Tractor Supply Co (TSCO) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Tractor Supply's conference call to discuss second quarter results. 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 is being recorded. I would now like to introduce your host for today's conference Ms. Cara O'Brien of FD Morgen-Walke. Please go ahead Cara.

Thank you operator and good morning everyone and thank you for joining us for Tractor Supply's conference call to discuss second quarter results. You should have all received a copy of the press release by now, but if have not please contact my office at (212)850-5600 and we'll get one 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 SEC. The information contained in this calls are accurate only as of the date discussed. Investors should not assume that the statements will remain offered at a valid later time. The Tractor Supply Company undertakes no obligation to update any information discussed in this call.

Now I'm pleased to introduce Joseph H. Scarlett, Chairman and CEO, Jim Wright, President and Chief Operating Officer and Calvin B. Massmann, CFO, all at Tractor Supply. Joe, please go ahead.

Good morning, everybody and thanks for joining us this morning. This morning Jim Wright is with me, who is our President and Calvin B. Massmann our CFO are both with us. Jim Brase, our Chief Merchant is on the phone available for questions and Stan Ruta is on the road visiting stores in Texas right now. On the agenda for this morning, I'm going to give you a brief overview of the quarter. Jim is going to cover sales and operations throughout the organization and then Cal will go through the financial highlights and then we'll entertain questions.

In the Second quarter, same-store sales was up 1.2% which is not particularly great but that is on top of an 11.2 last year and if you factor out the seasonal products as we said in the press release we would have had a nearly 5% same-store sales increase. During the quarter we had strong performance on basic products. Now, we had a weakness in seasonal categories, particularly tractors and riders. You've heard us talk about weather before and weather has been a big drag for us this quarter.

You probably heard me say over and over again that we like it in the springtime warm, wet and early. Well, this year we got wet, wet and wetter and it never really got warm. So that is sort of the factor that went into our seasonal sales follow-up. April was the drag for us. May and June were okay months for us. We had great execution by our people. Our team is increasingly stable and competent. For the quarter our gross margin was off 20 basis points. The SG&A had 100 basis point improvement and if you take out the one time quest from last year we had a 220 basis points improvement. Per Share earnings were $1.37 versus $1.07 last year and again if you take out the one time cost it would have been down to 93 cents.

Cal will give you more on the financials in a moment. Store growth, we added 13 stores in the quarter, making a total of 25 for the year so far. We'll add seven more this year. And as we look to next year, we're going to ratchet it back up to 10% unit growth rate, at least 47 stores next year. We've upgraded three stores in the quarter. When I say upgraded we are talking about relocations of older stores to newer and better locations. Gives us six for the year and we're going to could an amazing 17 stores in the second half of the year. We're right on target to achieve our goal of relocating and upgrading about 100 of our oldest stores over a five-year period. We're about probably a little more than halfway through that.

Our goal is that by the end of 2006 we have no dated real estate in our inventory. That's it from here , so let me turn it over to my partner, Jim Wright.

Thanks, Joe and good morning everyone. As Joe covered the results and Cal is going to provide some more detail, I'll use the next few moments to update you on a few of our current initiatives. We have concluded the initial research on our new television advertising and we're delighted with the lift in awareness of Tractor Supply Company, the categories that we are advertising, and the brand attributes that we're attempting to develop. Our print program continues to improve as we refine the distribution to currently target our customer base.

Our improved product selection in print is also driving a certain productivity, which we measure very diligently in gross margin dollar lift against the ad cost of the event. The development of our team in the quarter, we made two significant internal moves prompted by the retirement of a Vice-President. We have new leadership in charge of our supply chain and distribution and transportation. We're pleased with the energy and fresh thinking that are being applied to both of these critical areas. We continue to make progress against our employer choice initiative. Our candidate flow today is very strong both in number and quality. This continues to allow us to raise the bar of performance, customer service, and to prepare ourselves for growth.

New district manager candidates who joined us from outside our company must have several years of demonstrated multi-unit experience successfully by the seven of us and then we spend six to 16 weeks familiarizing them with our processes and inculcating them to Tractor Supply. We also developed GM’s internally and they are developed from our ranks of our area manager program between six and 18 months. As a result today our field bench has never been stronger than it is today. All of our executives are involved in the development, coaching, and mentoring of our high potential candidates.

