Tractor Supply Co (TSCO) 2004 Q1 法說會逐字稿

Welcome to the Tractor Supply 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. (OPERATOR INSTRUCTIONS) Please be advised that reproduction of this call in whole or in part is not permitted without 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, Miss Melissa Myron of Financial Dynamics. Please go ahead.

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 212-850-5600 and we'll 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 certain 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 referenced 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. The Tractor Supply Company undertakes no obligation to update any information discussed in this call. And now, with these formalities out of the way, I'm pleased to introduce Joe Scarlett, Chairman and Chief Executive Officer. Joe, please go ahead.

Good morning, everybody, and thanks for joining us. With me on the call this morning Jim Wright, who is our President, I'm sure you know him; Cal Massmann, our CFO; we have with us a special guest this morning, Kim Vella, our Vice President of Human Resources is going to talk to us about the people engine which is so important for us; and then Gerry Brase and Stan Ruta are also here to answer questions.

I'm going to start off by giving you a brief overview of the quarter, then Jim is going to talk a lot about operations and future plans. Kim's going to talk about the people driving engine, and then Cal will cover the financial highlights and the financial guidance for the remainder of this year. As always, we encourage you to look at our business in the longer-term, not in the shorter term.

First quarter was certainly a very good quarter for us. Comp sales were up 12.4 percent, which was just tremendous, and that's on top of about 4 percent last year. The credit for the quarter goes to some very strong merchandising programs, great execution by our people, our gross margin was up 50 basis points, the SG&A gave us a 10 basis point improvement, and we earned 9 cents a share versus either a nickel or zero depending on how you look at that accounting adjustment last year. We used to say that it would be hard or difficult or almost impossible to make money in the first quarter; we've now done it two years in a row, so we've raised the standard for ourselves and for our people.

As we always say, the most important component of our success is the selection and development of our people, and as always that is a number one challenge. You're going to hear more about that from Kim Vella in a few minutes. As we recap the growth; we will add 52 new stores this year on top of 31 last year, and incidentally we closed one store in the first-quarter this year. And the new stores, as they come online, are giving us financial performance that's meeting or exceeding our expectations. Additionally, we relocated three of our older stores during the first quarter of this year and anticipate relocating probably another 18 or 20 before the year's over. And the financial performance on our relocated stores is very strong; more than enough in improved sales and profits to offset the increased expenses, so we're very happy with the relocations. And incidentally, we never count those relocations in our comp store sales numbers.

Now let's look at this year and beyond. On the sales line we forecast our comps this year at at least 5 percent; a little bit higher than we had before, that's on top of a 7 percent comp last year and 9 percent the year before. The stability of our team throughout the organization and more aggressive new merchandise programs are the things that are driving that sales growth. On the new store front, as I said before, we're going to open 52 stores this year; that equates to an 11 percent new store growth rate this year and then we're going to do 12 percent the year after and 13 percent the year after that; which means 52 stores, 62 stores and 75 stores over the three year period.

And additionally we're piloting three stores in California this year; we expect to learn a lot and eventually roll out a lot of stores in California and throughout the West Coast. We're confident that there's room for at least 1,300 stores in the United States and we expect to continue to grow at a more rapid pace, and we also will continue the aggressive replacement of our older stores.

Again, we recommend thinking about Tractor Supply in long term increments. Weather often shifts sales and margins between March and April and September and October. And last year we had a really unusual year. The comp sales for the first six months of the year were up only 2 percent, yet we wound up with an almost 14 percent increase in the third-quarter giving us a comp for the first nine months of 6 percent. So things like that do happen from time to time. We expect a more normal second-quarter this year. And in the long-term we expect long-term revenue growth in the midteens and net income growth in the mid to high teens. That's the overview, now let me turn it over to my business partner, Jim Wright.

