Tractor Supply Co

NASDAQ:TSCO

Earnings Call Transcript 2021-Q4

[Mary Winn Pilkington, Investor Relations]

Good morning and welcome everyone to Tractor Supply’s Fourth Quarter 2021 Enhanced Earnings Event. The video we just shared, I hope, has you in a Tractor Supply state of mind. Thank you for taking the time to join us today. We look forward to the time we can host this event in person.

We have a packed agenda today. Our executive team is excited to bring you many updates of where we’ve been since our last event in October 2020 and where we are headed in 2022 and beyond. To do that, we will lead off our meeting with Hal Lawton, our CEO and Kurt Barton, our CFO. They will review our operational and financial highlights for the fourth quarter and 2021. Kurt will also provide more details on our 2022 financial outlook. Then Hal will provide an update of our multiyear Life Out Here strategy. It continues to be our north star in our day-to-day operations and mindset. Our Senior Vice President of Marketing, Christi Korzekwa, will join us to discuss important insights we have learned about our core customer as well as the new customers that we have gained. Then John Ordus, our EVP and Chief Stores Officer, will illustrate how Tractor Supply is a relationship retailer and share our approach to continue to deliver and elevate our legendary customer service.

At this point, we will have a quick break at around 10:15 Central. After the break, Rob Mills, our EVP and Chief Technology, Digital Commerce and Strategy Officer, will share new capabilities we are introducing as we continue to enhance our customers’ digital experience. If you followed Tractor Supply over the last 20 months, you’ve heard us speak about our exciting changes in store layout with Project Fusion, along with our Side Lot remodels. Our EVP and Chief Merchandising Officer, Seth Estep, will give a quick tour of these revitalizing efforts inside of our stores as well as a couple of other features that continue to allow Tractor Supply to lead the market. Up next, Colin Yankee, our EVP of Supply Chain, will provide insights on how we continue to evolve our supply chain and differentiate as the dependable supplier for our customers. Then Kurt will bring it all together and layout our plan to deliver strong and sustainable total shareholder return. He will speak to our long-term growth outlook, the progress we have made with the execution of our strategic investments and our capital allocation priorities. Finally, Hal will wrap up the presentations, after which we will take a quick break before going into an extensive Q&A session with our executive team.

Our goal is to allow at least an hour for the Q&A. But before we get too far down the road, I’d like to ask you to take note of our Safe Harbor statement. Please note some of the discussions, presentations and statements that we make today regarding our business operations and financial performance maybe considered forward-looking. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially. 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 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 Exchange Commission.

Because we use select non-GAAP measures to describe our business performance, we have provided a reconciliation of these measures to the most directly comparable GAAP measures, which are included in the appendix of this presentation and will be posted on the IR section of our website as part of today’s call. The information contained in this webcast 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 webcast. Please note this event is being recorded. It will be available for replay on our website at ir.tractorsupply.com under the Events and Presentations link. You can also find the slides from today’s presentation there. Before Hal and Kurt joined us, we wanted to share some of the big wins for Tractor Supply in 2021, many of which we will be discussing later today in detail. Let’s take a look.

[Video Presentation]

[Hal Lawton, Chief Executive Officer]

Good morning, everyone. Thank you for joining us today. We are here in cold Nashville. We are excited to update you in greater detail on our Life Out Here strategy that we first shared with you back in October 2020. As our Year Review video highlighted, we are just getting started. At Tractor Supply, we are very early on our journey to build on the momentum in our business and capture the tremendous growth opportunities that we see ahead of us.

As we operated early through the early days of the pandemic back in 2020, we set our sights on ensuring that our business would emerge stronger than before. Today, our business has never been stronger. We have significant momentum, our team is executing at a high level and our results demonstrate that our multiyear Life Out Here strategy is working. We are operating from a position of strength. We have a lot of exciting news and progress we want to share with you today. Kurt and I will take you through our fourth quarter and fiscal year 2021 results and review our outlook for 2022 before the team provides an update on our strategic priorities.

Retail is ever evolving, that our most important strategic asset remains constant in our team members. They nurture our relationship with our customers and they make us who we are and what we stand for as a company. As a purpose-driven company, our team members create a sense of community in our stores and with each other. Our 46,000 team members are passionate about Life Out Here. Over the last 22 months of the pandemic, they have lived our mission and values to ensure that Tractor Supply is the dependable supplier that our customers count on. This team has worked diligently with grit and determination to overcome the challenging operating environment. They have come together to support the increased sales volume through our DCs, to our stores and online, welcome new customers into the lifestyle, onboarded new team members and navigated the supply chain disruptions. We have enhanced our IT capabilities and done so much more. My thanks goes out to their hard work and dedication to each other, our customers and the communities we call home.

Thanks to the team. 2021 was a record year for our business as we successfully comped our record performance in 2020. And as we will share throughout today’s presentation, we are benefiting from the many market trends that continue to be structurally sound. So, let’s recap a few of the milestones in 2021. We celebrated the opening of our 2,000th store in December right here in our home state of Tennessee. We announced the acquisition of Orscheln Farm & Home. And we remain committed to the acquisition, which continues to be reviewed by the FTC and we hope to have an update soon. The strength in our customer base is supporting our market share gains across our categories. Our Neighbor’s Club program is growing with membership up 24% year-over-year as we transition from an affinity program to a tier rewards program. We have robust retention rates and engagement, especially with our highest value tier members.

We are committed to making Tractor Supply a household name. Through our targeted investments in marketing, we are seeing a remarkable increase of 21 points in our unaided brand awareness. We are also investing in our supply chain as we announced the first of 3 new distribution centers over the next 5 years. And in September, we announced new robust ESG goals to further reduce our carbon emissions from our operations as well as new diversity equity inclusion goals. And the team has done a remarkable job managing through the well-documented challenges across the global supply chain and dealt with an unprecedented level of inflation. We have tremendous strength and it is broad-based.

And now, let me provide some specific color on our fourth quarter performance. Our comparable store sales grew a robust 12.7% and this represents a 40% stack on a 2-year basis. Continuing the trend, we have had several quarters now. Every week was positive with broad-based strength across all regions and all categories. We believe we are significantly outpacing the industry in our growth and continuing to gain market share both online and in store. Inflation, it contributed over 850 basis points to comparable store sales as we navigated the ongoing cost pressures across the supply chain. Where necessary, we are taking price increases to pass through some of the cost pressures that we cannot offset. And our merchants and supply chain teams are currently navigating this challenging and disruptive environment extremely well and they are most focused on being that advocate for our customer to be everyday low price. As we closely monitor our customers’ purchasing behaviors, we are focused on product unit trends and as I said, we are committed to being priced right everyday.

Consumable, usable and edible products, they continue to perform well with comps above the chain average. These categories, as we discussed often are needs-based, demand-driven and they drive trips to Tractor Supply. And key categories in our C.U.E. area, dry dog food, livestock feed, equine health and pet treats were among some of the strongest categories that continue to perform very well. While we were comping exceptional strength in the fourth quarter of last year for our big ticket categories, we had double-digit growth again this quarter. Looking at the cadence for the quarter, December was modestly below October and November comp performance. And as a reminder, December was the warmest on record in 30 plus years. That said, we exited the quarter strong as weather normalized and as we all know, January has started off quite cold.

So to recap our sales performance, we had a remarkable year with consistency that gives us confidence that the trends we are experiencing are more structural in nature. The execution by our team has been excellent. Our store teams and distribution centers, along with our supply chain partners, have navigated another challenging year with outstanding execution of our operational playbook. We have faced every challenge head on, focused on controlling what we control, all the while staying true to being the dependable supplier for the Out Here lifestyle. The strength and diversity of our comp growth in 2021 on top of our record results in 2020 is very compelling.

As evidenced in our share gains, the health of our customer continues to be very robust. All customer segments had strong growth with the fastest growth in our core farm and ranch segment. We continue to see stellar performance from our highest spending customers. Our retention rates remain higher than historical standards, and it’s even higher from our Neighbor’s Club members. 1 in 5 or 20% of our new customers came to Tractor Supply through our digital channels in the fourth quarter, reinforcing the importance of the investments we are making in this area. We are supercharging how we serve customers with convenience and meeting them how they want to engage with us.

To recap, we are experiencing more customers shopping us than ever before. They are visiting us more frequently. And when they come to shop with us, whether it’s in our stores or online, they are spending more money per trip. Throughout the team’s upcoming presentations today, you will learn much more about our plans to continue to build on this positive momentum that we have with our customers. Before we get to the update on our Life Out Here strategy, Kurt will go through some of the key highlights of our fourth quarter and share more details around our 2022 financial outlook. Kurt?

[Kurt Barton, Chief Financial Officer]

Thanks, Hal and hello everyone. Thank you for joining us. We really appreciate your time and attention today to hear more about our substantial progress and our very bright future. As Hal covered a good bit about our top line results and impressive customer trends, I will pickup with our gross margin performance.

Our fourth quarter gross margin rate was 33.8%, a decrease of 83 basis points versus last year. This was generally in line with our expectation as we expected inflationary pressures to continue in both product and transportation costs. As has been very well documented, the cost environment remains elevated across imports and domestic freight, commodities and labor wages. Hal shared with you our approach to managing through the current environment. I commend our team for the great job they are doing in the current environment. The Tractor Supply team effectively offset a significant portion through our retail price management program. The fourth quarter comparable ticket growth included the benefit of approximately 850 basis points of inflation.

For fiscal 2021, inflation benefited comp sales by approximately 550 basis points. Across the network, we have been nimble to navigate the unprecedented supply chain environment and macro issues, including inflationary pressures. Additionally, we continue to see favorability in the frequency and depth of promotions. This is due to our commitment to our everyday low pricing strategy and a continued strong demand for our product categories.

Turning to SG&A, our fourth quarter adjusted SG&A expense ratio, including depreciation and amortization, improved by 68 basis points versus last year to 24.9%. This improvement as a percent of net sales was primarily attributable to good leverage in occupancy and other fixed costs from the increase in our comparable store sales, along with lower COVID-19 pandemic response costs and decreased incentive compensation. This leverage was partially offset by higher wage rates, incremental store labor hours to ensure we are providing a great customer service and investments in our Life Out Here strategic initiatives.

Moving to our profitability, adjusted operating profit increased 13.4%, adjusted net income increased 14.6% and diluted earnings per share was $1.93, an increase of 17.7% on an adjusted basis from the fourth quarter of last year. This slide recaps our record performance for the year, all on an adjusted basis. Our operating income increased 22%. And for the fiscal year, we had an operating profit margin of 10.3%. Net income was just under $1 billion, with diluted EPS growth of over 25% for the year.

Turning now to a few additional financial highlights, the strength of our balance sheet and the consistency of our free cash flow continue to be a position of strength for Tractor Supply. Fiscal 2021 was a year of strong cash flow from operations, which totaled $1.14 billion. Our balance sheet remains incredibly healthy and we exited the year with a 2x leverage ratio. At the end of the year, our merchandise inventories were $2.2 billion and on a per store basis, inventory increased about 15%. This increase reflects our commitment to support our strong sales trends and be in stock for our customers, along with an increase from inflation. In 2021, the team opened 80 new Tractor Supply stores. We continue to see very robust new store economics. For the full year, we returned a total of around $1 billion in capital to shareholders through the combination of share repurchases and cash dividends.

With another year of remarkable performance in the books, let’s now turn to our outlook for 2022. We detailed our 2022 guidance in our press release, but I want to take a few moments to comment on the highlights. We have momentum. We will continue to invest in the 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. And this team is committed to doing just that. We continue to operate in a time of heightened uncertainty regarding the pandemic. This uncertainty includes product cost inflation and supply chain constraints as well as the impact that these factors will have on the broader economy and the consumer. As a needs-based business, Tractor Supply has a long history of resilience during volatility.

Starting with sales, please keep in mind that we are cycling tailwinds from generally favorable weather and government stimulus, principally in the first half of the year. With that backdrop, we believe we can comp the comp as our view is that our customer is healthy, even despite their concerns over the state of the broader economy. We anticipate the insights and initiatives you will hear more about today, including Neighbor’s Club, Digital, Fusion and Side Lot and investments in the customer experience to contribute to our positive comp range of 3% to 4.5%. We are planning for positive comp transaction growth. We are also planning for positive ticket growth, which assumes an inflation benefit of approximately 4 percentage points. This is partially offset by an average ticket decline from lapping the strength in big ticket and other select categories from last year’s stimulus benefit. The 53rd week adds about 1.5 percentage points of net sales growth for fiscal 2022 and about $0.15 of earnings per diluted share. Please keep in mind the prospective acquisition of Orscheln Farm & Home is not included in our guidance. We believe gross margin and SG&A will remain flattish to the prior year. Key drivers for gross margin include assumptions that transportation and inflation pressures will continue, but at a slightly lesser pace offset by our price management and continued limited promotions.

Turning to SG&A, we are planning to make investments in strategic initiatives and wages, offset by leverage of fixed costs, normalized incentive compensation expense, reduced COVID costs and operational efficiencies. As to the cadence of the business in 2022, Q1 is our toughest compare at 39% sales comp, benefiting from favorable weather and stimulus. In 2021, we estimated those two had 9 points of comp benefit on the first quarter. The gross margin and overall operating margin are also the toughest compare in Q1 as we had favorable mix of product due to weather and strong leverage on comps and limited pressure from inflation.

We anticipate comps to be flat to slightly positive in Q1, driven primarily from positive comp ticket. Q4 will have the strongest year-over-year sales growth due to the 53rd week. Sales comps are expected to be relatively consistent in Q2 through Q4, all within our guidance range. Our ninth distribution center is expected to begin operating in the fall. Our outlook is for capital spending in the range of $625 million to $675 million, with 70% for growth initiatives. Depreciation expense is estimated to increase approximately $70 million, up about 25% year-over-year due to the investments in our business. We anticipate continuing our strong track record of returning capital to shareholders. We are planning on share repurchases of $700 million to $800 million, with an expected 2% net reduction in weighted shares outstanding.

To wrap up, 2022 is positioned to be a great year for Tractor Supply. There is no doubt that Tractor Supply is stronger than we were entering the pandemic. We are delivering against our goals. And most importantly, we have a compelling, incredible plan to continue to grow. I look forward to sharing more on our long-term outlook later in the presentation.

Now, let me turn it back to Hal to share a broader update on our Life Out Here strategy. Hal?

[Hal Lawton, Chief Executive Officer]

Thanks, Kurt. Wow, what again outstanding 2021 on top of a record 2020. Yes, the team did a great job, they did, just fantastic. Alright. Let’s transition out of a typical earnings dialogue and look to the future. We have a very bright past with more than 83 years of serving Life Out Here. We are coming off a record 2 years of performance. But from our point of view, we are just getting started. We believe Tractor Supply is well-positioned for a bright future. We are in the early stages of the next transformation of Tractor Supply. This transformation should allow us to both grow our top line and earnings sustainably over a long period of time, while operating at a higher margin profile.

Given the robust growth of our stores and online that have experienced, we have had a step function change in our business that is evident in our market share gains, sales growth and profitability. We are dedicated to investing and to continue strengthening our position in the marketplace and separate ourselves from our competition. We are committed to creating sustainable value creation for all of shareholders, for our team members, our customers, for the communities we call home, for our supply chain and vendor partners and ultimately, our shareholders.

The roots of our long history of growth were established in 1938 when C.E. Schmidt founded a mail order catalog for tractor parts. We opened our first store in Minot, North Dakota, the following year. We serve Life Out Here. We are focused on the needs of recreational farmers, ranchers and all those who enjoy living the rural lifestyle. As I mentioned earlier, in December, we celebrated our 2,000th store opening in White House, Tennessee. This is a testament to all of our team members who continue to support each other, our customers and our communities. Not many companies have gotten to this milestone and I doubt C.E. Schmidt ever imagined this milestone when he started his tractor parts catalog business 83 years ago.

Our mission and values are the foundation for our success. Our culture is shaped around our mission and values. We have lived by these principles for over 80 years and we will continue to do so for decades to come. Our mission and values help us in our business decisions and they serve as guiding beacons to ensure we maintain course even in uncertain times. It is not something that you can put in a financial model, but it makes a huge difference on our bottom line, but they are more than that. Our mission and values are what you feel when you walk into one of our stores and talk with one of our team members. We are not like other retailers. We are a relationship retailer. Our customers are passionate about family, their land and animals and their communities and they count on us, Tractor Supply, to be their dependable supplier.

We are able to serve our customers so well, because we know our customers so well. We hire our customers. Our team members are members of and representative of the community. They are experts in equine and welding, gardening and pets. They are involved in 4-H and FFA. Our team members are the largest and most important strategic asset of our company. And I encourage you all to visit us out here to experience it for yourself. At Tractor Supply, we are committed to preserving Life Out Here for future generations.

