Afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's Conference Call to discuss Second Quarter 2014 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. Please note that each participant will be permitted to ask one question with one follow-up. And as a reminder, this call is being recorded.
I would now like to introduce your host for today's call, Ms. Christine Skold, Vice President, Investor Relations and Strategy of Tractor Supply Company. Christine, please go ahead.
Thank you, operator. Good afternoon and thank you for joining us for Tractor Supply Company's quarterly earnings conference call. Before we begin, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. 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.
Important risk factors that could cause actual results to differ materially from those reflected in the forward statements are included 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. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. I'm now pleased to introduce Greg Sanford, Tractor Supply Company's President and Chief Executive Officer.
Greg, please go ahead.
Hey, good afternoon, everyone, and thank you for joining us today for our Q2 earnings call. With me today are Tony Crudell, our EVP and CFO Lee Downing, our EVP of Store Operations and Real Estate and Steve Barbarick, EVP of Merchandising and Marketing is out of town today attending a trade show, so he will not be with us. Now although the Q2 did not fully live up to our expectations, I am pleased with how our team reacted and managed the business. Weather is always going to play some role in our business results and it is our job to manage successfully through all those types of external factors. What we faced in the Q2 of this year was different than previous years and I believe we on the cool weather patterns and late start to the spring selling season.
Based on years past, we expected that weather patterns would begin to normalize in May and we would see a spike in the spring seasonal business mid quarter. However, that pattern did not hold true this year, particularly in our northern markets where the weather turned warmer much later than normal. Instead of a spike, we saw a much more gradual build in the seasonal business throughout the quarter. We reacted midway through the quarter by enhancing a few remaining key promotional events focusing on things that would drive sales and traffic, while maintaining the integrity of our everyday value pricing model. These promotions included the advancement of our 4th July circular by 1 week, a second and more timely Demo Days sale event for the northern regions and an improved targeted distribution of our remaining circulars and direct mail.
These actions resulted in improved redemption rates and while this had a modest impact on our overall margins in the quarter, it did drive sales of seasonal categories midway through the quarter. As weather became less of a factor in the northern markets, we noticed it returned to more normal sales trends. The momentum continued as the quarter progressed, but again this was much more gradual than years past. June sales were strong and that strength has carried over into the 1st few weeks of July. This has given us confidence that the weaker sales trends in the first half of the year were in fact weather related, while our underlying fundamental traffic in core businesses remained healthy.
With the different pattern to the seasonal business this year, we cannot be assured that we will recapture all the spring seasonal sales that were lost early in the Q2. And as such, we adjusted our full year outlook and our business update just 2 weeks ago. Tony will be reviewing the financials of the quarter in more detail, but let me give you a few highlights. Comparable transaction count increased 2.3%, making this our 25th consecutive quarter of positive comp transaction count. Comparable store sales were positive in each of the 3 months with the second half of the quarter above our expectations and the first half below our expectations.
Regionally comparable store sales in the South significantly outperformed comparable sales in the North and not all spring seasonal sales products performed the same. We observed strength in grass seed, live goods, fencing and riding lawn mowers. And in riding lawn mowers, it's been several years since we've a positive year over year sales comparison in that category. But on the flip side, we saw weakness in the outdoor power equipment such as tillers and chainsaws as well as we saw weakness in accessories for mowers, trimmers and in the safe category. So for the quarter, we made a number of inventory investments in key categories early on and we were pleased with how these categories performed.
And we know that when we support a product category from both the merchandising and branding perspective and we place the inventory, we typically do well and drive those sales that where we targeted in those categories. For example, our garden event, another big success again this year and that benefited from further investments in that category in both live goods and in soil products. So while the early part of the quarter was not fully in line with our expectations, We were pleased with the way it ended and the way that we manage the seasonal business and the underlying strength in our core business throughout that quarter. I'll now turn the call over to Tony for a more detailed review of the financials, after which I will offer a few closing comments and some forward look on the second half of the year.
Thanks, Greg, and good afternoon, everyone. For the quarter ended June 28, 2014, on a year over year basis, net sales increased 8.8 percent to $1,580,000,000 and net income grew by approximately 8% to $133,400,000 or $0.95 per diluted share. Comparable store sales increased 1.9% for the 2nd quarter compared to last year's increase of 7.2%. As Greg discussed, the seasonal side of the quarter got off to a slow start as a result of the cold weather that continued further into May than in the prior year. Sales did not start to rebound until halfway through the quarter as spring finally broke and the build was much more gradual than last year.
This was especially the case with our Northern stores. Sales were consistent with our plan in the back half of the quarter as June posted a solid comp and was the strongest comp month in the quarter. Comparable store sales were driven by continued strength of consumable, usable and edible products, our Q items and healthy traffic counts. Comp transaction count increased with 25th consecutive quarter, gaining 2.3% on top of a 4.8% increase last year. Certain spring categories performed very well such as live goods, grass
seeds and
fencing. These favorable trends were partially offset by weaker than expected sales of other seasonal categories in the North and continued declines in our safe category resulting from difficult comparisons from a year ago. Average comp ticket decreased by 30 basis points compared to last year's 2.3% increase. The decrease resulted principally from deflation of 100 basis points. An increase in items per transaction and favorable mix impacts partially offset the negative impact of deflation.
The impact of big ticket was slightly negative as the increases we saw in the riding lawnmowers were more than offset by the declines in the safe category. A few key points about the quarter. As Greg mentioned, although we have seen solid comp sales performance in our spring seasonal categories in June and the 1st 3 weeks of July, it is difficult to assess whether we will recapture all the lost sales resulting from the late spring. If you recall, last year's Q3 benefited from a late and extended spring and summer selling season. Although the general pattern is similar to last year, the build of the seasonal business has been more gradual this year and we do not know how this trend will progress.
