Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss 4th Quarter and Full Year 2019 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. Call. As a reminder, this call is being recorded.
I would now like to introduce your host for today's call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.
Thank you, David. Good morning, everyone. On the call today are Howard Lawton, our CEO Greg Stanford, former CEO and Strategic Advisor and Curt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our SVP of Merchandising, will join us for the question and answer 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 its forward looking statements are reasonable, it can give no assurance that such expectations or any of its forward looking statements will prove to be correct and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward looking statements are included at the end of the press release issued today and the company's filings with the Securities and Exchange Commission.
The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply takes no obligation to update any information discussed in this call. In discussing the results of operations, we'll be providing adjusted net income and diluted earnings per share amounts that exclude the impact of the executive transition agreement. You can find additional information regarding these non GAAP financial measures in our earnings release, which is available in the New Rooms section of our website.
Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to 1 with a quick related follow-up. I appreciate your cooperation. He will be available after the call for follow-up. Now it's my pleasure to turn the call over to Greg.
Thank you, Mary Winn. Good morning, everyone, who's joining us on the call today. Before we discuss our Q4 results, I'd like to take a moment and update you on the CEO leadership change at Tractor Supply that we announced in December. Hal Lawton officially joined the company in mid January as President and CEO. The Board engaged in a thorough and comprehensive search to identify the right leader for this next chapter in the company's growth.
I am very excited that the Board chose Hal as the next CEO for our company. Hal brings tremendous experience across multiple retailers, including Home Depot, eBay and Macy's. And more importantly, Hal is a great cultural fit, and I believe he is the right leader for the future growth of Tractor Supply. As we have previously communicated, I will continue to be available as an advisor to Hal and the company through August and will serve out my Board term through May. My expectation is that this will be a very smooth transition.
As this will be my last earnings call, I want to reiterate that it has been an honor and a privilege to serve as the CEO of Tractor Supply. The Tractor Supply Company is a special company with a unique culture like no other in retail. I believe the company is in great hands with Hal as CEO. The company has a strong leadership team in place that is passionate about helping our customers live life out here. While the traction supply team has made tremendous progress in recent years, I believe there is considerable opportunity ahead.
And now I'll turn the call over to Hal for a few comments before we address our quarterly results and outlook.
Thanks so much, Greg. Good morning, everyone. It's great to be at Tractor Supply. For many years of my retail career, I have watched and admired this company. Under Greg's leadership, the team has achieved remarkable results and I'm honored to follow in his footsteps.
As you are acutely aware, the retail industry is experiencing disruption and reinvention at an unprecedented speed. Leading retailers need to excel at not only merchandising, customer service and execution, but also at data, technology, flexible supply chains and productivity. The key for successful retailers however will continue to be the same, a differentiated customer experience. With more than 2,000 stores complemented by our online sites, Tractor Supply has substantial scale, very high brand loyalty with our customers, an incredible culture that is part of our secret sauce and a business model that is supported by a strong balance sheet and significant cash flow generation. At Tractor Supply, we have a differentiated experience, a robust set of competencies and are well positioned to become an even more integral part of our customers' lives.
I'm excited about the opportunity to continue to build on the 1 tractor foundation the team has in place to drive the business forward. We are committed to executing on our 2020 initiatives and delivering on our plans for the coming year. The Tractor Supply team has been very welcoming me since the transition was announced. In the coming weeks months, I'll be out in our stores and distribution centers listening and learning as I spend time with our team members and customers. I look forward to engaging with you in the future.
And now I'll turn the call back over to Greg.
Thank you, Hal. And now let's move on to the results. Overall, 2019 was a solid year for Tractor Supply with record sales and earnings. While the Q4 of 2019 did not meet our expectations on the top line, the team did a great job of controlling those things we could manage and as a result, we delivered operating profit margin expansion for both the quarter and the year. The most significant factor weighing on our sales results in the Q4 was unfavorable seasonal weather trends.
Across many of our markets, we were negatively impacted in the quarter with unseasonably warm temperatures, which hampered our ability to drive top line sales in numerous seasonal categories. As I have shared with you consistently over time, the Tractor Supply customer is a needs based demand driven shopper and there is relatively little that will influence the customer's purchasing decision if that need doesn't exist. Given the stronger traffic trends, the softer traffic trends, we were unable to capitalize on impulse or ancillary purchases. And as you have heard from other retailers, I believe the 6 fewer days between Thanksgiving and Christmas over the prior year impacted our customers' gift giving purchase activity to a greater degree than we had anticipated. Over my 12 years with Tractor Supply, I've experienced these seasonal impacts before.
The Q4 of 2015 15 and again in the Q1 of 2017 and as always was the case, when temperatures arrived with seasonal change, the sales demand also returned. Despite the softness in our comp store sales, the underlying health of our business remains solid as evidenced by the continued strength of our core year round farm and ranch categories, which generated overall solid comp sales increases in line with our expectations and historical norms. The teams executed well across the operations, merchandising, supply chain, planning and placement. The teams managed inventories effectively and minimized our clearance exposure. We leveraged our retail price optimization capabilities to preserve margins and we had disciplined cost control throughout the quarter.