13 years ago, we launched our stewardship program. As ESG has emerged as the universal standard for good corporate citizenship, we have adapted our stewardship program to align with this direction. And over the past year, we have made significant progress in our ESG efforts. A few highlights include significantly reducing our energy and water consumption, materially increasing the gender and ethnic diversity of our board, management executive committee and our overall team member population, conducting unconscious bias training for over 40,000 team members and implementing a new 6-week paid parental leave policy for full-time salary and hourly team members. In September of 2021, we announced new robust goals to further reduce our carbon emissions as well as continue our progress on diversity, equity and inclusion.

After exceeding our initial carbon reduction goals set in 2018, Tractor Supply established more aggressive commitments. By 2025, we will reduce our absolute greenhouse gas emissions by 20% from what they were in 2020. By 2030, we will reduce those emissions by 50%. And by 2040, we’re committed to achieving net zero emissions across all our operations. Over the past 2 years, we’ve rallied around the theme of stronger together and made material investments to accelerate our initiatives for DE&I. Recently, we announced a 5-year goal to support and advance underrepresented groups across our workforce, vendors, suppliers and communities.

Our commitment to being a good corporate citizen has been broadly recognized. Recently, we were named to Investor Business Daily’s 100 Best ESG Companies of 2021. Just yesterday, it was announced we were included in Bloomberg’s Gender Equality Index. And today, it was announced that we received a perfect score from the Human Rights Council. We are committed to being a leader in ESG as this is authentic to our mission and values while also making great business sense. Over our rich 83-year history, this business has a strong track record of success, complemented by consistency and resiliency. Highlights include 30 consecutive years of revenue gain, 12 consecutive positive comp store sales growth and an average share price performance of 28.3% since the year 2000. And this ranks as the fourth best-performing stock in the S&P 500 over the last 21 years. Thank you to our investors for their confidence and we continue to strive to earn your trust and build on it.

And today is all about that, the future of Tractor Supply. As demonstrated by the highlights of 2021 that you saw in our opening video, our business has never been stronger. Our team has done an outstanding job navigating the challenges in ever-changing environment over the last 2 years. We’re benefiting from many market trends that continue to be structurally sound. We have strengthened our customer base, and we’re gaining market share across our categories. Importantly, our total addressable market has grown materially, and we see significant opportunities for organic growth as well as an increased number of new stores. And we will continue to invest from a position of strength to capture this growth through our Life Out Here strategy.

Out here, Tractor Supply enjoys significant structural advantages. And these advantages have allowed us to gain substantial share over the past 2 years. Our unaided brand awareness is 55%. And that puts us among the best in retail and well above our farm and ranch competitors. With a network of over 2,000 stores and nearly $1 billion in digital business, supported by 8 million square feet across our distribution centers, we have a unique ability to serve our customers wherever and however they choose to shop. We believe no other rural lifestyle retailer provides a comparable experience. And we have deep relationships with our vendors and in many cases are their largest customer. Our Neighbor’s Club program has 23.6 million members. It is engineered to drive customer behavior, and it is the foundation for a sophisticated marketing platform and enables deep customer insights. Our brand, scale, our supply chain, our digital capabilities, our loyalty program, all in combination creates significant and enduring strategic advantages for our business.

Our structural advantages are the result of long-term investments in the foundation of our business and the deep seated values embedded in our culture. These roots have enabled us to adapt in the face of the pandemic and the ripple effects of other impacts like the tight labor market, unprecedented inflation and supply chain challenges that are impacting our industry. At the same time, broad-based macro category trends towards self reliance, world revitalization, pet adoption, home setting, these things are benefiting our business.

And when you add to that, the acceleration of trip consolidation as people are shopping single retailers more, you think about the adoption of digital trends and you put all these themes together and they are working to our advantage as customers value us for our proximity as a one-stop shop grows. These lifestyle changes are accompanied by long-term commitments by our customer to care for and maintain their land and animals. We believe these trends have staying power and are structurally and substantially sound. These changes align with our investments in the business and dovetail well with our strategic positioning as the dependable supplier for Life Out Here. And as the dependable supplier for Life Out Here, we offer a wide assortment for our customers’ lifestyle. Our total addressable market is large and growing, and it’s heavily fragmented.

In 2019, we estimated the total addressable market for Tractor Supply to be about $110 billion and we shared that with you in October of 2020. Today, we estimate our addressable market to be much larger at $180 billion. The tailwinds and structural changes that we just outlined earlier contributed an estimated $30 billion increase in the TAM. And that’s a 25% growth over the past 2 years in our market. But by comparison, if you look at our business, we grew 50% over the past 2 years and consequently gained significant share in this market.

Now in addition to our core market, we’ve expanded our TAM by over $40 billion given our investments and initiatives like Project Fusion and Side Lot, which have expanded our category offerings in areas like pet and lawn and garden. With a market share of about 7% of this $180 billion market, we see substantial opportunity for growth in an increasingly attractive market, both deepening our relationship with our current customers as well as reaching new customers. Given our total addressable market growth, continued strong performance of our new stores and our strategic initiatives, we’re revising our long-term store targets from 2,500 to 2,700 Tractor Supply stores in the United States. And we’re excited to serve 700-plus more communities over the next decade.

Of note, we view the Orscheln acquisition to be accretive to our overall store growth opportunity. Opening highly productive new stores is a core strength and competency of Tractor Supply. We continue to have strong new store productivity metrics, with performance outpacing our historical investment thesis. And our stores are profitable in year 1. With compelling returns, we continue to have significant runway for growth with high-return new stores.

Given the attractiveness of our market, we’re investing in growth through our Life Out Here strategy. We shared this strategy with you in the fall of 2020. And as a reminder, there are 5 pillars of our strategy, and they include deliver legendary customer experiences which focuses on driving greater traffic and increasing conversion; number two, advancing our ONETractor capabilities to reach new customers and deepen our connection with existing customers by offering a truly omni-channel experience; number three, operate The Tractor Way, which enhances the productivity and efficiency of our existing retail assets; number four, go the country mile for our team to ensure we continue to support and show our appreciation for our team members who drive our business every day; and then number five, generate healthy shareholder returns, which reinforces our commitment to effective stewardship of our shareholders’ capital.

To support these transformational growth initiatives, we increased our capital investments from $275 million in 2019 to over $600 million in 2021. We made excellent progress in year 1 of our strategy and are on track with our expectations. We continue to be very excited about our strategy given our customers’ response, the performance of the key initiatives and the robust long-term growth prospects. Two key tenets of our Life Out Here strategy are the Fusion and Side Lot initiatives. They are designed to drive space productivity and sweat our existing assets. Project Fusion is a multiyear store remodel program that both revitalizes the store environment and introduces an improved layout and expanded offerings. These changes are designed with the customer and our team members in mind to drive productivity through areas like enhanced experiences like pet washes and wellness clinics, but operational improvements as well to better support growing demand, things like our feed rooms. Also, though, driving space allocation trade-offs such as the service desk, but also widening our assortment across departments like apparel and animal and tools.

Complementing Project Fusion is the Side Lot initiative, which transforms and expands our existing outdoor side lot retail space to drive greater productivity and convenience with the addition of a garden center and a drive-through pickup lane to support our omni-channel technology investments. Importantly, these projects are delivering on the return expectations with material sales lifts, existing customer sentiment improvements and new customer acquisition. By 2026, nearly 100% of the store base will be in the Fusion layout, and 60% to 70% will have had executed the Side Lot initiative in it. By 2022, we plan to exit the year with nearly 30% of our chain in the Fusion layout and over 15% of our chain with Side Lot. And Seth will take us through a more detailed walk of these exciting transformations later in the presentation.

Another key component of our Life Out Here strategy is the enhanced focus on customer service. This isn’t just about training, but also about enabling our team members to spend more time with our customers. To accomplish this, we rolled out the FAST program, the Field Activity Support Team. And we started this program with 1,200 team members in late 2020. And we expanded it by another 200 in 2021 and plan to add 300 to 400 more team members in the first half of this year. This team’s sole focus is on merchandising execution. And this specialization improves our store merchandising while simultaneously enabling our store team members to focus more time on customer service. And with over 95% on-time planogram completion, our stores have never looked better or been more shoppable for our customers. And this team enables improved store productivity and is funded significantly by our vendor partners. It’s truly a winning-winning program for all of our stakeholders. And John will share more details on our initiatives to fuel our legendary customer service later on.

Tractor Supply is fortunate to have a highly engaged and loyal customer base. Last year, as we discussed, we converted our Neighbor’s Club from an affinity program to a tiered points-based reward program. Simply said, the more you spend, the more you save. And this conversion is resonating with our customers. And year-over-year, we’ve added 4.6 million new customers to the program, and we’re seeing broad strength continuing across our customer base. More customers than ever are shopping at Tractor Supply. And these customers are making more trips and are spending more money per trip. We’re experiencing strong retention of customers that have shopped us over the last 12 months. Our retention rates continue to run above our historical standards. And I’m excited for you to hear more customer insights and details on how we intend to continue to engage our new customers and drive retention of our existing customers from Christi.

More than 5 years ago, we introduced our ONETractor strategy that drove significant progress in providing a seamless customer experience. Our focus on engaging with our customers anytime, anywhere and any way they choose has allowed us to reach nearly $1 billion in e-commerce sales last year. Our customer is deeply engaged with Tractor Supply. And this transformation is happening across the whole shopper journey. Our customer behaviors continue to evolve, embracing convenient ways of shopping with a continued preference for mobility. Since launching our mobile app in late 2020, we’ve had 2 million-plus downloads, with the app already $100-plus million platform for us. We remain focused on introducing new capabilities, improving the shopping journey and ensuring we have scalable platforms.

As we enter 2022, we are more excited than ever about the future of Tractor Supply. We see significant opportunity to continue to grow the business, expand our competitive moat and drive business productivity all the while creating value for our shareholders. As we’ve completed the rollout of FAST and Neighbor’s Club, we freed up some bandwidth, and that’s going to allow us to focus on two new initiatives as well as evolve the focus of our digital initiative. The first one is lead with legendary service. We consistently rank in the top 10% to 20% of retailers on customer service, right out there with the best of them. But our goal is to be number one. And we have all the assets to achieve it. We’ve got the right format, the right team, the right culture. And we have made and will be making investments in our team, in their technology and in their training. And you’re going to hear more from John on our plans in this area in his presentation.

Increasing mobile engagement. Mobile will be the next moat that we create around our business. We’re going to convert our nearly 24 million Neighbor’s Club members into power users. And Rob will share more highlights of our plans to accelerate our growth and achieve more than $2 billion in digital sales by 2026.

Deliver on C.U.E. We talked often about how important this business is to us. We have the number one market share in bag feed, and we’re in the top five in pet food. And given our growth in these categories over the past 2 years, we’ve increased cubic volume by 26% running through our stores compared to 2019. These are destination categories. And it is critical for us to ensure we have capacity for future growth and, importantly, that we are the lowest cost to serve in the market in these categories. And our supply chain is a critical differentiator for us to deliver on C.U.E. And Colin will share more details on our ability to continue to widen the gap with our competition.

Given our recent performance, and the significant opportunity that I’ve just outlined, we’re updating our long-term guidance. Now we’re maintaining our sales outlook of plus 6% to plus 7% in spite of a much higher base of sales. We’re increasing our operating margin guidance to a range of 10.1% to 10.6%, and that’s an increase from our previous guidance of 9% to 9.5%. We’re also increasing the top end of our range for EPS growth to 11%. And notably, we’re increasing our dividend payout to 40% while maintaining our commitment to share repurchases. And we’re spending approximately $650 million annually of capital. These are aggressive but achievable targets that will create significant shareholder value over time. And Kurt will share more details as he focuses on our ability to deliver strong and sustainable total shareholder return.

From our founding 83 years ago, Tractor Supply has proven to be a business model that has stood the test of time to be resilient and differentiated. This business has shown the ability to evolve over the years to reflect our customers’ changing needs. And we’re investing to continue to evolve and capture the significant opportunities for growth. And underpinning our strategy is an experienced retail team that knows retail and our culture and our team members, and they are passionate about the out here lifestyle. As we enter year 2 of our multiyear Life Out Here strategy, our business is substantially stronger than before the pandemic. Our resilient and differentiated business model allows us to capitalize on the structural consumer trends, benefiting our business with a long runway of growth ahead of us.

We have momentum in our business. And our results demonstrate that our multiyear Life Out Here strategy is working. We will continue to evolve our business from a position of strength. And with that, I’ll turn it to the team to walk you through more detailed plans. Thanks so much.

[Mary Winn Pilkington, Investor Relations]

Thank you, Hal. Building on Hal’s outlook on the positive momentum of our Life Out Here strategy is Senior Vice President of Marketing, Christi Korzekwa. Christi will share insight on our potential to capitalize on consumer behavior trends that emerged during the pandemic and several exciting initiatives to forge a deeper connection with our growing customer base. Christi?

[Christi Korzekwa, Senior Vice President, Marketing]

Thank you, Mary Winn, and good morning. As you’ve already heard from Hal and Kurt, our future at Tractor Supply is extremely bright and promising, that’s why I’m excited to take a few minutes and give you an update on our customers, provide some insights into what we know about our ever-expanding marketplace and how we are using our industry-leading Neighbor’s Club program to drive our growth. Most importantly, we continue to see significant growth in the farm and ranch market which, as previously mentioned, we estimate to be more than $180 billion. And the pandemic continues to reshape and rewrite customer behavior. And it’s why we see such a large migration of customers from urban centers to rural and suburban areas moving into Tractor Supply’s neighborhoods.

We also have seen customers’ homes become their sanctuaries during the pandemic, inspiring more home, outdoor living and land projects. And we only see that continuing as hybrid workforces are the new norm. We’ve also seen more pets become family members with record adoptions across the U.S. And with the pandemic’s disruptions to daily life and the broader supply chain, we’re recognizing a growing interest in self-reliance, sustainability and the desire to consolidate shopping trips. And this migration into a more rural, self-reliant lifestyle, or what we call Life Out Here, we believe, is a continuing cycle with lasting tailwinds. And according to our analysis, we have the potential to capture the interest of more than 40 million additional customers in our trade areas who do not shop at Tractor Supply today.

So let me share some insights into our current customers. We’re seeing significant expansion with increased participation from our core farm and ranch customers and a surge in new customers. Core farm and ranch customers increased the number of animals and pets they care for and they expanded their gardens and land projects. They rely on Tractor to be open and ready to support them and they prefer Tractor over our competition. Based on data from Earnest Research, since the onset of the pandemic, Tractor Supply has seen six consecutive quarters of outpacing the farm and ranch channel in market share gains. And beyond our core customer, we have seen record levels of new customers as more move into our trade areas, adopt new pets, start of flock, and grow gardens.

What both customer groups share is a passion or growing passion for Life Out Here. And with the increase in share among existing customers and the addition of so many new customers, our investment in and growth of the Neighbor’s Club to a best-in-class loyalty program this past year is key to our success. We’ve reimagined our Neighbor’s Club program to enhance our Neighbor’s Club members’ benefits and experiences. Based on feedback from our customers, we relaunched the Neighbor’s Club program last April, creating a tier-based program, enabling members to earn loyalty points tied to their spending levels. They can also access tier-specific benefits such as same-day delivery and trailer rentals. In essence, the more they spend, the more benefits they receive. And we continue to enhance the program with new benefits and member exclusive experiences every day. We see this program as another differentiator for Tractor Supply.

No other farm and ranch program offers the scale and exclusivity of benefits that Neighbor’s Club can offer our members. The response to our Neighbor’s Club enhancements continues to be overwhelmingly positive as it increases customer retention and market share. Our program enrollment is now 23.6 million members strong and we added over 4.6 million members in the last 12 months. Our members represent 70% of our sales, they shop more frequently and they spend 3x more than nonmembers. We also annually retain over 97% of our high-value Neighbor’s Club members. And 90% of those members were active in the last 3 months. Our overall customer retention and recency is industry-leading. In addition, we’re seeing new customers join the program at record levels, with over 30% of all new customers joining with their initial purchase.

We also continue to gain extremely rich and valuable insights about our customers and they are shopping us more frequently and across more categories. For example, taking a deeper dive into our core customers, we’ve seen explosive growth in our high-value farm and ranch customers. The number of extremely loyal customers, those who spend greater than $1,000 per year, has grown over 50% since 2019. While many of these customers rely on us for feed and supplies to take care of their growing pets and animals, we’ve learned they also shopped more broadly across our store as part of the continued change to consolidate all of their shopping trips. And we discovered their spending was structural across more high-repeat categories, including pet food, gardening, tools, home and outdoor living, supporting their self-reliant mindset for their families, homes, animals and land.

Here is a snapshot of a customer from our highest loyalty tier, Preferred Plus. Jake has been a Tractor Supply regular for years, but we can see he’s changed his behavior over time, shopping more at the store and more categories each year. Many of them repeat consumable categories. He now spends approximately $4,500 each year and shops over 30x. Analysis of his transaction shows he regularly shops our pet food and feed categories, but he also frequently expand his basket with purchases in other categories like gardening and outdoor living. It’s so exciting to see millions of our high-value customers shop us in a similar fashion. But also playing a meaningful part in our growth are the 19 million new customers we’ve welcomed since the beginning of the pandemic. Many customers made initial trips in 2020 for home and yard improvement projects to shop for pets as well as for initial purchases in the backyard poultry and gardening categories.

