Tractor Supply Co

NASDAQ:TSCO

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen and welcome to Tractor Supply Company’s conference call to discuss First Quarter 2019 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. We ask that all participants limit themselves to one question and one related follow-up. 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, Mary Winn Pilkington, Vice President of Investor Relations and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

[Mary Winn Pilkington]

Thank you, David and good morning everyone. On the call today are Greg Sandfort, our CEO; Steve Barbarick, President and Chief Operating Officer; and Kurt Barton, our CFO.

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 in the company’s filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call.

After our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one related follow-up question if necessary. I sincerely appreciate your cooperation. We will be available after the call for follow-up.

Now, it is my pleasure to turn the call over to Greg.

[Greg Sandfort, Chief Executive Officer]

Thank you, Mary Winn and good morning to everyone joining us on the call today. Our first quarter 2019 was really a great start for Tractor Supply. We delivered strong comparable store sales driven by continued increases in both average ticket and transaction counts. Our Tractor Supply team executed well across store operations, merchandising, supply chain and planning and placement. The team did a great job allocating products to capitalize on the varying weather trends across the regions of the country as we move through the quarter.

We had better than anticipated comparable store sales, effectively managed our gross margin performance and balanced our SG&A expenses, successfully controlling those elements that were in our control. Our results were driven by broad-based strength across all geographic regions as well as increases in both comparable store transactions and average ticket and all major product categories achieved positive comp sales in the quarter. Our first quarter results represent the seventh consecutive quarter of comp store sales running above a 3% comp.

Now, let me touch on the few highlights for the first quarter as compared to the first quarter of last year. Comparable store sales increased 5% in the first quarter with both transaction count and average ticket increasing. Net sales increased 8.3% to $1.82 billion for the quarter as we continued our strategy to open new stores. Diluted EPS was $0.63, an increase of 10.5%. We returned $193 million to shareholders through the combination of share repurchases and cash dividends in the quarter. And based upon our performance year-to-date, we are confirming our full year financial guidance.

Now, let’s take a look at some of the operational highlights of the quarter. Our distribution center in Frankfort, New York began shipping product to stores in the Northeast. We opened 10 new Tractor Supply stores and 1 Petsense location. This quarter marks our 27th consecutive quarter of strong double digit sales growth in our e-commerce business. During the quarter we continued to experience strong growth with our Buy Online Pickup in Store program. Between the combination of our Buy Online Pickup in Store and Direct Delivery to Stores, the majority of our e-commerce orders are being fulfilled at stores and our stores continue to play a key role in the fulfillment of our e-commerce business.

With our capabilities we believe the Neighbor’s Club personalization, Buy Online Pickup in Store, Stockyard in-store ordering kiosk and our competitive private label credit card and mobile point of sale rollout uniquely positioned us to serve the customer base better than anyone in this fragmented market. And we see significant opportunities to broaden our customer base and increase market share as our store base and digital capabilities expand over time. As we have stated before our ONETractor strategy is clearly aligned around four objectives, driving profitable growth, building customer centric engagement, offering the most relevant products and services and enhancing our core and foundational infrastructure capabilities.

We continued to take a balanced approach to managing our business, keeping the long-term in focus. As we look to the future, I think it is important to recognize how much progress we have made. We have invested in our infrastructure to support enhanced capabilities, to capitalize on the convergence of our physical stores and digital sales for a seamless shopping experience. We have strengthened our core with key investments including wages for our team members. And as a result our turnover is down year-over-year and I believe we are building a strong foundation for future growth of the company. In 2019 our capital spending is prioritized to new stores with an increase of capital dedicated to customer insight and store service initiatives as well as our supply chain. We are investing in technology to strengthen our execution and maximize efficiencies in our stores, so our teams can shift their focus from task to driving customer service.

As we have shared with you our real estate modeling process continues to support the potential for upwards of 2,500 tractors supply store location over time. And we continue to be pleased with our new store productivity and returns. While the timing for opening a number of our new stores in 2019 has shifted a bit more to the second half of the year, we remain on track to open 80 new tractor supply stores and 10 to 15 new Petsense store locations. I believe our ONETractor strategy positions us well to meet the unique preferences of our customers because they have demand driven immediate need of products and they want it in an easy and seamless shopping experience anytime, anywhere and anyway they choose.

Now I will turn the call over to Steve for more detail regarding several of the merchandising, marketing and supply chain initiatives.

[Steve Barbarick, President and Chief Operating Officer]

Thanks, Greg and good morning everyone. Our first quarter results are very encouraging. For the quarter our comp sales growth was driven by both average ticket as well as ongoing increases in customer traffic. We experienced broad based growth across the number of product categories in all geographic regions. This was the continuation of the trends that we experienced as our merchandising plans and marketing events are resonating with our customers. In addition our store teams and supply chain network executed well during the. The teams were effective in capitalizing on the various weather fronts across all regions. Whether it was winter weather that lingered in key markets or more moderate spring like temperatures arriving across the south, we leveraged our supply chain which allowed us to be there for our customers with the right products at the right time.

As a company our ability to execute resulted in the comp sales gains of 5% for the quarter representing a 2 year stack of 8.7%. Many of the performance factors we experienced in 2018 continue to benefit us in the first quarter. Our strong average ticket growth of 3.2% was driven by strength in retail price management, product mix, growth in big ticket along with some commodity inflation. We continued to experience strong sales in many of our consumable products with notable strength in heating, lubricants, pet products, animal feed and forage. These are stable categories that our customers depend on us for and drive repeat traffic to our stores.