I am very proud of how this team reacted to and effectively managed our 4th quarter business. Now let me touch on a few financial highlights for the quarter and the full year. For the year, net sales increased 5.6% and comparable store sales increased 2.7% to reach a record $8,350,000,000 in sales. In the 4th quarter, comparable store sales continued positive as we lapped a strong 5.7% increase in the prior year quarter. For the 4th quarter, diluted EPS increased 9% to $1.21 and for the full year, diluted EPS was $4.66 and adjusted diluted EPS was $4.68 We returned $696,000,000 to shareholders through the combination of share repurchases and quarterly cash dividends for the year.
And this was the 9th consecutive year that we increased quarterly cash dividend for our shareholders. In terms of operational highlights for 2019, we opened 80 new Tractor Supply stores and 8 Penthlinx locations, increasing our store count to over 2,000 stores. We made solid progress on many of our ONETractor strategic initiatives. We completed the rollout of Stockyard in store kiosk and mobile POS technologies to all stores across the chain. We continue to experience a robust Neighbor's Club loyalty program with membership approaching nearly 15,000,000 members as we exited the year and a retention rate of approximately 80%.
In addition, we also made great progress to improve our targeting of high value customers and look alike customers throughout various digital channels. We continue to invest in our dotcom business and sales once again grew strong double digits for the quarter year. Our private label credit card program was significantly enhanced with the new 5% back reward to our Neighbor's Club members and we completed the ramp up of our new distribution center in Frankfort, New York to support our continued store growth in the Northeast. We also achieved LEED Silver Certification for this facility, making this the 3rd LEED Silver Certification Facility in our fleet. And Tractor Supply was named to Barron's 100 Most Sustainable U.
S. Companies for the 2nd year in a row. So to summarize, 2019 was a solid year for Tractor Supply and the team has a good handle on the business and has built a robust plan for 2020. In over 80 years' time, Tractor Supply has grown from a mail order catalog business to the largest farm and ranch retailer in the country and our passionate commitment to our customers, team members, communities as well as our shareholders is the foundation of our growth. All that has been accomplished over my 12 year tenure at Tractor Supply has been a total team effort.
I want to express my appreciation and gratitude to the nearly 34 1,000 team members across Tractor Supply and Petsense for a job well done. And I'm excited to watch the progress and growth for Tractor Supply that Hal and the team will provide in the coming years. I will now turn the call over to Kurt, who will provide more details on our financial results for 2019 and our outlook for 2020. Thanks, Greg. Please accept my many thanks for your friendship and your leadership.
On behalf of the entire team, thank you for all you've done for Tractor Supply for the last 12 years. Now let's get right into the results for the Q4 and the year. Sometimes weather driven demand can help sales growth and then sometimes it works against us. Every quarter can be a little different at Tractor Supply. What is at the core of our mission is that we are there for our customers with the right products they need at the right time and the right price.
To build on what Greg shared with you, our comparable store sales performance was driven by continued strength in our core farm and ranch categories such as livestock feed, fencing, forage and animal health. Offsetting the strength was softness in categories such as generators, rubber footwear, heating equipment, safes, insulated outerwear and toys. Within consumables, our pet food category average unit retail was impacted by the industry trend of trade down from grain free products. Of significance, our data shows that we are retaining our customers given the sales trends across the breadth of our product category offering. In the quarter, we continue to drive comp increase of tonnage or pounds sold as total pounds of pet food.
As well, our pet supplies categories were up mid single digits on a comparable store basis. We would anticipate the trade down trend to continue in the first half of twenty twenty until we cycle in the Q3. The unfavorable trends Greg mentioned, coupled with lapping the hurricane benefit from emergency response categories in the Q4 of 2018, impacted our big ticket performance. We experienced softer results across generators, safes, stoves and air compressors. Last year in Q4, we shared with you that we believe comp sales benefited by about 100 basis points from the weather.
This year, we estimate the negative impact from warmer weather represented about 2 thirds of the comp miss versus our expectations. Moving down the income statement. For the 4th quarter, gross margin increased 26 basis points to 33.8%. This increase was primarily driven by a reduction in freight expense as a percentage of net sales from our cost reduction initiatives and the overall market. And to a lesser extent, the team's effective management of our direct product margins as they work to mitigate the impact of tariffs.
Including depreciation and amortization, SG and A as a percent of sales for the Q4 increased 3 basis points to 25.2%. The increase was primarily attributable to deleverage in store personnel, occupancy and other costs given the comparable store sales performance and incremental costs associated with the new distribution facility in Frankfort, New York. Partially offsetting these SG and A increases were a decrease in incentive compensation as well as disciplined cost management by the team. Looking at our balance sheet, we believe our inventory is in good shape and we are very comfortable with its quality. As we enter the year, we're well positioned to wrap up the winter months and transition into the coming spring season.
