Tractor Supply Co (TSCO) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Tractor Supply conference call to discuss fourth quarter results. (OPERATOR INSTRUCTIONS). 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 Financial Dynamics. Please go ahead, Cara.

Good morning, everyone, and thank you for joining us for Tractor Supply's conference call to discuss fourth-quarter results. You should have all received a copy of the press release, which was issued yesterday in afternoon. If you have not received a copy, please contact my office at 212-850-5600 and we will send one out to you immediately.

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 SEC. 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. Finally, the Tractor Supply Company undertakes no obligation to update any information discussed in this call. I am now pleased to introduce Mr. Joseph Scarlett, Chairman and Chief Executive Officer of Tractor Supply. Joe, please go ahead.

Thank you, Cara, and good morning, everybody, and thanks for joining us. We are very proud of another good year. 2003's performance was very good for us. And we expect 2004 to be another good year. With me this morning is Jim Wright, our President, Cal Massmann, our Chief Financial officer. And Gerry Brase and Stan Ruta are here also to respond to answer questions. Gerry runs merchandising, and Stan, store operations.

On our agenda this morning, I'm going to give a brief overview of the fourth quarter, of the year, and an overview of 2004. Jim is going to fill us in on the operations of the business day in and day out. And then Cal will cover the financials.

The fourth-quarter performance same -- store sales were up 9.6 percent on top of a little better than 6 percent the previous year. Credit for those sales goes to great execution by our people throughout the Company and continuing strong merchandising programs. Gross margin was down slightly. The SG&A benefited us by about 100 basis points, which gave us a 33 percent increase in net income, or 41 cents a share versus 32 the previous year. For the year, we came very close to getting to $1.5 billion, and we would have really liked to get to that number. But in any case, we were up nearly 22 percent. Comp sales were up 7 percent on top of 9.6 percent the previous year. We've become a sales engine. We continue to drive those same-store sales, which we know is the most important measure of retailing. Gross margin was down 40 basis points. And SG&A was down 160 basis points. The net income was a little over 56 million, up 50 percent from the previous year, $1.45 a share versus 99 cents.

On team building, which is the most important component of our success, which is our number one challenge, just like most other retailers, the recruiting, development and retention of top-quality talent is our goal. We believe we're making big strides in the team building efforts. I think maybe the most important component of that, or most important measure of that, is that we had the lowest turnover in years, the lowest personnel turnover at both the hourly and the supervisory levels. Jim Wright brought the term 'becoming the employer of choice' to us three years ago or so. And I think we are really down the path on becoming the employer of choice in our business, which has all sorts of tremendous benefits in the team building aspect, and subsequently, in the business-building aspects of Tractor Supply.

As we recap our new store growth, we added 31 new stores this year. The performance of those stores has exceeded our plans. We closed one underperforming store in the fourth quarter. We relocated 18 of our older stores, typically, in poor neighborhoods and old, old buildings. And the performance of those relocated stores has simply been stellar. Our goal, as we mentioned before, is that by the end of 2006, to be out of all our seriously dated real estate.

As we look to the future, we forecast strong comps again this year. We believe, again, it is on the basis of the stability and quality of our team throughout the organization and the strength of both existing and new merchandising programs. On the new storefront, we've announced previously that we're going to be growing at a more rapid pace. And on a unit basis, we will add 11 percent new stores this year, 12 percent next year and 13 percent the year after. And that translates to 52 stores in '04, 63 in '05 and 76 in '06.

We also previously announced three pilot stores in California. I want to emphasize the word 'pilot' there. It's going to take us sometime, probably a couple of years, to really flush out the assortments and get things running smoothly. And we will keep you posted on that, as we go forward.

This year, we will also relocate about 20 of our older units, and expect to get the same kind of success we got out of the relocations of stores this past year. We're confident that there is room for at least 1300 total Tractor Supply stores in the United States.

Again, as we look at this year, we want to recommend that everybody think in long-term increments. The weather often shifts the business for us. Between March and April, sometimes September and October, and this past year between June and July, we wound up the first six months with a two percent comp store sales gain. And then the third quarter gave us almost a 14 percent same-store sales gain. When you blend it, together we were up 6 percent for the first nine months. So just try to look at us in longer-term increments, at least six month increments. We do expect the second quarter to come back this year and be more like a normal second quarter. So we likely have stronger sales performance in the second quarter this year than we had previously. In the first quarter, we're opening a lot more stores than we used to, so we can expect some additional new store opening expenses in the first quarter, more than last year.