So while we are pleased with the comp performance so far in Q3, we do face difficult comparison in the Q3, particularly in July August when comps increased close to double digits last year. On a regional basis, our warmer southern regions outperformed our cooler northern regions as the southern regions were the least impacted by the delayed spring weather. All 3 months had positive comp sales with June tracking at our internal comp target. Although big ticket items as a group had a positive comp for the quarter, it was still a slight headwind to average ticket. Since the big ticket comp percent was less than chain average and the big ticket sales were a smaller mix of total sales from the softness in the safe category, it had a slight negative impact on average ticket.
Deflation was approximately 100 basis points, which is slightly higher than we expected. Last year's Q2 had approximately 140 basis points of inflation, making the year over year swing 2 40 basis points. Turning now to gross margin, which as a percent of sales was flat to the prior year at 34.8%. Our initial direct margin improved as a result of our initiatives around price optimization, markdown management and strategic sourcing. Import purchases in the quarter increased 8.1% and represented 11.5 percent of the sales mix.
Also exclusive brand sales increased 9.4% compared to last year's Q2 and were almost 30.7 percent of sales. Deflation was the most significant favorable factor impacting margin. As we focus on maintaining margin dollars per unit, this typically will result in an improvement in gross margin rate and deflationary periods. Offsetting the benefits from deflation and our margin enhancing initiatives was merchandise mix, which we estimate had a negative impact approximately 13 basis points. This was primarily related to the rider category that has a lower than average margin and had a solid year over year increases and the softness in several of the seasonal categories that carry above chain average margin.
The softness in seasonal sales also resulted in Q being a higher mix of sales for the quarter, which in aggregate carry a lower than average margin. Freight increased approximately 14 basis points as we had increased transportation rates related to inbound truck capacity and availability as well as an increase in store stem miles to the new Western store base. Additionally, the freight rate will increase as a percentage relative to sales and cost of goods in a deflationary period. The enhanced sales driving events during the quarter that Greg referred to also modestly impacted margin. For the quarter, SG and A included depreciation and amortization was 21.5 percent of sales, an increase of 27 basis points over the prior year quarter.
Although we managed SG and A dollars well, we still delevered as a result of the shortfall in sales. We knew that some of the investments we put in place in the second half of twenty thirteen would make it difficult to leverage SG and A in the second quarter and this was exaggerated by the limited comp sales increase. We begin to anniversary some of these investments in the back half of this year. For example, we'll cycle the added expense of the relocation of the Southeast distribution center and the relocation of our data center in the second half of twenty fourteen. The largest variance was employee benefits where medical costs and workers' comp expense have been running higher than planned.
Incentive compensation was favorable and offset a significant portion of the deleverage. Our effective income tax rate decreased to 36.7% in Q2 compared to 37.4% last year. The decrease was due principally to the timing of the recognition of state and federal income tax credits. Turning to the balance sheet. At the end of Q2 this year and last year, we had a cash balance of $56,000,000 and no outstanding debt.
During the Q2, under our stock repurchase program, we acquired approximately 961,000 shares for $62,500,000 We estimate that the share repurchase program did not have a material impact on EPS for the quarter. Average inventory levels per store at quarter end were 3.4% lower than last year, while annualized inventory turns increased by 3 basis points for the quarter. We are pleased with the productivity of the inventory during the quarter as team did an excellent job flowing early spring orders as sales demand warranted and managed seasonal inventory throughout the quarter. Overall, we do not anticipate any markdown exposure in Q3 outside of our normal clearance activity. Capital expenditures for the quarter were 40 $200,000 compared to $49,300,000 last year.
We opened 23 stores this quarter compared to 26 stores in the Q2 of 2013. The decrease in capital expenditure relates to cycling expenditures for the construction of our Southeast distribution center last year. Turning our attention to the full year outlook. Based on the Q2 results, the company believes its fiscal year 2014 results will be at the low end of the previously provided ranges, which were net sales of $5,620,000,000 to 5,700,000,000 comparable store sales of 2.5 percent to 4 percent and net income of $2.54 to $2.62 per diluted share. We have reduced our estimated range for capital expenditures by $20,000,000 to $220,000,000 to $230,000,000 The new store pipeline is tracking to our full year goal of 102 to 106 new stores.
Based on the volume of our share repurchase year to date, we are also adjusting our estimate for full year diluted shares outstanding to approximately 140,000,000. We now expect the deflation to be higher than originally than originally anticipated for the back half of the year as corn prices, which is a directional indicator, continue to remain low. We are now estimating deflation to range between 50 and 100 basis points in the second half with the 3rd quarter being closer to the high end and moderating slightly down in the 4th quarter. The safe category will continue to be a headwind, but the merchant team has put together a solid plan to drive total sales in the back half of the year. We expect gross margin to be flat to slightly down in the second half of the year.
The Q4 will be a tougher comparison in the back half as strong seasonal sell through last year minimized markdowns. We will continue to have freight and mix headwinds that will offset some of the benefits of our key gross margin initiatives. With respect to SG and A, our store support center consolidation into our new campus is on budget and on time and will be completed before the end of Q3. The anticipated lease termination and transition costs will be incurred and expensed in the 3rd quarter, which we estimate to be $0.01 to $0.015 per diluted share. We have a very focused plan to manage SG and A expense in the back half of the year and we expect to leverage SG and A in the back half, principally in the Q4, as we begin to cycle the investments made in the back half of last year.
We expect SG and A leverage to be closer to flat in Q3 as a result of the store support center transition costs I just mentioned. We forecast that our effective tax rate for the full year will be approximately 36.9% compared to our previous guidance of 37%. To conclude, our core business remains strong. We saw seasonal sales accelerate as the weather warmed and we managed the inventory properly to position Tractor Supply for a healthy summer selling season. So now I'd like to turn the call back over to Greg.
