Tractor Supply Co (TSCO) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Tractor Supply’s conference call to discuss first quarter 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. If anyone should require assistance during the call, please press the star and zero on your touchtone 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. And, as a reminder, ladies and gentlemen, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Athan Dounis of FD Morgen-Walke. Please go ahead Athan.

Thank you, operator. Good morning, everyone. Thank you for joining us for Tractor Supply’s conference call to discuss first quarter results. You should all have received a copy of the press release, which was issued yesterday afternoon. If you have not received a copy, please contact my office at 212-850-5776 and we’ll fax it out to you immediately.

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 and that Tractor Supply Company undertakes no obligation to update any information discussed in this call.

Now, I’m pleased to introduce Joe Scarlett, Chairman and Chief Executive Officer. Please go ahead.

Good morning everyone and thanks for joining us. And we’re happy to report another good solid quarter. With me on the call this morning are Jim Wright our President and Chief Operating Officer; Cal Massmann, our Chief Financial Officer; Gerry Brase who is our Senior Merchant and Stan Ruta who’s our senior store operator.

First, I’m going to give you a little bit about our agenda today. First I’m going to give you a brief review of the quarter. Jim’s going to cover sales and operations for the company. And, then Gerry and Stan are going to share a combined success story about one of our key product lines. Then Cal’s going to go through the financial highlights and cover the financial guidance for this year and to try to cover those accounting changes that we were forced to make like all other retailers.

We like to call the first quarter our get-ready quarter; get ready for the rest of the year. It’s a relatively small quarter in terms of sales. And we always encourage investors to look at our business in six-month increments, the January through July and then August through December. As we take a look at our first quarter, same store sales were up 3.9 percent and that’s on top of a 13.4 percent same store sales increase last year. Our credit for the quarter goes to a number of things, strong merchandising programs, great execution by our people in the stores, and, incidentally, we went through some remerchandising in the stores the early part of this year that was very difficult and took a great deal of time, but our people did a great job. And the final result is just wonderful. But, it also goes to an increasingly stable and competent [audio gap] throughout the company, particularly at the store level where we’ve seen a continuing reduction in turnover and greater stability. And there was also a slight benefit of weather during the first quarter.

Gross margin was up 40 basis points. The SG&A showed a 70 basis point improvement. And we’re happy to report a 10-cent profit in the first quarter compared with a 1-cent loss last year. I might also point out that this is the first first quarter profit the company has ever made. I’ve been here 24 years and we’ve never made a profit in the first three months of the year before, so we’re very proud of those accomplishments.

As we look to our growth, we have added 12 new stores during the first quarter of this year and we’ll probably add about 20 more, a big portion of those will be during the second quarter. We have also relocated two stores and that’s out of a total plan of about 20 for this year. Our goal, as I mentioned before, is to rid ourselves of all our older dated real estate by the end of 2006. And, we’re on a very aggressive path to achieve that goal and may very well get there prior to the end of the 2006.

A good quarter, and, with that, I want to turn this over to my partner, Chief Operating Officer and President, Jim Wright. Jim?

Thanks, Joe. Good morning, everyone. We are really delighted to have produced a 3.9 percent comp sales increase, particularly due to the fact that this sales increase was driven principally by an equal increase in our transaction count. Our average transaction for the quarter was virtually flat with last year. Our stores up north cycled the benefit of a closing and liquidation of several quality stores in markets that we had previously shared. Those stores are -- we have now reopened against many of those markets.

A year ago those group of 143 stores produced a 19.2 percent comp and this year they cycled that with a comp 1 percent positive. So, we’re delighted to see that strike. Sales were strongest, again, in our targeted growth categories and categories where we have introduced new skews, new parting ramps and new marketing events. In this get-ready quarter, our store teams performed extremely well and actually changed 25 percent of the merchandising of our floor space.

We introduced about 1,400 new skews and discontinued 1,600 skews during the quarter. This constant updating of our assortments and merchandise presentation will continue to provide sales lists as we enter the peak selling season. On the employer choice initiative we are, again, delighted with the retention rate of our store managers. It was terrific last year, as good or slightly better this year. Through the first quarter we see our store manager turnover rate actually slightly improved. We have deepened our bench and we now have the optimal number of assistant managers and trainees on the bench.

This stability, the competence and enthusiasm of our management team allows us to provide the unique sharpened experience that our loyal customers have come to expect. On the advertising front, I hope you’ve seen our ads. We’ve introduced our new television ads late in the first quarter. We’re delighted with the creativity of the ads in which our people, our product and our stores are the stars. We have moved to a national cable format, which allows us to cover all the existing markets with greater frequency and lower cost against a very narrowly targeted audience while building awareness in markets that we will enter at a future date.