Good morning, everyone. We are really delighted with same-store sales being at 12.4 for the quarter and total sales up almost 21 percent. More importantly however, is the fact that these sales increases were driven broadly across many categories and also across a very wide geography. In fact, all five of our regions experienced double-digit comparable store sales increases. Customer visits and the average ring both increased nicely, however, once again, traffic was a primary generator of our sales increases continuing our record of traffic increases that we have seen throughout the last three years. We believe that this validates the fact that our advertising, marketing, merchandising, and our in-store experience initiatives are all working very well.

During the quarter Joe, Jerry, Cal, Stan and I visited over 25 percent of the chain. The overall; we were delighted with the condition of our stores, seasonal prep, our merchandising, team member selection, product knowledge development, and the pace are all very solid and we are indeed executing our plan in the stores. On the people front, this morning I'd like to introduce Kim Vella who is our Vice President of Human Resources who will take us briefly through the HR engine here at Tractor Supply.

Good morning, everyone. Today I'd like to talk to you about our evolving effort to become the employer of choice. As you've heard from Joe and Jim many times, we believe that people are a sustainable strategic advantage and we are intently focused in this area. Our over arching goal is to provide a workforce that embraces opportunity and develops capability for sustaining the growth of the organization. There are five basic parts. Selection, training and development, recognition, retention and promotion.

First, in the selection process, we have adopted the philosophy of hire hard, manage easy. We are well down the path of identifying role specific competencies for every function in the organization. We benchmark our successful business leaders at all levels, and by identifying the competencies that they bring to the table, we are better able to continue to match the right person to the right job. We recognize which competencies can be developed and which ones are the price of admission.

Our second point is training and development and it is certainly a priority for us. We recognize that each person must satisfy their need to grow and improve. Our continuing talent development is provided under Tractor University which is a partnership between Belmont University and the Tractor Supply Company. For example, our initial Tractor U class is a two-year class focused on developing advanced leadership skills. This class consists of two days of instruction and a half-day of facilitation to better understand the concept and find real-life applications.

Another piece of this area is the experiential learning, and it is perhaps the most important. Each team member is exposed to many opportunities to learn. Some may be designed and monitored and yet others may be the result of just a learning organization reaping the benefits of exposure to each other and customers in different situations.

Recognition is our third point at Tractor Supply Company, and we believe that it is the best motivator of people. Towards that end we have many types of recognition programs. Our goal in recognition is to understand that each person plays a significant role in our overall success and we celebrate that contribution at every level.

The fourth piece is retention. We work to provide each person with challenges and opportunities to grow personally and professionally. Tenure, loyalty, contribution and accountability are drivers of efficiency and customer satisfaction. As we continue to invest in our team members we are investing in the shopping experience. There is a direct correlation between motivated and trained team members and exceeding our customers expectations. This in turn ties directly to the creation of shareholder value.

The final part of our continuum starts again, promotion from within. As our team members experience the key parts of our continuum, they will begin to be further recognized by building the team of the future. As we look to add to our team we first look at existing team members for high-quality, capable people. Our people drive outstanding customer service. We have seen significant improvement in our capability to hire, develop and retain team members who are currently propelling our results. Our people engine is up and running and will continue to fuel our future growth.

As you understand, we are truly well down the path of becoming the employer of choice. The pace of merchandising continues as we rapidly evolve our merchandise assortment. Currently we have over 200 product tests in process. As I mentioned, our Q1 comps were very broadly based. In addition to new products however, our merchants and marketing departments continue to bring new events and new displays and merchandising techniques to market which add an element of discovery to our stores while allowing us to sustain our everyday low price strategy. Our distribution logistics and supply chain teams have done a wonderful job with keeping up with the strong sales increases.

We are in stock and ready for the spring selling season. Our same-store inventory grew at 1.4 percent while our same-store sales grew at over 12 percent. We are delighted with the results of our new distribution center in Braselton, Georgia. We are fully staffed and currently supporting over 100 stores. In fact, the March efficiency numbers from that brand-new facility match that of our mature distribution centers. In addition, we have now narrowed our site selection for our new DC in the northeast to the final couple and anticipate making a decision there over the next few weeks. That new distribution center will be open this time next year and we'll start out by supplying approximately 100 stores in the northeast.