Thank you, Tony. Looking forward to the second half of twenty fourteen, we are focused on driving sales and operating margin growth for the full year. Last year, the spring and summer selling season extended well into the Q3 and we benefited from having inventory in the right mix of seasonal products. Our success in Q3 last year presents us with a challenging comparison this year, but nevertheless, we feel we are well prepared given how well we ended the Q2 with inventory and how we have successfully transitioned our assortments toward fall. In the second half of the year, we have several merchandising initiatives, which we are excited about, including a number of direct mail campaigns, looking at our targeted distribution of our circuitous and numerous in store events focused on driving more footsteps into our stores.
While we will selectively sprinkle in a few individual store level efforts, we are diligent in maintaining our everyday value pricing model. We also have our seasonal center court that I should mention, where we always introduce new products that also support our customers' lifestyle and drive business. So in closing, I'd like to thank our dedicated team members in the field, distribution centers and here at the store support center for all the hard work and dedication to our company and our shareholders and the investment community for your continued support. We feel comfortable about the underlying trends and fundamentals of our business, but we recognize that we need to continuously raise the bar on our execution to address the external business conditions that can change and have changed around us. We appreciate your time today and we will now open the call for your questions.
Thank And we'll take our first question from Michael Lasser.
Thank you
for taking my question. I was hoping to dig a little bit further into the gross margin. The last quarter you got about 100 basis points of gross margin expansion. It sounds like largely from the deflation element of your retail prices adjusting a little bit slowly more slowly than the wholesale prices. You laid out some factors that restrain that in the quarter like 13 basis points from mix, 14 basis points from freight.
You didn't call out promotions, but you made it sound like it was slightly less than that amount. That would add up to around 40 to 45 basis points. So was there just less of a benefit from the deflation in the second quarter than there was in the Q1? Or was there something else going on?
No, Mike. I think that summarizes it. The deflation was
a little bit less of an impact, although it clearly was the largest. And then we did benefit from our price optimization and exclusive brands initiatives. So but between clearance, which you're correct, it was relatively modest, it was definitely less than 10 basis points And mix and promotion really were the drivers. And when it came to mix, like I had mentioned earlier, you had riding lawnmowers, which tend to be well below chain average. You also then were very light in categories that generally are above chain average some of the key spring categories.
So that was the key part of the mix impact. And then as consumables continue to increase as a percent of sales that also caused the mix to be to have an impact. But other than that there was nothing significant relative to the margin.
Okay. And the commentary about the promotions that you laid out during the quarter was very useful. And it sounds like you could continue to follow some of that those tactics continue to use those tactics moving forward. Is there something that's changed about the customer? Or are you just digging into customers that are more expensive to attract and that's why you're having to run the promotions?
Is there anything different about the competitive environment? And then does that influence your thinking about the long run margin outlook for the business where you've consistently guided to 25 basis points or of overall expansion, but have done quite better than that? Thank you very much.
Michael, this is Greg. First of all, there's nothing significant that we can see that changed with our customer. They're still being conservative. They're still buying very close to need. What I think we saw was demand shifted later and as demand shifts later, a lot of these customers say, maybe I don't need to make that investment in X, Y and Z.
And we clearly saw them not interested this year in some of the outdoor products that in years past, they have performed very well. And by the way, those are higher margin products that we count on in our 2nd quarter mix. So that's the first thing. And I think we saw them pull back a little bit from what I'll call discretionary spending on some things. I don't think there's any competitive pressures that we can see that have caused any issues.
So I would say to that, no, haven't seen anything. And I think in general, our consumer will look at forward purchasing a little differently. We're already starting to see a good indication on some early reads and early sell throughs on fall products and certain categories in our business and I won't get into specifics from a competitor standpoint. But that is a very strong indication that they are looking forward not looking back and that's really what we need from them right now.
Great. That's very helpful. Thanks again.
And we will take our next question from Peter Benedict with Robert W. Baird.
Hey, guys. Thanks for taking the question. I guess following up on that a little bit. The inventory looks very well managed in the quarter. Does that limit your ability to capitalize any extended spring selling season in 3Q?
And is that why maybe you're being a bit cautious on that? Or Greg, maybe just the comment you just made there that your customers
are kind of looking forward?
Peter, two things. In some categories like some outdoor power equipment, there will be a limited availability because either there's model changeover or those manufacturing facilities have already moved on to making snowblowers and other type of winter products. So yes, there'll be some limit to that, but we were able to grab some inventory before some of those conversions occurred. So I think we're sitting where we want to be with inventory and we think we can maximize what's left of the season. Again, I think the customers from what we've seen initial here is that they're already looking forward, which is a good thing, but they're still buying to need.
And in some of our regions where we've had a lot of moisture and heat, some of the outdoor power equipment categories have been just extraordinarily strong. And we're basically feeding that business day to day. So mix of things going on right now. Good luck at fall forward as well as still trying to capture some of those lost sales in spring.
Okay, fair enough. And then my second question is just on the freight headwind that we saw in the quarter. I mean, clearly, the Western expansion is expected to be a freight headwind here. But I guess the inbound capacity issue would seem somewhat new. So maybe if you guys can talk a little bit about that and then whether you expect that
to persist going forward? Thank you.
Right. Peter, Tony. When it comes to the inbound freight, there has been a lot of conversation about some of the incremental costs as far as the truck and availability, driver availability. That has increased our cost. We do expect to have that go forward and we have taken that in consideration in our forecast.
It is somewhat impactful. It does add some basis points to the freight in the impact. But again, we believe that we can manage that through that and have included in our forecast in the back half.
