Tractor Supply - Earnings Call - Q4 2011

Transcript

Speaker 4

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss fourth quarter 2011 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. Should anyone require assistance during the call, please press star, then zero on your touch-tone phone. Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Tractor Supply Company. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Jennifer Milan of FTI Consulting. Please go ahead, Jennifer.

Speaker 3

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Before we begin, let me take a moment to reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. Although the company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed.

Investors should not assume that the statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. Now, I'm pleased to introduce Gregory Sandfort, President and Chief Merchandising Officer. Gregory, please go ahead.

Speaker 1

Thank you, Jennifer. Good afternoon, everyone. I'm here today with James Wright, our Chairman and CEO, and Anthony Crudele, our CFO. We are pleased with our fourth quarter performance, which caps off another strong year for Tractor Supply Company. Our team continued to execute well in what remains a challenging environment for customers and retailers. In the fourth quarter, we experienced another period of strong, broad-based performance across the store and achieved double-digit increases in both sales and profitability, on top of record results a year ago. This mix of broad-based sales growth across the store continues to mitigate our dependence on weather-related merchandise. The momentum in our business is a reflection of the structural improvements we have made in recent years.

Not only have we increased our focus on consumable, usable, edible key merchandise, which has proven to be a very successful strategy in meeting the needs and creating loyalty with our customers, but we have also made great strides in our inventory management through better merchandise allocation and expanded regionalization. These sustainable improvements have enabled us to ensure we have the right products in the right places at the right time. As we continue to learn more about our customers each day, we are working diligently to further refine our product offerings, our marketing initiatives, and the in-store shopping experience. Now, let me provide a little more detail on our performance during the fourth quarter. Our strong top-line sales results were reflective of consumers' continued support of our unique merchandise mix, which enables us to meet their needs across multiple categories at a compelling everyday value.

As we had anticipated, weather was warmer than last year in the quarter, and we planned accordingly. We were nimble and adjusted our merchandise mix to take advantage of the weather trends. Our proactive planning approach to merchandise allocation and regionalization enabled us to deliver higher year-over-year results for the quarter. During the fourth quarter, our key categories remained key sales and traffic drivers. Our feed and food customers shop our stores more frequently and contributed to our 15th consecutive quarter of comp transaction count increase. Despite the inflationary environment, we continue to provide compelling values to our customers while effectively managing merchandise margin. We were once again capable of improving gross margin dollars per unit in most key categories while increasing market share. We also achieved strong sales performance in our hardlines areas, which include tools, hardware, truck, and automotive.

Our strategy of balancing our product selection between national brands and increased private label brand mix across multiple categories contributed to improved performance for the entire category. From an inventory perspective, our rigor has enabled us to manage flow more productively. As a result, we continue to execute better than ever. While we did decide to move forward spring deliveries for several of our southern regions to accelerate sales, we were pleased with our year-end inventory position, and we continued our successful management of seasonal carryover and minimized forward business risk into the next season. Operationally, we continue to make great strides in the areas of inventory management, price optimization, and merchandise allocation and regionalization. These collectively have driven meaningful, sustainable improvements in our business.

Our fourth quarter in 2011 results further validate that we continue to gain traction from our strategic initiatives, and as we look to 2012, we have never been more excited about the opportunities that lie ahead. I'd now like to turn the call over to Tony to review our financial results for the quarter and discuss our outlook, after which Jim will share some closing comments.

Speaker 5

Okay, thanks, Greg, and good afternoon, everyone. We delivered another very strong performance in our fourth quarter. Our sales growth remained broad-based, and we continued to increase our market share in many of the key merchandise categories. We achieved these results despite being up against robust sales growth last year and experiencing relatively unfavorable weather conditions compared to last year. For the quarter ended December 31, 2011, on a year-over-year basis, net sales increased 20.1% to $1.24 billion, and net income grew 40.4% to $70.5 million or $0.96 per diluted share. As a reminder, the fourth quarter included an extra sales week as part of the company's 53-week calendar in 2011. The additional week also added one comparable store sales day in the quarter. The additional week resulted in our fiscal year ending on Sunday, December 31.

The comparable week last year ended on January 1, and our stores were closed for the holiday. For modeling purposes, please note that we will have one less comp sales day in Q1 of 2012 due to the calendar shift. The additional week represented 6.6% of the overall sales increase for the quarter. Comp store sales increased 7.6% for the fourth quarter compared to last year's increase of 13.1%. We continued to drive transaction count increases with our Q products, while average ticket was favorably impacted by inflation. We estimate that the additional comp day represented an approximate 110 basis point benefit to same store sales in the fourth quarter. Non-comp sales were $71 million or approximately 5.7% of sales. Comp transaction count increased for the 15th consecutive quarter, gaining 3.6% on top of an 8.8% increase last year.

Our Q products serving our customers' basic and functional needs remained an important driver of footsteps. The trend in average comp ticket continued to be positive at 3.8% versus last year's 3.9% increase. Inflation, which was seen in many of our feed categories, was a key driver of the average ticket increase. Big ticket purchases, which we define as items greater than $350, also contributed to the increase. The transaction count of big ticket purchases increased year over year, which more than offset a slight decrease in the average ticket for these larger purchases. We continued to experience broad-based sales strength with respect to both merchandise categories and geographic regions. All eight of our geographic regions had positive comp store sales. The Northeast and Southwest were the strongest regions, while the Upper Midwest was the softest as the region cycled against strong sales from winter storms a year ago.

The broad-based nature of sales growth supported positive comps during each month. The relative strength was seen early in the quarter as December was very warm. Inflation exceeded our forecast for the quarter, as we estimate that it contributed nearly 500 basis points to top-line sales. Inflation was most evident in livestock feed and lubricant categories, with cost increases in both grains and oil. Turning now to gross margin, which as a percent of sales decreased by 11 basis points at 32.5%. Direct product margin percent improved slightly as we continued to make progress on our four strategic gross margin initiatives. This helped offset negative mix impact of the Q products. The merchandising team continued to do an excellent job managing gross margin through a period of continuing inflation in many of the core categories.

