Good afternoon, ladies and gentlemen, welcome to Tractor Supply Company's conference call to discuss second quarter 2017 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. We ask that all participants limit themselves to one question. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Christine Skold of Tractor Supply Company. Christine, please go ahead.
Thank you, Bethany. Good afternoon, 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-looking statements are included in the company 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 am now pleased to introduce Greg Sandfort, Tractor Supply Company's Chief Executive Officer. Greg, please go ahead.
Good afternoon, everyone, thank you for joining us today. On the call with me are Steve Barbarick, our President and Chief Merchandising and Marketing Officer, and Kurt Barton, our Chief Financial Officer. We experienced broad-based positive sales trends across our business in the second quarter. Store transaction counts were healthy at a positive 2.2% to last year, and our average ticket trends improved by quarter end. Online traffic was also strong, with unique visits up 28% and much more traffic coming from mobile devices. While our performance continued to be led by our animal and pet categories, we were pleased to see improved performance across many of our other major departments. With favorable weather conditions, the strong demand has continued for spring seasonal products, and we believe the momentum has extended the selling season into the early weeks of the third quarter.
For some time now, we have been sharing with you our initiatives to link the physical and digital components of our business to provide our customers one seamless shopping experience. Broadly speaking, we call this our ONETractor initiative. We are starting to see signs that the physical and digital sides of our business are working well together and support one another. As the connection between our stores and the online presence strengthens, we see evidence that these initiatives are improving our top-line results. We know that we have a dedicated, loyal customer who shops our stores for our unique merchandise offerings and our great customer service. We also know that the Internet is a powerful tool in retailing today.
We strongly believe our unique merchandise assortment, conveniently located stores, and experienced team members, along with our integrated digital storefronts, are points of differentiation for us from other farm and ranch stores and online competitors. We continue to invest in initiatives to drive convenience, personalization, customer service, and operating efficiencies across our business. During the second quarter, we completed the rollout of our Buy Online, Pickup In Store program. We know this was a very important feature for our customers as it gives them greater flexibility and added convenience when shopping with us. They can place an order online, be assured the product is there at the store, and pick up that order soon thereafter.
They don't have to wait for the package to arrive or deal with the hassle of shipping back product if a return is necessary. They can receive seasoned advice from our team members while shopping for other products in our stores. We continue to see positive response from our customers, with over 55% of our online orders in the second quarter being picked up at our stores. Additionally, the average order value for a Buy Online, Pickup In Store transaction is larger than the total company average. We believe there is an opportunity for this program to increase our average basket size over time. In the second quarter, we continued to grow and develop our Neighbor's Club customer rewards program. This program was expanded to all stores in April. Enrollment continues to grow very rapidly, exceeding our initial expectations. We are now approaching 4 million members.
Our Neighbor's Club members are some of our best and most engaged customers. We expect to strengthen our relationship with them by capturing and utilizing information regarding their buying habits, tailoring our communications to their particular product and information needs. As we develop our Neighbor's Club customer attribution data, we will be capable of improving our targeting to these customers and regularly inform them about new products and upcoming events that matter most to them. While very early in the program, we have noted that our higher Neighbor's Club membership stores are outperforming our lower penetration stores in sales. We believe there is a significant opportunity to leverage this program across our entire store base to drive our sales, customer insights, and customer loyalty.
Our Buy Online, Pickup In Store and Neighbor's Club programs are two sizable initiatives that we have been developing for some time and are beginning to generate momentum. We believe both of these initiatives will be powerful sales drivers for years to come. Two other initiatives that we're testing, and we believe could be meaningful longer term, are Mobile POS and Stockyard. Mobile POS is an in-store initiative that allows our associates to locate product, find information, check inventory in surrounding stores, and process the sale through a Mobile POS device. In our initial store test, Mobile POS has already proven to be a great time saver for team members and our customers. Stockyard is another store-level initiative that merges our online capabilities with our store operations. This initiative allows us to dramatically increase the selection of product offerings at store level, using our vendors' inventories for fulfillment.
Our team members can increase customer loyalty by offering our customer access to purchase items not normally carried in our stores and have them drop-shipped to the location of their choice, by extending our digital footprint utilizing tractorsupply.com. Today, we are a 24/7 retailer. We're using technology to make the shopping journey easier. While digital integration is important, we know that we are a successful brick-and-mortar retailer, opening new stores each year. Our customer appreciates our differentiated product offerings, our convenient locations, and expects knowledgeable team members to assist them. We are constantly updating our product and event offerings to meet the needs of our customers that will, in the end, drive traffic into our stores and to tractorsupply.com. We continue to execute new product resets year-round that deliver innovation, newness, and provide greater value to our customers.
To generate excitement and theater in our stores, we're adding a new fall Chick Days event this year and hosting a one-day fall Farmers Market based upon the success we experienced in a test earlier this spring. We continue to see very high interest in locally sponsored store-level events and strongly believe in these events to support the communities that we serve. These events are another key differentiator for our business, and they drive continued interaction with the brands. With respect to Petsense, we are continuing to improve our understanding of that business model and have identified numerous merchandise and operational opportunities to grow that chain.
I'm pleased with the performance of those stores that we've opened this year, and we'll continue to see the benefits as we bring this concept to rural communities with both quality brands and the added convenience of services such as grooming and the mobile vet offerings that we have. In summary, I am encouraged with our execution this quarter, and I believe that the long-term investments we are making, along with some moderation in the headwinds we have seen over the past 18 months, are beginning to positively impact our top-line results. As I said last quarter, we are confident we are investing in the areas that will drive sustainable long-term growth, but we cannot guarantee that this growth will always be a smooth and linear path. We will, however, continue to be as transparent as possible about our business, and we'll keep you updated on our progress.
Before I turn the call over to Kurt, I want to extend a big thank you to all our team at Tractor Supply and Petsense who continue to serve our customers and execute our business plan every day. You are the driving force behind our success. I'll now turn the call over to Kurt to take you through our second quarter financial results.
Thanks, Greg, and good afternoon, everyone. For the quarter ended July 1st, 2017, on a consolidated year-over-year basis, net sales were $2.02 billion, resulting in net income of $160.6 million and EPS of $1.25 per diluted share. Comparable store sales increased 2.2% versus a reported decrease of 0.5% last year. As a reminder, our Q2 2017 comparable store results reflect the calendar shift associated with the 53rd week in 2016. Adjusting for the week shift, last year's second quarter comparable store sales increase would've been a positive 1.0%. Also, this year's second quarter had one less sales day compared to the second quarter of 2016. We estimate the one less sales day impacted comparable store sales by approximately 60 basis points, and the comp store sales increase would've been approximately 2.8% on an equivalent quarter basis. Comp store sales performance rebounded nicely from the 2.2% decline in the first quarter.
