Tractor Supply Co (TSCO) 2004 Q4 法說會逐字稿

Welcome to the Tractor Supply's conference call to discuss fourth-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, prior written authorization of Tractor Supply Company. As a reminder ladies and gentlemen this call is being recorded.

Now I'd like to introduce your host for today's teleconference, Ms. Melissa Myron of Financial Dynamics. Please go ahead, Melissa.

Thank you for joining us for Tractor Supply's conference call to discuss fourth-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. Now I'm pleased to introduce Jim Wright, President and Chief Executive Officer. Jim, please go ahead.

Thank you for joining us. I'm here this morning with our Chairman, Joe Scarlett, Cal Massmann, our Chief Financial Officer, Stan Ruta, Senior VP of Store Operations and Gerry Brase, Senior VP of Merchandising. 2004 was another great year for Tractor Supply. We achieved solid financial results; made significant strides in laying the foundation for our long-term growth. Our strategic initiatives were significantly accomplished and in some cases exceeded. Specifically we opened 53 stores which was above our initial plan; we researched the California market, developed specific store layouts and assortments and opened our first three stores in the Golden State.

We completed the opening of our Brazelton, Georgia distribution center which is now operating at chain level of efficiency, we expanded our Pendleton distribution center by 50 percent adding 250,000 square feet. Constructed and initiated operations at our new distribution center in Hagerstown, Maryland where we are delighted to welcome our first 90 new team members to the Company. Additionally we selected and closed on the site for a new distribution center in Waverly, Nebraska which will be operational late this year or early '06. We relocated our store support center, rolled out significant store resets and introduced several exciting new merchandising initiatives.

Given that most of these projects were scheduled to be completed in the second half of the year we had warned that the end of the year would be a challenge, as all of you are aware we faced some significant challenges in Q3 and I'm delighted to report that the team overcame those obstacles. We were able to maintain our operating efficiencies for the full year which allowed us to drive strong traffic to our stores and produce same-store sales increases, further develop our relationships with our customers and improve virtually all areas of our business including both the top and the bottom line in 2004.

Now specifically turning to our fourth quarter, we saw significant improvement in our business over last year as well as compared to Q3. In Q3 we reported disappointing earnings given the fact that we (technical difficulty) produced 10.1 percent comp store sales mix. At that time we cited sales mix, steel costs and other commodity cost increases as well as freight costs as the key drivers of a 220 basis point margin erosion versus the prior year.

I'm delighted to announce that those issues have been overcome, and as a result our efforts to, as a result of our efforts to improve freight efficiency and our selective and strategic retail price increases. For Q3 we improved our gross margin by 40 basis points over Q4 last year and sequentially on a year-over-year basis that is a 260 basis point run rate improvement. The sales drive initiatives that we struggled to execute in Q3 produced sales above our expectations and added significantly to our overall Q4 sales.

We are also pleased with the productivity of our holiday gift giving event and our equine Christmas events. Along with many other retailers our gift card sales increased nicely; sales in all regions were up, and they were led by the South. Although we experienced a slow start to the winter selling season, the favorable weather did arrive allowing us an acceptable sell through on seasonal clothing and heating. Our strategy of deemphasizing below or no margin promotions traditionally used on Black Friday in favor of a more balanced five-week long merchandising and promotional event produced the strong sales gains and much improved margins that we reported in the quarter.

We are proud of our performance in '04, and continue to look for this positive momentum into this year. I will go into further details about our plans for this year and forward and our strategic initiatives after Cal discusses the financial results of the quarter and the year. Cal.

Good morning everyone. Our fourth-quarter sales increased 17.4 percent to $456 million, slightly above our guidance. We posted a 7.7 percent comp on top of a strong 9.6 percent gain last year for the fourth quarter. Higher selling prices primarily in the steel, grain and petroleum-based products contributed roughly 3.4 percent of the comp store increase. Same-store sales were positive in all of our regions. Equine animal and pet continue to lead our sales performance while sales of farm and ranch maintenance products dropped as a percent of total sales.

The increase in transaction count resulted in 4.7 percent of the increase while the average ticket contributed approximately 3 percent of the gain in same-store sales. For the full year our net sales increased 18.1 percent to approximately $1,739,000,000 driven by our 9.9 percent comp store sales increase for the year. Same-store sales for the year were positive in all of our regions and again the equine, animal and pet products led the annual sales performance while the farm and ranch maintenance products continued to be less of a percentage of total sales.

