Tractor Supply Co (TSCO) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Tractor Supply conference call to discuss first-quarter results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) Please be advised that a reproduction of this call in whole or in part is not permitted without prior written authorization of Tractor Supply Company. As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Cara O'Brien. Ma'am, you may begin.

Good morning everyone and thank you for joining us for Tractor Supply's conference call to discuss first-quarter results. Before we begin, let me take a moment to reference the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. This conference call may contain forward-looking statements that 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 those expectations or any of its forward-looking statements will prove to be correct.

Important factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the Company's filings with the SEC. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time. The Tractor Supply Company undertakes no obligation to update any information discussed in this call but now I'm pleased to introduce Jim Wright, President and Chief Executive Officer. Jim, please go ahead.

Thank you for joining us today. I'm joined here this morning by our Chairman, Joe Scarlett; Cal Massmann, our Chief Financial Officer: Stan Ruta, from Store Operations; Gerry Brase, from Merchandising; and Randy Guiler, our Assistant Controller who also takes pointers (ph) on Investor Relations for us.

During the first quarter of 2005, we experienced a trend that we have spoken to you about many times namely the late onset of warm weather. We shifted full price sales of spring merchandise into Q2. It's important to note however, that now that spring is finally upon us, we are currently seeing trends that are very encouraging and which support our full-year guidance.

Our stores are in great shape for the second quarter. Wonderful in stock positions and spring merchandise is now selling very well. In fact, the second and third week of April set all-time sales records for our Company and in fact beat our previous record -- one of those weeks beat our previous record by 13%. And during those two weeks our cost of goods sold increased $29 million on a year-over-year basis for the same two weeks a year ago testifying to the fact that our strategy of being in stock, having inventory ready for the selling season was exactly the right thing to do.

Despite the shift of spring sales into Q2, are comps for the first quarter were really quite strong, 4.2 on top of last year's 12.4. More importantly our sales increases were consistent across many categories and also across a broad geography with the strongest comps produced in areas that had the most spring-like weather.

Sales were driven principally by ticket increase, pricing as opposed to mix drove the majority of that ticket increase due to the year-over-year decline in big ticket spring sales. We experienced good sell through in our end of season and winter products earlier in the quarter. We remain pleased with our initial results so far in fiscal 2005. The skewed results from the quarter are already beginning to even out as I mentioned. Our customers are in the stores and continue to look to Tractor Supply for all of their outdoor lifestyle needs.

As we stated in the release, our full-year guidance remains intact. And our strategic and operational initiatives that we've established at the beginning of the year also remain on track.

I will go into further detail on some of our initiatives after Cal provides more detail on our financial results.

Thanks Jim. Good morning everyone. I'd like to share the results of our get-ready first quarter. Consistent with our guidance we experienced an approximate breakeven net income for the quarter of about $0.02 per share. The importance of the first quarter is not $0.02 above or below guidance or analyst's estimates but the state of readiness of our stores for spring selling. We are ready.

Now onto the income statement. Our first-quarter net sales and comps were strong, increasing 14.1% and 4.2% respectively. As we mentioned in our release, our same-store sales were broad-based with greater strength in the Southern markets. Sales of seasonal products were under our expectations while hardware and tool and truck, trailer and towing sales were above our expectations. We posted solid year-over-year growth in gross profit dollars for the quarter, however, our gross profit margin fell by 30 basis points.

We experienced certain positive trends in our gross margin including improved initial margin as a result of selling price increases, a reduction in credit card promotion discounting compared to the prior year, and additional vendor markdown support on clearance merchandise. However, we also experienced a 20% increase in freight cost as a percent of sales due to higher fuel costs and had slightly higher shrink expense than in the prior year. We don't expect the shrink expense increase to recur.

In line with our expectations, SG&A as a percentage of sales was higher this year compared to last year. As we have previously stated this increase was the result of expenses incurred in preparation for growth including the staffing of our stores, opening new distribution centers and the fixed cost of our new store support center. Interest expense for the quarter is up year-over-year primarily as a result of borrowing for additional seasonal inventory build.