Because of our Neighbor’s Club program, we quickly recognized the surge of new customers early in the pandemic. And we were able to develop dedicated relevant marketing messages to connect with these new customers drive awareness for our pet, home and poultry-related offerings. These efforts help a record number of our new customers, with the highest recorded retention. Over 55% of our new customers returned to Tractor Supply for another purchase. These 10 million-plus new customers are engaging in high repeat activities, such as starting a new garden, adopting a new pet or starting a flock. And to bring these new customers to life, the data from our Neighbor’s Club regarding our new customers’ show they tend to be younger, more female and digitally engaged. We’re also seeing more millennials, who represent 30% of our new customers.

Sarah is an excellent example, visiting us for the first time in the early part of 2020. She is one of our more than 1 million customers who started a backyard flock during the pandemic. And that initial poultry trip led her to buying pet food, clothing and gardening supplies from us. Like many new customers entering the poultry category for the first time, Sarah needed and continues to need trusted advice and expertise regarding her new flock, and we’re providing that. Whether it’s information we’re sharing through our digital channels or our store team members, we believe that our Welcome to Life Out Here marketing campaign and our offering of expert know-how in the Out Here lifestyle is a significant differentiator for us.

I do want to point out something very important here. While Tractor Supply is enjoying record highs for attracting new customers, we’re also seeing all-time highs in their basket size. Average sales for new customers in 2021, was up $26 from the prior year, marking an expansion of nearly 40% since 2019. The rich insights we gain from our Neighbor’s Club members also allows us to personalize our messaging in a highly targeted and relevant manner. We can effectively segment our customers based on their interest because we know which categories they shop. Moreover, we know where they live and the local events they are passionate about. This continues to allow us to personalize our messages to each customer based on their specific interest and reasons for shopping Tractor Supply.

Our core farm and ranch customer is more likely to receive content regarding livestock and equine feed or bulk pricing on fencing, while our newer customers might receive pet or poultry messaging. We have robust capabilities to target these personalized messages across various marketing channels and at significant scale, in digital advertising, within our mobile app, e-mails, push notifications, social media, text messages and our sizable website. This ability to deliver highly relevant messages to the right customer at the right time has allowed us to build an even stronger relationship with our members.

Another major shift we have made to capitalize on our rich and growing customer opportunity is a transition from traditional promotional print marketing to highly targeted and broader reaching, brand building television, streaming and digital support. Early in the pandemic, we expanded our brand marketing to leverage national cable news and digital streaming while also partnering with marquee television properties and high-impact programming that resonates with our customers. It was an approach centered on programs that genuinely support our customers’ passions and Life Out Here, including the wildly popular Yellowstone series, it’s prequel 1883, Professional Bull Riding, NFL Sports and home networks like Discovery and HDTV. Looking ahead to 2022, we plan to lean deeper into this strategy as we have seen it drive the significant increases in key brand awareness metrics.

At the beginning of the pandemic, we have recognized that we were one of the best kept secrets in retail for new customers. Then as more new customers shopped with us and became interested in living Life Out Here, we continued to grow awareness with our TV and digital strategies. We know from our customers that our assortment, convenience and know-how are significant reasons that they shop at Tractor, so we highlight these in all of our marketing. And as the metrics show, our expanded and targeted marketing efforts are paying off. Our unaided brand awareness is up 2,100 basis points. Customers considering Tractor for their Life Out Here needs is up 1,000 basis points. And we have seen a 25% increase in our ranking as their favorite retailer of choice. These are remarkable results we are incredibly excited about, particularly as we look to future growth. We are continuing to elevate our brand perception as our customers’ retailer of choice and are well on our way to making Tractor a household name synonymous with Life Out Here.

So looking ahead, here is our game plan. First, Tractor Supply is part of a robust, growing and attractive market. We see significant opportunity for durable and sustained growth. Second, our customers are extremely engaged and loyal and return again and again, making us their retailer of choice for Life Out Here. Third, Neighbor’s Club is an industry-leading loyalty program, continuing to grow at a record pace, and is a key differentiator that allows us to drive expansive, continuous growth of our highly engaged customer base. Fourth, we have one of the best marketing technology platforms in the industry, allowing us to customize messages that cultivate loyalty. And last, we will continue our meaningful investments in high-profile, marquee marketing partnerships reinforcing our position with our customers and all of those potential customers that we are synonymous with Life Out Here.

I look forward to answering any questions that you may have in our upcoming Q&A session in just a bit. But before we go to John to talk about legendary customer service, let’s hear from one of our customers.

[Video Presentation]

[John Ordus]

I love hearing stories like that from our customers. I get a bunch of notes every week from our customers and our team members. I will share another one with you in just a few minutes. But I am excited to talk to you today about something I am very passionate about, taking care of our customers. I believe we have the best customers in retail. And our job is to always live up to their expectations at Tractor Supply enables them to live on their terms. I will walk you through how we are going to lead with legendary service in 2022 and beyond. We are going to talk about our mission, GURA and the Country Mile, our stores, team members and customers, leading with legendary service and our game plan for growth.

Our mission is to work hard, have fun and make money by providing legendary service and great products at everyday low prices. Our store team members take the words legendary very serious. That means your visit will be the best at any given time in any one of our stores. Our team members are empowered to do whatever it takes to support our customers. Our mission to be legendary is not new to us though. Over my 24 years at Tractor Supply, we have had a dedication to be legendary. We have been on a journey to deliver on this promise to our customers for many years. Looking ahead, this is a significant step-up in our commitment to legendary customer service. We have strong foundational values and the culture, both in the field and at the store support center that puts the customer first in our decision-making.

In 2019, we launched our Tractor Way operating model, which continuously optimizes the relationship between task time, customer time, enabling more time for service. Further, we continue to invest and deliver on our omnichannel roadmap to keep pace with our customers’ demand for convenience and our store team members’ ability to execute our new offerings, things like buy online, pick up at store, ship to store, and our drive-thrus. Today, above all things that we do, it’s our team members that make a difference to our customers. When you have a horse, you love talking about your horse. When you weld, you love talking about welding and how to weld. That’s why we hire our customers, they live the Out Here lifestyle and as team members can provide seasoned advice.

We have a customer service approach called GURA. GURA is our way of life. It’s our battle cry and it’s how we drive our results. The G in GURA is for greeting. Every customer should be greeted with an open-ended greeting. The U is for uncover. Our team members ask the right questions to better understand exactly what the customer is looking for. For example, the age of your dog, how many acres are you going to be mowing. Once we know what the customer needs, we can move into the R for recommend. Recommend is where the power of the red vest comes in and our team member’s seasoned advice makes a difference. Our customers trust us to give them the best product recommendation. A is for ask, this is where we offer to help the customer load up their purchase or take it to the register for them. And with our mobile POS units, we can ring up our customers anywhere in the store.

Our team members know what we value and what we reward. We value people who make commitments and keep them. Our commitments matter and our promise to be legendary is more than just words in our mission and values. We have strategic programs like Hi5 and our Country Mile program that reward desired selling behaviors. Hi5 is all about uncovering and recommending. Our Country Mile program is all about recognition. Whether it’s peer-to-peer, team-to-team or supervisor-to-team, this program is an opportunity for team members to recognize one another for going above and beyond in our commitment to the customer and to each other. Last year alone, we gave over 300,000 Country Mile badges.

By rewarding what we value, we have further positioned ourselves as a relationship retailer. Let me give you an example about Jacob, our team member in our Jonesborough, Tennessee store. This is from Jacob’s manager. I had a customer come to me this morning to let me know what a great team member we have in Jake. Last week, the customer went outside about 7:30 p.m. to find they had a brand-new baby goat. The mother was not allowing it to nurse, so they jumped in their vehicle and drove straight to our store. They barely made it before we closed, but they realized once they were there that they had forgotten their wallets at home. Jake said, “That’s not a problem,” and paid for everything the customer needed to save the baby goat. The customers came in this morning to pay Jake back and let him know that the baby had survived and was doing well. Jake was taken aback and said he had truly done it out of kindness of his heart. Jake, thank you for demonstrating what true kindness and community is all about.

Our customers are special to us at Tractor Supply. I get thousands of positive letters from customers with great experiences inside our stores, just like that one. What our team members do inside our stores every day is making a difference. They love this lifestyle because they live it. Tractor Supply is already really good when it comes to the customer experience, but we are on a journey to being legendary. And being legendary means best in class. We hire for winning attitudes. We are enhancing our training for selling skills and product knowledge. The size of our box allows us to see the customer at any given time and get them out of the store as quick as they would like. We are moving all three of these metrics to be the best.

Our Tractor Way operating model is the foundation and will continue to be. Our process efficiency mindset is what allows us to compete on key aspects, like team member knowledge and friendliness, without overinvesting in payroll. Through the Tractor Way, we unlock value for our customers through improved on-shelf availability and more efficient processes that created time for selling. Our field activity support teams are another example of applying the Tractor Way philosophy to remove task work from the stores and make that work more efficient for the teams that are doing it. Our FAST teams are doing an outstanding job and we have seen significant increases in completing tasks on time. By removing this highly variable work from the stores and giving it to the specialized team, we have again provided more time for our store team members to execute GURA.

We have spent 2021 adjusting the Tractor Way operating model to reflect the needs of our higher-volume stores. We have also begun to further define roles and responsibilities and related metrics, including that of the sales team versus the operations team versus the FAST team. Expanding on these delineation of roles, we have optimized our scheduling to define when work should get done and what type of work is best done off hours, which allows us to sell during the power hours. We are also working on what other tasks we can take to eliminate, to repurpose, to make sure that we are selling and where an hour of labor investment is best spent. We will measure this operating model through metrics we know work, like GURA, implementing new traffic counters and measuring conversion to better optimize our scheduling capabilities and to identify and coach lost sales opportunities.

This is full contact retail. And at Tractor Supply, we believe in belly-to-belly selling. We know that execution of GURA has a direct impact on our customers’ experience, sales and our units per transaction. In fact, when all four steps of GURA are executed, we see an over 15% increase in that transaction. As such, to support our operating model changes, we will heavily focus on improving our training and ability to execute GURA. Our leadership team will champion this program through how we message, what we message and our actions always starting with the customer and the why behind what we are asking. We will begin the shift with the re-launch of GURA at our upcoming leaders meetings and annual sales meetings.

Everyone in operations will be talking about the customer experience and GURA. There will be new GURA sales leader scorecards and improved visibility for our district managers. All our communications, meetings, celebrations will be centered around the customer experience and GURA. We will also train to drive confidence in executing GURA. Part of this training will focus on vendor-sponsored product training, selling skills training and product knowledge training. On our team members’ first day, as we tractorize them, they will have enhanced GURA training to make sure we onboard them the right way. And we continue to invest in our district learning centers to make sure our management teams understand how to coach selling.

Enable convenience is all about equipping our team members to sell both within the four walls of the store and beyond. Our single integrated team member mobile device is putting all the power and information in the hands of our team. We continue to expand on Theatro capabilities for driving sales and team member efficiency. Our team loves these communication devices, and we are already seeing efficiency and communication improve. We are getting to our customers faster than ever before. We are teaming up cross-functionally to bring the best tools to our team members and customers like things like Wayfinder, conversion metrics and to ask the expert. And we are building upon our current strategy to roll out greenhouses with drive-thrus.

Alright. So, here is our game plan for growth and how we are going to lead with legendary service. Our team members provide a differentiated relationship-driven customer experience. Our customers trust our team members’ seasoned advice and product recommendations. Our operating model will be used to create more customer time. We will continue to reduce task and move task work to off-peak hours. New and existing technology will be used to create even more convenience for our customers.

Our team members are our number one strategic asset. They are the backbone of this company. We will drive productivity, be more efficient with tasking and service, leverage expenses, continue to invest in our FAST team and we are going to deliver on our commitment to provide legendary customer service to every Tractor Supply customer. We will be best-in-class on customer service.

[Mary Winn Pilkington, Investor Relations]

Thank you, John. We will take a moment here for a quick break. When we return, Chief Technology, Digital Commerce and Strategy Officer, Rob Mills, will share details on consumer-facing digital initiatives; Executive Vice President and Chief Merchandising Officer, Seth Estep, will provide an update on remodeling efforts inside and outside of our stores; and our Chief Supply Chain Officer, Colin Yankee, will share our vigorous efforts to meet strong consumer demand in a challenging supply chain environment. We will see you back in a few minutes.

[Video Presentation]

Welcome back. A reminder that a Q&A session with members of our executive team is coming up after this round of executive presentations. So, please stay with us. Joining us now to share how investments in our digital platforms are providing better customer experiences is EVP, Chief Technology and Digital Officer, Rob Mills.

[Rob Mills]

Thank you, Mary Winn. I am very excited about being here today to talk about the activities that we will continue to grow our legendary customer experience. It’s great to be here. We have made significant opportunities to continue to grow and capture and build momentum on our digital business we have seen over the past few years. We have accelerated our digital journey, focused on creating a seamless experience regardless of how our customer shops anytime, anywhere, any way.

When we introduced our Life Out Here strategy in 2020, this continued to be a focus for Tractor Supply, continuing to advance our ONETractor digital capabilities. Over the past 12 months, we have made significant progress on this journey. The team is living our values every day, driving change, taking initiative and being accountable to the expectations of our customers and our shareholders, introducing new capabilities to enhance our customer interactions, such as curbside pickup and our customer mobile app. We have taken a mobile-first approach in everything we do, using geofencing, which enables store efficiency and enables fast and convenient service for our customers.

We have also worked to enrich the customer experience across browse, search and checkout. We are leveraging the rich data from our Neighbor’s Club loyalty program to serve personalized and relevant content to our customers. And we have expanded the ability to purchase from inventory beyond our stores, allowing our customers to buy items that are in transit from our DC to our stores, ensuring that they have access to the products they always need.

As you heard Hal mentioned, we continue to grow our online presence, completing our 38th quarter of double-digit growth. Our customers continue to leverage the digital convenience of buy online, pick up in store and curbside pickup. We have seen continued adoption of our customer mobile app as we rolled out capabilities that provide convenience and interaction with our customers. Within 1 year, we have grown 10% of e-commerce sales occurring on the mobile app. We have grown visitors to our website and our mobile app nearly 20% year-over-year and attracted 1.4 million first-time customers through the digital channel. Over the past 12 months, we have driven over 2 million downloads within the mobile app. And even with this digital growth that we have seen, there is still a tremendous opportunity ahead of us compared to other hardlines and specialty retailers.

We are definitely the digital leader in the farm and ranch industry. In just 2 years, we have doubled our digital sales, now representing 7% of our total business and have plans continue to grow share to over 15% by 2026, exceeding $2 billion of our total sales. I will share more about our plans for growth today, all of which focuses on the mobile experience that Hal shared earlier. Our customers’ behaviors continue to evolve, embracing convenient ways of shopping and continued preference on mobility. Over 70% of our customer interacts with us on a mobile device, outpacing the industry. And their satisfaction directly ties to the convenience the mobile interaction provides. Our customer satisfaction scores are 500 basis points higher when our customers shop on the mobile app.

We will differentiate our digital offering for our customers through the mobile app. For example, we deployed the ability for a customer to request propane refill from the app. This capability simplifies the purchase process, giving the customer the ability to notify a team member that they need assistance with the refill. Through a tap of a button, a team member is notified that the customer is in the parking lot and needs a refill. The team member can acknowledge the request, proceed to the refill station and complete the transaction on a mobile device, making it simple and convenient for the customer. By extending the team member and the customer interactions beyond the store, we are able to improve the customer experience by providing two-way communication, allowing the team member to know and plan for the next customer interaction, which ultimately leads to the legendary customer experience.

So, let’s talk a little bit about what’s ahead of us on the digital front. Our activities in 2022 will focus in three primary areas, areas that Hal referenced earlier when he talked about advancing the ONETractor capabilities and that are part of the Life Out Here strategy. First, increasing mobile engagement by creating the best-in-class digital interactions; second, connecting our customers to care for their pets and animals, capitalizing on the strengths in these categories; and third, advancing the omnichannel delivery experience by leveraging conversational commerce.

Let’s look at each of these. Our customers tell us through data. They prefer to interact with us through a mobile device. We will continue to increase engagement by providing legendary customer service through frictionless experiences. By using data analytics powered by artificial intelligence, we will drive personalized experiences. And we will continue to differentiate the experience by introducing capabilities that improve the customer interactions and convenience. We will leverage our Neighbor’s Club loyalty program to drive engagement with easy access to program benefits, including rewards and the market, catering to our top-tier customers, providing tools to make their Life Out Here easier.

Our Neighbor’s Club power users will easily view reward status, offers and coupons as well as store payment options within a newly redesigned wallet. We will integrate reorder options and introduce Wayfinding to make locating products easier and faster for our customers and our team members. And we will allow customers to obtain on-demand assistance from anywhere in the store or outside the store. The mobile app will drive a personalized experience to our customers, and we will talk to our customers about products and services they need. Using data and analytics, we will offer knowledge to our customer base on their shopping trends, while introducing one-stop shop for all customers’ pet needs within the mobile app.