This quarter’s performance reflects our commitment to being the most dependable supplier of basic maintenance needs for those customers that live the Out Here lifestyle. In addition to our consumable businesses, we also experienced broad-based strength across categories such as truck and towing products, tools and hardware. Lastly, store traffic benefited from favorable weather trends during the quarter. We posted solid sales gains in categories such as wood cutting, insulated outerwear and cold weather outdoor power equipment. In addition, we experienced positive comps in spring seasonal categories. Lawn and garden products, lawn cutting equipment, outdoor power equipment products and accessories will all comp positive for the quarter.

The first quarter represented our 27th consecutive quarter of strong double-digit comps in e-commerce. Our investment in capabilities and breadth of our e-commerce offering is driving sales. Key metrics such as overall visits, unique visits and conversion rate along with store locator searches were all positive. Between the combination of our Buy Online, Pickup in Store and Direct Delivery to Store, approximately 70% of our e-commerce orders are fulfilled at our stores. This demonstrates the importance of our store assets and their role in the fulfillment of our e-commerce business. Importantly, this is a cost effective way to serve our customers with greater speed, convenience and efficiency. All-in, the first quarter was a solid start to the year. As we look forward, we continue to be committed to providing our customers with the everyday basics. In addition, we have a strong assortment of newness planned across our stores and online.

Our spring assortments are set across the chain. We have new product resets across categories such as lawn and garden, live goods and outdoor power equipment, including an expanded offering of Husqvarna, all while delivering localized and relevant product assortments that support the lifestyle of our customer. At Tractor Supply, sign of spring is the arrival of our annual Chick Days event. Every spring, Tractor Supply customers look forward to the arrival of live chicks and ducklings. We offer everything a seasoned or novice backyard poultry keeper needs to care for their flock, where stores carry an extensive line of chicken care and poultry products with an expanded assortment available online.

As a team, we are committed to building our organizational capabilities. Our focused areas this coming year include driving quality and relevance of our Neighbor’s Club engagement, building royalty to an enhanced private label credit card offering, expanding the stockyard kiosks as well as team member mobility solutions. We continue to be excited our Neighbor’s Club results and the long-term opportunity it represents. This program is a transformational and growing asset to drive brand royalty for Tractor Supply. We are in the process of implementing technology that will further automate our personalization efforts.

As we noted last quarter, our 1 year retention rate is consistently running at nearly 90% with customer feedback continuing to be very positive. Our sales per customer are up in the year post enrollment with Neighbor’s Club members shopping 3x our average customers. With the foundation of personalization established in 2018, our plans are designed to drive frequency and basket across our customer segments. This personalized and segmented approach allows the opportunity to grow share of wallet with our members over time. Using our Neighbor’s Club data, we can effectively map out and manage customer lifecycle interactions, drive key customer segments and deliver relevant and timely content leveraging artificial intelligence. In addition to our Neighbor’s Club program, our customers have responded to our enhanced private label credit card offerings.

This year, we are investing in increased training for our store team members on the benefits of the TSC card to our customers. Over time, we anticipate the card will become a key tool to deepen our relationship with our customers, drive loyalty and increase our share of wallet. Our research shows that customers have become TSC credit card holders, visit our stores an additional 2x per year and spend more. At the store level, stockyard kiosks are a proven tool for driving incremental sales. We anticipate a complete rollout across the chain by the end of the year.

Lastly, we continue to make investments across our supply chain. Our newest distribution center in Frankfort, New York began shipping the stores during the first quarter. The Frankfort facility will support replenishment to our stores and increase our fulfillment speed for Direct to Customer orders. Just last week, we also opened a new mixing center in North Carolina to better support our in-stock position of fast-turning products while reducing total inventory in the store. This brings our total number of mixing centers across the network to 5 locations.

In summary, we believe we are ready for a solid selling season with differentiated products and a customer engagement approach that will not only surprise and delight our customers, but allow them to live life on their terms.

I will now turn the call over to Kurt.

[Kurt Barton, Chief Financial Officer]

Thank you, Steve and good morning everyone. Echoing what you have heard from Greg and Steve, I am pleased with the balance in the first quarter across our top line growth, margin improvement and SG&A performance that resulted in operating profit expansion. For the first quarter of 2019 we had strong comp store sales growth of 5.0% which was driven by 1.8% increase in comp transaction count and a 3.2% increase in average ticket. All months of the quarter were comp positive and Petsence comp store sales increase was in line with our chain average. For the first quarter gross margin increased 26 basis points to 33.8%. The increase in gross margin was primarily driven by strong sell through of winter seasonal categories and the continued strength of our price management program. These increases were partially offset by increased transportation costs, principally from higher carrier rates which were in line with our expectations and the assumptions in our guidance.

Including depreciation and amortization SG&A as a percentage of net sales increased by 21 basis points to 28.1%. The increase in SG&A as a percentage of net sales was primarily attributable to incremental costs associated with the new distribution center in Frankfort, New York as well as incentive compensation for store and field team members from the strong year-over-year performance and to a lesser extent investment in team member wages. These SG&A increases were partially offset by leverage in occupancy and other costs from the increase in comparable store sales. Specific to the ramp up of our Frankfort distribution center, we estimate that about 25 basis points of our SG&A increase as a percentage of sales is attributable to the startup of the distribution center in the first quarter. That should not reoccur at the same rate of de-leverage for the balance of the year. All-in, we were pleased with our underlying expense control which helped to contribute to the modest operating profit increase.