We currently have 20 high potential managers enrolled in an 18-month program with a local university where they'll be taught graduate level classes in twelve 3-day sessions. Senior management takes a very active role in the ownership and the development of these team members again, supporting our future growth and development. Today we have almost 90 store manager trainees and over 200 assistant managers, all of whom are in the store management development track. At store level, we continue to hire for attitude, looking for a customer focus, smile on the fast pace.

In addition we continue to our efforts to hire a farmer, a rancher and horse owner in all of our stores and today over 50% of our store team members fit into one of these categories allowing us to deliver the seasoned advice that our customers are looking for. We have several training and certification initiatives in place for our hourly team members and we bring them up to speed on any product area where they do not possess the level of expertise required. In merchandising, we continue to bring new products and new displays to market.

Our current recent activity going on as we speak will change 36% of our floor space in the average store. Of this, two-thirds will be non-seasonal and permanent. A few of the categories have already been set and the early results are very encouraging. Our customers continue to demonstrate their discretionary spending power as they move to premium product and continue to purchase a wide array of the impulse products that we're now offering. Over last month or over the last nine months we've moved two-thirds of our stock-keeping units into our supply chain team to be managed.

Today these dedicated professionals are Manager "Inventory" at the store and DC level watching skew sales trends back through to our vendors. This team and the processes that we have in place will maximize the productivity of our current technology as we take time and cross all the supply chain and build accuracy in. Throughout this transition to the supply chain team we have stayed within our desired on-hand target levels. The team continues to improve under lead times, fill rates, economic order quantity and will improve our seasonal prep and regional response to in-season trends.

We also expect gains in end of the season markdown optimization. We did end the quarter 4% above prior year average inventory per-store. However, we know that these are solid goods and we anticipate that we will sell through the vast majority of this 4% gain in the third quarter and do so at acceptable margins.

Our newest distribution center in Waco, Texas, will be on-line in the next two weeks. This 300,000 square foot facility will serve 75 stores initially and will mature north to 130 stores. We anticipate a smooth transition and uninterrupted supply to our stores in the Southwest. This distribution center will take some volume from our Pendleton, Indiana distribution center as well as the one in Omaha allowing us to support much of next year's growth. Our team continues to develop best practices for the most critical functions gaining shade-wide consistency as we go forward.

The quarter was challenging with unfavorable weather early and the chatter of cycling 90 new stores in the prior year. Our comp base however is now normalized. We're aggressively pursuing sales and brand development. The team is strong and aligned, and we're moving quickly, and in fact, accelerating the pace of change. With that I'll turn it over to Cal.

Thanks, Jim. Good morning, everyone. I'd like to review the financial highlights with you, first of all, the income statement for the quarter. Net sales increased 14.6%, was below our prior guidance. The shortfall was concentrated in seasonal products, primarily in the northern stores. New store sales impact last year, we grand opened 86 farmer quality store locations in the second quarter, and these locations benefited last year from pent-up demand and also had strong sales generated by grand opening, advertising and celebrations.

As a result, the same-store sales for these stores were approximately flat, which we consider to be a good performance under the circumstances. Our same-store sales overall, as Joe mentioned, was 1.2% this year versus a strong 11.2% last year. If you average that, it's still above our long-term comp store sales trend. Exclusive of seasonal products, the same-store sales improvement was 4.8%. Margin, we continue to have margin improvement as a result of better product costs and improved sales mix; however, freight costs were unfavorable to last year when we were shipping more full truckloads into the new stores and when fuel costs were lower.

Going forward we were optimistic that the freight cost will improve somewhat, but dependent on future fuel costs. Another issue from last year's second quarter was in the quarter, we incurred approximately $4.5 million of training transition and pre-opening costs related to opening the stores in the real estate we acquired from quality stores.

Excluding those integration costs, SG&A improved from 20.4% of sales last year to 19.4% this year. Approximately 50 basis points of that improvement was due to lower bonus accruals in 2003 compared to 2002. The net improvement in SG&A results from improved leverage and overhead cost controls. The tax rate improved from 37.9% of pre-tax income last year to 36.6% this year as a result of more profit allocated to the lower tax rate stores.