Our print media continues to evolve as we introduce more color, better arch, and, as a result, we continue to see a slightly improved sales lift with our print efforts.

On the supply chain front, the quarter that just ended inventory was down slightly from the prior year on a per store basis. We are pleased with this as we have actually front loaded the spring selling season, which has allowed us to present a very strong assortment to our customers. It also allowed us to level the flow through our supply chain.

Inventory dollars tied up in slower discontinued merchandise continues to decline. And, additionally, we ended the winter selling season with record low inventory carry over. That’s a benefit that will keep for the rest of this year.

In summary, this quarter Tractor Supply will cycle the opening of 90 new stores, which will fall into our comp base on the 366 day of they’re being open. We be recycling that with all those openings, plus an 11.2 percent comp sales reform to Q2 last year. However, we remain very confident in or first quarter projections.

I’d now like to turn the call over to Gerry Brase, our Senior Vice President of Merchandising. Gerry?

Thank you, Jim, and good morning everyone. This morning I would like to share a Tractor Supply success story with all of you. And, what I’d like to speak with you about for a few minutes is the launch last year of our Cub Cadet line of outdoor power equipment. First, a little bit of background information, Cub Cadet is owned by MTD Products out of Cleveland, Ohio and has been since 1984. MTD Products happens to be Tractor Supply’s largest supplier or merchandise for resale in our stores. The Cub Cadet brand is a very well respected 42-year old brand. It’s really known for its strength and its durability. The Cub Cadet product line has historically been sold exclusively through independent servicing dealers and, I might add, that Tractor Supply, over the period of the last five years has been negotiated with MTD over the rights and the ability to be able to carry the Cub Cadet line of products.

So, let’s talk about last year, 2002. In 2002 Tractor Supply earned the right to carry the Cub Cadet line of outdoor power equipment. Our program last year consisted of three riding mowers, two walk behind lawn mowers, two premium string trimmers and a full line of accessories, of course. Our chain-wide rollout on Cub Cadet took place in February of 2002. It took a major commitment of training and resources to launch this program in our stores. And we were very focused on creating a Lexus-like shopping experience for Cub Cadet in the Tractor Supply stores. Each Tractor Supply store was partnered with a Cub Cadet independent servicing dealer and we worked hard at creating win-win situations for the servicing dealer, for the Tractor Supply store, and, of course, for the Tractor Supply customer.

The results, last year’s launch was hugely successful for Tractor Supply. Tractor Supply’s most popular Cub Cadet items where the most expensive, most premium units that we carried in each category of merchandise. Tractor Supply’s customer is different than the customer of the big box home centers and discount store operators in that most of them live on large acreage and our customer is simply more demanding of the products that they purchase from a retailer like Tractor Supply. Frankly, adding Cub Cadet helped attract a more premium customer to our stores at Tractor Supply. It also boosted our sales, I might add, of the exclusive Huskee supreme line of [prior labeled riders] [phonetic word] that we carry also manufactured for us by MTD Products.

What’s next you might ask for Cub Cadet in 2003? Well, first and foremost, we’re going to be building on last year’s successful launch. We have altered our assortment of our Cub Cadet riders this year to include, at the request of our customers, more shaft drive units, greater horsepower and larger mowing decks. We are also getting ready, in the second quarter, to launch the exclusive Cub Cadet commercial duty line of outdoor power equipment. This product line is targeted at the commercial landscaper and rural residence who truly want the very best in outdoor power equipment. The product line will include chainsaws, pole pruners, gasoline string trimmers, blowers and hedge trimmers.

In conclusion, Tractor Supply has embraced the Cub Cadet brand as our own. Cub Cadet brand has a strong agriculture roots in its background and its origination. It is ideally positioned against Tractor Supply’s target customer. And, it is, frankly, a great fit for Tractor Supply. Together, Tractor Supply and Cub Cadet will dominate the outdoor power equipment industry in the markets in which we operate.

At this time, I’d like to turn the call over to my partner in store operations, Stan Ruta. Stan?