Our effective tax rate for the first quarter came in at 22.0%. This was modestly below our full year expectation primarily due to an incremental tax benefit associated with higher stock option exercises year-over-year. This provided a favorable impact discrete to the quarter on the effective tax rate. Now to our balance sheet and cash flow, our accounts payable leverage was about 41.7% at the end of the first, a modest improvement year-over-year. At quarter end our merchandise inventories were $1.89 billion, an increase of 2.7% on a per store basis from the 2018 first quarter. We believe our inventory is in great shape and we are very comfortable with its quality. As the spring selling season continues to progress, we are well positioned to take advantage of the growing demand for spring and summer seasonal products.

We remain committed to returning cash to our shareholders through our share repurchases and dividends while maintaining a disciplined approach to capital allocation. For the quarter we repurchased about 1.7 million shares of our common stock for $155.3 million and paid quarterly cash dividends of $0.31 per common share outstanding totaling $37.6 million. Since the inception of our share repurchase program in 2007, we have repurchased just over $2.6 billion of our common stock and our remaining share repurchase authorization was approximately $365 million as of the quarter end.

Turning now to our outlook, we have not made any changes to our full year outlook for 2019 and we continue to forecast net sales in the range of $8.31 billion to $8.46 billion, an increase of 5% to 7%. Comp store sales growth is anticipated to be in the range of 2% to 4%. Our expectation remains for modest gross margin improvement in 2019. We are forecasting slight pressure on SG&A due to the ramp up of our new distribution center, ongoing wage pressures and higher depreciation expense. Our outlook includes progress on our profit improvement plans to help mitigate cost pressures and our ability to reinvest back in the business over time. The three key work streams of our profit improvement plan are focused on supply chain efficiencies, store productivity and indirect procurement. The team has made great progress and is on track for our plans for the year. We are committed to ensuring our spending is directed to our highest strategic priorities all on a sustainable basis.

We anticipate operating profit margin to be in the range of about 8.9% to 9.0%. Net income is forecast in the range of $555 million to $575 million or $4.60 to $4.75 per diluted share. Comp store sales each quarter are anticipated to be fairly consistent within our annual range of 2% to 4% growth. As always, we would encourage you to think about our business between the first half of the year and the second half as this is in line with how we manage the business. As you model 2019, please keep in mind key factors to the cadence of our profitability growth. Operating profit performance and earnings growth is expected to be stronger in the second half of the year. In addition, we will be cycling a benefit from hurricanes in both the third and fourth quarter of about 40 basis points each.

Moving to below the line, our effective tax rate is anticipated to be in the range of 22.4% to 22.7%. Our capital spending is anticipated to range from $225 million to $250 million, with roughly two-thirds of the spending going towards initiatives to support long-term growth. We remain committed to a disciplined capital allocation strategy. Our first priority remains investing in the business to support long-term growth through the opening of new stores and our ONETractor initiatives. We are also committed to creating lasting value for our shareholders through anticipated quarterly dividends and consistent share repurchases. Overall, we were pleased with the first quarter and continue to do what we said we would do as we execute our plans for 2019.

Now, I would like to turn the call back to Greg.

[Greg Sandfort, Chief Executive Officer]

Thank you, Kurt. And in closing, first quarter was a great way to start out the year. I want to thank the nearly 30,000 team members across our organization, the dedication, their hard work and for consistently placing our customers first in everything they do. I believe our results are directly correlated to our team members’ efforts. Our commitment to provide legendary service and great products at everyday low prices will continue to be the foundation of our growth.

And with that, Mary Winn, we would now like to open the line for questions.

[Mary Winn Pilkington]

David?

[Operator]

Thank you. [Operator Instructions] And we will take our first question from Michael Lasser with UBS.

[Michael Lasser, UBS]

Good morning. Thank you so much for taking my question. You cited retail price management in both – as both benefit to your average ticket and gross margin. Can you give us some more specifics around what that driver is and how much is more of an opportunity there is to benefit from it?

[Steve Barbarick, President and Chief Operating Officer]

Sure, Michael. This is Steve. For years, we have been talking about investing in our pricing tools and those tools have really helped us analytically assess elasticity and make appropriate changes, where they need to be made. As we went into this year, we recognized as we have restructured our pricing program out in the field that there was future opportunity and so we took advantage of that tool. And I would say that at the end of the day, it assesses elasticity and demand and we feel like we are in a really good spot with it. So it’s a tool that we have used in the past. We just cited it probably this time a little more than we typically have and we will continue to lean and leverage that system as we move forward.

[Kurt Barton, Chief Financial Officer]

And Michael, this is Kurt. I will add to what was saying. In regards to the second part of your question, first quarter, the team did an excellent job capitalizing on margin opportunities that were specific to first quarter, particularly on the winter seasonal product. So extending the margin benefit in Q1 into future quarters is it’s a little bit hard to fully extend that into those other quarters as we had some success in areas that were discrete to the quarter. But as I indicated, we do anticipate to have modest gross margin improvement throughout the year.

[Michael Lasser, UBS]

And Kurt, that leads to my second question you did have a very good first quarter with upside to at least what the consensus forecast were and yet you maintained your guidance for the full year. Is your anything aside from some of those unique factors that mentioned in the first quarter – is there anything we should be mindful as we are modeling north of the year given that you did maintain your guidance?