In 2019, we generated cash from operations of $812,000,000 an increase of about 17% over the prior year. Total capital expenditures were $217,000,000 with approximately 35% of this being maintenance related and the remaining 65% being growth oriented in areas such as new stores, digital capability investments and supply chain infrastructure. We remain committed to returning cash to our shareholders through our share repurchases and dividends, while maintaining a disciplined approach to capital allocation. We're managing to a leverage ratio of approximately 2 times adjusted debt to EBITDAR. The majority of our debt is a very low fixed rate.
We're comfortable with our debt maturity ladder. For the fiscal year, we repurchased nearly 5,400,000 shares of our common stock. Since the inception of our share repurchase program in 2007, we've repurchased just over $3,000,000,000 of our common stock. Our remaining share repurchase authorization was approximately $1,500,000,000 as of year end. Turning now to 2020.
We will continue to build on our strong foundation for long term success. Across the business, our strategic initiatives are focused on allowing us to exceed our customers' ever evolving expectation and position us for further growth. The offering of relevant products and services for our rural lifestyle customer is at the core of our merchandising plans. We will continue the introduction of industry leading and differentiated brands. Coming into the spring season, the team is very energized about the launch Toro, as this brand has a strong reputation for quality that really resonates with our customers.
The Toro brand provides us with the opportunity to attract new customers and be more relevant with our existing customers. We're also expanding our product assortment with a broader lineup of Cub Cadet and the addition of Troyville. Combined, these brands will help solidify our position as a premier destination in the lawn and garden category and enhance our already industry leading lineup. In equine feed, we have added the premium brand Triple Crown across the majority of our stores to further round out our strong offering in this category. New space productivity technology for SKU localization and assortment will be implemented across the chain to help drive specific growth plans by category and refine our product mix.
In addition, we'll be looking to enhance the shopping experience through selected store within a store expansion with an emphasis on winning brands such as Carhartt and Workwear, Purina and Livestock Feed and Husqvarna for outdoor power equipment. Overall, it is imperative that we merchandise our stores with the products and brands at everyday low price our customers expect. Exclusive brands continue to play an important role in our offerings. You can expect to see newness through brand refreshes and line extensions across our exclusive brand portfolio. For example, Ridgecut, our new exclusive workwear brand will be expanded into footwear and accessories.
Our initiatives to drive loyalty through our Neighbor's Club program play an important role in connecting with our customers on a more personal level. Our loyalty program is its transformational asset to Tractor Supply that we will continue to elevate to drive greater relevance, engagement and loyalty. We're actioning the rich customer data we're receiving from our Nabors Club loyalty program. The health of our program continues to be very robust as measured by membership growth, increased penetration of sales, greater frequency and higher average ticket sales by these customers. In addition, our core farm and ranch customer, which is our largest group by sales, continues to be strong across growth, retention rates and spending.
Looking ahead, our artificial intelligence enabled tools allow us to scale our marketing efforts to target communication on a 1 on 1 basis. Our Neighbor's Club communication is being customized to offer products and service to an existing customer, engage a lapsed customer or welcome a new customer to the program. Our private label credit card continues to be a win for us. With the addition of a 5 percent reward that we rolled out at the end of September 2019, cardholders are now able to earn $5 in Neighbor's Club rewards for every $100 they spend on the card. The loyalty proposition is more competitive and easier for our team members to communicate.
We exited 2019 with an annual tender penetration rate approaching 5%, with all metrics since the rollout of the reward positive. We've seen robust growth across applications, sales and tender penetration. In 2020, we anticipate capitalizing on the program enhancements to expand the Tractor Supply credit card penetration as we know that our credit card customers visit our stores more frequently and have a higher average spend. Across the organization, there is much work underway to support our strategic initiatives and to extend our leadership position in our markets. What I've shared with you today are just some of the areas where the team is focused to drive the business.
Let's now turn to our financial outlook for 2020. We expect net sales in the range of 8.75 dollars to $8,900,000,000 an increase of approximately 5% to 6.5%. Com store sales growth is anticipated to be in the range of 1.5% to 3 percent. We anticipate opening about 80 new Tractor Supply stores and 10 to 15 new PetSense locations. The cadence of new store openings this year should be more in line with our historical trend as we anticipate more balanced openings in the first half of the year.
Our expectation is for modest gross margin improvement in 2020. We're forecasting slight pressure on SG and A due to ongoing wage pressures and investments in our supply chain and digital space. Our outlook includes progress on our profit improvement plans to help mitigate cost pressures and our ability to reinvest back in the business over time. We are committed to ensuring our spending is directed to our high strategic priorities, all on a sustainable basis. For the year, we anticipate operating profit margin to be centered around 8.9% with a clear emphasis on maintaining our margin rate.
Net income is forecast in the range of $575,000,000 to $595,000,000 or $4.90 to $5.10 per diluted share. As always, we would encourage you to think about our business between the first half of the year and the second half as this is in line with how we manage the business. As you model 2020, please keep in mind key factors to the cadence of our year. Our business performance is expected to be stronger in the second half of the year as our compares ease. The Q1 of 2020 is forecasted to have the lowest comp performance of the year and correspondingly the most pressure on operating profit.