Okay. And then I guess as we look at the back half on gross margins, I think you had said kind of flattish to down a little bit in the second half. And I think you're still expecting the Q4 to be down given the comparisons. Do you also expect the Q3 gross margin to be down? Or you think could be flat?
Is there a chance to be up? Just any color around that given what you're seeing so far? Thank you.
Yes. As we look at the 4th as we look at the 3rd quarter, we think that the gross profit is going to probably be more in the flattish range. We think that there's obviously more upside in Q3 than in Q4 because we did have such strong sell through in the 4th quarter. If we can continue to get good springsummer sell through on some of the higher margin goods, there's some potential upside there as well. But again, just overall, we try to stay away from specific quarter guidance and try to keep it generic to the back half.
But we believe that there is a little bit more upside to Q3 than there is to Q4 when it comes to gross margin.
Yes, understood. Thank you.
And we will take our next question from David Magee with SunTrust.
Hi. Good afternoon, guys.
Good afternoon.
You may have said this and I may have missed it, but the new store productivity we're getting around 75%. Does that sound about right?
That's correct. Yes.
And that number is sort of the higher end of the range that you've seen over time. Is there something that you're doing differently with these class of stores that's producing a better number?
Well, there's clearly a lot more research that's going on before we open these stores because we're going into new regions, David, and we've spent time out there with the customer base and our teams here at the store support center with our field people that we're placing out there. So much more focused on understanding that consumer before we're out there opening more stores. The second thing and I've mentioned this before, we have a team of people here at the store support center that with any new store that opens in its 1st 12 months of its life, there's a bit of a, I'll call it, a babysitting period where they really work very closely with that individual store, understanding differences in needs, whether it be flow product, depth of product, some change outs and planograms, maybe some products that we need to introduce into the store because of customer demand, so on and so forth. So we spend that 1st 12 months with that new store trying to get that assortment and that new store positioned in that market before we turn it over and put it into the run rate of the normal the rest of the company.
So it's a unique process. It takes time. It takes people, but it's paid big dividends for us.
Thanks, Craig. Dana, just
to also clarify on that. As we move west, the mix of the store is going to be a little bit larger. So it's a larger volume store. So as you see that in the number sort of increasing as a percent of the sales total sales of the company or average store. Some of it is just due to the mix of the stores that we're opening.
Thanks, Tony. And then just secondly, the when you mentioned you had a good look or some look into the fall product demand and it's favorable, what products in particular are you looking at to see that?
Well, Dave, unfortunately, I can't tell you which categories because from a competitive standpoint, but there's 3 or 4 that are key to our business, just as there are 3 or 4 the spring season and they're great indicators of a forward look or a forward trend. And what I can tell you with great confidence is we've started off with very, very positive trends and we expect those to continue.
Great, Doug. Thanks and good luck.
Thank you.
And we will take our next question from Chuck Cerankosky with Northcoast Research.
Good afternoon, everyone. Just want to reflect back on that north south split a little bit. Could you comment on how that looked among the new stores you opened? The cold versus warm area?
More warm. I mean, cold, that's for sure.
Chuck, the newer stores as we grow in the Southwest obviously are going to be warm weather. And they as we had indicated earlier, the Southern stores did produce better than the Northern stores from a sales perspective. So for the most part, we felt very good about the new stores. And again, they were specifically more in the South and obviously had a better opportunity to perform well during this delayed spring.
All right. That makes sense. Thank you.
And we will take our next question from John Laurence with Stephens.
Good morning, guys. Good morning, John. I'd like to follow that on the divergence between the North and the South. I mean, was that the biggest spread the largest spread between those regions you've seen in some time as far as that how say April May and part of June performed? Yes, it was.
Lee, you want to talk to that? I think the John, I think the difference in the North, South typically over the last, I'd say, few quarters we've been relatively consistent across all regions. But I think we this time we saw quite a differentiation in particular with the Northeast and kind of the Mid Atlantic areas that they did not perform up to area. And is it fair to say, Greg, your comments on some of the forward looking, is it fair to say that those lines have converged and when weather is sort of at parity in both places that they look a lot similar going forward? That is correct.
And I will say that echoing what Lee said, we still are seeing very consistent traffic. And what happened really in the north versus south was the mix in the basket was so different from a year ago. And as the weather's warmed in both locations now, both parts of the country, we're seeing very similar selling patterns, but we're also seeing a nice movement forward in business across the country. So very happy with that so far.
Great. Thanks. Good luck.
Thank you.
And we will take our next question from Chris Horvers with JPMorgan.
Thanks. Good evening. As you talk about as you think about really the 1st 7 months of the year, you always encourage us to look at the business in terms of halves and maybe including the July to date is the right way to look at. What do you think the core underlying trend in the business is? You had some early help from the cold and then it hurt you and then you had this delayed spring, but now it seems to be helping you.
So what's the right underlying trend in the business?
Have been some comments about volatility. There's been some comments about volatility, but it's really not volatility. This is really some I think we could give some great examples of how consistent there are some things are in the underlying components of the business. Number 1, comp store traffic counts. They remain strong.
They're very consistent. And that's an underlying piece of the core business that the customer is still coming in making purchases in Q and in other products and stores. Second thing, the basket. The basket changed quite a bit in the 1st part of this year versus a year ago. And as the demand increased based upon the warmth of the weather and I hate to use weather, but weather did have an impact, it then started to affect how the mix of the basket and sales of products were from the stores.
So the North and the South looked very different in sales for the first 5, 6 months. This is probably some of the most extreme weather honestly we've ever seen at least for the time I've been with the company. And so we dealt with it, but it was clearly a shifting of product mix and demand from the consumer of certain products based upon the fact they can get out and either work in their yards, work in their gardens, work outside in general. So underlying, it's good. Now deflation had some impact, no question.
