Good morning, ladies and gentlemen and welcome to Tractor Supply Company's Conference Call to discuss Fourth Quarter and Full Year 2019 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

We ask that all participants limit themselves to one question and one related follow-up. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead..

Thank you, David. Good morning everyone. On the call today are Hal Lawton our CEO; Greg Sandfort, former CEO and Strategic Advisor; and Kurt Barton our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our SVP of Merchandising will join us for the question-and-answer session.

Now let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company.

In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable and can give no assurance that such expectations or any of its forward-looking statements will prove to be correct and actual results may differ materially from expectations.

Important risk factors that could cause actual results to differ materially from those related in these forward-looking statements are included at the end of the press release issued today and the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed.

Investors should not assume that statements will remain operative at a later time. Tractor Supply takes no obligation to update any information discussed in this call. In discussing the results of operations, we'll be providing adjusted net income and diluted earnings per share amount that exclude the impact of the executive transition agreement.

You can find additional information regarding these non-GAAP financial measures in our earnings release, which is available in the Investors section of our website. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick related follow-up.

I appreciate your cooperation. We'll be available after the call for follow-up. Now, it's my pleasure to turn the call over to Greg..

Thank you, Mary Winn. Good morning everyone who's joining us on the call today. Before we discuss our fourth quarter results, I'd like to take a moment and update you on the CEO leadership change at Tractor Supply that we announced in December. Hal Lawton officially joined the company in mid-January as President and CEO.

The board engaged in a thorough and comprehensive search to identify the right leader for this next chapter in the company's growth. I am very excited that the Board chose Hal as the next CEO for our company. Hal brings tremendous experience across multiple retailers including Home Depot, eBay and Macy's.

And more importantly, Hal is a great cultural fit and I believe he is the right leader for the future growth of Tractor Supply. As we have previously communicated, I will continue to be available as an advisor to Hal and the company through August and will serve out my board term through May.

My expectation is that this will be a very smooth transition. As this will be my last earnings call, I want to reiterate that it has been an honor and a privilege to serve as the CEO of Tractor Supply. The Tractor Supply Company is a special company with a unique culture like no other in retail. I believe the company is in great hands with Hal, as CEO.

The company has a strong leadership team in place that is passionate about helping our customers live life out here. While the Tractor Supply chain has made tremendous progress in recent years, I believe there is considerable opportunity ahead.

And now I'll turn the call over to Hal for a few comments before we address our quarterly results and outlook..

Thanks so much, Greg. Good morning, everyone. It's great to be at Tractor Supply. For many years in my retail career, I have watched and admired this company. Under Greg's leadership the team has achieved remarkable results and I'm honored to follow in his footsteps.

As you are acutely aware the retail industry is experiencing disruption and reinvention at an unprecedented speed. Leading retailers need to excel at not only merchandising customer service and execution, but also at data, technology, flexible supply chains and productivity.

The key for successful retailers, however, will continue to be the same a differentiated customer experience.

With more than 2,000 stores complemented by our online sites, Tractor Supply has substantial scale, very high brand loyalty with our customers an incredible culture that is part of our secret sauce and a business model that is supported by a strong balance sheet and significant cash flow generation.

At Tractor Supply, we have a differentiated experience, a robust set of competencies and are well-positioned to become an even more integral part of our customers' lives. I'm excited about the opportunity to continue to build on the One Tractor foundation the team has in place to drive the business forward.

We are committed to executing on our 2020 initiatives and delivering on our plans for the coming year. The Tractor Supply team has been very welcoming me since the transition was announced. In the coming weeks and months, I'll be out in our stores and distribution centers, listening and learning as I spend time with our team members and customers.

I look forward to engaging with you in the future. And now I'll turn the call back over to Greg..

Thank you, Hal. And now let's move on to the results. Overall, 2019 was a solid year for Tractor Supply with record sales and earnings. While the fourth quarter of 2019 did not meet our expectations on the topline the team did a great job of controlling those things we could manage.

And as a result, we delivered operating profit margin expansion for both the quarter and the year. The most significant factor weighing on our sales results in the fourth quarter was unfavorable seasonal weather trends.

Across many of our markets we were negatively impacted in the quarter with unseasonably warm temperatures, which hampered our ability to drive topline sales in numerous seasonal categories.

As I have shared with you consistently over time, the Tractor Supply customer is a needs-based demand-driven shopper and there is relatively little that will influence the customers' purchasing decision if that need doesn't exist.

Given the stronger traffic trends -- the softer traffic trends, we were unable to capitalize on impulse or ancillary purchases.

And as you have heard from other retailers I believe the six fewer days between Thanksgiving and Christmas over the prior year impacted our customers' gift-giving purchase activity to a greater degree than we had anticipated.

Over my 12 years with Tractor Supply, I have experienced the seasonal impacts before the fourth quarter of 2015 and again in the first quarter of 2017. And as always was the case when temperatures arrived with a seasonal change, the sales demand also returned.

Despite the softness in our comp store sales, the underlying health of our business remains solid as evidenced by the continued strength of our core year round farm and ranch categories, which generated overall solid comp sales increases in line with our expectations and historical norms.

The teams executed well across store operations, merchandising supply chain, planning and placement. The teams managed inventories effectively and minimized our clearance exposure. We leveraged our retail price optimization capabilities to preserve margins and we had disciplined cost control throughout the quarter.

