Tractor Supply Co (TSCO) 2004 Q2 法說會逐字稿

Good day and welcome to the Tractor Supply Company second-quarter conference call. During this presentation all lines will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded on Tuesday, July 13, 2004. And at this time I would like to turn the program over to one of your hosts, Melissa Myron from Financial Dynamics. Go ahead, please.

Thank you. Good morning everyone. Thank you for joining us for Tractor Supply's conference call to discuss second-quarter results. Before we begin let me take a moment to reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the Company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time.

The Tractor Supply Company undertakes no obligation to update any information discussed in this call. And now I am pleased to introduce Joe Scarlett, Chairman and chief executive officer. Joe, you may begin.

Good morning, everybody. Thanks for joining us; we are sorry we are getting started a little bit late but apparently there are a record number of people on the call this morning. With me today are Jim Wright, our President and soon to be Chief Executive Officer, along with Cal Massmann our Chief Financial Officer. We also have Stan Ruta from store operations and Gerry Brace with us.

There were two press releases yesterday; one would be the standard release about our earnings and the other may have come as a bit of a surprise to some of you about the change in leadership and the upcoming promotion of Jim to the additional position of chief executive officer. Our Tractor Supply leadership team, the Board, Jim and myself and the other top executives all take a long-term view of our business. We're committed to excellence in management, and we are also committed to seamless leadership transition at the top and throughout the organization.

Historically I became President in 1987 and Chairman in 1993. I have had the top job for 11 years; 4, 5 years ago, a little over 4 years ago we hired Jim in an effort to strengthen our team and he certainly has done that and exceeded our expectations. And you can see that in the results. We also hired Jim with the thought in mind of potential succession; his performance has been outstanding and the Board has made that decision over a period of time. The team is ready for the change, and we believe the time is right. We have been planning the change for a long time. The Board has been involved in it for about 15 months. The press release said the transition will be seamless, and it will be. And I believe that I represent investor conferences and in previous conference calls that Jim has had near total responsibility for running the business for over a year now.

We have total confidence in Jim's ability to run the business. What you see today is the transfer of titles, a shift in ultimate accountability, but Jim and I both share the same set of values. We are passionate about our business. We are passionate about our mission, and we see eye to eye on all the basic business strategies. So what you'll see in the future I am confident is a continuation of our strong performance and an acceleration of that performance.

Now what am I going to do? I am going to stick around full-time. I am not going anywhere. I am going to continue to be the heart and soul of the Company. I'm going to work with Jim on high-level strategy issues. I'll be doing some of the Investor Relations work. I will continue to spend a lot of time in stores, teaching and mentoring our store managers and district managers and I am going to continue to focus a large amount of my time on leadership training and education through Tractor Supply University and other avenues we have of developing our people.

I will be at it full-time. I will be Jim's number one supporter and number one cheerleader. And we look to the future and believe the future for the Company is going to continue to be solid and probably get even better than it is today. So with that let me turn it over to our future CEO Jim Wright to talk about the recent financial results.

Thanks, Joe, good morning everyone. This morning I will speak to you about the transition announcement and then the review of Q2 and discuss some going forward projections briefly. As you know, Joe and I have been partners at this great Company now for four years. During that time our store count has grown from 305 stores to 490. Sales from 760 million to 1.7 billion. Net profits gone from 16 (ph) million to our projected $68 to $70 million. We built a just a terrific, terrific team that is seizing the opportunity. Well aware that our market cap has gone from 160 million to 1.4 billion or 1.5 billion.

While we have been great partners, the credit for these accomplishments really rest with the 4000 team members that were present in 2000 when we started and the 7000 team members who are with us today. They own our historic performance, and they own our future. In the future we are going to be staying on strategy. We are a farm store chain who serves customers who enjoy the out here lifestyle, as we have mentioned we are going to be accelerating our store opening to 12 and then 13 percent, yielding 63 new stores next year and 76 the year after with expansion and acceleration beyond that quite potentially.