For example, in several of our Q categories, while the overall gross margin rate declined slightly, we increased the number of units sold and the gross margin dollars earned on each unit. As you can see from the results, this approach was very effective in managing gross margin dollars during the fourth quarter. Markdown cadence was consistent with our expectations during the quarter. We did, however, book a one-time charge for a marginally profitable welding gas product line that we rationalized and will be exiting in several hundred stores. This negatively impacted gross margin by approximately $2.7 million in the fourth quarter, or about 20 basis points. Freight expense increased by 37 basis points over last year. This increase was driven by higher fuel costs, costs associated with increased import activity of the seasonal goods, and the continued mix shift to more freight-intensive merchandise.

As part of our strategic sourcing initiative, import purchases in the quarter represented a little over 9% of total purchases, which is a greater than 16% increase year over year. Overall, we're pleased with our ability to successfully manage gross margin while continuing to provide great values to our customers. For the quarter, SG&A, including depreciation and amortization, was 23.5% of sales, which was a 150 basis point improvement from the prior year's quarter. The improvement in rate resulted principally from our same store sales growth and leverage provided by the 53rd week. We leveraged our key store expenses, payroll, and occupancy while growing the store base 8%. Incentive compensation was relatively consistent with the prior year and had a favorable impact of 8 basis points during the quarter.

We are very pleased with SG&A leverage that we achieved during the quarter, particularly given a one-time charge for the write-off and acceleration of depreciation of certain e-commerce assets. As we move forward into 2012 with our multi-channel replatforming initiative, we reassessed the useful life of our existing platform. Additionally, we increased our sales tax reserve as states continue to pursue revenue generation alternatives. These two charges amounted to approximately $3.6 million, representing a 29 basis point increase in our SG&A rate during the fourth quarter. Turning to the balance sheet, at quarter end, we had $177 million in cash compared to $257.3 million last year. We exceeded our year-end cash target of $100 to $150 million as our 10B5 plan limited the amount of shares we repurchased in the fourth quarter. During the fourth quarter, under our stock repurchase program, we acquired approximately 114,000 shares for $7.9 million.

For 2011, we purchased 3.1 million shares for $180 million, or an average purchase price of $58.52 per share. We estimate that there was minimal impact to EPS from share repurchase in the fourth quarter. For the full year, we estimate that the share repurchase program increased EPS by approximately $0.08. Average inventory levels per store at quarter end increased 2%. We did an excellent job managing inventories in light of embedded inflation, the opening of our largest DC in September, and the additional week in our calendar as we flowed merchandise for our January events. Inventory turns for the year were 3.23 times, or a 14 basis point improvement over last year. Capital expenditures for the year were $166 million compared to $97 million last year.

This increase in capital spending related to approximately $48 million for the construction of our new distribution center in Franklin, Kentucky, compared to $22.5 million expended in the prior year for conveyor systems and equipment for two distribution centers. Additionally, we acquired 12 of our lease stores for $32 million compared to 4 stores acquired last year for $12 million. We opened 31 stores in the quarter versus 27 stores in the prior year's fourth quarter. Turning our attention to 2012, first our outlook for a few key metrics for the full year. We expect full-year sales to range between $4.56 billion to $4.66 billion. We have forecasted comp sales to increase between 3% and 5%. We are targeting improvement of approximately 15 to 20 basis points in EBIT margin compared to 2011.

We anticipate net income to range from approximately $246 million to $253 million, or $3.38 a share to $3.46 per diluted share. We expect to open 90 to 95 new stores. Let me discuss some of the specific drivers and assumptions that helped us form our projections for 2012. We expect the retail environment will be stable, but the consumers will continue to be cautious as unemployment remains high. We expect that our customers will continue to shop our stores for basic and everyday needs, similarly as they did during 2011, and that they will remain price-conscious and value-oriented. Although there were some positive negative weather events in 2011, such as the hurricane activity and the Southwest drought, we believe it was a net neutral year from a weather perspective and that we can effectively manage the business against these comparisons in 2012.

Therefore, we do not anticipate that weather trends will have a significant impact on year-over-year results in 2012. With respect to inflation, we anticipate that we will continue to have considerable impact ranging from 3% to 4% in the first quarter as key commodities prices remain high. We expect that the inflationary impact will moderate as we begin to cycle the commodity price increases that we experienced last year. Overall, our forecast assumes inflation of 1% to 2% for the full year. We have demonstrated our ability to manage pricing effectively over the past several years. We are targeting 15 to 20 basis points of EBIT margin improvement for the year, with the majority coming from gross margin rate as a result of several of the key merchandise initiatives. For the full year, we expect gross margin rate expansion of approximately 10 to 15 basis points.

This reflects our expectation that gross margin percent will be somewhat flat in the first half of the year, with improvement weighted more to the second half as the impact of inflation on our merchandise costs subsides. As I mentioned earlier, we manage profit per unit during inflationary times, focusing on gross margin dollars instead of rate. We also expect freight costs to remain a headwind until we begin to cycle the accelerated fuel costs we experienced in 2011. Additionally, similar to 2011, we expect imports to increase as a % of our total purchases, which will increase our freight costs but have an overall favorable impact on gross margin rate. We also expect continued headwinds from the merchandise mix shift to more freight-intensive Q products. Inventory turns are expected to improve slightly, with per-store inventories likely to increase modestly due to investments in key merchandise categories and some inflation.