Longer-term, we expect long-term revenue growth in the midteens. We expect net income growth in the mid to high teens. A special note, we will be moving our store-support center, consolidating the three buildings we have today, under one roof midyear this year. We estimate a $2 million after-tax charge for that move. And that will be in either the second, third or maybe both the second and third quarters this year. That's sort of an overview of where we are today. Let me turn it over to my number one partner, President, Jim Wright.

Thanks, Joe. Good morning, everyone. We're extremely proud of our team and the results produced in 2003. December's (indiscernible) comp on prior year's 9.6 is terrific performance. All five of our regions produced positive comps this year, indicating a broad base of demand for our products. And this solidifies our model across the country. Our sales are driven by increased transactions, again, which validates our programs, advertising, merchandising and service delivery. Our team's capacity to execute the plan at an everyday low cost environment allowed us to deliver the nearly 50 percent increase in EPS.

This morning, I will update you on progress, on some of our initiatives and provide some insight to their future benefit. 2003 was a year -- our first full year of our new advertising programs. As we previously mentioned, we changed our agency, our media mix, our print, our direct-mail and our Web site. We currently use our Web site to educate and informed our customers. Our Web visits this year have almost doubled. Our page views are up threefold, and time spent on our site by each of those visitors has doubled. The pre and post analysis of our television advertising campaign indicates that advertising awareness is up significantly. Overall, awareness of our advertising in our market is up 20 percent; among our best customers, is up 60 percent; and our main-message recall is up over 600 percent. We increased our customer database by over 24 percent and improved our ROI on direct-mail significantly. Our circular (ph) have produced a significantly improved ROI, which we measure by gross margin dollar lift over trend divided by ad cost, which is a very tight measurement of advertising productivity. We continue to have or refine our advertising and marketing programs, and expect continued gains in efficiency.

Our human resource engine continues to gain speed. We are delighted with another -- actually our third -- consecutive year-over-year decrease in store manager attrition. We also enjoyed a significant reduction in team-member turnover. Our employer of choice initiative, as Joe mentioned, which is about improved recruiting, hiring, orientation and development, continues to produce results. During the year, we also rolled out 100 percent pre-unemployment drug testing, and we will test all of our team members over the next 12 to 18 months. Our skills and competency-based selection, development and appraisal process is now in rollout. We're proud of our progress with people, and are currently reaping the rewards. However, much does remain to be accomplished. This improvement will continue to drive our results in execution, our ability to develop ticket average, and of course, drive increased shopping frequency through customer delight.

During the year, we made significant investments in distribution capacity. We relocated our Waco distribution center from three buildings totaling 180,000 square feet, to one facility at 300,000 sq. ft. We also opened a new 350,000 square-foot distribution center in Braselton, Georgia, which is located 40 miles northeast of Atlanta.

Radio frequency, hands-on and paperless technology was successfully introduced to three of our four distribution centers. All of these initiatives are behind us. We experienced no major disruptions, and are very well positioned to serve our existing stores and future growth, going forward.

We're also on schedule with site selection for our new DC, to be located in the northeastern United States, and anticipate opening that in December of this year. Savings and transportation will offset the increase in occupancy costs, as it has in each of the last two distribution centers that we have opened or relocated. Our stores and customers will benefit from shorter leadtimes. The Company will enjoy lower freight costs, as I mentioned. And the RF technology is improving our inaccuracy.

Significant progress was made in store operations throughout year. In addition to the turnover improvement I mentioned, we now have over 300 assistant managers and 84 trainees on our team preparing for roles in our expansion. Thirty-one new stores and 18 relocated stores we opened in 2003 achieved sales in excess of performance. Improvements were made to the grand opening process, and we currently have a best practice team charged to take time and cost out as we go forward. Our preparation for execution of seasonal programs in recess was the best ever, according to our store manager advisory board. The 2002 best practices, which we have previously reviewed with you, have all been installed, institutionalized in our system. And we are currently on track with the next set of best practices, which are, new stores, freight movement within the store, POS systems, area manager development, store administration, inventory accuracy and taking a look at how we run our highest-volume stores. Each of these best practices, which are owned by cross-functional teams, will take time, work and confusion out of our system, allowing for better execution and customer service.