Deflation played a role. But I think generally speaking, demand shifted later in the North and the upper Midwest and we saw pretty normalized business in the more Midwest and South.
And then did as you think about the feed and food category ex I guess maybe for on a unit basis, has the growth in that business moderated? Has there been much change there? I think some of the dog category, it seems like there's some consternation out there in the dog category. But overall, as you think about dog and horse as the food and feed category been pretty still been very good or pretty good for you?
I can tell you that our unit counts are up in both categories. So we are continuing to take market share.
Okay. And then perfect. The July commentary, is it fair to say that July is an unassisted comp? I mean, some of the questions focusing on the promotional level here. I think people investors were trying to understand if you're driving the business or being forced to drive the business through promotions.
Is the July commentary about trend largely unassisted or unpromoted?
Yes, Chris. July is a return to more normal. What we would expect would be the performance of Tractor Supply as we've known it. Yes, we did nothing to further assist the business. This is just a good solid trend of business that honestly just came later.
Perfect. Thanks very much.
Thank you.
And we will take our next question from Scot Ciccarelli with RBC Capital Markets.
Hi, guys. I guess, everyone's kind of talking around it, but can you give us an idea for how big the difference was between the South and Northeast, whether it's a range or some other way to think about it?
Yes. I think when you look at it, I guess, we can give you some range. But what was interesting is that as we progressed in the quarter, we did start to see the North come back. So as much as we feel that there was a little bit of some lost sales there, it did start to moderate some. So when you look across the chain and if you look at it from a full year basis, actually the Northeast came back very nicely.
When you look at some of the range, it's probably somewhere between 300 to 400 basis points of swing between North and the South as far as the performance of those regions when it comes to sort of the spring categories.
Got you. That's very helpful. And then, I don't know how you really answered this. I mean, Greg, you kind of talked about you didn't really see a change in consumer behavior, but obviously there's some people out there thinking that there's significant deflation in forces on some of your core customers with corn, etcetera.
Maybe you can just give
us some of your thoughts on if that could have some sort of impact on your rural customer base? Or what's the right way for investors to kind of think about that as the potential impact on the business? Thanks.
Well, the first thing I would say is that what gives us comfort is the fact that we were having consistent growth in our transaction counts at the store. So our customer base continues to shop with us and it continues to grow. I would tell you that in many of the products we sell, corn is a very small component. However, it's a good indicator of what can happen with the rest of grains and other mixtures of products in feed and food. We have not seen any shift downward in quality of product that the customer is buying or them buying any less of.
And we saw that back in the early part of the recession. If you remember, we've been following the company back in 'eight. We saw customers trading down into lower priced feeds and foods. We're not seeing that at all. Not seeing that at all.
As a matter of fact, many customers, I think, are seeing great value and understanding that a better quality feed or food, that is better for their animals. So no indications of that. There were some challenges, no question, in the early part of the year with weather and being able to run trucks and get product to stores, but that was past us. So the Q2 really was more of it was circled around demand for other seasonal products. Q and the Q categories are performing very well.
We're very pleased with those. And we believe because of that traffic count and the unit increases that business is
solid. That's very helpful. Thanks guys.
This is Tony. We've done some analysis in the more rural areas where we'd expect the farm income to have an impact. And we have not seen any large disparities relative to the performance of those stores in those areas.
Got you. All very helpful. Thanks guys.
And we will take our next question from Seth Basham with Wedbush Securities.
Hi, there.
Hi. Hi.
Our question tonight is really around the consumer. And I'm trying to understand your read on the consumer a little bit better. The one hand, you're talking about strength in some big ticket discretionary categories like riding lawnmowers. On the other hand, you're talking about more limited behavior sales and other high margin discretionary things in the spring. How do you juxtapose those things?
And what do you think the consumer is really thinking right now?
This is Greg. I think it's a simple answer. Some of those, what I'll call, discretionary purchases are more ornamental and decorative type things. And there's a life to those. Typically, you buy them early.
You kind of use them and they transition from year to year. Our customers typically shop on needs. So I think because of the delay and their ability to use some of those products, particularly some of those outdoor products, they may have made some decisions to say, no, I'm going to continue to support the things I need and I'm going to move on now and look forward to the next season. And what we did was when we started seeing that trend, we started to moderate our inventory levels in those categories and manage ourselves to a successful conclusion. So, I don't think that's anything unusual, particularly given how late the season developed.
Got it. That's helpful. And then secondly, as you think about the gross margin outlook being a little bit more limited going forward, are you guys changing your cost control measures to offset that in any way?
Yes, Scott, we've taken a hard look at the back half and we believe we have a very focused approach around SG and A. And that's why we've adjusted our outlook relative to SG and A where we believe that we can derive some leverage from SG and A in the back half of the year.
Anything specific that you can point to?
Well, obviously, there's some discretionary spend. There's also some initiatives that we're we've been able to manage more efficiently and some that we've just continued to make sure that we don't spend ahead of the benefits that we receive from some of the key initiatives. And we've been able to manage some of the CapEx spend as well around those projects. So we believe that those are a few things that we've done relative to drive some expense. And obviously, we're always looking at things like managing labor and some of the key occupancy expenses when it comes to repairs and maintenance.
But at the same time, we want to make sure that we take care of our store base. So it's a balancing act, but we really feel that as we move into the back half the plan that we put together we can achieve some SG and A leverage.
Got it. Thank you.
And we will take our next question from Simeon Gutman with Morgan Stanley.
Hi, good afternoon.
Good afternoon.
Can you
talk about if you can estimate the magnitude of the comp lift or the sales lift that the promotions drove the business? And then and if I interpreted it right, were the promotional levels, were they similar to the cadence of sales growth, meaning the promotions were, let's say, more prevalent in the month of June versus the other months of the quarter?