My Pet feature will provide customers with easy access to pet prescriptions, vet services and managing their product subscriptions and scheduling interactions. We will make the experience for the customer, embedding the capabilities into the shopping experience and updating the customer pet profiles based upon their shopping habits and purchase. We will continue to differentiate ourselves by integrating the in-store and digital experience to create a best-in-class omnichannel experience, integrating our digital shopping cart with the in-store cart, allowing checkout on a mobile device or with a team member, introducing one shopping cart regardless of how you shop or this channel you shop in. We will offer our customer connections to our team members from any locations, introducing conversational commerce embedded in the mobile app. This will allow us to provide seasoned advice about their projects, land and animal anytime, anywhere, any way.

Providing connections to both the products and services our customers needs for their pets and animals is a part of what enables our ability to deliver legendary service and be the authority for Out Here lifestyle. The My Pet feature, I mentioned will create a one-stop-shop experience for all things related to our customers’ needs for their pets, from prescription medications to reoccurring feed or food needs, offering product subscriptions delivered to their home or set aside for pickup in store, we want to make any item our customer needs easily available, making it convenient and dependable.

As the lifestyle leader we have a significant opportunity to continue to widen the gap with our competition in this space. One of the most important parts of the digital interaction is the delivery experience, ensuring that no matter how our customers want their products we exceed their expectations. By continuing to bridge the customer team member experience across the digital lines, we can improve the customer experience and the ability to meet their needs while gaining market share.

Let’s look at a quick example. Kelly has placed an online order for curbside pickup. She has purchased several items, including bags of chicken feed and a bag of oyster shell. In Kelly’s customer profile and her mobile app, she has designated a preference to be contacted by a team member in the event a product is unavailable, allowing the team member to suggest a substitution. When Kelly’s order is submitted, a team member in the store receives a notification on his personal communication device that a curbside order is ready to be picked. He picks the chicken feed and then realizes the store doesn’t have the oyster shell she ordered. Mark presses the substitution button on his mobile device and is immediately connected to Kelly via chat. He apologizes for the out of stock and provides her with two similar options, including one of our exclusive brands. Kelly chooses the substitution and Mark completes the order. By keeping our customers and our team members always connected, we can extend the legendary customer service Tractor Supply is known for beyond the four walls of the store. I am very excited about the opportunities that lie ahead of us as a company and in the digital business.

As you hear from Seth and Colin, you will see the items I have shared support our broader Life Out Here strategy from continuing to evolve the Neighbor’s Club loyalty program to supporting legendary customer service to how we move product efficiently from our distribution centers to our stores. Each element of the Life Out Here strategy is tied together, ensuring that the work we are doing is focused on supporting the needs of our customers and the Out Here lifestyle, providing a great team member experience and a best-in-class omni-channel experience.

The three key highlights I want to leave you with today are: first, we will capture significant market share by creating a best-in-class digital experience; second, we will deploy best-in-breed technology that capitalizes on our unique strength in the pet and animal categories, widening the gap with our competition and we will own the relationship with our customers at all times through conversational commerce, maintaining our position as the Out Here authority. We are uniquely positioned to deliver against the significant digital opportunity we see for Tractor Supply. The Tractor Supply team continues to be excited and passionate about the digital vision and how it is fueling our growth. I am thrilled and proud to continue to be a part of this great organization.

Seth, I will hand it over to you.

[Seth Estep]

Thanks, Rob. Good morning, everyone. Tractor Supply has been busy making headway with our Life Out Here strategy. In 2020, we outlined initiatives to grow space productivity as a major opportunity to deliver consistent comp store sales. This was a primary goal of our Operate the Tractor Way pillar.

When we launched this strategy, we knew we had significant opportunity for improvement in sales per square foot compared to our hardline and specialty retail peers. Since then, we have been focused on our Project Fusion and the Side Lot transformation to drive convenience and to optimize our indoor and outdoor assortment. Importantly, we are making progress and we are driving significant productivity gains. Today, I want to walk you through a local store, updating you on the improvements and how we have continued to evolve our store layout with Fusion and Side Lot, highlighting some of the successes we are seeing as we rollout these strategic initiatives. Let’s get started.

Welcome to one of our Tractor Supply stores, where we recently completed a combo Project Fusion and Side Lot Transformation remodel. For today’s tour, we are starting outside in our roughly 4,000 square foot garden center. When we first introduced our space productivity initiatives, we highlighted that our most significant opportunity to drive incremental sales, traffic and market share was through our Side Lot Transformation program. In this, we convert a space that’s traditionally been utilized for storage to a garden center that’s tailored to the lifestyle of our Out Here customers.

We knew from customer research that the lawn and garden category, specifically live goods and bag products, was the number one hobby of our shopper where they did not look to Tractor Supply as their primary destination. And as the weather turns warmer and we enter spring 2022, we are excited to have more than 160 garden centers to start capitalizing on this opportunity. Our merchants have been aggressively adding growers to prepare for the season. In these garden centers, we will be offering a broad assortment of live goods with a focus on vegetable gardening, shrubs, trees as well as a full assortment of color to create excitement with our customers.

Our offering is differentiated for the Out Here lifestyle. We are also introducing additional products in seasonally relevant categories, such as furniture, planners, drilling and outdoor living. From our early reads, we believe that these additions will drive share of wallet with both our core customers and attract new customers to Tractor Supply. From a performance perspective, we are seeing positive lifts in the seasonal department despite very few stores having a garden center in 2021 during the peak season. In our 27 stores where we added only a garden center and did not do a Fusion remodel, we are seeing triple-digit lifts in our live goods and the lift for packaged seeds leaves the chain with strong double-digit lifts on top of triple-digit lifts in 2020.

Let’s now shift to the exciting trends of our Fusion and Side Lot combos, particularly the 15 combo stores that were opened for the 2021 spring selling season. In those stores, we are seeing double-digit sales lift performance for the entire store and strong performance across all merchandising divisions. Specific to our seasonal division, which includes our lawn and garden categories, the total seasonal product division lift in these stores is up more than 30% and we are getting incredible feedback from our customers as a shopper updated side lot, in our updated seasonal corner, in our fusion layout. In aisle, we are seeing successes in handheld products, belts, blades and everyday lawn and garden items.

Looking ahead to 2022, all garden centers will be built in combination with a Fusion remodel as well as the vast majority of new stores will open with the garden center. As we know, we get the greatest sales lift when we combine our Project Fusion and our Side Lot initiative. These categories are a key focus for Tractor Supply to continue to capture share as identified in our total addressable market opportunities. I hope you share our excitement with our Side Lot Transformation.

Now, let’s walk a few of the other areas inside the store and highlight some of the updates and the initial results that we are seeing from our Project Fusion remodels. As you enter the store, our customers immediately experience a dramatic update as they are greeted by the customer service hub, which consolidates our cash registers and customer service desk. Sight lines have also dramatically been improved with the implementation of the new Department Lightboxes. Customer feedback to these changes has been overwhelmingly positive. Our shopper survey results show positive increases in cleanliness, speed needs and checkout and availability of team member assistance. Also, our score for a variety of merchandise in store has improved more than 120 basis points in our Fusion customer survey results. And by moving the customer service desk to the hub, we added approximately 300 square feet of selling space in the center of the store that is more effectively being used to drive space productivity and show additional merchandising programs.

So as we move to our pet department, we have reworked adjacencies, updated space allocations and increased the number of pallet positions. One of the biggest changes in our Fusion pet layout is leading the flow of the department with ct products. We know we have significant opportunity to grow sales and share of wallet in cat. And by placing it on the first aisle on Fusion, we are giving greater visibility and access. And when looking at the results, we are excited to see that our Fusion stores are over-indexing in new customer growth in this category. And existing Tractor Supply customers buying in this category is up 600 basis points versus non-Fusion stores. We are also seeing positive sales lifts in wet cat food and supplies across all-time periods post remodel.

Since we first introduced you to our Fusion layout, we have also had an additional run of dry dog food in select stores, like you see here, which maximizes holding power and increases space allocations to accelerate growth in this key category. We believe approximately 40% of the Fusion remodels will have the space to add this additional footage in our pet department. We are confident that these changes will continue to drive our market share gains in pet.

In addition to pet products, we continue to enhance the services we offer our pet parents, like self-service pet wash stations, which are now in more than 500 locations. In a small subset of stores, we are also piloting wellness centers, which operate in 44 stores to-date with a full-time veterinarian staff 5 days a week. Wellness centers are also complemented with mobile pet vet clinics that operate in more than 1,400 stores today. And in 2021, we serviced over 1.2 million pets through pet wash, wellness centers, pet vet clinics and televet solutions. We will continue to look to grow our pet services as an opportunity to increase customer lifetime value and bring in new customers.

In our Fusion stores, we continue to drive space productivity in our livestock feed, health and supplies categories. Just like dog food, these sections, along with the entire pet department, are among the most highly productive areas of the store already. We have updated adjacencies, reallocated square footage and visually improved the department to support this important category. The most significant positive impact is the equine supplement, leg care and fly control categories, which are trending between 400 and 800 basis points above trend. And in select stores, we have added a feed barn that gives the stores the inventory holding power needed to stay in stock and allows customers to drive through and load heavy animal feed, fencing and other core categories directly into their vehicles. These are trip-driving categories where we will win as the 100% dependable supplier. Colin will share more details on how we will widen the gap versus the competition in this key area.

Moving into our truck tool and hardware area, this part of the store experienced some of the most significant merchandising updates with the introduction of new brands, new fixtures and significant changes to space allocations. As a result, we are seeing growth in traffic counts, attachment and cross shopping in our power tool department. We see that existing customers are finding and shopping the power tool aisle for the first time. And these customers are much more likely to attach an accessory to the power tool purchase at a Fusion store versus a non-Fusion store. We have also rolled out this tool crowd concept to more than 300 additional non-Fusion stores based on the early results. And what really excites me is that our TAM assessment indicates that these are categories, where we continue to have significant share opportunities.

And finally, let’s take a look at our apparel section, which is experiencing the most significant lifts inside the store across all of our Fusion remodel categories. In many remodels, we actually reduced the footprint of the department by consolidating our presentation, with new fixturing and merchandising. In these Fusion stores, apparel is running at comp above 35%, with high single-digit lift as compared to control stores. This is a category that gets an immediate response from the consumer and the lifts have been sustained over time. We believe this is attributed to the visual impact post conversion, updated space allocations of categories and brands as well as the expansion of women’s with brands like Carhartt, Ariat and Wrangler. Apparel is now a key customer mission for people to come to Tractor Supply.

We are also excited to showcase brands throughout the department like Carhartt, that you can see here, store within a store concept in 90 locations, which are running departmental comps above company averages. We will continue to look for ways to differentiate our offering in apparel that support our customers’ lifestyles. So thanks for coming along with me on the store tour today. I hope you get the opportunity to get in store yourself and see our new Fusion and Side Lot upgrade soon.

I hope you found our store tour insightful today. We believe that investing in our stores is just table stakes to win in today’s omnichannel retail environment. Overall, we are encouraged by the early results we are seeing from our Fusion and Side Lot initiatives, with the biggest impact coming when their innovations have reached a maturity of about 9 months post completion. As we look ahead, our target for Fusion-only stores is a mid-single-digit sales lift post project maturity and we are targeting a high single-digit sales lift on the Fusion and Side Lot combo stores. Our goal is to have 100% of the chain in the Fusion format by the end of 2026, while our combo Fusion and Side Lot stores will ultimately be across 60% to 70% of the chain.

We are making significant progress towards our space productivity goals and delivering on the strategic pillar of operate The Tractor Way. We have a best-in-class customer-focused merchant team that will continue to grow sales and profit by driving innovation and optimizing our differentiated merchandising assortment. We are highly focused on capturing market share of our expanded TAM. And we have a compelling game plan for growth that will serve our core customers while bringing in new customers to the Tractor Supply family. All-in-all, we are committed to being the indispensable supplier for Life Out Here and widening the gap versus our competition.

Thank you again for going on this Fusion and Side Lot store tour with me today. Next up is Colin, who plays such a key role in serving our customers. With the recent complications to the supply chain, Colin and his team have done an amazing job keeping our stores in stock.

[Colin Yankee, Executive Vice President, Supply Chain]

I really appreciate that, Seth. Thank you so much. It’s great to be here with you to share the transformation that we are on across our supply chain. Tractor Supply is differentiated as the largest retailer for bagged animal feed in the country and the leader in meeting our customers’ needs for poultry, equine, dog and cat food, forge and other C.U.E. or consumable, usable and edible products that are core to living the Out Here lifestyle. Last year, we moved 8 billion pounds of C.U.E. through our supply chain. And as we have grown our sales and market share in C.U.E., our logistics network, our distribution centers and our stores have stepped up to handle that volume and meet the demand. In fact, compared to 2019, last year, the average Tractor Supply store moved 18% more units and 26% more cubic volume of C.U.E. product. And those volumes in total and per store are continuing to grow.

We have seen a significant growth in C.U.E. customers because of our product portfolio with breadth across national, local and exclusive brands and products that cover the spectrum of species for all stages of life. We know C.U.E. products are traffic drivers, attracting new and younger customers. We know that customers who shop for C.U.E. at Tractor Supply are some of our most loyal customers, on average making 4x more transactions and shopping across a larger set of categories than a non-C.U.E. customer. And we know how important being in stock and a price leader are to customer satisfaction and retention.

With the success of our Fusion and Side Lot remodels and the Neighbor’s Club loyalty program, the increased volume, velocity and variety of C.U.E. products moving through our supply chain and through our stores presents an opportunity to use our scale and sophistication to widen our leadership position with the C.U.E. customer. While we always take an end-to-end view of our supply chain, the growth we have already experienced and the growth we anticipate in C.U.E. requires a fresh look at the operations, and that’s exactly what we are going to do with our effort to deliver on C.U.E.

We are bringing together a powerful new technology with the strength of our distribution center and mixing center network and continuous improvement within our store processes drive more C.U.E. volume through the same-store footprint with maximum efficiency. And we are going to deliver best-in-class on-shelf availability for our customers, whether they shop with us in store, use buy online, pickup in store or we access that inventory to fulfill orders from stores.

As Hal mentioned earlier, we are continuing to invest in our supply chain capacity. We are currently building our ninth distribution center located in Novara, Ohio and we are on track to open that facility later this year. In 2022, we will also start construction on our tenth distribution center, which will be located in Arkansas. We are planning on a facility opening in late 2023 and we will continue to look for locations to best support our operations as we grow the store network, turning our attention next towards distribution points in the Pacific Northwest.

To leverage our expanded distribution network with the power of our vendor base, we are deploying a new inventory forecasting and replenishment system in 2022. This new system takes in more data on demand patterns like seasonality and day of the week variations, business decisions like promotions, price changes and changes in display and space and external factors like weather, traffic and local events. Using advanced mathematical techniques and near real-time information, we are creating an even better picture of future demand, supporting higher in-stock rates, with less inventory.

The new platform allows us to be more collaborative with our vendors. By sharing information that is fed directly to our vendors’ production planning processes, we can create more accurate orders for these fast-turning products. In our initial test and use cases, the forecast accuracy improvement has lowered total inventory, increased our in-stock rates, driven production efficiencies and improved our response and recovery to changes in demand.

We are also deploying new capabilities that allow us to be faster and more responsive inside of our distribution centers. The new replenishment logic allows for high velocity and large C.U.E. products to get picked, loaded and dynamically routed to stores faster and more frequently than we are able to do today and that speed reduces the amount of inventory held in the backrooms. While this new replenishment logic is geared towards our C.U.E. items, we will also strategically apply it to big ticket items, like gun safes and riding lawnmowers, helping us get the right product in the right stores at the right time to optimally use inventory and the store’s capacity.

To further support more just-in-time replenishment, we will continue to expand the number and reach of our mixing centers. Mixing centers are rapid replenishment centers designed to deliver the 100 fastest moving C.U.E. items in full pallet quantities. Over the last several years, our mixing centers have proven to reduce the days of inventory coverage required in stores to support sales, relieving pressure on our store backrooms while increasing in-stocks. Today, we operate 12 mixing centers, covering about half of the stores in the chain. And as part delivering on C.U.E., we will service more stores from our existing mixing centers and look to add more mixing center locations to the network over the next several years.

Our store teams are agile and they do an incredible job managing the volume and tonnage and the number of deliveries that backup against our store every week. But we are going to give them even greater visibility to that workload. With a new set of visibility dashboards that uses historical data, real-time tracking and predictive analytics, our stores will have greater insight on estimated times of arrival, allowing them to track inbound deliveries from distribution centers, mixing centers and vendors, equipping them to manage tasks and equipment in the store more effectively throughout the day.

At the network level, this new visibility provides a rich source of data for analyzing and optimizing inbound workload to inform staffing and operational support for continued optimization efforts. So we are applying new technology and logistics processes to impact product flow, but we are also focused on maximizing efficiency in the stores. In our stores, we are optimizing the backroom layout to reduce the number of touches and the amount of travel our team members need to take while moving product from the trailer to the sales force.

