Tractor Supply Co /De/ Q4 FY2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Fourth Quarter and Fiscal Year 2020 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Ms. Mary Winn Pilkington, Senior Vice President of Investor Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today. And I hope you're all staying safe and well. On the call today are Hal Lawton, our CEO; and Kurt Barton, our CFO. After our prepared remarks, we will open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we've made a supplemental slide presentation available on our website to accompany today's earnings release. 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 available at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP is included in today's press release and presentation, which are posted on our Investor Relations website. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick related follow-up. I appreciate your cooperation. We will be available after the call for follow-up. Thank you for your time and attention this morning. Before we get started, I ask you to please turn your attention to our year-end review video that can be seen on our webcast.

Good morning. And thank you, everyone, for joining us today. I hope you enjoyed the opening video. We will always remember 2020. And while we'll never recall the year with anything close to fondness, at Tractor Supply, 2020 will be remembered with a small measure of pride, as we reflect on our efforts to take care of our fellow team members, support our customers and invest in the future. None of these results would have been possible without the hard work and dedication of our team. I want to express my sincere appreciation and gratitude to the more than 42,000 Tractor Supply team members, for how they have lived our mission values and worked together to take care of each other and our customers. My thanks also go out to our supply chain and vendor partners, who've done an excellent job supporting our business. The environment continues to be uncertain and challenging. Vaccines are on the rise, but our country is still very much in the midst of a pandemic. Given the pace of the vaccine rollout, it will be at least fall before we're back to some form of normalcy. Throughout the pandemic, our utmost priority has been to take care of the health, safety, and well-being of our team members and customers. We spent tens of millions of dollars on cleaning supplies, masks, plexiglass, and sanitizer. We provided almost 700,000 hours of COVID sick pay. We have conducted nearly 20,000 COVID tests. And we rolled out company-wide contact tracing wearable devices for all team members to use. We will continue to spare no expense in this area in 2021. In addition to rolling out industry-leading safety protocols, we've also shown our commitment to our team members through appreciation bonuses, increased wages, and broader benefits offerings. At Tractor Supply, we are committed to being a part of the solution for our team members, our customers, and our communities. We remain steadfast in that commitment going forward. As we shift to talk about 2021, we believe there is as much uncertainty this year as there was in 2020. How fast will vaccines roll out? How are the variants of COVID impacting transmission rates and antibody effectiveness? Will there be another stimulus? How will consumer spending evolve through the year? Given these questions and many other elements of uncertainty, we're planning for fiscal 2021 based on a range of potential outcomes. The initial guidance we're providing today is consistent with our long-term algorithm that we shared with you at our Enhanced Earnings Event in October. Importantly, our 2021 outlook reflects the strategic initiatives that are foundational to our Life Out Here Strategy. With the actions we're taking, we are committed to emerging from the pandemic stronger than before. Now let's shift to the business review section for the fourth quarter of 2020 and the fiscal year. We delivered another strong quarter that exceeded our expectations. In the fourth quarter, we had strong net sales gains of 31.3%, with comparable store sales up 27.3%. We continue to gain market share and benefited from customer shopping with us with larger baskets. All customer segments and all value segments experienced growth. For the fiscal year, we added over $2 billion in revenue, and we reached over $10 billion in sales for the year, a significant milestone for the company. Once again, our quarterly results were remarkably consistent across all periods of the quarter, across all product categories, and across all geographic regions of the country. Also, both our transactions and ticket growth were balanced. For the third quarter, e-commerce saw strong triple-digit growth and increased significantly as a percentage of our overall sales. The work we did this year to improve our omnichannel capabilities has certainly resonated with our customers, as we've seen several years of digital adoption accelerate in just a matter of months. For the year, about 75% of our omnichannel sales were picked up at a Tractor Supply store, further reinforcing the importance of our stores to our customers. As we have experienced in the last several quarters, we continue to have strong performance and market share gains in our consumable, usable, and edible categories, with growth exceeding 20% for the quarter. We had more customers shop with us than ever before in 2020, with increased sales across our existing customer groups, new customers, and reacquired customers. Now to talk about a few other operational highlights for 2020. We added more than 10,000 team members to support the growth of our business. These new team members were critical in our ability to service our customers at these elevated levels and to flow volumes through our supply chain. We pivoted our marketing spending from more traditional print media to digital and national TV. We launched our first national advertising campaign in over a decade. Our research indicates that Tractor Supply has become more top of mind with consumers, as our unaided brand awareness increased by over 800 basis points. We expanded our in-store and digital capabilities to make it easier and safer to shop at Tractor Supply. We were nimble and agile in offering curbside pickup and same-day or next-day delivery. We also re-launched our website and rolled out a new mobile app, which already has over one million downloads. We celebrated the opening of our 1,900th store in Oakhurst, California, and announced plans for a new distribution center in Navarre, Ohio, that is expected to be operational by the fall of 2022. We reinforced our long-standing commitment to ESG through improved disclosure and transparency. We also surpassed our original target of a 25% reduction in carbon emissions, five years ahead of plan. Overall, 2020 highlighted the resiliency of the Tractor Supply team and illuminated the potential for the business. We participate in a large, attractive market. We have momentum and are investing in our business through our Life Out Here Strategy. We have the opportunity to create and define our future and extend our leadership for years to come. Before I hand the call over to Kurt, I'd like to address the impairment charge we took for the Petsense business. We recently completed a strategic review of Petsense. Although Petsense had solid sales performance in 2020, we concluded to reduce the number of new store openings planned over the long term and identified some underperforming stores to close. We expect to close 10 to 15 stores in 2021. Combined, this resulted in a pre-tax charge of about $74.1 million or $0.49 per diluted share after tax. Petsense offers a differentiated shopping experience to suburban and rural pet owners. As mentioned, the business is currently doing well overall. We remain committed to growing and investing in Petsense. Earlier this week, we named Matthew Rubin as the SVP and General Manager for Petsense. He brings a strong retail background, and I'm confident that he'll be an immediate asset to the business. I look forward to sharing more about our plans with you over time. Now Kurt will walk you through greater details of the quarter and the year, along with our 2021 outlook, before I return to give you an update on our Life Out Here Strategy.