Now turning to the balance sheet, our inventory levels on a per-store basis increased from approximately $850,000 a year ago to approximately $950,000 at the end of this year's first quarter, due to a combination of the new merchandise that we rolled out in the third quarter of last year and the inventory that we have ready for that all-important spring selling season. As Jim discussed, our stores are stocked with spring merchandise and ready for that important second quarter.

The year-over-year increase in net property and equipment reflects our investment in new stores, distribution capacity and technology. Capital expenditures for the first quarter were approximately $7 million.

Going onto guidance, for the full year we continue to expect net sales to be in the range of 2 billion to $2.025 billion; this assumes same-store sales between 4 and 5% and the addition of 60 to 65 new stores with about 34 stores in the first half.

On an operating basis, our outlook remains unchanged, however, the effective certain changes in lease accounting which were announced and implemented after our year-end call have resulted in about a $0.06 a share reduction in our net income expectations for the full year 2005. As a result, selling general administrative expenses will be approximately $1 million higher and depreciation will be approximately $2.5 million higher, and that will be spread fairly evenly over the year. These accounting changes don't have any impact on cash flow, just a difference in timing of the recognition of certain expenses.

Using the new lease accounting methods, we now expect (technical difficulty)

We would like to apologize for the momentary delay. Please remain on the line as the teleconference will continue shortly.

We are back on the line. We were giving guidance I believe when the difficulty occurred. Let me start over with our guidance. For the full year we continue to expect net sales to in the range of range of 2 billion to $2.025 billion. This assumes same-store sales to be between 4 an5% increased, and the addition of 60 to 65 new stores with 34 new stores in the first half.

On an operating basis, our outlook remains unchanged during; however, the effective of certain changes in lease accounting which were announced and implemented after our year-end conference call have resulted in a $0.06 per share reduction of our net income expectations for 2005. As a result, selling general and administrative expenses will be approximately $1 million higher and depreciation will be approximately $2.5 million higher spread evenly over the year. These accounting changes have no impact on cash flow.

Using the new lease accounting methods, we now expect 2005 net income to range between 79.2 million and $80.0 million or $1.89 to $1.93 per fully diluted share. This compares to physical (ph) 2004 net income of $61.5 million, or $1.57 per fully diluted share, and that $1.57 and 61.5 million is after the impact of the lease accounting changes.

We expect full year to (indiscernible) margins to be approximately 6.2% under the new accounting compared with a restated 2004 EBIT margin of 5.8%.

Capital expenditures are expected to be approximately $84 million in 2005, and depreciation is expected to be about 35 million. We don't plan to adopt the new accounting rules for stock-based compensation until 2006.

Looking at the second quarter, we currently anticipate that net sales will range between approximately 590 million and 605 million, and net income after the change in lease accounting will range between approximately 34.2 and $35.2 million or $0.83 to $0.86 per fully diluted share. We currently plan to open 19 new stores in the second quarter, compared to 12 in the second quarter of 2004. And now back to Jim.

Thanks Cal. On the new store side we are pleased with our performance and we will be opening 32 stores for the first half. Our new stores continue to open very well with strong sales. Our confidence in the model is confirmed; we continue to note great acceptance to our model in markets familiar with Tractor Supply and most exciting, those markets that our new to the concept. We target a very attractive consumer segment that continues to grow as more and more people are choosing to lead the rural lifestyle.

Training has been and will continue to be very important to Tractor Supply. It's one of our core values. In the first quarter we provided 760 man weeks of training here at the Store Support Center and our annual manager's meeting which was held over a four-day period in February allowed us to deliver an additional 23 hours of training to the 600 attendees. 225 vendors representing almost 80% of our sales participated in our trade show, and interacted with our field management team. As always, the meeting was very high-energy, a celebration of prior year accomplishments, our culture and recognition of our bright future.