[Kurt Barton, Chief Financial Officer]

Yes, Michael, I mean we acknowledge Q1 as both Greg and Steve said was a clear success for us above our initial expectations both on top and bottom line. But as we said, we faced strong tough compares in all the remaining three quarters on the top line and we have a vast majority of the year still ahead of us. So, we haven’t really pointed anything out. I think it’s just with a strong level of the majority at this point. Consistent with our practice, we believe it’s a good and prudent thing to maintain our guidance on the reminder of the year.

[Michael Lasser, UBS]

Thank you so much and good luck with the rest of the year.

[Kurt Barton, Chief Financial Officer]

You are welcome. Thank you.

[Operator]

Alright. And next, we will go to Oliver Wintermantel with Evercore ISI.

[Oliver Wintermantel, Evercore ISI]

Yes, good morning guys. I just want to follow-up on the gross margin side. I understand there were some specifics in the first quarter, but if I think about the headwinds that you mentioned it was transportation cost or the rate of transportation with a headwind in the first quarter. If I understand right that should get easier throughout the year, I think we are going to lap some of those – is that going to be that maybe a tailwind in the later part of the year?

[Kurt Barton, Chief Financial Officer]

Yes, Oliver. This is Kurt. Yes, you are correct on transportation year-over-year, I mean, the first, they still were up. I will give you a couple of points on transportation and then answer the last part of your question. Our transportation costs had a growth year-over-year. We did see some easing of some of those cost pressures even in the first quarter that was in line with our expectations, particularly in the area of fuel and common carrier costs. And we also saw some success with the progress we are making on transportation. Our spot rate usage is down year-over-year and this is really the third quarter we made progress on reducing the usage on spot rate. And we also saw progress on reducing some of our stem miles. So, we are going to continue to focus on transportation. And while those costs year-over-year are anticipated to be slightly higher, they will begin to moderate in the back half of the year as we begin to cycle some of those step-ups. And all of that is anticipated in our guidance. So we don’t really anticipate at this point to see anything significantly different than we have guided on the overall gross margin.

[Oliver Wintermantel, Evercore ISI]

Alright. I stick with one question. Thanks very much.

[Kurt Barton, Chief Financial Officer]

Thank you.

[Mary Winn Pilkington]

Thank you.

[Operator]

And next we will go to Christopher Horvers with JPMorgan.

[Christopher Horvers, JPMorgan]

Thanks. Good morning, everybody. So wanted to get your thoughts in terms of how the spring season has played out so far this year regionally, did it arrive earlier year-over-year in the south and what’s your view in terms of how it’s played out and then northern regions have a lot of retailers talking about weather on the retail calendar quarter. So just curious what you have seen so far and what you think is ahead?

[Steve Barbarick, President and Chief Operating Officer]

Yes, Chris this is Steve. We always talk about weather plays some factor in our business especially when you talk about customers who live “out here.” What I would tell you is that as stated early in the commentary, we saw strength in both the fall weather side of our business, but we also saw some strength in the seasonal goods and they comped off. So as we look at it fortunately for us we are geographically dispersed, we are prepared for spring as we go forward. I don’t want to get in the specifics of the individual regions, but I can tell you that we have got product set and as the season continues to move north, we will take advantage of it.

[Christopher Horvers, JPMorgan]

Understood. So it sounds like it did sort of hit the south was really the early spring seasonal selling in the first quarter and it’s been moving north since then?

[Steve Barbarick, President and Chief Operating Officer]

I think that’s….

[Christopher Horvers, JPMorgan]

Okay. So the other I think hot topic out there is to take an improvement that you have been able to really drive, was that inflected in the second quarter of last year. Can you sort of somehow size the buckets of what drove ticket between the price management in the credit card and the inflation and so forth and how are you thinking about sort of lapping against that ticket comparison as it steps up here in 2Q, do you expect it to moderate or do you think that what you are doing around BOPIS and the kiosks can continue the strong ticket growth going forward?

[Kurt Barton, Chief Financial Officer]

Chris, this is Kurt, I will just hit a couple of the highlights on there. As Steve mentioned in his prepared remarks on the average ticket there was a number of key contributors and that’s the excellent point that the average ticket benefited from good strong price management ensuring that we can offset some of those cost increases particularly in the areas of transportation. But we had positive comps in big ticket. Our big ticket comps for the quarter was in line with the overall chain average and that contributed to the average ticket. It wasn’t the primary, but it was one of the key contributors. But also the efforts we have got on adding units in the basket and the efforts to continue to improve our selling along with our private label credit card all contributed to that. And as we lap the future, I mean the success of the quarters going forward, we are really excited about and we have good confidence in our initiatives in these particular areas to be able to lap the improvement we saw in average ticket going forward the rest of the year.

[Christopher Horvers, JPMorgan]

You mean, continue to put up average ticket increases?

[Kurt Barton, Chief Financial Officer]

That’s in our assumption, yes.

[Christopher Horvers, JPMorgan]

Understood. Thanks very much. Have a great spring.

[Kurt Barton, Chief Financial Officer]

Thank you.

[Operator]

And next we will go to Steven Forbes with Guggenheim Securities.

[Steven Forbes, Guggenheim Securities]

Good morning. I wanted to focus on the credit card program and really the special financing options ahead of the spring selling season here, so if possible can you provide some color regarding the customers usage and our response to the offering thus far. And then maybe comment on how view Tractor’s offering like the special financing options relative to what you are seeing from the local competitors out there, local independents from just so we have engaged competitive going for those big ticket sales?