Thank you, Hal. And hello to everyone on the call. This year was like no other in the history of Tractor Supply, as we delivered record sales and financial performance for the year. The fourth quarter continued to benefit from the macro trends that have worked to our favor. As we rank order our comparable store sales performance, the trends that I shared with you in the second and third quarter continued to play out in our sales performance. The largest driver continued to be our customer's desire for product categories that support the Out Here Lifestyle, as they shifted spending away from travel, entertainment, and dining to creating their own experiences. For Tractor Supply, this included purchases such as outdoor recreation and living, like UTVs and outdoor fire pits, along with all those indoor projects and winterizing their homes and equipment. This trend also includes living a more self-reliant lifestyle. The adoption of new hobbies like backyard poultry, hunting, gardening, and bird feeding has continued, and we believe these hobbies and trends are becoming more ingrained in our customers' behavior. The strong brand awareness and new customer performance that Hal discussed was the second largest driver of our comparable store sales performance. This was then followed by tailwinds such as emergency response-related demand due to hurricane activity and various strategic initiatives, such as our investments in digital and the omnichannel experience, same-day delivery, and our private label credit card. Excluding the modest hurricane activity benefit, the weather impact was generally neutral compared to the prior year. We had robust performance in our big-ticket categories, which exceeded our overall comparable sales growth. This was driven by broad-based strength in safe recreational vehicles, utility vehicles, trailers, and generators representing the top 5 product categories. Fourth quarter gross profit exceeded our expectations due to higher demand for our products and a reduction in promotional and clearance activities. These factors were partially offset by higher transportation costs as a percentage of net sales. The result was that gross margin as a percentage of sales was 34.6% in the fourth quarter, an increase of 75 basis points. Moving on to SG&A, the 46 basis point increase in adjusted SG&A as a percentage of net sales was attributable to three primary factors. First, incremental costs related to the COVID-19 pandemic, second, increased incentive compensation due to record sales and profit performance in the quarter, and then third, investments in our strategic initiatives. The additional costs incurred due to the COVID-19 pandemic included appreciation bonuses to team members across stores and distribution centers, as well as additional labor hours and supply costs dedicated to cleaning and sanitation to enhance the health and safety of team members and our customers. COVID-19 related incremental costs were approximately $33 million in the quarter, which compares to our estimate of $15 million to $20 million going into the quarter. For the quarter, adjusted operating profit increased nearly 36% with an operating profit margin of 9%, an improvement of 29 basis points. Adjusted net income was $193.2 million, an increase of 34%. Adjusted diluted EPS was $1.64, an increase of nearly 36%. For the year, we reached an adjusted operating profit margin of 10.1%, and had strong growth in adjusted diluted EPS of 47.4%. Turning now to our balance sheet, which remains strong. Merchandise inventories were $1.8 billion at the end of the fourth quarter, representing an increase of 5.6% in average inventory per store. This level of inventory is still a bit lighter than we would like, given the momentum of the business, and we are working with our suppliers and vendors to build our stock to support this momentum. During the quarter, we issued our first-ever public offering of debt and received investment-grade ratings from both Moody's and S&P given our strong credit metrics. We issued $650 million in 10-year notes at a coupon rate of 1.75%. The proceeds from the debt issuance were used for refinancing and repayment of term loans as we plan to maintain a leverage ratio below 2.5 times. Fiscal 2020 was a year of strong cash flow from operations, which totaled $1.39 billion, an increase of $582 million or 72%. For the full year, we returned a total of $518 million in capital to our shareholders through a combination of share repurchases and cash dividends. We currently have approximately $1.1 billion remaining on our authorization for share repurchases. Today, our Board reconfirmed our commitment to returning cash to shareholders through a 30% increase