Comp stores were positive across all geographic regions. The sales by month was generally consistent throughout the quarter. From a merchandise standpoint, the sales growth was broad-based, with most of our major product categories experiencing positive comp store sales. Once again, the livestock and pet category led our comp performance, and we continued to experience solid demand for many of our basic everyday items. Comparable store transaction count increased 2.2%, or approximately 2.8%, adjusting for the one less sales day. This compares to prior year's reported 1.5% increase, or 2.7% adjusted for the week shift. Comparable store transaction count increased across all regions of the country and was driven by strength in our C.U.E. items. Both average comp ticket and big-ticket sales were flat to prior year. Product resets and new assortment offerings helped sales of certain big-ticket products such as chicken coops, generators, and grills.
These sales were offset by softness in other seasonal categories. Outdoor power equipment sales were soft in the back half of the quarter. Cooler temperatures and greater moisture has extended the spring selling season, and we have seen an improvement in the outdoor power equipment category in the early part of third quarter. Deflation impacted average ticket by approximately 30 basis points. As a reminder, Petsense store sales are not reflected in same-store sales, as those stores will be included in the store base beginning with the fourth quarter of 2017. Turning to gross margin, which decreased 10 basis points to 34.9%, compared to a 30 basis point decrease in the prior year. Product margin was essentially flat to prior year, with no significant impact from mix or rate.
We were pleased with the merchandising team's ability to maintain gross margin rate with a balanced pricing approach that incorporates both market share and margin-driving strategies. Freight negatively impacted gross margin, principally due to a greater mix of freight-intensive categories, higher average fuel costs, and to a lesser extent, growth in our online business. Petsense provided a slight benefit to gross margin, as these stores operate at a higher rate than Tractor Supply Company stores. For the quarter, SG&A, including depreciation and amortization, deleveraged by 50 basis points to 22.1% of sales, compared to 21.6% of sales in the prior quarter. The SG&A growth principally reflects our investment in a few key strategic areas. A greater investment in store payroll hours as part of our focus on enhancing the customer experience. Also, our investments in technology to grow our digital capabilities, Petsense, which operates at a higher SG&A rate.
Our effective income tax rate for the quarter was 37.0%, compared to 36.8% last year. The increase in the rate principally reflects lower state tax incentive credits compared to the prior year. Now turning to the balance sheet. At the end of the second quarter, we had a cash balance of $68 million and $454 million outstanding debt, compared to a cash balance of $151 million and $196 million in outstanding debt last year. During the second quarter, we acquired 2.2 million shares for $134 million through our stock repurchase program. Year to date, we've acquired a total of 3.8 million shares for $248 million. The consolidated average inventory per store decline of 6.5% reflects the impact of Petsense stores on the chain average. Exclusive of Petsense, average inventory levels per store increased 1.1%, compared to a 1.2% decrease in last year's second quarter.
We are pleased with the productivity of our inventory during the quarter, as well as the management of our working capital. Given the seasonal nature of some of our product categories, we evaluate our business based on the performance of the halves and not just the quarters. With this in mind, let me make a few brief comments on our first half performance. Consolidated net sales grew 7.9%. We had positive comp sales of 0.2% for the first half, versus an adjusted increase of 1.7% last year. Comparable store transaction count increased 0.5% for the first half, compared to an adjusted 2.7% in the prior year. While sales and gross margin trends improved in the second quarter, our first half results were below our expectations, with the majority of the shortfall from the first quarter. Now with respect to our outlook.
Based on the trends and results of the first half of the year, we've revised our outlook for the full year fiscal 2017. We expect full year sales to range from $7.13 billion-$7.19 billion, comparable store sales to increase between 1.1% and 1.7%. Net income to range from $413 million-$419 million, earnings per diluted share to be $3.22-$3.27. Assumed in this guidance is an operating margin decline of 80-100 basis points, a tax rate of 36.7%-36.9%, average diluted shares outstanding of approximately 128.2 million-128.8 million, capital expenditures of $250 million-$270 million. We estimate deflation will impact full-year same-store sales by approximately 30 basis points, which includes a second half forecast of approximately 20 basis points impact.
Our revised comparable store sales outlook assumes a comp estimate of 2.0%-3.0% in the second half of the year. Based on our Q2 trends and early third quarter momentum, we are keeping our comp store sales assumptions for the back half generally consistent with our original plan. As a reminder, the third quarter is cycling an adjusted negative 1.1% comparable store sales from the third quarter of last year, and the fourth quarter cycling a prior year positive 3.8% comparable store sales results. While our timing of new store openings is slightly behind our original forecast, we expect to hit our 100-store target and continue to be pleased with the new store productivity. For the year, we expect gross margin to be flat to slightly down due to the decline in experience in the first half.
We are estimating a slight improvement in gross margin during the back half. With respect to SG&A, including depreciation and amortization, we anticipate SG&A deleverage of approximately 80-100 basis points this year. Factors to consider are, first, higher payroll expense to drive strong customer service levels in our stores, along with cycling favorable medical and workers' compensation related costs in the prior year are key contributors to the deleveraging of expenses in the back half of the year. Additionally, depreciation expense is expected to grow 16%-17% over the prior year, resulting from our key strategic investments in technology, our LED lighting retrofit program, and supply chain enhancements. Additionally, Petsense will have an unfavorable impact on SG&A leverage for the full year.
Let me remind you that the prior year's second half SG&A benefited from strong expense control, a reduction in incentive compensation, and favorable medical and workers' compensation expenses. Additionally, the 53rd week benefited last year's second half and full-year expense leverage and also added approximately $0.055 per diluted share. Our effective tax rate is expected to be in the range of 36.7%-36.9%, as we do not expect to see tax benefit in the current year from the new accounting rules related to the recognition of the tax benefit on stock options exercised. That concludes our prepared remarks. Operator, we will now turn the call over for questions.
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. As a reminder, please limit yourselves to one question and one follow-up question. Thank you. Again, that is *1 to ask a question, and we will take our first question from Seth Sigman of Credit Suisse.
Thanks a lot. Good afternoon. Nice progress in the quarter.
Thanks.
My question, Greg, is, do you think we're at an inflection for the business? You did a 2.2% this quarter, did 2.8% adjusted for Easter. You kept the guidance for the second half for 2%-3%. The first half overall was basically flat, though. I know over time, you've taught us to look at the business in halves. I'm just wondering, can you give us a better sense of what you think is driving that improvement in the second half of the year? What gives you confidence in that? I know you talked about the moderation in some of the headwinds. If you can elaborate on that, I think would be really helpful.
Seth, a couple of things. I think number one, we always talk about the halves, not the quarters. I look at the first quarter as an anomaly. I really did. I also would tell you that we're seeing some very positive signs that our consumers are back in our stores. Our customer service levels have never been better. I think that our consumers, not only in stores, but even online, are finding that we're in stock. We can take care of their needs. Now that they're out doing these projects and that, we are the place that they're choosing to shop with. I think what I should do is maybe throw this over to Steve and let him talk to you about a few things that he believes also he's seeing on the merchant marketing side.
Seth, this is Steve. I would tell you there's probably a handful of things because we sit down and really analyze the business when we took a look at the forward look here. I would tell you that our Q2 sales trend gave us a bit more confidence as we worked our way into the year that things were starting to play out like we had intended originally. That. Greg mentioned that we're seeing a bit of an extended selling season on the spring product into July, which gives us a little bit of confidence. We've experienced a number of headwinds. We've brought those up over the last 18 months. Greg addressed this in his initial comments. We're starting to see a little bit of a moderation in some of those headwinds, such as some of the oil-impacted stores as well as deflation.