We will continue to provide great products, new products, seasoned advice and convenience to our customers along with everyday low pricing. We have been preparing for this transition for some time. Today, Stan Ruta, our Senior Vice President store operations also oversees real estate and construction, which he's done for over a year now. Gerry Brase, a Senior Vice President of merchandise assumed responsibility for distribution and logistics earlier this year. Cal Massmann has been reporting to me for everything except finance since midyear last year. In addition to the Senior Vice Presidents, (indiscernible) vice president of advertising/marketing and Kim Vella, Vice President of Human Resources will continue to report directly to me.

So I have 5 direct reports. The structure is working extremely well. Each of these executives is talented and dedicated to our mission and as such we have no plans to fill the COO position. I am delighted to be named CEO of this fine Company; excited about the opportunity and honored to be working with the executive team and most importantly our frontline team members who ultimately make it all happen.

On to the quarter, we're pleased with the Q2 results. Sales were up 17 percent in total, 10 comp and it was strong across all categories with pet and livestock equipment and products producing a leading comps. Our 10 percent comp increase, 2.1 percent of that came in pricing as we were able to translate cost increases of steel and commodities driven cost increases to the retail market, and delighted to say that while we have been able to exert pricing pressure we do remain very competitively priced on all of these products.

Our sales are strong in each of our 5 regions, and again our sales were driven by increases in both traffic counts and in average ticket. Our gross margin improved 20 basis points as a result of a positive changes in mix, selling price and improved purchasing costs. Some of these gains were offset by freight costs, driven principally by the cost of fuel and by the LIFO charge that we reported.

Total inventory increased 15 percent at the end of Q2 versus the same time last year. That was on a 17 percent sales increase. Our comp increase in inventory was 5.9 percent versus a 10 percent comp increase. On a rolling twelve-months, our inventory turnover is tracking at 2.85 versus 2.70 this time last year. We are well on our way to achieving our objective of 3 inventory turns this year.

Our net profits increased 15 percent in the quarter, 28 percent year-to-date. EPS diluted we are up 10 percent in the quarter and 22 percent year-to-date. While we did not achieve the desired SG&A leverage we did hit our first-half projections and positioned our company for future growth. The 50 basis points year-over-year increase was driven by benefit costs, field management expenses primarily as a result of increased staffing and training related to future growth.

Distribution center expansion. At this point in time we are managing 1.2 million square feet of distribution space, which compares to 830,000 feet this time last year and we are well down the path of preparing to add another 650,000 square feet of distribution space over this next 7 months. Obviously these initiatives will prepare us to accelerate our growth in the future. We continue to be pleased with the traffic flow and the brand awareness as being produced by our advertising initiatives. And we again saw a year-over-year reduction in store manager turnover, resulting in an improved capacity to execute our plans and to delight our customers.

Moving on to Q3 and the second half, as your probably aware we are cycling a 13 percent comp Q3, 9 percent comp Q4. The next two quarters obviously will be challenging. We are also opening 27 new stores in the second half, adding one new DC and expanding another distribution center by 50 percent, relocating our store support center. However, we are reaffirming our full year guidance of approximately $1.7 billion in sales and earnings of $68 to $69.7 million, diluted EPS of $1.62 to $1.66 after a $2 million charge to relocate our store support center.

We continue to see customers responding to our stores, purchasing the new products that we will continually present and our confidence in our capacity to add 63 new stores next year as we grow towards our target of 1300. As I mentioned there is an awful lot going on in Q3 and Q4 and Stan Ruta is going to shed some light on a few of our initiatives for us at this time. Stan.

Thank you, Jim. Good morning, everyone. Right now we've got a major initiative rolling out to our stores. It's one that is very exciting and one that will help us continue to drive our comp store sales. Based on new product opportunities and merchandise testing that has been completed, we are rolling out to our stores these categories and new products through a remerchandising program that will involve virtually every store at Tractor Supply.

The work is above and beyond what we normally do at this time of the year, and it is considered a major project. We've invested a lot of planning in this initiative, and it's going very, very well. At this time we have assembled over 100 traveling teams that are going out to our stores to tear down old planograms, reset fixtures, install new fixtures, set new planograms and set new product that is waiting in our stores to be for these set-up teams.