in our quarterly dividend, which aligns our dividend payments with our target of at least a 30% payout ratio. Moving now to our guidance for 2021. The impact that the COVID-19 pandemic will have on the broader economy, the consumer, and our fiscal 2021 results remains uncertain. Given that backdrop, we are planning for fiscal 2021 based on a range of potential outcomes. To date, while still very early in the first quarter, we continue to see strong sales momentum in the business. For fiscal 2021, we expect net sales in the range of $10.7 billion to $11 billion. Comparable store sales are anticipated to be in the range of down 2% to up 1%. For the year, we anticipate an operating profit margin to be in the range of 9.3% to 9.6%, a significant step up when compared to our baseline 2019 performance. In fiscal 2020, approximately 90% of the operating margin year-over-year gain was driven by gross margin improvement. For fiscal 2021, we anticipate some giveback in gross margin, and SG&A is expected to slightly increase as a percentage of sales compared to fiscal 2020 on an adjusted basis. Our expectation is for modest gross margin contraction in 2021, as we anticipate incremental promotional activity along with higher freight costs. Partially offsetting these pressures are an expected benefit from vendor funding for our field activity support team program while the FAST program expenses will be reported in SG&A with a year-over-year impact of about 40 basis points on each. Breaking down SG&A, the leverage from reduced COVID-19 costs and more normalized incentive compensation is expected to be offset by ongoing wage pressures, investments in our supply chain and digital space, as well as higher depreciation and amortization expenses. As a reminder, the FAST program costs are reported in SG&A. As a result, we are forecasting SG&A as a percentage of sales to slightly deleverage. Adjusted for normalization of the FAST program costs, SG&A is expected to remain relatively flat as a percentage of sales. As always, we encourage you to think about our business between the first half of the year and the second half as this aligns with how we manage the business. As you model 2021, I want to point out a few items that will impact comparability. Appreciation bonuses impact the second and fourth quarters of 2020, while wage increases of about $13 million per quarter took effect in the third quarter of 2020. Costs related to the COVID-19 pandemic remain an uncertainty for us in 2021, as our utmost priority remains the health and safety of our team members and customers. For the first quarter, we anticipate costs related to the pandemic will continue at elevated levels. Additionally, as you think about the cadence of 2021, our business performance is expected to be stronger in the first quarter, as our comparisons step up starting in the second quarter. The first quarter of 2021 is forecast to have the highest comparable performance of the year and correspondingly the highest operating profit growth rate. The second quarter is likely to be our most difficult earnings comparison of the year due to a couple of factors. Please recall the second quarter of 2020 experienced the strongest gross margin performance, driven by the least sales promotional activity. In addition, we expect incremental costs in Q2 of this year as we support the launch of an upgrade to our Neighbor's Club loyalty program. Moving to below the line, we expect total interest expense for 2021 to be approximately $27 million, while our effective tax rate is anticipated to be in the range of 22.5% to 22.8%. Our capital spending is anticipated to range from $450 million to $550 million, with more than 80% of that spending going toward growth initiatives. The vast majority of the capital spending increase is attributable to new in-store initiatives and supporting technology for our Life Out Here Strategy. Depreciation expense is estimated to increase by approximately $50 million. This is above our recent run rate as we accelerate our investments in the business. For the year, we expect share repurchases to reduce our diluted weighted average shares outstanding by about 1% to 2%. For modeling purposes, we've assumed weighted average shares outstanding of about 116 million shares in 2021. Net income is forecast in the range of $750 million to $800 million, or $6.50 to $6.90 per diluted share. With our strong performance in 2020 and the critical momentum in our business, the team at Tractor Supply is excited about the Life Out Here Strategy. Our clear focus enables us to continue to be the innovation leader in our channel and emerge from the pandemic stronger than before. Now I'll turn it back to Hal.