Thank you, Gerry, and good morning, everyone. I’d like to say a few words this morning about the commitment we have made at Tractor Supply to train and develop our people to top level training programs. Investing in the development and training of our team is something we feel is essential to ensure the long-term growth and success of our company. At our recent store managers’ meeting that was held in early March, we conducted three, two-hour training classes. Attending these classes were TSC’s store managers, district managers, regional managers and senior executives of the company. The three classes included a management skills class that focused on developing and enhancing the skills of our management team. A merchandise presentation class that focused on improving our customers’ shopping experience and increasing those important ad-on sales. And the third class was a product knowledge training class, which focused specifically on how to sell riding mowers at Tractor Supply. In our product knowledge training class our store managers reviewed the 2003 Huskee, Huskee Supreme and Cub Cadet tractor lineup that Gerry just talked about. Extensive time was spent in the class teaching how to qualify a customer for the right product to suit their needs and how the features and benefits our tractor lineup compared against the competition.

At the conclusion of the class, every store manager was, what we call at Tractor Supply, certified to sell Huskee and Cub Cadet tractors. In addition, each store manager was supplied training material so that they could go back to their stores and conduct the same class once they returned home.

We are great at selling riding tractors because we have a great product lineup and our store teams are trained to sell. I’d like to share with you a recent success story that I just received from one of our stores. The success story is from Terrell, Texas. And the following is a quote from our store manager. Stan, we had a customer come into our store and look at our lineup of riders. He was out comparing us with the competition. When he came in, Kevin asked him what he was looking for, after a short conversation, Kevin explained all the features of our lineup. The man stated that this was the most information that he had received on any rider within any of the competition that he had shopped. Kevin set him up on a TSC credit card and sold him a 23-horse power, 46-inch cut garden tractor. The customer was very pleased with the product and service he received and he’s now a customer for life.

Folks, I receive several success stories like this every week. Our store teams are proud of their ability to outsell the competition when it comes to riding mowers. As a management team we’re confident that investing in top-level training programs ensures that our store teams have the confidence and the ability to outsell the competition and to provide our customers with an A-plus shopping experience.

And, now I’d like to turn the call over to Cal Massmann, our Chief Financial Officer.

Good morning, everyone and thanks for your continued interest in Tractor Supply Company. In the most recent quarter, like every other retailer, we adopted the new accounting guidance for vendor allowances. This new guidance requires Tractor Supply Company to recognize vendor marketing support allowances as a decrease in the cost of inventory and a reduction in the cost of merchandise sold as that inventory is sold. Prior to adopting this pronouncement, the company classified all vendor provided marketing support allowances as a reduction in selling general and administrative expenses as those marketing expenses were incurred that was pretty much common practice in the industry.

The accounting and financial statement changes can be summarized as follows: the reported selling general and administrative expenses are increased. This is offset by increased reported gross margin and the decrease in the reported inventory carrying value. The impact on 2001 full year was negligible. The impact on 2002, had this accounting been in place, we would have reported 6 cents a share less in income because of the significant increase in inventory and the heavy vendor allowances that we received as a result of the new store openings in 2002.

The inventory carrying value at the end of 2002 was reduced by less than 1 percent as a result of the adoption of this accounting guidance. In the current quarter we recorded a $1.8 million net of tax cumulative effect on this change. The change doesn’t affect cash flow in any way and it will have only a minor impact on annual reported earnings going forward. Included in the press release is the summary of operations by quarter for the past eight quarters as if the adoption of the guidance had occurred prior to 2001. So, if you’re building models, you might want to go take a look at how some of the impacts on a quarter-by-quarter basis may have occurred.

Going to our first quarter financial performance, firs the income statement, net sales for the quarter increased over 40 percent. We had 106 more stores and we had a 3.9 percent same store sales growth. Sales of seasonal products were strong. Animal and pet products continue to be the category that drive our business. All categories performed well. Two of the regional performance was strong except the northern tier of stores. Sales were hurt a little bit on spring product as a result of the cold -- continued cold weather.

Margin improvement for the quarter of 40 basis improved, improved cost factors and fewer markdowns on seasonal merchandise. The SG&A as a percent of sales for the quarter improved 70 basis points, that’s if you exclude from last year’s cost, the pre-opening and other cost related to the 87 stores in the quality transaction. And that’s a result of sales leverage and some pretty tight expense controls, even though there was a lot of good work that got done in the stores getting ready for our most important quarter, the second quarter.

Depreciation increased from 3.1 million to 4.5 million. That’s primarily a result of the asset additions from the 113 new stores from 2002. And, as a percent of sales, it’s approximately 6 percent both years. Interest expense for the quarter was about million dollars for both years. And the effective tax rate was 37 percent.