The work is being done at night, so there is very little interference with our service levels for our customers. Our goal is to deliver to all of our comp stores this new package and allow our store teams to continue to focus on driving sales and delivering great customer service. In the month of July our store teams will focus on the right-hand side of the store and then in the months of August and September they will go right back and attack the left side of the store.

Feedback from our store managers over the last ten days has been just outstanding, and they are very, very happy with the results they are getting from our setup teams. So a very well planned program that involves store operations, merchandising, and we have lots of field input from district managers and regional managers. We are all confident that this new initiative will drive comp store sales in our fourth quarter and as well in 2005 and 2006. This is new ground for Tractor Supply; it's new learning and I'm confident that we will be talking more about these kind of initiatives in the future.

Thanks, Stan, as you can see we continue to invest a (indiscernible) that will produce revenue going forward. As I have stated before we are managing the Company against a long-term opportunity and ask that you judge us by the half. I'm excited and delighted to be leading this Company; glad you are along with us for what promises to be an exciting and rewarding future. And now Cal Massmann will give us some insight on the financials.

Thanks, Jim, good morning everyone. Starting with the income statement net sales for the quarter increased over 17 percent driven by the 10 percent same-store sales growth, so that is consistent with the high end of the guidance that we had given for the quarter. The margin improvement for the quarter of 20 basis points to 30.5 percent was a result of several factors. We had some market-driven selective price increases, improved product costs due to line reviews over the past twelve months and some mix improvement. This was offset somewhat by our increased cost for freight and higher steel and other commodity costs.

Gross margin included a $1.8 million unfavorable swing in LIFO compared to the comparable quarter last year. We have generally been able to pass through these cost increases maintaining margin dollars with modest declines in margin percentages. Our SG&A expense as a percent of sales for the quarter increased 50 basis points to 19.9 percent, primarily as a result of increased spending for field level people development, the new distribution capacity and new technology spending. As Jim discussed our operating plan includes increased SG&A as a percent of sales as we put the infrastructure in place for future growth in the years to come.

Depreciation increased approximately $1.3 million compared to the prior year quarter, primarily as a result of asset additions for distribution capacity and technology. Operating income for the quarter was 9.5 percent of sales compared to 9.8 percent in 2003. We expect to continue investment spending in the third quarter to develop the infrastructure and staff necessary to achieve our new store and same-store sales growth plans for the next several years.

As Stan outlined we have some very exciting things that we are spending money on in the third quarter that will deliver for the years to come. Interest expense for the quarter decreased as a result of lower borrowing and lower interest rates. Overall our income for the quarter was slightly above the high end of our prior guidance.

Balance sheet, strong quarter. Cash flows were very good. Our quarter end sales were high. We had nearly $50 million in terms of increase in our cash balance compared to the prior year, and we were able to pay down our revolving credit facility to zero. We had no debt outstanding whatsoever at the end of the third quarter.

Our inventories, the average inventory per store was $842,000 compared to $820,000 last year. That is less than 3 percent increase and it supports over 10 percent comp store sales increase. Inventory turns continue to improve, and we expect them to come in at about 3 times or better full year.

Accounts payable were approximately 58.5 percent of the inventory balance compared to 53.5 percent last year. Total fixed asset additions in the quarter were $11 million, bringing the year-to-date amount to about $37 million. Now for some financial guidance. First of all, some key aspects of how we are running the business. We are in this for the long term. We're building infrastructure both physical and people. This takes spending that reduces current period leverage. Our sales goal is to increase midteens for the year. Our earnings goal is to increase high teens to low 20 percent range for the year.

So what we've said from the beginning of the year; it's what we continue to say. Don't get too hung up on quarter-by-quarter. We are in it for the full year. Our full-year net sales estimate continues to be in the $l.695 million to $1.715 range. Comp store sales we see improvement for the balance of the year. Low single digit gains expected in the third quarter and high single digit gains expected in the fourth quarter.

The same-store sales increased approximately 7 percent overall in the last half of 2003. Net new stores 52 in '04 that continues to be our goal of 63 in '05 and 76 in '06. The teams continue to do a better job of opening and running stores. The spending for recruiting and training to support our unit growth and comp store sales growth will continue while we deliver year-over-year profit improvement.