Net income overall improved approximately 50%, when you include the transition cost in the 2002 results. Without those transition costs, income improved over 30% on approximate 15% revenue growth. Earnings per share for the quarter were in line with analyst expectations at $1.37 a share fully diluted, and that compares to the $1.07.

Reconciliation of various topics is included in the table to the press release. Going to the balance sheet, you might notice that we don't have receivables in that balance sheet any more. We've out-sourced our commercial customer financing and no longer provide that on our balance sheet although we have a program that's available so our customers can buy from us and actually with a program that is easier for us and easier for them.

Going to the inventory and inventory management, our inventory position and seasonal products at the end of the second quarter was higher than we planned. The average inventory per-store increased about $30,000 over the last year. However, with the heavy rains during the second quarter, the drought conditions in our markets are essentially over and this bodes well for an extended selling period for seasonal products well into the third quarter and we have every confidence that we'll be able to correct our inventory position without taking any excessive markdowns.

Moving to capital expenditures, we have about $16.4 million of capital expenditures year-to-date. About half of that is on new stores and about half of the remaining is on relocations and refurbishments of stores that are being relocated. Going a little deeper into the balance sheet, accounts payable, last year our vendors provided extended terms for the financial -- opening of 100 stores. This year accounts payable have decreased from 71% of inventory to a more normal, for this time of year, 53%. With those vendor terms last year, we were able to pay our revolving credit facility down to zero. That is compared to $10 million borrowed at the end of June this year on $155 million credit line. So, as you can see, we've got significant financial leeway.

Looking at stockholders equity, you'll notice that over the past 12 months, there is about $12 million that's been added to equity as a result of employee stock purchases, through stock option exercises, and employee stock purchase plan that a substantial number of our team members participated. Going to the guidance for the balance of the year 2003 net sales in the $670 to $690 million range. EBIT margins of 6.4 to 6.6% net income to range in the last half between $25 and $26.5 million, which translates into 52.5 to $54 million for the full year.

Full year capital expenditures are forecast to be between $42 and $45 million, and that includes owning the Waco distribution center. Full year depreciation and amortization, we would expect to range between $21 and $20 million -- $21 and $23 million. We expect modest cash requirements for working capital short-term, and we plan to pay our revolver down and evaluate alternatives for the free cash flow that we expect to generate over the next 18 months or so. With that, I'll turn it back to Joe.

Thanks, Cal. As we've always said, we're a growth company. We're only going to add 32 stores this year. We mentioned before we would add a lot more if we knew the acquisition from last year would have gone so well. Next year we'll be up to a 10% unit growth rate, 47 stores at least. As we look across the nation, we find over 1300 opportunities for Tractor Supply stores and today we have less than 500. The growth opportunities are enormous.

On the team-building front, which is the most important component of our long-term success, as Jim mentioned earlier, we are well down the road on our efforts to become the employer of choice. That's actually a journey that we'll be on forever. Just like any other retailer, number one challenge for us is developing the talent, and we think we have made enormous strides in that direction and feeling more confident about the management team, not just the leadership team but the entire team from store manager up to the senior executives.

We also at the store level, we have been focusing for years on hiring farmers, ranchers, horse owners and welders and some recent measurements of that showed us that we now had more than 50% of our hourly workforce, more than 50% of our team members in the stores are come from one of those backgrounds from farming, ranching, being a horse owner or being a welder which is just wonderful for us operationally because that means that we can solve any customer's problem, walk any customer through any project.

To summarize our position in the marketplace, we have got a clear strategy, small stores with differentiated product. We are perfect compliment to the Big-Box home centers and discount stores. We have a growing customer base. We're very close to our customer we listen to our customer in many, many ways. We have a clearly defined and growing niche in the retail marketplace. We have a strong culture. We've got the best executive team the company has ever had. We're consistent, we're focused on what we do and we're all in it for the long-term and we’re having fun along the way. So, that's it for the second quarter. Let's open it up for questions now.

[Operator instructions] Thank you. Your first question comes from David Cumberland from Robert W. Baird & Co. Go ahead, please.

Good morning. With the quality stores now in the comp base and open for more than a year, what is your current expectation for the maturity curve of those stores?