Going to the balance sheet, cash increased a little over $10 million due to increased store count and a strong quarter in sales. Trade receivables you won’t see on our balance sheet anymore. We’ve outsourced our commercial customer credit and we take no receivables risk. It also gives us administrative efficiency.

Inventories, as Jim stated, were relatively flat on a per store basis. Actually $824,000 on average per store this year compared to 844,000 at the end of the first quarter last year. Accounts payable as a percent of inventory, 57 percent this year, 55 percent a year ago.

At quarter end our total bank borrowings were $60 million, compared to 65.1 million in 2002. That $5.1 million year over year decrease is in addition to fully funded that record 2002 growth.

Looking to the future, some guidance for ’03. Net sales full year, a billion 390 to a billion 415. Comp stores sales guidance up approximately 3.5 percent, 30 to 35 new stores. Joe had mentioned that we’re in the process of relocated and remodeling stores. At least 20 of those older stores will be dealt with in the current year. The full year income from operations, this is before interest and taxes, is expected to be approximately 6.6 percent of sales, an increase in that all-important measure over last year and every year before.

Depreciation and amortization is expected to be a little over $20 million. Interest expense for the full year approximately 5 million, the tax rate approximately 37 percent. For the full year, excluding the change in accounting, we expect the bottom line to be about 55 to $55.5 million, up slightly from our prior guidance.

Capital expenditures are estimated to be between 42 and $46 million and that includes the purchase as opposed to the lease of the Waco distribution center, which made a lot of financial sense after we started digging into it without the great amount availability that we have from our banks. By half we expect the following ranges, first half sales 725 million to 731 million, that’s about a 24 percent increase. Income from operations, approximately $50 million, compared to 35.7 million last year on an adjusted basis. For the second half, sales of between 665 million and 686 million, compared to 624 million last year, that’s an increase between 7 and 10 percent. And income from operations of about between 42 and $44 million, compared to approximately $39 million last year.

We’re prepared for this all-important spring selling season. And with the hard work and enthusiasm of our entire team, we expect that Tractor Supply will have its best year ever. Now back to Joe.

Thanks, Cal. Just a little wrap up, we are very focused on building our team. It’s the most important component of our success. We’re well down the path of becoming the employer of choice. We’re seeing lower turnover of personnel of both the hourly and the supervisory level. Our number one challenge, just like every other retailer, is the recruiting development and retention of top talent. And we are very clearly focused on that topic.

One of the interesting things we do at the store level that’s making an enormous difference for us is hiring farmers, ranchers, horse owners and welders. And most stores we visit today we find that close to half of the staff are farmers, ranchers, horse owners and welders. And I was in a store a couple of weeks ago in Indiana, and I asked the store manager about that topic and she said, of all the people I’ve got, only one does not fit into that category. Well, as we build teams of farmers, ranchers, horse owners and welders, we’re building a product knowledge base into our stores that just, you can’t match anywhere else and it makes the training process a whole lot simpler and a whole lot easier and a whole lot more advanced for us. So, we’re very focused on building our team and we’re making huge steps forward.

To summarize our position in the marketplace, we’ve got small stores, differentiated products, we are a perfect compliment to the big box home centers and discount stores. We’ve got a growing customer base that we know very well and that we listen to very carefully. We’ve got a great niche in the market, got a very strong culture. Our executive team is very aligned. We’re consistent and focused in everything that we do. We have a clear vision for not only for this year, but on into the future and we’re having fun doing what we’re doing.

We had another great quarter. Thank you very much and now let’s open it up for questions.

Thank you. Ladies and gentlemen, at this time, if you have a question, you’ll need to press the star, and one, on your touchtone phone. Your questions will be taken in the order they are received. If your question has already been answered, you may remove yourself from the queue by pressing the pound key. Also, if you’re using a speakerphone, please pick up the handset before pressing the buttons. One moment please for the first question.

We’ll go ahead and take our first question from John Lawrence with Morgan Keegan. Go ahead.

John Lawrence. Thank you. Good morning, guys.

Good morning, John.

Joe, you commented on a couple of things, first of all, we’re there any significant mix changes with the extended Cub Cadet line? Did the tractor sales move up a little bit on the mix?

John, good morning, this is Gerry. And, one of the things I can tell you is that spring has come earlier in many of our markets this year. We saw very strong sales in outdoor power equipment, both on our Huskee line, as well as our Cub Cadet line in the month of March and that did tilt a little bit the product mix in the later part of the first quarter.

Right. And I assume, can you make any comments, I guess Demo Days was last weekend?