As such, we anticipate 1st quarter net income and diluted earnings per share to be flat to the prior year's quarter. Significant factors driving this performance include a discrete executive transition costs of about $0.02 per share, incremental costs from the Frankfort distribution center that we do not lap until the latter portion of Q1 and cycling our toughest comps of the year. Although we are seeing the unseasonably warm weather trends continue into January, there is a significant amount of the Q1 and the year ahead of us. Moving to below the line, our effective tax rate is anticipated in the range of 22.4% to 22.7% as we do not expect discrete tax benefits that we receive in 2019 to reoccur this year. Interest expense is forecast to be approximately 22 $1,000,000 to $25,000,000 Depreciation expense is estimated to increase 4% to 7%.
This is below our recent run rate as we cycle the step up in depreciation from the addition of our new distribution center in the Q1 of 2019. As such, the growth rate will be towards the higher end of the range first half of the year with the lower growth in the second half of the year. Through the year, our share repurchases are anticipated to range from $450,000,000 to 5 $50,000,000 For modeling purposes, we've assumed weighted average shares outstanding of about 117,000,000 to 118,000,000 shares in 2020. Our capital spending is anticipated to range from $225,000,000 to $275,000,000 with roughly 2 thirds of that spending going towards initiatives to support long term growth. We remain committed to a disciplined capital allocation strategy.
Our first priority remains investing in the business to support long term growth through the opening of new stores and our growth initiatives. We also are committed to creating lasting value for our shareholders through anticipated quarterly dividends and share repurchases. That now concludes our prepared remarks.
Thank you, Kurt. David, we'll now open the line for questions.
Thank you. The question and answer session will be conducted electronically. We'll take our first question from Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question and Brett congratulations and Hal, best of luck.
Thank you.
Thank you. My question is on traffic. You're suggesting that the year will improve as it goes on. So when can we really expect that traffic is going to get better?
Michael, this is Kurt. The traffic trends for Tractor Supply, as Greg mentioned, the core of the business has been very consistent throughout 2019. And really the significant headwinds that we faced in any particular quarter are more about the compares as we saw in 2019. And as we look at Q4 and transition into 2020, the traffic headwinds were more related to the weather and seasonal trends. So looking ahead to 2020, I pointed out to you the toughest compares in Q1 and even indicated what we've seen thus far in January from less than ideal weather conditions.
Outside of that, we anticipate to be able to drive comps in both traffic and ticket and the compares on traffic do ease more in the second half of the year.
And Kurt, my related follow-up question is putting the 1.5% to 3% comp guidance for this year in the context of a 3% plus long term comp guide target, the markets historically relied on maybe 1% to 2% growth in traffic and 1% to 2% growth in ticket. Is that still a reasonable expectation over the long run? Because some may argue that given how much how many initiatives have been in place, the traffic from the quarter from the 4th quarter may signal that traffic growth moving forward might be a little slower?
For the long term, Michael, we would anticipate that we'll continue to have a balance of both, trying to be more specific on either one of those in any particular year for the long term, not reasonable. But I would say that our plans from the initiatives that we talked about expect us to be able to drag traffic and market share, but we also see with the merchandising initiatives that ticket is going to play a key part in 2020 and long term as well.
And next we'll go to Kate McShane with Goldman Sachs.
Hi, this is John Negirch on behalf of Kate McShane. Thank you for taking our question. I guess we wanted to ask about understanding the margin opportunity at both ends of your comp guidance. Is it safe to assume that there could be more margin opportunity at the 3% range? And do you have to cut your SG and A to keep margins flat at the low end of your comp range?
Thank you.
Sure. This is Kurt. The operating margin rate, as I mentioned, we're very focused on maintaining the margin rate in 2020. Low end and top end of the range, there's a number of variables that can play into the drivers of that. And we believe we've got the flexibility and strong plans in place that allow us at both ends of those range.
There's at the top and bottom end, there's sales mix that can play into that as well as the team's ability to drive benefit from profit improvement. But even as we've shown in Q4, the team can flex down and manage expenses well. So we believe we've got plans and we'll be very focused on either end of that range to maintain our operating margin for 2020 centered around at 8.9%.
Thank you. And if I could quickly follow-up in terms of just the health of the consumer, are you seeing any signs of weakness from the energy economy? Thank you so much.
I'll take that one. This is Greg. We've seen really no significant overhang from the chain in the oil markets. And it's only about 10 trading down
of different things
like food and feed and such. Trading down of different things like food and feed and such. That's a pretty good indicator of what may be happening with consumers' overall confidence. We're not seeing any of that. So for right now, I'd say steady as she goes.
Great. Thanks, Greg. Good luck.
And next we'll go to Scot Ciccarelli with RBC Capital Markets.
Hi, good morning. This is Ashley Gustaf Gonzalez on Scott today. Thanks for taking our questions. I guess just in regard to pet food and obviously the recent trend away from natural grain free products. Sort of provide us any more based on what you're kind of seeing in that segment and if anything kind of what you guys are able to do to sort of combat that trend?
