Hal Lawton - Chief Executive Officer Kurt Barton - Chief Financial Officer Seth Estep - EVP of Chief Merchandising Officer Mary Winn Pilkington - Senior Vice President of Investor and Public Relations

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss First Quarter 2020 Results. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. We ask that all participants limit themselves to one question and one related follow-up. 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, Mrs. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, Christina. Good morning everyone. On the call today are Hal Lawton, our CEO and Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP of Chief Merchandising Officer will join us for the Q&A session. 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 our forward-looking statements are reasonable, we can give no assurance that such expectations or any of our forward-looking statements will prove to be correct and actual results may materially differ from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements that 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 operative at a later time. Tractor Supply takes no obligation to update any information discussed in this call. 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 cooperation. We will be available after the call for follow-up. Now, it's my pleasure to turn the call over to Hal.

Thank you, Mary Winn, and thank you to everyone for joining us this morning. I want to start off by recognizing this is an extraordinary time. First and foremost, this is a human health crisis, and secondarily a global economic crisis. We hope your loved ones and your family are healthy and safe. We're living in a generational moment that is unprecedented. Each day requires a close inspection of a very dynamic external environment and a clear determination of how we'll respond. While our call this morning is about our first quarter results, we will focus more on updating you on where we are with the crisis at hand, how we’re navigating the uncertainty and how we are responding to strengthen our business. I want to start by thanking the entire Tractor Supply team who has truly come together to ensure we are taking care of the health, safety and well-being of each other and our customers. This is our absolute, soul, number one focus priority. The culture and purpose driven nature of Tractor Supply has served us well in responding at this critical time. It has never been more clear or more evident of what an advantage this strong foundation is to the company. I'm incredibly proud of how the Tractor Supply team and our vendor partners have stepped up to every challenge. Our goal is to make sure we come out of this pandemic stronger. Stepping back, let me share with you how we’ve approached this crisis. As the virus began to gain traction in China, we put together a cross functional team that was dominantly focused on our supply chain. This team worked with each of our factory partners at a purchase order level to identify issues and coordinate substitution products and other merchandising actions that we…

Thank you, Hal, and good morning everyone. I hope you, your families and loved ones are safe and healthy. I’ll walk through the highlights of our results for the first quarter and then share what we are doing to respond to the challenges of COVID-19 from a financial perspective. For the first quarter of 2020 net sales increased 7.5% as we had strong comp store sales growth of 4.3%. The comp store sales growth was driven by a 5.4% increase in comp average ticket, and a 1.1% decrease in comp transactions. The declining comp transactions resulted principally from two factors. First, the difficult compares in January and February due to the prior year’s strong winter selling season; and second, we believe consumers consolidated shopping trips in March under the current environment as Hal discussed. Our average ticket was driven by strong units per transaction growth as customers stocked up for essentials. Commodity price inflation had a slight impact on average ticket as inflationary trends moderated during the quarter. As we shared previously, January and February in total tracked in line with our expectations with March up 12% given the stock-up sales we experienced. For the quarter we had robust growth in our consumable, usable, netable categories with declines in discretionary, clothing and footwear, and to a lesser degree declines in our winter seasonal categories given the milder winter. Big ticket sales increased in line with our overall comparable store sales growth. Safes, heating stoves, Tillers, Trailers and Generators were drivers of this growth, partially offset by declines in snow blowers and compressors. For the first quarter gross margin was essentially flat to prior year at 33.8%. The gross margin performance reflected a favorable benefit from transportation costs as a percentage of net sales. Our efforts in 2019 help drive lower…

Thank you, Kurt. Our top priority is the safety and health of our team members and customers. In the current environment, we are more relevant than ever to our existing customer base. At the same time, we are acquiring new customers and seeing market share gains as a result. We are taking this opportunity to invest in the business, do the right thing to support our team members, but also to strengthen our position. It seems like a long time ago, but many of us were together on March 10, and during that time we share with you some of our early insights on the business and all those items that we discussed, all still are true and are very relevant and you've heard many and them sprinkled through our comments today. We will certainly be leaning into those as we make our investment decisions through the second quarter and the second half of the year. We are not losing sight of the long term. During these times, we will focus on the strategic opportunities to serve our existing customers, while also expanding our reach. I believe that the strength of a company is shown in a time of crisis. I am confident in this company. We are navigating this one by leveraging our strength and pursuing opportunities that will help us thrive over the long term. Tractor Supply is a very resilient business with a proven business model. In closing, my thanks and gratitude go to the entire Tractor Supply team. Thank you. With that, Mary Winn we are ready for Q&A.