Finally, I would go as far as to say that some of the initiatives that both Greg and Kurt spoke of relative to the Neighbor's Club, Buy Online, Pickup In Store, and even some of the merchandising events that we've got planned for the back half give us some degree of confidence that the things that we're doing are working. That's why we kind of laid out what we did, that 2%-3%.
Okay, thanks, guys.
We will take our next question from Matthew McClintock of Barclays.
Hi, yes. Good afternoon, everyone.
Good afternoon.
Yeah. I wanted to actually talk a little bit about digital because you talked a little bit about that in your prepared remarks. The one thing that I wanted to focus on was the evidence that the initiatives are contributing to the top-line results. Could you maybe help walk us through a little bit that in more detail, what evidence there is that you're seeing and why you have that level of confidence?
Yeah, Matt, this is Steve. We scaled Buy Online, Pickup In Store, I'll start there, across the entire chain, I think it was back in May. Those Buy Online, Pickup In Store sales represented just over 50% of our online business. If you look at our direct-to-customer business, we continue to see very strong double-digit comps there as well. We're feeling very good that our customer. We've always known that they've gone online for content. Part of this ONETractor initiative is to make sure that we support them anytime, anywhere, in any way they want to work with us. Now, the store is really the epicenter of our transactional business. This outside opportunity for customers to do their research and come online continues to grow.
The unique customers coming to our site were up almost 29% from a year ago. In addition to that, the store locator button that we have on the site was up almost 60% from a year ago. We see the digital part of our business really enhancing the store experience. That's why I think we have some degree of confidence that our initiatives are paying off.
Then if I may, one follow-up. Just on Farmers Market, you talked about that at the Analyst Day. I was wondering now that we've progressed throughout the year a little bit, if you could talk a little bit about how has that performed as you've rolled that out to other stores in your chain.
Well, we got some great feedback when we did it this spring. While the business was very strong during that window of time, it really wasn't about a one-day type of initiative. It's really about working in communities that our stores are located and making sure those folks in and around those communities feel like Tractor's a hub for them. The feedback we've got from our store operators, guys, it was fantastic. Let's take a look at this in the back half of the year as well, so that they have more opportunities to sell more unique and different things. For example, a lot of the harvest products that they may bring in from their gardens. We see this partly as an opportunity to bring new people to Tractor Supply.
At the same time, we see this as an opportunity to really be part of the community that we serve.
Thank you very much.
Our next question will come from Simeon Gutman of Morgan Stanley.
Hey, good afternoon, everyone. My first question is, I guess, a follow-up on the guidance. The back half, I think Kurt mentioned 2%-3% comps implied for the rest of the year. Yet it looks like the margin profile of the business is a bit worse. The incrementals look weak. Kurt mentioned a couple of items on the SG&A side. Is it just that you have some of those tough compares, or is the cost of business going up a little from investments that you're making in the back half?
Sure, Seth, this is Kurt. Couple things in there. As I mentioned, on the gross margin side, there's a slightly less benefit in the back half than our original forecast was on the gross margin side. On the expense side of it, there's the additional spend, as Greg mentioned, on the store payroll. We see a lot of strong feedback and benefit from great customer service in the stores. There's additional store investment on the back half as well. You mentioned the third thing. The back half of the year has some strong compares in the 53rd week, as well as some of the cost savings and favorable benefit we got from certain insurance reserves, such as medical and workers' comp in the back half last year.
Okay, my follow-up, you mentioned that in the back half, gross margin is expected to be, I think you said flat or up a bit. Can you talk about what the risks, meaning if you don't get there, what are some of the culprits if gross margin isn't up in the back half of the year?
Sure. A couple things on there, Seth. I'd say that the biggest factor on the gross margin side is that we do see freight headwinds persisting in the second half as we do in the first half. The difference that we see on the gross margin side is that we do see some momentum from the gross margin improvement that we saw in second quarter, and we anticipate that those trends will continue in the second half. We see that those will be some of the tailwinds that we've got on it. The expense side are the things I just mentioned in the first part of your question.
Okay, thanks.
Our next question will come from Peter Benedict of Robert W. Baird.
Yeah. Hey, guys. Just to follow up on that question. The momentum, Kurt, you just mentioned the momentum on gross margin in the second quarter. It was down for the quarter, but can you speak a little bit more to what is breaking right for you on the gross margin side that you think is going to hold that number up? If freight's still a bit of a headwind, what's going to carry the day on gross margin in the back half?
Sure, Peter. A couple things. What we saw in the second quarter that was different is, we did see a momentum change in the first part of the second quarter all the way to the back end. Strength in some of our pricing initiatives as well as the exclusive brands. Our assumptions for the back half, we see opportunity and growth on the gross margin with additional exclusive brand products and growth there, as well as continuing on the pricing side, the momentum that we saw in the second quarter.
Peter, the only thing I would add to that, this is Steve, is that if you look at where we're at right now, Greg had mentioned a little bit of an extended selling season of spring product. We feel like we'll be in a really good position where we won't experience maybe deep markdowns, and we think that will benefit us here, at least in the third quarter as we roll into Q4.
Okay. That's helpful, guys. Just on the CapEx, I know that you kind of pulled that in a little bit. What's coming out and just can you give us a sense for when you think about the cash coming in and the leverage ratio of the business, how comfortable are you with where you're at in terms of leverage? Where are you comfortable taking that in the future? Thank you.
Sure. Peter, first on the CapEx, the most significant difference is the Northeast distribution center capital spend that was in the original plan. There's a decrease, and that's the most significant factor on the CapEx, and it's a timing issue. The timing of the spend has shifted out of 2017 into 2018. Most of the other parts of the spend are relatively consistent, maybe a slight reduction on new stores and slight reduction on IT. As far as the capital spend side, we look at the back half as operating cash flow fairly consistent to last year, and I would anticipate our debt to be in the $500 million-$550 million range by the end of the year. That's pretty consistent in line with our targets of a 2.0 leverage ratio.
Okay, great. Thanks very much.
Our next question will come from Scot Ciccarelli of RBC Capital Markets.
Hey, guys. This is Robert Iannarone on for Scot. Thanks for taking the call. As we think about the SG&A investments, as we're going to see in the second half here, should we view that as more of a one-time bump because sales have been a bit on the slower side? Or should we assume you guys are going to invest more in labor to improve customer service levels on more of a longer-term basis?
Rob, I'll take that. This is Greg. I would tell you that the results that we've seen from our efforts to bring what I would call our store teams' level of customer service back to levels that we're excited about, and we've seen this through our SMG reporting, is not a short-term thing. As we believe the sales will come with that investment, I think we'll be able to leverage some of that over time. It's a little bit of a step out, but it's also a step up, I believe, in driving the sales.
Great. Thank you for that. Just one other, a little bit separate here. When you think about big ticket and average ticket, are you concerned at all there that those remain flat despite stronger seasonal trends?