Our best practice teams throughout the Company continue to produce solutions, they're taking time, cost and complexity out of our stores. As previously announced, we planned our SG&A to be up in the quarter due to the increased number of new store openings. However, we did in fact achieve a 10 basis point improvement from LY as a result of increased sales, reduced training and recruiting costs which were allowed due to a continued reduction in store manager and store team member turnover. We did have some slippage, however, in the number of new stores against plan in the quarter as a result of weather, construction and permitting issues which reduced. As a result we enjoyed some reduced preopening costs of about a quarter million dollars.

We remain confident that we will open 52 new stores this year. However, there will be more activity in Q2 and Q3. Currently we have 10 area managers who are principally district managers in training in the system and 81 managers in training helping us prepare for our future growth. Our strong comps also increased our sales bonus on the year-over-year basis with I guess 3.9 percent comps this year, so we paid higher bonuses to our sales bonus eligible hourly team members, yet still achieved our leverage SG&A.

Our three pilot stores in California are progressing well. We'll soft open all of those late in this quarter, and our merchandising mix has been tweaked to fit the market -- the California marketplace. Again, we do not expect to expand rapidly in California and we'll spend certainly at least the next 12 months monitoring the progress and refining the mix. We have had some pressure on commodity pricing, principally from steel, and what has not impacted us broadly -- those products we sell that have a high degree of steel content without a lot of value added manufacturing has been price pressure at the cost side.

We have, however, been able to pass the pricing along at retail and, in fact, have been able to maintain a very competitive position reflecting on the fact that being our size we have superior purchasing power over our smaller regional competitors. We've also seen some pricing pressure in commodities that go into pet and animal feed; but again, we've seen retail pricing opportunity in the marketplace as well. On the overall, we're delighted with Q1, with our team and with our preparedness for the spring selling season. And now on to Cal for some financial details.

Good morning, everyone. Thanks for being with us this morning. Let me go through the income statement. First of all, net sales for the quarter, as you've heard earlier, increased over 20 percent driven by about 12.5 percent comp store sales growth on top of about 4 percent last year. Equine animal and pet categories were strongest followed by strong sales also in the hardware and tool area. All categories and regions performed well with strong sales improvement.

The margin improvement for the quarter of 50 basis points to 30 percent was the result of several factors. First of all an improved product cost due to line reviews over the last 12 months, less markdowns on seasonal sell through, and then some mix improvement over the prior year's first quarter. This was offset somewhat by increased cost for steel and other commodity based merchandise. Gross margin included a $1 million unfavorable swing in the (indiscernible) provision.

In general we've been able to pass through the cost increases resulting from those commodity price increases while maintaining margin dollars with only modest declines in margin percentages. This customer focused approach has allowed us to capture market share and certain commodity based product sales. Our SG&A as a percent of sales for the quarter improved 10 basis points to 26.3 percent primarily as a result of the leverage from those strong comp store sales improvements. As Jim discussed, our operating plan includes increased SG&A as a percentage of sales as we put the infrastructure in place for growth in future years.

Depreciation increased approximately $1.3 million compared to the prior year first-quarter primarily as a result of the asset additions for distribution capacity and technology. Our operating income for the quarter was about 2 percent of sales compared to 1.5 percent last year's first-quarter. This 50 basis point improvement is above our stated goal of a 30 to 40 basis point average annual improvement in EBIT. We believe we'll be able to improve operating income while also growing the infrastructure and staff necessary to achieve our new store and same-store sales growth plans for the next several years.

Interest expense for the quarter decreased as a result of lower borrowing and lower interest rates. The effective tax rate, however, was slightly higher than a year ago for the first quarter as a result of increased mix of business in some of the higher state tax states that we're now operating in. Fully diluted earnings per share -- before the cumulative effect of the accounting change nearly doubled, however, we continue to look at the business in six-month time periods and encourage you to do the same.