Our real estate team is performing extremely well. We are assured of opening our 52 planned stores for this year, and are well down the path to securing the sites for the 63 new stores in '05. The new initiatives in our construction department have produced savings and improved consistency.

On the merchandising side, last year, our inventory turns improved to 2.8 to 2.7. And this year, we will hit three turns or better. During the year, our merchants brought us a significant number of new items and lines to market. In fact, today, 36 percent of last year's sales came from SKUs that were not in our line in the year 2000. Significant new lines include Cub Cadet, a commercial two-cycle product, Iams and Eukanuba pet food, Levi Strauss clothing, and our very successful private brand CE Schmidt line of outerwear, which we launched in Q3 last year.

We continue to drive the pace of change in merchandising. We currently have over 250 test programs in the system. We continue our aggressive line review cycle, and continue to score product, packaging and cost improvements with each line review. Our seasonal prep and merchandise presentation will continue to drive sales. December (indiscernible) comp store sales increased last year, and the 21.7 percent overall growth, as well as this year's projected 13 to 15 percent growth is a direct result of our merchants' ability to anticipate our customers' needs, set and execute their strategy.

As for the future, we will continue to make Tractor Supply a great place to work. We've demonstrated our ability to acquire heart, and by that I mean, selecting and hiring team members who understand and embrace the out-here (ph) lifestyle. We continue to refine our capacity to train, develop and recognize and retain team members. We know that loyal team members create loyal customers. Our initiative to be a great place to shop is based on the team members I've just described and compelling honest, simple advertising. Merchandising is our strategy, value pricing and a functionality and ability to surprise with the products that we sell.

We continue to drive our great place to work and our great place to shop initiatives while staying true to our everyday low-cost culture. And as a result, we intend to continue to be a great place to invest. I am glad you're with us. And I am confident in our model, our team and our future.

I am going to go through the financial statements for the quarter and the year and then give you some guidance for the year coming up.

Net sales for the quarter just ended increased over 18 percent, driven by 9.6 percent same-store sales increase on top of the 6.3 percent that we had in the fourth quarter of 2002. Animal and pet products continue to be our strongest category, followed by strong sales of hardware and tools during the quarter. All categories and regions performed well with sales improvements. For the full year, net sales increased nearly 22 percent, driven by the full year impact of over 100 stores in 2002, and strong 7 percent same-store sales growth on top of the 9.6 percent sales growth the prior year. Again, animal and pet products are leading our growth.

Margin improvement for the quarter of 10 basis points to 31.5 percent included both mix of sales and improved product costing elements. For the full year, margin decreased 40 basis points to 30.5 percent due to a reduction in vendor allowances as a percentage of sales. Offset somewhat by improved mix of sales and improved product costing.

Selling, general and administrative expenses as a percent sales for the quarter, improved 100 basis points to 22.8 percent, primarily as a result of leverage from strong comp and new store sales performance. For the full year, SG&A, as a percent of sales, improved 160 basis points to 22.6 percent of sales. Excluding the cost of the integration and transition of the quality stores real estate in 2002, the SG&A expenses improved 80 basis points. Depreciation increased approximately $1 million for the quarter, and $3.3 million full year, primarily as a result of the asset additions for distribution capacity, new stores and technology. Operating income for the quarter was 7.3 percent of sales compared to 6.3 percent in 2002. For the full year, operating income was 6.6 percent of income compared to 5.3 percent in 2002. Exclusive of the 2002 integration and transition costs, operating income on and EBIT basis improved approximately 40 basis points for the year. We believe we will be able to improve operating income on an EBIT basis while also growing the infrastructure and staff necessary to achieve our new store and same-store sales growth plan for the next several years. Interest expense for both the quarter and the full year decreased as a result of lower borrowing and lower interest rates. The effective tax rate for the full year increased from approximately 36.2 percent to 37.5 percent, as a result of increased allocation of income to higher tax states. We expect that to continue into the future and that will be part of our guidance going forward. Fully diluted earnings per share before the cumulative effect of the accounting change increased approximately 50 percent year-over-year.