Yeah. This is Steve. I think Kurt mentioned that where we fell short really was in some of the seasonal spring businesses because we saw some pretty good movement in categories like Kurt mentioned, chicken coops and grills, generators, and a few other categories. They were just offset. What we did also say is that we saw a bit of an extended selling season, Greg had mentioned in his opening remarks, I think it was outdoor power equipment. Some of that may be just delayed.
Great. Thanks for taking the questions, guys.
Ladies and gentlemen, as a reminder, please limit your questions to one, and we will take our next question from Alan Rifkin of BTIG.
Thank you very much. You talked about there being significant opportunities to grow the Petsense format. I'm wondering if maybe you could provide a little bit of color since it's almost a year under your belt as to how those unit economics compare with the legacy Tractor format.
Alan, this is Greg. I'll start off by telling you that it's not been a year. It's been about six months. What we're learning is that in these rural markets, we have a niche of consumer there that is a little different than the Tractor consumer who needs high service, who needs maybe a little higher mix of what I'll call premium brand products that they can't find really anywhere else. They may find it at an individual mom and pop. When we did our research on Petsense and the history that we had developed with our experience with HomeTown Pet, it clearly showed that there was at least 1,000 stores and markets out there that we could place this concept. It is very different than Tractor from the standpoint of its offering of services and even mix.
It will be more bifurcated as we go forward. That particular organization from an economic standpoint, little higher SG&A, also higher margins because of the mix of the services piece. We like the model. We like the way it's going to add, I think incremental value to TSC over time, it won't be the same ramp that you'll see in Tractor stores right now. We still have some more learning to do, as I said when we made the purchase, it's about a year's worth of learning before we can start to push the pedal down.
Okay. One follow-up if I may, Greg. In the past, you've talked about the relative low vulnerability of the Tractor Supply stores to e-com. Now you're talking about the greater connectivity that you're seeing between the stores and online as that strengthens. Net net, do you think that there's a little bit more vulnerability to e-com and online today than what you thought even one or two years ago? If so, what incremental changes are you going to make going forward for the anticipated accelerated growth online?
What I would tell you is this, I think Steve will probably join here as well, is I don't use the word vulnerability. I will use that the consumer's purchasing patterns and interest in how they engage with us is changing. There are some products in our stores that are virtually impossible to sell online and be able to move to a consumer in a way that makes any sense or any money. Secondly, you can't underestimate the importance of having that store and that availability of the online component where the customer can research, engage with us as a brand, and make the decision. Because they're in control. They make the decision if they want to shop the store, if they want to buy directly online, have it shipped to them.
That's an element that I don't think we understood until we turned on Buy Online, Pickup In Store, how powerful that was. What's amazing to us is the amount of our customers that like to still come to our store. They buy online, but they choose to make the pickup in our store. It's a very high percentage in comparison to most, I'll call it, other retailers that have both sides of the business. Steve, anything you want to say?
Yeah, Alan, the only thing I would say is it's still a relatively small percent of our total revenue. This year, I believe between Buy Online, Pickup In Store, and what we're going to do in direct sales, it's going to be between 1% and 2% of our total overall revenue. It's still relatively small. It is a convenience for our customer. I think we've always had good traffic to our site, and I think the investments that both Greg and Kurt talked about with IT are going to help us in the future. Your next question, I believe you ask, is what are you going to do as your customer continues to evolve? I will tell you, there's a number of capabilities that right now we're working on or have actually put into play that's enhancing that experience.
For example, we've got e-gift card, which we just rolled out, expanded offerings. We're working on enhanced search. By the end of the year, we should have subscription up and running, which I think will be a great offering to our customers, and whether they take advantage of that or not we'll have to find out, but we believe that's a real benefit to them. Of course, Stockyard and special orders. There's a lot of things that I think we're doing to evolve with our customers' needs, and that's of no surprise. We've been working on this for years, and I think right now we're really getting a much better understanding of how to best accommodate those customers.
We will take our next question from Christopher Horvers of J.P. Morgan.
Thanks. Good evening, guys.
Good evening.
I wanted to follow up, just as you're thinking about the back half, I know you do some work in the planning process around the weather. That really hasn't cooperated with you, at least in the fall the past couple of years. What are you expecting in terms of the full heating season, and then as you get into December and lap that cold snowy month from December last year. How are you sort of positioned against the weather?
Christopher, this is Kurt. I'll start. I'll just say that our assumptions baked into our revised guidance for the back half assumes more normalized weather there. I'll just start with that, in that last year, we had a slow start to the fall-winter season, sluggish September as well as October, November were soft. Then, as you referred to, the December. We see a more normalized year between Q3 and Q4 as the main factor that we baked into our guidance.
Okay.
Yeah. I would just say to add on to that a little bit, Christopher, that it was a slow ramp this last year. We did have a nice December. The team's working around other initiatives that we can put into place to offset some of that vulnerability, or if you want to call it that. A lot of the resets that we're working on and things within the store are really Q based and Q focused. While that will always be a factor, we're trying to lessen the impact.
I got it. I know it's a little early, but a lot has happened over the past two years, as you look out beyond the back half, how do you think about the pace of store opens? Is 100 the right number for the year? Thinking about the investment pressures, I know some of it is one-off items cycling in the back half, but does the investment cycle extend into 2018, and does that sort of push the leverage point to the upper end or even further on the 2%-3% comp algo?
Sure. Christopher, it's Kurt. First on the new stores, as I mentioned, we're excited about new store productivity. Our new stores are continually part of our growth strategy in that they're driving the comp sales as well as the bottom-line profit. Our new stores typically are profitable in year one. Yes, we see in 2018 and beyond were our targets of approximately 100 stores. It's a good fit for our internal resource structure. We can grow those 100 stores with a lot of the existing support and good opportunity for Tractor Supply out there. Other investments, we anticipate our capital spend would be somewhat consistent in the near future years to what you're seeing in 2017. I would say, yes, the investments on the technology side, logistics supply chain to drive and support our key initiatives, we're expecting those in the near term as well.
We'll be cycling that type of level as that investment is baked into the operating margin today. Yes, we've got years where we're going to continue to drive support on the digital and the logistics side.
Our next question will come from Ben Bienvenu of Stephens Inc.
Thanks. Good afternoon. You made a comment about your customers. You're seeing evidence of your customers coming back into your stores, I'm curious, are you seeing customers shopping parts of the stores that maybe they weren't over the last year? Are they just broadly coming in and shopping the store when they may not have even been in the store over the course of the last year and a half or so?
Hey, Ben, this is Greg. One of the things that we've seen through the additional layers of, I'll call it customer service we've been able to give our customers, is a more satisfied customer who seems to be shopping across more categories. That being said, we have a little bit more favorable weather here as we ended the quarter. I would tell you that we've seen no slowdown in our C.U.E. business and the consumable side of our business. It keeps driving it. As we add more and more product categories there, as Steve and the merchant team continue to break things out there, we're finding that we saw our transaction counts move back up, the average size of our transactions holding even without having some of that big-ticket tailwind that we'd like to see.
All these things are good positive signs that our customers are still with us, still shopping with us, still choosing us over others. We're encouraged as we go into the third quarter and the second half, that'll continue.