[Kurt Barton, Chief Financial Officer]

Steven, this is Kurt. Let me give you a couple of highlights on the progress with the private label credit card. We are very pleased with the performance. I will give you some indications on the progress on it. The general key metrics that we look for at or above our expectations, we look at the number of applications, our active accounts including repeat visits from those customers, all of those key metrics continued to move positively for us in line with what we expected. And we are really excited about aagain another where the tender mix on the card and up strong double-digits. So what is resonating with our customers, we see a good connectivity and correlation on bigger ticket items as well. And when it comes to comparison to prior year or what’s being offered out there, this year in the spring a couple of key differences year-over-year were consistent throughout the spring selling season on our deferred financing offers. Those bigger ticket deferred financing offers that were on and off a bit with some of the adds last year will be consistent. And then also we introduced late last year or offer where in certain price levels you can choose the deferred financing or 5% off. And we believe that resonates differently with customers. And there is a segment of our customer that, that resonates better than deferred financing. So overall, we have got a very competitive offering when we look at what the competition has and a greater offering than even last year in the second quarter.

[Steven Forbes, Guggenheim Securities]

And then just a quick follow-up on the full year revenue guidance, right, so if we think back to January when you provided the initial guide, I believe there were some caution, right, so you can have early, you had the guide in the year around the potential impact to demand from the anticipated increase in the tariff rates, so maybe just update us on how tariffs are incorporated into the guidance, now that we are past March, right and have better visibility to the full year?

[Greg Sandfort, Chief Executive Officer]

Steven, I just go back to what we said on the last call that we believe what we can be and have the ability to be nimble in how we manage that. We new there was a risk of wave three coming or not perhaps and as we know how that played that, our ability to yield a add-on or layer off the tariffs gives us a good competitive advantage. And we also said we felt with it you might have some challenge of the demand or the traffic, but yet an offset on the ticket and we believe that tariffs can have a pretty even offset. So it really doesn’t impact significantly anything that we see going forward in the remaining quarters for the year.

[Steven Forbes, Guggenheim Securities]

Thank you.

[Operator]

Okay. And next we will go to Scott Mushkin with Wolfe Research.

[Scott Mushkin, Wolfe Research]

Hey, guys. Thanks for taking my questions. I just wanted to dive into the pet business a little bit, talk about how it’s going, what kind of inflation you are experiencing, some of our data since pets become inflationary, so I didn’t want to get your read on what’s going on in the pet business? And then I had a follow-up.

[Steve Barbarick, President and Chief Operating Officer]

Yes, Scott, this is Steve. Overall, we are still running solid comps both on the food side as well as on the supply side. Our focus around pet is really been around our own private or exclusive brands, that in those brands are really more differentiated and channel specific. And if you look at our assortment, 70% of those brands that we sell are not mass or grocery and that’s what we are seeing a lot of the strength in our business. There is some inflation, but it’s not significant to the total and it’s not necessarily material to our overall company’s performance.

[Scott Mushkin, Wolfe Research]

That’s perfect. And then I wanted to kind of talk about the – you have been remodeling some stores, I know you have a new store format out there, but I want to get an update on those stores are performing versus the kind of the stores they replaced? And I am wondering also which ONETractor effort is driving the most incremental sales? Thanks.

[Kurt Barton, Chief Financial Officer]

Hey, Scott. This is Kurt. Yes, it’s correct. We did start to last year introduce that new layout format not only in new stores, but began to test and roll it out into some of our retrofit existing stores. At this point, we are still assessing the performance of the retrofit stores and the ROI just like we would do with any remodel or investment in existing stores. At this point, the investment return isn’t where we wanted to be to warrant further or a larger scale expansion, but it’s still very early. What I can tell you also though is we will continue to test and modify in those stores and we are taking some of the learnings and applying that to the chain where appropriate. And we are all really excited about the impact it’s having on the new stores and we are continuing to open up new stores with that format.

[Greg Sandfort, Chief Executive Officer]

And I think the other portion to your question had to do with what parts of ONETractor we are most excited about. I would tell you within the formats themselves, we have seen benefits across a couple of different areas. But one of the things it’s given us confidence is we put the stockyard kiosk into these ONETractor formats. And seeing the results that we have gotten there has given us confidence to expand that program to all stores by the end of this year. So from a technology standpoint and getting our customers comfortable with using the technology, supporting buy online, pickup in store, our team members comfortable with it. That’s where we are really seeing a lot of benefit in the new capabilities.

[Scott Mushkin, Wolfe Research]

Alright, perfect guys. Thanks. Good luck for the rest of the year.

[Kurt Barton, Chief Financial Officer]

Thanks, Scott.

[Greg Sandfort, Chief Executive Officer]

Thank you.

[Operator]

And next we will go to Simeon Gutman with Morgan Stanley.

[Josh Kamboj, Morgan Stanley]

Hi, this is Josh Kamboj on for Simeon. In light of the higher current run-rate over the past few quarters and ignoring some of the factors like weather, obviously you are targeting your existing customers there, but do you think that you are also capturing a large swathe of new customers and if so where might they be coming from?