I am very proud of how this team reacted to and effectively managed our fourth quarter business. Now, let me touch on a few financial highlights for the quarter and the full year. For the year, net sales increased 5.6% and comparable store sales increased 2.7% to reach a record $8.35 billion in sales.

In the fourth quarter, comparable store sales continued positive as we lapped a strong 5.7% increase in the prior year quarter. For the fourth quarter, diluted EPS increased 9% to $1.21. And for the full year, diluted EPS was $4.66, and adjusted diluted EPS was $4.68.

We've returned $696 million to shareholders through the combination of share repurchases and quarterly cash dividends for the year. And this was the ninth consecutive year that we increased our quarterly cash dividend for our shareholders. In terms of operational highlights for 2019.

We opened 80 new Tractor Supply stores and eight Petsense locations, increasing our store count to over 2,000 stores. We made solid progress on many of our ONETractor strategic initiatives. We completed the rollout of stockyard in-store kiosk and mobile POS technologies to all stores across the chain.

We continued to experience a robust Neighbor's Club loyalty program with membership approaching nearly 15 million members as we exited the year and a retention rate of approximately 80%. In addition, we also made great progress to improve our targeting of high value customers and look-alike customers throughout various digital channels.

We continued to invest in our dot-com business and sales once again grew strong double digits for the quarter and year. Our private label credit card program was significantly enhanced with a new 5% back reward to our Neighbor's Club members.

And we completed the ramp-up of our new distribution center in Frankfort New York to support our continued store growth in the Northeast. We also achieved LEED Silver Certification for this facility, making this the third LEED Silver Certification facility in our fleet. And Tractor Supply was named to Barron's 100 Most Sustainable U.S.

Companies for the second year in a row. So, to summarize, 2019 was a solid year for Tractor Supply. And the team has a good handle on the business and has built a robust plan for 2020. In over 80 years' time, Tractor Supply has grown from a mail-order catalog business to the largest farm and ranch retailer in the country.

And our passionate commitment to our customers, team members, communities, as well as our shareholders is the foundation of our growth. All that has been accomplished over my 12-year tenure at Tractor Supply has been a total team effort.

I want to express my appreciation and gratitude to the nearly 34,000 team members across Tractor Supply and Petsense for a job well done. And I'm excited to watch the progress and growth for Tractor Supply that Hal and the team will provide in the coming years.

I will now turn the call over to Kurt, who will provide more details on our financial results for 2019 and our outlook for 2020..

Thanks, Greg. Please accept my many thanks for your friendship and your leadership. On behalf of the entire team, thank you for all you've done for Tractor Supply for the last 12 years. Now, let's get right into the results for the fourth quarter and the year. Sometimes weather-driven demand can help sales growth and then sometimes, it works against us.

Every quarter can be a little different at Tractor Supply. What is at the core of our mission is that, we are there for our customers, with the right products they need at that time and the right price.

To build on what Greg shared with you, our comparable store sales performance was driven by continued strength in our core farm and ranch categories, such as livestock feed, sensing forage and animal health. Offsetting this strength was softness in categories such as generators, rubber footwear, heating equipment, safes insulated outerwear and toys.

Within consumables, our pet food category average unit retail was impacted by the industry trend of trade down from grain-free products. Of significance, our data shows that we are retaining our customers, given the sales trends across the breadth of our product category offering.

In the quarter, we continued to drive comp increase of tonnage or pounds sold, as total pounds of pet food. As well, our pet supplies categories were up mid-single digits on a comparable store basis. We would anticipate the trade down trend to continue in the first half of 2020, until we cycle in the third quarter.

The unfavorable trends Greg mentioned, coupled with lapping the hurricane benefit from emergency to response categories in the fourth quarter of 2018, impacted our big ticket performance. We experienced softer results across generators, safes, stoves and air compressors.

Last year in the fourth quarter, we shared with you that, we believe comp sales benefited by about 100 basis points from the weather. This year, we estimate the negative impact from warmer weather represented about two-thirds of the comp miss versus our expectations.

Moving down the income statement, for the fourth quarter, gross margin increased 26 basis points to 33.8%.

This increase was primarily driven by a reduction in freight expense as a percentage of net sales from our cost reduction initiatives and the overall market and to a lesser extent, the team's effective management of our direct product margins, as they work to mitigate the impact of tariffs.

Including depreciation and amortization, SG&A as a percentage of sales for the fourth quarter increased three basis points to 25.2%.

The increase was primarily attributable to deleverage and store personnel occupancy and other costs given the comparable store sales performance and incremental costs associated with the new distribution facility in Frankfort New York.

Partially offsetting these SG&A increases were a decrease in incentive compensation as well as disciplined cost management by the team. Looking at our balance sheet, we believe our inventory is in good shape and we are very comfortable with its quality.

As we enter the year, we're well-positioned to wrap-up the winter months and transition into the coming spring season. In 2019, we generated cash from operations of $812 million, an increase of about 17% over the prior year.

Total capital expenditures were $217 million with approximately 35% of this being maintenance related and the remaining 65% being growth oriented in areas such as new stores, digital capability investments and supply chain infrastructure.

We remain committed to returning cash to our shareholders through our share repurchases and dividends while maintaining a disciplined approach to capital allocation. We're managing to a leverage ratio of approximately 2 times adjusted debt to EBITDAR. The majority of our debt is a very low fixed rate.