Okay, great. On the e-commerce side, you noted some of the traction that you've achieved there with the enhancements you've made. I'm curious, what particular categories are you seeing selling at a faster rate online? As you're seeing customers transition to online purchases, where is that velocity highest, in which product categories?
I think that's a question Steve and I will both answer. First of all, we don't talk in specific categories, they buy across a broad base. There's no one specific category. We've done some things with some free shipping offers and minimum purchase offers that have played out very well for us in both the pet categories and some other categories. I would tell you, it's not so much a transition as it is giving the option to our consumers. As I said before, the Buy Online, Pickup In Store component is incredibly strong, and it gives us great confidence that our customers still like shopping in our stores. Yes, on some things, they will choose maybe to ship it direct, I would tell you, it's a combination of both, it's giving them choice. That's what matters.
The only thing I would add is that the business that we are doing online, a lot of that business are through products that we don't even carry within the four walls of the building. They may be special order products that are larger sizes. It could be vendors that we've set up that ship direct to customer, drop ship. A lot of that business isn't necessarily business that you would find within the four walls, but it really has an index that's pretty high in terms of categories we don't have within the four walls.
Our next question will come from Steven Forbes of Guggenheim Securities.
Good afternoon.
Afternoon.
Afternoon.
You gave some color on Neighbor's Club, but can you expand on what you're seeing that would indicate that you're gaining share of wallet with your 4 million members, or maybe a target group of those members? Just really trying to understand how the customer evolves as a member, whether it be their shopping patterns, how they build a relationship with your store associates. How do they evolve with the brand as they mature as a member? Then just quickly on that as a follow-up, are they generally satisfied with the reward they're getting, right, the seasonal reward, or is that still evolving?
Steve, this is Steve. Great questions. I was just traveling this last week up to Pennsylvania and had a chance to visit a lot of our stores and talk to some of our customers that are part of the program. Generally speaking, it's gone over very well. Now, if you look at our growth in this, we're still relatively immature. We haven't fully cycled year-over-year all store scale. What I can tell you is, let me give you a few tidbits. Greg mentioned that those stores who have a higher index of transactions of members are performing at a higher rate on a comparable store basis.
Another slice of data that I would give you is that I asked the team to go back and look at those customers that started with us and enrolled in October through December of 2015, so it was right when we started the program. I asked what their purchase history looked like in the first half of 2016 versus the first half of 2017. You can see an increase in transactions of those same existing customers within the box itself. That leads us down a path that we can definitely tell that by working toward a reward and getting reminders, it is bringing people in more often. The last thing I would say is, how do we feel about the offers that we're giving? The feedback so far has been, we've tried a variety of different things.
We're still testing and learning here, I can tell you that the opt-out rate of people that are part of the program is incredibly tiny. People still want to be engaged, they still want to be involved, and we still think that this is a big opportunity as we mature into this. We're collecting a lot of data. The next step for us is getting tools to mine it better and then even personalize those messages more so than we're doing today.
Maybe just a quick follow-up on that point. Can you just remind us what data you are gathering from those members, whether it's emails, phone numbers, demographic data? What information are you gathering?
Yeah. What we do is we ask for phone and we ask for email, we give them a profile page if they'd like to fill it out and opt in there. We've got some key data, and that data also, we also collect data if you're not a Neighbor's Club member through reverse append and getting phone and zip capture there. Our attribution rate has continued to grow, it allows us to really dig deep into what that customer's experience is. We're also able to tie that back into their experience online. We'll have more information for you guys in the future on that.
Our next question will come from Michael Lasser of UBS.
Good evening. Thank you so much for taking my question.
Hey, Michael.
Hey, Greg. Your traffic improved from down 1.4 in the first quarter to up 2.2 in the second quarter. You continued to say that Q was a leading factor in driving the traffic. Did Q get better from 1 Q to 2 Q to drive the traffic improvement, or was it some other factor that contributed to the improvement?
Yeah, Michael, this is Steve. First off, don't forget that extra day that we lost.
Right.
I want to keep reminding everyone of that.
Yeah, we lost a day.
One day in a quarter does represent a pretty big portion of the total. So while we did have a reported Q2, I believe there was about 60 basis points there, and that would've driven up the transaction count higher than what you had originally stated. Our Q business does continue to grow. As I think it was Greg mentioned in his remarks, or Kurt, the animal and pet area continues to be a portion of that Q business that we saw that growth. We recognize we're a dependable needs supplier, and that continues to work well for us.
I guess, Steve, what drove the improvement in the traffic from the first to the second quarter?
In first quarter, again, if you go back and look at the months, January was a really tough month for us, a lot of that was weather related. Just year-over-year comparable was very difficult this last year, it wasn't on the animal side of the business that we struggled. It was more on the seasonal side of the business.
My follow-up question is on the e-com growth. It sounds like you're seeing some bigger ticket trends online than you are in the stores. Does it just validate that maybe the consumer wants to buy some of the bigger ticket products online and get free shipping because when they pick it up in store, it is free? Does that suggest anything about what you might have to do over the long run and maybe where you're losing some of the traffic too, by virtue of what you're seeing in your particular e-commerce business?
Michael, this is Steve. I don't know if I fully follow that train of thought because most of the traffic that is driven in our stores is in smaller ticket products, as you can imagine. It's not in big ticket merchandise. While there is a benefit of going online and doing a lot of research, the majority of what we sell in big ticket is done within the four walls and not done online. I think most retailers would tell you that as well. I don't know if it's necessarily a gap or anything. I think we continue to see growth, as Greg said, across the board on e-com, including a lot of products we don't even sell in our stores where we've got drop ship.
Our next question will come from Brian Nagel of Oppenheimer.
Hi, good afternoon.
Hey, Brian.
The question I have on the comps. It's very nice to see the bounce back from Q1 to Q2 and then essentially no changes to the back half guidance for 2%-3%. You mentioned earlier, I guess some of the other headwinds we've been talking about for a while may be going away. The question I have is, how should we think about what should the underlying or what should the company be comping normalized? I know that's a difficult question, but I assume it's higher than 2%-3%.
I have to get out my black and my eight ball, and turn around and answer that question, Brian. I would tell you that we've always said a 3% to 5% in that range was where we would target, okay, as a comp. Probably high single if you add new stores, is total company. Our feeling about Q2, it was moving more toward the normal of where I would consider we need to be, if you take the extra day and put it back in at 2.8%, pretty close to a 3%. We're saying we're getting more back to that normal, what I would call between 3% to 5%.
Okay. I guess a follow-up to that, what headwinds are still out there that are keeping you out, really out of that 3% to 5%, even though you've gotten closer to the lower end of it?
Michael, this is Kurt. A couple of things, we've talked about these, we've not seen the return of the tailwinds on the inflation. At this point, as I mentioned, the back half of 2017, we anticipate continued deflation. Those years where you saw the benefit of the inflation, we don't have those yet, and we don't have signs that those return in 2018 at this point. The oil markets have stabilized, moderated a bit, that's a positive in regards to how Texas, Oklahoma are performing. We're not at a point where those type of conditions are tailwinds for us. Those would be some things that we'd certainly be looking for to get to a higher comp rate.