Thanks, Kurt. So now let's shift into 2021. As Kurt said, we're laser-focused on continuing to gain market share. We're going to do this in three different ways. One is capitalizing on our macro trends benefiting us. Second is nurturing our existing, new, and re-engaged customers, and the third is executing our Life Out Here Strategy. So let's talk about each one of those in a little more detail. We believe that many of the consumer behaviors that we've seen over the last nine months will continue through most or all of 2021. These trends we've mentioned before, include rural revitalization, trip consolidation, omnichannel adoption, the self-reliant lifestyle movement, consumer spending that is shifting from travel and entertainment to home and land, and an all-time high in pet ownership. We exited the year with nearly 19 million Neighbor's Club members. For the full year, over 11 million new identified customers and more than 6 million reactivated customers shopped with us at Tractor Supply. We're seeing strong retention with these customers, and we have plans in place to engage them with new capabilities, marketing, and product offerings. The third way we're focused on gaining share this year is through our Life Out Here Strategy, which positions us to strengthen and transform the company. As we shared last quarter, there are five pillars to our Life Out Here strategy. The first is delivering legendary customer service, second is advancing our ONETractor capabilities, the third is to operate the Tractor way, the fourth is to go to the country model for our team, and lastly, generate healthy shareholder returns. So let me highlight some of our planned efforts that we have this year in support of our strategy. In 2021, we plan to open 80 new Tractor Supply stores and 10 Petsense stores. Additionally, we plan to remodel 150 to 200 stores with Project Fusion, and to execute Project Side Lot in 150 to 200 of our stores. That brings our total construction activity for the year to 400 to 500 projects. This is a significant increase in the team's workload and is being executed in the midst of COVID. Our Project Fusion remodel program is designed to drive space productivity and enhance the customer experience in our mature store base. It combines changes in the store layout and imagery that create a greater lifestyle impression and drive space allocation for product assortment. Fusion stores help create a more welcoming destination and offer a compelling showcase for our brands. Our Side Lot program is a full transformation of the space from primarily a storage location for agricultural equipment to a state-of-the-art outside garden feed and farm shopping center. That also provides greater convenience through the expansion of buy online pick up at store. While we are still very early in both of these projects, we continue to be very excited about the sales trends we're seeing from the first tranche of Fusion remodels and Side Lot transformation projects. Importantly, the customer feedback has been overwhelmingly positive. Given the size of our store base, these initiatives represent a multi-year opportunity to continually refresh our store base and drive further comparable sales. Another initiative we have is our FAST team, which is already having a significant impact on the business. Since their implementation in August, they have taken on execution programs like Center Court, End Caps, planogram resets, seasonal programs, and sales-driving initiatives. This allows our store teams to focus more on customer service and improve their in-store execution, ultimately allowing us to concentrate more on the customer and driving comparable sales. We're very pleased with the FAST rollout. We're also committed to ensuring our digital capabilities stay ahead of our customer expectations. We did this in 2020, and we will continue to do this in 2021 and beyond. Big areas of focus for us in the first half include shipped from store, search engine optimization, payment options like Apple Pay and Google Pay, subscriptions, both online and in-store, including the recent launch of our Pet Rx platform. As Kurt mentioned, we have plans to upgrade our Neighbor's Club loyalty program by mid-year. We anticipate this new program will drive incremental customer retention and provide a strong incentive to allow us to grow our share of wallet with our customers. As we get closer to the launch of our new Neighbor's Club program, I look forward to sharing more of the details about the changes with you. Now, stepping back, we're excited about spring. We believe our customers will continue to focus on their homes as their oasis and create their own experiences, whether that's through things like gardening, grilling, or home settings with their family, friends, and neighbors. Spring Chick Days create great retail theater and support existing and new customers who want to expand their flocks. This is a big category for us, and we expect it to be so this year. We will have a broader selection than we historically have had of chicken coops. Tractor Supply is the clear destination for this on-trend category. Given the strong trends we're seeing in our companion animal categories and recent growth in pet ownership, we are focused on being a more complete resource for pet parents. In-store, this includes relevant product assortment and brands, expansion of self-serve pet wash locations across 150 to 200 stores, and the build-out of 50 to 75 additional pet wellness centers. Currently, about 1,600 stores have vet services in-store through our mobile vet clinics. Starting this quarter, pet prescriptions can be fulfilled online at Tractor Supply. As I mentioned earlier, in our app, we're now offering on-demand veterinary advice from a team of experienced veterinary professionals. Customers can call, chat, or email a team of veterinary professionals to get all their pet health questions answered. These expanded and new services allow Tractor Supply to offer a complete solution to care for our customers' pets, whether in-store or online. Our stores will be ready for the change of seasons as we move into spring. In closing, we have a unique opportunity. We compete in an attractive and fragmented market. We have a track record of success and outperformance in our business. We see a unique opportunity to capitalize on the powerful customer trends we are benefiting from, and to emerge from the pandemic as a stronger and transformed company. Our goal is to make strategic investments that enable us to create greater competitive advantage, capture the opportunity we've discussed, and generate shareholder value. With that, operator, we would now like to open the lines for questions.