Yes, this is Seth. So similar to what Kurt stated on the call earlier and we mentioned in the last quarter, the greenfield trends due to the DCM announcement in early Q3 of last year has caused a little bit of averaging our retail decline that we've been very open about. We have got a very robust category management approach that we've been utilizing. And actually next week, over the course of the next 2 weeks in our stores, you'll see some significant reset activity as we continue to respond to those trends. We'll have over 80 new items get launched in the stores.
We'll also continue to be expanding upon the brands that are benefiting from the recent trends. And we'll be launching new brands as well. So you'll see Canada come in our store. You'll continue to see new innovation through our 4 Health lineup and a new sub brand called Thrive. We're fully committed to continuing to evolve with the trends in pet and we continue to see pet and pet food as a future growth engine for us.
Got it. Thanks. And I just one related follow-up. So it looks like our data kind of points to general pet food kind of seeing a pickup in inflation in 2019 versus more of a deflationary trend over the past 3 years or so. Is that kind of something that has manifested in the results your results recently across the Pet business?
And kind of what would be your sense as to what is driving that recent pickup?
Yes. I mean, when you
look at
the industry trends that are out there, when you see some of that inflationary trend, I would say that's within the brands themselves.
So if you look at some
of the introductions of the premium product in mass and grocery, obviously, they're seeing some price upticks as it relates to their mix. However, when you look across our portfolio, when you look at the back half of the year, we did see some of the average unit retail decline just strictly due to the trade down and trade across from some of the super premium grain products into some more of the traditional premium products. So at this point, we're not seeing anything that's significant in terms of inflation.
Got it. That's it for me. Thanks guys.
Next we'll go to Simeon Gutman with Morgan Stanley.
Thanks everyone. Doug, congratulations. Good afternoon, Hal. Welcome. My first question is on the 2020 outlook.
So you guided chance to look at the business and make an assessment. And I just wanted to confirm that and maybe hear from Hal if there's any initial thoughts on the level of investment that the business has been making over time and any initial thoughts he had when he was looking into the business.
Simeon, this is Mary. We really are having a hard time hearing you on your line. So if you don't mind, can we get you to repeat that question?
Yes. Pick up the handset. Is that better?
Modestly.
Is that better? Okay. My first question was
on the 2020
flat margin. It feels like that okay, I'll get back into the queue.
Okay. Thank you. All right. David, we'll just move on to the next question.
Next, we'll go to Christopher Horvers with JPMorgan.
Thanks and good morning. And Greg, it's been a pleasure all these years and congratulations on a wonderful career and how it's Greg, it's been a pleasure all these
years and congratulations on a wonderful
career and how it's great to be working. It's really great to be working with you again. So really excited about everybody's future here. I wanted to still put a question to both of you. So sort of how do you think about the need to invest here?
You guys have put a lot of money into the business over the last few years of Stockyard kiosk rollout, buy online pickup in store, loyalty card enhancements. So what do you think the big sort of investment buckets that are left is sort of click and collect something that you think is right for your customer and box size? Is there sort of like a big data sort of data science need that you'd like to build out? Just trying to get a sense of what big things are left to do versus
what
you've accomplished so far and how maybe that could impact spending?
Chris, this is Greg. I'll start out by saying that you're right, we've made some investments. It's a terrific foundation, but those investments are beginning to scale. I mean these things take time. And what we're happy with what we're seeing, whether it be in a Neighbor's Club, whether it be in the use of Stockyard, the mobile POS initiatives, many of the things that we put money into.
I would tell you that this is a wonderful jumping off point for me and a wonderful entry point for Hal. So from there, I think Hal, I'll let you take it. Thanks, Greg.
First off, I'd just say I'm incredibly excited to be at Tractor. It's a special retailer, as I said in my opening remarks, with a real clear purpose. And I'd start with just saying, I'm excited about the opportunity to continue to build on the foundation that the team already has in place to drive the business forward. As Greg said, there's a number of really strong initiatives that are just starting to get scale. We've incorporated those into our 2020 plan.
I think it's a robust and realistic and prudent plan. The team has a track record of success and there is a strong management team in place. I'd say as it relates to me, I'm really spending my this is week 3 for me. I'm spending a lot of time listening and learning right now with Greg, with the management team, spending time in stores and our distribution centers. And everything I'm seeing is only it's even better than what I had anticipated.
So I'm really pleased with the 1st 3 weeks in. And as I learn more and the team and things have and our views evolve, I look forward to sharing with the investment community over time.
Understood. So sort of a
lot of money put in and figuring out where things are. So in a sense, a little bit TBD? Okay. Yes. And then Go ahead.
Nigel, I had a few want to add there. No.
I was going
to say, I think that's a fair assessment of me personally. I think as it relates to the business, we're very executed very focused on executing our 2020 plan. As Greg said in his opening remarks, we're very committed to a seamless transition here. It's a very purposeful overlap organized by him and myself as well as the Board. And we have a strategy and a game plan in place for 2020.
And as it relates to any updates that we may make in our long term strategy targets, we'll share more with you that as it evolves. But we have a very clear 2020 plan.