Good morning David. In comping (ph) up against those stores, we have only been doing it now for a couple of weeks and it's very hard to tell whether they will or not. But mentioned as previously, whether they will be -- whether they will perform like new stores with a high comp level or whether they'll perform like mature stores at a lower comp level. Our uneducated guess here right now is it will probably be somewhere in between, but it is too premature to draw any conclusions today.

On the transition to the second half products of the fall/winter set, is the timing of that transition any different this year versus last year?

No. We are essentially in the same time frame and I do -- I would say, however, our preparation and execution is probably the best ever.

Then one housekeeping question for Cal. What is the comp expectation embedded in the sales guidance for the second half?

Roughly 4%.

Great, thank you very much.

Okay, thank you. Our next question comes from Andrew Wolf from BB & T Capital Market. Go ahead. Please.

Good morning.

Good morning, Andrew.

On the 30,000 of excess inventory versus last year, simplest like but I forgot to say, the average selling price of a tractor was maybe 2000, that works out to 15 units or something. First of all, how far off am I? Could you tell us on a unit basis, how many, you know, tractors or mowers are you above, rider mowers are you above last year per store? And what is sort of the seasonal sell-through, so we can get a sense of what - what we should look for in terms of the sell-through over time?

Sure. First of all, the $30,000 is concentrated in other things beyond just the riding lawn mower, so it is substantially less than 15 over year-over-year gain in units. We feel very comfortable that we will end the year actually and probably end the quarter, certainly end the year with the same approximate number of rider carryover that we had a year ago which is something probably in the range of eight per store.

So we've always managed that very, very well. We have no reason to believe that will not be the case this year. Some of the seasonal carryover is things like grass seed and there is a fall selling season for grass season. Lawn care, we just averted the normal August load that we would be putting in for that time of the year.

And the other mower question is, are you still sort of on a postmortem basis feeling that the Home Depot, John Deere promotionality didn't really affect you too much?

Yeah, we have looked at every competitor. We understand the proximity of every major competitor to each one of our stores. We have drilled down at the Cub Cadet level, the Huskee level and Huskee Supreme level and we have found absolutely correlation to the proximity of any competitor and our trends.

One last question I want to ask you about the comps. You mentioned April was a little soft and May and June picked up. Could you give us a sense of, you know, how good May and June were and I know it's early in July but sort of what the trend has been lately in terms of your same-store sales?

Andrew, this is Joe. I just gave that as general information. We don't discuss comps by the month. We were just -- we were down in April and we were up reasonably well in May and June and it's too early. We're only two weeks into the quarter so it's really too early to draw any conclusions but we still stand by our year-end guidance and feel very confident that we'll achieve the numbers that Cal has put out there.

Okay. Thank you.

Thank you. Our next question comes from David Campbell from Davenport & Company. Go ahead, please.

Good morning.

Good morning, David.

Joe, I was wondering if you might be able to talk about your most recent store growth projection of another 500 stores east of the Rocky Mountains and where exactly you expect that to go and how that compares to your previous forecast and secondly can you also talk about your smaller market stores and how that test is going and what the sizes and economics of that source are?

I'll take the first part and Jim will take the second part. We keep reassessing our ability to grow and we find examples where we can put much more density than we originally thought. To give you an interesting example, we have a store in New York, Pennsylvania and one in Hagerstown, Maryland, about 35 miles apart. We put a store in between them in Hanover, Pennsylvania and it had virtually no impact on either one of those two stores. As we assess and reassess, we ratcheted our number of potential store opportunities up to a total of 1300 today and I'm confident as time goes along that number will probably grow still further.

You mentioned going West. Going West would be a big step for us and will be a big undertaking and we don't see a reason in the real short-term to move further west because there is so many opportunities in markets where we already have a presence, we already have distribution, supervision and a high level of identity. On the smaller market stores, let me turn it over to Jim. That is sort of his pet-program.

Sure. We currently have three stores in what we would define as smaller markets and we like the performance at this point in time. We continue to monitor it. It will be part of our mix going forward and I can't speak to exactly what % of the mix next year. I think we have a few more planned for the next 12 months but we like what we're seeing so far.

What is the size of those stores and can you talk about the up-front investment and so forth?