With respect to SG&A, we expect slight leverage as we remain committed to growing our store base and the supporting distribution and technology infrastructure. We expect to increase our marketing spend by 8 to 10 bps in 2012 as we plan incremental investments in direct marketing, circulars, and customer research, and continue to test various other programs. Store payroll is expected to leverage slightly as we grow our comp sales base and begin to cycle to a more normalized level of incentive compensation, which should offset wage and healthcare increases. We also expect modestly to leverage our store support center costs as normalized incentive compensation offsets increased expense from full-year management additions in 2011 and new hire growth in 2012. We anticipate slight deleverage from our distribution network, reflecting a full year of operations from our new Franklin, Kentucky distribution center.

There are several levers that we can control when managing various expense line items. As in the past, we will continuously assess the environment and the company's performance in 2012 and judiciously allocate resources accordingly. For the full year, we forecast that our effective tax rate will be approximately 36.8%, an increase from 36.5% in 2011. This will result principally from a reduction in expected federal tax credits. We plan to increase capital expenditures in 2012 with a range of approximately $160 million to $170 million targeted for the full year. We have included approximately $40 million as a placeholder for a lease store acquisition program and $11 million potential land acquisition for a Southeast distribution center relocation. Additionally, we expect an incremental $6 million spend as part of our e-commerce replatforming.

As I stated earlier, we plan to maintain our store growth rate and to open approximately 90 to 95 stores in 2012. We plan to open 50 to 55% of these stores in the first six months of the year, with 30 to 33 new store openings expected in the first quarter of 2012. We will continue to make purchases under our share repurchase program as part of our long-term objective of reducing our cost of capital and maintaining a target cash balance of $100 to $150 million. For modeling purposes, we estimate that diluted shares outstanding, inclusive of option grants and share repurchase activity, will approximate 73.1 million for the full year.

As we've emphasized in the past, we believe our business can be more accurately assessed by focusing on the halves, not the quarters, as weather patterns can change significantly from one year and shift the timing of sales. We currently estimate that the net earnings will be fairly consistent each half of the year, as year-over-year earnings growth will be slightly greater in the first half of 2012. However, if you normalize 2011, adjusting for the additional week, growth in the back half of fiscal 2012 is expected to be slightly greater than in the first half. Some key points with respect to the quarters. As another reminder, 2012 is a 52-week year. Thus, Q4 will have one less sales week relative to 2011. We estimate that the benefit of the 53rd week in 2011 was approximately $0.09 per diluted share.

Due to the calendar shift, Q1 and the full year 2012 will have one less comp sales day compared to 2011. As a result of the calendar shift back to the 52-week year, Q1 in 2012 will benefit from an added week later in the spring selling season, replacing a below-average sales week between the holidays and late December. Therefore, we anticipate that the year-over-year earnings growth will be the strongest in Q1 this year, even with the one less comp sales day. Also related to the calendar shift, we will pull some marketing expenditures forward into Q1 to drive spring sales in the southern region. We believe that this will pull some sales to Q1 from Q2 and, as such, anticipate that Q2 will have the lowest quarterly year-over-year earnings growth in 2012. Thus far, in Q1, comps are positive, even withstanding the one less comp sales day.

We expect the comp store sales will be slightly stronger in the first half of the year, as we will cycle stronger comp sales in the back half of 2012. Except for the one less comp day in Q1 2012, as previously mentioned, there are no other calendar shifts between any quarters that would affect comparability to 2011. As in the past, we will provide more color on our expectations for the subsequent period at each quarterly conference call. Now, I'd like to turn the call over to Jim for more details on our plans for 2012.

Speaker 1

Great. Thanks, Tony. Good afternoon, everyone. Today, Tractor Supply Company is agile and able to respond to regional and seasonal opportunities, and our planning and our execution are, frankly, the best in our history. While we are pleased with our progress over the last few years, we really believe that we have not arrived, and we remain excited about our lean initiatives and other opportunities that lie ahead. In 2012, we'll continue to focus rigorously on our long-term strategic objectives. The structural improvements that we've made to our business in recent years are taking hold, and we believe that we are only in the early stages of realizing the benefits. While we will continually test and refine the assortments, our marketing programs, and the in-store shopping experience, we believe that we have the foundation in place to maintain momentum through 2012 and beyond.

As we embark on another exciting year for Tractor Supply Company, I'd like to speak briefly to our retail environment. Consumers continue to look for compelling value, and purchases are being driven by need and taking place closer to need. What has changed, however, is our ability as a company to anticipate our customers' needs and react more quickly to those needs. This was demonstrated by our fourth quarter performance and the results we achieved throughout 2011, as we overcame severe drought in Q2 and Q3 and a mild Q4. Looking ahead to the upcoming spring selling season, we remain confident that we have the right plans in place to drive results and to build our brand. We're expanding a number of assortments and continue to test and refine our product mix. For instance, we will be expanding our live goods test this spring.

We also remain focused on private label brands to create additional value for our customers and foster even stronger customer loyalty. We are gaining traction as we edit generic brands and introduce private brands to replace them. Now, let me briefly review some of the additional merchandising and marketing initiatives. We continue to refine the in-store experience to exceed our customers' expectations. In this regard, we are again pleased that our customer loyalty scores improved in 2011. At the same time, we continue to roll out our price optimization and learn from our customers' response. We also continue to mine data from our CRM and direct mail programs that allow us to further refine our marketing strategies to deliver greater efficiencies from our marketing spend. As we reflect upon 2011, we are proud of our achievements, but we are by no means complacent.

We remain relentlessly dissatisfied and believe that we have considerable opportunity ahead to increase customer spend and to attract new customers to Tractor Supply Company. We continue to improve our ability to meet our customers' needs across multiple categories and garner both higher frequency and higher customer loyalty. We'll continue to expand our footprint in key regions and remain focused on collaborative, consistent execution across the board. Our balance sheet is strong, allowing us to reinvest in key initiatives to grow the business. We are a more agile organization than ever before, and we look forward to building on the momentum through 2012 and in the years ahead. I'd like to thank all of the Tractor Supply Company team members for their ongoing dedication, hard work, and commitment to our company.