The increase in transaction count resulted in a 6.3 percent increase while the average ticket contributed 3.6 percent gain in same-store sales. Our gross margin increased 18.6 percent to $145.4 million in the quarter, gross margin was 31.9 percent for the quarter compared to 31.5 percent last year, the reason for this 40 basis point increase was a combination of several factors including higher selling prices, a change in sales mix, and increased vendor marketing support. Pressure from higher commodity cost in the quarter resulted in an additional LIFO charge of approximately $4.5 million.

For the full year our gross margin increased 16.9 percent to $524.7 million, gross margin was 30.2 percent for the full year compared to 30.5 percent last year. This 30 basis point decrease is predominantly a result of higher freight cost, delays in increasing selling prices and a $9.6 million LIFO charge in the year offset somewhat by improved sales mix.

Our selling, general and administrative expenses as a percent of sales were 22.8 percent for the quarter equal to last year. Our SG&A in the current quarter included the preopening cost related to 22 new and relocated stores compared to 8 stores in last year's fourth quarter. We leveraged our occupancy and advertising costs but had fringe benefit costs and continued to build our capacity to grow the business. For the year SG&A as a percentage of sales was 22.8 percent compared to 22.6 percent in '03.

As we noted in our release the 20 basis point increase includes roughly $3.2 million or 18 basis points for the consolidation and relocation of our store support center. For the year we leveraged our occupancy and advertising costs but had higher fringe benefit costs and continued to build the supply chain, distribution center and support staff to grow our business. Operating income was 7.6 percent of sales for the fourth quarter, versus 7.3 percent in 2003 demonstrating our ability to bounce back from our third quarter disappointments.

For the full year operating income as a percentage of sales was 6 percent versus 6.6 percent in 2003. In addition to the third-quarter disappointment this decrease was predominantly impacted by the investments we made throughout the year to develop the infrastructure and staff necessary to achieve our growth plans for the next several years. Our fourth-quarter tax provision was 34.6 percent compared to 39.4 percent in 2003, and it benefited from favorable allocation factors among states. Our earnings per share was ahead of expectation for the quarter coming in at 55 cents versus 41 cents last year. Had the tax provision rate been at the 2004 full year rate of 36.1 percent, the fourth-quarter earnings per share would have been reduced by approximately 2 cents.

For the full year our diluted earnings per share were $1.61 compared to $1.40 in 2003. As result of a miscalculation fully diluted earnings used in the calculation for the first three quarters of 2004 were overstated by approximately 1 million shares and the previously reported fully diluted earnings per share for the second quarter was understated by 2 cents, and the third-quarter amount was understated by a penny. Net income and primary earnings per share were not affected. The fully diluted earnings per share and share count for the fourth quarter and full year included in the press release were not impacted by the miscalculation.

Turning to the balance sheet the year end cash position increased $20 million, increased from $20 million in 2003 to $29 million in 2004, as a result of more stores and higher in-transit deposits at year end. Inventory on a per store basis increased from approximately $700,000 per store to approximately $750,000 per store. Of that $50,000 increase approximately 15,000 was due to the higher cost for commodity-based products and approximately 12 million per store resulted from the new products introduced in connection with our sales driving initiative in the third quarter. Inventory turns were approximately 2.8 times per year in both years. Our 2005 plan is to reduce inventory per store to approximately $715,000 by year end.

Accounts payable were approximately 38 percent of inventory at year end of 2004, compared to approximately 40 percent in 2003. We expect that 2005 year end accounts payable to be at or above 40 percent of inventory. Property and equipment increased in the year net $62 million. Capital expenditures for 2004 were approximately $90 million, primarily for distribution centers and to open new stores. Planned capital expenditures for 2005 are estimated at approximately $80 million primarily to open new stores, complete the spending on the Hagerstown, Maryland distribution center and build a new distribution center in Nebraska.

Looking at 2005, full year net income guidance we anticipate sales to range between approximately $2 billion and $2.25 billion, an increase of 13 to 15 percent. This reflects a comp store sales increase of 4 to 5 percent. We have plans to open an additional 60 to 65 stores, split approximately evenly between the first half and the last half of the year. We expect sales for the first half to be in the 48 to 50 percent of the full year amount and the full year EBIT margins to be approximately 6.5 to 6.55 percent of sales. Our effective tax rate is expected to be approximately 36.3 percent.