Our next question will come from Peter Keith of Piper Jaffray.
Hey, thanks. Good afternoon, everyone.
Hey, Peter.
I've got two questions just on e-commerce. Greg, you'd mentioned you guys have extended some free shipping offers, minimum shipping offers with pet food, and then we saw it pick up with footwear in the quarter.
Are you seeing any uptick in those specific categories that make you rethink your current shipping offers and maybe getting a bit more aggressive on that e-commerce offer?
Well, we tried several price tiers. We tried free, we tried $29 minimum, we tried $49 minimum. Let me assure you that our customer had really very little difference between $29 and $49. We gravitated back to the $49 level. That seems to be working just fine, and we're seeing growth. We're very selective on what we do on the free side, particularly if we can gear it more toward our own brands where there is a much richer margin. That's something that Steve and the team have been working through. I think as you'll note, the mix of our business still coming so heavily through Buy Online, Pickup In Store is a tremendous advantage for us.
That just continues to show you that because of our stores' proximity to where our customers live, and the fact that they're probably on their way by our store or toward our store to do other shopping, they still choose to make that trip, and I don't believe that's going to change. I think it's a combination of both that works. We don't always have to give free ship. We can do it with a respectable minimum, and our customers seem to respond.
Okay, great. That's actually a nice segue to my next question, is the Buy Online, Pickup In Store. It's ramped very quickly here. I guess, do you feel like you might be leaving some sales on the table as a result of out of stocks? I think in the past you've mentioned that some of the orders from Buy Online, Pickup In Store can be rather large. Furthermore, as Buy Online, Pickup In Store presumably gets bigger, should it have any impact on overall margin?
Yeah. Peter, this is Steve. No. I'll start with the second question first. If anything, the margin impact is a plus because people are coming in to pick it up rather than having it shipped to their place. From that perspective, we don't see any negative impact overall on the margin side of things. On Buy Online, Pickup In Store in general, our in-stocks year-over-year are better than they were a year ago. We made some key investments in some of the categories that were under $20 that we felt would benefit us overall, and we were able to do that with very little total inventory investment. As you heard Kurt say, I think we were over about 1% for the quarter. In terms of our concern about losing business, I actually think that this is probably benefiting us in the long haul.
That's not an overall concern at this point.
Our next question will come from Seth Basham of Wedbush Securities.
Thanks a lot, and good afternoon.
Good afternoon.
My question's around the promotion and pricing environment. Can you give us a little bit more color year-over-year on where the promotional intensity was and where you saw opportunities to take price or invest in price?
Yeah, Seth. This is Steve. I think, relatively speaking, our promotional cadence was pretty similar. I think we did have an ad roll into the second quarter that we didn't have in Q1. Outside of that, there was nothing really material or substantial during the quarter that would've had any real impact. As we look forward, we don't see any significant changes in what we intend to do either when it comes to promotion.
That's helpful. As it relates to pricing specifically, I think you talked about.
Oh, yeah.
the opportunities that helped your margin a little bit. Can you give us a little bit more color category-wise where those were?
Yeah.
Yeah, that'd be great.
No, a good question. One of the benefits of having invested in a pricing tool years ago was it allows us to look at elasticity across all categories. We really took advantage of that system during the quarter and looked at the four walls and looked at the different regions of the country. This wasn't a one-stroke brush across the entire chain. It was very scientific in what we did. The impact on elasticity, we didn't show a whole lot of negative impact as far as losing share and gaining rate. Based on some of the learning and the testing that we did, we rolled it out to more stores, and I think that's some of the lift that we experienced toward the back end of the quarter.
Great. We anticipate that continuing through the back half of the year, right?
Yeah. I think that's what gives us a little bit more confidence in talking about the stabilization, as Kurt mentioned, toward the back half, not maybe what we experienced in Q1.
Thank you very much.
We will take our next question from Scott Mushkin of Wolfe Research.
Hey, guys. Thanks for taking my questions.
Sure.
I just wanted to dive into a little bit the longer-term margin profile of the company on how we should frame it. I know you guys talked a little bit about a step-up in SG&A spend. We're also shifting the business a little bit more to e-commerce, like Buy Online, Pickup In Store is good, 55%, but you have the other side. Also, with the stuff that's available widely online, and a lot of your stuff isn't, there does seem to still be some price discrepancy where you're priced a little bit higher. I was wondering, as you guys frame it, how should we think of margins as we go forward and shift your business
on a longer-term basis, is this just going to be a natural pressure on the business on the margin side?
Sure, Scot, this is Kurt. I would start with saying that we don't get too far into beyond the current year and maybe a little bit the near term. I would tell you that for the near term, that we would expect the investments that we referred to on the expense side to have some of those continue to exist. On the gross margin side of the product, we continue to balance the different levers that we've got on rate, mix, and driving market share. I'd say, the short term, there's pretty much consistency between 2017 and say 2018. Beyond that, I think it's too far out reaching to try to give additional guidance at this point.
The only thing I would add to that, Scot, is that we have a list of opportunities in terms of margin improvement that we can take advantage of. I think about a third of our business was in exclusive brands or private brands in sales that we did in the second quarter. We still see more upside, more opportunity there. We have just recently added to our team in strategic sourcing, we believe that there's more opportunity to lower costs there. Finally, as we grow as an organization, my challenge back to the merchandising team is that we should be able to leverage our position, in a lot of cases with the branded folks out there today, to really be able to lower overall costs.
There are a number of things I think we can do that could offset any of the potential headwinds that you mentioned.
As a follow-up to what you guys said, I appreciate the detail, is when you look at some of the C.U.E. products, some of the clothing that's the branded items that are available in multiple channels, a lot online, where do you think you're priced, and do you think you need to make some investments there? That's my follow-up, and I appreciate it.
Yeah, Scot, this is Steve. What I would tell you is that we look at pricing all the time, whether it be in brick-and-mortar competitors or what we're seeing online. We've got categories of merchandise that we stand for that, quite frankly, we've got to make sure in those categories and in those items that we're very competitive. We use our pricing tools and dynamic pricing to make sure that we're managing that accordingly. What I would tell you is, are we going to be the best price on 15,000 SKUs inside our box every single day against every single competitor online? Probably not. Where we're going to stand for something, we will be priced right.
Our next question will come from Daniel Wewer of Raymond James.
Thanks. As a follow-up on a few of the questions, thinking about the operating margin outlook. Back in February at the investors meeting, we were looking for a 20 to 30 basis point annual improvement. Is it fair to say that, given the investments that are going to continue that 2018, that we probably should not expect any kind of meaningful improvement until 2019?
Dan, this is Kurt. I would tell you that some of the investments that we talked about in 2017, they'll exist in 2018. Near term, operating margin may be more flat, and you're close on if we were reaching out and looking ahead, it would be at least 2019 perhaps to start to see some operating margin growth. Even that far out, it's hard to, and don't want to try to give any sort of guidance beyond that.
Do you think that the thesis for Tractor Supply is more of a top-line story going forward, in that future cost of goods sold savings will probably have to be shared with the customer in an effort to grow market share?