Additionally, I'd like to thank all of our shareholders for investment in Tractor Supply Company and ongoing support in our collective journey. Operator, that concludes our prepared remarks, and we'd now like to open the call for questions.

Speaker 4

Thank you. Ladies and gentlemen, at this time, if you have a question, you will need to press star one on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star two. Also, if you're using a speakerphone, please pick up the handset before signaling. One moment for the first question. Once again, that'll be star one. Let's go to Vincent Sinisi of Bank of America.

Speaker 0

Good afternoon, and thanks very much for taking my questions and congratulations on a nice end to the year.

Speaker 4

I wanted to.

Speaker 0

No problem. I wanted to ask about your gross margins. As you folks had mentioned during your comments, if you take out that one-time charge, you did have gross margins up on a year-over-year basis for the quarter. Now, can you give a little more color on your outlook for next year with 10 to 15 basis points of improvement for the full year? I know that in the past, you had signaled around 20 basis points, 20-some odd basis points. Is that just a case of being a bit of conservatism in there based on the headwinds? How do you weigh that against, obviously, the traction you're getting on your initiatives?

Speaker 5

Sure, Vince. When we look at it, we really have to assess the inflationary environment, the headwinds that we experienced from freight. We were hopeful that we would start to cycle some of the fuel costs a little bit sooner than we did, and the prices did stay up. We're hopeful as we move through the year that those headwinds will be a little bit less limited. Based on where we're currently at, we anticipate that between the mix and the freight, we wanted to be more reasonable in our future expectations. We are still very committed to the four initiatives we have around gross margins, and we anticipate that they'll continue to drive our direct margin as we move forward in the year.

Speaker 0

Okay, that's helpful, Tony. Thank you. Maybe just as my follow-up question, sticking with margins, can you give us an update on your price optimization initiatives in terms of where you are in terms of categories and rollout there?

Speaker 1

Yeah, Vince, this is Greg. I'll talk to that.

Speaker 0

Okay.

Speaker 1

First of all, you know, we chose Rubionics, and we are convinced they were the right choice for us. Remember, price op is one of the four drivers of the gross margin equation that we've talked about. We're about a third of the way through the company's SKUs right now, and we have all buyers participating at some level within the program. It's a very iterative process, and it's an ongoing learning. You make a change in one category to one set of SKUs, it has an impact on other things around it. What I would tell you is, you know, we're learning as we go. We're encouraged with the learnings. There's three phases to price op. There's the regular price optimization, there's a promotional phase, and there's a clearance phase. Today, we're really only in the regular price phase.

We're still doing some of what I would call rudimentary clearance price op. I'll remind you that we talked about price op as more back-weighted over a few years because even though you may make some changes today and gain some movement in margin rate, that changes as you touch other things in the store. The dynamics of the business, as they are, it's not something that you can just touch and forget. Very pleased, really still very early in the game.

Speaker 0

Okay, that's helpful. Thanks very much, Greg.

Speaker 4

Let's go to Alan Rifkin at Barclays.

Speaker 2

Thank you very much. I'd add my congratulations as well. First, with your exiting of the welding gas product line, can you maybe just provide a little bit of color, Jim, as to what was behind that decision? As you continue to roll out the category management program, are there potentially other product categories that are up for review for long-term inclusion at the SKU level?

Speaker 1

Sure, Alan. This was welding gas. We're talking about oxygen, acetylene, and argon gas that's sold to a very, very heavy duty seller or a small professional shop. It was a category we began to enter probably five or six years ago, and based on early results, it felt that it had legs and continued to roll out across the chain. We now have come to understand that there is a limited demand for this product, and frankly, we've not enjoyed the level of category growth that we expect from that investment. As a result, we have rationalized, we will be rationalizing that category in about half the stores, maybe a little more, keeping it in those stores where it's most productive.

Speaker 2

Okay, thank you. If my math is correct, it looks like your average pre-opening expense per store declined rather significantly by more than 10% or so. Can we expect that the average pre-opening expenses that you witnessed in 2011 are a good number for which we should be modeling going forward in 2012?

Speaker 5

Yeah, Alan, this is Tony. We have had some improvement in our pre-opening process, and it has been a focus to reduce the days. It hasn't been a significant impact, but I would agree that 2011 should be consistent with our pre-opening expenses as we move forward.

Speaker 2

Okay. Tony, is that a function at all of more smaller stores being opened? Maybe if you can also give us some color on what the prognosis is for those smaller stores. Are you now at the point where we can expect an acceleration in those smaller stores? If so, does it raise the overall saturation level for the company?

Speaker 5

I'll address the expense side, and then Jim and Greg can talk about our small market concept. There are really just two elements when it comes to pre-opening, and that's the payroll it takes to open the store and the rent expense that's related to that period before we open the store. It could have a small impact as the rents will be a little bit reduced for the smaller market, but it's not going to have a significant impact. It's really sort of the time to open and the payroll that's incurred that drives the pre-opening expense.

Speaker 1

Okay.

Speaker 2

In regard to small stores, we are pleased. We have 25 of them, 28 actually now that are now open, and we're really delighted with their sales relative to pro forma and also HERN metric that we measure our businesses by. We're delighted with the small store. We do plan to include them in our opening mix moving forward. This next year, it'll be something between, what, 10 to 12 stores of the smaller markets are planned. As I believe we've mentioned before, it's important to begin thinking about our growth more as square footage as opposed to unit growth. Historically, we've been growing at 8% units, which are made of square footage. We now may be growing more at 9% units and still coming up at 8% square footage growth. We'll be talking in great detail at the analyst day about the small market. That's an opportunity going forward.