[Steve Barbarick, President and Chief Operating Officer]

Yes, this is Steve. And I will take that one. We have had a good stream over the last 40 plus quarters of comp transaction growth. And I would tell you a lot of that growth is a result of new customers being introduced to the brand. They are being introduced to the brand through a lot of different marketing vehicles. And one of the ones that I think is probably the most significant for our brand is the actual website itself. There is a lot of customers. And if you look at our traffic on our site, if you look at unique visits, if you look at store locator clicks, it’s very easy to be sitting in your home and pull up – see something from a Tractor Supply banner ad that runs across a website you are looking at, you click on it and you are introduced to the brand. And I think that, that right there is the new front door for Tractor Supply Company. So, I would suggest looking at the data that we have got as we continue to scale Neighbor’s Club and understanding who our customers really are, there is a tremendous amount of value in getting our brand out there in different vehicles in digital in my opinion is the way to bring new customers in. So that’s what I would tell you.

[Josh Kamboj, Morgan Stanley]

Alright, thank you. And just as a quick follow-up, your core customers are obviously engaging with you a lot more closely during the past initiatives that you have outlined. Do you have a sense of your wallet share of those core customers you are able to quantify that in anyway?

[Steve Barbarick, President and Chief Operating Officer]

That’s always been difficult for us. And part of the reason is as we compete with a lot of folks that are private in our space. And so we have been reluctant to really give out some of the initial insights that we have at this point as we continue to assess the data, but our business is very unique. It’s incredibly fragmented. And at this point I don’t have any specifics for you.

[Josh Kamboj, Morgan Stanley]

Understood. Thank you.

[Operator]

And next we will go to Chuck Grom with Gordon Haskett.

[Chuck Grom, Gordon Haskett]

Good morning guys. Great quarter. Just wanted to circle back on the gross margin a little bit on the gross margin line, specifically in the first quarter, how much was mix versus price management? And I guess how big a drag was transportation cost and looking ahead to the second quarter and the balance of the year, how do we think about those moving parts, it sounds like mix may not be as good, but it also sounds like transportation may not be as bad? I am just trying to size up the moving parts on the GPMI?

[Kurt Barton, Chief Financial Officer]

Sure, Chuck, this is Kurt. If I heard the question right, gross margin mix versus price and then impact the transportation, exciting that all key factors mix and price were both contributors on the gross margin side of it. And pricing for the first quarter for the things that we pointed out are particularly on price management as well as capitalizing on demand on winter merchandizing a solid sell through those were the primary two contributors that were larger than the benefit from mix and transportation costs were in line with what we expected which is showing as I indicated some easing and less of pressure then it was in Q3 and Q4 of last year, but it still was a key factor in gross margin and we are really excited about as we continue to learn and manage through that not only driving some efficient in transportation, but being able to manage the pricing to be able to pass on some of those incremental cost to our customer during the quarter overall we manage the transportation increases well from both sides of that.

[Chuck Grom, Gordon Haskett]

Okay great. And then on your prepared remarks you talked about mapping out the customer life cycle I think it is kind of [indiscernible] as you guys start to gain more knowledge about your customer to royalty in the card just wondering like how you think about that over time what you have learnt so far and what’s the progression could potentially be?

[Steve Barbarick, President and Chief Operating Officer]

Yes this is Steve. I will tell you that the way it is scaled is really giving us some deep insights in our customer not just the frequency but the amount they spend year-over-year spend what categories they spend within the benefit of the life cycle is taking that data and then welcoming new customers and watching them grow and mature into the lifestyle that we had in communicating on a very relevant and personalize basis to them so that were not only talking about the categories that they purchase today but we can cross sell of so of those customers we recently implemented their campaign management tool and they give you a sense for it we are not able to scale or emails and then in the last campaign we actually were able to have 4000 different versions all that email sent out to individual customers to really talk what we have previously, we are ruling more of a mass email deliver so between that and been able to really shift our spend in advertising the more digital we see this is real upside as we track these customers over time. And if we do find a customer that only came in once, we can talk to them and if we have a customer that may have lapsed, we have a better way to communicate with them as well. The e-mails that we are getting today addresses from our customers will add tremendous value in the long-haul.

[Chuck Grom, Gordon Haskett]

Thanks very much.

[Operator]

And next, we will go to Brian Nagel with Oppenheimer.

[Brian Nagel, Oppenheimer]

Hi good morning. Kurt, very nice quarter. So congratulations first.

[Kurt Barton, Chief Financial Officer]

Thank you.

[Brian Nagel, Oppenheimer]

The other question, I want – I think that prior question may have touched on as well, but the question I have is we talk how we call it your stock now for many years, with a topic weather comes up a lot. And if I look at this quarter very solid 5% comp in a period where I don’t think weather was all that cooperative, because I think weather was essentially I mean I think this was another year where maybe winter stuck around longer than it should have that type of thing, you didn’t have in Q1 the real break to spring we knew, we had it now, so subsequent to Q1. But so the question I have is I mean guess first my assessment is correct, but bigger, is something changing, obviously you are doing much more of the systems now and is Tractor now becoming better equipped so to say that deal with these potential weather issues that we see back during the first quarter?

[Steve Barbarick, President and Chief Operating Officer]

Yes. I think that there is – I think there is a maturation of us as an organization using systems and technology that will help diffuse some of the weather impact. But if you look at the quarter, we did see benefit from spring like products. We saw some benefit from cold related products. But I will tell you we saw very strong sales of our core business or what we call year around products. All three work in concert, all areas and regions of the country were positive and all product divisions saw positive comps. So it’s hard to pick any specific thing out Brian, but I would tell you that as we mature as an organization our supply chain becomes nimble. We have got systems to support what we are doing and the capabilities that we have invested in. I think we are starting to see the results of a lot of those investments.