We will continue to perform line reviews with vendors on a regular basis to lower our merchandise cost. We are monitoring the impact of potential additional cost increases in steel and other commodities and currently expect a full year LIFO charge of $4.5 to $5 million. We anticipate higher freight costs to continue through the balance of the year.

Our operating margin on an EBIT basis is expected to be 6.7 to 6.8 percent for the year exclusive of the store support center consolidation costs. We will continue to make investments that drag EBIT margins while building for the long term. Depreciation and amortization is expected to be about $26 million for the year. Interest expense is expected to be approximately $2 million. Our tax rate is expected to be between 37 and 37.3 percent, and that income is projected to be in the $68 to $70 million range including the estimated $2 after tax impact from the consolidation of our store support center.

Capital expenditures are estimated to be between $96 and $98 million. That's up slightly from where we were before. That includes distribution center spending of $40 million and new store and relocated stores we will spend about $35 million on. We increased the planned size of our Pendleton, Indiana and northeastern distribution centers and are finding more subsequent use store locations that require additional capital expenditures, but with lower rents than prototype buildings. We still hold ourselves to the same return on capital employed whether we have prototypes or build-to-suit.

Third-quarter guidance, sales in the $390 to $400 million range. Stan has discussed the major initiatives that we are currently working on in the stores in addition to the people IT and DC infrastructure investments that we have previously discussed. So it will result in net income exclusive of the cost of the store support center consolidation and relocation in the $11 to $12.4 million range. That is 26 to 29 cents for fully diluted share compared to $12.1 million in '03, which was 30 cents per share.

We got a high level of confidence in our ability to achieve our financial goals not only in '04, but beyond and continue to encourage you to look at us not in the -- not on a quarter-by-quarter basis but on a half. The guidance that I have just given on the third quarter could change base on how weather turns out in September as we have always indicated, there can be swings from quarter-to-quarter in our business. And now back to Joe.

Thanks, Cal. Just to summarize, Cal mentioned this but we take a very long-term view of the business. We are all in it for the long term. We have a clear strategy. We have small stores, differentiated products, a perfect complement to the big box home centers and discount stores. We have a growing customer base. We know our customer very well. We have a clearly-defined and growing niche in the retail marketplace; we are the only major player. We have a strong culture in the company, and we are rapidly becoming as Jim talks about frequently, becoming the employer of choice in our business which gives us tremendous operating leverage.

And now with Jim as the CEO I'm sure we're going to continue and continue to show strong performance and accelerate that performance in the future. So with that we say thank you for joining us, and let's open it up for questions.

(OPERATOR INSTRUCTIONS) David Cumberland with Robert W. Baird.

On the second quarter how would you describe seasonal sales? And related to that, would you consider weather conditions to have been positive, neutral, negative for that, and maybe any comment about your outlook for weather in the second half.

Generally speaking, David, the great news is that while the weather was favorable for us we saw terrific growth in nonseasonal categories, which again is in response to some of the strategic and categorical initiatives we've taken trying to move away from the vagaries of the weather. Joe has mentioned that weather was favorable, and we did enjoy a solid seasonal sales, but nonseasonal categories were up very, very solid as well. And it is wet out there. Continues to be wet and that augers well for us going forward.

Looking at the second half of the guidance you've provided for the full year and for the third quarter nets to letting us see your expectations for the fourth quarter and for Q4 you seem to expect a significant amount of operating margin improvement. And I would like you to elaborate on how you see achieving that.

A combination of things, David. First of all, we have some significant spending in the third quarter that we wouldn't expect to move forward into the fourth quarter the things that Stan just mentioned. Additionally the fourth quarter is typically our highest margin business month, and we will have the benefits related to the programs that are being rolled out in the third quarter. So it is a combination of those factors that give us the better drop-through in the fourth quarter expectations.

Would some of the programs, the remerchandising rolling out in the third quarter possibly result in operational efficiencies in the fourth quarter and beyond, not just comps benefits, but operational efficiencies?

