. As we shared last quarter, there are 5 pillars to our Life Out Here strategy. The first is the liver legendary customer service, second is advance our ONETractor capabilities, the third is to operate the tractor way, the fourth is go to country model for our team, and lastly, it's generate healthy shareholder return. So let me highlight some of our planned efforts that we have this year in support of our strategy. In 2021, we plan to open 80 new Tractor Supply stores and 10 Petsense stores. Additionally, we plan to remodel 150 to 200 stores with Project Fusion, and to execute Project Side Lot in 150 to 200 of our stores. That brings our total construction activity for the year to 400 to 500 projects. This is a significant step up in the team's workload and also is being executed in the midst of COVID. Our Project Fusion remodel program is designed to drive space productivity and to enhance the customer experience in our mature store base. It is a combination of both changes in the store layout and imagery that creates a greater lifestyle impression and drive space allocation for product assortment. Fusion stores help create a more welcoming destination and offer compelling showcase for our brands. Our Side Lot program is a full transformation of the space from, primarily a storage location for agriculture equipment to a state of the art outside garden feed and farm shopping center. That also provides for greater convenience through the expansion of buy online pick up at store. While still very early with both of these projects, we continue to be very excited about the sales trends we're seeing from the first tranche of Fusion remodels and Side Lot transformation projects. And importantly, the customer feedback has been overwhelmingly positive. Given the size of the store - of our store base, these initiatives represent a multiyear opportunity to continually refresh our store base and drive further comp sales. Another initiative we have is our FAST team. And they are already having a significant impact on the business. Since their implementation in August, they've taken on execution programs like executing merchandising programs like Center Court, End Caps, planogram resets, seasonal programs and sales driving initiatives. And what this is doing is it's really allowing our store teams to focus more on customer service and improve their in-store execution and then really ultimately allow us to focus more on the customer and driving comparable sales, and we're very pleased with the FAST rollout. We're also committed to ensuring our digital capabilities stay ahead of our customer expectations. We did this in 2020, and we'll continue to do this in 2021 and beyond. Big areas of focus for us in the first half are shipped from store, search engine optimization, payment options like Apple Pay and Google Pay, subscriptions, both online and in-store and also the recent launch of our Pet Rx platform. As Kurt mentioned, we have plans in place for an upgrade in our Neighbor's Club loyalty program by mid-year. And we anticipate that this new program will really drive incremental customer retention. And also provides strong incentive to allow us to grow our share of wallet with our customers. As we get closer to the launch of our new Neighbor's Club program, I look forward to sharing more of the details about the changes with you. Now just stepping back, we're excited about spring. We believe our customers will continue to be focused on their homes as their oasis and creating their own experiences, whether that's through things like gardening, grilling or home setting with their family and friends and neighbors. Spring Chick Days create great retail theater and support existing and new customers who want to expand their flocks. This was a big category for us last year, and we expect it to be so this year. And we will have a broader selection than we have historically of chicken coops. Tractor Supply is the clear destination for this on trend category. Given the strong trends we're seeing in our companion animal categories and the recent growth in pet ownership, we are focused on being a more complete resource for pet parents. In store, this includes relevant product assortment and brands, expansion of self-serve pet wash locations across, 150 stores to 200 stores and the build-out of 50 to 75 additional pet wellness centers. Currently, about 1,600 stores have vet services in-store, through our mobile vet clinics. Starting this quarter, pet prescriptions can be fulfilled online at Tractor Supply, as I mentioned earlier. In our app, we're now offering on-demand veterinary advice from a team of experienced veterinary professionals. Our customers can call, chat or e-mail a team of veterinary professionals to get all their pet health questions answered. These expanded and new services allow Tractor Supply to offer a complete solution to care for our customers, pets, whether in-store or online. Our stores will be ready for the change of seasons as we move into spring. In closing, we have a unique opportunity. We compete in an attractive and fragmented market. We have a track record of success and outperformance in our business. We see a unique opportunity to capitalize on the powerful customer trends we are benefiting from, and to emerge from the pandemic, stronger, transform company. Our goal is to make strategic investments that enable us to create greater competitive advantage, capture the opportunity we've discussed and generate shareholder value. With that, operator, we would now like to open the lines for questions.