I want to stress that our business must be looked at by half and not by the quarter. With that said we expect our get ready first quarter to be approximately breakeven. We expect full year 2005 that is a 53-week year, net income to be in the range of approximately 81.7 million to 83.3 million or $1.95 to $1.99 per share. Our guidance is before any change in accounting for stock options. Assuming the adoption of expensing stock options in the third quarter of 2005, our GAAP after-tax income for the year would be reduced by approximately $2 million. If expensing of stock options had been adopted at the beginning of 2004 after-tax income for both 2004 and 2005 would be reduced by an estimated $4 million or 10 cents a share.

More significant than the year-over-year improvements in annual results is the future growth potential from same-store sales, improved leverage and at least 800 additional stores. I would like to turn the call back over to Jim for some details on our future plans.

As I mentioned, 2004 was a great sales year but only a good profit year. We were able to continue our aggressive growth strategy, we increased our store base by over 11 percent and entered into new markets and entered the West Coast for the first time. As I also mentioned we embarked on several long-term strategies that will set the stage for future growth and points of leverage going forward. Looking at 2005 we are focused on continuing the momentum that we experienced in the fourth quarter. Specific I would like to walk you through our plans to achieve sustained growth and will provide an update on various strategic initiatives.

On the operations front we continue to employ our successful best practice methodology to take time, cost and work out while improving the service to our customers. At this time we are refining 8 initiatives designed to increase long-term shareholder value through customer strategies and will be meeting next week to discuss a series of initiatives targeted at reducing cost and improving asset utilization. We continue to work on gross margin expansion through mix, merchandising and price initiatives. Our commitment to testing continues, we currently have over 250 items in tests and continue the trend of producing sales through new lines and new products. In fact, last year 35 percent of our sales were produced by stock keeping units not in our assortment three years ago.

Our promotional strategy will continue to use and emphasize national cable television, our pre and post research indicates a lift in sense (ph) consumer assigned attributes as a store you can trust and a store that understands my needs. We also measure net promoter scores and are seeing just wonderful results, amongst our most frequent customers we get an 80 percent net promoter score. And we score in the mid '50s across the general population of our customers.

We will be increasing our use of direct mail which allows us to leverage our customer database by mailing specific product lines to customers known to participate in those categories at the seasonally appropriate time. Funding for our direct mail program expansion will come by eliminating the three least productive circulars which were not covering their cost with incremental margin lift.

Our pricing policy, the increase in our cost of goods has moderated somewhat and today is mostly limited to seasonal categories that are being purchased for the first time since last year's inflation set in. In most categories we have been able to pass the price through at retail while maintaining our competitive position. We are monitoring raw materials and fully expect to normalize our cost when our vendors see a reduction in their raw materials.

On the IT side we are very close to selecting the software vendor for our new enhanced point-of-sale technology. The benefit of the new POS system will be improvement in data collection, speed and our DCs will improve and it will be a robust base allowing us to continue the aggressive expansion in store count.

New store openings, the 60 to 65 stores planned for this year will be more evenly split between first and second half versus the back loading we experienced in '04. Our real estate team has been significantly strengthened in the last 12 months, our pipeline today is adequate to meet our projections.

On the distribution and store center side the new DC center capacity will support our aggressive growth strategy going forward. At this time next year we will be operating 5 distribution centers with the oldest being 6 years old, all the technology will be state of art and standardized and the layouts in these distribution centers will be very efficient. They will in total occupy 2.3 million square feet versus 800,000 square feet we had in the year 2000. This capacity will support 400 additional stores.

We are dedicated to building on our success over the last several years to ensure our long-term prosperity. I firmly believe that we with what we've already accomplished as well as what's in store for the coming year that we are on the right track. The condition of our stores is very, very good, our customers are happy with our assortment and pleased with our customer service, there's a terrific amount of energy in our teams, our turnover remains low and their bench is deep. Our new stores are performing very well and we continue to be the only major player, a very well defined and growing niche retail market. These positive results give us the confidence to continue to invest in new programs and initiatives that allow us to drive sales and build the Tractor Supply brand. I would now like to turn the call over to Joe Scarlett.

Thanks, Jim. We just completed our February Board meeting in the last two days and we are I think most of you know very focused on improvements to corporate governance and I would like to just share with you 4 points, decisions that we made over the past 2 days that we think will improve the whole topic of corporate governance. But first we will propose to our shareholders this Spring that we eliminate the staggered terms for the board members and move to annual election of all directors.

Second, we established limits on the number of public boards on which our directors can serve, third, we have established requirements for regular board education for all of our directors and fourth, we formalized the succession planning process as a regular function of the board compensation committee. Our goal is for Tractor Supply Company to be in the top quartile on the topic of corporate governance and we are well on our way to getting to that point. So Jim, back to you.