They were not designed to do that. This is primarily rolling out the successful test that we've had over the past twelve months putting those in place in more stores than we have typically done in the past. The rollout is faster, better and it's being done in a more efficient way. It actually puts less strain on the store operations, and it gets it done in a consistent fashion.

Gary Holdsworth with Wedbush Morgan.

I wanted to follow up to David's question about the initiatives you are doing in the third quarter and just directionally speaking on the SG&A line, are you expecting a kind of sequentially -- an increase from where we were in the second quarter flat? Could it be down a little bit, just as far as giving us a little sense of where that number could go in dollars?

I don't know that we're prepared to talk at that level of detail. Our tendency has been to give annual forecast and the primary reason for giving the additional details on the third quarter was the unusual initiative that we're doing and the position that some of the analysts had that was above our own expectations; we wanted to make sure that there was more clarity.

Our SG&A leverage as we discussed before is being hampered as a result of the long-term spending that we're doing. We're not in it for the quarter-by-quarter SG&A leverage. We are in it for the long-term growth and sustainable comp store sales improvements that we've seen.

Again, the cost of the store reset, though, is not inconsequential to the current quarter. So I think what we're trying to understand is will we get the -- an almost immediate benefit from that spending? And I guess what you are saying is you are expecting it in the fourth quarter.

We're expecting it in the fourth quarter and beyond.

Final question is on basically touching every category in the store, or only certain categories or just your overall view of these resets in the third quarter?

Just responding to your question, the recent work that we are doing in the third quarter that Stan spoke about is not touching every single category in the stores. It's really broken into 2 key categories one of which is the rollout to a much more expanded store base, test programs that have proven to be successful over the last 12 months. In addition we are rolling out and accelerating the rollout of new test programs to get some accelerated learning so that this time next year we will have something new that has been in tests for close to a year hopefully to be able to rollout in the second half of the year 2005. So heavy focus -- when Stan says the right-hand side of the store, what he is referring to there is basically our in our pet and equine side of the store, we are making some notable changes. And when he talks about the left-hand side of the store we are making some significant changes in our tool and to a limited extent in our hardware departments.

Jason Campbell with Davenport.

I was wondering if Stan might talk about the store openings and how those are progressing with permitting and timing and so forth. And then I have a follow-up question.

Be glad to. The new store opening is going extremely well. From a construction standpoint I think we are probably getting a few more this year in our mix. We are probably getting a few more build-to-suits which you know, think that that timing can change there based on permitting and coding from the city and counties that we're going into. From an execution standpoint, from the store operations standpoint, our new store best practice team has brought forward some significant benefits that are helping us open up new stores just better and better on every one. And we are continuing to improve. We will continue to have opportunity, and we continue to work on every opportunity we have.

Okay, and then a question on the resets. Do you have any plans to reset the bird food category this year as well or is that something you are still working on for next year?

The fact is we're not going in and making major changes to the bird feeding categories at the present time, but we will continue to test opportunities that we see in that category based on its historic strength for Tractor Supply.

Okay, and the question for Cal. Cal, can you explain a little bit more of the LIFO charge and also, do you think that gross margins might be up quite a bit in the third quarter given the mix shift you experienced last year in the third quarter?

I'd rather not get into the specifics of margin. I can tell you that we expect a full-year LIFO charge to be in the 4.5 to $5 million range. That would imply that there's another $2 to $2.5 million of LIFO charges yet to come. Contemplating no significant additional increases in steel and commodity pricing, but a continued cost at the higher levels that we experienced during the first half of the year.

Okay. Thank you very much, and congratulations to Jim on the new position.

Thank you, David.

John Lawrence with Morgan Keegan.

Good morning, gentlemen. Could you just -- not to beat a dead horse with this, but would you talk a little but about the strategy. I mean obviously these new test programs I assume that as you work through the year they were working well and you just wanted to get more of that out there in the system at one time, is that the fair way to look at it?

That is fair.

And what point in the year -- how long ago did you make this decision that you wanted to do this in the third quarter?

First-quarter, I guess. Probably Q1 as we -- John, as we began to see these plans come to fruition we made a decision probably late Q1.

Late Q1.