Thank you. [Operator Instructions] Your first question comes from Scot Ciccarelli from RBC Capital Markets. Your line is open.

Good morning, guys. It's Scot Ciccarelli. I hope everyone is well and healthy, first of all. Second, I do appreciate you guys providing guidance, obviously not easy given the amount of uncertainty in the environment. But with that being said, I was hoping you guys could help us better understand how you went about constructing your topline expectations? And maybe outline a couple of your key inputs or assumptions? Thanks.

Hey, Scot. It's Hal Lawton, and good to speak with you this morning. I think the guidance that we provided is very consistent with the commentary that we had at the end of the third quarter. And I think aligned with the spirit of the dialogue in our opening remarks, which is that we expect COVID to remain a large kind of consumer driving force for the foreseeable future, certainly into the fall, if not for the balance of the year. And as a consequence of that, many of the macro trends, which have benefited us, will continue. We also think a number of these macro trends are sticky irregardless of COVID. And so, we kind of see those two coming together in a way that shapes the year as follows. The first quarter we're in now, we expect momentum in this quarter and our results in this quarter will be much like what we saw in Q2 and Q3 and Q4 with elevated sales levels. And then, as we start to comp on top of those in Q2 and Q3 and Q4 this year, we do expect that the comps will start to turn to more normal levels. And the collectiveness of that will kind of compile [Technical Difficulty] guided between minus 2 and plus 1. So it is a heavily weighted in the first quarter with kind of Q2, Q3, Q4, recognizing it will be comping on top of last year's elevated levels, but with still likely strong underlying momentum supporting those quarters.

I appreciate that, Hal. And how much – obviously, the macro trends, we actually agree with that assessment. But how much of your expectation is from some of the company specific initiatives, the Side Lots, some of the store remodels? Or is it just kind of all thrown together in a mixing goal there? Thanks.

Yes. We're certainly looking to piece apart our various initiatives, and we have some pretty sophisticated analytics tools that allow us to do that, at these more elevated volume levels, it is a little bit harder to see than what you might see in a normal mid single digit comp environment. But I will say that it's our view that we are gaining share and winning in all the categories that we participate in. And that's really consistent across the Board, whether you're looking at industry level data or we're talking with vendors. And so that would lead us to believe that not only are we benefiting from the macro trends, but the work that we're doing to support the business is also helping with that. And I'll call out a few things that kind of give us that - give us that sense. First off, I'll point to kind of some data sets around our customer. Our unaided brand awareness due in part, due to our national television campaign that we launched last March is up 8 points in the year. That's a very significant improvement in unaided brand awareness. And then the benefit that we've seen of that is a significant - the most customers that we've ever had shop our store in one year last year, including 11 million new customers and six million reacquired customers. And those customers are shopping with us at repeat rates that are at kind of all-time highs. And those repeat shopping rates are for the new customers are holding - have held through the year. So whether it was a new customer we saw in March or April or May, or a new customer that we saw in October, November, December, all those repeat shopping rates are holding at all-time highs. And then, last thing I'll talk about is, if you look at our team members. And you look like our customer SAT scores, our - if you look at the customers perception of safety and health and well-being in our stores, customers seem to be voting with their wallets and shopping and Tractor Supply, indicative of both our strong transactions, but also our strong ticket. And I think that would speak to the fact that customers are certainly aggregating their ticket. You're hearing that from other retailers, more units per basket driving basket up, but a lot of these retailers are talking about negative comp transactions. With us, it's very balanced with about half coming from comp transactions and about half coming from average ticket. So we're seeing that stock up, but we're also seeing more transactions in the store. So, it's hard to kind of piece it together, but we do think the initiatives we're taking, the support we've given the business on inventory and adding staffing, our focus on cleanliness, plus our digital efforts and our early efforts around Fusion and Sidelight [ph] and FAST, are adding to the share - creating - helping us drive share gains and kind of add it to the macro trends we're seeing.