For our highest volume or more space-constrained stores, we have seen the success of creating dedicated feed rooms that add pallet drops and storage capacity. By the end of 2022, we anticipate having 160 to 180 feed rooms in our network and we will continue to build out dedicated feed rooms as needed when the store is going through the Fusion and Side Lot remodel process. These layout changes support an increased level of efficiency, building on the existing operating procedures in the store. Because C.U.E. items are the most space and labor-intensive products in our stores, we are focused on new levels of process standardization and engineering in our freight and replenishment tasks. Our stores are adapting staffing models to handle more frequent deliveries, more throughput and faster replenishment to the shelf. By driving greater process engineering and optimizing the backrooms of our stores, we will free up time that can go back to delivering legendary service to our customers.

We see the growth in our C.U.E. categories as part of an enduring consumer shift and a central part of our long-term growth plans. To support our long-term sales per store projections, we need solutions to drive more C.U.E., more deliveries and more units through the same-store footprint with greater visibility, predictability and cost efficiency. We are embarking on a multiyear program to optimize the entire C.U.E. supply chain, from the vendor to the store using new technology, logistics processes and store operating procedures. The benefits of these continuous improvement efforts will ultimately drive greater efficiency across the entire assortment, further enhancing the competitive advantage our supply chain provides within farm and ranch space, but importantly, ensuring we are the most dependable supplier for those consumable, usable and edible essentials.

Thanks for taking part in the event today. And I’ll hand it over to Mary Winn.

[Mary Winn Pilkington, Investor Relations]

Thank you, Colin. Before Hal joins us to share his closing thoughts, EVP, Chief Financial Officer and Treasurer, Kurt Barton, rejoins us to deliver Tractor Supply’s strategy for robust shareholder returns.

[Kurt Barton, Chief Financial Officer]

Thank you, Mary Winn. It’s been 15 months since our October 2020 enhanced earnings event, and I am excited to talk to you again about Tractor Supply’s strategy, our new supporting strategic initiatives and our plan to continue to deliver strong and sustainable total shareholder return.

At that time, we outlined our Life Out Here strategy and our focus on TSR. We are pleased with the strong progress that we have made against all elements of the Life Out Here strategy. We have continued to deliver on our highly differentiated proposition as the number one farm and ranch retailer. We have accelerated execution of all our strategic priorities and we have remained disciplined and focused on how we have allocated our capital. This team has worked hard to deliver outstanding financial results and are honored that our shareholders have benefited from the S&P 500 top decile TSR that we have delivered over the last 2 years.

Despite our strong progress, we are not resting on our laurels. We continue to add important new strengths to reinforce our focus on delivering strong and sustainable TSR. Our top line revenue growth is compelling, not only in magnitude, but also in its quality and durability. The Life Out Here strategy continues to expand and we have added new strategic initiatives. As you heard from John, we plan to lead with legendary service and aim to achieve that number one position in customer experience. And as you heard from Rob, we are deeply focused on digital as part of our omni-channel approach and intend to dramatically lift our mobile engagement. And as you heard from Colin, we are investing in our supply chain to support the growth in key products that are core to living the Out Here lifestyle. We are proud that our strong and durable free cash flow enables the Power of AND ensuring that we can fully support and fund all of our most important growth investments and return significant capital to shareholders at the same time.

The growth that Tractor Supply has generated over the past 2 years is highly differentiated within retail and is firing on all cylinders. Rarely can a retailer founded more than 80 years ago demonstrate the magnitude, diversity and quality of growth that Tractor Supply has delivered over the past 2 years. Almost one-third of our growth came from new customers and over two-thirds has come from increasing share of wallet with our passionate and loyal existing customers. The volume and basket growth that we have delivered has meaningfully exceeded any top line tailwinds that we have seen from inflation.

Our e-commerce growth continues to accelerate with 2-year CAGR of 80% in our digital channel, forming a larger part of our growth that we have ever seen before and new and expanding categories in lawn and garden, grilling, apparel, power tools and pet drove almost one-third of our comp growth, along with strong increases in our core businesses such as C.U.E. The diverse mix of growth that we have seen highlights the underlying strength of Tractor Supply’s top line organic growth. This gives us deep confidence in the strength and quality of our growth trajectory. As we look to the future, we expect to deliver a high-quality and sustainable top line organic growth trajectory that builds on the substantially higher revenue base that we have achieved in the last 2 years.

Our long-term financial outlook includes a revenue growth of 6% to 7%, with a 4% to 5% contribution from comps and 2% contribution from new store openings. Our 4% to 5% comps outlook is underpinned by growth in customer demand from our loyal customer base and new customer growth. Expansion of our TAM through the new and expanded categories I mentioned earlier, such as lawn and garden, grilling and pets and continued execution of our Life Out Here strategy, with key roles being played by the lift in store productivity from Fusion and Side Lot, our goal of being the number one legendary customer experience and our strong focus on customer retention and further engagement through our powerful Neighbor’s Club loyalty program.

We are pleased that our most recent market analysis has indicated that we have more new store growth headroom than we shared with you in the fall of 2020. And as a result, we are increasing our total store target by 200 to 2,700 stores. Our target of 2,700 stores will be achieved organically. We are excited that with this increased target we will have a decade of future growth runway in non-comps growth ahead. As Hal mentioned, we remain optimistic about the FTC process regarding Orscheln, which would be additive to our total store target of 2,700.

Given our recent performance, increased scale and greater line of sight into some of our most important cost drivers, we are raising our long-term operating margin target to a range of 10.1% to 10.6%. Since initially providing this guidance in the fall of 2020, we have gained greater line of sight into the operating margin drivers that you see on the left side of this page. As a result, we believe we can sustain an operating margin above 10% and feel that there is upside margin potential beyond last year’s operating margin of 10.3%. We have seen favorable impacts from pricing and promotion, expansion of our product mix, our operating efficiency program and the improved operating leverage generated from our high-quality growth. Despite the headwinds from inflation, higher transportation costs as well as maintaining the significant investment programs we have underway, we see our current margin levels in the 10.1% to 10.6% range as sustainable longer term.

As I mentioned earlier, our operating margin guidance for fiscal year 2022 is in the range of 10.1% to 10.3%. And from this, you can infer that over the next 5 years, we feel that we have the opportunity at least to maintain and potentially grow margins towards the top of that range. In addition to the operating margin outlook range, we believe there are other opportunities that while uncertain provide the potential for further margin upside if they progress favorably. These include the normalization of investment levels to sustain our growth trajectory, lower transportation and COVID-related costs and reduced inflationary pressures such as wages.

We have made enormous progress in the execution of our Life Out Here strategy. The rollout of our two key store remodeling programs, Fusion and Side Lot has accelerated. As Seth shared with you, our expectation for Fusion-only stores is a mid single-digit sales lift post-project maturity and a high single-digit sales lift on the Fusion and Side Lot combo stores. By end of 2026, we are targeting 100% of our stores to have the completed Fusion remodel and 60% to 70% of our stores base to have the new Side Lot with garden center. Our Neighbor’s Club loyalty program is seeing very strong growth and helping us provide even greater value and engagement with our deeply loyal Life Out Here customers. As Christi mentioned, our Neighbor’s Club members remain one of our most valuable assets, driving approximately 70% of total sales and spending 3x more than non-loyalty customers.

Our e-commerce performance has been fantastic, delivering 80% annual growth in sales over the past 2 years. Our mobile app just launched late 2020, already makes up 10% of our digital sales revenue. We are excited to target a digital penetration of approximately 15% and over $2 billion in sales by the end of 2026 and we will continue to invest behind and strengthen our digital capabilities. We continue to focus on our disciplined capital allocation with a clear set of priorities and how we think about optimal capital allocation to support the delivery of strong and sustainable TSR. Investing in the business to drive organic growth remains our number one priority with the clear ambition of sustaining our high-quality growth trajectory long-term.

We remain committed to outstanding return of capital to our shareholders, firstly, through our growing dividend at least as fast as earnings and secondly, by returning excess cash through a strong and consistent share repurchase program. Where appropriate, we will pursue tuck-in acquisitions to add to our growth and key capabilities for the future. All of this is underpinned by our commitment to cash flow generation, a healthy balance sheet and an investment-grade credit rating. This compelling free cash flow that we expect to generate over the next 5 years, which includes a cumulative $8 billion of operating cash flow, $5 billion of free cash flow puts us in a very attractive position and enables the Power of AND. The strength and durability of our future cash flow delivery means that we can fully fund all of our growth oriented, high return initiatives and return a significant amount of capital to shareholders simultaneously.

Over the next 5 years, we plan to invest $3 billion in CapEx, in Fusion and Side Lot distribution centers, technology and customer experience with the objective of delivering our long-term growth ambition. While organic growth investments are our highest priority, the strong and growing free cash flow enables us to remain fully committed to our capital return. In our October 2020 enhanced earnings call, I indicated that our 5-year return of capital to shareholders would be approximately $4 billion. Based on the expectation of our stronger cash flow generation and our updated long-term financial outlook, we now expect to return more than $6 billion in capital over the next 5 years. This return of capital is expected to exceed our free cash flow by utilizing existing cash on the balance sheet and modestly increasing our leverage, ensuring we are putting every dollar of cash and cash flow to use.

As announced in our earnings release today, we will significantly increase our quarterly dividend by 77% to $0.92 per share. This level will approximately equate to a target 40% payout ratio as a percent of net income. Moving forward, we plan to grow our dividend per share at a rate that is equal to or greater than our earnings per share over the next 5 years. It is important to note that future quarterly dividends are subject to Board of Directors discretion and approval. This dividend increase and future growth highlights our strong commitment to disciplined capital allocation and our confidence in Tractor Supply’s trajectory. Now, we also remain committed to a consistent share repurchase program and our increased dividend should not be seen as being at the expense of our share repurchase program, but reinforcing the Power of AND.

Let’s now look at our long-term financial outlook. When comparing back to our 2019 long-term outlook, we have pulled forward 6 years of targeted growth into the past 2 years. We expect to build from our stronger revenue base and deliver 4% to 5% comps, 6% to 7% total sales on average over the next 5 years based on the solid evidence of the success of our Life Out Here strategy and the structural shifts in our markets as you heard from the team today.

As I mentioned earlier, our greater line of sight into the cost drivers has enabled us to lift our long-term operating margin outlook from 10.1% to 10.6% range. This means that our compelling top line growth, operating margin outlook and consistent share repurchase program will enable us to deliver an 8% to 11% earnings per share growth over the next 5 years. Pulling this strong financial outlook together highlights Tractor Supply’s long-term, double-digit TSR delivery potential. This double-digit TSR potential includes 8% to 11% EPS growth and an approximate 1.5% current dividend yield with further room to grow relative to earnings. Beyond this double-digit TSR, we see further potential upside that can be achieved by accelerating strategic initiatives and executing on tuck-in acquisitions.

As I wrap up, I would like to leave you with some final thoughts. The strong finance performance and outlook I have talked through with you today is reflective of our success with our customers. The tireless and dedicated work of all of Tractor Supply’s team, combined with the deep and growing loyalty of our customers is what makes Tractor Supply the company that it is.

Building on my statements at our last enhanced earnings event, whether I look at our strong and sustainable growth outlook, the operating margin potential, the Power of AND and our double-digit TSR potential, in my 22 years at Tractor Supply, I cannot recall a time in which I have been more proud and excited about the future of the company. And I hope you all feel the same way.

With that, I will turn it back over to Hal.

[Hal Lawton, Chief Executive Officer]

Thanks, Kurt. We appreciate everyone in the audience spending the last couple of hours with us. As we transition to Q&A, I hope you found compelling the updates we shared with you today.

Kind of a quick summary of the incremental news we discussed. One, we are capitalizing the many macro structural benefits such as rural revitalization, self-reliance, home steady and pet ownership and we are investing in our capabilities like digital and loyalty to continue to widen our moat with the competition. Two, we provided an update to our long-term financial outlook that includes raising our operating margin to 10.1% to 10.6%. Three, we operate in a large, attractive and fragmented growing market that we now estimate to be $180 billion. Four, with our growing total addressable market and the vibrancy of our trade areas, we now see the opportunity for an additional 200 Tractor Supply stores, bringing our total store opportunity to 2,700 locations. Five, we had the financial flexibility to invest in our Life Out Here strategy and return capital to shareholders through the combination of dividends and share repurchases.

Today, we announced our Board’s approval to increase our quarterly dividend by 77% and an additional share repurchase authorization of $2 billion. We remain committed to maintaining a disciplined capital allocation strategy to create value for our shareholders. Tractor Supply has a deep history and a track record of success. We are coming off a record 2 years. We have compelling opportunities for continued growth and the team to execute. The future tomorrow is bright for Tractor Supply.

Thank you. Now we’ll take a 5-minute break before we go to the Q&A segment. See you in a minute.

[Video Presentation]

[Mary Winn Pilkington, Investor Relations]

Welcome back to the Q&A session of Tractor Supply’s enhanced earnings event. We have assembled all of today’s presenters and they are ready to take your questions. A couple of housekeeping notes first. Please limit your question to one per call with a clarifying follow-up only if necessary. We have been very proactive in trying to show plenty – and allow plenty of time for this Q&A session, so you are welcome to get back in the queue to ask any additional questions if time allows.

For anyone just tuning in, a quick introduction of our team, President and CEO, Hal Lawton; CFO, Kurt Barton; Christi Korzekwa, SVP of Marketing; John Ordus, Chief Stores Officer; Rob Mills, Chief Technology, Digital Commerce and Strategy Officer; Seth Estep, Chief Merchandising Officer; and Colin Yankee, Chief Supply Chain Officer. We have a line of folks already standing by. So, let’s take our first question.

Our first question comes from the line of Kate McShane from Goldman Sachs. Good morning, Kate.

[Kate McShane, Goldman Sachs]

Hi, good morning. Nice to see everyone. Our question is centered around the operating margin opportunity. So I guess this question is for Kurt. We wondered about the cadence of the operating margin expansion over the next 5 years. Is it fairly even each year? And what is the biggest difference in this outlook versus what you gave us in October when it was a 9% to 9.5% range? I am just thinking that since the last time we spoke with you, transportation and labor is higher, while the top line outlook is staying the same?

[Kurt Barton, Chief Financial Officer]

Yes, hey, good morning Kate and thank you for the questions. On operating margin, as you think about the long-term targets, one, we are extremely pleased with the performance of the business. And the last 15 months have really shown in regards to is it structural, is it transitory in regards to the performance of the company, a lot more visibility and confidence in the structural nature of our business. And really that was one of the key factors when you look back to our enhanced earnings event 15 months ago. So, what we have seen first from the top line is that the belief in the structural nature of that really gives us the confidence on the SG&A that you have got that leverage.

In regards to your question about how the cadence and what are some of the factors? I’ll break it down between gross margin and SG&A and over time. So with gross margin, certainly, we recognize right now we are in unprecedented inflationary times, managing that really well. We expect that inflation, as I mentioned, our 2022 guidance, to persist in over the next few years we expect a general inflationary environment, but more typical modest inflation and we believe we can manage that through our scale and through our retail price management. Transportation and the supply chain disruptions, we believe those maybe a little bit longer in nature and it might take a few more years to be able to actually normalize on it. But in the back end of that timeframe some of that transportation easing and normalization. In addition to that, on the SG&A side, we look at it in our investments right now we are hitting some of the peak investments. We understand that those investments put pressure on the SG&A and it’s the right thing for the long-term, along with investment in wages. So, the next couple of years have a stronger pressure in operating margin, but when you take the easing on the gross margin pressures of inflation, when you think about us beginning to have traction on the investments and our ability to drive efficiencies. I’ll even mention really proud about our profit improvement, our operating efficiency programs that we’ve got. We believe those are key drivers along with leverage from scale that allows us to be able to invest for the long-term, grow the top line. And during this time of investment, where you heard from Seth, really transforming many of our stores that we can do that while maintaining and potentially even grow our operating margin in the next 5 years. So it again, will be a little bit of easing into that. And maybe perhaps in the back end of it is more the upside of it, but we like that algorithm and the excitement that having an operating margin above 10% with phenomenal growth.

[Mary Winn Pilkington, Investor Relations]

Thank you. All right and our next question will come from Peter Benedict with Baird. Good afternoon. I guess, your time Peter. Nice to see you think morning.

[Peter Benedict, Baird]

Hi, Mary Winn, yes, nice to see you all. Congratulations. Great event today. I guess maybe I just wanted to ask one about the cadence around Fusion and Side Lot, the rollouts there. Maybe you can talk a little bit more about how you see that over the next few years, how you gave some guidance on ‘22. Maybe something on the cost and the time to complete there is Side Lot tougher to get done here with some of the supply chain issues out there. And then maybe just an updated view on your Lawn and Garden TAM, what are you really going after here with Side Lot, and what type of share do you think you guys can get within those incremental categories over the next few years? Thank you.