Great question, Dan. I think there's a couple angles to that. One is that we continue to share today with our customer the benefits of our size and scale. Our pricing, generally on most of the products we have in our store, are priced right every day. As you know, we're not a high-low retailer. The second thing is, on the share basis, in certain categories of businesses where Steve and the team have really built a strong, substantial base of our own brands, we continue to see more and more growth there. Those should, over time, continue to add to some margin improvement. You talk about the sharing. We'll probably give some of that back when we look at some of the things we'll be doing with probably the direct-to-customer side of the business.
I seriously do not believe that that direct-to-customer business will ever outweigh the Buy Online, Pick Up side of the business. I said this earlier in my remarks, that ours is a store that our team members and our customers have this bond and this relationship where they like to come in our stores and shop. They like to talk to our team members for that seasoned advice. We see that, too, when we turn on Buy Online, Pick Up In Store. We're going to share back with the consumer to make sure that they're getting a good value for their money. I don't think that we have to go out. We always use this terminology: Do you own your customer or do you rent your customer?
We like to own our customers through giving them great values, great service, being in stock, and being available to them, whether we're close to them with a physical store or being available to them 24/7 online. That's how we believe we'll win.
Okay. Just one real quick question. On the same-store sales performance, we're measuring that two different ways in the quarter, right? One is on the Calendar you have this year and one is adjusted so that the weeks match up the same in the prior years. Inside your company, do you believe that your same-store sales are up 1% or 2.2%? When you're evaluating results, which metric would you use?
Dan, this is Kurt. I think I understand the question. Just maybe clarify the reference to 1% versus 2.2%. Is the 1% you're referring to last year?
Maybe. There was a week difference in the calendar, right? Year-over-year.
Right. Yes.
Which calendar do you use internally in evaluating your performance?
Gotcha. We use the 1.1% last year as the base up against that 2.2% reported number. Yep.
We will take our next question from Chuck Cerankosky of Northcoast Research.
In looking at the spring seasonal strength you're seeing so far extending into the third quarter, can you talk about how broad that is? Is it just outdoor power equipment? Is it some of the consumable stuff? With that strength, why aren't you a little more positive on the comps in the third quarter and second half? Is there an offset going on?
Chuck, first of all, this is Steve. I would tell you that the season has extended in a lot of the spring seasonal product. We feel that there is some momentum here that's building, we also want to be reasonable in terms of what our comp guidance and future forecast looks like. Over the course of the time I've been with Tractor, we've laid out plans and we've always worked hard to achieve those. I think the work that Kurt and his team have done as we look forward is a reasonable comparable store sales target.
Are there any tougher categories that are sort of offsetting the stronger ones that are extending?
Well, what I would say is that the spring seasonal business becomes less of a total part of our business as the quarter continues. September is a five-week fiscal quarter for us, and we certainly don't get a whole lot of spring seasonal business then. While we've got a little bit of traction now, it's hard for us to gauge what August and September are going to look like.
Got it. I'll finish with this question. How about competitive promotional activity? How would you gauge that in the current economic environment?
Again, this is Steve. I would tell you, I don't see a whole lot of change in brick and mortar. Our existing competitors, we try to keep an eye on that. I haven't seen a whole lot there. I think online is always a different story, and there's so many different categories that so many different people are in. We try to keep an eye on that, but that's ever-changing and it's incredibly dynamic. I wouldn't want to make a standard blanket comment on that other than that it continues to change and we continue to keep an eye on it and make sure that we're doing what we need to do not to lose share.
Our next question will come from David Magee of SunTrust.
Yes. Hi, everybody.
Hey, David.
Hey, David.
Just a quick one from me. I'm thinking about the store format over the next 12, 18 months, and you mentioned earlier resets continuing in the store, and I'm curious what departments might get the most attention. Big ticket, apparel, whatever it might be. Any color there would be helpful. Thank you.
Big ticket.
No. Kurt, do you want to take that?
He's talking about in your store sets. He wants to know what store sets. David, clarify the question. You're asking, what are some of the department store sets that are going to be some things driving the business as we go forward?
Yeah. As you look around the store.
would get the most attention?
Okay. Got it.
Yeah, I apologize for that, David. Well, first of all, I would tell you that the box has really evolved over the course of the time that I've certainly been with it, and it's evolved over the last 5 to 10 years as well. We've talked a lot about the Q business continuing to drive the overall transactions and traffic. We're going to continue to put the pedal down there. We believe there's more upside in what we're doing in a lot of the Q businesses. In the back half, for example, we're going to go back and revisit our pet business. There are some sub-brands out there that we believe will continue to add growth. In feed, we know that there's more of a regional play that we can get into there.
We're going to be looking at our oil and lubricant categories as they continue to grow. Over time, we're going to have to look at the totality of the box. Now, it will probably be the same size it is today, but we're going to revisit the space allocation that we give to certain categories. As times change and as business change, there may be some categories that would be better off at special order, and we can improve the level of productivity of the inventory and drive our overall turnover up. Right now, the team's working diligently on this, and we'll probably have more to share on the next conference call.
Great. Thanks, Steve.
Sure.
Our next question will come from Adam Sindler of Deutsche Bank.
Yes, good afternoon, everyone. How are you doing?
Good.
Good.
Good. I wanted to talk a little bit about expenses as well. It looks like DNA was up quite a bit in the quarter, maybe about 21% in dollars. Is that simply due to some of the online initiatives that you're working on, investing in software and things of that nature? If so, should we expect that to continue throughout the year? Then looking out a little bit, should we continue to expect SG&A total operating expense dollars to grow in the 9% range?
Sure, Adam. This is Kurt. First, I'll address the depreciation question. Depreciation grew in the first half about 19%. As we look ahead, I think the key thing is there's a distinct difference in regards to cycling or not cycling yet Petsense. You've got growth in that number in Petsense included this year and not. When you factor that out, the gap is a little bit different. We're estimating about a 16%-17% growth rate in depreciation for the year, and we'll start to cycle Petsense in the fourth quarter. The second half of the year will have a little bit more investment that half last year than the first half. The compares are a little bit closer, so you'll probably be at about a 15%-16% depreciation growth rate in the second half of the year.
Biggest difference in the comparables is really the Petsense with, yes, some additional investment in our strategic initiatives. The size of the gap is not an indicator of the impact of the initiatives that we're talking about. They're driving 200 or 300 basis points maybe in growth rate of depreciation in the year. We'll see the growth rate next year probably in the high single-digit range, a little bit ahead of the sales growth rate. We will continue to manage the levers that we've got to address the spend in there and keep the growth rate as close in line to the sales growth as possible.
That's total operating expense dollars you're referring to there, correct?
Yes.
Okay. Just real quickly follow up. Average order value on the Buy Online, Pickup In Store you said was favorable. Is that due to just a different mix of product, more items for basket? What's driving the delta there?
Yeah, a lot of it's mix. We added a lot of different categories this past year, and we saw the benefit of doing so.
We will take our next question from Steven Simon of Goldman Sachs.