Now I would like to turn the floor over to questions.

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

First question relates to vendor support in the quarter. First what prompted the increase and second if you could please quantify the impact on gross margin in the quarter?

Basically the increase in the vendor support was primarily driven by the increased purchasing that Tractor Supply did through the supplier community to support our top-line sales growth. For the year our 9.9 percent comp store sales growth was significantly above previous expectations and as a result we were fueling that through our purchases throughout the year. Many of the volume rebates that we have in place with our supplier community out there today don't actually kick in until you hit certain thresholds of purchasing power with the suppliers and a lot of those thresholds were exceeded during the course of the fourth quarter, and of course we worked on quantifying that coming out of the fourth quarter itself. And David at this point I'd rather not share with the collective group the significance of the dollars that added to the fourth quarter P&L.

Thank you. On the outlook for 2005, if you could please share some of the key merchandising initiatives that you have planned for the Spring?

First of all as you heard Jim allude to and as I think we had shared with the group at the end of the third quarter we made major investments in new merchandising initiatives and programs in the third quarter that significantly benefited our comp store sales growth in the fourth quarter of this year. And we will continue to benefit through those initiatives throughout the first nine months of the year, 2005, as we continue to cycle across those initiatives. Those initiatives were significant in that we basically had taken advantage of successes, David, they come from the test programs that we have had in place for the last 18 to 24 months. As I shared with the group in the past those initiatives were heavily focused in our core categories that are really propelling our growth, the pet and the livestock side of our business has been a major focus for us. And as Cal indicated had contributed significantly to our comp sales growth so we had a number of initiatives in that segment of the business as well as over in hardlines, both in the tool and the hardware categories. We are delighted with the results we are seeing, we are measuring them, monitoring them and fine-tuning them as we move through the first quarter and expect that those categories will be the primary driver of our first half sales success, David.

Thanks a lot. Congratulations.

Reed Anderson with Friedman Billings Ramsey.

Congratulations on a nice quarter. Couple questions. First in terms of it pertains to your comment on guidance, Cal, you said first quarter will be kind of (indiscernible) breakeven from an earnings standpoint. Just curious as you look at same-store sales implicit in your earnings guidance do you think same-store sales will be fairly consistent on a quarterly basis or do you think those will also kind of ramp up and a little bit stronger in the back half?

That is a difficult question because of the same reason we don't like to focus on quarters, it's because of the seasonal shifts that we can have between the last two weeks of March and the first couple weeks in April. Just as we prefer not to make any significant comments about the first quarter except to say that it is our get ready quarter, I don't know that I would be prepared to give anything more specific on comp store sales for the quarter by itself. For the full year we would expect comp store sales maybe to be just a little bit stronger in the first half but not significantly.

That makes sense. From a margin standpoint given what we saw in the fourth quarter given Gerry's comments about seeing the next nine months clearly getting benefit from the merchandising changes and the mix and so forth, obviously it seems reasonable to assume that gross margins where you are going to see your margins expand this year and SG&A you will see likely be more near last year's levels, are those assumptions.

Again, we don't like to get into the specifics of gross margin versus SG&A because there are things that trade off between them where you spend more money on distribution center cost that lowers your cost of goods, the distribution centers in our case are in the SG&A cost. And we would rather focus on the EBIT margins. But I think that the trends that you've seen we believe will continue and those trends include spending on the SG&A side to develop the infrastructure, both physical and human to be able to grow stores going forward at an increasing rate. Eleven percent this past year, we planned on 12 percent unit growth and we just have talked about a 13 percent growth going into '06.

Makes sense. One last one. You pick up an extra week this year. My assumption would be that week is not an overwhelming week from a sales standpoint versus some of your other weeks or quarters that sort of thing. Is that fair or is it --.

That's how we see it as well. It's probably about two-thirds or so of an average week, it tends to be, it would be the lame week that includes the new year's holiday. So you will have the new year's holiday and the Christmas holiday in the year. Usually in the fourth quarter, so that particular add-on week historically hasn't been strong.

That is what I thought, great, thanks very much. Nice job.

John Lawrence with Morgan Keegan & Co.

Gerry would you comment just a little bit on I mean the pet category continues to perform and I know you got a lot of things in test, just look at I guess the broader landscape and tell us how longer-term you can continue to drive this category and the opportunities there obviously the comp will for several years here. How can that category just continued to grow?