It was, as a matter of fact, that’s an annual event here at Tractor Supply and it was extremely successful. We had the largest day in our history on this past Saturday, John.

Great. Thanks. Cal, are you making any comments, when you remodel a store what could we assume is the -- are you quantified what you see when, say, a year down the road on one of those remodels?

I don’t know that any one would be instructive, John. We look at the economics before we do it and expect to get an adequate return on capital employed. It varies pretty significantly; suffice it to say that we’re only doing that when it makes sense.

Great. Congratulations, guys. Thanks.

John, I’d like to add a little bit more on that. We’re doing very few remodels. Most all of them are relocations and when we relocate, we take then out of the comp store base so they’re not considered in that number and the results in total are favorable.

Joe, just one last question, on the overall marketplace, I mean Quality had a lot more stores out there that were closed. Have you been able to tell, what are those customers doing for your type of product and a lot of those markets where those stores were closed?

I’m not sure we have an answer to that. The stores we did not take were the stores that had the poorest performance.

Right.

So, we cherry picked the best of those stores. I think some of them are coming to our other locations today.

Right. Right. Okay, thanks.

The next question today comes from Anthony Lebiedzinski with Sidoti and Company. Go ahead, sir.

Good morning, gentlemen. I just wanted to know if you could just comment on the impact of the weather in the first quarter, how that was by region. And, also, if you could just comment on the monthly trends as well.

The weather had a relatively minor impact on the quarter. We actually, in terms of performance, we had a fairly good January, really frightening February and a very good March. But, weather was a minor impact. When you weigh it all together, it was not a big issue.

Okay. And, in terms by region, you said that the northern part of the country was affected by the cold weather, right? But, the south was okay, though, right?

That’s partly true. But, sometimes the cold weather’s good for us, particularly in January. So, there was some positive impact there too.

Okay. Was it like the snow removal equipment and stuff like that?

And winter work wear and heating products.

Okay.

And animal medicines and animal feeders, in the cold weather those are the kinds of products that do well for us.

Okay. Just getting back to the Demo Days, that you guys briefly talked about, are you planning to do any more of those in the second quarter?

We do about six meaningful promotions a year. I think there’s one more in the second quarter on Memorial Day weekend. Is that correct?

Yes, Anthony, we’ve got a series of events keyed up for the balance of the year. There’s one or two more that will be contributing to our sales success in the second quarter.

Okay. Also, could you just comment on the progress of your Waco distribution center and once that’s opened how are you guys doing in terms of your distribution capabilities?

Yes, Anthony, Jim. We are on schedule. We had some early rains and, actually a lot of rain in January in Waco, Texas, of course, a couple of weeks behind. We are now only a matter of a few days behind schedule. I’m confident we’ll make that up. And the distribution center is scheduled to be opened August 1 of this year. That will, for the next 12 or 14 months, give us all the capacity, after that’s opened, so really through 2004, that will give us all of the capacity we need at that point in time. And, as I think we reported last time, the freight savings that we’ll incur as a result of the located distribution center in Waco, Texas will offset the incremental run rate cost of that additional facility or larger facility.

Okay. And, one last question, your gross margins continued to expand nicely. They’re up 40 basis points in the quarter. How much farther can you take these up, these margins? And what are the drivers of this improvement?

Anthony, we’re giving overall guidance, as we mentioned earlier, on the EBIT or the income from operations, we don’t particularly want to go into details on margin versus SG&A in our guidance, nor on this call.

Okay. And, the drivers of the gross margin improvements?

Better buying, primarily.

Okay. All right. Good job, thanks.

Our next question today comes from Jenny Hubbard with Avondale Partners. Go ahead.

Good morning. I first wanted to talk about your animal feed category and that continues to be a strong performer. Can you talk about any major changes in that business, additional of new brands, that type of thing?

Jenny, good morning, this is Gerry. And, one of the things that’s been driving our business most recently, Jenny, last year we introduced a completely revamped line of private label feeds for us in the livestock feed category under our private label DuMor brand, our producer is Pride Line and those are continuing to mature very nicely for us. In addition, this year we completely revamped and overhauled our pet food department, which has been a very rapidly growing segment of our business for us. We added to our product mix, the line of feeds, the premium line of feeds, Iams, as well as [Gucanuva] [phonetic word], which are new brands to Tractor Supply.

Probably the number one driver of our success in the whole animal feed business here at Tractor Supply, Jenny, has been the investment that we’ve made in product knowledge training as an organization. You heard Stan speak about the importance of that in outdoor power equipment. But, teaching our associates and our team members to sell feed has been critical to the conversion of customers in our stores and the success of the category.