Okay, great. Thank you very much.

Speaker 4

Peter Benedict at Robert W. Baird, please go ahead.

Speaker 0

Hi, guys. First question, just on the increase in the number of transactions over $350. Can you give us a flavor for maybe what items were driving that? Any indication or read-through you can make towards the spring here, what you guys are expecting for the rider season?

Speaker 1

Pete, I'll break that down for you. First of all, in the fourth quarter, it was really mixed and broad-based across the company. It wasn't any single category that drove that. We typically see a little bit stronger in that fourth quarter, but it was fairly broad-based. As far as the rider business in the spring, we're encouraged right now with the amount of moisture that seems to be prevalent across the country, even through Texas. Early indication is, it's looking better than a year ago. However, the forecasts that we've been looking at still are calling for some drought in the south, and it's going to come a little later, probably in the May-June period and then run through the rest of the summer if those forecasts are correct. Still very cautious on thinking that the rider business will be much better than it was even a year ago.

Speaker 0

Okay, perfect. That's fair. Just on the private label penetration, where did that get in in 2011? Greg, what's kind of the thought process on where you can take that in the next couple of years?

Speaker 1

We saw several hundred basis points improvement over the prior year. I had mentioned on an earlier conference call that we would see that movement this fall, and we did as such. Mostly on the left-hand side of the store, as you walk into our store, which is where we place that focus. Very pleased with both the heating and within the tool and equipment categories where we expanded those private label brands.

Speaker 0

Okay, great. Thanks a lot. Nice job.

Speaker 1

Thank you.

Speaker 4

At Nomura, let's go to Aaron Rubinson.

Speaker 0

Oh, thanks, guys. One question and a follow-up, if you don't mind. One, Greg, just hoping you can delineate for us the parameters of kind of new merchandising initiatives. If you don't, whether it's stuff that's going to be more indoor, more outdoor, whether it's vendor-owned stuff or a company-owned inventory, just help us think about the parameters so we can understand what it is you're trying to fit. Just remind us what didn't go right in that gas category again, just to know which box that didn't check.

Speaker 1

Now, are you talking about, let me see if I can clarify the question. Are you talking about fourth quarter performance or are you talking about forward performance?

Speaker 0

No, just in terms of newness that you're adding to the mix, I'm just wondering what are the parameters as you look to new businesses to add to the store over time. I know you've got a lot of experimentation going on. What are the most important metrics and parameters that you're trying to fit?

Speaker 1

The first thing we look at is product category extension. We know who our customer is. We also know the products that they have interest in. We are not going to go out and create a category that you may find in an off-price discount operation or in a big box that does not fit the customer profile. What we have done in some categories, for example, in garden, we have taken a position to look at more live product as we move forward into 2012. In our feed business, one of the things we have talked about and are executing against now is the expansion of forage.

That is the things you are going to see us do. I have said a couple of times, you know, there are many things we could sell in our store, but we are going to stay true to who our customer is and service them.

Speaker 0

Just as a follow-up, I think you said that Q1 was going to be the best earnings quarter. Wondering, first of all, the 110 basis points that shifted out of Q4, what the weight, if it'll be the same kind of thing that will come out of Q1. I don't think you said it was going to be your best comp quarter. How do we think about, given the comparisons last year, you've got two really tough comps that you're up against and then the calendar shift, which are the quarters that are going to kind of do best from a comp perspective, unless I missed that already?

Speaker 5

Right. Generally, you would look at the 110 basis points relative to Q4. It would have a slightly greater impact on Q1 in 2012. You can sort of work through that math, but it should be in that 125 to 135 basis point range. Relative to the quarters in the year-over-year, the weakest comp last year was in Q2, and generally, you would translate that into having the best potential increase. However, as I had indicated in the prepared remarks, we anticipate doing some advertising and marketing that would push some sales from Q2 into Q1. That could be one of our tougher comparisons. Overall, when you look at the halves, you have the second half has a little bit stronger comp that we'll be going up against. As you look at Q1, Q1 will have some inflation.

Again, that will drive some of the top-line growth as well as having that additional week, a stronger sales week in the spring selling seasons compared to the one that dropped out of Q1. Those are some of the factors, a lot of moving parts. Hopefully, that gives you a flavor for trying to allocate between the halves and some directional for the quarters as well.

Speaker 0

Is it likely that we'll see a quarter drop below that 3% to 5% range, do you think, or do you think it'll fit inside of there somehow?

Speaker 5

We'd like to look at the comp growth for each quarter to be relatively consistent within that 3% to 5% range.

Speaker 0

Okay, thanks, guys. Good luck.

Speaker 1

Thank you.

Speaker 4

Matthew Fassler with Goldman Sachs, please go ahead.

Speaker 0

Thanks so much, and good afternoon. First question, if you look at average ticket, ex-inflation, I believe it's a bit of a decline and probably a bigger decline than you had in other quarters. I know you spoke about a couple of different pieces of that equation, but if you could just talk to us about how that's impacted by mix and any other factors, it would be very helpful.

Speaker 5

Sure. If you look at, you know, mix can be a good portion of the decline in the ticket. I haven't allocated the portion, you know, proportionately, but that clearly is the largest offset when it comes to offsetting the big ticket piece and the inflation. We also had an increase in the unit per transaction. If you look at those three, those three are the key increases, inflation probably being 80% to 90% of the increase, and then mix being really the largest and almost singularly the offset to the increase in the ticket.

Speaker 0

Okay. I have a couple of clean-up questions. You gave us traffic and ticket numbers in the release. Do we net the 110 basis points from the extra day out of the traffic number, or is that already netted out?

Speaker 5

Yeah, generally, the extra day will translate mostly into transactions.