Great question and one of the things that I can tell you is we have applied the concepts of category management to many aspects of our business right now as we continue to roll that out throughout the merchandising departments themselves. And a lot of the key learning that is coming out of that is indicating to us the upside potential that we have in some of these categories. For example I can tell you today that nationally our market share in both livestock feed and pet food, two key driving categories for us, is very, very small. We are delighted with the growth but the upside potential when you consider what a small portion of the marketshare that we truly have today, we believe is significant. And as you apply that learning across any number of other businesses whether it's equine categories or the pet supplies categories, you've got to get excited about what the future holds for us in those businesses just because for us they are still very immature, John.

And secondly to follow that, the 250 items in test, are they just as strong as they were two or three years ago, the ability to pick up those items?

The fact is they are all over board. I will tell you one-third of those will wind up being expanded and rolled out throughout additional stores and possibly chain wide. A third of them will require additional monitoring and testing and probably a third of them will tilt, the are going to prove to be not successful. We think when you look at the productivity of our boxes today there is still a lot of upside potential as we apply the concepts of dense packing our merchandising in the stores to open up additional footage to accommodate some of the new programs that will prove to be successful going forward.

Last question, now that you have seen the fourth quarter and it was all successful, would you have done anything differently on the reset in the third and fourth quarter other than what you did?

Just from an executional standpoint John, I think we could have been more effective and more efficient collectively on many fronts in the third quarter with the execution. But the timing to push on it in the third quarter and begin seeing the benefit in 2004 was absolutely the right decision for Tractor Supply.

Congratulations, thanks guys.

David Campbell, Thompson Davis.

I was wondering if you might comment on the mix shift you saw in the quarter towards the higher margin products, maybe if you could elaborate a little bit more on that? And also can you talk about the weather, how did the weather affect you in the fourth quarter? Thank you.

I like to take a crack at that question for you. The fact is the mix shift towards higher margin goods, I mean collectively as an organization we put a major push on developing our holiday gift giving categories for Tractor Supply. And as you might imagine and as you understand from other retail clients that you service out there, the gift giving category certainly offer the opportunity properly managed, for better margins than some of the other core categories, the maintenance categories that we have throughout our business. That trend continues, we had a very successful year in the gift giving categories as Jim indicated earlier.

Relative to the weather impact on the business, really the weather was unusually mild on a year-over-year basis in 2004 versus 2003's fourth quarter up until the middle of December. We had a nice burst of cold weather in the last part of the fourth quarter. It certainly benefited us in our pre-Christmas selling and cold weather categories.

Can you give us an update on the work wear business and apparel business in general? How is CE Schmidt doing also?

David, we are pleased with our apparel business today at Tractor Supply. We've made major investments in a number of different fronts with the introduction a year ago of the Levi's brand and the introduction of the CE Schmidt private-label brand. The private-label brand is in its second year of rollout right now and to date we've been very pleased with both topline sales and bottom-line margin performance of the CE Schmidt brand.

Great, I will look forward to seeing the latest new products, and congratulations on a solid quarter and a solid year.

Frank Brown with SunTrust Robinson Humphrey.

I wanted to ask one, about the impact of passing along higher commodity costs in the fourth quarter. I guess in the press release it was 3.4 points of the comp that seems I believe similar to the third quarter impact. In which case was there more passing along or higher commodity costs? Was that a major factor in terms of the gross margin improvement?

Yes, quite frankly, as we mentioned one of the problems we had in Q3 is that we had digested the cost increases and had not yet, a little bit reticent in reacting at retail. We got that caught up in Q4. We did not catch it up at the expense of competitive positioning.

Okay. I was also curious you mentioned an increase use of direct-mail as we go into 2005. I think that was one topic that you talked about in the third quarter in terms of bringing in a different customer, buying a lower mix item. Is there a plan in place to control that better?

A couple of things, first of all on the direct-mail we have several million customers in our database that have opted into our database, we understand the categories they participate in and the next item they are most likely to buy. A little bit what we did in the third quarter was early in the Q3 on the learning curve, frankly our response rate -- I think the offers were perhaps a little more aggressive than they needed to be. Our response rate was a little higher than we intended and, as a result, we had some negative mix of business impact. That was revised and fine-tuned for Q4. We continue to see very, very favorable response.

We like the ROI on the initiative, and the offers are being accepted by our consumers and there's really no margin degradation and frankly much less than there would be if we were marketing on a broad array of products in a circular.