On the operation side we continue to take time and cost out of our chain. And currently we have teams working on eight consumer sales based initiatives and four cost asset utilization initiatives, each targeted to improve processes and create shareholder value.

Our new distribution center in Hagerstown, Maryland is performing as expected; currently running at 80% of pure DC efficiency which is ahead of where our new Braselton DC was at the same time last year. We expect to reach chain average productivity run rate by the end of Q2. Our Waverly, Nebraska distribution center is on track from a construction standpoint to replace the dated facility in Omaha by late December of this year.

Our merchandise (technical difficulty) and we're solidly in stock for the spring selling season, inventories are up $100 million, 25% from last year, one-half of that gain is driven by new stores and our new distribution center. A majority of the remainder is the result of new products, price inflation and a slow start to spring selling -- to the sales of spring products. The rest is a result of our aggressive action to get back in stock after our hiccup that occurred late in Q4.

We our confident our turnover will improve as the year progresses, however, we ask you to note that the initial result in installing a demand forecasting replenishment system is frequently an increase in best seller inventory followed by a slower sell down of slow-moving products over time.

We continue to aggressively test and launch new products and currently have one of our divisional merchandise managers and three buyers in the Orient; our first trip to the Far East in a number of years.

On the IT side, we have chosen 360 Commerce as our POS software vendor and are currently in development. Expect to be in tests during Q4 and subject to the test will be live with our new POS platform in the spring selling season of next year which will allow us to benefit from improved checkout speed functionality and data capture.

On the market and advertising front, we are delighted with the acceptance of our spring TV ad campaign. Not only have sales strengthened since we launched it, but we continue to receive a number of e-mails and letters from our consumers complimenting our advertising.

(indiscernible) we recommend looking at Tractor Supply in the long term. The weather spewed our results for the quarter. We are solidly on track to deliver profitable growth for the full year. We are excited about the condition of our stores. We have, as I mentioned, many strategic initiatives in place to ensure long-term growth and are confident in our ability to affectively build off of our past successes and continue to invest in new programs that will drive sales and further build the Tractor Supply brand.

I would now like to turn the call over to Joe Scarlett.

Thanks, Jim. We all spend a lot of time in stores but I probably spend a little bit more than others, so let me give you a little progress report from the field. I've been in 68 stores in the last three months and I've talked to 70 or 80 store managers over the last couple of weeks. And what I hear and what I see out there is that we are, as Jim mentioned earlier, we're in the best stocked position earlier, morale is great, people are excited, the weather has finally broken and we're simply moving forward. I think morale is probably better now than it has ever been. I think we are very well-prepared for spring and things are actually rolling now. And my confidence level is probably at the highest it has ever been. I think this spring just is going to be fantastic. Jim?

Thank you, Joe. We will now like to open the call to Q&A.

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

Good morning. Can you please comment on results for the departments that were part of the reset last Q3?

In general all the departments that we reset in Q3 last year continue to perform at or above expectations. Both from a sales and a margin development perspective.

Perhaps a couple of questions for Cal. Within the Q2 sales guidance, what is the comps assumption embedded in that and is some benefit from higher selling prices included in them?

Well there will be some benefit from slightly higher selling prices on a year-over-year basis. The comp sales guidance that we are giving for the full year is 4 to 5% and that is fairly consistent with what we would expect in the second quarter.

One more for Cal. The change in lease accounting -- it looks like the impact for net income is around 2.5 million in 2005 and that's compared to 1.3 million in 2004. I'm wondering why that has increased to that extent?

As you open a greater number of stores, that certainly has an impact. So that is a significant piece of it. The stores that we opened last year -- as the newer store base gets bigger, it creates a bigger number there.

Thank you.

David Campbell with Thompson, Davis.

I was wondering if you might give us an update on the status of the apparel shop you were testing at the manager's meeting in February? What you are planning to do with that this year?

Sure, I will let Gerry speak to that.