[Hal Lawton, Chief Executive Officer]

Hey, Peter, and thanks for joining us today. I appreciate your question. If we look backwards last year, I just can’t say enough about the fortitude and grit determination of the team to get 80 new stores open, to have 300-plus Fusion stores and over 150 Side Lot stores. And as you mentioned, given all the disruption from COVID is related permitting and construction crews and the availability of things like fixtures and other materials. To be able to still achieve our goals from the beginning of the year, it’s just a real tribute to that team. In light of those issues, which we expect to persist for all of this year, we kind of kept our cadence for this year, similar to last year, as we talked about a couple of hundred Fusion stores, around 150 side lot stores and again, another 80 new store. And then if you kind of – all of our new stores also will be done with Fusion and many of our new stores also have garden centers. And then if you kind of take the balance, it will be really equally spread over the remaining 4 years as we lead to 2026, and that does assume a slight step-up in annual cadence from ‘23 and beyond.

On the returns, we are very – continue to be very pleased with the returns of both Fusion and Side Lot. As we shared on our last earnings call, the Fusion-only stores are running in that kind of mid-single-digit comp once they get kind of the 12-month kind of cycle, maturity cycle. And then our combo stores are right at that kind of high single-digit comp. We’re very excited that we’ve got about 150 stores in our Side Lot combos that will be hitting that 12-month mark right around the time spring hit. So it’s going to be a great opportunity for us to drive some sales and drive some share with those fresh stores.

On the TAM, we talked about in my presentation about adding $40 billion to our TAM. And that is dominantly lawn and gardening, kind of live goods. And it’s a fresh category for us, and one we think is a great opportunity. Our customers qualitatively, as we talked about, I talked about it being the number one category that they participate in that we least serve them in. And we’re seeing great results as we talked about in the first cohort of stores. On the cost, it’s hard to get each individual store because there is so much nuance depending on the setup of the store and the age of the store. But toughly, the way to think about it is we took our capital from $300 million to $600 million, roughly. About $100 million of that is supply chain with little technology. That leaves about a couple of hundred million left that involves our store investments. And then if you take the kind of 350 combo Fusion, Side Lot stores this year, you can kind of divide those into each other and get a sense. The range is anywhere from $0.5 million to $1 million a store that really just depending upon the nuances around that store. But again, really pleased with the return we’re getting strong return on investment capital it’s hitting all of our business cases. And as I said, we’re really excited about having over 150 Side Lot stores open for business when we hit the spring garden season.

[Peter Benedict, Baird]

That’s super helpful. Thanks so much, guys.

[Mary Winn Pilkington, Investor Relations]

And our next question comes from Zach Fadem with Wells Fargo. Hey, Zach.

[Zach Fadem, Wells Fargo]

Hey, thanks for taking the question. And thanks for all the great data today. So following up on the last question, you noted that combo stores with Fusion and Side Lot are seeing high single-digit lift in year 1, which alone looks like about a 100 to 200 basis point comp lift per year through 2026. So first of all, it sounds like the early 2021 cohorts performed closer to a double-digit lift. So I just wanted to confirm that. And then curious if you have any thoughts on what those stores could in year 2 and beyond and whether they will continue to outcomp the fleet or fall back more in line with the broader company average.

[Hal Lawton, Chief Executive Officer]

Hey. Zach, and I appreciate your question, and thanks for joining us today. I’d say two things. First off, kind of to clarify, high single-digit I think is kind of what we’re on the record right now, around the 12-month mark for the combo stores. As it relates to the impact on comp, I think that’s around – that’s roughly right. You take, call it, 9%, 10% lift on kind of 10% of the store base annually. And do the math, and that’s about what the contribution should be. That’s certainly baked guidance.

And as Kurt said, it’s the thing that really gives us confidence in our guidance. And the last time we did an investor enhanced earnings call was in October 2020, we’re roughly 35%, 40% bigger in revenue, right, larger revenues from that date. And yet we’re still holding to our 4% to 5% long-term comp growth and 6% to 7% revenue growth. And it is because of the investments we’re making in the Side Lot and in Fusion and there are other areas that we’re confident they are really going to go after that growth and drive those sales and that we can do that mid-single-digit comp on top of revenue growth of over 50% in the last 2 years. And as we said, again, we’re very excited about having well over 150 Side Lot stores business here in the spring season, and we’re getting even a better read on the impact that it can have on our business.

[Zach Fadem, Wells Fargo]

Thanks so much. Really appreciate the time today.

[Hal Lawton, Chief Executive Officer]

Thanks, Zach.

[Mary Winn Pilkington, Investor Relations]

And our next question comes from Peter Keith with Piper Sandler. Hi, Peter.

[Peter Keith, Piper Sandler]

Hi, thanks, everyone. Good to see you and a terrific presentation today. I wanted to dig into some of the gross margin discussion. I think in thinking about the forward gross margin drivers, product mix was mentioned as a positive driver. That kind of goes counter to what we seen historically with the business, with the growth in C.U.E. I would think that product mix could also be hindered by the garden center expansion. So maybe you could unpack that a little bit on how you feel about product mix and what categories do you think can drive that positive shift? And then furthermore, just thinking about the other positive drivers to gross margin, pricing and promotions, there might be some skepticism on lower promotions, because there hasn’t been lot of promotions in the last 2 years? So maybe you could unpack how you’re thinking about delivering margin expansion on those, too?

[Seth Estep]

Hey, thanks, Peter, this is Seth. Great question. Good to see you today. And when we look at gross margin as we manage forward, I would say if you look where we were historically, when we’ve talked about C.U.E. outpacing the fleet now potentially could put a little bit of pressure on the company. What I would say today is that the balance of the four walls is really performing. So while C.U.E. is outpacing, we’re continuing to premiumize even our C.U.E., we’re pushing people, call it, into that premium segment. But outside of that, we’re also seeing the apparel segment do really well for us today, right? We’re seeing our truck and toy area is doing really well for us today. I could go around the four walls of the store, and we look at our sales forecast and we look at particularly, this upcoming year, we’re anticipating all four walls continue to contribute to that sales number and that estimate that we have out there. So while C.U.E. is continuing to outperform, we’re looking to continue to drive that C.U.E., drive those footsteps, coupled with the balance of the store, along with our pricing technology that we have today, which is much more sophisticated than we continue to have in the past. We feel confident in the ability to be able to look at the pressures that are coming in the business, manage the mix of the product and be able to deliver those gross margin targets that we have out there.

[Peter Keith, Piper Sandler]

Okay, thanks so much, guys. Good luck.

[Mary Winn Pilkington, Investor Relations]

And our next question comes from Steve Forbes at Guggenheim.

[Steve Forbes, Guggenheim]

Good afternoon, everybody.

[Hal Lawton, Chief Executive Officer]

Hi, Steve.

[Steve Forbes, Guggenheim]

I wanted to focus on e-commerce and digital growth. So Hal or Rob, you mentioned 15% penetration by 2026, which is a, I think, about a mid ‘20 CAGR in the next couple of years. So can you comment on how the average customer engages with this channel? The profitability of this channel, how that’s evolved? And whether your initiatives behind this channel has increased the average numbers of transactions that you’re seeing within all customer cohorts?

[Hal Lawton, Chief Executive Officer]

Yes. Absolutely, Steve. Thanks for your question. And I’ll pass it over to Rob to address that. I appreciate it.

[Rob Mills]

Good morning, Steve. Great to see you, and thank you for the question. So in regards to the customer and the customer interaction, they are definitely engaging with from a digital perspective. And as you heard through my presentation, the focus around mobility first is very key as well as leveraging the power of the data that we have with Neighbor’s Club. We have seen tremendous growth. We are extremely confident with that penetration rate. And we’re holding in to really drive a personalized experience with that customer, telling what they need for the product, their services and just really simply, how do you remove any of the friction and really driving that convenience. From ability perspective, we’re profitable. We deliver contributions back to Tractor Supply. We have a profitable online business. We will continue, of course, to look at profitability, ways to improve the profitability, leveraging all the great work that’s being driven through either the analytics and understanding of our business through the product assortment mix as well as the work that’s being done and can’t see him. We look at the store as our primary hub, how do we fulfill from this store? Same day delivery, delivering from the store capability as well as buy online pickup as well as curbside pickup, which has been a tremendous growth opportunity.

Lastly, I shared some core capabilities that we’re focusing on. And going back to the mobile piece, it is around how we’re putting mobile first. We’re using the power of the Neighbor’s Club and that analytics and knowing that customer to ensure that we’re always connected with that customer at all times. When they are researching items so you are leveraging as the expert, so all the way through the ordering process, when you’re actually fulfilling that customer order and how do you drive that connection back to the store, the store hub and being connected back to that team member. So we’re providing that knowledge, that trust and the authority that our customer trusted. And so I guess I’ll leave you with that. We have a clear road map, a strategy to move forward, both how we’re engaging to the customer. We listen to the customer. We leverage the data and we’re as well as we will continue to focus on the profitability, but we’re strong and we’re ready.

[Steve Forbes, Guggenheim]

Thank you.

[Mary Winn Pilkington, Investor Relations]

Thanks, Steve. And our next question will come from Scot Ciccarelli at Truist. Hey, Scot. Nice to see you.

[Scot Ciccarelli, Truist]

Thanks a lot, Mary Winn, good to see you as well. So my question has to do with the new customers. Obviously, new customers have been a significant source of growth for the last 2 years. And I think we can kind of all get our heads around kind of 2020 patterns, people moved away from urban centers. But I guess my question is, when you look at your cohort – the new customer cohort from ‘21, is it the same kind of cause and effect? Or is this a new customer acquired because some of the changes that Tractor Supply has been able to institute over the last few years?

[Hal Lawton, Chief Executive Officer]

Yes, hey, Scott. Thanks so much for the question today. I appreciate you joining us for the event. And I’ll toss it over to Christi to talk about our new customers and the customer insights for seeing.

[Christi Korzekwa, Senior Vice President, Marketing]

Hi, Scott, thanks for the question. I’m looking forward to talking to you about our new customers. You’re right. I mean, we’ve had record growth in 2020 during the pandemic of new customers, but that really didn’t wane during 2021. We saw a very similar, if not even a larger pre-pandemic number in 2021. So those customers are coming back to us, are coming to us even in 2021. We see that, that has a lot to do with those structural changes that are happening in – with the pandemic relative to rural revitalization and more millennials moving in from urban to suburban, ex-urban and rural areas. And what we’re finding is that 30% of our sales are coming from these new customers. So we feel incredibly positive about growth of the new customer, and it will continue. A lot of that given to the structural nature of our business, need space. They are moving into our trade areas, our Tractor Supply neighborhoods. They are buying homes there. They are starting garden, they are starting flocks, pet adoptions at record highs. So, just incredibly optimistic that our runway is still far from at an end and certainly, we identified 40 million customers that we can still talk to that should be shopping us that are within our trade areas, so just lot of momentum and a lot of power behind those new customers just excited about it.

[Scot Ciccarelli, Truist]

So just to clarify, if I might, so this isn’t because you guys have expanded garden and live goods, this is just the customer migration towards kind of your areas and regions, which is what’s driven it?

[Christi Korzekwa, Senior Vice President, Marketing]

I would say it’s a combination of many things. I would say it is certainly the fact that we have a lot of customers moving into our trade areas. It’s because we have our individuals maturing into the lifestyle. I would say it’s because of our merchandising mix, I would say it’s because of the trends and the work from home. So there is many factors that are attributing to the growth, certainly glad that we have a lot of runway with the 40 million customers that – or should be shopping us in our trade areas that we are going to be attracting over the next years to come.

[Scot Ciccarelli, Truist]

Thank you very much.

[Christi Korzekwa, Senior Vice President, Marketing]

Thank you.

[Mary Winn Pilkington, Investor Relations]

Our next question comes from Simeon Gutman with Morgan Stanley. Hi, Simeon. Nice to see you.

[Simeon Gutman, Morgan Stanley]

How are you doing? I look funny on camera. I wanted to go at Kurt, a follow-up to the question that Kate asked you about operating margin. If you look at your business in 2021 versus 2019, your sales per store were up just over 40% and your SG&A per store were up about 39%. So you spent into all of your growth, and that’s about the tightest spreads you get across all of the companies we follow. So if your business continues to grow at 4% to 5% comps and new compound going forward, and your investment cycle is going to peak. Unless your SG&A continues for your gross margin comes down, it would seem like there is a lot of upward pressure on your EBIT margin way past the numbers you guided today. So what’s wrong with that logic?

[Kurt Barton, Chief Financial Officer]

Simeon, yes, thank you for the question. I think it’s a great one. And this team is basically focused on managing our operating margin overall. Here’s a couple of the things that in regards to over the next 3 to 5 years. You pointed out the investments that we’re making on the business. When we look at our operating margin, we look at what we’re doing to invest from a position of strength and for the future. We’re making key investments in the SG&A, and we’re making investments in our supply chain. And those investments in the supply chain will help drive the market share and the sales that will help drive gross margin. We’re making investments field activity support team. We’re making investments in our IT technology. So we’re making the right investments, and yes, that puts some pressure on the SG&A, but our focus on driving market share for the long-term and the ability to be able to enhance that gross margin, it’s going to differ between the years. But we’re going to be really focused on top line being competitive and getting a good price to our customer and maintaining a good operating margin and keeping that even balanced. I’ve mentioned in my presentation, I put in that slide that we recognize there is some uncertainties in the financial algorithm today, unprecedented inflation. We’re seeing wage inflation and make sure that we’re positioned again to invest in our stores, in our technology by doing all of those things along with just having COVID expenses still in the business like most of retail. All of those costs we have some expectations continue to play into the financial algorithm, and there is opportunity. We want to be careful. We want to be prudent in our operating margin. And we feel like some of those factors turn positive in the long-term, that does give us the opportunity for that while we’re being pretty prudent in that approach and making sure that we’re doing the right thing for the business and real steady throughout these 5 years.

[Simeon Gutman, Morgan Stanley]

Thank you, everyone.

[Hal Lawton, Chief Executive Officer]

Thanks, Simeon.

[Mary Winn Pilkington, Investor Relations]

Thanks, Simeon. Our next question comes from Michael Lasser of UBS. Hey, Michael.

[Michael Lasser, UBS]

Good morning. Thanks for taking my question. Your guidance for this year assumes that you’re going to get 400 basis points of an inflation contribution. You also mentioned you expect traffic to be up. So let’s assume that’s going to be up 50 basis you the high end of your comp range. You also mentioned that you expect big ticket to be under pressure this year. Presumably, your core customer also saw an extraordinary amount of government support from stimulus, enhanced unemployment and child tax payments last year. How have you factored that into your guidance for this year? And as a follow-up, and a quick clarifying, after we get through fiscal supply chain disruption, what’s the prospect for some potential deflation in your categories?

[Hal Lawton, Chief Executive Officer]

Yes. Hey, Michael, and tanks for the question. I mean I think the math you provided is really kind of the math that our guidance reflect is about four points of inflation in the year that will drive ticket up, kind of a give back on ticket of a couple of points because of stimulus due to last year’s kind of surge in big ticket, kind of netting to a couple of points. And then the balance of our comp range made up of comp transactions to kind of get there, so in kind of that 1% to 2% range on the comp transactions. And we feel very good about that formula. And we’re committed to unit growth, and we’re committed to comp transaction growth this year. And we gained substantial share over the past years we talked about. We think there is a big opportunity to continue to do that. And then on deflation, I think there is a likely – there is – that’s always out there. I think it’s really unlikely for the foreseeable future for a variety of reasons. Dominantly that the majority of the inflation we’ve seen is, I think, structural in terms of the new levels that we’re at, whether that’s wages, many of the cost of goods, freight, imports. I think we’re going to see a kind of a structural holding of a lot of those costs. I don’t know they will continue to see inflation, but I don’t know we’re going to see significant deflation on that certainly in the next 18, 24 months or so.

And the other thing I’d say is our past cycle on inflation, it’s been really kind of the core commodities that drove it. And here, it’s really across the board. I mean, we’re seeing cost of goods increases due to wages, cost of goods due to steel, cost of goods due at other raw materials and our manufacturers’ wages. So I think it’s more structural in nature. The final thing I would leave is we lot more sophistication around our pricing tools and our competitive pricing engines that we had before. And so we’re just a lot more sophisticated in the way we can navigate through that. But regardless of how the environment evolves, I think we’ve shown our ability to be flexible, agile, deliberate performance, stay priced in the market, continue to gain share and deliver results, and that’s our commitment, whether it’s an inflationary environment or a deflationary environment.

[Michael Lasser, UBS]

Thank you and good luck.

[Mary Winn Pilkington, Investor Relations]

Thanks, Michael. Our next question is going to come from Chris Horvers at JPMorgan. Hey, Chris, how are you?

[Chris Horvers, JPMorgan]

Thanks. Good afternoon, thank you for the presentation. So a bit of a follow-up question to Michael. So as you think about elasticity and inflation, you saw some headwinds to gross margin rate from product cost inflation. Is that simply you managing the business from a gross profit dollar perspective versus not a gross margin rate perspective? And then similarly, on the macro side, as you think about your potential sensitivity to wealth effect and higher rates in housing, have you taken any of that into account considering your expectation for continued ruralization?