Thank you. [Operator Instructions] Your first question comes from Scot Ciccarelli from RBC Capital Markets. Your line is open.

Good morning, guys. It's Scot Ciccarelli. I hope everyone is well and healthy. First of all, I appreciate you guys providing guidance, obviously not easy given the amount of uncertainty in the environment. But with that being said, I was hoping you guys could help us better understand how you went about constructing your topline expectations? And maybe outline a couple of your key inputs or assumptions? Thanks.

Hey, Scot. It's Hal Lawton, and good to speak with you this morning. The guidance that we provided is very consistent with the commentary that we had at the end of the third quarter. I think it's aligned with the spirit of the dialogue in our opening remarks, which is that we expect COVID to remain a large consumer driving force for the foreseeable future, certainly into the fall, if not for the balance of the year. As a consequence of that, many of the macro trends that have benefited us will continue. We also think a number of these macro trends are sticky regardless of COVID. We see those two coming together in a way that shapes the year as follows. The first quarter, we're in now, we expect momentum in this quarter, and our results in this quarter will be much like what we saw in Q2 and Q3 and Q4 with elevated sales levels. As we start to compare against those in Q2 and Q3 and Q4 this year, we do expect that the comparisons will start to return to more normal levels. The collectiveness of that will compile our guidance between minus 2 and plus 1. It is heavily weighted in the first quarter with Q2, Q3, and Q4 recognizing that we will be comparing against last year's elevated levels, but with likely strong underlying momentum supporting those quarters.

I appreciate that, Hal. And how much – obviously, the macro trends, we actually agree with that assessment. But how much of your expectation is from some of the company-specific initiatives, the Side Lots, some of the store remodels? Or is it just kind of all thrown together in a mixing bowl there? Thanks.