The size of the store roughly would be a market of about two-thirds the size as far as population, about two-thirds the size of our chain average. The growing in inventory, last year we opened it at about 480, I believe. It's normalized now, maybe at 590, 620 as opposed to 780 today, our average for the chain and we're discovering that the volume level what we report our chain average volume was $3.1 million, these stores are coming in at 24, 26, so obviously we like the economics a great deal.

Okay, can you elaborate more on the reset activity that you're doing, what categories you're focusing on and what we might expect to see from that?

Yeah. Again, the seasonal mix is -- we move from lawn and garden into heating and heavy winter outerwear is a major portion of the seasonal reset. Of the rest of it, we'll continue with our policy of allowing our competitors to come out and take a look and we'll discuss particular categories on this call. I will give you one, however, that we're pleased with which is a small category called Books and Magazines. We just reset that and increased the number of titles and space allocations significantly and early results looked very positive.

We have some interesting titles in there about how to raise goats and how to take care of the health of your horses, a lot of lot of interesting titles that pertain directly to our kind of customer. We have found that our customers are very interested in learning more and more about their lifestyle.

Good. Thanks a lot. Congratulations.

Thank you. Our next question comes from Jenny Hubbard of Avondale & Partners. Go ahead, please.

Good morning.

Good morning, Jenny.

Good morning, Jenny.

A couple of quick questions. Most of mine have been answered but you mentioned that over the next 18 months you expect to have some pretty good free cash flow and you were evaluating other alternatives for that. Can you talk a little bit about what you might be contemplating there? Would it be an increase in unit growth, possibly a dividend, what you had in mind?

Everything is still on the table, Jenny.

Okay.

We are still evaluating what we're going to do and when we make a clear decision, we need to first discuss that with the board and then we'll make some announcements.

Okay. And then any ideas or ballpark ranges, Cal, on sort of the free cash flow that you do expect to generate?

I think I gave most of the components of it. It's probably $20 to $30 million a year.

Okay. And the last question is just on the same-store sales of the product categories, you talked about the seasonal products a little bit, but can you talk specifics about how your animal feed performs, and, you know, some of your other major product categories in the second quarter?

Sure, Jenny. As you know, we do discuss - we bring our categories down into six buckets. We've disclosed that seasonal did not perform to plan or prior year. However, the pickups were in the categories that we label livestock and pets. We're pleased with that area's performance. Truck trailer, towing and lube also performed very well principally due to a major reset in the January-February time frame. So one more time we offered new product, new assortment and our customers voted in a very supportive way.

Okay, great. And then finally, you mentioned last quarter that you were rolling out the higher end power tools. How have those been performing? Have you seen any competitive pressures from the Lowe's, Home Depot there?

Are you talking to the Cub Cadet and Huskee Supreme?

Yes.

We are delighted with the performance of Huskee Supreme. It's done extremely well and that product is the one that most closely aligns in price features and benefits with the John Deere at Home Depot. Cub Cadet has continued to perform, although not -- not at an accelerating rate.

Okay. All right, thank you very much.

Okay. Our next question comes from Anthony Lebiedzinski from Sidoti and Company. Go ahead, please.

Good morning, gentlemen. I was wondering if you could just talk just a little bit more about the gross margin. You did mention that you had improved merchandise margins but the increased freight costs. I was wondering if you could just quantify that, how that broke down, please?

Actually we would rather not. Because there is some things that move back and forth between those categories, depending on sourcing and other issues and the thing to concentrate on is that overall margin and how it develops over time because there can be shifts depending on how we -- how we source and where we're buying things.

Okay, but you do expect the gross margins pickup in the second half, right? I think you mentioned -- you talked about the freight costs?

Yes, we have given guidance that we expect the EBIT margins to improve 30 basis points and we're sticking with that.

Okay. Jim, you mentioned earlier in your comments about -- that you guys are putting in more impulse items in the stores. I was wondering if you could just talk a little bit more about that, please?

Yeah. Anthony, what you see if you walk our stores particularly if you give us a week or so, is a much more compelling utilization of end-caps. For example, we will be rolling out a dollar day theme in our normal soft time of late July and August when back-to-school consume an awful lot of consumers discretionary income, so we have - it has a very compelling end cap features.

Also if you have been in our stores you'll see the use of tool tables we had launched about two years ago - actually two years ago in September we launched those. We're delighted with the result of that initiative. We're trying different categories beyond just the tools that we have historically displayed there and in some stores about 180 of our largest stores we have expanded those tool tables from four to six and continue to see (audio gap).