[Hal Lawton, Chief Executive Officer]

Yes. Hey, Chris and good to speak with you today. And I’d say, first off, on pricing. I think the team has done a fantastic job navigating the cost environment, finding offsets to many of the inflation factors and productivity and efficiency. Also being that advocate for the customer on price and making sure we’re staying price right every single day. And then where we have found it necessary and needed to, we have passed through price. I mean, to the tune of 7% price inflation in Q3 and 8.5% price inflation in Q4. I think our guidance as we talked about a 4% inflation for 2022 reflects kind of the higher single-digit price inflation through the first half starting to cycle that and settle back into low single digits in the second half. If you look at all the puts and takes, I think there is more risk to the upside on our inflation assumption than there is to the downside. But the team will continue to navigate, navigate through that as we go forward. And remind me, Chris, the second part of the question?

[Chris Horvers, JPMorgan]

So as you think about – clearly, you’ve had a strong wealth effect for the consumer low rates, house price increases, stock market benefit. Surely, that’s had some impact to your consumer and the sort of ruralization that you’ve seen as people sort of spend more time in rural homes. So have you taken any potential headwinds into account from rates moving up and decelerating the housing and wealth engine?

[Hal Lawton, Chief Executive Officer]

Yes. It’s something we certainly watch closely. Christi and the team have a number of ways that they monitor the health of our customer, whether it’s quantitative and qualitative. I’d say, right now, the home market is really strong, right? There is less than 1 million homes that are available on the market around, I think, 900,000 last month, 1.6 million, 1.7 million new homes being built right now on an annualized basis. existing home sales, well above $6 million. I think that’s going to continue for really the next couple of years at a minimum, even in spite of interest rates and even likely in spite of – within reason, home prices. You just got a millennial generation that’s now wanting to purchase homes. And I think in general, that’s good for us. When people buy homes or transact around homes, it creates projects. It’s a big project starter, and we see that in our business. And I think it’s going to continue on. The consumer still has over $2 trillion of pent-up savings. I think the last month or 2, if you look at the data, they have started to tap into that a little bit. But there is runway certainly for the balance of this year as they draw down, so to speak, on those pent-up savings to drive the GDP growth that I think is being forecasted really across the country. And I think rural customers have navigated this environment better than the average kind of a consumer out there. And I think we’re in a very favorable market as we head into 2022. Thanks so much, Chris for your questions.

[Mary Winn Pilkington, Investor Relations]

Thanks, Chris. And up next is Scott Mushkin with R5. Hey, Scott, how are you, today?

[Scott Mushkin, R5]

Hi, Mary Winn. How are you guys doing? Thanks for having me on and thanks for conducting. This is great. So I wanted to actually attack the revenue side of things, your revenue growth algorithm. It seems to me if you look over the next several years. And I think you guys said it right, like you kind of only just begun to make these changes. I mean, clearly, Lawn and Garden is an adjacent category, but there is a lot more where as you guys transition into the more kind of lifestyle superstore. It seems like there is a lot of other categories you could get into become bigger and some are available online. So I wanted to ask you about that. I also wanted to ask about the making store more experiential. We have the check based and stuff like that, but it’s obviously more you can do that way. And then finally on services, again, another enormous opportunity for the company to layer in additional services and so there is a lot here. And do you guys have a speed to attack all this, and it seems like revenue growth could actually come in significantly higher?

[Hal Lawton, Chief Executive Officer]

Hey, Scott, thanks so much of the question. And I think we’re going to break that up into two parts with Seth, can you maybe talk a little bit about the assortment and how we’re evolving and much of that he shared in the video and kind of recap some of that. And then maybe John can talk a little bit about the experiences in our stores, whether it’s chip days, pet watches, clinics and many of the other things, the 4-H and FFA type stuff that we do. But Seth, you want to hit the assortment expansion first?

[Seth Estep]

Yes, absolutely. Hey, Scott, great to see you. Thanks for the question. I’m incredibly excited about exactly what you’re talking about and how I outlined earlier our expansion of our total addressable market. And from a merchandising perspective, that’s what really, really excites us because we know we have opportunities across our business as we’re seeing both our core shopper and these new shoppers that are finding Tractor Supply as we’re introducing them to this lifestyle. They are finding the buying and where we know we have that considerable market share opportunity. Our merchants are continuing to attack that with partnerships, exclusivity, going after differentiation, driving experiences in the store that John will talk both inside the box, but also looking at outside the box. Obviously, with what we’re looking garden centers, our front aprons could go on and on. And so we’re looking at this year. Again, I mean, you talk about things like apparel and the trends that we’re seeing like in Carhartt, Ariat as well as our own exclusive brands, whether it be like in Ridgecut and expanding into women’s, those are the things that we’re really looking to attack. As well as like in pet, constant, constant newness that the team is going after, whether it be like the introduction of brands like Victor and Tractor Supply as well as doubling down on brands that we’re really seeing growth for like that would be considered specialty for the rural marketplace like science diet, Proplan, etcetera. And I can go around the store. And if you think about things like where we have big opportunities, we’re approaching spring. And you mentioned Chick Days, we’ve talked about live goods. But we’ve also got things like the electrification of these new shoppers that are in – or the OPE market, these new shoppers per coming in.

We announced this past week, our partnership that I’m really excited about with Greenworks and Greenworks Pro. We know shoppers have been trending towards the battery market, but we’ve been really waiting on a product that we believe that would stand up to the demands of consumer. And that’s what we really went after and have created this partnership with them. That’s just like one area and one category that we continue to talk to. But we’re really not playing in today, but we’re going after, and we’re going to continue to go after that with market share and play in the future. So absolutely agree that I can talk about product all day long and within our store and not just in the store, but also online with Rob and team with the product expansion there. So John, I’ll turn it over to talk about experiences.

[John Ordus]

Yes. Hey, Scott. Good to see you, again.

[Scott Mushkin, R5]

Hey, John. Good to see you.

[John Ordus]

So I’m going to break it down in a couple different parts. So one is we hire our customers. So our team members love talking about everything that we have inside of our stores. So you brought up chick days, it’s an event side of our store, where we have chick captains in there. They know the chicks. They work with the chicks when customers come in here, there is a good conversation that goes back and forth between that customer and that team member. The other things we do is stuff for our Greenworks, like we love theater inside of the side of the store. So some events we’re doing this year, like try before you buy, we have an even a weekend where our team members are all going to be outside, and we’re going to be test driving the Greenworks and using the blowers and using the weed whipper and different things and using our different power equipment materials. The other thing is we love to be able to have the community involvement. So we bring in things like 4-H, FFA. We do things like hot dogs outside. We’ve come in, our customers do donations for them, but we have it where they can talk to each other, do chicken swaps and different things out front. So we kind of break up into many different parts, but we look to be part of those individual communities.

[Hal Lawton, Chief Executive Officer]

Yes. Thanks so much, Scott, for the question. And as you were mentioning, just in wrap up here, we are literally pushing every corner of the store really into kind of a more modern, contemporary assortment, right? A Seth shared, shared expansion of power tools into kind of a legitimate tool chorale, expansion of pet into full fledge pet offering, deepening our commitment around animal feed, expanding into live goods, bringing in services like pet wash. John has over 250 stores now doing delivery with our own trucks. So just so many things that we’re pushing the envelope, so to speak, on every inch of the store, all around just sweating our assets more, getting more productivity out of those stores and delivering those mid-single-digit comps. Our goal is to gain market share every single year to grow above GDP, to grow above retail and to grow above growth rates. And we think we’ve got an exciting plan to do that.

[Scott Mushkin, R5]

Thanks, guys.

[Hal Lawton, Chief Executive Officer]

Thanks, Scott.

[Mary Winn Pilkington, Investor Relations]

Thanks so much, Scott. Up next is Joe Feldman with TAG. Hi, Joe. Please go ahead with your question.

[Joe Feldman, TAG]

Hi, guys. Thanks for taking the question. I wanted to ask, given everything you just said about all the opportunities that you do have in front of you. You’ve mentioned tuck-in acquisitions a few times. And I’m just wondering what you’re thinking there. Is that more to acquire small competitors? Is it getting into new product lines or categories or even just for infrastructure to run the business better? I just wanted you to share some thoughts on that.

[Hal Lawton, Chief Executive Officer]

Yes, Kurt, do you want to share our capital allocation strategy and then talk about tuck-in acquisitions after that?

[Kurt Barton, Chief Financial Officer]

Yes, definitely. Just to – I’ll start with reiterating the capital allocation. Certainly, our number one priority is investing in our stores, and we see still significant opportunity, as I mentioned, nearly a decade of growth in the runway of new stores. The investments we’re making to sweat those assets and put more productivity in the stores that already have the occupancy and the rent there. So Joe, to your point, first, we’ve got so much opportunity in the growth of the business and grab the total addressable market and grab market share there. Then of course, after that, we feel with the tremendous step-up in growth and the consistent operating cash flow will return to with the opportunity, both dividend and share repurchases, thrilled to be able to announce the Board’s approval of a 77% increase in dividends. As far as the tuck-in acquisitions then, where there are opportunities. We’ve not been highly acquisitive. We feel there is so much opportunity in our core. But where there are opportunities, Tractor Supply is sometimes that an exit strategy in our niche industry, where there is area that we are not in. I mean we’re open to that opportunity. If we look at it and say, hey, there is opportunity to grab the real estate we’re not in or to complement. And so if there is a acquisition, if there is a capability that builds on one of the strategic initiatives that you hear from us as part of Life Out Here strategy to buy versus build, we will look at that opportunity. But it’s certainly more of that opportunistic things on our radar and really excited about what we’ve got right in front of us, and there may be complementary opportunities.

[Joe Feldman, TAG]

Thank you.

[Mary Winn Pilkington, Investor Relations]

Thanks, Joe. Our next question comes from Brian Nagel at Oppenheimer. Hi, Brian, how are you?

[Brian Nagel, Oppenheimer]

Good. How are you doing? Good morning. Great presentation, thank you. So my question – I know it’s a bit of a follow-up to some of the prior questions. But I mean clearly one of the big themes in today’s meet in all the comments is just the rebasing higher sales. And as I think about that dynamic, clearly, there is now – there is more people sort of say there is a large portion of population living a lifestyle that wins to Tractor Supply. But at the same time, you have – you’ve taken market share gains. There is always been this market share opportunity for Tractor Supply, and we talked about that for years. But I guess as you look – maybe more color on what you’re actually seeing with market share? I mean through the academic where there are more permanent changes in your competitive set that lend to these sustainability some market share gains? Or – and on the other side, are you seeing – is this is happening? Are you starting to see some competitors that maybe seeded share starting to fight back more now?

[Hal Lawton, Chief Executive Officer]

Hey, Brian, thanks for the question. I’ll break it into three buckets. First off, we talked about over the last few years, our market grew at about 25% in aggregate over those 2 years. And I think that does say to all the trends that we’ve outlined and you implied in your question. The second two things I’ll highlight are really around investment. We’ve got substantial structural advantages in our digital business, in our Neighbor’s Club, in our supply chain, in our store base and the way we train our team members, the technology we use inside of our stores for our team members like our Theatro headsets and our Honeywell handheld devices. And so – and those are things that we have historically invested in and there are things we invested in over the last 2 years. It was mentioned earlier about our operating margins come up in the context of our sales, perhaps not grown as much as some others out there. And the reason is because we put a lot of that expense back into the business, we kept our stores heavily staffed, we paid the appropriate wages, we invested in marketing, we invested in digital. And I think as we talked we gained – our sales grew over 50% over the last few years. And it’s really – the reason we been able to double the market growth rate is because we had the inventory in our stores. We had the people to service them. We had buy online, pick up in store when others didn’t. We had a Neighbor’s Club program talk those customers and bringing them back into the stores. We had a supply chain that partnerships that allow product to flow in a way that others couldn’t. And once people over 2 years change their shopping behaviors, it’s really quite infrequent for them to slip back unless we let them down.

The third thing is all the structural all the incremental investments we’ve made in our Life Out Here strategy, the Fusion stores, the garden center stores, all the incremental technology investments we made. Last year, we talked about mid-single digits on Fusion, doubled – high single digits on the Side Lot combo stores. And that was only on 300 and 150 stores. So we are starting to see kind of the initial impact of those in our comps, and we’re excited about those continuing to drive our business in the future, plus it’s holding on to those customers and having a higher sales base. But I kind of break it into those three buckets, structural trends driving the overall market, us being committed to operating with excellence in the midst of the last 2 years and then investing on top of that with that momentum to gain even more share.

[Brian Nagel, Oppenheimer]

Thanks, Hal. That’s really helpful. Congrats.

[Hal Lawton, Chief Executive Officer]

Thanks, Brian.

[Mary Winn Pilkington, Investor Relations]

Thanks, Brian. Next question comes from Karen Short with Barclays. Hi, Karen. How are you today?

[Karen Short, Barclays]

Hi. Thanks very much everyone. Yes, a couple of questions. Just actually following up on that, when you think about your top line growth versus your unit growth within the context of your algorithm, how should we think about that relationship? Because depending on the scenarios, I guess growing a little bit at rate and sales on the algorithm. And then the second question I had is on your increased unit potential, I was wondering if you could just talk about that analysis in more detail, given the 40 million incremental potential customers, I actually would have thought that your unit potential is higher?

[Hal Lawton, Chief Executive Officer]

Yes. So, I will take the unit potential question then turn it back to Kurt to talk about operating margin leverage. On the unit potential, what we have is John and the team have been very sophisticated kind of map of our country, kind of ZIP code by ZIP code. We know what the demand potential is. We know where our stores are, we know where competitive stores are. And we look at those void spaces that are in that map. We then take those void spaces and bounce them up against the financial model and say, does it create value if we put a store there? And historically, that analysis has led us to 2,500 stores. Now with the growth in our market, that creates one, some new void spaces, but also it makes some void spaces that were not previously financially attractive, more financially attractive now. As I mentioned, our new stores over the last 3 years have significantly outperformed their business case. Our new stores are profitable in the first year. And so the combination of those factors led us to take our new store target up from 2,500 to 2,700. And we feel very confident in that number. And hopefully, in a couple of years, there is more on top of that, but we feel very good about that number. And Kurt can talk about our operating margin leverage.

[Kurt Barton, Chief Financial Officer]

Yes. Hey Karen, good to see you. Let me ask for clarification because you broke up a it on the question on EBIT. So, I know it was an EBIT margin question and also referencing sales growth, but maybe just clarify that.

[Karen Short, Barclays]

Well, no, it was thinking about the EBIT growth percent relative to the sales growth, right? So, we don’t know what you have done historically, but within your guidance, I think that to a decent rainwear site to range where the growth grows in line with sales growth or it grows slightly at a greater rate. So, just wondering how you think about that within the context of the algorithm?

[Kurt Barton, Chief Financial Officer]

Yes, great. From an operating standpoint, I mean the – again, I will just reference the key – if the question is regarding our long-term outlook, and we think about the EBIT margin in there is that we see an important opportunity right now to make investments, and a lot of that investment will be in the stores technology and in our supply chain. And so as we make the investments and those investment pressures are on SG&A, we also see great leverage through our operating efficiencies, the leverage from the growth in the sales. And so we have – over the next 3 years to 5 years, we see definite inflation and pressure from investments that we can offset with the leverage and with the operating efficiencies. On the gross margin side, we also see over time that we have got the opportunity from those investments able to grow our gross margin. So, there is some good opportunity in here with our scale and with the work that Colin and Seth are doing to be able to grow some of that gross margin at a faster rate and really see that opportunity there. So, from the algorithm, our assumption is that these investments are growing the top line, but also giving our gross margin an opportunity to grow. And there is likely to be more growth in the operating margin over that 5-year period in our assumption from the gross margin side as we balance out our efficiencies, our investments in the SG&A side.

[Karen Short, Barclays]

Okay. Thank you very much.

[Hal Lawton, Chief Executive Officer]

And Karen, the only thing I would say is like in a really simple way for me is you have got revenue growth of kind of 6% to 7%. And then you got the EPS growth, which Kurt took us through at 8% to 11%, and then you were buying a couple of percent of share back. So, if you take those out, we are kind of growing EPS kind of 6% to 9% organically, which means earnings are going to grow kind of with sales or slightly better on an annualized basis on average. And which means kind of particularly after this next year to cycle of investment, we will grow kind of operating margin about 0.1 point a year, and that kind of leads you up to that 10.6%.

[Mary Winn Pilkington, Investor Relations]

That’s great clarification there Hal. Up next on the line is Chuck Grom from Gordon Haskett.

[Chuck Grom, Gordon Haskett]

Hi. Thanks. Great presentation, everyone. A lot of great statistics today, but the one that really called my eye was the 40 million additional customers in your trade area. So, I was hoping, Christi could speak to the timeline for acquiring these new shoppers. And then as a follow-up for Hal on the gross margins, I believe you spoke to roughly flattish for 2022. How should we think about the cadence of gross margins throughout the year?