Okay. Great. And, is it safe to say that sales of animal feed and the animal products outpaced, you know, your other product categories in Q1?

Yes, it is.

Okay. And on the Cub Cadet power equipment that you’ll be introducing, can you go through that again in more detail? I missed the first part of that.

Jenny, we are introducing primarily a two-cycle line of outdoor power equipment and it’s premium, two-cycle outdoor power equipment. And if there’s one category of merchandise over the last five years that I’ve had the most number of requests from our store team members for it has been for a premium line of two-cycle outdoor power equipment. As I mentioned, it will include chainsaws for the commercial user and for really the rural residents out there that just want the very best product, gasoline string trimmers, gasoline powered blowers, gasoline powered hedge trimmers and the like, all of which will be exclusive to Tractor Supply under the Cub Cadet commercial banner as a line extension of what we did last year with Cub Cadet.

And, Gerry, how does that product assortment compare to what you might be able to find in a Lowe’s or Home Depot?

Good question, today Lowe’s carries the Hubs Pharna [phonetic word] line of two-cycle outdoor equipment, premium outdoor power equipment and Home Depot would carry Echo as a brand that they would carry. And Tractor Supply will have Cub Cadet going forward, Jenny.

Okay. Great. And, finally, a question for Cal and that is you had so much upside relative to expectations in Q1 and Q2 looks like it’s going to be coming in higher than consensus. And, yet, the upside there is not as great as the upside in your guidance for 2003. And I was just was curious if you expect to see, due to EITS 216, a significant shift in your vendor allowances between Q2 and Q3?

Between Q2 and Q3? No, Jenny, we’ve given guidance out of both top line and bottom line by half. I think that’s the appropriate way to look at our business. And the entire impact of the new guidance shouldn’t be significant for the half.

Okay. All right. Thanks very much.

Our next question today comes from David Campbell for Davenport and Company. Go ahead.

Good morning.

Good morning, David.

Yes, congratulations on a great quarter.

Thank you.

I was wondering if you might be able to quantify the impact that Cub Cadet had on the overall comps last year or the incremental volume from that. And, also, what performance have you seen this year so far from that extended assortment of the Cub Cadet lawn mowers?

David, I’d prefer not to give any specific volume figures on Cub Cadet other than what I did mention was the fact that [audio gap] sell not just the Cub Cadet line of products, but also the highest end of the Huskee line of outdoor power equipment. As a result, it significantly boosted our gross margins overall in outdoor power equipment, riders in particular last year because the more premium units do carry a stronger gross margin. So, we had an earlier question about what’s helping to boost the gross margin run rate for us as a company. And I would tell you, favorable mix change like what we just talked about, is helping to drive that business.

Okay. Any update on initial performance on the Levi’s that are in your stores?

David, it’s a little too early to make a full assessment at this particular point other than we can tell you after the first month we’re pleased with what we’re seeing. And, again, that’s a new product brand launch and right now it’s in 108 Tractor Supply store locations.

Okay. Thank you very much.

Our next question today comes from Justin Hughes [phonetic word] with Blackbird. Go ahead.

Yes, did you guys give an operating cash flow number for the quarter? I wasn’t sure if I missed that.

No we did not. If you look at the -- at the [indiscernible] in the borrowings, that’s effectively the operating cash flow. This particular quarter isn’t one that that particularly meaningful measure because of the build up for the all-important second quarter.

Okay. Okay. Next question, on this 0216 and the adoption, I’d like to get a little understanding of how that sort of flowed through and it was really nice to see the quarterly restatements so we can get sort of a quarter-by-quarter picture of it. It looks like your balance sheet for the March ’02 quarter was provided and there was some restatements of the receivables inventories. I can sort of understand that. But, why would TT&E [phonetic word] go up?

I’d have to get back to you on that.

Okay. And why would receivables go down from that?

Yes. And I’ll get back to you on those.

Okay. And, then why would operating income be down by $1.7 million for the full year on the restatement?

Because of the, in effect, the reduction in the value of the inventory as a result of the merchandise that was purchased that had that lower cost related to it that hadn’t sold yet.

Okay. So, we should expect to see, on the year-end balance sheet, a $1.7 million reduction in the inventory value at year-end?