Good morning, David. What we displayed in our manager's meeting back in February was basically a pilot clothing program that we had in test in our California stores and we have since rolled it out to two of our Texas stores. We've been pleased with the results so far and we'll be incorporating that in new stores going forward beginning in June. We'll actually be testing it regionally to make sure that this works in other regions around the country in approximately 50 store locations that will be reset in the July/August timeframe this year.

Can you remind me again what the approximate size of that shop is versus the existing shop?

The expanded clothing department that we're rolling out is 2700 square feet, which is up from 1700 square feet that was our previous prototype for a clothing department, David.

That is great. Gerry, while I have you on the phone, could you address the cost and inflation issue and give us an update on where you are with product prices at this point and the need to raise retail prices any further?

David, we've been very aggressive in trying to stay on top of cost increases that have been passed through principally in steel and petroleum products. Feed pricing has stabilized and we've not seen a lot of movement in the last six to eight months in feed. We believe that we have digested most of what we're going to see in the steel product cost increases, and in fact, are looking forward to some moderation of that over the course of the next several months.

When it comes to petroleum-based products, that is a hard one to peg. We are continuing to see some movement in that area. To date we've been successful in being able to pass along those increases to the consumer as our competitors have been forced to do the same thing.

Thank you very much.

Reed Anderson with Friedman, Billings, Ramsey.

Good morning. A couple of questions. First Cal, just from an inventory standpoint I think I got the detail why or what it is this year versus last year. Is it also fair though -- I mean last year you had a phenomenal first quarter so I have to believe the inventories may have artificially been low. Is that a fair assumption last year?

Perhaps to some extent. The bigger pieces have to do with the increase in store count and additional distribution center make up about half of the delta and then some of the new merchandise that we rolled out in the third quarter is a piece of it; selling prices went up and so did cost. So that is a piece of it. And then we are locked and loaded for spring selling and haven't had any of that sell down compared to the prior year. I would say that most of it is the delayed spring as opposed to selling down. I guess two sides of the same coin maybe.

Then in terms of -- I wonder if you could just provide some more color on the mower category which is obviously front and center right now. I know I've been in some stores recently and seen some open space where those zero turn riders might have been so I'm guessing those have been moving out the door a little bit. Maybe color on what you are seeing today and expectations over the next couple of months?

Reed, this is Gerry Brase. As Jim indicated earlier, our business in the second quarter has exploded as a Company. Clearly outdoor power equipment is a key piece of that. And to date our anticipation in terms of the mix of sales is playing out in the rider category pretty much as we anticipated that it would last year when we put our fall business plans together for the spring of this year on that.

And in terms of -- Jim, where are we at on the -- direct importing was something I know you had a trip scheduled. I'm not sure if that has happened or is coming up. But what is your thought process there today versus a few months ago?

Reed, as of today we have a divisional merchandise manager and three buyers in the Orient as we speak. So first trip in a number of years. We will have to wait until they come back to really calibrate the size and scope of the opportunity although all the feedback from them has been optimistic given the opportunities that they are discovering.

Thank you.

Jack Murphy with William Blair.

Good morning. First is just to follow up on that last question. I wonder if you could give us a sense what categories you think -- that you are looking at for the direct Asian importing and just kind of generally?

Today we import -- direct import approximately 5% of our product mix. We are looking to expand that over the course of the next several years. Categories that we are primarily focused on -- no surprise -- we would be looking at some of the opportunities in tools and hardware. In addition, we're looking at a couple of categories in automotive and beginning to explore doing more direct import business in the clothing side of our business right now.

Just changing gears a little bit here, I wonder if you can give us a little bit of the historical perspective on when you do have spring coming late as it does -- I mean, when you look at the first half as a combined period, does spring coming late have really any impact on the combined period? Or is there some amount of margin that you have to give up or even sales volume that you have to give up when spring comes late?

Our observation over the last several years is that any movement from Q1 to Q2 results in really no impact on the half from a revenue achievement or margin production standpoint. If you go back to 2003, we had a swing of summer and spring selling season over the half from first half to second half that did have an impact on Q3 of that year. We ultimately got the sale albeit at lower margins. I guess to answer your question, within the half really very, very little impact.