Okay. Got it. And then as a follow-up, you mentioned that 2 thirds of the comp shortfall was weather. So call that maybe 150 basis points. Do you think the rest was the 6 days?
And does that suggest that you think the underlying business is sort of that 2% to 2.5% that you had originally guided for? And related to that, do you think that do you expect 1Q comps to be positive given the impact of the weather so far?
Chris, this is Kurt. So there was a number of points in there. I'll just take the clarification on the Q4, what was the impact. We estimate based on the data that about 2 thirds of the missed our expectation was weather related. We have very specific weather related items that we sell.
And we also know when the customer comes in for those seasonal weather trends, need based items, there's additional items they purchase on their trip. 2 thirds of our shift in the comp performance, we would package as weather related in those two categories. The remaining third is pretty well balanced between what we mentioned on we feel like there was an expect an impact from the 6 less shopping days. And we also mentioned the AUR shift in the pet side of it. So those 2 really round out that remaining third.
And the core of the business, as Greg mentioned, is strong. And the Q merchandise has consistently performed solid comps in all 4 quarters of 2019. And as you know, we've talked about that's the core of our business. That's what fundamentally we take into 2020. And we capitalize on seasonal weather trends as the opportunity exists.
On 1Q?
Chris, on 1Q, like I said, we anticipate Q1 to be our toughest compare. And January weather conditions are not ideal at this point. So as it's the earliest part of our quarter, we still have a lot of the quarter ahead of us. Understood. And as you know, Q1 is a transitional quarter and you have us transitioning out of winter and into spring and the timing of that transition really shift between Q1 and Q2.
So still so much about the quarter and the first half still ahead of us.
Got it. Thank you. Best of luck.
And next we'll go to Chuck Grom with Gordon Haskett.
Good morning. Congrats to both Greg and Hal here. Hal, one for you, just kind of pivot off of Chris' question. I know it's only been 20 days or so, but I guess just bigger picture, how are you thinking the foundation of the company in terms of store targets, the optionality with loyalty with what you've seen at HD and Macy's? And I guess ultimately, do you think 9% is the right operating margin for the business to succeed?
Hi, good morning. I'd just start with what I said earlier is that I'm incredibly thrilled to be here at Tractor Supply. Just a few weeks in doing a lot of listening and learning right now. I think probably the best way to answer that would be just explain what attracted me to Tractor Supply. I start with, it is very much a differentiated leading retailer in the space with a strong brand, a true reason for being in a differentiated customer base, very special culture and unique opportunities for growth.
I'd also comment that the team has made a number of investments in the last few years, which are starting to scale and you're seeing the benefits of those with our customers. And we're confident that those will continue to deliver results in 2020. I also do think that there is, as I said in my opening remarks, an opportunity to continue to become even more integral into our customers' lives and things like the Neighbor's Club and other categories that we are pushing on and activities are going to help us do that. But I'm very excited to be here. And as I said earlier, as I look forward to engaging with the investment community over time as appropriate.
Okay. So no initial thoughts on store targets or margins at this point?
We have no updates to any of our long term targets at this time. Those are still very much what we're focused on and I think our 2020 guidance is consistent with those.
Okay, fair enough. And then just on 2020, when you think about what Tractor can control in terms of sales, can you force right where you guys see the most optionality over the next four quarters in terms of Neighbor's Club, cultivating the relationships that you've built up, kiosks, digital? I know you've got a couple of new brands sitting Toro. Just help us contextualize how you think about the year in terms of what you guys can control? Thanks.
Chuck, this is Kurt. I mentioned 3 things that we look at as the tractor supply controlled initiatives that we believe benefit us in 2020 and we're going to lean on and we've made the investments. First, it's the relevant products and services. As I mentioned in my prepared remarks, our outdoor powered equipment lineup is strong going into the springsummer season. So we'll lean on the combination of those brands there as well as the introduction of Triple Crown.
In addition to that, secondly, our private label credit card momentum is strong coming off the introduction of the 5% reward back And we'll carry that momentum out of the Q4 into 2020 and we believe it's a sales driving asset that we've got. And then I'd rank 3rd with that as Neighbor's Club and how we're actioning the data, as we mentioned, to be able to not only retain and communicate with potential lapsed customers, but as a lifestyle retailer, the ability to find look alike lifestyleers and then digitally engage with them is a completely new tool that we've got. We started to put that into place in the back half of twenty nineteen. And I guess after those 3, I'd throw in that we're excited about what John Ordis and the store operations team is doing with the tractor weight program that came out of operational efficiency. They've taken work out of the back room and they're moving it to selling cultures.
And where we've introduced that earlier in 2019, availability of product scores from our customers were up and customer service scores as well. And we know if those two increase, it's positive to sales. So we also believe fundamentally, there's some good traction in that program.
Very helpful. Thanks and good luck.
And next we'll go to Stephen Forbes with Guggenheim Securities.
Good morning. I wanted to maybe revisit the 4th quarter traffic performance. I don't know if you could provide a little more color around maybe the cadence of traffic or if the weakness was concentrated during a specific period in the quarter. It really is like if you compare December traffic trends versus the average, I mean, is there a large call out or any sort of quantification you can provide us?