It will be reduced by whatever that, on a -- compared to what the old accounting would have been, it’ll be reduced by the amount of that inventory that’s still on hand. It shouldn’t have an impact on the current year’s operations except for the cumulative catch up and then any additional -- if we build inventory significantly, there could be some of those vendor allowances that are still in the balance sheet as of the end of the year.

Okay. So, if I’m trying to understand sort of how 0216 will be adopted, there’s going to be more of an accrual of the vendor allowance benefit throughout each year. And it looks like, in last year, it benefited you significantly in Q4 and hurt you somewhat in Q3 on the restatement, which was -- does that suggest that at the end of the year you stock some extra stuff in your stores and took those vendor allowances early?

No, actually what it was is we have a certain amount of that vendor allowance that is tied to the amount of our purchases. And we had a very strong fourth quarter in terms of our sales and, therefore, we replaced that inventory. And that would then give us more offset to our expenses, which we conservatively waited until we actually had it in -- realized before we took in. We typically had been very conservative in our accounting for vendor allowances and have waited until we have assurance that we’re going to get that last lug and that typically has fallen into the fourth quarter. So, it basically moves it forward in the year as a result of applying it to the merchandise as opposed to applying it the advertising spend.

Right. Will there be -- will any of the impact in the current year and how will 0216 be effecting your current quarter and year? Will there be any -- will this reduce the choppiness?

I think we’ve gone into a bit more detail than is appropriate. Going forward, we’ve given guidance on where we expect to be by half and without outlining the impact of the guidance going back to the last two years. If you’d like, give me a call when this calls over at 615-366-4608 and I’d be pleased to go through it in more detail with you.

Okay. One last question, can you give us a breakdown in the sales mix for the quarter between, you know, feed et cetera, equipment, going to get a sense of that.

That’s not information that we release. We release that once a year for the six major categories of products.

Great. Okay. Thank you.

Once again, if you would like to ask a question, please press the star and one on your touchtone phone.

We have a follow-up question from John Lawrence with Morgan Keegan. Go ahead.

Yes, would you -- Cal, would you define a little bit more about how much sales is related to the credit card please?

How much sales to the credit card?

Yes, sir.

That’s a difficult one, John. I can tell you what our credit card sales are as a -- our in-house card as a percentage of sales for the quarter if you’ll bear with me a minute. I don’t know if that tender type of analysis is particular important though.

John, as an over arching answer to that, we have implemented our own credit card within the past couple of years and we’ve gotten more efficient at it. And it is helping us in closing sales and situations where we were not able to do that previously. And I think each year it becomes slightly incremental in our business growth. In terms of a percentage of sales it’s not an increasing trend, but we can’t find those numbers right now.

Okay. That’s fine.

Call Cal back later.

Yes. And, the last question, Joe, when you overall, I mean, you’ve been through, you did a great job of executing the quality transaction and now that you’ve sort of been through that fourth quarter and you look at sort of the northern stores compared to the southern stores, how would you generalize the difference in that customer base and how you allocate products to those stores from a general standpoint compared to your original stores?

John, Jim here. As you’re well aware, we have always had stores both north and south. There is a -- the fundamental merchandising mix is probably 95 percent the same. The timing of the launch of the categories and to an increasing extent, the timing of the marketing to support the seasonality of that merchandising is becoming more regionally responsive. There are some specific categories, dairy, as an example. We carry virtually no dairy in our mid-south to south stores. We have added dairy to several of the stores in New York and Michigan and Pennsylvania due to a background demand for that category. But, for the most part, the merchandising is the same, the velocity moves a little bit from category to category.

Yes. And what you found in experienced, where are your most prime opportunities for expansion geographically at this point?

I think we’ve said this before, we found some pretty fertile lands, pretty fertile benefit of the stores in Pennsylvania and New York and we’ve always had good operations in Maryland and Northern Virginia. So, we will be allocated a disproportionate amount of our resources to growth in those four states, Northern Virginia, Maryland, Pennsylvania and New York and probably moving on into New England over the next several years. That’s not exclusive growth, but that’s where we will have our largest emphasis.

Thanks, guys.

John, that runs about 3.5 percent of our total tenders.

Thank you, sir.

Our next question today comes from Andrew Wolfe [phonetic word] with BBNC Capital Markets. Go ahead.

Hi. Good morning. Just a few follow-ups most of my questions were asked. First on same store sales guidance, I don’t know if Cal did talk about it by half, is it safe to assume that the 3.5 percent use for the year could be sort of allocated similarly for each half or is that a leap of [inaudible] necessarily.

That would be a reasonable conclusion.