Great! Christina, we’ll open up the lines for questions.

[Operator Instructions] Your first question comes from Simeon Gutman from Morgan Stanley. Your line is open, please go ahead.

Thanks. Good morning everyone. My first question is on thinking about demand, realizing and respecting that you know there's no guidance and we're in a fluid situation. Thinking about the stocking up in your business, maybe a hangover period and then some normalization, how are you thinking about it and can you glean anything since you have a pretty diverse store base? Yes, you're more or less open, but states have different restrictions and so maybe you have some insight around timing. But just trying to think if we're going to see some peaks and valleys here as we move through the next few months or quarters?

Hi Simeon, good morning. This is Hal. Yeah so, maybe I'll just kind of walk through a little bit around kind of the three phases that we have seen in our business and then just talk about how we're thinking about it. So, the first phase is exactly as you articulated. The last three weeks of March we saw substantive stock up behavior, material stock-up behavior. As we said in the month of March, our comps were 20%. For those three weeks – sorry, my apologies. For those three weeks our comps were 20%, the comp of March 12%. And that was really driven in areas like livestock feed and pet food and things like propane, these very essential almost grocery like categories that our customers rely on us for. As the first kind of week of quarantine really took hold across the country, that first week of April, we did see some early give back across the hand, really more than just a few days. And then really for the full three weeks of April here's, as we said our sales have been very strong, and they've really transitioned from kind of livestock and pet food feed stock up, to much more the things that I shared earlier on around the life out here lifestyle; things from homesteading and fence management and fence building to poultry and chickens and coops, to sustainable living, to gardening, to landscaping, to lawn care, all those things are really what are driving our business right now, and what we're finding is that you know our existing customers are shopping, they are cross shopping categories in an increased way. We're seeing reactivated customers, customers that haven’t shopped with us in over 12 months in the store, and we're seeing new customers in our store…

That's fair. My one related follow up is anything to glean positive or negative yet in oil markets and you know you can understand the premise of that question.

Yes. I mean this is Kurt. I mean certainly the oil market is a very fluid situation, so we're watching it very closely and right now our data is showing us that we're seeing limited impact or decline, but we recognize how quickly and how fluid this situation is. So two points maybe they give you on that, on how we're looking at it. First, I'd say we do anticipate based on the forecast and the fact that there is such a strong supply with a real softness in the demand for oil, that there's got to be some supply taken out, and so the pressure on that local economy will likely exist. We do believe though this is still somewhat different than historical experiences that impacted Tractor Supply like in 2016. And as an example, in 2016, we saw after coming off a peak, 1,800 rig counts went down to about 400 in an 18 month period of time. In 2020 we're seeing that the rig counts have sustained over the last year, so around 7 to 900, a little over 700 today. Various forecasts show that that may be cut in half and you could be seeing 700 out of 350, so it's quite a bit different in regards to the decline. The second point is just to remind around our exposure. About 10% to 12% of our stores are in markets where there's oil economy and historically only a percentage of our products have been impacted. So it's a percentage of product in a small percentage of our stores and we will be flexible and nimble in flexing in our product, but while this could prove to be a headwind in the near term, it again is a small percent of our stores and we believe that the strength of our business models needs base can certainly perform well in this situation.

Thank you. Good luck!

Your next question comes from Michael Baker from Instinet. Your line is open. Please go ahead.

Hi! A couple of follow-ups there and Hal, what a time to start as CEO, but I commend you on the job you're doing. I'm wondering if you can quantify some things. For instance, the spread between some of your more rural stores or stores that aren't in at rural locations or even quantify April to-date relative to the 20% you're running towards the end of March. And I guess I'll ask up front to the extent that you pass on quantifying, although I think it would be helpful. I did want to ask about the cost. Why are we looking at $30 million to $50 million in the second quarter versus only $7 million in the first quarter, understanding that the impact in terms of the number of months in the second quarter could be longer. For us its only started towards the end of March, but still that seems like a big increase. Thanks.