That's great to hear. Just one last question. In terms of the amount of growth investment that Tractor Supply will make in '05 compared to 2004, is there any way you could quantify that to some degree?

Probably not quantify the P&L side of it. Certainly the CapEx side of it, we anticipate $80 million of CapEx in '05 versus 90 million in '04. The other investment spending is embedded in our SG&A as we ramp up the various departments that are necessary for that growth, and also improving other areas of the business.

Nice job, thanks a lot.

Michael Cox with Piper Jaffray.

Congratulations on a good quarter. My question as it relates to your same-store sales assumption for 2005, can you give a breakdown as to what you're assuming in terms of traffic versus ticket? Is it fairly split?

Yes, I think to continue, if you back at this last year, between a third and 40 percent of our comps came from ticket and the remainder came from traffic. If you go back to several years before that, it was principally driven by traffic. Going forward this next year, we think it will be more of an even mix. But I do believe that traffic will probably remain more than 50 percent of our comp store sales driver.

In terms of the Maryland distribution center, it sounds like that's in operation already. Is that going to be fully on track for the spring selling season?

Yes, if you drive by it, it looks like a construction site. We had some unfavorable weather. Inside it is a functioning DC today, and we expect it to be -- it is shipping as we speak, and it will be fully operational in the March/April time period.

Can you give me any insight as to early results or early learnings from your test stores in the Sacramento area?

Not yet, other than the fact that we are not disappointed. We believe it's very important for us to cycle a full 12 months as our learning from 4 years ago when we entered Florida. We discovered that our assumptions were not necessarily valid when we entered a very different geography. We find California to be seasonally and climatically because this is arid, very, very different than most of (indiscernible) we've done business with and we want to reserve comment until we really have twelve months under our belt. The trends are not disappointing.

One model-related question perhaps for Cal, in terms of the share count assumption it sounds like -- I didn't quite follow the changes that were made in the second and third quarter. But a down tick in the fourth quarter and then your guidance assumes an uptick of over a million shares for '05, could you give us some clarity on that please?

A lot of that has to do with stock price. If investors move the stock price up it changes that fully diluted number. And there is also the granting and exercise of stock options. So we are using 42 million common equivalent shares in the calculation that -- of the EPS that is in the guidance. That is probably one of the more difficult things to predict because it's not anything in many cases that we have any control over at all when it comes to the dynamics of that calculation. Hopefully the fact that we are using 42 million shares will help you at least see the basis for the number that we have given you.

Thank you very much and congratulations again.

Anthony Lebiedzinski with Sidoti & Co.

Good morning. Couple of questions. You were able to pass along higher selling prices in the steel, grain and petroleum-based products in the fourth quarter. What percent of sales is that actually in 4Q?

It represented a little over 3 percent of our comp store sales growth that we experienced in the fourth quarter in terms of higher selling retails. Again Jim indicated a trailing impact off of the third quarter adjustments on retail prices. Some portion of that was waiting until we saw similar movement across the industry out there. We have done everything we can to maintain or strengthen our competitiveness from our pricing standpoint with the adjustments we have made.

In terms of your new store openings for '05, are these going to be mostly in existing markets or are there any new markets where you will enter?

I think we have no new states planned for the year, -- oh, we do, we are going to have our first store in New Jersey.

We just opened mass (ph) we are going to open in Vermont, then later this year, probably New Jersey.

Where in New Jersey?

We don't know right now, several of them are in the works but we don't know which ones are going to open.

It will not be Newark.

That's a safe bet. In terms of your CapEx spending it looks like total number is going to be about 80 million. I was wondering if Cal, you could just maybe provide a little bit more color in terms of how much of that is going for new stores, how much for the distribution centers and how much for some other --.

We will lay that out in the 10-K that we'll file in accordance with the due date. I don't have that fingertip ready right now. The decrease is primarily distribution capacity, we bought the distribution center in Pendleton and added the distribution center in Hagerstown this year. There will be about a $15 million reduction in DC spending and about a $5 million increase in store related spending just to give you some flavor for it. The specifics will be laid out in the 10-K.

So once you get into 2006 I assume you have no plans for any distribution center additions, right?

That would be correct. At this point in time it will probably not be till '08.

It's pretty safe to say that capital spending will be even down even further in '06, right?

Based on the modeling of the store growth we've given that and no distribution centers that is a reasonable assumption.

Thank you very much.

Joan Storms with Wedbush Morgan.