That's very helpful. One final question, just on your comment about the shrink expense in the quarter. Could you give us a little color on -- it sounded like that was a one-time thing that you don't really expect to continue? Give us a little color on what the issue is there? And any sense of magnitude?

We concentrate some of inventories that we thought might be problematic in the first part of the year and our methodology for applying shrink is looking at the sales since the last inventory in the entire chain. And then applying our experience rate to that and that is what we did again in the first quarter. And because of some of those inventories that we took in the first quarter, we extrapolated that and it ended up with a slightly higher shrink expense for the quarter. We don't anticipate that to be anything that is ongoing. And it doesn't change the fundamentals of the business for the first quarter.

Thank you.

Michael Cox with Piper Jaffray.

Good morning. Just one quick question. I certainly appreciate the detail on the inventory year-over-year increase. Could you -- is there any way to quantify the impact of commodity price increases specifically on the inventory build?

On a year-over-year basis, it has added $15 million to our total inventory on that, Michael.

And in terms of the gross margin decline, I just want to make sure that I guess the late or the prolonged winter season -- I'm assuming there is very mark-downs within winter seasonal items, is that fair to say?

That's an accurate statement.

My last question relates to Sarbanes-Oxley expenses. Will there be any incremental ongoing expenses related to the recent ruling on that and is that incorporated into guidance?

The Sarbanes-Oxley expenses in the current year will be approximately the same as they were in '04. I don't see that it's going to be reduced. We have added some stuff in our accounting department to be able to continue compliance. Last year we had our internal audit department more involved in it than they will be in the future. But as far as any reduction in year-over-year cost related to that, I just don't see anything happening. The compliance costs are significant.

Thanks a lot.

Frank Brown with SunTrust Robinson Humphrey.

A couple of questions on SG&A expenses if I could. Is there any way you could quantify for us the amount of training expense or however you would want to characterize that relative to prior year in terms of additional store managers to support future growth and that kind of thing?

No, Fred, we just don't get that granular. You could I guess recognize the acceleration of first half and as we projected in openings of the first half and preparation for 65 versus 52 which is dialed into our forecast for the half and for the year. We just don't want to get that granular.

Did a couple of store openings flip in the first quarter into the second quarter? And if that's the case, was the preopening expense on those stores still in the first quarter?

We had a little movement. Yes, maybe (multiple speakers). Only one store moved over and the answer is yes, the preopening costs -- most of them would have been captured in the first quarter.

On advertising expense, is there anything you can say about a view of the new advertising campaign, what the expense might have been versus prior year?

For the year we'll have slight leverage on advertising costs, not much. And the flow by quarter is I think pretty flat, again later in the quarter. But on the overall for the quarter, we are fairly flat. Year-over-year. (multiple speakers) Year-over-year, we're flat.

Thank you very much.

John Lawrence with Morgan Keegan.

Would you comment just quickly -- the earlier question regarding some of the categories related to the reset? I assume most of that was not really late spring -- that was across the board from that type of product? Could you comment on that place?

In Jim's remarks you heard him comment on the fact that basically we saw strength in hardware and tools as a category. It was our best performing from a comp standpoint. And we put a lot of focus on the expansion of our tool assortments targeted against our customer after extensive testing over the last 18 months. So those categories are performing exceptionally well.

You also heard them comment on the truck, trailer and automotive initiatives and again, that was a key area of focus for us with the expansion ATVs and UTVs and accessories in particular as part of the third quarter reset activities we undertook last year.

Right. Feed and pet continues to perform extremely well?

We are very pleased with the continued growth of our pet and animal categories. It is our biggest category as a percentage of sales today and continues to be a top performer from a comp standpoint, John.

Thanks.

Todd Wakefield with the Boston Company.

You cited poor weather in Q1 as impacting sales and it sounds like Q2 started off pretty strong. But the midpoint of your Q2 guidance, sales growth of 14% which is right in line with Q1. I was wondering if your guidance assumes any shift of some of this spring business maybe that didn't sell in Q1 into Q2?