Speaker 0

Got it. Okay, we take it out of there. Also, can you tell us the SG&A dollars associated with the extra week? The expense control is exceptional despite presumably some extra SG&A there.

Speaker 5

Yeah, we have not quantified that for anyone because it's difficult to do some of the allocations of the key expenses. We do have a general breakout, but my preference is not to disclose the details of that.

Speaker 0

Okay. If we were to try to back into it, would we be given the extra sales associated with the extra week, would we assume kind of an average gross margin, or is gross margin different because of allocations as well when you think about that period?

Speaker 5

It might be slightly lower, but the general guidance that we've given is that you look at it as an average week because sales are a little bit lighter, but there's less expense structure. You could probably back into it that way. Again, $0.09 is our best estimate based on just trying to sort of assemble that particular model and then trying to allocate a certain amount of rent expense to that particular week as well. There are a couple of moving parts when it comes to assessing that particular week from an SG&A standpoint. I'd rather not disclose any details around that.

Speaker 0

Okay, thank you very much.

Speaker 4

Moving on, let's go to KeyBanc Capital Markets, Brad Thomas.

Speaker 0

Thanks. Good afternoon. Let me add my congratulations as well. I was hoping to talk a little bit more about your advertising plans for 2012. I know you've been testing some new opportunities in advertising. Could you talk a little bit about what you've learned lately and what you're going to be ramping up in 2012?

Speaker 1

Yeah, Brad, this is Greg. Let me talk a little bit about a couple of things. One is the CRM focus. What we continue to learn and we continue to improve upon is our targeting of this customer. Now, we've said before, there's seven segments, and within those seven segments, we are doing a far better job today of using our dollars much more effectively. The ANS ratios were actually quite good for the fourth quarter, and that was part of that. We did mention that there's a shift, as we talk about in the first quarter to second quarter, within the advertising cadence for 2012. What that is in reference to is the southern markets need to have the advertising focus on spring a bit earlier than the northern markets.

In the past, we've tried to split the difference and run the advertising somewhat, you know, down the middle between both seasons. This year, we really believe that by making that change, shifting the south a few weeks earlier and the north a few weeks later, we're going to capitalize on when the customer is ready to buy and not be ahead of them and at the same time not be behind them. That's some of the things that we've looked at. We talked a little bit on, I think, the last call about this aware non-shopper, which is a segment of consumer that we're looking at that is aware of our store, probably doesn't see themselves shopping in our store because of the name Tractor Supply. We've done some testing in a few markets with some media trying to bring that consumer back in.

I would tell you that right today, we have more work to do. We're not satisfied with the initial results, and we'll continue to test throughout 2012.

Speaker 0

That's helpful, Greg. If I could just follow up on your performance in the seasonal categories, it's clear you did a great job in the fourth quarter. Could you just talk a little bit about where inventory was at the end of the quarter and how things have played out in January as perhaps the weather's gotten a little bit better for you?

Speaker 1

One of the key things that we talked about was our improvement in allocation of the inventory. We've really held the inventory as long as we could either at the manufacturer or in the distribution centers to push it at the right time so we could take advantage of the sales as they develop. We did that in the fourth quarter. The inventory today, as far as heavyweight and cold weather, is sitting in the right stores, and we are starting to see some benefit from that, even though the winter weather has come a bit later. We are very pleased with how we came out of the season. We did a far better job of targeting the right stores with that mix.

When we looked at our overall inventory levels as we ended the year, the 2% per store was really, when you look at it, there's inflation built into that, there's a new DC startup built into that, and then there's the shift forward of some products into the southern region. If you run the numbers net to net, we're actually slightly behind or down in inventory per store. We are very pleased with how we managed it. I give the team a lot of credit, and the merchant groups, they did a fine job this fall.

Speaker 0

Great, thanks very much.

Speaker 4

Mark Miller at William Blair. Go ahead, please.

Speaker 0

Hi. For my first question, I would like just to follow up on the average ticket again, given that you had, again, inflation above the average ticket, increase in some of the larger ticket items, and then I think you said increase in units per transaction. What within the mix was an offset? Was that coming in apparel, perhaps, with the warm weather, or Tony, if you could just expand on what was happening there with mix?

Speaker 5

Sure. It's really in the Q items. Not only do they run just slightly below chain average with the significant increase that we've had throughout the year, but as well specifically in Q4. Those are the items that are driving that mixed variance. There are also obviously the items that drive sort of that freight intensive category that we talk about, which also causes a mixed headwind when it comes to freight.

Speaker 0

Okay. With a transition from your comment there on freight, I think you talked about the same calendar EPS growth being better in the second half than in the first half. Is that due to higher expected freight costs in the first half, or why would that be?

Speaker 5

Just looking at the performance in the first half with the calendar shift, we drop off a lesser week. There's a lesser sales week. That is a trigger. We're cycling with some of the inflation will assist in some of the comps. What's interesting is that if you look at year over year, and depending on how you factor that additional week, we would expect higher growth in the first half if you look at the second half as comparing against the 53rd week. If you back out the 53rd week out of the second half of the year, you'll have a slight increase in the second half of the year. Directionally, I was just trying to sort of give you some flavors to the background and to try to be able to try to allocate between the halves.

I think the easiest way to look at it is that if you look at the full year, we earn about the same in the first half as we do in the second half.

Speaker 0

Okay. Fair enough. A final question, Greg, I understand you're looking at the footwear category, and I think you're planning a reassortment there. Can you maybe expand on that initiative and how material that could be? Are there other resets here that we should expect that you haven't commented on yet? Thanks.

Speaker 1

We are always experimenting with the interior of the store, and we have multiple tests that are out there. We made a decision to rework the footwear assortments, and we spent the last year actually studying what we had done and looking at the competitive nature of the business. Yes, we will be looking at a reset as we get into the late, latter part of first into second quarter. Very excited about it. We believe that we've done the right homework. We believe we've got the assortments much more pointed by region. This is a very regionalized approach. You know, we will wait and see. We will be able to talk more about it as we go through the reset.