[Brian Nagel, Oppenheimer]

That’s helpful. And then the second follow-up question I have the way the topics stick with Mary Winn’s rule, the flooding that occurred in the Mid-west particularly in the states like Nebraska and Iowa, how do you think about that in terms of either the impact in Q1 going forward may have a factor for your business as we look for 2019?

[Steve Barbarick, President and Chief Operating Officer]

Yes. This is Steve again. When we look at the data we don’t see any material impact from those stores on the district, the region, the geography anything specific jumps out, I think from a more macro perspective it will be interesting to see what happens with corn yields and soybeans just because that impacts possible inflation, it doesn’t impact our sales specifically because our consumer is not production, but it is probably a macro thing than anything else. So we don’t necessarily see those floods as having any material impact at this point on our business.

[Brian Nagel, Oppenheimer]

Got it. Thanks.

[Greg Sandfort, Chief Executive Officer]

Thank you.

[Operator]

And next we will go to Seth Sigman with Credit Suisse.

[Seth Sigman, Credit Suisse]

Thanks guys. Good morning and great quarter. I wanted to just follow-up on the guidance for margins this year and the cadence that you have talked about in the past, so it sounds like second half will be better than the first half, now obviously the first quarter came in better than expected, at the same time you are also shifting some store openings into the back half, it sounded like, so does that change your view on the cadence at all as we think about how the year should play out?

[Kurt Barton, Chief Financial Officer]

Seth this is Kurt. In regards to the store shifting a bit, it will not have a material impact on the cadence of the operating margin. But to the first part of your question on operating margin and the cadence of it, still in line with our initial guide. And I will just remind you that we do anticipate second half to have operating margin performance stronger than the first half. And there is really three key contributors to that. The Frankfort distribution center ramp up more negatively impacting the first half of the year than the second half. And in the second half while it still has on SG&A some de-leverage impact as modest as that is, you will begin to have some offset of that on the transportation side on the distribution center. Secondly on the back half we really don’t start to cycle most of the step up in some of our higher costs last year transportation or wages until about mid-year. So it gives the better compare in the second half of the year. And then third, our profit improvement plan initiatives that we have been strategically working on we are in that implementation stage right now and not at the point of seeing a lot of benefits from it, but we continue to believe we get offset in benefits starting in the second half of the year on the profit improvement plan initiatives. Those key factors really give us a better opportunity for the strength of the operating margin and the flow through in the back half of the year.

[Seth Sigman, Credit Suisse]

Okay. Thanks Kurt for that and I appreciate that. Maybe just one follow-up that’s really the incentive comp in the quarter was higher, are you guys able to quantify that and then for the full year you kept the guidance, so should we assume that if you hit those numbers incentive comp is neutral for the year or is it a headwind, can you just remind us how that plays out and what’s factored into the guidance? Thanks.

[Kurt Barton, Chief Financial Officer]

Yes. Sure. The incentive compensation was less of a factor in the level of its impact compared to the non-recurring distribution center cost. Slightly below that the important thing is that its level of impact on the quarter was less than we saw impact on Q3 and Q4 last year. So it begins to moderate as we have easier compares. And if we hit our guidance for the year which should be in line with our plan for the year incentive compensation would not be a de-leverage point for 2019.

[Seth Sigman, Credit Suisse]

Okay, understood. Thank you.

[Operator]

And next we will go to Matt McClintock with Barclays.

[Matt McClintock, Barclays]

Hi yes, good morning everyone and also congratulations. I was wondering two quick questions, first one just is a follow-up on the commodity costs, you kind of give us an overview of where they may go given the flooding, but I was just wondering because there is such divergent in commodity cost pressures right now, you have oil going one direction, crop prices going in other, if you can just give us an overview of how you are thinking about that impacting your business over the course of the year? Thanks.

[Greg Sandfort, Chief Executive Officer]

Matt, let me start with that one. I don’t mean to scare anybody, but about the floods of North I don’t know what’s going to happen with that. I am just saying that from a macro perspective we just got to keep an eye on it, that’s all I would say there. Relative to inflation for the quarter and for this year, what we saw basically in the first quarter was in line with expectations and really was a carry over from what I would say was the second half of last year. So that’s kind of where we are at and that’s what I would say that we would expect going forward for the remainder of this year. And what we are seeing it is, we are seeing a little bit in some gains and we are also seeing a little bit in some steel products. Our lubricant business isn’t significant, but there is a moderate – modest impact there.

[Matt McClintock, Barclays]

Okay, that’s helpful. Thank you. And another follow-up to Michael’s question in terms of comp acceleration potential or just comp stream going forward, I think Greg started up by talking about seven straight quarters of above 3% comps and the trend it self has been building, it’s been going up and that’s a great direction to be, but I was just wondering because of that how should we think about that going forward, clearly your initiatives are playing out, clearly they are driving stronger comps, what inning would you say are we in and some of these initiatives playing out in terms of that acceleration meaning 5 today could be a 6 tomorrow or 7 tomorrow, should we just think in kind of leveling off here going forward? Thanks.

[Greg Sandfort, Chief Executive Officer]

Yes. This is Greg. Here is what I would tell you. First of all, the ONETractor strategy and the components of that have been talked about here most of the morning. And they are all in different stages of what I would call maturity, nothing is anywhere near maturity. As Kurt mentioned in a couple of his comments, the PIP program, the profit improvement is just starting to really get embedded. So there is a lot of headroom in front of us for these things. So what we would caution you always in our business we have been in this business now a little over 11 years. Steve has been here over 20 years. Kurt has been here 17 years plus. You can see that is really a half in game. You have got to look at the business on halves and you got to look at these components of initiatives and such probably gaining more momentum as we get towards the second half and that’s basically what we put into our guidance. That’s what we felt that way initially. But it’s a half game, it’s not a quarter game. We are very pleased with Q1. We believe that we have got ammunition to carry forward. But I wouldn’t tell you that there is any one thing today that is I can highlight. I would say that what we are fortunate to have is a number of things in the basket that are working all-in units. And as Steve said earlier, they are all moving the business forward. The opportunity to drive greater comps and we have seen is there, but it’s too early in this year to start call that.