Good morning, congratulations. Quick question regarding for first-quarter and looking into kind of first-half, is there any for expected LIFO charge, it looks like in going over the documents that the second quarter last year was the first time you started talking about that with regards to commodity prices. And then also if you could give us idea about store openings for Q1 and Q2?

We don't usually go into specific quarters on the store opening they will be spread about 50-50 between the first half and the second half of the year. The LIFO charge we would expect to be about $3 million for the full year based on what we know now, and for modeling purposes I would suggest that you just spread that over the year. As we get better information on costs going forward we will give you a refinement to that, but that would be what I would suggest if you're trying to build a model.

Great, thank you.

Andrew Wolf with BB&T Capital Markets.

On your LIFO charge the 4 million this quarter. That compares to zero last year, is that right?

That's right.

And just on the vendor rebate, vendor support. Could you give us a sense directionally, did you get enough increase in vendor support year-over-year to cover that LIFO hit?

I don't know that the two are related in any way. No, we didn't get enough of an increase to cover it.

To help understand the LIFO gross margin but I was just -- you can also think of it as a tricky way to tell us what your vendor support was.

Nice try.

So it was less than the increase from the LIFO charge.

The increase was less than the increase in the LIFO charge.

Some companies that I cover are actually breaking out in footnotes their vendor support numbers, are you guys contemplating that in your filings?

I don't know at this time. We haven't finished the 10-K yet.

Could you tell us on the bonus accrual, it helped you last quarter but you had a reversal in there.

We had a little bit of a reversal yes. We came closer to, we met the expectations in the fourth quarter and there was included in the fourth quarter charge a bonus calculation that was appropriate for the results in the fourth quarter.

Okay, so this quarter no (indiscernible) you didn't get a good positive swing on the bonus?

No. Thank goodness. For you and us.

Lastly, I don't want to belabor this but could you just sort of clarify a little bit the miscalculation on the share account. Your fourth quarter guidance when you gave out a few months ago used basically a higher, a million higher share account, essentially 2 cents of today's upside is just based on essentially versus your guidance, a miscalculation. Could you give us a little more clarity as to what happened there?

It was a spreadsheet miscalculation that resulted in approximately one million share overstatement of the fully diluted shares. That equated to 2 cents in the second quarter and a penny in the third quarter. We put some additional controls in place, it doesn't have any effect on the fourth quarter press release amounts or any impact for the quarter or the full year.

So it had less to do with the stock price? Because an earlier answer it sounded like you might have been inferring it was more related to the stock price? I am just wanted to try to clarify.

No. The primary difference between, in the shares used compared to the shares used in the second and third quarters, would have been that miscalculation.

Thank you. And good quarter.

David Ricci with William Blair.

No trick questions here. The extra week that you've got there, does that have any profit impact in '05?

Maybe a little bit. Hopefully we are not going to have a week where we lose money. It would have a little bit not, if you took the full year divided by 53 and got a weekly profit, the profit that we would anticipate from that 53rd week would be less than the average per weekly profit. Again because of how it falls, it's a six-day week and it falls at a slow time of year for our business.

The month of January you specifically take a fair amount of markdowns, and the weather here has been somewhat mild. How are you looking or how did you look, I should say, on the markdown front in January?

I thought you said no trick questions. We never speak about the quarter in process.

I think you projected that your weather-related inventory was okay in Q4 so I just wanted to clarify it's not going to have any significant impact on Q1.

Okay. Our inventory position in seasonal goods end of the Q was okay. I will confirm that.

And I think our overall comment on the first quarter as always is that is our get ready quarter and we expect to be approximately breakeven in there. With a train wreck coming we would not be setting here saying that or if we thought we were going to blow it out of the water we'd probably mention that as well.

Last question is not a trick question, it is just a little bit harder question. What if the situation were to reverse this year or next and prices come down substantially on things like steel and oil. How would you manage a deflationary environment; what impact you see that having on your earnings?

The fact of the matter is we monitor the commodity markets on a weekly basis. And the three areas where we have been most impacted, certainly steel which has been well-publicized. Petroleum-based products and grain products which impact pricing on the feed categories and pet food categories primarily for Tractor Supply. For us in terms of our negotiations with our vendors and through our line review process we have been able to minimize overall the impact of some pretty dramatic increases in both steel and petroleum products, again to try to keep that in check. Nonetheless we have had to absorb cost increases which we had passed along wherever possible and recognizing what the market and the competitive climate would bear.