[Christi Korzekwa, Senior Vice President, Marketing]

Yes. Hi Chuck. Thanks for the question. I love talking about our customers. And just thinking about our customers pre-pandemic or when the pandemic first started through 2020, we acquired 11 million new customers. We are still comping the pre-pandemic numbers in 2021. We have more new customers in 2021 than we did pre-pandemic. So, 10 million to 11 million a year is what we are attracting, and 50% of those are returning to us after they shop. So, we are attracting and retaining a lot of new customers. And with the new work with the TAM and the opportunity in Fusion and Side Lot, there is so much more opportunity for us to really begin to attract even more than those 10 million a year new customers. But we are on a trend line right now of 10 million to 11 million new customers every year, and I would see us just accelerating that over time.

[Hal Lawton, Chief Executive Officer]

Yes. And I would just speak, Christi and the team are just doing an outstanding job. I think raising the awareness of our business, going from 34 points 2 years ago to 55 points. Now, that 21-point awareness increase, I think has really helped kind of drive traffic into our stores. And then whether it’s through online and product assortment or John and the team at customer service, that conversion in the store and then holding those customers. And then I think just continues to build on top of itself as we continue to grow that awareness and have that fantastic experience in our store and online. As it relates to the kind of operating margin algorithm, I think the way we think about it is very similar to the way we have talked about the last couple of years, which is we would see us continuing to kind of that 10.1% to 10.6%. Last year, we did a 10.3%. The year before that, it was a 10.1%. And the bulk of that gain was really in gross margin rate as we held SG&A kind of roughly flat. As we think about the next few years, particularly once we get through this peak investment over this year and next year. I think gross margins will hold to maybe moderate some. And then the leverage is where that we will see will be in SG&A. And that’s what kind of gives us that range between 10.1% and 10.6% with us creeping towards the middle to higher end of the range as we get into the out years of the 5-year range. And Seth and the team are doing a fantastic job navigating all the cost inflations that are coming through, offsetting it in ways they can and then passing through some on price. And then importantly, maintaining little to no promotions and then also little to no clearance. And the great thing is we list on last year, we were asking whether or not the little to no promotions could remain kind of structural in nature or whether or not that would creep back in. And I think after a couple of years, really the behaviors in the market have evolved, particularly as we look at this year and continuing to be constrained still in supply chain. So, we feel really good about maintaining kind of little to no promotions as we look into future and kind of stay in core to our EDLP trip routes.

[Chuck Grom, Gordon Haskett]

Alright. Thank you.

[Mary Winn Pilkington, Investor Relations]

Thanks Chuck. And our next question comes from Oli Wintermantel with Evercore ISI. Hey Oli, how are you today.

[Oli Wintermantel, Evercore ISI]

Hi. I am good. Thanks. Thanks very much for the presentations today. I had a question regarding the longer term outlook on your transactions or traffic within the comps. If you think about what drives your traffic within the stores. And then on an inflation basis, if that normalizes over the next 5 years, how do you think about the mix between traffic and transactions?

[Kurt Barton, Chief Financial Officer]

Yes. Hey Oliver, I will take that. First, I will start by just talking about 2022 as a quick reminder, and then beyond that. So, for 2022, what we have said is we plan and are targeting positive comp transaction and positive comp ticket. And ticket likely to lead more than transaction in 2022. Beyond 2022, while every year could be a bit different, what we think about it is it’s really going to be pretty balanced. And if you refer back to some of the real drivers of our comps that we have talked about, you have got Fusion and Side Lot that are driving traffic into the store with new categories. They are also driving ticket, digital doing the same thing, the work that John and Colin talked about on delivering on legendary service. These types of things, we really see the strategic initiatives that we have got and the momentum in the business that in the 2023 to 2026 period of time is that we have got opportunity to be really balanced between both of those because these strategic initiatives are focused long-term on driving market share, which means traffic, which means footsteps into the stores and clicks on the website.

[Oli Wintermantel, Evercore ISI]

Okay. Thanks very much. Good luck.

[Mary Winn Pilkington, Investor Relations]

Thanks so much. Our next question comes from Daniel Imbro at Stephens. Hi Daniel, how are you?

[Daniel Imbro, Stephens]

Hi, good morning. Thanks for all the info today and taking the question. I had a two-parter for Hal and Colin, just as we think about growth on your existing infrastructure, maybe how in the stores, as we think about store efficiency, are you seeing any throughput issues as the team is handling more volume? How is store turnover doing as the team members are being asked to handle more? And then Colin, you talked about the DC investments. But can you talk about any investments in existing DCs to improve efficiencies? And then maybe you can provide an update on turnover given the wage investments you made?

[Hal Lawton, Chief Executive Officer]

Yes. Hi Daniel. Thanks for joining us today and I appreciate the question. I would start by saying, we have seen some modest increases in our turnover this year, certainly relative to last year when turnovers were at all-time lows. But I think we fared much better than most companies. One, first and foremost, because of our culture and our commitment to mission and values and all the things that John talked about earlier around our commitment to the communities and hiring our customers. And then secondly, we have made substantial investments in wages and benefits and other benefits over the last couple of years, which have served us well in terms of retention. And then in terms of kind of flow through the business, our – we are up substantially on C.U.E. over the last couple of years. No one sells more animal feed and bag animal feed in the country than we do. We are one of the top retailers on pet food as well. And interestingly, on – particularly on the pet side, our customers skew larger on their pets, right. So, we sell more than anyone 50-pound bags of dog food and certainly the vast majority of our animal food are 50-pound bags, and that’s flow through, a lot of tonnage through. We are the lowest cost to serve all those in the market. We are committed to being the lowest cost to serve. We are committed to be able to be in stock on those. And that’s really a lot of what Colin’s presentation and focus is going to be on for the next couple of years and let him elaborate a bit on that.

[Colin Yankee, Executive Vice President, Supply Chain]

Sure. Daniel, thanks for the question. As far as turnover, I think Hal answered that. But with investment in our existing distribution centers to drive throughput, I just can’t thank our team enough. They hit a record level throughput this last year. And I would say it’s more than just the distribution centers. It’s really tough to execute that we have a planning problem. So, it starts upstream with working with our vendors, with our replenishment allocation, with our transportation team to make sure we set the distribution centers are for success. So, the team is at phenomenally in 2020 and 2021, given all the different disruptions that we have well publicized across the supply chain. Within the four walls of our existing distribution centers, we are really reaping the benefits this last year and going into 2022 of investments we made in profit improvement over the previous years with bringing all of our systems up to the common execution platform across all distribution centers. Two, engineered labor standards within our facilities to drive throughput and efficiency to schedule flexibility and communication with our team members. And most importantly, to the quality of leadership that we have in developing our frontline leaders because we know our team members can go work at other distribution centers, and these distribution centers intense kind of geographical areas, but they choose to work at Tractor Supply because of our culture, because of our mission, because of the way they are treated in those facilities. And that’s an enduring strength that’s going to carry us through for the next foreseeable future.

[Daniel Imbro, Stephens]

Thank you. Good luck.

[Hal Lawton, Chief Executive Officer]

Thanks Daniel. Appreciate it.

[Mary Winn Pilkington, Investor Relations]

And our next question comes from Steve Zaccone at Citi. Hi Steve.

[Steve Zaccone, Citi]

Great. Hi Mary Winn. Thanks for taking my question. Thanks for the presentation today. I had a question on 2022 and then just a follow-up on like the longer term targets. So, we think about 2022 from an inflation perspective, could you talk about the level of inflation from maybe a category perspective relative to what you saw in 2021? It seems like it’s more broad-based than the nature. And the other question I had just on the longer term targets, the last time you met with us, you talked about a potential giveback year to cycling some of the strength. It doesn’t seem like this is factoring in a give-back year. What’s really driving the confidence that you don’t have that give-back here?

[Seth Estep]

Hi Steve, this is Seth. Relative to inflation and what that outlook is this year versus this past year, what I would say is if you were to go back to 2021 in the beginning of that year, it really started with the commodity markets, right? And you think about grains, then we move more into steel, then other cost pressures continued on our supplier side, continue to roll to, call it, cost of goods pressure, whether that would be getting components from overseas to here, their labor rates, etcetera. And what I would say is we are – as we have entered into 2022 and where we are today, it is more broad-based. And so relative to last year, you are looking more broad-based across the four walls. What I would say about that, though, is when we think about our pricing sophistication, we know where the price is coming at us. And we know what’s in front of us and our – and the team has done a fantastic job from an analyst perspective, utilizing our tools to be able to go out and make sure that be priced right in the market, to drive market share, measure elasticities and at the same time, make sure that we can manage the P&L accordingly. So, as you look at last year, it did really started commodities, really went into steel. Now it is more broad-based and that’s where we see it heading in 2022.

[Kurt Barton, Chief Financial Officer]

Hi, Steven. I will take the question on the reference back to the last enhanced earnings call, where we had that give-back year. And your reference, I am assuming you go back to that line graph that many have referred back when they are talking with me about it. And really back then, the question was all about structural or transitory, and really how resilient is this step-up in growth. And 15 months ago, there was that legitimate question of how much of this growth is a temporary shift in behavior that’s in favor of Tractor Supply. But all the things that we have talked about and what Christi mentioned in regards to the permanent shifts in some of the customers, not only geographic locations, but what the hobbies are and people entering in our lifestyle, millennials buying homes, those types of things began to get answered over an 18-month period of time. I will reference back to, as an example, one of the slides I presented, I think is really powerful that over this period of time, what we saw that we had growth from new customers, 30% but then growth in existing new categories of the product as well into existing digital as well as in brick-and-mortar and the fact that our growth was from transactions and ticket. And when you look at transaction and basket, it was the biggest piece of it, so really broad, diverse growth in it and the fact that we have had consistency. Best way to give an example on the consistency. Last three quarters, 40% almost to a tee, each of those quarters, 2 years back on the comp. So, as we work through that, it really solidified that these are enduring customer relationships that are benefiting Tractor Supply. It’s really the difference between what our outlook was 15 months ago versus what we are presenting today, and really excited about that for the future.

[Steve Zaccone, Citi]

Very helpful guys. Thanks very much.

[Hal Lawton, Chief Executive Officer]

Thanks Steven. Appreciate it.

[Mary Winn Pilkington, Investor Relations]

And our next question comes from Liz Suzuki with Bank of America. Hi Liz.

[Liz Suzuki, Bank of America]

Hey. Thanks so much for hosting this event. I just had a follow-up to Karen’s question about the store base. Is it correct to assume that essentially all of those 2,700 stores will ultimately have Fusion layout and that the vast majority will have Side Lot, or are there any alternative store formats that might be considered in that 2,700 number? And a related question about Petsense, and what you view as the long-term opportunity for that store base?

[Hal Lawton, Chief Executive Officer]

Yes. Hi Liz. Yes, that’s correct. All new stores are being built with the Fusion layouts. So – and that was the case in 2021 and will be the case moving forward. As it relates to the garden center, it’s really on a store-by-store basis, whether or not the store is built with a garden center, depends on what the market opportunity assessment tells us. What I would say is this year in 2022, the vast majority of our new stores will have the garden center, and that’s incremental to some of the guidance that we gave on our existing store base through the presentation. And then as it relates to Petsense, we haven’t had a chance to talk about that business today, but the business is doing very well. Matthew Rubin joined us last year about this time to lead the business, done an excellent job of kind of driving the business. They had an excellent year, strong sales growth and profit growth, a number of new stores built. We have made several elements of integration that are customer facing like we now sell for health branded food inside of Petsense. We are in the process of doing some things in terms of integration later in the year on Neighbor’s Club and also some integration on branding. We are also taking our software now implemented that inside of Petsense. And we are also working on kind of a centralized inventory platform, whereas right now, the stores are done via kind of the individual store base. And so a lot of work is going on to leverage the breadth of Tractor Supply to make Petsense better. The team is doing a great job driving it. We have got a number of new stores that will be built for Petsense this year, and we are excited about the future of that business.

[Liz Suzuki, Bank of America]

Great. Thank you so much.

[Mary Winn Pilkington, Investor Relations]

We have got time for two more questions. So, we will go up to two more questions. And up next is Bobby Griffin with Raymond James. Hi Bobby. Bobby, we are having a little bit of trouble hearing you.

[Bobby Griffin, Raymond James]

Thank you, Mary Winn. Yes. Sorry about that. I guess I just want to quickly unpack the long-term growth targets. Is the rate – and what the embedded market rate is in those targets? Is the right way to think about it is the market grows, say, 3 to 4 Tractor that picks up a point of market growth share in comps, or is the market growth going to grow in line with comps and then the market share gains come from the new store growth?

[Hal Lawton, Chief Executive Officer]

Yes, it’s a great question. And I think we think about it the latter, that kind of long-term GDP, the country is kind of 2% to 3%. Our market typically maybe grows kind of 0.5-ish point above that, 2.5% to 3.5%, maybe ease up to 4% with our comp guidance of 4% and 5%. We are certainly taking share in the markets that we are already in. And then the building of new stores just allows us to take incremental share on top of that. So, it’s a bit of a blend of the two scenarios you mentioned, but it’s certainly taking share with our existing stores, growing our sales productivity. And then on top of that, also gaining it through both new store build-outs as well as digital.

[Bobby Griffin, Raymond James]

Thank you. Best of luck.

[Mary Winn Pilkington, Investor Relations]

Thanks Bobby. And our last question will come from John Lawrence with Benchmark. John, please go ahead with your question.

[John Lawrence, Benchmark]

Great. Thanks for doing this today, that’s great and congrats on the year. Can you talk a little bit about the pet business. And you mentioned the pet washes and the wellness clinics. Can you talk a little bit what happens when you add one of those into the business? Does that customer go around and shop? Just so how much does he pull from other categories? I think you mentioned you had over 40. How big could that business be? And what are you seeing with the availability of veterinarians in this environment?

[Hal Lawton, Chief Executive Officer]

Yes. Hi. Thanks for the questions. First off, I would start off by saying our pet business is incredibly strong. We talked about our C.U.E. and its performance over the last handful of quarters, out-comping our overall store. And then we mentioned that pet particularly dry dog food is outperforming even our C.U.E. business. So, our pet business is very strong, both in-store and online. And then we certainly want to make sure we are providing a full suite of services around that. And I will let John talk a little bit about the dynamics and we have a pet wash or a pet clinic or a mobile clinic and how that plays out in our stores.

[John Ordus]

Yes. Thanks John for the question. So, our pet washes – so as soon as a customer uses the pet wash, they continue to come back and back and back. They love using the pet wash. They like to come back. We have pet washers where some stores will do over 100 a week in pet washes. So, the customer really likes it. They enjoy it, they love that feed and they like being able to take care of their pet. It doesn’t have to always be a dog though. Sometimes it’s something else. You asked about what they do after that. So, let’s go into the store and the number one thing they buy is the collar. Because the first thing you do if you wash your pet is you want to get something new for the pet, so you will get a collar. They will also pick up some other while they can’t get the rest of their shopping done. Out of the pet wellness clinics or the mobile clinics that come up to the front of our stores, we have lines out in front of our stores for these clinics. Customers use them. We advertise them out there, Christi and her team to get it out there. And then customers will come in, they will sign up and then they love getting their dogs taking care of out there. So, it’s something our customers really like. They love the fact that we do it for them, they love the convenience about it.

[John Lawrence, Benchmark]

How many of those stores could you add over time or those projects?

[Hal Lawton, Chief Executive Officer]

Yes. So, pet wash is now kind of a core component set outline of our Fusion stores. Really, the only time it’s not going into a Fusion stores when there is a legit kind of a real space limitation. So, we see over time, the vast majority of our stores having a pet wash. The mobile clinics, the vast majority of our stores already have mobile clinics. At a minimum, it’s every two weeks, but there is a lot of our stores that had it twice a week. And then on the wellness clinics, that what I think is still a bit more in a testing mode for us. As Seth talked, we are in that kind of 50 store, 60 store range. We will add some more this year through Fusion, but we are really excited about the benefits and the performance of those, and we will look to do more as we see the performance over the next year or 2 years.

[John Lawrence, Benchmark]

Alright. Thanks. Congratulations and good luck.

[Hal Lawton, Chief Executive Officer]

Thank you.

[Mary Winn Pilkington, Investor Relations]

Alright. Well, that’s going to be our final question. As always, those were some great questions. So thank you, everybody, for your time today. We really appreciate you joining us virtually to learn more about what we think makes Tractor Supply such a special company. I also wanted to take a minute to thank Marianne Denenberg, and a multitude of others at the company who helped pull off today’s event to showcase Tractor Supply. An event of this scale takes a lot of partnership to all of those at Tractor Supply that supported Investor Relations program. Please accept my sincere appreciation and gratitude on behalf of the investment community. And thanks to all of you for taking time out of your day to join us virtually. We look forward to speaking to you again on our first quarter 2020 call in April. And Marianne and I will be around today to take any questions this afternoon. Take care, and please stay safe.