Great. Thanks. Also on sales, did you notice any negative affect when the war in Iraq broke out that was in the quarter?

No. It was a non-even for us. And, say, if you go back a year and a half ago, 9/11 we saw a fall off, a small fall off in sales for about four or five days and it bounced back to normal. And this time we’ve seen no impact of that situation.

And, Jim mentioned the transaction count driving the comp in this quarter, which I believe is a change in trend. Just, if you could, give us your thoughts on that if that has sort of any significance for you as you think about the rest of the year.

No, actually, that was not a change in trend, that is a continuation of trend throughout all four quarters of last year. And we think that orders very well for the future. We have more customers trying us and we have our existing customers visiting us more frequently while we have been able to sustain our average transaction value.

So, the average transaction counts has been essentially the same for about a year now?

The average transaction value, yes.

By quarter.

Yes.

And my last question is you put a lot of investment internally into training of essentially store level management, as I understand it, could you just -- I think last quarter you updated us and just let us, give us another update on sort of this year’s plan versus last year’s. What you did, I think you’re increasing it this year.

Yes, Andrew, this is Stan Ruta here. We continue on management training to elevate our current programs. We’ve made some real significant progress in enhancements in our management training and continue to do so. As Joe stated earlier and Jim, we’ve put a lot of emphasis into training and developing. And we continue to do that in both external hires, people we bring in from the outside of the organization, as well as internal promotions from within. And, certainly, we have a big focus on accountability and our training stores and our management training program is performance based.

I guess I was referring to some of the offsite trainings you’ve been doing and where I think you were going to increase the number of categories that were focused on and that kind of thing.

Are you talking product knowledge training?

Yes.

Okay. Andrew, we did that last summer at our summer product knowledge training sessions. And we had three classes at our spring managers’ meeting that I alluded to earlier, as well as several in-store product knowledge training sessions that we had scheduled throughout the first quarter. There’s been no further offsite product knowledge training.

Okay. And, a last question, I mean what’s the plan on the three quarters for the rest of the year?

Training plan?

Yes.

We will do product knowledge training at our summer meetings this august and September throughout the company, as well as in-store training on an ongoing basis every month.

Great. Thank you.

Once again, if you would like to ask a question today, please press the store and one on your touchtone phone.

We have a question from Pete Ward [phonetic word] with [Verdus] [phonetic word] Asset Management. Go ahead.

Good morning. Looking out at the competitive landscape, are there any other store bases out there like the Quality stores that you guys could look at in terms of acquisition? I know there’d been some mention of I guess southern states the cooperative after your vendor conference, is anything like that possible?

There are seven or eight or nine chains of farm stores that are reasonably comparable to ours. All are family-owned. They typically have between 10 and 30 stores and there’s one chain that has 115 stores, none of which appear to be available for acquisition today. And we’re not necessarily and acquisition minded company. If something should come our way we will opportunistically investigate that, and if it makes sense, it makes economic sense, we would go forward with it. Although, most situations in the past we’ve not done. Last year’s acquisition went tremendously. We don’t consider southern states much of an operator or much of a competitor and would not have any interest in anything they had, other than a handful of the very few real estate locations they have that will be meaningful to us.

So you guys would be looking to buy a whole other store base only assets out of the bankruptcy or what not?

Well, I wouldn’t necessarily qualify it that way. We’re not an acquisition minded company.

Okay.

If something comes down the road that makes sense to us, we’re going to run and take a look at it. And if we can make it work, whether it’s in bankruptcy or not, we would go after it. But, I would not pin any hopes on that at this stage in the game. We don’t see anything out there today that makes a whole lot of sense for us.

Great. Thank you very much.

We have no further questions at this time. Please continue with any closing comments.

I want to thank you all for joining us. We look to the future with great optimism. Again, I want to caution everybody to think in terms of six-month increments with Tractor Supply Company. Today, organizationally we’re functioning better than we’ve ever functioned. We’ve got a great market niche. We’ve got a growing customer base. This team makes decisions for the long-term. We’re all in it for the long-term. We make long-term decisions that are in the best interest of all of our constituents, our people, our customers, our communities, our vendors and our investors. Our leadership team is strong and we’re aggressive and we’re aligned. We’ve got great people in our stores. We’ve got top-flight sales people. We’ve got enthusiastic district managers and store managers and our support function’s here and the distribution centers are running very well. We’re all positive, optimistic and enthusiastic and we hope to give you some more good news in July. Have a nice spring and pray for the right kind of weather.

So long everybody.

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect and thank you for participating.