In the balance sheet, the $6 million increase in cash is primarily the result of strong sales the last few days of the year and the increased store count. Inventories -- the average inventory per store is $700,000 at the end of this year compared to 663,000 at the end of 2002. Direct import goods continued to be a higher percentage of our inventory turns for 2003 -- were slightly over 2.8 times compared with about 2.7 times in 2002. The inventory on-hand is current and well-balanced by geographic area and zone. Accounts Payable are approximately 40 percent of inventory, consistent with the year-end 2002 percentage. In the financing activities, we continue to have a $155 million line of credit that's in place. We believe that's adequate for our anticipated mates. At year-end, borrowings under that line were $19.4 million compared to $33.5 million in 2002. This $14 million year-over-year decrease is in addition to the payoff of $5.5 million in term debt and the purchase of the Waco distribution center for over $13 million during the year.

Going onto guidance for the year 2004, sales in the 1,670,000,000 to 1,690,000,000 range. Comp store sales, approximately 4.5 to 5.8 percent improvement. The same-store sales increased approximately 7 percent in 2003, and 9.6 percent in 2002. Our overall guidance for the future is comp store sales improvements in the 4 to 6 percent range, and we have tried to narrow that range in this guidance. New stores, Joe mentioned 52 or 11 percent in 2004. We have confidence about our operations execution. Store manager and store team turnover has improved significantly. The TSC team continues to get better at opening and running stores. However, we will continue to spend for recruiting and training to support our unit and comp growth, while also improving our EBIT margins over the next several years.

Store refurbishments and relocations -- we plan to relocate or remodel an additional 20 stores in 2004. We will continue to perform line reviews with vendors on a regular basis and a lower our merchandising costs. We anticipate slightly higher freight rates than in 2003, but slightly more blended costs. We will continue to be an everyday low-place retailer and pass on some of our net cost improvements to our customers. We also plan to price aggressively in those markets where competition warrants. Operating margin, on an EBIT basis, is expected to be in the 6.75 to approximately 6.8 percent range for 2004, and that's exclusive of the store support center consolidation/relocation that we will be doing midyear.

Depreciation and amortization is to be approximately $23 million. The interest expense -- we currently estimate about $3.5 million. And the tax rate, as I mentioned earlier, is higher than it has been in the recent past, because of the states that we are having our activity in -- approximately 37.5 percent to 38 percent, let's say. Net income is projected to be in the 68 to $69.3 million range, exclusive of the $2 million after-tax impact from the consolidation of the store support center. Inventory is projected to turn approximately three times. Capital expenditures are currently expected to be in the 86 to $90 million range, above the $48 million that we spent this year. Most of that significant increase has to do with the store support center -- excuse me -- it has to do with the distribution center investments that we are going to make. We have a high-level confidence in our ability to -- of the entire team to work hard, have fun and make money in 2004 and beyond. Joe, back to you.

A couple of notes here. As we look at our business, we've got, we think, a very solid position in the marketplace -- clear strategy, small stores, differentiated products, a perfect complement to the big boxes. We know our customer and we listen to our customer very well. We've got an aligned executive and leadership team. We've got a very strong culture. And we've got a clear vision of who we are and where we're going.

As we were talking, I thought I would mention something else to you about the consolidation of the store support center. We are in three separate buildings now in a rapidly deteriorating neighborhood, and we found it necessary to move a little more rapidly than we originally expected. But I've read all the stories about sell the stock as soon as somebody begins to build a fancy new headquarters. You should know that we're relocating to a building that's about 18 years old, and we are going to do it economically and quickly and efficiently. So I just thought I would pass that along to you.

Most of you have heard me talk about our culture. And what we do, in terms of telling success stories throughout the Company -- this morning, a particularly neat one passed my e-mail, and I thought I would just share it with you. It has to do with Kaiser West Virginia. And this is written to the district manager from the store manager. And I think it tells you a lot about our culture and our customer base. Eric, remember the success story about a family that bought a couple of horses? They bought nine roles of fence off me that day. They came back in today and placed an order for 600 wood posts and a round pen. A round pen is a big series of fences that keep horses in. They want me to get the products in and they are going to pick it up a little closer to spring. They are also going to come back when they have more time, and I am going to show them our horse stalls. The best thing about this is, they would be buying two horse stalls. The moral of my story is they told me that every time they come into the store, they get what they want. They also said they know -- they don't know much about horses or farming, but I don't treat them like beginners. It made me feel very good. Just one more point, they told me they were recently in the Somerset and Union Town Pennsylvania stores, and were treated exactly the same way as they were treated here. I told them they will find that feeling in all our stores. I hope we all work hard to keep that feeling for all of our customers. I just thought I would share that little story with you. And with that, let's open it up for questions.