And your next question will come from Elizabeth Suzuki from Bank of America. Your line is open.

Great. Thank you. Could you just elaborate a little bit more on the strategic review of Petsense? And what came out of that review that resulted in the decision to slow the growth of new stores? It just seems like with pat ownership at all-time highs, unless those stores were significantly underperforming the company average, just kind of wondering what some of the specifics were of that review?

Yes. Hi, Elizabeth and good morning. Yes. This was just completing my first year as the CEO of Tractor Supply. And so just kind of normal course, kind of steps back and did a strategic review of Petsense, right at the beginning of the fourth quarter. The business - the net takeaway is where the business is doing well. But if you look at the broader landscape of pets and where the shifts are coming, where things are growing, and you look at the - kind of what's playing out in specialty, through that work and then us revisiting our real estate model as a part of that, we made the decision to reduce the long-term store count expectations that we have for that business. And in doing so, that led us to revisit the value that we had on that business, on our balance sheet. And so we've now kind of reset our expectations for the new store counts of that business. We've hired a new leader, for the Petsense business, and we are - we will continue to invest in Petsense, as we see opportunities. And it's - as I said, the business is doing well. We do think its gaining share, in the specialty space. And we will continue to support that business and moving forward, just at a lower long-term store count target.

Okay. And could you potentially shift more of the sales in that business online, if you're not going to grow the store count to quite as much as you thought. Like, do you just view a shift towards the e-commerce side of the business as a way to expand into new markets?

Yes. I look forward to sharing with you more about the Petsense strategy as Matthew comes in and has an opportunity to engage and chart the future of the company. And we're very pleased with the performance. The stores are doing well. The website is doing well. As you said, Liz, we do know pet online is doing well. You can look at the industry data, and that's certainly something I know Matthew is going to - we'll be looking into as a way to accelerate our efforts there. So, more to come.

Your next question comes from Karen Short from Barclays. Your line is open.

Hi. Thanks very much. Congratulations on a great year. I wanted to just talk a little bit about the three or five-year algorithm. You had originally called out 9% to 9.5% operating margins. Your fiscal ‘21 bottom end range is already 30 basis points higher than that algorithm. So I guess, what would make the range, I guess, decrease in ‘22 and beyond? And I guess, maybe asked a slightly different way, when I look at that 9% to 9.5% range, that would imply flat operating profit growth in 2022, and that doesn't seem likely scenario?

Hey, Karen. This is Kurt. Yes, thank you for the question. And really, the question, as I understand it, is about the outlook on the operating margin, the flow-through going forward. One important thing that I pointed out in our prepared remarks is, we had tremendous upside and benefit in 2020 from the gross margin side of the business. And the principal drivers with that, was for the majority of the year, we had favorable transportation. And the most significant was unusually of low levels of promotion and clearance. I mean, the inventory, at some point, really felt like it was going hand to mouth to the consumer. And we anticipate this year in 2021, as we still have some of that extended pandemic demand before we start to cycle into that, that there's benefit on less promotion and clearance. We'll start to normalize on that. The important thing is to manage the business, ensuring that we're everyday low price. We're giving our customers a great value in our product enterprise. And over the years, we're going to manage the operating margin, ensuring that we continue to gain market share. And the important thing is that there may begin to be in the next couple of years as inventory more normalizes and more clearance exposure normalizes. There's some anticipated risk with gross margin. So, we'll continue to manage gross margin with our benefits of our driving and staying at EDLP, not anticipating to revert back to the promotional activity in the past. But with our investments in the business the next couple of years to continue to gain this market share, we anticipate still staying around that range. We think it's a great sweet spot to allow us to continue to hit those revenue growth targets and to continue to gain on the market share. So we want to manage to a reasonable operating margin to continue our opportunity to gain market share. And our outlook for 2021 and the long-term really anticipates that. And as we progress, we'll continue to update you as we see more visibility as things change.