And we're comfortable with our debt maturity ladder. For the fiscal year, we repurchased nearly 5.4 million shares of our common stock. Since the inception of our share repurchase program in 2007, we've repurchased just over $3 billion of our common stock. Our remaining share repurchase authorization was approximately $1.5 billion as of year-end.

Turning now to 2020, we will continue to build on our strong foundation for long-term success across the business. Our strategic initiatives are focused on allowing us to exceed our customers, ever-evolving expectation and position us for further growth.

The offering of relevant products and services for our rural lifestyle customer is at the core of our merchandising plans. We will continue the introduction of industry-leading and differentiated brands.

Coming into the spring season, the team is very energized about the launch of Toro as this brand has a strong reputation for quality that really resonates with our customers. The Toro brand provides us with the opportunity to attract new customers and be more relevant with our existing customers.

We are also expanding our product assortment with a broader lineup of Cub Cadet and the addition of Troy-Bilt. Combined, these brands will help solidify our position as a premier destination in the lawn and garden category and enhance our already industry-leading lineup.

In equine feed, we have added the premium brand Triple Crown across the majority of our stores to further round out our strong offering in this category. New space productivity technology for SKU localization and assortment will be implemented across the chain to help drive specific growth plans by category and refine our product mix.

In addition, we'll be looking to enhance the shopping experience through selective store within a store expansion with an emphasis on winning brands such as Carhartt in workwear, Purina in livestock feed and Husqvarna for outdoor power equipment.

Overall, it is imperative that we merchandise our stores with the products and brands at everyday low price our customers expect. Exclusive brands continue to play an important role in our offerings. You can expect to see newness through brand refreshes and line extensions across our exclusive brand portfolio.

For example, Ridgecut, our new exclusive workwear brand will be expanded into footwear and accessories. Our initiatives to drive loyalty through our Neighbor's Club program play an important role in connecting with our customers on a more personal level.

Our loyalty program is a transformational asset to Tractor Supply that we will continue to elevate to drive greater relevance, engagement and loyalty. We're actioning the rich customer data we are receiving from our Neighbor's Club loyalty program.

The health of our program continues to be very robust as measured by membership growth, increased penetration of sales, greater frequency and higher average ticket sales by these customers. In addition, our core farm and ranch customer, which is our largest group by sales continues to be strong across growth, retention rates and spending.

Looking ahead, our artificial intelligence enabled tools allow us to scale our marketing efforts to target communication on a one-on-one basis. Our Neighbor's Club communication is being customized to offer products and services to an existing customer, engage a lapsed customer, or welcome a new customer to the program.

Our private label credit card continues to be a win for us. With the addition of a 5% reward that we rolled out at the end of September 2019, cardholders are now able to earn $5 in Neighbor's Club rewards for every $100 they spend on card. The loyalty proposition is more competitive and easier for our team members to communicate.

We exited 2019 with an annual tender penetration rate approaching 5% with all metrics since the rollout of the reward positive. We've seen robust growth across applications, sales and tender penetration.

In 2020, we anticipate capitalizing on the program enhancements to expand the Tractor Supply credit card penetration as we know that our credit card customers visit our stores more frequently and have a higher average spend.

Across the organization there is much work underway to support our strategic initiatives and to extend our leadership position in our markets. What I've shared with you today are just some of the areas where the team's focused to drive the business. Let's now turn to our financial outlook for 2020.

We expect net sales in the range of $8.75 billion to $8.9 billion, an increase of approximately 5% to 6.5%. Comp store sales growth is anticipated to be in the range of 1.5% to 3%. We anticipate opening about 80 new Tractor Supply stores and 10 to 15 new Petsense locations.

The cadence of new store openings this year should be more in line with our historical trends as we anticipate more balanced openings in the first half of the year. Our expectation is for modest gross margin improvement in 2020.

We're forecasting slight pressure on SG&A due to ongoing wage pressures and investments in our supply chain and digital space. Our outlook includes progress on our profit improvement plans to help mitigate cost pressures and our ability to reinvest back in the business over time.

We are committed to ensuring our spending is directed to our highest strategic priorities all on a sustainable basis. For the year, we anticipate operating profit margin to be centered around 8.9% with a clear emphasis on maintaining our margin rate.

Net income is forecast in the range of $575 million to $595 million or $4.90 to $5.10 per diluted share. As always, we would encourage you to think about our business between the first half of the year and the second half as this is in line with how we manage the business. As you model 2020, please keep in mind key factors to the cadence of our year.

Our business performance is expected to be stronger in the second half of the year as our compares ease. The first quarter of 2020 is forecasted to have the lowest comp performance of the year and correspondingly, the most pressure on operating profit.

As such, we anticipate first quarter net income and diluted earnings per share to be flat to the prior year's quarter.

Significant factors driving this performance include a discrete executive transition cost of about $0.02 per share, the incremental cost from the Frankfort distribution center that we do not lap until the latter portion of Q1 and cycling our toughest comps of the year.

Although, we are seeing the unseasonably warm weather trends continue into January, there is a significant amount of the first quarter and the year ahead of us. Moving to below the line, our effective tax rate is anticipated to be in the range of 22.4% to 22.7%, as we do not expect discrete tax benefits that we received in 2019 to reoccur this year.

Interest expense is forecast to be approximately $22 million to $25 million. Depreciation expense is estimated to increase 4% to 7%. This is below our recent run rate as we cycle the step-up in depreciation from the addition of our new distribution center in the first quarter of 2019.