Simeon, this is Greg. I would say 2 things on that. One is, it was moderate as far as impact on sales and moderate impact on margin, so minimal. What it we already had as weather started to change, we happened to be, I would think, in the right place at the right time with some of the promotions we had already put into play. And for example, by shifting the July 4 piece up a week, that just gave us a little bit of more time to understand where is the customer on some of these products.
It typically all you're doing is shifting the business typically or a little earlier sometimes versus extending it out. But we tried that to see if we got we get any kind of comp increase out of it. So it had some effect, not a large degree of effect. We were already starting to see some turning of the business in the positive direction. And the comps, as Tony had mentioned, were significantly better in June and it continued into July.
So in July, it's been a month where we've changed nothing. It's been exactly the same. And we didn't do anything really significant in the month of June, nothing like going out and dropping another piece of circular or circulation for 2,000,000 or 3,000,000 customers, which would be a normal drop for us. We didn't do that. This was more local store type events, something we could do from inside the store and we'll leave it at that.
Okay. And then on the feed business, you mentioned your units in dog are in one of the categories was up, you're probably taking share. Can you talk about where you think that's coming from? Is it the same customer who's buying large animal feed? Are you pulling from more of a suburban market, so maybe from the strip center customer?
Where is that coming from? Or is there also and is the private label or your private offering within that growing faster than the brands?
I can't tell you exactly where it's coming from, Simeon, I wish I knew. We do our best to try to track that. I think in general, our pricing structure, our in stock levels and our offering and mix tends to drive customers to our stores. We are seeing nice growth, continued growth in our own exclusive brands. That's a reason for people to come to our store.
You can only buy those at Tractor. So I think this has been something we've seen for a while and we see it continuing as we increase the depth and breadth of those assortments in our
stores. Okay. Thanks.
We'll take our next question from Alan Rifkin with Barclays. Go ahead.
Thank you very much. Greg, understanding the perishability Greg, understanding the perishability component of
your commodities side
of the business,
is there anything at all that can be done by you guys on a proactive basis to try to take advantage or somehow not be as susceptible to the declining prices in commodities, be it slowing your terms or anything?
Well, a couple of things we have done. We've made some significant investments in inventory that we would forecast with our suppliers. But we don't buy we're not buying commodity type products. We're not out there. And the fact that we've been able to build exclusive brands in our company and that's a base of business that we can control from a flow margin and exclusivity standpoint helps us.
But I'm not in the future business, don't plan to be. And I think we do a fine job today working that inventory and turning inventory. We're not having out of stock issues. What we're having more of is trying to look at what's the next level of business in some of our exclusive brands more so than even some of the national brands on occasion. So it's a good mix right now.
It's a good healthy mix. We need both.
Okay. I mean you said on more than one occasion that the buildup was more gradual than what you anticipated. What do you think is really behind that? Is it a macro issue? No.
I think
it's we are convinced now looking at how the business developed, it was primarily weather. Because as things normalize, when weather normalized, business is back to, like I said, the typical what we would call tractor supply performance. So I don't like to use weather as any type of issue, but it clearly was driven primarily North and the coastal side of the Midwest. And that area of the country just didn't respond until the weather actually warmed. And once it did, business normalized.
So I'm we're clearly convinced it was weather.
Okay. And one more question if I may. I know it's been asked 10 different ways. But with respect to the weather, I mean, besides the North, did you hit your plan in all other areas whatever that plan may be?
When you say hit the plan, do you mean sales in other regions? The answer to that would be yes, we did. We actually accelerated in a number of regions beyond plan. Significant weakness in the North and in the Mid Atlantic, significant strength in other parts of the country.
Okay. Got you. Thank you very much.
And we will take our next question from Mark Miller with William Blair.
Hi, good afternoon. It seems like
one of the swing factors of the gross margin near term would be some of these spring seasonal categories that
you talked about.
And you highlighted the importance of 3 or 4 going forward, 3 or 4 looking back. Could you give a little more perspective on what some of the 3, 4 spring categories that you're hoping to see good follow through late in the season?
Well, one of the categories is the riding lawnmower business. It's been exceptional this year. And we don't know if it's because honestly the season just developed late and equipment from last year wore out or it's we're in just an advantageous cycle. We have inventory and quantity product and maybe people we compete with have sold through. Things like sprayers and chemicals, those are businesses that typically start early in the season.
And when they come later as they have this year and I'll give you an example. We're hearing that cuttings of hay this year. There's probably still 2 cuttings left. Well, at this time a year ago, there would have been maybe one. The twine business is extremely strong.
And why is that? Well, there's forecasted more cuttings and things. So there's some unusual things year to year here that are happening, but they're delayed and they're still coming. So our biggest challenge right now is managing trying to gain the maximum return on the inventory we have in those categories and then also transitioning to fall. And as I said earlier, we're very pleased with what we're seeing in some of the early indications of some of the fall sets in some of the northern regions.
So I feel quite good right now about the mix of inventory, how things are selling through, but it is unusual. This is not a typical year. We wouldn't be seeing some of the selling of some of these products this late in the season.
Great. That's helpful. And then something, I guess, apart from the weather. On the import purchases up around high single digit in the first half, That had been growing a little bit faster than total sales in the past. So I guess can you kind of give us a sense for what is your current outlook for higher penetration on import?
Which of the categories again are you really focusing on? And do you think that will start accelerating again? Or are you kind of getting closer to where the business can go? Thanks.
Mark, I've always stated that there's no set number for us as far as a target. But it will shift between seasons. This year, we did pull back a little bit on some, I'll call it, import products in the outdoor category. And I think it was a good move on the merchants part because it was a category, unfortunately, that was soft this year. It wasn't because of inventory, it's because the customer just decided that, that disposal income was going to go somewhere else.