Let me just add a little something on here. Jim talked about the dollar days. Days is our merchandise, it's not what you find in Dollar General, any place like that. Well, it's our stuff, but we're just pricing at an even dollar number and building end caps out of it.

Okay, got it now. As far as the same-store sales, what was the breakdown between traffic and ticket?

We were once again propelled by traffic. We're delighted with our traffic and obviously with lawn and garden sales being off, that -- there was a negative impact on the ticket average.

Okay. And the last question about the tax rate that went down this quarter. Is that the -- should we assume that rate going forward or --

That would be a good assumption for the balance of this year.

Okay. All right, thank you.

[Operator instructions] Our next question comes from Brent Rystrom from Piper Jaffray. Go ahead, please.

Is this a fair assumption that the lower taxes is kind of a God bless taxes situation.

You're right. Is a what?

God bless taxes.

A couple of questions for you. Out of curiosity, what percentage of your goods flow through your DC's now?

It's about two-thirds of the DC and about a third direct.

And I'm assuming the one-third direct is more the seasonal goods?

The direct shipment would be private label dog food, animal feed, riding lawn mowers in season, salt, fencing, livestock equipment, the big bulk products.

Heavy stuff, okay.

Logically flow through the DC's and part of what goes through the DC is cross-dock, it is not all warehouse.

Okay. And then out of curiosity, what has been the change in that percentage that goes through the DC? Is that increasing numbers have been flat?

That has been increasing over time and we expect that will continue to be the case. Obviously the most efficient method of distribution is full trucks to the stores, provided you could turn it within your desired range. The next most efficient is full trucks to the DC and break out and then again full trucks from the DC to the stores.

We have continually expanded the number of breakout or (inaudible) picks that we use through our gravity flow in our Pendleton distribution center. Waco will come up with that same capacity. And about three years ago we had less than a thousand skews going through the gravity flow system. Today we have over 5000 skews that are still picked.

Okay, from a quality stores perspective, the grand openings, can you walk us through both how you account for them in the comp base and also then also the timing of, you know, for example, when do they go into the comp base and then just give us kind of a feeling for, you know, the monthly anniversary, the grand opening, is that a down month and does it typically rebound in the next month? How does that kind of work?

First of all, we comp everything on the 366 day. We hold ourselves to a very tough standard. We have just cycled against those grand openings. They were a little more than half in May and the other third or so was in early June. Those stores came up about even for the months that they went up against each other and I'm pulling that out of the air but I'm pretty sure I'm accurate in that.

So they were even in the grand opening month?

The grand opening month not the grand opening week. In the grand opening month they were about even.

But that actually surprises me as good. Does that surprise you that you did that well? I would have expected it to be down given the visibility for the grand openings.

I'm not sure I can comment on that. I just haven't studied those kinds of numbers carefully.

Okay. The long-term, obviously the Cub Cadet has been a big success and I know we have talked a little bit off-line about ATV's any progress on ATV's?

We continue to look at the market both for ATV's going to work -- a work ATV not a sport and we continue to look at the marketplace and hope to be discussing a test in the very near future.

And with this be a private label or a branded ATV?

Initially we're looking at both but most likely the test on full-size adult ATV would be a private label, a product we're also testing several utility vehicles which are the larger John Deere gator type of units although it would not be the John Deere Gator.

Okay. The final question, have you guys happen to see the ATV assortment at (inaudible) super stores.

Yes, they struck a relationship with BearyCatBearcat.

Beary cat, I believe.

That's exactly.

Just out of curiosity I know in the past it's been difficult for people like you or like the Andrew Mountains to strike those sorts of agreement, but I am hearing on that Beary Cat is giving them a green light for all the new stores across the country. Are you seeing any increased interest from the major manufactures?

No comment at this time.

All right. Thank you very much and congratulations on a good performance in a tough quarter.

Thank you.

Our next question comes from David Rucci from William and Blair. Please go ahead.

Good morning, guys.

Good morning, David.

Two questions. First, Jim, on the advertising front, any way of kind of parsing out the net impact of the changes that you made both electronically and in print at this point?

You're asking for a mix of spend electronic?