I don't know that our guidance is as granular as you might suspect. That is kind of -- we prepare a budget for the year and the sales that we experienced in the first quarter in total were not significantly different than what we anticipated. And the second quarter is in line with our plans that we put together for the full year. The granularity of a couple of good weeks, the first couple of weeks of April on sales doesn't necessarily mean that the entire second quarter is somehow going to be a boom time. The guidance is what it is, and we'd rather not speculate on whether it could be significantly more or significantly less than that.

Thank you.

Kevin Foll with Next Generation Equity.

A lot of my questions have been answered. Just a couple follow-up maintenance. The tax rate you are assuming for 2Q in '05 is still the 36 -- low 36 range?

That is correct.

And the share count for '05 and 2Q, you're still around 41?

Yes.

Could you talk a little bit more about the TV campaign and kind of what sort of benefits you're seeing to store traffic and what you are hearing from your consumers with the new -- and talk more detail about that?

Sure, I can. It is always hard to tie a lift in store traffic directly to any print or media event, although store traffic has strengthened concurrent with media and obviously concurrent with the arrival of spring. What we are hearing from our consumers on the new advertising flight is that they enjoy it; they find it very creative; they find it fun; they find it to be representative of how they view life. And we've even gotten some comments along the lines of how well it articulates or explains what our stores are all about.

So we continue to be delighted with what our agency is doing for us and what our in-house team has been able to add to our electronic media.

Do you quantify how many spots you'll be running this year?

No, don't get that granular. I can say that we have reduced the number of programs. Our research indicated last year where we were getting the biggest level of efficiency, and we have narrowed the target or narrowed the breadth of programming and increased the frequency of those programs that turned out to be most productive last year. As I mentioned before, we are now on national cable, indicating that that is the most efficient way to hit our target audience. It also allows us to advertise not only in markets where we have stores, but also to begin building a brand in markets that we are yet to enter.

Thanks. Lastly, on your operating margin guidance previously for the year was 6.5 to 6.55%. Can you give the updated guidance on the operating margin line, given the change in lease accounting?

I think I gave 6.2 in my comments.

I'm sorry, I missed that. Thank you.

Anthony Lebiedzinski with Sidoti & Co.

Good morning. I joined the call late so you may have answered this question. In regard to your distribution capacity you've added a lot of that over the last couple of years. As far as the Nebraska distribution center is that going to be added this year or is it next year?

Yes, Anthony, our current space, DC space is 2.1 million square feet and that is up from 800,000 square feet four years ago. The net gain in Nebraska will be about 300,000 square feet moving from a very small dated facility. And that will be online Q1 next year. We will be occupying it probably Q4, late Q4 this year. It will be online Q1 next year and should be up (technical difficulty) showing average efficiency by the end of Q2 next year.

But the capital spending for that DC is all going to be this year?

(multiple speakers) Potentially all.

So by next year your capital spending in theory should be down from '05, right?

Down with the exception -- I think our guidance has been that we plan to open 76 stores approximately in '06. So we will have some increase in store count. It would increase as a result of that. It should be down from the $83 million that we're forecasting this year, maybe by 8 or $10 million. We haven't prepared those plans in detail at this point.

In other words you should be able to generate stronger free cash flow next year?

That would be a reasonable assumption.

What would you expect to be the use of that cash?

We haven't shared anything that we would plan to do specifically. As we did a few years ago, we evaluate that with our Board from time to time. At this point in time we don't have any plans that we're ready to share with anyone.

Thanks.

Michael Weisberg (ph) with ING (ph).

Would you expect -- I think your seasonal items have a higher steel content. Would pricing be a bigger component of the sales gains in the second and third quarter than it was in the first?

Michael, this is Gerry. The fact is we've seen a leveling of steel prices over the last six to eight months. As a result we expect that the impact of steel pricing both on the inventory delta and the sales delta will be declining as we move through the remainder of the year. We will still see a piece in the second quarter but it will be significantly diminished by the time we reach Q3 and Q4 of this year.