We still see growth. We still see the machine behind our product development and sourcing piece of the company growing. I still think that we will see I don't know, it could be 300, 400, 500 basis points more growth as we get into a lot of part of the year and into next year still. So there's no slowing of that conversion, but I don't have a target number to give you. I think it would be wrong to say because it's a totally different mix between parts of the business.
Some pieces, a higher percentage, others low. So look for continued improvement and increases in the mix.
That's helpful, Greg. Thanks.
And we will take our next question from Adam Sandler with Deutsche Bank.
Yes. Good afternoon, guys. Thank you. So two questions. 1, sort of both on weather.
1, if you could remind us what an extended season means for you guys specifically? What was it about the weather last year that helped drive double digit comps in July August? And then as it relates to the commentary on fall, just wondering if that was concentrated in sort of the Ohio, Michigan, Western, New York, Pennsylvania areas, which did see for every reason very late polar vortex over the last couple of weeks with temperatures dropping very well below average, just to make sure we're not getting sort of a false read on that?
Let me address your last piece. There's no false read here. Okay. What you've got is our consumers last year honestly were caught a little short on a number of categories of products because we had a very, what I would say, voracious long winter. So what we typically have seen in the history of our company is when that happens, they start to buy earlier for the next year in an effort not to get caught short, in an effort to make sure that they're well stocked on products.
So that's what I think is happening there, polar vortex aside. As far as the other weather things, what you see is an extension, ironically, this year is they're still planting grass seed. They're still putting in gardens. They're still cutting hay. There's a number of things that typically would start to be winding down at this time of the year that are still very vibrant upper Midwest, out in the coastal areas in the Carolinas and up to the Northeast.
So that's going to play itself out for a while. And we're still seeing again some forward buying, but I like what we're seeing as far as the reaction to, I'll call it, a late spring. But there will come a point in time and it could be right around Labor Day or shortly before where that will shift again and we're in great shape to take advantage of that.
Okay. Very good. Thank you. I appreciate it.
And we will take our next question from Aram Robinson with Wolfe Research.
Hey, guys. Thanks for taking the question. What I'm trying to get a handle on is the historical kind of perspective of the promotions. You mentioned you're kind of sprinkling in some promotions, which I understand. But just remind us of the history of that when you've done that last and how it kind of developed if you don't
mind? Arum, we have been doing that for a number of years now. And it's not really promotion. What it is, is store level, I'll call it customer interactions. Whether we would do a farmers market on a weekend in a group of stores in a certain part of the country or we would have a pet swap meat or something.
I mean, it's all kinds of interesting things that our marketing department has researched and developed and they're really local store events that we give the stores the opportunity to execute to. And we actually put together a marketing package for them that's done at the store. So understand, it's not about more promotion and it's not about on sale. This is we're an everyday priced value company and that's how customers have come to trust us on pricing. So these are events that draw customers to the store.
They're primarily geared on the weekends and there's literally a menu of things that they can use. And we usually give them some guidance, but we've been doing this for a number of years now.
And maybe just help, last question is, we're trying to rebound to get back to normal, which is kind of let's say 3.5 or 4 something maybe for the back half. Now in years past doing a 3.5 and a 4 wouldn't have kind of passed muster because you were comping up 6%, 7% s 8%. I'm just wondering kind of is the new normal kind of 3% to 4% s? And what can you do to get back to the old normals because those were even better still?
Great question. Not a simple answer.
Some of the
things that I'm encouraged about is that we're continuing to find new products and able to take some businesses that we thought had cycled through and were kind of mature and actually breathe some new life into them. We talked a little earlier about the Safe business. That business was running hot for a number of years and we knew it was going to soften at some point. So it's one of those things where you look at those businesses and you say how do you offset that? How do you continue to grow it?
Well, sometimes if the pie gets smaller, you have to go out and look at how to get more of that pie. And but I think it's in general, we're going to continue to do the things that we think we do best and that is introduce new products, use in store events and things to bring customers through and do some of the new products, make sure we're in stock and watch those in stock levels and make those investments and really look at maximizing probably 3 or 4 key categories each season where we believe we have a dominant position. We've learned that when we get behind some of these categories from a merchandise presentation and branding and promotional level, we can drive the business and I think and we can do it at healthy margins. So there's more for us to do. Unfortunately, we've seen a little bit of some weather challenges that have gotten in the way, but I believe we'll get back to being the tractor you know here shortly.
Thanks, Gary. I hope so. Bye.
And we'll take our next question from Peter Keith with Piper Jaffray.
Great. Thanks for taking our question. This is actually John Berg on for Pete tonight. It sounds like you guys have talked about corn being a deflation kind of indicator on the business. And just curious about what you've seen with oil and steel in your business so far this year and how you're looking at those categories for the second half?
John, this is Tony. The big driver as far as our adjustment to deflation is really the corn prices. When we look at the other two factors which is oil and scrap steel are the other two indicators for our business. We did see some flattening out when it came to oil. But as we look at the back half of the year, we don't believe that those two indicators will be a significant driver of the deflationinflation in the back half.
Okay, great. And then just quickly the second question. When did the softness in the safe category really start to set in? And I mean how long do you anticipate that core category being a headwind?
Right. The safe category has really been a headwind just the last two quarters, so really 2014. And obviously, the big driver has been some of the gun control issues that are out there, especially when it surfaced after Sandy Hook. So last year was very, very strong gun safe sales year. And again most retailers have talked about that, especially those in the sporting goods area about the softness across the industry.
Okay, great. Thanks a lot and good luck in the second half. Thank you.
And we'll take our next question from Eric Bauschard with Cleveland Research Company.