[Matt McClintock, Barclays]

Great. Thanks Greg and everyone else best of luck.

[Greg Sandfort, Chief Executive Officer]

Thank you.

[Operator]

Next we will go to Scot Ciccarelli with RBC Capital Markets.

[Scot Ciccarelli, RBC Capital Markets]

Good morning guys, Scot Ciccarelli. So I have two very specific questions on the private label credit program. First of all, of the people that are using Tractor Supply’s credit card, what percent of those transactions are people actually taking advantage of your deferred financing. And then second, what percent of tender is now coming from the private label tender?

[Kurt Barton, Chief Financial Officer]

Scott this is Kurt, I will start with the second question. What we have said is that when we re-launch this program historically we maintains at a low single-digit percentage of tender. And with still yet a year under our belt it’s still very early. But with the double digit growth that we have seen year-over-year, we are making good progress on being able to move outside of that low single digit mark on the penetration from the card. It’s right in line with our expectations. And I will just add to it I will plan to give a little bit more detail at the investor community day coming up in May on our targets for that and some of the initiatives we have as well. As early as it is right now, I don’t have the data nor we are really sharing a lot of the specifics on what the customers are spending in particular on big ticket versus just non-big ticket item, how much they are taking deferred financing. But in general, I would say we have seen growth in both deferred financing as well as the standard financing on the program. And we have seen a real solid momentum and strength from that deferred financing that’s pushing the growth in the program. So in general, the growth certainly is correlated with the resonation with our customers accepting the deferred financing and the program is exactly where we would want that to be.

[Scot Ciccarelli, RBC Capital Markets]

Okay. So in other words, the reason that the tender has increased as dramatically as it has is because of the deferred financing offers?

[Greg Sandfort, Chief Executive Officer]

It’s one of the key contributors. That’s a big part of it. Just don’t want to understate we would like the fact that we are able to grow in standard financing as well being repeat visits and buying on the card outside of the big ticket deferred financing.

[Scot Ciccarelli, RBC Capital Markets]

Alright. Thanks guys.

[Greg Sandfort, Chief Executive Officer]

Thank you.

[Operator]

And next we will go to Zach Fadem with Wells Fargo.

[Zach Fadem, Wells Fargo]

Hey good morning. Thanks for taking me in. Could you talk a little more about the personalization technology, you said you are implementing for Neighbor’s Club, you mentioned more targeted promotions as an opportunity, but how does the new technology come into play here and to what extend are you actually utilizing data to drive incremental sales today?

[Steve Barbarick, President and Chief Operating Officer]

Sure. This is Steve. I mean basically we have some machine learning AI type of technology that will allow us to go in and set parameters. Say we will take key product categories, key SKUs, good to understand who is buying them, understanding their e-mail address through their Neighbor’s Club program and then be able to take that large amount of data with the guidelines parameters that we put in and personalize the communication directly to them not just through test but also through the inventory. And see that’s where the value of this really comes in. So rather than trying to do the linked e-mails, we are just grouping some e-mails. We are able to now get to that as I mentioned earlier 4,000 versions in triggered e-mail out to specific customers. That’s how the system will work and we can continue to refine and better improve the e-mail communication out over time as we continue to get more and more data, click rates and responses from these customers.

[Zach Fadem, Wells Fargo]

Got it. And then quickly on the profit improvement plan, could you just talk about the evolution of the benefits particularly this year like what’s on deck for the second half in terms of store or DC productivity benefits and then how do you expect this to evolve with indirect spend and all the other items in the out years?

[Kurt Barton, Chief Financial Officer]

Yes. Sure. Zach this is Kurt. As I have said we are on track with it. The first thing I would say is it’s important to know that from the – our strategy on the profit improvement plan is about process re-engineering, performance management and benefiting and leveraging automation. And I would point that out to contrast against just a cost cutting initiative because our focus is on sustainable efficiencies in the process. We are launching in-store productivity. It’s now in test in 100 plus stores on a lot of the process re-engineering. We are in pilot on with re-engineering in labor management standards and efficiencies at one distribution center and we are fairly well along on the transportation side of optimizing lanes and driving efficiency in reduction in costs – carrier costs which we believe will start to flow through on the back half of the year. So like the ability to go after long-term sustainable, we are making good progress on the program.

[Zach Fadem, Wells Fargo]

Got it. Helpful color. Appreciate the time.

[Kurt Barton, Chief Financial Officer]

Thank you.

[Mary Winn Pilkington]

David, I think we have hit the top of the hour. So I think we can close out the call, mail and thanks to everyone joining the call. Marry Ann and I will be around if you have any questions. We look forward to talking to you on our second quarter call in July. More importantly, we will be hosting our Investment Community Day on March 15 here in Nashville. I hope you can join us. Thank you for your interest in Tractor Supply and have a great day.

[Operator]

And that does conclude today’s Tractor Supply Company’s conference call to discuss first quarter 2019 results. We thank you for your participation. You may now disconnect.