Hi, this is Hal Lawton. I’ll answer the first couple of components to the question and then I’ll turn it over to Kurt to handle the last part of the question. We're not prepared today to share specific numbers, but what I would say is we are seeing material differences. First off, I’ll start with all of our stores are generally kind of rural or suburban and we have kind of shades of grey even in the context of that, the way we evaluate and look at our stores. And I guess I'd say is, the more rural the store is, the better the store is performing, speaking generically, and then the closer the city is to an urban area, the lesser the stores performing, kind of speaking generically, and we can kind of map that out. We really see the gradients of their sales performance across almost any category and so you know as you all know, the bulk of our stores are in rural America and core rural America and so that is benefited favorably and I do think many other companies have been talking about a very similar trend. And then on April to-date, I think what we just say is the growth and the strength that we saw in March has continued into April and we're very pleased with our April results so far. As we said, the customer's category, our behavior has changed significantly and in my view, in a very positive way, the category is demonstrating the essential needs in orientation of our business and into the kind of people's lives and their livelihood and their families and their needs and it's gotten very broad across landscaping, gardening, sustainable living, fencing, homesteading, home care, you know things that really speak to the fullness of the product offering that we as a business carry. So rural stores are very strong. April to-date continues the momentum from March and I’ll turn it over to Kurt and talk about the cost, Q1 versus Q2.

Sure Michael, this is Kurt. And in regards to the range of these additional expenses and the difference between Q1 and Q2, first let me just point out the differences between the quarters. You'll recognize from some of the business updates and releases we started to produce in the mid part of March and later that, the efforts that we took in regards to wages, labor and safety and cleaning began in those last three weeks of the quarter. So those expenses that we pointed out for Q1 were principally in the last few weeks of the first quarter and the expectation as we continue to do that and more just extends throughout the second quarter. Let me just talk about what these costs represent and then how it plays out. The bulk of these costs, about 80% roughly is labor related or benefits related and Hal spoke to much of those in his prepared remarks. Most of the remaining 20% is for supplies and safety and cleaning and how that plays out throughout the quarter or even in the second half, as I mentioned, it really depends on the extent and depth of this crisis, specific to Q2. The low end of the range assumes that these efforts play out through all of April and May. The high end of that range would assume that we extend all of the wage, the benefits or cleaning if the prices would require that, all the way throughout the second quarter. So that's a way you can think about the cost of how it would impact into the second quarter.

Thanks. We’ll talk about a related follow-up with how – it sounds like some of the sales trends in April are strong, but different mix, so I presumed that would have a less negative impact on your gross margin. It seems like it’s being less dominated by Q and more by some of these outdoor areas which I would think would have better margins than Q products. Is that a fair assessment?

Yeah, I think that's roughly fair. The other thing I'll add is, and again you know we’ll see how the next two months play out. But like most other retailers that are open, we have pull back on discounting, on coupons, on promotions, you know in the spirit of not trying to drive too much traffic on one day, driving queuing, you know just trying to have more of an everyday ongoing. Really what's the core of us anyway in everyday low price business, which is what we do well every day, and so I think you know we'll see how the next couple months play out and whether or not we – you know how we need to manage that going forward. That’ll be – that's something else that you know it's part of our strategy we've been trying to implement.

Great, I appreciate all the time. Thank you.

[Operator Instructions] Your next question comes from Steven Forbes from Guggenheim Securities. Your line is open. Please go ahead.

Good morning. I wanted to start with the Roadie Partnership, right. Clearly a significant accomplishment like to roll up the program in such a short period of time, but how could your same-day, next-day delivery offering evolve, right. As I believe you were or have been testing a few options over the past couple years, what made Roadie the right choice today and/or should we expect incremental investments to maybe alternative forms or options throughout this year as you test and learn from this initiative?

Hi Steve, it is Hal. Thank you so much for your question. Hope you're doing well. Yes, to start at the highest level and just say our aspiration is that customers can buy anywhere anytime and get it delivered or picked up or shop with us in any way they want, and you know we talked a little bit about this in early March, in continuing the digitization and omni-channel efforts for Tractor Supply. Given the COVID-19, you know we rapidly accelerated the rollout of same-day, next-day delivery and I'm just – I can't say enough about the flexibility and the speed of urgency and just to the implementation precision of Roadie, of our stores and our technology team to really get this executed in a really good way. Roadie’s been a partner of ours for some time. You know I have a really high regard for them. I worked with them when I was at Home Depot over five years ago now and they're – you know they serve a large number of retailers in a similar capacity. And since we already had 400 stores rolled out with them, from a speed perspective moving national with them made the most sense, and they do an excellent job. I've had several orders in the last couple of weeks delivered to myself, as have Kurt. What I would say is though, we know that we need to have a best-in-class solution and that requires us to test a variety of options, and so we're in the process of doing that. We have the Roadie solution as they have kind of built out and is kind of their normal Roadie Solution in all of our stores right now. We’re going to take in a subset of stores. We have two different subsets…

Thank you for that. And then just a quick follow up. I think I thought you mentioned strength in new customer growth. I don't know if you can provide some color on how these customers, maybe whether its demographic or the baskets have compared to the average customer. Are they shopping multiple categories or just a few, and then you know a comment may be on the initial initiatives right around customer retention, as you think about growing your customer base.