And then I think as we went on, once we made the decision we began to calibrate how to best do it and as that plan came together we decided to frontload the activity in July/August and so we are assured that we're receiving full benefit, having universal and excellent execution in all of our stores. And that resulted in a little bit of the SG&A increase in Q3. But as we said, we are (indiscernible) Q4 a lot because of it.

And just to be, and to look at it if you break down those costs -- I know Cal is not going to give me any detail, but how much of it is just additional people versus say merchandise, additional inventory? Can you just break it down in those categories roughly?

I will surprise you and tell you the inventory number is about $10 million of additional inventory that we will put in but that is all contemplated in our inventory turns. And the cost associated with the effort is also contemplated in the guidance and our guidance isn't significantly different than it has been from the beginning of the year.

Great. Thanks, guys.

Frank Brown with SunTrust.

If I could ask a couple more questions about the test program and the accelerated rollout of the products you have in test now, could you tell me how many stores it will be in and at what point it will be in those stores? Is that by end of October? Is it the whole chain?

What's interesting about this initiative that makes it a little bit different from what we've done in the past, first every store in the Company will be impacted by some number of changes that we're making. What you have to understand, however, is we operate stores today between 12,500 square feet and we have a few stores that are close to 20,000 square feet of selling space. As a result, stores can accommodate different programs and some number and size and scope.

So this has become a real Rubik’s cube for us in terms of how we fit this out there. Literally every store has its own thumbprint if you will in terms of what they can accept. Not just solely based on size on that, but also very focused on what the market opportunity is. I mean we are not going to expand equine in a market that may not have proven to be a good equine market historically for Tractor Supply. So very complex initiative on many different facets, but it's something we think we need to do more of in the future to refine and really fine-tune our performance.

Looking at the capital expenditure that Cal mentioned, of 96 to 98 million, that looks to be something like 8 to 10 million higher than I guess at least I was thinking before. Would it be fair to say that is really related to the store reset program?

A portion of it is, less than $3 million. The other aspects of it is our original plan had contemplated a Northeast distribution center of a little over 300,000 square feet. Now we're planning one a little over 400,000 square feet. Our Pendleton, Indiana expansion, we're now going to build out everything that will fit on that particular parcel of land. It was more efficient to do it that way. And we have found that there are some efficiencies that we can have with some of our vendors by bringing certain merchandise into those distribution centers that effectively lowers our costs and improves our inventory turn. So that is a second piece of it.

And then just some additional, there's additional fixturing that we're doing in the new stores compared to our original plan to be able to put some of the same initiatives that we're putting in our existing store base into the new stores as we roll those out. So it's a combination of those four things.

That's great. Also let's see, the stores you said accelerating new test programs, can you quantify the amount of testing you will do in the next 12 months versus the last 12 months?

As a Company we basically got roughly the same number of test programs in place today that we had a year ago at this time. For the full year we expect to complete roughly the same number of tests. Last year it was something slightly in excess of 250 test programs. We expect to complete a comparable number this year.

And just a different question on a pet feed, you had a very strong pet and animal feed comp number. Can you give us any insight where that's coming from, I mean a tremendous, almost 15 percent gain?

It is pretty much across-the-board for us. Everything from fencing to livestock equipment to pet food and actual livestock feed for horses and cattle and such all have been performing very well for us at this point, Frank.

Frank, the exciting thing about that is that's the driver for our business. That's what most differentiates us from other stores, and it brings that shopper in who then also will pick up the other areas of the store and increase our comps going forward. It is the driver that makes us work the way we do.

Last question, you talked about favorable mix shift in the quarter. Would that be related to the strong sales in that category, higher margins there?

That's a portion of it, yes.

Thank you very much.

Anthony Lebiedzinski from Sidoti & Co.

A follow-up about the store resets. How many stores have the store resets right now, and do you expect all of them to have by the end of the third quarter?

What Stan mentioned is we're actually doing the reset activities in two ways. So we're doing the right-hand side of the store and all stores will be impacted by that in the month of July. So by the end of the month of July all stores will have seen the benefit or begin to see the benefit of changes we're making on the right-hand side of our store, and then in August and early September we will go back through all stores one more time, and will make the changes on the left-hand side of our stores. So by mid-September all stores should begin seeing the benefit of the changes we are making on the left-hand side. So certainly by mid to late September all stores should be benefiting in their run rate as a result of the changes we're making in July and August.