Going on to our balance sheet, the average inventory per store was about $847,000 this year compared to about $824,000 last year. This increase supports our strong sales. Inventory turns continue to improve with our 2004 expectations of three times or better. The inventory is in place for our strong spring selling season. Accounts Payable are approximately 57 percent of inventory, consistent with what they were at the end of the first quarter last year.

Our financing activities during the quarter -- as you know, we have a $155 million line of credit in place and it's adequate for our anticipated needs. At the end of the first quarter last year we had borrowings of $55 million. At the current quarter end they were $16 million. This $39 million year-over-year decrease is in addition to the payoff of $5.5 million of term debt and the purchase of the Waco distribution center last year and the Pendleton distribution center in the quarter just ended. Total fixed asset additions in the quarter were $26 million. At year end borrowings under the line were $19.4 million. Our strong cash flow from operations and $4.6 million from the issuance of shares under the employee stock purchase plan and the stock option exercises has allowed us to finance the spring inventory build while lowering borrowings.

On to financial guidance, net sales for the full year 1,690,000,000 to 1,715,000,000, that's a slight increase from the prior guidance. Comp store sales, we expect those to increase over 5 percent for the balance of the year. Same-store sales increased 7 percent in '03 and over 9 percent in '02. We expect average comp store sales increases to be in the 4 to 6 percent range over the next several years.

New stores -- Joe went over our growth there with 11, 12, and 13 percent unit growth in years '04, '05 and '06 respectively. We've got confidence about our operations execution. Store managers and store team turnover has improved significantly. The TSC team continues to get better at opening and running stores. Spending for recruiting and training to support our unit and comp store sales growth will continue while we also improve our EBIT margins.

We'll also plan to relocate about 20 of our older stores this year. We continue to perform line reviews with vendors on a regular basis and lower our merchandise costs. We will continue to monitor the impact of the cost of steel and other commodities on our business. We anticipate higher freight cost in 2003 but overall lower landed cost exclusive of any impact of commodity cost increases. We will continue to be the everyday low price retailer and pass on some of our cost improvements to our customers.

We believe that we have pricing power to pass on cost increases when necessary while pricing aggressively in markets where competition warrants. Operating margins on an EBIT basis for the full year is expected to be in the 6.75 to 6.8 percent range, and that's exclusive of the store support center consolidation. Depreciation and amortization is expected to be approximately $23 million for the year and interest expense is estimated to be approximately $2.5 million. Tax rate in the 37.3 to 37.8 percent range with net income projected to be $69 to $70.5 million exclusive of the estimated $2 million after-tax impact from the consolidation of our store support centers.

Inventory is expected to turn about three times. Capital expenditures are estimated to be about $86 million, and that's summarized in our 10-K if you'd like to see more details. We have a high-level of confidence in the ability of our entire team to achieve our financial goal in 2004 and beyond. Back to Joe.

Jim, let's open it up for questions now.

(OPERATOR INSTRUCTIONS) David Campbell, Davenport.

Congratulations on your first profitable quarter on an EPS and GAAP basis. I think that's great. I'd like to talk about the sales a little bit. Your sales were really solid. Can you just provide a little bit more color on what was driving the strength in the categories that you saw such as the animal and pet products and the hardware and tools?

Virtually every category in the chain was up positive. We had just a general lift, some more than others, as Cal mentioned, but just generally business was very, very solid across all categories of merchandise and across all geographies. Again driven by the fact that we had a very substantial increase in customer count.

How were the seasonal products and was much of the comps -- or much of the sales weighted towards the month of March?

David, good morning. This is Gerry Brase. Probably the softest area of our sales performance in the first quarter was in seasonal categories. Whether it was cold weather goods or it was warm spring weather -- spring related merchandise on that. We did not get a big zoom in the month of March as a result of seasonal sales which, again, we were up against pretty strong numbers from last year in March. March was very kind to us a year ago. Particularly pleased with the strength of our core business and, to Jim's point, it's been pretty much across the board with seasonal probably being the softest piece of the business.