Speaker 0

Great. Thanks.

Speaker 4

Moving on to Deutsche Bank, let's go to Adam Sindler.

Speaker 0

Yes, good afternoon, guys. How are you doing?

Good.

Good. I wanted to just ask three very quick questions here. First, on the 73.1 million shares out, you did mention that there was some share repurchase assumed in that amount. Could you maybe just detail either a number or a number of shares or dollars that you're looking to spend in 2012?

Speaker 5

Yeah, Adam, at this time, we're not giving any detailed background on the share repurchase. Obviously, it is dependent on the market variances. We have some estimates, and we actually have generally some ranges, and therefore, we just wanted to try to provide guidance because in looking at the various models, we see that that share count based on everybody's projected net income seemed to be in a fairly wide range. We're trying to help narrow that down for you all.

Speaker 0

Okay. Real quickly, also, I understand that you lost a day because of the calendar shift. Does the leap year not impact that at all? Does it sort of just get shifted out so that the number of comp days is the same?

Speaker 5

Correct. As you see, relative to the leap year, we still have 13 weeks in each quarter, same number of days. You wind up using a day that you never get back in 2012.

Speaker 0

Okay. Lastly, real quickly, how many stores will have the hay and forage by the spring and summer seasons?

Speaker 1

I won't give you an exact number, but I can tell you that we plan to increase the penetration of those stores. It really depends, Adam, on availability. I would tell you that a substantial increase this year over last year is probably the answer I'll give you.

Speaker 0

For reference, what did you have last year?

Speaker 1

About 150 stores.

Speaker 0

Great. Thank you so much.

Speaker 4

A question now from Matt Niemer, Wells Fargo Securities.

Speaker 0

Good afternoon, everyone. First question is, could you just comment on where you're at in terms of regionalized assortments across all the product categories, either in terms of what inning you're in and what you plan to attack next to regionalize?

Speaker 1

Matt, this is Greg. We are in the early innings still. We've been doing regionalization for a period of time, but to really say that we're as proficient as we'd like to be, and as far as us capturing many of the opportunities that are in front of us, there's still plenty of running room for us. There are hundreds of different assortment combinations today. My guess is it will go into the thousand range as we get further developed here. It may sound complex, but it's really not. It's numbers of stores, certain groups of stores, expansion of assortment, contraction of assortment. We're still in the early stages, probably second, third inning, to be honest.

Speaker 0

Okay. Could you just provide some detail on the e-commerce platform that you're writing down? What are you planning to use going forward? You've talked a little bit to the CapEx impact, but how much income statement impact will there be? Could there be from e-commerce and adding talent this year? What's the rollout schedule for that functionality?

Speaker 1

I'll talk a little bit about the platform side. We're going to stay with WebSphere, but we're going to upgrade to WebSphere 7. That particular platform gives us the ability to institute special order dropship and many other functionalities that we believe we'll need as we build this business out. We have added some talent. We just recently hired our VP. He's a seasoned person, understands the space, was an ex-merchant, so I'm thrilled with that. The fact that we're going to be making some other additions to the team this year, we are not going to see a dramatic move in sales in that this year because there's a lot of platform work that has to be accomplished first.

We're positioning ourselves, we're getting ourselves in the right technologies in that so that as we start to add assortment and expand into what we call the endless aisles scenario, as we talked about before, we can service it. The other aspect is our ability to be able to replenish and fulfill from our own facility. That's something we're going to transition to over time as well. The timeline is going to be the next 18 months to two years.

Speaker 5

Matt, relative to the P&L impact, we don't see a significant impact from any additional costs related to this initiative. We expect that pretty much the run rate we're currently at relative to the e-commerce impact on the P&L will be consistent year over year.

Speaker 0

Okay. Congrats on a great year and good luck.

Speaker 1

Sure.

Speaker 5

Thank you.

Speaker 4

Moving on to Samantha Goodman with Credit Suisse. Please go ahead.

Speaker 0

Thanks. Greg, can you talk a little bit more about moving into forage and maybe talk about how the customer typically today gets the forage? Our understanding is that as a % of food, forage is a bigger piece. What could that do to sort of the traffic as a complement to the existing customer? If you can just talk about maybe the margin profile.

Speaker 1

This is a very regional business that has to be literally bought and sourced locally. You can imagine we have a full-time buyer now for this category. He is on the road most of the time, and he's contracting with the local growers to provide us hay and other forage products. From a margin standpoint, it's similar to the rest of the feed business, but what it's done for us is it's now, and we are now holistic in our approach. We've got the branded feed mixes, we've got the base feed mixes, we've got our own mixes of feed as the middle tier. We now have forage, and we have all the other components. We have now become a destination. There's no reason for someone who lives this lifestyle to have to make several trips. We can fulfill all their needs inside our store now.

I mentioned earlier that we had 150 stores up and running by the end of this year. We plan to increase that number substantially, but it will all depend upon, to be honest, our ability to source it locally. It will be a growing business over the next probably two to three to four to maybe even five years. You can imagine when you're in a drought situation like in Texas, they're just not growing hay. That presents another challenge where you have to bring it in from other regions. We're very excited about it, very excited about it.

Speaker 0

Okay. Can you talk about private label? I think the last update was around 23%, and maybe the last target that's been out there is 25%. It seems like a lot of the merchandise categories that you're expanding into, it seems like either it's going quicker or better than you thought. I don't know if you can comment to that and how, if 25% gets pushed to something else over time.