Great. That means by the second half of this year maybe there will be no year-to-year benefit -- well, increase in your steel cost and pricing on the year-to-year basis?

Barring any material changes in the steel industry, that is correct.

One other, where do you expect your inventory per store to be by the end of the year, Cal?

I don't know that we have anything that we are prepared to share on that this far in advance. Probably fairly in line with what it -- actually a little bit less than it was at the end of last year.

Okay, because I think you had talked -- I have in my notes maybe a lower number maybe down to 715 a store this year?

At the end of the year, that could happen. I don't think we've given any specific guidance on that.

Thanks a lot.

Artie Baum (ph) with Arnold Bleichroeder (ph).

I wondered what the promotional program this year and what kind of gross margin reductions you're going to use or are using in the spring relative to what you did last year?

We are principally an everyday price house. We will run -- and looking at print first of all -- our TV advertising is not off price. It is basically brand building and products and category promotion. Our print advertising and generally any print, we will have about 140 items generally presented, generally eight to twelve of them will feature some type of off price special, almost always a price that we've negotiated with our manufacturers that we are passing along to our consumers for a limited period of time. And our flyers have a five-day price life this year versus a seven-day price life a year ago.

So if anything, we'd expect less of a margin impact due to promotional activity. We do see some margin degradation during promotional -- during ad periods predominantly driven by the mix of product that we sell but not related to the pricing of that product.

Right and I guess our initial gross margins are up for the spring season and we're trying to end up with somewhat less done on promotion, is that fair to say?

That would be fair, yes.

Okay. Thanks.

Patrick Stowe with Priority Capital.

Good morning. Most of mine have been answered. Maybe just can you talk generally about the real estate environment? Is it getting more difficult now to find new land or leases that are affordable or kind of in line with the traditional pricing model for new stores?

This is Stan Ruta. Regarding real estate, I think as we continue to go into the Northeast where we're finding that it is just taking longer to put together deals. Getting signed leases and getting building codes and building permits to go forward is our primary surprise up there. We've dealt with it now for the last couple of years and we pretty much got it figured out that as we go into the Northeast and as we go into California, it's just going to take longer to put together deals. And we're prepared for that and we've built it into our model.

Okay, that sounds great. And then just on the POS system, you talked about -- I guess you said it should be rolled out into the stores by spring '06. Can you give just a little color around that system? Maybe what size of an investment it is and is there any kind of operational risk in getting that in place in the stores?

Sure. The CapEx is north of $3 million. We are rigorous in our testing and our development and this will not be done with a big bang so we will crawl, walk and run through the implementations. So there is virtually no risk to the business. If there's any risk we will just do it later rather than earlier. The main benefit to the Company is that we will be much more efficient at point of checkout. We will in time -- maybe not initially but over time -- we will have the wireless technology in the stores so we will have line busting capacity. We will have much better data capture. Our customers will enjoy increased speed and we will have time -- we will have the capacity to have prompt to prompt for the additional sale at register and at our service desk. And in time, this will provide us with a platform for enhanced special (indiscernible) capacity.

Will it be tied to -- kind of replenishment in inventory management?

We are already tied. We have skewed that at POS capture daily across every store, site, skew combination today. That will not change. What will change on POS on replenishment is that we are currently implementing JDA's E3 demand forecast in replenishment software and we've already transitioned about 30% of our stock keeping units onto that platform and that's going quite well for us at this time.

Great. I appreciate it and hope this weather continues.

We hope the same, thank you for much. Thank you everyone. Again, a good solid quarter for us, everything within our control worked very, very well. We did not control the weather but now it is here in Q2. We are pleased with our performance, we're in stock, we're ready to go. Morale is very, very high.

We are glad you are with us and we have an exciting trip ahead of us as we seize this tremendous opportunity in farm store retailing. Thank you very much. We will talk to you next quarter.

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