I don't suppose you're expecting a greater lift in the seasonal beginning in the second-quarter?

That is correct.

Okay. Can you talk a little bit about your newer stores operating above plan? Are there differences in geography between existing markets and new markets? What are the differences in advertising support you're providing?

David, as we mentioned I think in the last several calls, we have -- for our growth, maybe 35 or 40 percent of our growth is concentrated in the area that we define as the Northeast which is Pennsylvania north and east including Pennsylvania. We have a pretty efficient machine when it comes to new store advertise and we don't have to spend extraordinarily. We just began to add other than the initial events that has a little bit of radio and a little bit broader distribution of our circular, we just kind of open our doors and fold them into the baseline of advertising. There's not a lot of extra effort required there. The new stores are coming out of the box and appear to be -- or actually are running at average chain volume first full 12 months.

Do you think that's just overall execution and training and --?

Pardon me?

-- Is that overall just solid execution and training?

Yes, we have the machine -- as Kim mentioned, our new store engine is developed. We are hiring store managers well in advance of opening; training them, absolutely validating that they are capable of leading one of our stores, and we have now taken a lot of the process complexity out of opening new stores which allows us to allocate more of our preopening time to product knowledge or procedural training for the 12 to 16 new team members we hire in each new market.

Okay. And lastly, can you comment on the returns you're seeing on the relocated stores? And also can you comment on the performance of the smaller market stores?

The smaller market stores we don't have a large enough base to be able to have anything meaningful in the way of statistics there that would help you with your modeling. And on the relocated stores, I think we had mentioned that the cost of those stores is justified by the lift that we have. That's about as specific as we'd like to get on those two areas.

Thank you.

David Cumberland, Robert Baird.

Congratulations. Jim, could you talk some about the impact of your advertising program; how much credit you think that deserves as that continues to roll out for you, and if you could share any recent metrics on recall and other areas?

Sure. We give credit to several key initiatives. Our products, our merchandising is better. Our display is more compelling, our people have a very fast pace and execute very, very well. In addition to that, we look at advertising of both print, which has improved significantly in the last couple of years, and also I guess more importantly our electronic campaigns as inviting more customers in, new customers for trial and existing customers for increased visit frequency. We have no new metrics since the last time -- the last conference call.

But as I recall, I believe our primary message recall was up about 60 percent year-over-year. Directionally, I know that is correct. So I guess all the metrics -- we are delighted with our new TV campaign. The name recall, Tractor Supply is being recalled, and the primary message recall were both up very, very significantly. But we've not gone back to measure that recently. We always use -- the number one measure of everything we do is same-store customer traffic which continues to grow at a very nice clip.

Jim, you mentioned some change in timing for store openings. Can you elaborate on the reasons for that, including in the second-quarter it looks like some stores moving into the second half? Will most of those open in the third quarter? And did the later openings have any impact on second-quarter or first-half net income?

Probably not a significant impact on the second-quarter or the half. Generally we expect probably six to eight stores have moved from Q1 on into Q2. Some of those may flip over into Q3. Not significant. It's just the Northeast is more susceptible to weather delays and is more complex when it comes to permitting. And it really didn't catch us by surprise, but it did tip things over in the quarter a little bit.

And last question. Interested in initial thoughts on the ATV business and the related accessories, what you're seeing on keeping those in stock and your ability to assemble those at the store level efficiently?

David, this is Gerry Brase. As we've talked about on past conference calls, we look to this category to be a source of future growth for Tractor Supply. We've been testing aggressively the last two years and are now in the early stages of rollout of a utility vehicle program as well as an ATV accessory program with expanded testing on the actual ATVs themselves. And to date we're pleased with what we're seeing. But I can tell you, we are taking a crawl, walk, run approach to this business on the basis of the fact that there's a lot of legal issues, licensing issues that we're faced with state-by-state as we proceed in those businesses.