Okay. That's very helpful. And just my follow-up is looking at the comp in 2Q to 4Q, obviously, as you have said and we all see, you had very evenly kind of split composition on the comp from 2Q to 4Q. How do you think about when we start to lap those in 2021, do you think the pressure will come more from ticket or traffic in terms of the comp comparisons?

Yes. It's a great question. As we think about traffic and ticket in 2021, there's a lot of variables and still some uncertainty as we begin to lap that. We're going to be nimble and have shown in the past that we can shift very well to that. So as we think about the business with ticket and traffic, I'll give you some thoughts on ticket drivers, certainly some level of inflation that could be driving ticket. If there's continued trip consolidation, it helps in the ticket. But other aspects on traffic, as areas such as trip consolidation, if there's a bit more normalization on trip consolidation, as we begin to cycle some of the COVID demand. And if there's inflation, it sometimes has an offset on the traffic. So point being, there's a number of variables in there. And as we cycle this, we see our opportunity in both categories, and there can be some risk and shift in both. And we've contemplated those aspects in our guidance for comp sales as we begin to cycle the COVID lift that we saw starting in Q2 of 2020. And we anticipate that there's not a meaningful shift from either one as we see it at this point, but both has variables that could drive it up or down.

And your next question will come from Steve Forbes from Guggenheim Partners. Your line is open.

Good morning. So I wanted to start, Hal, with the new and reengaged customer trends, right, you mentioned repeat rates at all-time highs, just curious if you can provide more color here, right? Are these customers engaging at a level that's more comparable to your Neighbor's Club members? Are they shopping across more categories right than the average customer, shopping both channels, right? And why aren't we seeing greater, I guess, entrants into the Neighbor's Club Loyalty Program, as I would imagine, that's sort of a core initiative right for 2021?

Yes. Hey, Steve, and good morning. A couple of things I'll say. First of all, on the Neighbor's Club program, we are very pleased with the growth in the ownership of that - I mean, the growth in the membership of that program, reaching 19 million members, representing approximately 60% of our total sales. We're seeing very strong engagement rates with those customers. And we have plans, as we've talked about to reinvigorate that program in the first half of this year, which I think will drive a step change in engagement with those customers and also migration upward of their spend. So we're very - we're looking forward to that promotion and getting it out there and look forward to sharing more details with you at our next earnings call on it. As it relates to our new customers, we've mentioned in the past that we see approximately 20% of our new customers return and shop with us within 28 days. And that trend really hasn't changed since the beginning of the year. It's held very stable. And it's two or three points higher than what we would have seen in a historic period when we cohorted new customers. And then I would say it's not - we also continue to see strong repurchase rates as you get out to kind of two months at the 56 day count and at three months. And so we're very pleased with their reengagement. We see them engaging first in categories like poultry and dog and pet. But then they start to broaden their purchases across things like apparel and garden, and if they started in pet, they might move to poultry or vice versa. And a higher percentage of these groups than our normal business starts online and does a pickup in store, and then you'll see in their next purchase then coming into the store for purchase. And our new customer SAT scores are higher than historic as well. So, I'd say all around, we are pleased with the 19 million numbers. They represent the growth that we had this year, particularly in the midst of the pandemic. Our sign up is really at the register there face-to-face. People are really trying to check out much faster as we all know. So, the ability to still sign up those Neighbor's Clubs members and gain the millions that we did this year, we're very pleased with and then the new customers are exhibiting very strong reengagement behavior.

Thanks, Hal. And maybe just a quick follow-up. As we try to conceptualize the opportunity here, how does the 11 million new customers and 6 million reengaged customers compare to 2018 or 2019 levels?

I don't think we've disclosed that in the past. But what I will say is - and we'll get that some thought on whether to do so. But what I would say is there are material increases from previous years.

Awesome. Thanks so much. Best of luck. Stay well.

Thanks. Appreciate it.

And your next question will come from Peter Benedict from R.W. Baird. Your line is open.