As such, the growth rate will be towards the higher end of the range first half of the year with the lower growth in the second half of the year. For the year, our share repurchases are anticipated to range from $450 million to $550 million.

For modeling purposes, we've assumed weighted average shares outstanding of about 117 million to 118 million shares in 2020. Our capital spending is anticipated to range from $225 million to $275 million with roughly two-thirds of that spending going towards initiatives to support long-term growth.

We remain committed to a disciplined capital allocation strategy. Our first priority remains investing in the business to support long-term growth through the opening of new stores and our growth initiatives. We also are committed to creating lasting value for our shareholders through anticipated quarterly dividends and share repurchases.

That now concludes our prepared remarks..

Thank you, Kurt. David, we'll now open the line for questions..

And we'll take our first question from Michael Lasser with UBS. Q - Michael Lasser Good morning. Thanks a lot for taking my question and Greg congratulations. And Hal best of luck. A - Harry Lawton Thank you. Q - Michael Lasser My question is on traffic. You're suggesting that the year will improve as it goes on.

So, when can we really expect that traffic is going to get better? A - Kurt Barton Michael, this is Kurt. The traffic trends for Tractor Supply as Greg mentioned, the core of the business has been very consistent throughout 2019. And really the significant headwind that we face in any particular quarter are more about the compares as we saw in 2019.

And as we look at fourth quarter and transition into 2020, the traffic headwinds were more related to the weather and seasonal trends. So looking ahead to 2020, I pointed out to you, the toughest compares in first quarter and even indicated what we've seen thus far in January from less than ideal weather conditions.

Outside of that, we anticipate to be able to drive comps in both traffic and ticket and the compares on traffic to ease more in the second half of the year.

Q - Michael Lasser And really a follow-up question is putting the 1.5% to 3% comp guidance for this year in the context of a 3% plus long-term comp guide target, the market's historically relied on maybe 1% to 2% growth in traffic and 1% to 2% growth in ticket.

Is that still a reasonable expectation over the long run? Because some may argue that given how much -- how many initiatives have been in place the traffic from the quarter -- from the fourth quarter may signal that traffic growth moving forward might be a little slower.

A - Gregory Sandfort For the long-term Michael, we would anticipate that we'll continue to have a balance of both, trying to be more specific on either one of those in any particular year in the long-term not reasonable.

But I would say that our plans from the initiatives that we talked about expect us to be able to drive traffic and market share, but we also see with the merchandising initiatives that ticket is going to play a key part in 2020 and long-term as well. Q - Michael Lasser Thank you very much and good luck again.

Operator And next we'll go to Kate McShane with Goldman Sachs. Q - Chandni Luthra Hi. This is Chandni Luthra on behalf of Kate McShane. Thank you for taking my question. I guess we wanted to ask about understanding the margin opportunity at both ends of your comp guidance.

Is it safe to assume that there could be more margin opportunity at the 3% range? And do you have to capture SG&A to keep margins flat at the low end of your comp range? Thank you. A - Kurt Barton Sure. This is Kurt. The operating margin rate as I mentioned, we're very focused on maintaining the margin rate in 2020.

Low end and top end of the range there's a number of variables that can play into the drivers of that. And we believe we've got the flexibility and strong plans in place that allow us at both ends of those range.

There is -- at the top and bottom end there's sales mix that can play into that as well as the team's ability to drive benefit from profit improvement. But even as we've shown in fourth quarter, the team can flex down and manage expenses well.

So we believe we've got plans and we'll be very focused on either end of that range to maintain our operating margin for 2020 centered around at 8.9%. Q - Chandni Luthra Thank you. And if I could quickly follow-up in terms of just the health of the consumer. Are you seeing any signs of weakness from the energy economy? Thank you so much.

A - Gregory Sandfort I'll take that one. This is Greg. We've seen really no significant overhang from the chain in the oil markets. And it's only about 10% of our mix anyway. And so I would tell you that no nothing significant and we always look for indicators trading down of different things like within feed and such.

That's a pretty good indicator of what may be happening with consumers' overall confidence. We're not seeing any of that. So, for right now, I'd say steady as she goes. Q - Chandni Luthra Great. Thanks, Greg. Good luck. Operator And next we'll go to Scot Ciccarelli with RBC Capital Markets. Q - Gustavo Gonzalez Hi. Good morning.

This is actually Gustavo Gonzalez on for Scot today. Thank you for taking our question. I guess just in regards to pet food, and obviously the recent trend away from natural grain-free products.

Can you sort of provide us any more updates on what you're kind of seeing in that segment? And if anything kind of what you guys are able to do to sort of combat that trend? A - Seth Estep Yeah. This is Seth.

So similar to what Kurt stated on the call earlier and we mentioned in the last quarter, the grain-free trends due to the DCM announcement in early Q3 of last year has caused a little bit of averaging our retail decline that we've been very open about. We have got a very robust category management approach that we've been utilizing.

And actually next week, over the course of the next two weeks in our stores, you'll see some significant reset activity as we continue to respond to those trends. We'll have over 80 new items get launched in the stores. We'll also continue to be expanding upon the brands that are benefiting from the recent trends.

And we'll be launching new brands as well. So, you'll see candidate coming our store. You'll continue to see new innovation through our 4health lineup, and a new sub-brand called Thrive. We're fully committed to continuing to evolve with the trends in pet. And we continue to see pet and pet food as a future growth engine for us.