Great, thank you very much.

Scott Pettit, Avondale Partners.

I'd like to talk a little bit more about the animal and pet products category. Those categories have been strong for a long time now, and I was wondering if you could talk about some of the things driving that -- maybe talk about new brands, things like that.

Scott, Gerry Brase here again this morning and you asked about the animal and pet products side of our business. It is continuing to fuel our growth. It's been a primary focus for Tractor Supply over a period of the last several years. Jim alluded to the fact that we have over 200 test programs in place today and, again, a predominance of those are in this fast-growing segment of Tractor Supply's business. It represents in aggregate over 30 percent of TSC's total sales. Last summer we did major reset activities in our equine departments as well as basically in some of the related businesses such as, for example, books and magazines is a category that we focus heavily on the animal and pet titles that so drive our business.

Those are the kinds of things that we're seeing continue to throw more gasoline on this fire and to accelerate our sales. We've also in the first quarter this year made some notable changes in our pet supplies department which we believe is a (technical difficulty) and mature piece of Tractor Supply's business today. So more to come. Again, we're monitoring the test very closely and look forward to future additions to our overall lineup there.

What about the rollout of the Cub Cadet power equipment? How's that going?

Basically Cub is in -- at the end of the first quarter it was rolled out chain wide, and this is basically the Cub Cadet riding equipment program that we've had for the last two plus years along with the Cub Cadet two cycle program. And we're going to be very aggressive in our marketing of the two cycle piece of the business which is the newer piece of that business for Tractor Supply now beginning in the second-quarter of 2004. So it's complete; we're pleased with the performance of the category to date and pleased with the actual product itself. This is a product that has gotten rave reviews from the field and from our customers in terms of the quality of the product.

And then last question just for my model here. We talked about it a little bit, but will the bulk of the stores that you've going to open in the second half of the year -- are those stores going to be open in the third quarter?

Yes, we expect to have virtually all of our stores open by the end of Q3 for the year.

Thank you.

Anthony Lebiedzinski, Sidoti & Company.

I wanted to know if you could just elaborate about the impact of weather on your sales in Q1?

It certainly wasn't favorable. I would say that weather -- this, as was projected, this was a very normalized year in weather. So I think on a year-over-year basis we probably had less favorable selling of cold weather gear in January, first-half of February, and probably less favorable spring selling season in March.

Okay, so if you look at the second quarter of last year, if I recall correctly, your sales were somewhat negatively impacted by the cold and wet spring and so it looks like you should be in good shape for the second-quarter. Is that sort of a fair assessment?

That's our plan.

Okay. Looking at some of your -- you mentioned the increased costs of merchandise containing steel and other commodities; what percent of your sales is derived from these products that contain steel?

Let me get right to your question. If we look at how much of our comp store sales are driven by increased pricing in steel products the answer is 6/10 of our comp sales. So of the 124.6 (ph), 60 basis points was related to pricing of steel commodities.

Okay, got you, okay. Also you mentioned that in the first quarter you made some additional operating improvements. I know you've put in some new software E3 and I think Kronos into your stores. I wanted to know how far along you are with those improvements and when that process will be complete?

That continues to be in rollout. We're not getting significant benefits from either of those programs at this point in time. This is the spend before the benefit as we've talked about previously, and part of the reason for the lack of SG&A leverage in our plan.

And then the last question. With your guidance for the second-quarter, what kind of a same-store sales are you assuming in your forecast for the second-quarter?

In the 5 to 6 range.

Thank you.

John Lawrence, Morgan Keegan.

Can you hear me?

Yes, we can hear you now.

Hold on a second. One second please. (indiscernible) Good morning, guys.

Good morning, John. Hey John, we're putting a new store in your market. You are going to have something really modern to look at in Horn Lake.