Hey, guys. Thanks. I guess, first question, Kurt, you kind of mentioned inflation at ‘21. And I'm just curious where you're seeing that most acutely off [ph] and size it up, but which categories you're seeing inflation in the business? That's my first question.

Peter, I'm going to let Seth take that.

Hey, Peter, this is Seth. Hey Peter, as we look at some of the inflation of this coming year and what we're seeing kind of early on, if you just look at the kind of base commodity markets that are out there, I'd tell you early reads. Our steel-based product as well as some of the grain-based goods, if you look at those commodity markets. Feel really good about the handle that the team has on the business to be able to manage it accordingly with our tolls that we have on the pricing side. But those would be the areas that I would say that we're starting to see those come through in the early reads.

Got it. Okay. That makes sense. And then maybe, Hal, one for you. Just on the competitive environment out there. Obviously, it's been strong. But even with the strength in farm and ranch, and in the pet area, we're seeing some reasonably large chains have trouble and even shut down within both of those areas. So, I'm just curious as you've got a lot of strategic initiatives in place. But is the competitive environment shifting in a way that maybe has you thinking differently on any maybe longer term initiatives over the next couple of years? Just kind of curious your view on that. I know you got a lot on your plate, but just wanted to hear you add on that.

Yes. Thanks, Peter. And what I'd say is the – I think the dynamics that are playing out in the market right now, whether it's with customers or vis-à-vis our competitors, those dynamics are really playing to the sweet spots of Tractor Supply. First off, people are struggling with in-stocks, and I think you're going to see more of that as we get into the spring with the supply chain disruption that's out there. And our team has done an outstanding job, managing inventory through the year. We saw how we ended the year with inventory above last year. And we're tracking to continue with that at those levels, if not higher, as Kurt mentioned in his opening remarks. We planned for our spring shipments to arrive earlier than they have historically. And so while we are seeing some container backlog, we are going to be able to manage through that and get it kind of in on a normal time frame, but that's to our benefit. So I think anywhere where you've made investments in inventory and you've leaned in there, anywhere where you're making investments in customer service because right now that makes such a big difference in this environment. And we've certainly done that through the net hiring of 10,000 team members and providing appreciation bonuses and others and raises to drive their engagement. Also in technology, if you've invested in technology and you can do curb side pickup, and you can do same-day, next-day delivery, and you can do those with great customer service, that leads to advantages as well. So I think the scale that we have in our distribution systems, the scale that we have in technology, the leverage and scale that we have with our vendors, and then, of course, our advantage of our 42,000 team members, which wake up every day looking to provide legendary service, all that just plays well for us. I mean, we're – and then you think about the convenience, the location of our stores and that's why if you go across every category, we're confident that we're taking share in a significant way. I mean, if you look at our CUE business being up over 20% for the quarter, that's – and you think about the proxy – using that as a proxy for the businesses that are in there around animal feed and pet food and others, those rates are well above industry estimates for those categories. And certainly, a lot of other companies that are out there reporting that play in those categories. So I think it really just speaks to the business model to track or the resiliency of it and the foundation of it and then the investments that we're making day-to-day to ensure that our customers and our new customers are having a great experience.

Michelle, let me just say one thing, if I may. I know we're at the top of the hour, but we're going to let the call go about 10 minutes longer. Thank you.

Okay. So your next question comes from Scott Mushkin from R5 Capital. Your line is open.

Hey, guys. And Mary Winn, thanks for letting the call run a little bit longer and I'll try to be quick. So I was wondering if – and maybe I missed it, but the percentage of the new customers, I know we talked about this a little bit that are purchasing CUE and then the percentage of those that are repeating. I'm not sure I got that data and if you're willing to give us that data.

Yes. Scott, how are you? Good morning.

Good morning.

We have not mentioned what percent are buying CUE in their first purchase. We did mention what percent are coming back and buying a second time. So about 20% of our new customers return and shop with us again within 28 days. And we said that's above historic run rates by several points. So we feel very good about our retention of these customers. And that's a proxy at one-time marker, but it's the same if you look across 7, 14 days, 2 months, 3 months, et cetera. As it relates to what they're buying on their first purchase, the 2 dominant areas that they're buying on their first purchase are pet, pet food or poultry and or supplies and such around those two categories.