Good afternoon, guys. Thanks for taking the question. I want to talk some more about the calendar shifts, and I think last quarter you had said you expected about $15 million of seasonal sales to shift into 2Q. I'm wondering how that played out. I realize you're also cycling what I think you had sized as about a $25 million weather-related shift to the second quarter of last year. Was the $15 million pretty much in line?
Steven, this is Kurt. I just want to reiterate, we did not emphasize a seasonal shift from first quarter to second quarter. We indicated at the end of first quarter that we certainly saw softness in demand in the seasonal product, and there was about $15 million of variance perhaps in March year-over-year. We did not see enough indication in regards to timing that we were indicating in anything that there was a seasonal shift. I would say the only shift might be the timing of Easter and what we expected from pre-Easter in prior year first quarter to second quarter shifted pretty consistently. That was in our plan.
Got it. Okay, that's helpful. Just in terms of thinking through potentially the extension of the spring selling season into 3Q, are you able to put some numbers around that? How meaningful you think that could be?
No. At this point it wouldn't be accurate for me to get into that. Until we get through the entire season, we won't really have a good read on it.
Got it. That's fine. Just lastly, just higher level, I was wondering if you could comment on the health of your consumer and how that's maybe being factored into your outlook, what you're seeing in their spending habits, et cetera.
This is Greg. What I can tell you, I was also in stores quite a bit this quarter. Particularly I was down in the Texas markets and that consumer base, I think, feels and believes that the economy there is stabilizing, their spend levels are starting to come back. I think in general, our consumer is feeling as if business may be as normal for right now. I do believe that some of the first quarter issue could have been that the fact that we came out of an election and people were waiting just to see what was going to happen, if anything. I think once we got through that cycle, second quarter needs surfaced and people came back out and shopped. We don't see any big change in how our tender's coming through. I like the footsteps.
I like the fact that we were able to maintain our business in big ticket. I feel good that the consumer's feeling comfortable right now. Hopefully nothing else in Washington can sway them in the other direction.
All right. Thanks a lot, Greg. Good luck in [inaudible].
Thank you.
Our next question will come from Eric Bosshard of Cleveland Research Company.
Thank you. Good afternoon.
Good afternoon.
A housekeeping question and then a bigger picture question. From a housekeeping standpoint, I'm trying to just make sense of what sounds like a strong second quarter and a good second half with the magnitude of the earnings reduction relative to 90 days ago.
Yeah, sure. When we baked in assumptions and looked at the first half and created the guidance for the year and adjustments on our guidance, as we mentioned, top-line comp sales, fairly consistent. There's some reduced new store sales due to the timing of the opening of new stores. When you see on the expense side, a couple key things in regards to the back half. We certainly benefited from expense reduction and some favorable items last year. Do factor in the 53rd week, as I mentioned, and we have more cautiousness in the revised guidance on gross margin rate versus the 20-30 basis point improvement in the original guidance. Additionally, on the tax rate, I mentioned in my prepared remarks that the tax rate has increased 50 basis points.
I do want to point that out that we do not expect to get the 50 basis point benefit that we had in the original plan due to the lack of stock option activity. When you factor those results in, as well as the trends on SG&A in the first half, I think you can get more to the 80-100 basis points deleverage on SG&A in the back half or for the year.
I think the sales line in 2Q, quarter two sales, where you thought it was going to be, or did you expect a better 2Q sales result than the numbers out there, but trying to set in context with what you guided 90 days ago?
Eric, if I could ask you to repeat that. It was fading out, and I did not get much of the question. This is Kurt.
Oh, sure. Yeah, just the reduction of the sales guidance today versus 90 days ago, it seems like 2Q and the second half are where you thought they were going to be. Just trying to square those two.
Okay, sure. This is Kurt. I would just tell you without a lot of specifics, while the first half missed on both the top line and bottom line, most of that was in the first quarter. I would also say that second quarter, the top-line sales results, while good, there was also both top and bottom line slight miss on the second quarter as well. I do want to remind you, there are non-comp new store selling weeks that were baked into our original guidance that we've had to adjust based on timing of new stores.
From a big picture standpoint, I'm interested, and Greg, it's to you to speak about this. As your customer evolves, the opportunity in Q and execution in Q has been great for the company historically. As you look out with an evolving consumer, is it your expectation more of that will move online and it'll be bought online and picked up at Tractor Supply? How should you evolution with your customer in and out the stores and more online fit into that?
Great question, Eric, we are looking at a number of things. Not only polling our customers as to their expectations, but doing some testing here in the next 6 to 12 months with some delivery formats from store, from third party, from our own distribution hubs to understand if we make certain things available online, first of all, can we drive higher levels of volume and gain more share? Secondly, what would the cost be? You're going to see us doing some testing over time. It's not complete yet, we'll have a better picture in the next 6 to 7 to 12 months.
Our next question will come from Joseph Feldman of Telsey Advisory Group.
Hi, guys. Thanks for taking the questions. Just a couple of follows from some of the other commentary. I guess I understand on the expense side of things, like some of what you've outlined, what would you say is, again, incrementally different? Is it the fact that you're spending a little more on labor for the second half than you anticipated in the first half of the year to service people? Is it you're accelerating some e-commerce investment that's driving that SG&A level a little bit higher? I was just trying to get a better sense of it.
Sure, Joe. This is Kurt. First, we can walk you through the adjustments from our original plan. I would tell you that the key factors, again, are the gross margin rate is softer than the original plan, while a slight benefit. On the expense side, yes, we are going to invest on the second half additional payroll. The incentive comp is a strong headwind to go up against. We called it out last year that incentive comp was a benefit. After that, it's just some of the other expense management that we had. Those are the items that differ between the original 60-80 basis points deleverage on SG&A to more of an 80-100.
Got it. That's helpful. Thank you so much. The other, I wanted to ask again on the big-ticket items. I understand you're shifting a little bit more online, big ticket's been relatively soft for the past year or so, and I'm wondering, it seems like we've had several quarters of unfavorable weather that's kind of gone against you. Maybe snowblower's not selling because it was too mild in winter, things like that. How much, if you could bucket it, would be weather versus demand versus maybe even just competition? Do you see share loss in any of those categories?
This is Steve. I think it's a good question. We look at the business in a lot of different ways, we had some pretty significant benefits or tailwinds over the course of time. I'll use, for example, safes. I'll use log splitters, which is a great business for Tractor because of the customer base that we serve. Maybe less of an extent of snowblowers, just because it's a smaller part of our total business. There are some seasonal impacts to a lot of the big-ticket things that we talked about. We've done a lot of things to offset some of that. We've brought in a new lineup of trailers. We have modified what we've done and reset categories such as pressure washers and generators, we've seen the benefit of those things, and that's helped offset what would've been actually a bit more pain for us.
At the end of the day, I don't know if it's a matter of losing share necessarily, and it's just more of a matter of, quite frankly, some of the weather impacts that we've had and some of the tailwinds that we experienced for quite a window of time.
Ladies and gentlemen, this does conclude today's question and answer session. I would like to turn the call back over to Greg for any additional or closing remarks.
Okay. Thank you, operator. Great questions today. We thank all of you for your continued support of Tractor Supply and Petsense, and we look forward to speaking with you again regarding our third quarter financial results.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.