Well, I knew the marketing was good and so it is going to be pretty good (technical difficulty). We were in some stores yesterday, and could you tell us about the test on the situation for the -- some of the initiatives related to cost, specifically rolling out the merchandise to the front of the store, the security and the shrink. We saw that test yesterday, can you talk a little bit about that?

I believe, John, you're talking about our security test on power equipment, that's an initiative we have for the field; it's a security system that's tied right into our store security system that will enable our stores to leave power equipment outside all night long which will reduce the cost of doing business by reducing our manpower that we use to push them in an out every night. So far the test appears to be doing very, very well.

Stan, is it a reduction of hour or just a better quality productive time for those employees?

John, it will reduce the number of man hours we use in our stores to push power equipment in and out of our stores in high theft areas. And we will just reinvest that time and labor right into sales, customer service.

And is that test in early stage or is that pretty widespread or did I just find the right place?

That test has been expanded a couple times, John. It's gone along very well. We've been testing this probably for about 12 months now and we're quite confident that we'll be rolling it out chainwide here in the near future.

Congratulations.

Frank Brown, SunTrust Robinson Humphrey.

I'm looking for a little bit of additional color on gross margin if you can. It was an impressive performance on the gross margin. Can you talk about how much of that might be driven by improved purchasing leverage with vendors and kind of break that down in terms of what we could look for going forward?

Frank, this is Gerry. Basically Jim talked a little bit about our line review process that we use here within merchandising, basically where every second year we'd like to think that every category comes up for a detailed line review where we have the opportunity to leverage our greater purchasing volume. As a company we continue to see consistent reduction in our purchase order cost of goods as a result of the line review process. And as a company I think it's important to understand, Frank, that we don't necessarily harvest those gains in reduced cost and just drive it to the bottom line.

Wherever we can strategically we pass it along to the customer in the form of reduced selling retail so that we have the opportunity to protect our market share and, in fact, grow our market share out there on an ongoing basis. We don't see any end in sight as we continue with this engine. We're basically on an upward spiral here from that standpoint, and we've got more and more vendors waiting in line that would like the opportunity to do business with Tractor Supply. I would tell you that we can look forward to continued growth in the probably 10 to 20 basis point range on the raw margin side of the business on an ongoing basis.

Okay, great. Also, looking at the first quarter -- a tremendous result, but it doesn't really seem like looking at the business on a six-month basis that you'll stall sales or profits from the second-quarter. I'm trying to get a feel for how much of the strong sales and profit is kind of shifting due to seasonality type things and how much is really building momentum that's going to carryforward throughout the year.

Regardless of the significant improvement in the first quarter, when you look at it on a full year or even the full first-half basis, it's not particularly significant. With that said, we do anticipate that the benefits of the first quarter are something that we'll not have to give back in the second-quarter in any significant way. As mentioned earlier, the sales drivers tended to be traffic count and it was sustainable in terms of our ongoing business.

Cal, wouldn't that 5 to 6 comp guidance be a little conservative in that case?

I don't talk on things being conservative or not so; I think that they're realistic but sometimes we get surprised both ways. Last year in the second-quarter we fell short of what our guidance was for sales, more than made up for it in the third quarter. We drive the business based on a full year plan and we'll continue to and do that with a thought for what not only the current year is going to do, but what our expectations are going forward. So we try not to get overly focused on any one quarter.

Fair enough, I understand. Just one last question. Can I -- could you say anything about any other of the products in test that are looking more near-term in nature -- things that we might see imminently?

Frank, I could but I prefer not to for competitive reasons. As you're probably aware, we do a significant amount of our recent activity in the period of June through August, so I would encourage you to keep close watch on our stores in the June to August time frame and you'll see some of these new initiatives being rolled out.

Great. We'll do our best. Thank you very much.

John Purdy, Principal Global Investments.

Within your three-year program of planned store openings, does that include anything for California or would that be incremental for those numbers?

Those numbers would include the three stores that we're piloting in California, and over the long-term whatever we would grow in California would at this stage of the game be within the numbers that we give you earlier.