And so that's interesting. And I can be my follow-up. I was going to actually add something else. But a 20% repeat rate sounds high, but if it's skewing towards CUE, you might think you can actually make that number higher. Are there any initiatives to figure out how to make sure they're repeating at a higher rate if they're engaged in CUE and then our yield [ph].

Yes, absolutely. So this is what the full focus of our marketing team is focused on, is exactly this, is we've got - we've invested over the last 1.5 year or two in our CRM capabilities, moving that platform to the Azure cloud, upgrading our analytical capabilities, adding new personalization tooling in place and also looking at behaviors, whether on the site or inside of the store and then looking for kind of like comparing them to look like shoppers. And so whether it's e-mails that those new customers get or whether it's digital banner ads, we're retargeting them. All those sorts of kind of marketing channels and vehicles are being used to engage with these customers and encourage them to re-shop with us. And in addition, obviously, we just have the investments we're making in our team members, the investments we're making in our store experience, the investments we're making in inventory and those sorts of things that drive repeat behavior as well. One interesting anecdote that I'll give on this is we ask our customers in our checkout survey, kind of post-purchase survey, what their top criteria were for why they selected to shop with Tractor Supply. And typically the responses are similar to what any other retailer would have with price and location convenience, having the right product, customer service; those sorts of things that are kind of the dominant criteria for shopping for retail. During the midst of the pandemic over the last 6 months, the number one and number two criteria have been cleanliness and safety. Never in my 20-plus years of retail, have I seen those two criteria at the top of a customer’s decision-making criteria. And so that's why we've invested so much in those areas. And I highlighted the tens of millions of dollars we've spent on those areas in the last quarter.

And your next question will come from Peter Keith from Piper Sandler. Your line is open.

Hi. Thanks. Good morning. Great results, guys. Quick follow-up to Peter Benedict’s question on the inflation. Certainly, a lot of the commodities are ramping up to record levels we haven't seen in 9 to 10 years, would you have an inflation benefit factored into comp? And if so, could you provide that for us?

Yes. Peter, this is Kurt. In regards to inflation, let me first start with what we've seen here in 2020. I mean, we saw a bit of elevation as we worked our way through the year. In Q4, we still saw a bit of a modest level of inflation, less than 100 basis points of commodity inflation into the product cost. We anticipate that as all of the inflation information, as I know everyone's seen is certainly at higher levels. We're anticipating that to accelerate in 2021. We've seen where inflation on commodities can rise as quickly as it did. It can also shift, as you know, just as quickly. So like we said in our prepared remarks, we're planning for 2021 and are a number of scenarios. But in our guidance, we assume that over the year, a weighted average of about 1% to 2% inflation into the product cost and that certainly could vary first half versus second half of the year. And right now, we're seeing the points that Seth mentioned on grains and steel being primary drivers of some inflation at this point. So as we picked up an assumption, that range of about 1% to 2% is where we landed in our assumption.

Okay. Very helpful. And maybe committing over to a question for Hal or Seth, on the pet trends. Everyone knows 2020 was a record year for pet adoption and acquisition, but what are you guys seeing out there in the field? Are you seeing continued strength? And what would you expect in for ‘21? There's arguments if there's been a pull-forward and the acquisitions will drop-off or there's other arguments that the same adoption trends are going to continue for the year.