Speaker 1

My always comment about the private label brands expansion is when the customer continues to give us the green light to take it further, we'll take it further. I do not believe in the strategy of build it and they will come because that's dangerous when it comes to private label brands. You just can't anticipate and force the customer to buy something that they're not interested in. However, that being said, we had nice improvement this fall, and we've been talking about that improvement, and it did execute. I won't give you a specific number. We've said around 25%, but I think the number is going to be larger over time. Yes, we have seen acceleration in that part of the business.

I had mentioned that most of last year we were working to build that new capability with our private label brands side of the business here with not only the sourcing piece, but also the product development piece. We're starting to see very solid traction there. Again, a very exciting piece of the business that we'll drive ourselves.

Speaker 0

Okay. Last for Tony on the freight piece. I think last year it started getting called out in Q1. The reference this year to still cycling or dealing with freight, is that more because of rate, of price of gas, or is it just the mix of business, the higher tonnage that's coming from the Q categories?

Speaker 5

It's really a combination. When we look at fuel, we anticipate cycling fuel more of the significant rise in the May timeframe. If we look forward, we're really looking at, we have a static view saying where's the fuel cost today relative to where it spiked up during the year. We look forward at fuel in a May timeframe where we really start to cycle there. We potentially could have some relief if the prices stay at this level. The mix, when it comes to Q, we just continue to drive significant increases in those categories. Therefore, it's a little bit more difficult to predict as we move into 2012. Bottom line, we would enjoy the continued transaction count increase that we get from the Q items and absorb the impact that we take on the freight line.

Speaker 0

Okay, thanks.

Speaker 4

Up next, Eric Bouchard with Cleveland Research Company.

Speaker 0

I know on weather you commented, or I think you commented that weather for the year was neutral. Could you narrow it down and talk about what the weather impact was on Q4 sales and gross margin, and what the expectation might be for Q1?

Speaker 1

I think I can generally speak to the weather side of it. We anticipated a warmer fourth quarter. We also anticipated that the first quarter would probably not be as cold as it was a year ago. We bought accordingly. We ran our inventories accordingly. I would say that we're pleased with what we're seeing so far. It's somewhat played out the way we had expected.

Speaker 5

When it comes to Q1, what's interesting is that generally March is as impactful as both January and February. The key to the first quarter will be the spring selling season that we incur and that we look forward to in March. It's very difficult to predict. Obviously, as a standard, we like to have a very cold January and February and really spring-like conditions as soon as we hit March. With the shift in Q1 with the one week and having a stronger sales week at the end of the quarter, potentially could build well for us in that quarter.

Speaker 0

Within, and that's helpful in framing it, within four Q, was there then, I don't know. There

Speaker 4

Was a material gross margin impact. Was there a material comp or?

Speaker 3

No, there was not. There was not.

Speaker 1

Thank you.

Speaker 5

A question now from Wayne Hood, BMO Capital.

Speaker 0

Yeah, thank you, guys. I know it's getting late, but I just wanted to, Tony, just ask you a question. You know, your implied guidance for 2012 would assume maybe an operating or an EBIT margin of 8.5% against a GAAP number that was 8.33% this year. If you adjust kind of the 2011 numbers for the exiting of product and the write-off, that would put you probably around 8.5%, which would imply kind of a flat margin or EBIT, you know, given your implied guidance. I'm just wondering where I'm off relative to that math and kind of relating to this, too, Jim, I think, and others have commented at various conferences that you expect gross margin rate to be up 20 or 30 basis points per year. Yet we're coming off a year it was up 15. Now you're saying 17.

You've also made a comment that over the next three to five years you expect a 200 basis point increase, which would imply pretty significant sharp increases in 2013, 2014, 2015. On those two topics, can you help me through just thinking that through a little bit? Thank you.

Speaker 2

Sure. I think the one point that needs to be emphasized is the 53rd week. Obviously, we've given guidance that it represented about $0.09. From an impact overall to the SG&A, we estimate that it's probably in the 15 basis point range. That attributes to some of your logic relative to adding back some of the adjustments that were recorded in Q4. I think if you look at, if you normalize for the 53rd week year and then handle the adjustments as you see it, what's interesting as well is that in each year, we will run up against some type of potential adjustment that may not be in our model. It could be something as simple as the e-commerce or something like the welding gas. There's always going to be various things. Some of them aren't overly material, and then there's some that aggregate up to more material numbers.

I wouldn't necessarily discount that and just have it additive to your 2012 numbers. Again, I leave that up to your modeling.

Speaker 0

Okay. On the gross margin side, just kind of what you talked about, 20 to 30, yet your 15 to 17 of 2011 and 2012, it implies a pretty sharp increase in 2013, 2015 to hit those numbers. Is there a given year? Should we be thinking 50 or 60 basis points in 2013, 2014, 2015?

Sure. Let me address that. First of all, we calibrate. We talked about 200 basis points of initial margin. At the other end of that, we talked about improving EBIT margin at a rate of 20 basis points or so per year. The stuff in the middle is obviously the landed margin. Today, our landed margin is being impacted by two things. One, the mix of Q items, which we're delighted with because that drives loyalty and traffic, but it does come at a lower margin rate. It's diluted to margin rate. Next, obviously, the impact of freight, which is diluted, adds to the dilution of initial margin down to landed margin. I think as we look forward, we're certainly committed to improving our EBIT margin rate. I think we realize now that what we're really after is EPS.

I think EPS in time may prove to be driven as much by gross margin dollar growth as opposed to gross margin rate growth. I'm not restating what we had said a year or so ago, but I think that we've seen some new variables introduced that are frankly quite positive for us. We remain comfortable that we'll continue to build drive EPS.

Okay. Thanks, Jim.

Sure. Okay. I believe that finishes everyone in the queue. I want to thank you for your time today. Thank you for being on this trip with us and for your support. We look forward to talking to you at the end of Q1 in about 90 days.

Thank you.

Ladies and gentlemen, that does conclude our conference call for today. You may disconnect. Thank you for your participation.