Okay. And then you're opening up another DC about a year from now. Given your store growth plans when might we need to see another DC -- in '06?

'09 probably. We have -- more than likely that would be for the West Coast. It really depends a great -- actually it really depends completely upon the success of California and the rest of the West Coast. But if we have a success in trajectory we expect that we would be looking out there probably not earlier than late '08 or '09. We do have a dated and somewhat small facility in Omaha that will be relocated; it will not be an incremental site, but it will be relocated probably sometime in '05/'06.

Relocated for the west?

No, relocated in -- probably in that general vicinity plus or minus 100 miles.

Okay. And then could you give any kind of ballpark numbers for CAPEX based on your three-year store opening plan for '05 and '06?

We haven't really put those out and talked about those to any extent at this point in time. We'll likely be less than what the '04 plan is because of the significant build in infrastructure for distribution in the current year. Probably order of magnitude -- $50 to $60 million, but that's just a rough guess at this point -- in each of those two years.

Okay, thank you very much, gentlemen.

(OPERATOR INSTRUCTIONS) Nancy Krukashka (ph).

Can you tell me what the average age of your store base is now?

Well, how many stores did we have 10 years ago and the rest of them are within 10 years. We have 150 odd stores at the IPO?

Yes. We had 100 -- but we've replaced a lot of those. We just don't know the answer to that.

Yes, that's why I asked. Just because the replacements, the quality stores were essentially new when you opened them, not necessarily new locations. But -- so chances are it's less than a couple of years old.

On average not more than -- probably the average is 5 or less. Let me talk about our strategy here. Our strategy is not to let our stores age, to make sure we stay up to date, to stay ahead of the game to serve our customers and we are on a rapid path to replace the really old stores. And our long-term goal is simply to stay relatively up to date in every location. And additionally, if we have a real bad situation we're not afraid to close a store that's not making it either.

And on the older stores you probably -- I mean how many more of those do you have left? Do have less than 100?

There are less than 100 that are really old, probably we're down to probably 50 that are really old now.

Okay. And those you're replacing as leases expire and that's at a clip of maybe a dozen per year?

At least, but more like 20 a year.

Exactly. So the 20 is -- in the moves that you're doing are focused on those older or oldest stores?

Almost exclusively, yes.

Got it.

Just to kind of give you some metrics; we ended the year 1990 -- or 1999 with around 300 stores. Since then we've replaced about 40 of those, that base is 260. Everything else of the 477 is newer.

And I'm sorry, Jim, the first number that you gave me.

Year end '99 we had 300 stores. We have replaced about 40 or 50 of those -- so those 40 or 50 plus everything else up to the 477 we have open today are three years old or less.

Got it, exactly. So 40 to 50, the stores that you've opened since then, exactly. So it's clearly two-thirds is less than three to four years old.

Correct.

Okay. Thanks, guys.

John Lawrence, Morgan Keegan.

Could you comment just a little bit, Joe -- I don't know if you've talked about the smaller market stores at all and how you see those progressing?

We have only opened a handful of those, and the numbers are not big enough to further comment on. We are happy with the results we're seeing, but we're not pursuing that as aggressively as we might have indicated at one time.

Great, thanks.

I want to thank everybody for joining us today. As we look back at the last year and the current situation I think we've got a well oiled machine here. The business is running very well, the organization is functioning together very effectively. Our market niche is solid, our customer base is growing. Our leadership team is strong and aligned and we're making decisions, as I think you can tell from listening to us, for the long-term.

On the people engine side of things; Kim Vella talked about what we have done. Right now we just simply have -- we've got great salespeople in our stores, our team of store managers and district managers continue to get better and better all the time. And in Nashville and in our distribution centers we have a support network that continues to improve and continues to do a great job supporting our stores. We're optimistic about our company, our organization, our niche in the marketplace and look forward to talking to you in July and delivering some more good news. Thank you all very much.

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