Q - Gustavo Gonzalez Got it. Thanks. And just one unrelated follow-up. So it looks like our data kind of points to general pet food kind of seeing a pickup in inflation in 2019 versus more of a deflationary trend over the past few years or so.

Is that kind of something that has manifested in your results recently across the pet business? And kind of what would be your sense as to what is driving that recent pick up? A - Seth Estep Yeah.

I mean, when you look at the industry trends that are out there, when you see some of that inflationary trend, I would say that's within the brands themselves. So, if you look at some of the introductions of the premium product in mass and grocery, obviously, they're seeing some price upticks as it relates to their mix.

However, when you look across our portfolio, when you look at the back half of the year, we did see some of the average unit retail decline just strictly due to the trade down and trade across from some of the super-premium grain products versus more of the traditional premium products.

So, at this point, we're not seeing anything that's significant in terms of inflation. Q - Gustavo Gonzalez Got it. That’s it for me. Thanks guys. Operator Okay. Next, we'll go to Simeon Gutman with Morgan Stanley. Q - Simeon Gutman Thanks everyone, and Greg, congratulations, good luck, and Hal welcome. My first question is on 2020 network.

So, you guided [indiscernible] a few times. It feels like it's not a natural number of the business given what you're seeing today as opposed to Hal having a chance to look at the business and we make an assessment.

And I just wanted to confirm that and maybe hear from Hal presenting initial thoughts on the level of investment that the business has been making over time and then the initial thoughts he had been looking into the business. A - Mary Winn Pilkington Simeon, this is Mary Winn. We really are having a hard time hearing you on your line.

So if you don't mind, can we get you to repeat that question? Q - Simeon Gutman Yeah. Here I took up handset. Is that better? A - Mary Winn Pilkington Modestly. Q - Simeon Gutman Okay. My first question was on the 2020 [indiscernible] trend -- flat margin. It feels like that. Okay. I'll get back into the queue. A - Mary Winn Pilkington Okay. Thank you.

Okay we'll just move on to the next question. Operator Next we'll go to Christopher Horvers with JPMorgan. Q - Christopher Horvers Thanks and good morning. And Greg it's been a pleasure all these years and congratulations on a wonderful career. And Hal it's great to be working -- it's really great to be working with you again.

So I'm really excited about everybody's future here. I wanted to still put a question to both of you. So sort of how do you think about the need to invest here? You guys have put a lot of money into the business over the last few years, your stockyard kiosk roll out buy online pick up in store loyalty card enhancements.

So what do you think the big sort of investment buckets that are left is sort of click and collect something that you think is right for your customer in box size? Is there sort of like a big data -- sort of data science need that you'd like to build out? Just trying to get a sense of what big things are -- not to do versus what you've accomplished so far and how maybe that could impact spending? A - Gregory Sandfort Chris this is Greg.

I'll start out by saying that you're right, we've made some investments. It's a terrific foundation. But those investments are beginning to scale. I mean these things take time.

And what -- we're happy with what we're seeing whether it be a Neighbor's Club or be it in the use of stockyard, the mobile POS initiatives many of the things that we've put money into -- I would tell you that this is a wonderful jumping off point for me and a wonderful entry point for Hal. So from there I think Hal, I'll let you take it.

A - Harry Lawton Thanks Greg. First off I'd just say I'm incredibly excited to be at Tractor. It's a special retailer as I said in the opening remarks with a real clear purpose. And I'd start with just saying, I'm excited about the opportunity to continue to build on the foundation that the team already has in place to drive the business forward.

As Greg said there's a number of really strong initiatives that are just starting to get scale. We've incorporated those into our 2020 plan. I think it's a robust and realistic and prudent plan. The team has a track record of success and there is a strong management team in place.

I'd say as it relates to me, I'm really spending my -- this is week three for me. I'm spending a lot of time listening and learning right now with Greg with the management team, spending time in our stores and our distribution centers. And everything I'm seeing is only -- it's even better than what I had anticipated.

So, I'm really pleased with the first three weeks in. And as I learn more in the team -- and things -- and our views evolve, I look forward to sharing with the investor community over time. Q - Christopher Horvers Understood.

So, sort of a lot of money put in and figuring out where things are, so in a sense a little bit TBD… A - Harry Lawton No, go ahead. Q - Christopher Horvers No go ahead, I think you want to add there. A - Harry Lawton So, I was going to say I think that's a fair assessment to me personally.

I think as it relates to the business, we're very executed -- very focused on executing our 2020 plan. As Greg said in his opening remarks, we're very committed to a seamless transition here. There's a very purposeful overlap organized by him and myself as well as the board. And we have a strategy and a game plan in place for 2020.

And as it relates to any updates that we may make in our long-term strategy targets, we'll share more with you that as it evolves. But we have a very clear 2020 plan. Q - Christopher Horvers Okay, got it. And then as a follow-up, you mentioned that two-thirds of the comp shortfall was weather, so call that maybe 150 basis points.

Do you think the rest was the six days? And does that suggest that you think the underlying business is sort of that 2% to 2.5% that you had originally guided for? And related to that, do you think that, do you expect 1Q comps to be positive given the impact of the weather so far? A - Kurt Barton Chris, this is Kurt.

So, there was a number of points in there. I'll just take the clarification on the fourth quarter, what was the impact. We estimate based on the data that about two-thirds of the miss to our expectation is weather related. We have very specific weather-related items that we sell.