(OPERATOR INSTRUCTIONS). John Lawrence, Morgan Keegan.

Would you start off by just giving a little feedback on some of the categories? We know animal/pet was strong. And talk a little bit about looking longer-term. How do you think you can drive more out of that category? Secondly, how you felt the apparel test went with CE Schmidt, and some of those categories, please?

This past fourth quarter was an interesting quarter from the standpoint of our sales growth, which I think both Jim and Cal reported the fact that our sales grew really across all of our major categories in a fairly significant way. It was led by animal and pet products, which, as you are well aware, we have invested in significantly, in additional space, and additional inventory. We have a lot of test programs out there in those categories that will continue to fuel that growth. What we have basically enjoyed is the differentiations those categories have provided for Tractor Supply. In addition, in the fourth quarter, we were comping up against the fourth quarter in the year 2002, where we had some of the coldest weather on record since really we have been keeping records on the weather. Weak comped up in our seasonal categories favorably against those numbers, which was a cause for some concern going into the fourth quarter this year, which I think reflects the strength of some of our seasonal programs; but also indicates, for the 9.6 percent comp, John, that we are not dependent solely on the weather for purposes of really driving Tractor Supply sales in the fourth quarter. We have a lot of initiatives in the fourth quarter that help drive our gift giving business. We saw recovery of some of our big-ticket products in the fourth quarter, which helped strengthen our overall average transaction volume for TSC. You asked about our launch of our CE Schmidt private-label apparel line. As you are well aware, this was the first effort in that regard; it was an insulated workwear, and in the flannel categories, and was extremely well received by our customers and by our store team members from the standpoint of the value that the product represented. Customers had no hesitation in buying the product. And we look forward to future expansion of that category.

One last comment, can you comment on the first 30 days of the weather in January up in the Northeast?

No.

That's what I expected! Thanks guys, congratulations.

David Campbell, Davenport.

Congratulations on a great quarter.

Thank you, David.

I was wondering if I could get a comment on the timing of new store openings you expect this year, as well as kind of the geographic concentration of those stores, as well as the mix of different sizes?

The timing this year is, we always front-load principally first-half. This year, we will have more stores in Q1 than we had a year ago, hence, Joe's comment on some possible SG&A impact in Q1. Regionally, this year, while we continue to open stores in all regions, we do have some concentration in the Northeast, which we define as Pennsylvania, north and east.

You expect to open more stores east of the Hudson River; and how have the stores that you have in that region performed?

We really -- are we east?

We have one east of the Hudson River now. I think there are two more on the board east of the Hudson. What you might be most interested in is, we are going to have one in the Richmond market.

Oh yes? That would be great.

I am going to invite you to the grand opening.

Okay, I will be there. There is a lot of demand for your stores down here.

Yes, there is. There is much opportunity in Virginia.

Right. Is the first quarter going to be positive earnings this year? Can you comment on that?

It's too early to tell. A lot of it has to do with how the weather hits us and how many new stores we open. Again, we mentioned earlier, try to think of us in longer-term increments. We have always lost money in the first quarter, with the exception of last year, and it's just too early to predict.

How did the Cub Cadet outdoor power equipment perform for you this past year? And what plans do you have in the power equipment category for the upcoming spring season?

We basically have been supporting Cub Cadet in total now for the last two years. Last year, we introduced, across about two-thirds of our chain, there, two-cycle commercial-duty outdoor power equipment. This is a product that is frankly in its infancy for us. We have been pleased with the initial results of that launch. It will become a chainwide program this year, and we expect it to be a much more significant contributor to our total volume in 2004.

What other plans do you have in that category for the spring?

We've been working on re-tooling some of our outdoor power equipment programs that, in our opinion, did not perform up to our expectations last year. I would prefer not to disclose those at the present time.