Yes. Stephen, this is Kurt. In regards to the traffic trend, the first, the primary driver as mentioned was weather related. And I point that out because the two real factors on both comps and traffic were about comparing up against a strong hurricane in October of 2018 and then the expected positive change in weather conditions in December, not actually occurring as expected and heavily forecasted. So in regards to the cadence and expectation, October November, as we expected, saw some decline in traffic because hurricanes drive a good heavy amount of traffic.
You even get the ancillary customer coming in for that destination. November was extremely cold last year. So October, November, while traffic was down, was not against our expectation. The expectation was we would see more normalized December cold weather and that's really in both total and traffic where the missed expectation occurred is principally in the month of December.
And just a quick follow-up, right, maybe staying with you, Kurt, if you can just help us better understand the monthly weights as we look out to the Q4 the Q1, what does January represent as a percentage of the total as we conceptualize, right, the ongoing weather risk?
Stephen, we don't give specifics. But as we've said in the past, the quarter the months weight heavier as you move through the quarter. So January is the weakest in total percentage of the 3 and March is the heaviest.
Thank you.
And next we'll go
to Simeon Gutman with Morgan Stanley.
Thanks. Is the volume better now?
Yes. It's better. Thank you.
Okay. Thank you. And Greg, congratulations and good luck in retirement and welcome, Hal. My question, the first one is on 2020.
You talked a little bit
historically about getting up leverage closer to 3% at the 3% level. You're getting to flattish margins with a little bit less than that in 2020, at least the midpoint of the guide. You mentioned, Curt, I think some efficiencies that you're getting, but are you under spending in any place? Have you cut back in any spot?
Simeon, this is Kurt. So in regards to long term targets in 2020, our long term targets anticipate that overall in regards to our target of continuing to invest in the business, opening 80 Tractor Supply stores, we can have an assumed 3% plus comp and see operating margin improvement. What we also know is in a year like 2020 where we anticipate that that number could shift below that, we can make the necessary investments in business and we can actually we can flex and control manage the expenses like we did in Q4 to help us maintain that operating margin. In a year like 2020, if we were to fall towards the bottom end of that range, the team will be as controlled and nimble and we've done that in Q4. And if that were to be the scenario, we would actually have lower than normal levels of incentive compensation as an example.
So we believe that we can maintain that margin. And as we grow the business, we do think the long term plans continue to show opportunity to even have operating margin improvement.
Okay. And then the quick follow-up is on the pet category. You mentioned you're looking at the data and you're retaining your customers. Can you talk about, are
you still acquiring customers at the same rate? I didn't know if you were careful
with your comments because there is a change. I mean retaining is good, but are you still growing your customer base at a rate that you were before in the Pet and the Pet and Q categories? Thanks.
This is Seth. When you look out at Q4 specifically, in Q3 and Q4, the ability for us to leverage our Neighbor's Club capabilities has been really, really strong. So we're seeing nice gains when it relates to acquiring new customers through utilization of that tool, specifically what Kurt was talking about a little bit in these look alikes. So yes, we see us continuing to go out and acquire market share and gain the customers to the category.
Thanks again. Thanks.
And next we'll go to Seth Sigman with Credit Suisse.
Hey, guys. Good morning. Thanks for taking the question. And Greg, best of luck and Hal, welcome aboard. I wanted to follow-up on the comp outlook.
I guess, from our side, we're still not clear as to why it's largely just weather and you're not really seeing any sort of change in the consumer. The comp guidance for this year of 1.5% to 3%, it is below that long term algorithm, that long term 3% plus. And so is that just because of the Q1 comparison or are we missing something? So if you could just add a little bit more context on why you're setting the range where you are for 2020 comps? And then I'll just have a related margin follow-up.
Thanks.
Okay. Seth, this is Kurt. As we planned our 2020 year and the guidance that we shared with you, we look at all factors internal and external. Certainly, Q1 plays into some of that assumption. But as we look at the business, we're realistic as to 2020.
While our customer continues to show signs of being healthy, in 2020, early signs, there's indications of GDP slowing. It's an election year. Those types of things we had to consider in 2020 that can play into the consumer. So we anticipate with our initiatives that we've got good momentum, fundamentals are strong, we can drive in the long term towards that target. But what we're presenting to you is a reasonable prudent expectation for comp sales in 2020.
Okay. Thank you for that.
And then so just in light of that comp outlook, why is flat the right margin set up for 2020? In other words, if you do think that comps could be a little bit more constrained than the longer term potential, is there an opportunity to maybe invest a bit more aggressively this year? If you go back to past periods where comps were under 3%, the margins hadn't really been flatter up in those scenarios. So just love to get your perspective on that. And then just the gross margin, you are guiding to
the the operating margin for 2020 trying to center around 8.9%, a number of the things that you mentioned is certainly a part of our consideration. As I answered earlier question, we believe we've got the initiatives in place that can allow us to with profit improvement and efficiencies allow us to offset some of the pressures on the business, particularly wage pressures to be able to maintain that margin. In other cases, we have initiatives in place that help offset some of the investments we want to make in the business. So the way I frame it up for you is we've got a number of variables and levers we're pulling and allowing us to make the right investments. If the comps were at the lower end, we may flex on it to allow us to maintain around the 8.9 as well.