As I said in my prepared remarks, we're seeing unprecedented really record breaking new customer shopping with Tractor Supply and those customers are shopping with us, both on our e-commerce platform, as well as in store. They're leveraging by-online, pick-up-in-store curbside delivery. As I mentioned earlier, there's a large percentage of new customers that are using that. But as they shop with us inside of our stores, they're shopping across a whole range of categories and you know whether it be pet food or whether it be a more sustainable lawn care landscaping type offerings, so we’re seeing broad shopping behavior from them we're seeing them really engage in many of our new offerings that we rolled out in the last few weeks, including curbside delivery. As it relates to customer retention, you know I'm really pleased with the efforts that the marketing team has taken over the last few weeks. As we've gone in and put in a welcome to the Tractor Supply kind of customer kit in place and day one, day seven, day 14, what are we doing with these customers? How are we touching them? How are we reminding them that we’re here for them? How are we continuing to engage with them, we’re doing that – and we're doing that not only just in a generic way, but we're also doing it based on the specific categories that they purchased, and the way they purchased with us. And so, if they bought online with us for the first time, that way we kind of say “hey, wasn’t that great? Hope you enjoyed your experience. Let me tell you about some other things we are doing.” If they bought pet food, were saying “Hey, thanks for buying pet food. By the way you can sign-up for subscription for us, but you also have a bunch of other categories you can shop with us.” So really, you know textbook like, kind of new customer onboarding program that we've rapidly implemented over the last few weeks to make sure that these new customers are retained.

Thank you, and stay well everyone.

Your next question comes from Michael Lasser from UBS. Your line is open. Please go ahead.

Good morning. Thanks a lot for taking my question. Hal, you laid out a lot of the macro and big picture uncertainties that are going to impact your business. But under what conditions do you think your comps will turn negative and when do you think that critical point is when you'll know.

Michael, this is Kurt. Let me take that. Hal pointed out a number of the uncertainties, certainly the things that are favorable to the business right now and all the potential for uncertainty in the near term and even in the back half. The key factors that we were looking at and he mentioned those, we are keeping a close eye on unemployment and consumer sentiment. The timing and extent of the COVID-19 health crisis could impact it, and is there a shift to the impact on rural markets, and then weather always can play a bit of an impact, if you just threw that in there outside of some of the crisis type items. And those would be the primary ones that we're watching. Most of those are tailwinds right now, and if those were to flip any of those or a combination of those could have that level of impact on the business. But importantly we're confident in our business model and probably never been more evident than these times right now. The strength of our model and being a needs based business in the rural market. So as you can hear, we've got a lot of confidence in our business model and our ability to weather those situations.

Just to follow-up on the timing question. At what point do you exit – traditionally exit the seasonal lawn and garden category? Is it possible that all of that just didn’t pull forward right now to this timeframe, because folks just staying at home and do have some time on their hands. And then as part of that timing question, there has been some massive declines in a lot of commodity costs, not just oil but across the board. When do you expect to start to see that deflationary impact on your business and what's the reasonable expectation for deflation in the back half of the year?

Yeah Michael, this is Kurt. Why don't I first address the question on inflation and then I'll toss it over to Seth on timing of product sales. On the inflationary side of it, as I indicated we saw some slight inflationary benefit in the first quarter. In those particulars as you mentioned, we look at it similarly, there are indications in the near term on both oil and corn that in the near term there's more indicators of deflationary pressures in the business. And we would anticipate as it works its way through the supply chain, that in both of those cases we might start to see some modest deflation even playing into second quarter. And while hard to predict, if following all the forecasts in both of those categories, we would see that pressure may begin to increase a bit more in the second half of the year, and we're going to be watching it carefully. This is about the best we could probably indicate on prediction of this at this point.

Great! Thanks Kurt. Hey Michael, this is Seth.

Hey Seth.