No, no. In terms of the impact having on revenues. I mean, can you kind of back out of that a definite impact, any sense of the magnitude of the changes you made?

David, it's very difficult. John Juan maker said 50 years ago --

I know.

It is wasted. We don't feel -- we feel that we have gained tremendous amount of efficiency. The way we measure it is this way. One, on television we use survey data and we compare the consumer's response to questions like, "have you seen Tractor Supply? Have you seen an advertising for a store like this," Described in our type of store and measure that year-over-year. "have you seen advertising for Tractor Supply", measure that year-over-year.

What was the message of the ad, we measure that year-over-year. All of those three metrics, we're frankly delighted with the result after the first springs flight of advertising. Again at the end of the day however, the significant measure of advertising's effectiveness is traffic count and as I mentioned I guess my response to Anthony, we're delighted with the continued increase in transactions we're seeing in our stores. Obviously store service drives as well as advertising but we feel advertising is a piece of that lift.

I mean, judgmentally, are we going to take out whatever seasonal traffic you might have missed, do you get the sense you are seeing more traffic in the stores as a result of the advertisement?

Yes.

Yeah and that's great. And then the other question is if you kind of just update us on these maybe this is for Cal -- on these re-lows, you're going to complete all 100 of them I guess?

Over the next two-and-a-half years.

Right. The economics, the investment and the return on those and the impact you're seeing once you do relocate the store, give us some sense of what that looks like?

The cost is similar to the cost associated with the new store and there is a model on that on the website.

Right.

The benefit of it varies depending on the situation. Quite often what we're doing -- our primary motivation is to not have a situation where we have real estate that puts a drag on the company out into the future. It's real easy to under spend and then reap the rewards of that as you've probably seen in a number of retail bankruptcies over the last several years. So this is as much a -- a taking care of business as it is being a thing where we can justify it totally by the immediate lift. It's more maintaining things for the long-term.

But, David, most of them are getting some pretty significant sales increases right out-of-the-box. As we're typically going from a smaller store to a larger store, we are going from an older location to a newer location and many cases we're using more square footage and putting in a full assortment where some of the older stores that weretightwere tight on space didn't have full assortments.

And are they in or out of the comp base?

Out of the comp base for the first 12 months.

Okay, great. Wonderful stuff. Thanks so much.

One more question.

We do have a follow-up question from Andrew Wolf from BB & T Capital Market. Go ahead please.

On gross margin in the quarter, Cal, could you maybe break it out, you know, the 20 or at 17 basis points contraption, how much of that was a tough comparison to last year when you were writing, doing more full truckloads, the quality stores, and how much of it was fuel? Maybe that will help us get a sense of where the gross margin might go looking forward?

For purposes that I believe analysis you're trying to do, it's primarily -- primarily going to be fuel. Again, the important thing to do is to focus on our guidance on the EBIT line, which there can be fluctuations among the various components of both SG&A and gross margin or cost of merchandise sold. So, without going into every element within the difference between sales and EBIT, it is difficult to talk about any one in isolation.

And lastly on the 50 basis point the lower bonus accrual, can you give us -- sort of a two part question - sort of the background on that. Why you did it and sort of the financial background. Is it a catch-up adjustment because you're bringing accruals down for the year or is it something to do with the quarter?

No.

Was it very high last year just --?

It had everything to do with last year when we basically knocked it out of the park in the first half of the year and actually for the full year, and had an above normal bonus calculation where this year that looks over and above bonuses aren't being -- aren't being accrued which points out once more that the shareholder interest and the compensation are aligned.

Okay, thank you very much. We have been at this for about an hour now. So, I think it's time to wrap it up. I want to thank you all for participating. We think the future looks very bright. We want to caution you as we always do to think in terms of our business, think in terms of six-month increments and not necessarily quarters. Today our organization is functioning at better than any time in my 24 years. Our market niche is solid, our customer base is growing, we're all in it for the long-term, we're making long-term decisions, our people in the organization, we are continually improving the quality. We've got better and better sales people in the stores, our store managers are more enthusiastic and upbeat than ever before. We're simply -- throughout the organization our team is getting bigger and better, we're all optimistic and positive about the future, and we look forward to giving you more good news in October. Have a nice summer, everybody. Good-bye.

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