And we also know when the customer comes in for those seasonal weather trends needs-based items. There's additional items they purchase on their trip. Two-thirds of our shift in the comp performance, we would package as weather-related in those two categories. The remaining one-third is pretty well balanced between what we mentioned on.

We feel like there was an expectation -- an impact from the six less shopping days. And we also mentioned the AUR shift in the pet side of it, so those two really round out that remaining one-thirds. And the core of the business as Greg mentioned is strong. And the Q merchandise has consistently performed solid comps in all four quarters of 2019.

And as you know, we've talked about -- that's the core of our business. That's what fundamentally we take into 2020. And we capitalize on seasonal weather trends as the opportunity exists. Q - Christopher Horvers On 1Q? A - Kurt Barton Chris, on 1Q like I said, we anticipate first quarter to be our toughest compare.

And January weather conditions are not ideal at this point. But as it's the earliest part of our quarter, we still have a lot of the quarter ahead of us. Q - Christopher Horvers Understood. A - Kurt Barton And as you know, Q1 is a transitional quarter and you have us transitioning out of winter and into spring.

And the timing of that transition can really shift between Q1 and Q2. So, still so much about the quarter and the first half still ahead of us. Q - Christopher Horvers Got it. Thank you. Best of luck. Operator And next we'll go to Chuck Grom with Gordon Haskett. Q - Chuck Grom Good morning. Congrats. Good luck to both Greg and Hal here.

Hal, one for you just to kind of pivot off of Chris' question, I know it's only been 20 days or so. But I guess just bigger picture, how are you thinking about the foundation of the company in terms of store targets, the optionality with loyalty with what you've seen at HD in Macy's.

And I guess, ultimately, do you think 9% is the right operating margin for the business to succeed? A - Harry Lawton Hi, good morning. To start with what I said earlier is that, I'm incredibly thrilled to be here at Tractor Supply, just a few weeks in, doing a lot of listening and learning right now.

I think probably the best way to answer that would be just explain what attracted me to Tractor Supply. I start with -- it is very much a differentiated leading retailer in the space, with a strong brand, a true reason for being, in a differentiated customer base, a very special culture and unique opportunities for growth.

I'd also comment that the team has made a number of investments in the last few years, which are starting to scale. And you're seeing the benefits of those with our customers. And we're confident that those will continue to deliver results in 2020.

I also do think that there is, as I said in my opening remarks, an opportunity to continue to become even more, integral, into our customers' lives. And things like the Neighbor's Club and other categories that we are pushing on. And activities are going to help us do that. But I'm very excited to be here.

And as I said earlier is I look forward to engaging with the investment community over time as appropriate. Q - Chuck Grom Okay, so, no initial thoughts on, store targets or margins at this point? A - Harry Lawton We have no updates to any of our long-term targets, at this time. As we're still -- those are still very much what we're focused on.

And I think our 2020 guidance is consistent with those. Q - Chuck Grom Okay, fair enough. And then just on 2020, when you think about what Tractor can control in terms of sales.

Can you force rank where you guys see the most optionality over the next four quarters in terms of Neighbor's Club, cultivating the relationships that you've built up kiosks digital? I know you got a couple of new brands hitting Toro. Just help us contextualize how you think about the year, in terms of what you guys can control? Thanks.

A - Kurt Barton Chuck, this is Kurt. I mentioned three things that, we look at as the Tractor Supply controlled initiatives that we believe benefit us in 2020 and we're going to lean on and we've made the investments. First is, the relevant products and services.

As I mentioned in my prepared remarks, our outdoor powered equipment lineup is strong, going into the spring/summer season. So we'll lean on the combination of those brands there as well as the introduction of Triple Crown.

In addition to that, secondly, our private label credit card momentum is strong, coming off the introduction of the 5% reward back. And we'll carry that momentum out of the fourth quarter into 2020. And we believe it's a sales driving asset that we've got. And then, I'd ranked third with that as Neighbor's Club.

And how we're actioning the data as we mentioned to be able to not only retain and communicate with potential lapse customers. But as a lifestyle retailer, the ability to find look-alike lifestylers and then digitally engage with them is a completely new tool that we've got. We started to put that into place in the back half of 2019.

And I guess after those three, I'd throw in that, we're excited about what John Ordus and the store operations team is doing with their Tractor Way program that came out of operational efficiency. They've taken work out of the back room. And they're moving it to selling cultures.

And where we've introduced that, earlier in 2019, availability of product, scores from our customers were up and customer service scores as well. And we know if those two increase it's positive to sales. So, we also believe fundamentally there's some good traction in that program. Q - Chuck Grom Very helpful. Thanks and good luck.

Operator Next we'll go to Steven Forbes with Guggenheim Securities. Q - Steven Forbes Good morning. I wanted to… A - Harry Lawton Good morning, Steven. Q - Steven Forbes …maybe revisit the fourth quarter traffic performance.

Maybe if you could provide a little more color around maybe the cadence of traffic where risks -- or if the weakness was concentrated during a specific period in the quarter.

It really is like if you compare December traffic trends versus the average, I mean, is there a large call out or any sort of quantification you can provide us? A - Kurt Barton Yeah. Steven, this is Kurt. In regards to the traffic trends, first, the primary drivers mentioned was weather related.

And I'd point that out, because the two real factors on both comps and traffic were about comparing up against a strong hurricane in October of 2018 and then the expected positive change in weather conditions in December not actually occurring as expected and heavily forecasted.