Hey! In terms of your question as far as you know potential pull forward and just kind of lawn and garden, you know as you look at the current consumer trends and the shifts in spending activity that Hal spoke to earlier, we believe that there continues to be a runway ahead of us, because not only are we seeing the strength of this among our current customer base, but this is also one of those areas we're seeing new customers engage at Tractor Supply, within some of the new brands that we’ve launched, the ability to partner with some of our key partners in these areas. We continue to focus on areas such as gardening and increase those hobbies over the last few years, basically going just over 400 stores in certain key live goods to now over 1,700 stores and then when we shift into the summer months as well, you know we believe that consumers will still be around the house, and we're really starting to pivot some of our merchandising tactics and activities to linking parts for center court, as well as go after some of these backyard activities knowing that customers are going to continue to be around the house for the foreseeable future. So I'm really proud of the work that the merchants are doing. Not only getting products back in stock to make sure we can be that essential retailer for our customers, but also as we look ahead to the future months to be able to go where the customers are going where we believe the hobbies and activities are going to take place.

Thanks a lot, and best of luck!

Thank you.

Your next question comes from Kate McShane from Goldman Sachs. Your line is open. Please go ahead.

Hi, good morning. Thanks for taking my question. I was just wondering if you could help us understand the puts and takes with regards to margin given the increased E-commerce demand you're seeing, especially in light of your change to one-day delivery and increased buy-online, pick-up-in-store, and how do you think it’s evolved as the year goes on?

Yeah. Hey Kate, this is Kurt. In regards to the margins, let me just hit the gross margin quickly and then SG&A. While we’ve seen strong growth as Hal mention online, he also mentioned a real strong percentage of that being the buy-online, pick-up-in-stores which does carry – which is really what the most effective/efficient way for us to sell online merchandise and not a significant pressure in Q1 one on the gross margin. More specifically, the impact on gross margin, we saw about a 20-basis point impact on the shift in mix in the last few weeks of the quarter. So if you normalized for the mix shift in the last few weeks, the flat gross margin on a more comparable basis outside of that was running about 20 basis points up. That's about in line with our typical last few quarters. From the expense side of the operating model, I pointed out the 10-basis point de-leverage from the new DC which we've cycled starting in Q2, and the net impact of the incremental COVID expenses offset by the favorable settlements were a few basis points. If you normalize that, SG&A actually, the seven-basis point leverage would be closer to more about a 20-basis point leverage on a compatible basis.

Okay, that's helpful. Thank you.

Your next question comes from Chuck Cerankosky from Northcoast Research. Your line is open. Please go ahead.

Good morning everyone. Could you talk about how the balance sheet might normalize after this crisis is over? You've built up debt, built up cash. Is that an opportunity then to perhaps get quickly back into stock repurchase or dividend policy? What might happen there?

Yeah Chuck, this is Kurt. As we mentioned, we took some precautionary measures in this environment and in our capital allocation strategy, shifted our priority to liquidity in cash; that's the right prudent thing to do. The business is strong and as we work through this crisis and the macro economic factors and the uncertainties begin to become less uncertain and there's more normalized business, we would anticipate shifting our capital structure back a little bit more to where we previously were. At this point we're going to emphasize for utmost precautions, just maintain a structure with additional cash. We believe that gives us a real strong position if there were to be a worst case scenario and I would not anticipate reengaging on share repurchases, while we are borrowed on these additional loans at this point. So we could see ourselves paying those down. We have the ability to prepay whenever we want and upon prepaying down, we would re-evaluate our capital structure, particularly when to re-engage in share repurchases.

And finally – thanks for that Kurt. And finally, Hal could you discuss what categories are in the home setting purchase group that you mentioned?

Yes. So hi, it’s good to talk to you today Chuck. I would reference those in terms of those just things people are really doing around their farm and their ranches to just maintain and their homes. So we are seeing, if you think about in our stores if you want, fencing, T-post, you know you are looking at corral gate, you're looking at chickens, you looking at chicken coops, you look at the people creating gardens in their backyard and then buying the vegetables and the rakes and the hose to the tillers to create those. It's really just all the things that our customers do every single day. You know they are incredibly and a terrible humanitarian crisis, but a byproduct of it is that you know families are spending more time at home and they are spending more time together outside and they are wanting to keep busy and we have really all the things, we are built for that. We are built purposely built to enable people to do those sorts of activities around their homes, their lands, their ranges and their farms and that's the sort of activity that we're seeing, that’s the sort of categories we are seeing lift and drive the business.

Thank you very much. Good luck for the rest of 2020.

Thank you.

Christina, this is Mary Winn. Now that we tipped the top of the hour, with that we’ll wrap up our call. So everyone thanks for joining us today. I'm around if you need anything and we look forward to talking to you in July.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.