Have you guys opened stores in California?

We have opened our first store in California; it has been open for 20 days, and we are not unhappy.

Okay, glad to hear. And I know it might be a little bit early, but speaking about '05 but you actually you raised your CAPEX expectations for '04. Would it be safe to say that for '05 the CAPEX would be less than 2004?

That is probably a reasonable assumption. We will have substantially built out our distribution center capacity. We will have one additional distribution center to do, which will probably be in '06. That is in Omaha, Nebraska. We are currently in a building that is probably 30 years old that we've been in I think the full 30 years. And we will undoubtedly need to change that out. Other than that our distribution capacity west of the -- excuse me -- east of the Rockies will be substantially complete by the end of this year.

Any ballpark figure where the CAPEX could be for '05?

Not at this time.

Okay. So essentially the third-quarter spending that you will do should not be -- it's not exactly a onetime expense per GAAP, but it sounds like once these resets are in place you don't expect any significant spending on such initiatives. Is that safe to say?

I would say for this year to the extent we find things we can do in the third quarter next year it is likely that we will do them again; if you look at the return and we certainly did that on the initiative. That $10 million inventory investment together with the millions of dollars that you spend rolling out the program are costs justified.

One last question. In the press release you talk about developing programs that take time, cost and complexity out of the stores. Could you just you elaborate on that a little bit more?

I'd like to respond to your question. We have a couple of programs that we're working on continuously, Anthony. One is our workout program where we receive feedback from our stores on things that we can do to reduce work in the store, to reduce our time doing things so that we can reinvest that time into better customer service.

In many of the workout suggestions that we've got we've rolled those into best practice initiatives. To give you one example based on feedback we received from our store on the amount of time that we're just checking in merchandise from in our receiving area, we've put together a best practice team last year that put our entire receiving process under the microscope, and virtually we took our in-the-door and on-the-floor and 24-hour philosophy and changed that to freight-in-eight. And because of improvements that were made in the receiving process today literally we are processing freight in our stores better than ever before, and it is all happened as a result of feedback that we've gotten through our workout program.

Thank you.

Reed Anderson from Friedman Billings.

Congrats to Jim and the whole team there keeping the top line moving very well. Not many questions left but just a couple of things I want to dig into. On the product costs I talked about improving product costs, line reviews, that sort of thing in terms of driving gross margin. Are those line reviews that you've done recently this year? Are those things that have legacy back to even last year and so forth?

The fact is that line reviews are a part of our standard business practice here at Tractor Supply. They are constant and ongoing. Our goal is to review every program within our product assortment, no less than once every two years. With the rapid growth in our top line you can imagine that our purchasing power in the industry has accelerated significantly and as an organization we wanted the teams to leverage our position with the supplier community. Not to mention the fact that there's a number of suppliers out there today that are not currently doing business with Tractor Supply. They are beating a path to our doors hopeful to have that opportunity.

And so what are the categories you've done line reviews on recently say in the last six months or so?

It's difficult for me to say specifically on that, Reed. What I can tell you is every one of our 10 buying teams is charged with developing an annual line review schedule that they work on literally 12 months out of the year, and each of them has successfully completed a number of line reviews in the first half. For the full year this year we will complete between 60 and 80 line reviews for us on different programs across the store.

And then on the, you have relocated a number of stores in the past several quarters. Any comments qualitatively as to how those stores have performed as you have relocated? I can think of one up in Minnesota for example near where I'm at that was a great reload, and I would imagine you have quite a few others.

As you know, we've been focused on relocating and upgrading our older stores over the last couple of years. And we are extremely pleased with the overall performance that we are getting out of these stores. We build a pro forma for each one of them before we relocate them, and we've got a clear understanding and benchmarks in place and in aggregate, they are exceeding our expectations.

Just a reminder we take those out of our comp base so when they relocate, so we don't consider a shiny new store with 18,000 square feet of selling area to be comparable to the 12,000 square foot one that was on the wrong side of town. We take that out of the comp base.