Anthony Lebiedzinski, Sidoti.

Were there any product categories that were maybe somewhat below your expectations?

In looking at our categories overall, we had some very, very strong comps that we are going up against in apparel because of strength of the cold-weather business from the year before. We ran slight comp increases in those categories, which thrilled us to death overall, because we had such big numbers. If there was a softness, that was probably it.

I guess you guys don't have any comment as far as guidance for the first quarter?

That's correct.

And then, I think, Cal, you had mentioned that you had a higher percentage of your inventory is from direct import goods. What is that as a percentage of your inventory?

Right now, direct import merchandise that we handle is about 5 to 6 percent of Tractor Supply's total inventory on hand.

Okay. And where was that a year ago?

A year ago, that would have been 4 to 5 percent. So it's been increasing slightly over the last 12 months.

Anthony Lebiedzinski; Also, do you have the cash from operations figure for '03, by chance?

The net cash provided by operating activities was $62 million for '03.

CAPEX was 48 million?

It was 48.

Dave Tarantino, Robert W. Baird.

Good morning and congratulations.

Thank you.

Can you comment directionally on sales patterns across months during Q4?

No.

I thought it was worth a shot! Also another question on Q4 sales. Did you see a big pickup in gift cards during Q4?

Yes, we are very immature in gift cards compared to the retail industry. But our growth mirrored the trajectory of the industry.

Okay, great. And then last question, did snowstorms in December benefit sales of equipment?

Our snow removal sales have been very strong in the entire back half of the year. And frankly, we were up against some strong snow removal sales in December. So it's hard to say. We did have a very favorable comp in snow removal sales for the quarter, though.

Do you expect that to translate to lower sales in Q1?

At the present time, we are continuing to support the category and our sales are currently meeting our expectations. So it's a little early to say at the present time.

Okay, thanks a lot, and congratulations again.

Thank you.

Ryan Casey, Blalock & Partners.

You mentioned that new stores were performing better than expected. I was wondering if you could quantify that for us?

No. Understand this though -- we are very arduous in our pro forma development of our new stores. We continue to refine that model. We continue to raise the bar of performance. And against that as a background, we were frankly very pleased with what we were able to achieve this year in new stores.

It looks like you're keeping, as far as operating margin guidance for '04, you're keeping the 6.8 percent, it looks like, despite having been beaten by about 10 basis points this year?

That's correct.

Ryan Casey I would have expected those operating margin expansion improvements to have played out during '04. So I guess I am wondering why we couldn't expect the usual 30 to 40 basis points from the higher base?

As I mentioned, as I think I did, we continue to invest in those things that will allow us to grow in the long-term. We are not pulling all stops out to try to maximize the EBIT margin in the short run. We are looking at what it is going to be over a longer period of time. We have infrastructure investments we're making. The plan for '04 is in place, including a lot of training, recruiting and other expenses necessary to improve our new store growth rate, and to ensure to ensure that that comp store sales engine continues to run.

Is the CAPEX guidance, did that get lowered from 90 to 80?

I think that it's approximately 86 million. The difference is, the earlier guidance -- it is anticipated that we would be buying land and building to do the store support center consolidation. Now, we are taking as, Joe mentioned, an existing building. And the CAPEX requirements for the store support center will be less than we had anticipated when we were going to do a build-to-suit building.

Great. Congratulations.

Kent Green, Boston American.

Great quarter, fellows.

Thanks.

My question pertains to the change that's going on, as you get to be a bigger retailer, as well as geographic changes, and whether you're changing SKUs by region? And what is the total say, seasonal change or regional change? Will it have to increase, as it does at Wal-Mart or several other stores?

We have been in business for 65 years, and we've been spread out across the country for quite a while, not quite as far as we are today. And we have been learning for years and years and years what sells well in Texas, and what sells well in Pennsylvania, and what sells well in Florida. And we continue to listen to our people. We continue to study the numbers. We continue to respond to the marketplace and those assortments are different from place to place. Not only are the assortments different but the quantities are different. And the timing is different. Much of that is computerized. We stay very much on top of that issue. So we don't -- we see that as an evolving process, and one to which we are very responsive and very often ahead of the game.