You spoke briefly on the West stores and the relative size and sales volume. Curious if you could talk a bit about the margin experience at this point and what you think as you go forward as you open more stores out there specifically on the gross margin opportunity of what you're seeing and learning from those stores?
As we move west, obviously, we like the sales volume of those stores. As we've talked in the past, the real estate costs are more expensive. So from a modeling standpoint, they fit into our model from an economic standpoint. What we see in the gross margin side, it's going to vary slightly, but we do like what we see from a gross margin perspective. Those territories are a little less competitive, obviously, are going to be much stronger.
Some of that gross margin that is above chain average can be eaten up a little by the additional freight. So as we eventually get our distribution center out there at the end of 2015, Hopefully some of that freight degradation will moderate some. So net net, we really like what we see out there from a sales standpoint and from a gross margin standpoint and we believe that there'll be a very profitable segment of the business.
From a mix I understand the comments from competition. From a mix of what you're selling there and I suppose competition as well when the smoke clears and the infrastructure is there to supply those stores, is it likely to be a similar better or worse gross margin relative to the existing business?
I think net it will be a better gross margin business.
And then secondly as it relates to Greg understood the comments on some of the marketing things you've done with promotions and connecting with customers. But from a merchandising standpoint, curious if there's anything new or incremental either specifically or strategically that you're doing merchandising to help grow the sales as we look out this year and into next year, if there's anything changing materially there that you can speak to?
Eric, there are a number of things that we're doing differently. But again, I'm reluctant to speak to it in specific terms. But I can tell you this that we still drive a lot of newness into our stores. That's how we learn really where our customer is headed. They give us great indication very early on.
So the testing programs are still robust. And you will see as you travel our stores, you'll be able to tell where the focus is at. There's no question. You'll see the investment behind inventory. You'll see it in some of the promotions that will run out there in print and online.
So I would say to you that there's the pipeline is still full of new initiatives and new products. And we continue to learn from the web business, which is interesting. There's some things that the web is teaching us about demand and about some products even in some price tiers that we can sell on the web and we now figured out we can sell in stores. So both are working nicely
in tandem. Great. Thank you.
And we'll take our next question from Matt Niemeyer with Wells Fargo.
Good afternoon. This is Omer on for Matt. You had previously mentioned a high level of moisture on the ground, which is traditionally a tailwind to sales. Is that moisture still on the ground? And then is it a potential benefit in Q3?
Or does that benefit sort of disappear when we get around this time of the year?
Well, traditionally, we start seeing the if you look at the we weather maps and we look at NOAA's forecast and what we've seen is that this year in the Southwest and as we go through the Midwest and that, no question that more moisture drives broader sales, it drives weed control and bug infestation and all those types of things. So those businesses still have a little bit of running room. Well, we haven't seen any kind of moisture in those areas for a while. We've typically seen the map showing a lot of drought. So that has helped us this year a bit in the South and the Southwest.
I don't think it's going to give us any great benefit in the Q3. I think it's more in the Q2 period where we see the benefit from that.
Great. Thank you.
And we'll take our next question from Joe Feldman with Telsey Advisory Group.
Hi, guys. Good afternoon. Thanks for taking the question. I wanted to ask, I know we've a lot about the marketing and promotion and the cadence. And I apologize if I missed it during the call, but any update on an affinity type program?
I know you guys don't want to give away anything. We've talked about that in the past, but just any new anything new on that front? Because I know you've talked about testing different things on the Affinity side.
Yes. Well, you're correct. We're still in the testing modes. And we are, I would say, developing a position now on what we believe will work for Tractor Supply. It is not an additional discount type program as many of these programs turn out to be.
This is different and we'll be able to tell you more about that as the year progresses.
That's great. And then I wanted to go back to something I think a question or 2 ago. You brought up some comments about learning some things from the web and online sales. And I guess I wanted to broaden that out to like, are you seeing anything shifting towards the web? Because I think there's this general view out there and certainly we have it that your business is somewhat defensive against the Internet.
And I'm wondering if you've seen any shifts in the business model that may suggest there's categories that do lend itself to e commerce and maybe not threat from Amazon, but at least maybe more benefit for you to sell via the web?
I think generally speaking because we continue to see footsteps and traffic being very consistent in the store, what happens for us is the web becomes a facilitator and people use it for research. There are some products we're learning though that we can sell on the web and I'll give you an example of 1, chicken coops. Now you may say that's kind of a silly category to talk about, but we can sell very high end coops on the web and much larger scale coops on the web than we can even sell and really facilitate a presentation in our stores for. And that was an interesting category that to be honest with you, we weren't sure it was going to work as well as it did and it's been terrific. I'll also say to you that the web also teaches us a little bit about price transparency.
And when it comes to things like a DEWALT drill, that's not going to be a category I'm going to spend a lot of time and money on because honestly that drill is out there from everybody at a price. But I will have it and I'll have an assortment for my customers so it meets their needs. But what I'll find is other products in other categories of things that are unique to me that I can offer my customer out there that can't be found on other websites or if it is, you have to search multiple places to find it. What our whole focus is, is to use that web piece as an extension of the store and to use it as a piece of communication as well as to drive commerce. And we're very pleased with what the progress we're seeing there.
And what it is, again, there's some teaching going back and forth between both of those groups, the 4 wall group and the web group on how to manage some of our businesses and what we can sell.
Got it. That's helpful. Thanks and have a good quarter guys.
Thank you.
And that does conclude today's question and answer session. At this time, I will turn the conference back over to the speakers for any additional or closing remarks.
Yes. This concludes our 2nd quarter earnings call. I'd like to thank you all for your interest in Tractor Supply, and we look forward to speaking to you again on our 3rd quarter earnings call in October.
That does conclude today's conference. Thank you for your participation.