We relocated 3 stores in Minnesota and they are all doing well.

They sure look like it, so that's great. Last question, California you think you could have maybe 3 stores there by the end of the year? Or is that too many, what do you think?

We will have 3 stores there by mid-September.

Terrific. Great job. Thank you.

Michael Cox from Piper Jaffrey.

Congratulations. I might have missed this earlier, but could you comment on the cost per store of your re-merchandising program and will that fall entirely on the P&L for the quarter or is there some CAPEX involved there, too?

There's a limited amount of CAPEX. There is about $3 million of CAPEX involved with the initiative. And then there is the people that make it all happen. And the people that make it all happen will occur in the third quarter. And that is contemplated in the guidance that we've provided both for the quarter and for the full year.

Could you provide just an average store or cost per store on that program?

There probably is no average because it is different things in different stores and that's a level of detail that we typically don't go into because I do not see where it provides any meaningful information for making investment decisions.

Fair enough. In terms of the IT spending, how far along would you say you're on that rollout of that of your inventory management software?

Basically the E3 software package is in the early stages of rollout. We are today probably about 15 percent through. We're doing this sequentially, so it won't have a big bang impact on the business all at once. We expect to be complete with the rollout across all categories and all vendors by the end of February of 2005.

Actually in terms of the store opening schedule for next year, you guys have typically been more first half waiting. Is that with the exception of this year -- how should we look at that next year?

We feel comfortable that we are front-loaded for next year, and we will the able to firm that up as we get into probably our next quarter discussions.

Michael, we've added people in the real estate area under new leadership that will allow us to do a better job of opening early next year. That and we've also had significant learning as a result of doing business in the Northeast and some of the other places where we had not been as active in the past.

Excellent. Thanks a lot, guys.

Andrew Wolf with BB&T Capital Markets.

What was product cost inflation for the quarter? Analogous to the 2.1 percent increase in the sales? Inflation? Do you have that?

I don't have that top of mind (multiple speakers)

It was comparable? Okay, so -- on an overall basis, I realize that obviously it sounds like Cal you were saying you could have passed through all the price increases on some of the hardware-related items. But overall it sounds like you were still able to pass through your cost inflation?

That would be correct. I guess the question is, in the case of -- in the with rising product costs have we maintained margin, the answer is, yes.

Great, so there was a 2 percent bump roughly in sales due to inflation and in gross profit dollars?

Correct.

Thank you very much.

Our last question comes from John Curdy (ph) from Principal Global Investments.

I had a question regarding capital spending kind of moving into next year. With your build out and expansion of your distribution centers will there be up much in the way of CAPEX in next year's number for those items?

Not to the extent that there was this year obviously. There was significant spending this year. We purchased our Pendleton facility, and we're expanding it and we also have the Hagerstown, Maryland facility; those two combined are approximately $40 million. We haven't made decisions on what other expenditures we need to make for distribution capacity, but as I mentioned earlier the primary remaining old distribution center east of the Rocky Mountains is in Omaha, and I believe that we are currently planning on doing something with it in '06. There could potentially be some early spending late in '05 for that. It's premature to pin that down in terms of which fiscal year it will be in.

So the balance really then for CAPEX for next year would be devoted to new stores, relocations, remodels and IT spending?

That's correct.

Okay, thank you very much.

To wrap it up for everybody, we as a leadership team are in this business for the long-term. Our senior executive team is strong, aggressive, aligned. The best leadership team our company has ever had. Our customer base is growing. Our market niche is solid. The organization is functioning very well, and with Jim as the new CEO beginning October first I am sure will get even better. A few words about -- it is all about our people. A few words about our people in the stores.

We have top-flight salespeople. We've got great store managers. Our turnover rate of both the hourly and the manager people continues to decline which gives the company great stability. Our district manager group is doing a great job in the support functions both here and at the distribution centers are doing an outstanding job. We are all positive and optimistic about the future of this business and this Company and this niche in the marketplace. And we look forward to talking to you in October and thank you for joining us today.

This does conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation, and everyone have a great day.