Could you refresh my memory, how long does it take for a new store to reach profitability? Or is it profitable almost as soon as it starts?

It is virtually profitable within the first 12 months, exclusive of preopening costs. And even after preopening costs, it has just a minor drag. So the store door opens, they are contributing within that first 12 months.

And then the remodels were 20, up from 18. And how many would be left after that, approximately?

Probably another 25 or 30. We really have eliminated most of the worst of the older stores. And we are working on ones that are old and not as good as we would like, but not the real dead ones. We expect to be able to achieve our goal of getting there by the end of 2006.

Finally, just a question on pricing. You said you passed through, but what is the pricing upward drift, if there is any?

We are seeing pressure right now on pricing of steel goods, as there is significant changes occurring in the steel industry. And periodically, because of the commodity nature of our business, we do see pressure from time to time on our feed products and some of the seed products, grass seed and birdseed and the like. But steel is probably the biggest concern we have right now, in terms of upward pressure on pricing.

Finally, anything on the front of saying buying back shares or dividends or anything? Or is it too premature, with the acceleration of store openings?

We went through an evaluation over the last nine months or so, as to whether share buyback or dividends would be an appropriate use of the cash flow that we're generating. And the conclusion was reached that we would accelerate our store growth, but first build the infrastructure necessary to do that effectively. You may have noticed the CAPEX that we have spent in '03 and we will ill continue to spend in '04, is building up that distribution capacity. At the same time, we're spending time and effort and money in developing the people that are necessary to be able to do that and to it successfully -- improve the number of new stores that we open.

Final question is, is there any other regional chains out there or any other smaller, private groups out there that you could be interested in an acquisition? Or you are putting money in the build mode?

There are about a dozen family-owned businesses out there that operate 10 to 40 stores, and there is one that operates 110 stores, none of which appear to be for sale. And we are not necessarily an acquisition-minded company. If something presented itself, we would certainly pursue it. If it made sense, we would do it. If it didn't made sense, we would not. But that is not part of our long-term strategic plan to acquire other U.S.-based farm store retailers.

Fine. The only thing I could think of that is close to you is Menard's, but that's a much bigger footprint. What is your average-sized store. What is the model prototype, square footage?

Average store is about 15,000 square feet. And we are nothing like Menard's.

I understand, thank you very much.

Thank you. Thank you all very much for joining us. I have a few closing comments.

Mr. Massmann?

Yes?

We do have one last question from Gary Lapidus (ph) Morgan Stanley.

Fire away, Gary. I didn't realize that.

I will just be quick. On the Pendleton distribution center, I just wondered how much that is going to cost you and what that saves you relative to the lease that you had?

About $15.3 million purchase. And we will be adding onto that Pendleton facility during the year. The savings are in the guidance that we have given for '04. Suffice it to say that it was a much better alternative than continuing to lease. Our interest rate that we are currently paying is below 3 percent on an incremental borrowing basis. The rate implicit in the lease was significantly more than that.

Great, one more real quick one. There has been rumblings -- the Journal talked about just the fact that the farm economy has been stronger, and that is translating into benefits to the retailers like you. Do you feel that that's part of what is driving your performance? Or do you think it's more company-specific issues?

We caution everybody, do not think of us as tied to the farm economy at all. Less than 10 percent of our customers are full-time farmers and full-time ranchers. And in my 25 years, I have never seen anything in the farm economy have any impact on our business. And since we rely less on farmers than ever before, we never see any impact of that. So don't think about that in either a positive or a negative way, no matter what the farm economy is doing.

A few closing comments, 2003 was a very good year for us, but it's over. We have closed the books. And we have total focus on 2004 and the years ahead. Our stores are running very well today. We've got top-flight salespeople. We've got enthusiastic store managers, outstanding district managers. And we have strong support functions, both here, Nashville, and in our four distribution centers today. Organizationally, our market niche is solitude. Our customer base is growing. We are all in this for the long-term. Our leadership team is strong, aggressive, aligned. And we are all positive and optimistic about the future. And with that, I will say we are going to talk to you in April again, and we hope to deliver some more good news to you. You all, have a nice three months. So long.

Thank you for participating in today's Tractor Supply Company fourth-quarter conference call. The conference is concluded. You may now disconnect your lines. Have a good day.