Yes. We are planning for the pet category to continue to remain strong, and to over-perform relative to our overall business in the year. I think on the last call, we talked about poultry and chickens and flocks and how they're a bit of an annuity stream, given that they have a 7, 8 year lifespan. Obviously, pet is very much the same way. With pet adoption up at an all-time high, those pets, as they grow are only going to – they're going to move from puppy food to adult food. We're seeing that, by the way, in our trends. Typically with dogs, as they get a little older, they eat a little more, as they get bigger. So we're actually seeing that – the benefit from that a little bit on the tonnage side. And we expect the humanization of pet will remain very strong this entire year, as people continue to work-from-home really for the foreseeable future, potentially all of 2021. And so they're around their pets. They're buying toys. They're buying snacks. They're upgrading their bed, they're getting them a new bed. All those things, I expect will continue this year. And as I said, we're very pleased with our pet business. We are confident we're gaining share in our pet business. We're seeing strong growth in our pet business, both in-store just through brick-and-mortar channels, as well as online. And certainly, the sweet spot for us on pet is our omnichannel, where we're seeing significant amount of pet purchases online picked up in store. And as I mentioned in my opening remarks, we're investing heavily in this category to remain a strong destination for our customers in it, whether it was the release recently of our new Pet Rx solution online, whether it's the rollout of both the subscriptions in-store to support in a similar way that we have it online, whether it's the addition of 150 to 200 more pet watch stations this year, and then also the build-out of more pet wellness clinics in our stores to support the mobile pet clinics that we have that drive significant engagement with our stores from our customers. So we feel really good about where we are in pet, and we'll be continuing to invest here. I guess, I neglected also mentioned topologies is that our marketing campaign that we've been doing in the past year, we have a significant amount of dedicated marketing, both TV and digital devoted to pet. And it's - its systemic mean, it's always on and we do spike it at certain periods. But it's a consistent program that we're doing now. First time we've done that. We've been doing that for about 6 or 9 months.

And you next…

We'll call this our final question, as we wrap up the call.

Okay. Perfect. So Chuck Grom, is your final question for today from with Gordon Haskett. Your line is open.

Good morning. Nice quarter and a great first year, Hal. My questions on Side Lot, it seems like a tremendous opportunity for you guys. I'm curious, how you plan to approach it from a marketing perspective? And also how quickly you think it's going to take the ramp-up to optimal profit productivity levels?

Yes, hey, Chuck. We are - remain very bullish, on the Side Lot project. It's - as we remarked before, garden is the category that our customers say they most participate in that we don't fully address their needs. And in the Side Lot that we have open, we - the customer engagement with the product and the purchase rate, it was - it's kind of like an overnight switch. Once that's all - when the project is complete and the product is in there, we saw really strong engagement with customers. And this is in the midst of fall and winter when, live goods assortments are very limited and gardening activities is much less. So we've got over 50 of these Side Lots, in - underway right now. Some, we're in the process of applying for permits. Some were in the final stages of getting the certificate of occupancy. We've got 100 plus more – 100 plus more scheduled for the year. And we're very excited about their potential. And the team is doing an excellent job kind of navigating this environment to get those built. It's in the context of COVID you've got, construction crews at a time. So we'll have to quarantine for a couple of weeks, if one of the team members on the project is test positive. You've got city municipalities that getting permitting done is very difficult. Getting someone to come out and do a certificate of occupancy is much slower. And the team is just doing an excellent job managing through, all those twists and turns. We're very - we remain very bullish on Side Lot. And like, I said, a number of them underway. I just visited a handful of them in the last week and really excited to have our first batch of them opened in time for the spring season.

That's great. And just as a follow-up, I believe that the garden center pad is going to be about 4,000 square feet. When you compare that to - when you compare that productivity opportunity to what your stores typically do today, any sense or what you think that can eventually generate over time?

It's very seasonal. And in my experience elsewhere, the garden centers are very productive, if not more productive than they store, during the core spring season. And then in the winter time, the productivity falls off well below the core of the store. And so, we're looking forward to having a full year ahead of us with these projects to be able to get a sense for what's the max productivity in the midst of spring. How much can we prop the productivity up with things like Christmas trees, and pumpkins, and harvest type stuff in the fall? And then, we'll see where it plays out for the full year. But we are very confident that it will drive significant productivity relative to how the space is being used now and will drive strong shareholder returns. The question is to what magnitude. And we'll know more as we get into spring.

All right. Thank you, Operator. This will conclude our call today. And thank you to everyone for joining us. We look forward to speaking to you on our first quarter call in April.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.