So, in regards to the cadence and expectation, October and November as we expected saw some decline in traffic, because hurricanes drive a good heavy amount of traffic. You even get the ancillary customer coming in for that destination. November was extremely cold last year. So, October, November while traffic was down was not against our expectation.

The expectation was we would see more normalized December cold weather and that's really in both total and traffic where the missed expectation occurred as principally in the month of December.

Q - Steven Forbes And just a quick follow-up right maybe stay with you Kurt, if you can just help us better understand the monthly weights as we look out the fourth quarter -- the first quarter, what does January represent as a percentage of the total as we conceptualize right the ongoing weather risk? A - Kurt Barton Steven, we don't give specifics.

But as we've said in the past the quarter, the month weight heavier as you move through the quarter. So, January is the weakest in total percentage of the three and March is the heaviest. Q - Steven Forbes Thank you. Operator And next we'll go to Simeon Gutman with Morgan Stanley. Q - Simeon Gutman Thanks. Is the volume better now? A - Harry Lawton Yeah.

A - Mary Winn Pilkington It’s better. Thank you. Q - Simeon Gutman Okay. Thank you. And Greg congratulations and good luck in retirement. And welcome Hal. A - Harry Lawton Thank you. Q - Simeon Gutman My question the first one is on 2020, you talked a little bit historically about getting up leverage closer to 3% -- at the 3% level.

You're getting to flattish margins with a little bit less than that in 2020 at least the midpoint of the guide. You mentioned Kurt, I think some efficiencies that you're getting. But are you under spending in any place? Have you cut back in any spot? A - Kurt Barton Simeon, this is Kurt. So, in regards to long-term targets in 2020.

Our long-term targets anticipate that overall in regards to our targets of continuing to invest in the business opening 80 Tractor Supply stores, we can have an assumed 3% plus comp and see operating margin improvement.

What we also know is in a year like 2020 where we anticipate that that number could shift below that, we can make the necessary investments in the business and we can actually -- we can flex and control manage the expenses like we did in Q4 to help us maintain that operating margin.

In a year like 2020, if we were to fall towards the bottom end of that range, the team will be as controlled and nimble. And we've done that in Q4. And if that were to be the scenario, we would actually have lower-than-normal levels of incentive compensation as an example. So, we believe that we can maintain that margin.

And as we grow the business, we do think the long-term plans continue to show opportunity to even have operating margin improvement. Q - Simeon Gutman Okay. And then the quick follow-up is on the pet category. You mentioned, you're looking at the data and you're retaining your customers.

Can you talk about are you still acquiring customers at the same rate? I didn't know if you were careful with your comments because there is a change. I mean retaining is good, but are you still growing your customer base at a rate that you were before in the pet and Q categories? Thanks. A - Seth Estep This is Seth.

Look when you look out at Q4, specifically in Q3 and Q4, the ability for us to leverage our Neighbor's Club capabilities has been really, really strong. So, we're seeing nice gains when it relates to acquiring new customers through utilization of that tool, specifically like Kurt was talking about a little bit in these look-alike.

So yes, we see us continuing to go out and acquire market share and gain new customers through the category. Q - Simeon Gutman Thanks again. Thanks. Operator And next we'll go to Seth Sigman with Credit Suisse. Q - Seth Sigman Hey, guys. Good morning. Thanks for taking the question and Greg best of luck and Hal welcome to board.

I wanted to follow-up on the comp outlook. I guess from our side, we're still not clear as to why. It's largely just weather and you're not really seeing any sort of change in the consumer. The comp guidance for this year of one and a half to three, it is below that long-term algorithm that long-term 3% plus.

And so, is that just because of the first quarter comparison? Or are we missing something? So, if you could just add a little bit more context on why you're setting the range where you are for 2020 comps? And then I'll just have a related margin follow-up. Thanks. A - Kurt Barton Okay. Seth, this is Kurt.

As we planned our 2020 year-end the guidance that we shared with you we look at all factors internal and external. Certainly, first quarter plays into some of that assumption. But as we look at the business we're realistic as to 2020. While our customer continues to show signs of being healthy, in 2020 early sign there's indications of GDP slowing.

It's an election year. Those types of things we had to consider in 2020 that can play into the consumer. So, we anticipate with our initiatives that we've got good momentum, fundamentals are strong. We can drive in the long-term towards that target. But what we're presenting to you is a reasonable prudent expectation for comp sales in 2020.

Q - Seth Sigman Okay. Thank you for that.

And then so just in light of that comp outlook, why is flat the right margin set up for 2020? In other words, if you do think that comps could be a little bit more constrained than the longer-term potential, is there an opportunity to maybe invest a bit more aggressively this year? If you go back to past periods where comps were under 3%, the margins haven't really been flat or up in those scenarios.

So, just love to get your perspective on that. And then just the gross margin you are guiding to an improvement any more color on that? Thank you. A - Kurt Barton Sure. Seth, this is Kurt again.

And as we framed up the operating margin for 2020 trying to center around 8.9%, a number of the things that you mentioned is certainly a part of our consideration.

As I answered an earlier question, we believe we've got the initiatives in place that can allow us to -- with profit improvement and efficiencies allow us to offset some of the pressures on the business, particularly wage pressures to be able to maintain that margin.

