Behind the scenes of Tractor Supply's Q1

Tractor Supply posted an earnings and comp-store sales decline during the first quarter yesterday -- which largely had to do with its hard-to-top seasonal performance a year ago.

During the followup earnings call that same day, Tractor Supply executives provided some color to the hard numbers (to recap, a 6.6% sales increase to $1.56 billion, and a 10.9% net income decrease to $60.3 million.)

Additionally, comparable store sales decreased 2.2% compared to an increase of 4.9% last year, with a 1.4% comp transaction count decrease and a 60 basis point decrease in gross margin, which had increased 30 points in the prior year.

CEO Gregory Sandfort reiterated the impact of challenging weather on the Q1 results, with mild weather in January and February (and March winter storms) throwing business for a loop.

"The demand for both winter and spring seasonal products was clearly diminished for the quarter," he said. "In the markets where weather and sales were more favorable, we pulled forward several spring seasonal receipts, and where weather was less favorable, we acted aggressively addressing excessive winter product, which by quarter end resulted in a clean transition to spring."

"In April, the weather has turned more spring-like and our consumers are responding positively to our assortments and sales have improved," he added. "We know from our many years of experience, the spring sales can shift between the first quarter and second quarters and that is why we have consistently stated that our financial performance can be best accurately assessed, by the halves and not by the individual quarter's business."

CFO Kurt Baron pointed out that last year's first quarter benefited from a cold January (which drove seasonal winter sales) as well as warm March temperatures (which was good for early spring merchandise).

But the retailer isn't dwelling on the setbacks. Here's what else Tractor Supply has up its sleeve:

  • The Neighbor's Club customer loyalty program, which was rolled out to all stores as of early April, currently has 1.5 million members (and rapidly growing beyond original expectations). The program gives the retailer further insight into customer buying habits.
     
  • The Buy Online Pickup in Store (BOPIS) program, which is currently rolling out chain-wide and will be complete by mid-May. "Buy Online Pickup in Store made a lot of sense to us as step one, versus fulfillment," explained Sandfort. "But we said our customers buy projects generally and they come in, they want to know that the product is there before they make the trip. Remember, they're traveling on average of 10 miles to 15 miles to get to our stores usually." Currently, the program is driving online business and bringing customers to the stores, and encouraging customers to add other items to their ticket. Shipping direct is next on the radar.
     
  • The construction of a new distribution center in New York, to be completed by mid-2018 (and shipping by the end of 2018). This will boost capacity in the Northeast Corridor and help move Tractor Supply along toward its goal of reaching 90% of the U.S. population within 2 shipping days.
     
  • Though this growth was more than offset by lack of demand in winter seasonal products, the livestock and pet category saw continued increases in comp units and sales dollars, according to Baron. According to Barbarick, the chain had its most successful Chick Days event in its history, with growth in related accessories (like organic feed and treats).
     
  • Tractor Supply reset about 1,000 stores last quarter.
     
  • Online traffic is also booming. According to president and chief merchandising and marketing officer Steve Barbarick, web visits were up 26%, store locator hits were up 40%, and mobile traffic was over 60%. "We know our customers are going online; they're not just looking at content or looking to buy, but also to look where our stores are located," he said.

In response to a tough question about gradually slipping same-store sales -- a "slow decline" in the querent's words -- Sandfort replied that brick and mortar is experiencing a decline nationwide.

"Because we track this very closely with competitive intrusion, we don't believe that it is anything that we had done to not refresh the business or bring newness to the business," he said. "I do believe, however, that the entire four wall retail businesses around the country (and many segments) have seen some decline. I think the consumer has fallen in love with digital, which our consumer has as well. So, we have seen some shifting, as Steve mentioned earlier, we could see as much as 2% of our business this year bring down on the digital side. So there's been some shifting moving between four wall and digital, but in general I would tell you that some of those tailwinds became headwinds. And we didn't anticipate, honestly, the difficult business in the Texas, Oklahoma, and I'll call it the coldest regions, as it's often due to the pullback in the oil markets that was very, very difficult to overcome."

Nevertheless, Tractor Supply is still holding back with its outlook for 2017.

"With respect to our outlook, we are not updating our guidance at this time, as we have said for many years, we know that weather can impact the timing of sales this time of the year and we believe it's best to evaluate our performance based on the halves rather than the quarters," said Baron. "While our Q1 performance was disappointing, there is still a lot of business ahead of us in the spring summer season, therefore we believe, it is prudent to revisit our guidance at the end of the second quarter."

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