So we're going to manage this real time and we're going to work with the levers and flexibility we have. And I'll just point back to Q4 again and just show our ability to manage that and be nimble as an example.
Thanks very much and good luck everybody.
Thank you. And next we'll
go to Peter Benedict with Baird.
Hey, guys. Thanks. Congrats, Greg, and welcome to Hal. Look forward to working with you. A lot of mine have been asked here.
I'm going to hit a couple of quick ones. First, just maybe I'll just for Seth, the timing of the store within a store set rollouts and also the SKU localization efforts, any color on how that's going to cadence in 2020?
Yes. So first, the stores in the store, I
mean, you'll start to see those become
to life as we do reset throughout the year where we target key brands. So it's our goal not only to build strong exclusive brands, but also make sure we anchor with the leading brands in the industry. And so as we do reset such as here in Q1, I mean, you'll see Toil come to life in the store as you're there. You'll continue to see Purina come to life as we do our feedback resets. So those types of things will come throughout the cadence of the full year as we touch those planograms.
When you look at
localization and store our localization, we
just now are in
the process of finalizing standing up our assortment optimization platform. So we'll be rolling that out methodically, making sure that, obviously, we do that as proven as we can. While at the same time, when we think about localization, the team has been really focused on partnering with some of our key suppliers as well. So you take the spring season that we're rolling into here, we're going to make sure that we're set and ready to go to capitalize. So partnerships we have with key suppliers such as Scotts Miracle Gro, leveraging their analytics team, making sure that we have the products in the right store at the right depth.
That's another key piece of the localization that the team is focused on to make sure that we can capitalize on the traffic and drive sales.
Okay. That's helpful. Thanks. And then maybe one for Kurt. So look, I know looking at the business in Habs is really the way to do it for Tractor Supply.
But as we think about the 1.5% to 3% comp range for the year, does that envision maybe any of the quarters being above or below that range? I mean, it seems reasonable maybe 1Q below that, but maybe more opportunity at 4Q. Any color on just how you're thinking about it, Kurt, would be helpful. Thanks so much. Peter, I'd say generally there's low end and high end across the quarters.
And as I mentioned, Q1 is going to be our lowest, but nothing of significance to call out beyond that range of the 1.5% to 3% in any of the particular quarters.
Okay, fair enough. Thanks so much guys.
I think we've got time just for one more question, Ann.
All right. We'll go next go to Zach Fady with Wells Fargo.
Hey, thanks for fitting me in. I'll keep it quick. First question on the profit improvement plan. How much of that come into play over the past two quarters, particularly with EBIT expansion on sub three comps? And then curious if you could talk about what's next for the plan and how you think about the 2020 opportunity to drive further productivity?
Zach, this is Kurt. On profit improvement in the back half of the year, as you know, we've made investments in store and DC productivity, indirect procurement and transportation. In the back half of the year, the one area that really drove the key benefit coming out of it net would be the transportation side of it. We're able to jump on that early in late 2018 and back half of the year, as you know, we saw benefit from transportation. We're excited about the other categories, but there's been a balance of what we've had to do invest to make the changes in engineered labor standards in the distribution center.
We had to build an indirect procurement team and the work we've done to roll out all the tools and training in the stores. So the opportunity in those three other areas is now as we begin to roll that out and it matures and we train. So these are multi year benefits that just early in the maturity and a lot of runway in those 3 other categories.
Got it. Thanks for that, Kurt. And then sorry, just in the pet and feed categories, just quick question on your auto ship efforts. Do you think this is an offering that resonates with your customer base? And then just given the economics, is this an area we should expect to lean in on going forward?
So yes, this is Seth. So yes, we've obviously implemented some of the subscription based services throughout the year. We see it as an opportunity long term that we'll continue to continue to test into and make sure that we do it correctly. So you'll hear more about that in the future. But obviously, the capability that we brought to life, we do anticipate leveraging as we move forward to make sure we continue to drive market share.
Got it. Appreciate the time.
Great. Thank you. Doug, I'll hand over to Hal now.
Great. Thanks, Mary Winn. And thank you everyone for joining our call today. In closing, I want to say once again how delighted I am to have the opportunity to lead this extraordinary retailer. What has made Tractor Supply special is and what will continue to make us special.
I believe our business is well positioned across the retail landscape as it a company that has a very clear reason for being and is relevant to our customers. Our commitment to provide legendary service and great products at everyday low prices will continue to be the foundation of our growth. I look forward to sharing more about our plans to strengthen our position in the coming months.
Thank you all for joining the call today. This will wrap us up. Mary Anne and I will be around if you have any questions and we look forward to talking to you on our Q1 call in April. Thank you for your interest in Tractor Supply and have a great day.
And that does conclude today's conference. We thank you for your participation. You may now disconnect.