I can assure you that as the senior merchant here at Tractor Supply when the pricing tables turn and prices begin to fall we will be there with our hands out. We worked with the vendors on the upside, we expect that they will work with us and we will work with them on the downside. Again the challenge will be how to manage the retail side of this. We've done this over a period of a lot of years, the feed business every year goes through a cyclical pricing. We are no strangers to managing fluctuations in the commodity side of the marketplace. What happened this past year in steel and petroleum products us unusual, we have not experienced that certainly any time recently. We will be there and will be working very aggressively with the supplier community when prices split and begin to go the other way.

Let me add a little bit, we have also seen some elasticity with the unit movement as begun to soften on some of the categories that are most impacted at the shelf price. So as a result we believe there is some deferral of purchasing and as our costs come down with the deal over time, we think that the unit movement will accelerate as the average retail per unit declines. I think it will be a moderating factor as we work our way out of this.

That is definitely helpful. And I'm assuming there will be some short-term benefit on the gross margin line as you transition if that were to happen? If there was a negative --

Slowly, gradually, over time.

Thanks a bunch.

Michael Weisberg with ING.

Congratulations, how is everyone? Your comments about California, does that mean there will not be new stores this year?

No. We expect there will be another 3 to 5 new stores coming to us from time to time throughout the next 12 months. We are obviously working on them now but California has a history thus far of a little more breakage from the beginning of the deal until the end of the deal. We think 3 to 5 is a pretty safe projection.

Can you quantify how much of a margin lift you've gotten from the resets and whether that is fully reflected in the numbers or there is more to come from that as we move into '05?

We actually did not anticipate any margin percentage gain over a twelve-month period, the goal was to leverage the box by adding additional inventory and then getting the chain average turns from the chain average margin on that. But without any increases in occupancy costs and things like that. From a margin point of view it has more to do with comp sales than margin percentage.

Thanks. One final thing, I'm not sure if I heard you right, did I hear you say you've seen moderation in your end pricing from steel and petroleum more recently?

On our year-round categories it is already dialed (ph) into the mix. Where we are seeing a little bit of pressure is in the spring seasonal categories skews that we are buying for the first time since the cost of goods went up. Yes, in general there is some moderating, obviously oil is not changing much, steel has stabilized to a degree.

Thanks a lot, great job.

Let's take one final question.

Patrick Stowe with Priority Capital.

Congratulations on a nice quarter. Most of my questions have been answered but maybe just if we could step back and maybe from a macro perspective, can you comment on any changes or just general comments about the competitive environment, vis-a-vis the big bucks retailers that compete in certain areas? And maybe also any comments on small independents in terms of competitive reaction to your continued success or maybe even acquisition possibilities?

First of all, on the big boxes retail, the old Sam Walton saying that retail plagiarism is legal and highly efficient. We continue to shop the big boxes, they continue to shop us, it's not important that they embrace where we are today if we are someplace else next year. So we continue to be a faster retailer than we hade been before, we have not seen a significant change in category overlap between ourselves and the big boxes. With regard to the regional players in our space, there are several that are very, very good. Others that are challenged with real estate and generational transfer issues and things like that. They continue to grow in the aggregate, their growth is very, very slow, there are a few of them that are growing at a fairly good pace. Frankly again, not a significant impact on our business. And you had a third part to your question.

Acquisition opportunities.

Oh yes. Wish there were some, we are very good at it, nothing on the horizon as we speak.

Okay, and just as we look at the continued growth do you foresee any change in kind of the real estate strategy that you've used today or change in new store economics at all?

The real estate strategy continues to be refined, we just gone through another cycle of refining our site selection model. We feel very pleased with where we are today. And we see fundamentally no change in store economics.

We see individual differences in the total cost to put a store in place but it usually also translates into higher selling prices and higher volumes to where the overall economics are comparable to what we get in the existing stores that we currently own.

Great. Good luck in the future.

Thank you everyone for joining us, great questions, a couple closing comments. Our people engine is in great shape; we've got the depth and quality of a team we need to expand. Our merchandising department is on task and aggressively sourcing new products. Logistics is running, very, very well, we are comfortable with the function of each of our distribution centers today, we have the capacity to grow. As I mentioned site selection and capacity is just as good as I think capacity can be for us. '04 was a good year, we continue to concentrate on building the team and infrastructure, refining our category and moving forward. Were delighted to be in the business, glad you are with us and look forward to a terrific ride as we go forward. We will speak to you next quarter.

Thank you, this does conclude today's teleconference. You may disconnect at anytime and have a great day.