Yes. We're certainly looking to piece apart our various initiatives, and we have some pretty sophisticated analytics tools that allow us to do that. At these more elevated volume levels, it is a little harder to see than what you might see in a normal mid-single-digit comparable environment. But I will say that it's our view that we are gaining share and winning in all the categories that we participate in. That's really consistent across the board, whether you're looking at industry-level data or we're talking with vendors. That would lead us to believe that not only are we benefiting from the macro trends, but the work we're doing to support the business is also helping with that. I'll call out a few things that give us that sense. First off, I'll point to some data sets around our customer. Our unaided brand awareness, partly due to our national television campaign that we launched last March, is up 8 points in the year. That's a significant improvement in unaided brand awareness. The benefit we've seen from that is the most customers that we've ever had shop our store in one year last year, including 11 million new customers and six million reacquired customers. Those customers are shopping with us at repeat rates that are at all-time highs. Those repeat shopping rates hold true, regardless of whether it was a new customer in March or one that we saw in October, November, or December. All those repeat shopping rates are holding at all-time highs. Lastly, if you look at our team members and customer satisfaction ratings, customers perceive our safety and health protocols in our stores positively. Customers are certainly voting with their wallets and shopping at Tractor Supply, indicative of both our strong transactions, but also our strong ticket. You're hearing from other retailers that are gaining more units per basket driving up their basket size. But with us, it's very balanced, with about half coming from comparable transactions and about half coming from average ticket growth. So we're seeing stock up, but we're also seeing more transactions in the store. It's hard to piece it together, but we do believe the initiatives we're taking, the support we've given the business on inventory and adding staffing, our focus on cleanliness, plus our digital efforts, and our early efforts around Fusion and Sidelot are helping us drive share gains alongside the macro trends we see.

Your next question will come from Elizabeth Suzuki from Bank of America. Your line is open.

Great. Thank you. Could you just elaborate a little bit more on the strategic review of Petsense? And what came out of that review that resulted in the decision to slow the growth of new stores? It just seems like with pet ownership at all-time highs, unless those stores were significantly underperforming the company average, I'm just kind of wondering what some of the specifics were from that review?

Yes. Hi, Elizabeth, and good morning. Yes, this was just completing my first year as the CEO of Tractor Supply. It’s normal to step back and conduct a strategic review of Petsense right at the beginning of the fourth quarter. The takeaway is that the business is doing well. But if you look at the broader landscape of pets and the shifts in where things are growing, and the specialty products we have there, through this review and revisiting our real estate model, we made the decision to reduce the long-term store count expectations for Petsense. This led us to reset our expectations for the new store counts of that business. We've hired a new leader for Petsense, and we will continue to invest in Petsense as we see opportunities. The business is doing well, and we're confident that it's gaining share in the specialty space.

Okay. And could you potentially shift more of the sales in that business online, if you're not going to grow the store count as much as you thought? Do you view a shift towards the e-commerce side of the business as a way to expand into new markets?

Yes. I look forward to sharing more about the Petsense strategy as Matthew comes in to engage and chart the future of the company. We're very pleased with the performance. The stores are doing well. The website is also performing well. As you mentioned, we do know that pet online sales are doing exceptionally well. You can refer to the industry data, and that's definitely something Matthew will look into accelerating. More to come.

Hi. Thanks very much. Congratulations on a great year. I wanted to just talk a little bit about the three or five-year algorithm. You had originally called out 9% to 9.5% operating margins. Your fiscal '21 bottom end range is already 30 basis points higher than that algorithm. So I guess, what would make the range decrease in '22 and beyond? And I guess, maybe asked a slightly different way, when I look at that 9% to 9.5% range, that would imply flat operating profit growth in 2022, and that doesn't seem likely?

Hey, Karen. This is Kurt. Yes, thank you for the question. The question, as I understand it, is about the outlook on the operating margin and the flow-through going forward. One important thing that I pointed out in our prepared remarks is that we had tremendous upside and benefit in 2020 from gross margin side of the business. The principal drivers of that were, for the majority of the year, favorable transportation and unusually low levels of promotion and clearance. We expect this year in 2021 to see some normalization in those areas. The important thing is to manage the business, ensuring that we're everyday low price and providing great value in our product offerings. Over the years, we will manage operating margin, ensuring that we continue to gain market share. While there may be some anticipated risk with gross margin in the next couple of years, we'll continue to work to stay at EDLP without reverting to previous promotional activity. Our outlook for 2021 and the long term anticipates that.

Okay. That's very helpful. And just my follow-up is looking at the comp from 2Q to 4Q, obviously, as you've said and we all see, you had very evenly split composition on the comp from 2Q to 4Q. How do you think about when we start to lap those in 2021; do you think the pressure will come more from ticket or traffic in terms of the comp comparisons?