In other cases, we have initiatives in place that help offset some of the investments we want to make in the business. So the way I'd frame it up for you is we've got a number of variables and levers we're pulling and allowing us to make the right investments.

If the comps were at the lower end, we may flex on it to allow us to maintain around the 8.9% as well. So, we're going to manage this real time and we're going to work with the levers and flexibility they have. And I'll just point back to Q4 again and just show our ability to manage that and be nimble as an example.

Q - Seth Sigman Thanks very much and good luck everybody. A - Harry Lawton Thank you. Operator And next we'll go to Peter Benedict with Baird. Q - Peter Benedict Hi guys. Thanks. Congrats Greg. And welcome to Hal. I look forward to working with you. A lot of mine have been asked here, I'm just going to hit a couple of quick ones.

First, just maybe I don't know if it's for Seth. But the timing of the store within a store Seth rollouts? And also the SKU localization efforts, any color on how it's going to cadence in 2020? A - Seth Estep Yes. So first with stores within the store.

I mean, you'll start to see those to come to life as we do reset throughout the year where we target key brands. So, it's our goal not only to build on that strong exclusive brands, but also make sure we anchor with the leading brands in the industry.

And so as we do reset such as here in Q1, I mean, you'll see Toro come to life in the store as you're there. You'll continue to see Purina come to life as we do our feedback resets. So, those types of things will come throughout the cadence of the full year as we touch those planograms.

When you look at localization and store, our localization, we just now are in the process of finalizing standing up our assortment optimization platform. So we'll be rolling that out methodically making sure that obviously we do that as prudent as we can.

While at the same time when we think about localization, the team has been really focused on partnering with some of our key suppliers as well. So, you take the spring -- you take the spring season that we're rolling into here. We're going to make sure that we're set and ready to go to capitalize.

So, partnerships we have with key suppliers such as ScottsMiracle-Gro, leveraging their analytics team, making sure that we have the right products and the right store at the right depth. That's another key piece of the localization that the team is focused on to make sure that we can capitalize on the traffic and drive sales.

Q - Peter Benedict Okay, that's helpful. Thanks. And then maybe one for Kurt. So look I know looking at the business in halves is really the way to do it for Tractor Supply.

But as we think about the 1.5% to 3% comp range for the year, does that envision maybe any of the quarters being above or below that range? I mean, it seems reasonable maybe 1Q below that or maybe more opportunity in 4Q. Any color on just how you're thinking about it, Kurt, would be helpful. Thanks so much.

A - Kurt Barton Peter, I'd say generally, there's low end and high-end across the quarters. And as I mentioned, first quarter is going to be our lowest, but nothing of significance to call out beyond that range of about 1.5 to three in any particular quarters. Q - Peter Benedict Okay. Fair enough. Thanks so much guys.

A - Mary Winn Pilkington David, I think we've got time for one more question in the end. Operator All right. We'll go next go to Zach Fadem with Wells Fargo. Q - Zach Fadem Hey. Thanks for fitting me in and I'll keep it quick. First question on the profit improvement plan.

How much does that come into play over the past two quarters, particularly with EBIT expansion on sub three comps? And then curious if you could talk about what's next for the plan and how you think about that 2020 opportunity to drive further productivity? A - Kurt Barton Zach, this is Kurt.

On profit improvement in the back half of the year, as you know, we've been -- we've made investments in store in DC productivity, indirect procurement and transportation. In the back half of the year, the one area that really drove the key benefit coming out of it that would be the transportation side of it.

We're able to jump on that early in late 2018. And back half of the year, as you know, we saw benefit from transportation.

We're excited about the other categories, but there's been a balance of what we've had to do to invest to make the changes in engineered labor standards in the distribution center, we had to build an indirect procurement team and the work we've done to roll out all the tools and training in the stores.

So the opportunity in those three other areas is now as we begin to roll that out and it matures and we train. So these are multiyear benefits that just early in their maturity and a lot of runway in those three other categories. Q - Zach Fadem Got it. Thanks for that remark.

And then – sorry, just in the pet and feed categories just a quick question on your auto ship efforts. Do you think this is an offering that resonates with your customer base? And then just given the economics, is this an area we should expect to lean in on going forward? A - Seth Estep So yes, this is Seth.

So we've obviously implemented some of the subscription-based services throughout the year. We see it as an opportunity long-term that we'll continue to test into and make sure that we do it correctly. So, you'll hear more about that in the future.

But obviously the capability that we brought to life, we do anticipate leveraging as we move forward to make sure we continue to drive market share. Q - Zach Fadem Got it. Appreciate the time. A - Mary Winn Pilkington Great. Thank you. Yes, I'll turn it over to Hal now. End of Q&A Harry Lawton Great. Thanks Mary Winn.

And thank you everyone for joining our call today. In closing, I want to say once again how delighted I am to have the opportunity to lead this extraordinary retailer. I mean what has made Tractor Supply is and what will continue to make us special.

I believe our business is well-positioned across the retail landscape as it's a company that has a very clear reason for being and is relevant to our customers. Our commitment to provide legendary service and great products at everyday low prices will continue to be the foundation of our growth.

I look forward to sharing more about our plans to strengthen our position in the coming months. Mary Winn Pilkington Thank you all for joining the call today. This will wrap it up. Marianne and I will be around if you have any questions. And we look forward to talking to you on our first quarter call in April.

Thank you for your interest in Tractor Supply and have a great day. Operator And that does conclude today's conference. We thank you for your participation. You may now disconnect..