Yes. It is a great question. There are a lot of variables and still some uncertainty as we begin to lap that. We will be nimble and have shown in the past that we can shift well. For traffic and ticket in 2021, I'll give you some thoughts on ticket drivers. Certainly, some level of inflation could be driving ticket. If there’s continued trip consolidation, that helps with ticket. But other aspects on traffic, like trip consolidation, could normalize as we start to cycle some COVID demand. So point being, there are a number of variables. As we cycle this, we see our opportunity in both categories, and there can be shifts in either direction. We've contemplated those aspects in our guidance for comparable sales as we begin to cycle the COVID lift we saw starting in Q2 of 2020. We anticipate that there won't be a meaningful shift from either one as we see it right now, but both have variables that could drive it up or down.

Good morning. I wanted to start, Hal, with the new and re-engaged customer trends. You mentioned repeat rates at all-time highs. Just curious if you can provide more color here, right? Are these customers engaging at a level that's more comparable to your Neighbor's Club members? Are they shopping across more categories than the average customer, shopping both channels? And why aren't we seeing greater entrants into the Neighbor's Club Loyalty Program, as I would imagine that’s a core initiative for 2021?

Yes. Hey, Steve, and good morning. A couple of things I'll say. First of all, we are very pleased with our Neighbor's Club program, which reached 19 million members, representing approximately 60% of our total sales. We're seeing very strong engagement rates with these customers. We have plans to reinvigorate that program in the first half of this year, which I think will drive a step change in engagement with those customers and also encourage them to grow their spending. So we're looking forward to that promotion and getting it out there. As it relates to our new customers, we see approximately 20% of our new customers return and shop with us within 28 days. That trend has held stable and is two or three points higher than what we would have seen in a historic period. We continue to see strong repurchase rates at the two-month and three-month marks. We are pleasantly surprised to see them engaging in categories like poultry and dog and pet supplies first, then broadening their purchases across other categories. A higher percentage of these new customers start online and do a pickup in-store, then visit our stores for their next purchase. Our new customer satisfaction ratings are also higher than historic levels. We are pleased with the 19 million number, and they demonstrate the growth we had this year, particularly in the midst of the pandemic.

Thanks, Hal. And maybe just a quick follow-up. As we try to conceptualize the opportunity here, how does the 11 million new customers and 6 million re-engaged customers compare to 2018 or 2019 levels?

I don't think we've disclosed that in the past. But I will say there are material increases from previous years.

Hey, guys. Thanks. I guess my first question, Kurt, you mentioned inflation in '21. I'm just curious where you're seeing that most acutely in which categories? That's my first question.

Hey, Peter, this is Seth. As we look at some of the inflation for this coming year and the early indicators, I'd say early reads show inflation in our steel-based products and some of the grain-based goods. The commodity markets are showing us a handle on the business to manage accordingly with pricing strategies. Those are the areas we're starting to see inflation coming through in the early reads.

Yes. We are planning for the pet category to continue to remain strong and to outperform our overall business this year. I think on the last call, we discussed poultry and chickens and how they're a stream given their lifecycle. Pet adoption is at an all-time high, and the pets will continue to grow in terms of their needs. We are seeing that reflected in our trends; as dogs age, they eat more and shift from puppy food to adult food. We expect the humanization of pets to remain strong throughout this year as people working from home are engaging more with their pets—upgrading their bedding, buying toys, and snacks. We're very pleased with our pet business, confident that we're gaining share, and seeing great growth both in-store and online. We will be investing heavily in the pet category to remain a strong destination. This includes the recent launch of our Pet Rx solution and building more pet wellness clinics and self-serve pet wash locations.

Good morning. Nice quarter and a great first year, Hal. My question on Side Lot, it seems like a tremendous opportunity for you guys. I'm curious about your marketing approach and how quickly you think it will ramp up to optimal profit productivity levels.

Yes, hey, Chuck. We're very bullish on the Side Lot project. Customers say gardening is the category we most need to address to enhance their needs. Sales engagement with the products in our Side Lots was outstanding. We have more than 50 of these Side Lots underway; some are undergoing permitting, while some are in the final stages of getting certificates of occupancy. We’ve scheduled over 100 more of these for the year. The team has managed through challenges effectively despite COVID impacts on permitting and construction schedules. We're very optimistic about Side Lot and have opened several ahead of the spring season, which we expect will strengthen our sales.