Tractor Supply Co (TSCO) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Tractor Supply's conference call to discuss fourth quarter results. At this time, all participants are in listen-only mode. Later we will conduct the 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 prior written authorization of Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference, Cara O'Brien of Financial Dynamics. Please go ahead, Cara.

Thank you, operator. Good afternoon, everyone. 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 provision 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 with that, out of the way I am pleased to introduce Jim Wright, President and Chief Executive Officer, and Tony Crudele, Chief Financial Officer of Tractor Supply. Jim, please go ahead.

Thank you, Cara, and good afternoon. I'm here today with Tony Crudele, our CFO, Stan Ruta, Senior Vice President of store operations. Gerry Brase is joining us remotely from our new distribution center in Nebraska, and Joe Scarlett who is traveling will be listening in, but will not be speaking on today's call.

As many of you know, Tony joined Tractor Supply in late September of this year, of this last year, and officially became our CFO on November 4th. I'll now turn on to our results. We delivered another strong performance in the fourth quarter. In a retail holiday environment that was somewhat lackluster, we were able to generate strong comp store sales on top of a 7.7 comp last year, and a 9.6 Q4 comp the year prior. We were also able to grow our margins and our bottom line. Our business truly was operating on all cylinders, and I'm pleased to say that each area of our business met or exceeded expectations for the quarter. We had solid execution in several key areas, which drove our performance. We correctly anticipated our customers’ needs, our stores executed very well on -- and today are in just really excellent condition. Our advertising was compelling, and the merchandise presentation was simply our best ever.

During the quarter and throughout 2005, we maintained a strict focus to build on the success of the prior year, and as a result, we again produced another year of solid performance. In addition to generating strong year-over-year comparisons, in our financial results, we took significant strides in laying the foundation for our long-term growth and success by successfully executing many of the objectives we highlighted this time last year. New store openings for the full year, we opened 65 new stores and relocated 18 stores. Thus, hitting the high-end of our projected 60 to 65 new stores. This new store growth strengthens us both in the markets we currently serve as well as extending our reach into new markets, we entered Massachusetts, Vermont, and New Jersey for the first time this last year.

We again reduced our turnover for the fifth consecutive year at both the store management and team -- store team member levels. During this five-year period, we almost doubled our store count while cutting our turnover in half over that period of time. We continued to make crucial external hires while also developing and promoting from within. Our strategy of becoming first a great place to work, then as a result, a great place to shop, and ultimately, a great place to invest is indeed paying off. During the year, we completed construction and opened our Hagerstown distribution center, which has been operating at chain level efficiency since mid year. We also added 250,000 square feet to our Pendleton, Indiana distribution center and in December opened a new DC in Waverly, Nebraska, and closed a small outdated unit in Omaha, Nebraska. Our network is complete for now, and while we will be adding some incremental space in the West, as we grow, we will not be building another large distribution center until 2008.

We also have initiated lean processes in our distribution network, and are pleased with the initial value capture. And frankly, we anticipate the lean process will be widely employed in our company over the next several years. Our merchants did a great job of anticipating the shifts in consumer demand, either leading or quickly following the consumer up-market, and driving our average ticket up 4.3 percent in comp stores. The third and the fourth quarter were very dynamic and our team responded well to meet unexpected demand as energy costs sharply changed the sales rate and mix of heating, emergency response, fuel handling, and storage categories. We set out to improve margins throughout the [mising] merchandise mix in each store and market.

Our year end sales and gross margin results illustrate the success of those efforts. I'll go further -- into further detail in specific product categories later in my fourth quarter review. We also completed the implementation of E-3 in the fourth quarter and have already begun to capture value. While significant learning and optimization lie ahead, we ended the year with the best in-store and DC level in-stock positions percentage of any time in the last five years. Our year-end inventory level excluding the inventory on hand to support the 11 new stores we opened in January and the build-up of inventory on our newest DC was within acceptable range, and Tony will provide more detail on our inventory level.

In addition to these initiatives, we looked for other ways to strengthen the platform which we intend to grow the Company, specifically during 2005, we targeted and closed on the Del's acquisition, added Tony to our team, and appointed a new independent board member to our board. As a success of our year -- as successful as the year was, it was not certainly without challenges. The macro-environment was impacted by multiple natural weather related disasters, we faced record gas prices and diesel fuel prices and weak consumer sentiment. In the face of these challenges, however, we remained focused on achieving our set initiatives and demonstrated our ability to successfully serve our customers and meet our financial goals in a very dynamic external environment. We are very proud of our ability to continue the momentum generated in 2004, throughout last year, and I believe our solid performance is a direct result of the strength and the commitment of our team, our business model was strong, we continue to cater to a unique customer in a unique niche. [Technical difficulty] continue the positive momentum in 2006, and I'll go into further details on our initiatives for this year after Tony reviews our financial results for the quarter, and for year end. Now, Tony Crudele?

Thanks, Jim. Good afternoon, everyone. First I'd like to thank the entire team for a great quarter, and hopefully making this conference call go real well for me for my first time out.

A lot of topics to cover so I'll dig right in. Our fourth quarter sales increased 31%, and we posted a 10% comp on top of a strong 7.7% gain last year. The fourth quarter of this year included one additional sales day, since our stores were closed on New Year's Day in 2004. This accounted for approximately 1 percentage point of the quarter's comp store increase. We estimate that higher selling prices primarily in steel and petroleum-based products contributed roughly 50 basis points of the comp store sale increase. Same store sales were positive in all of our regions, and we saw the strongest comp results in our Southern stores. Agricultural, seasonal products, and clothing led our sales performance, livestock and pet was also very strong at approximately company average. We opened 18 new stores, closed one and finalized the acquisition of the 16 Del’s stores during the fourth quarter. Sales resulting from non-comp stores were about 82 million, which represents 16.8% of the total sales increase per quarter. New store sales as a percent of total sales were almost 13%, which is consistent with our new store growth. I'd like to remind you that Q4 had an additional week; therefore, of the 31% increase in Q4 sales, approximately 6.9% were a result of the additional week.

Our same store sales were driven by a fairly even balance of traffic versus ticket during the quarter. This represents a departure from the trend we had seen for the past year and a half where ticket increases were the primary driver of same store sales. As Jim mentioned, we are very pleased with our advertising, merchandise assortment, and in-store presentation, and we believe that our higher traffic count demonstrates our customers’ positive response to these initiatives. As a reminder, we count our traffic by rings, not swings, and at the same time, we are pleased that our ticket count continued to increase as well, demonstrating the ongoing success of our trade-up selling initiative. For the full year, our net sales increased 18.9% to approximately 2,068,000,000. Driven by new store growth and a 5.7% comp store sales increase. Same store sales for the year were positive in all of our regions, transaction count contributed 1.4%, and average ticket contributed 4.3% of the same store sales increase. The seasonal livestock and pet products and clothing led the annual sales performance. For the year, we opened 65 stores, acquired the 16 Del's locations and closed one store. Sales resulting from the non-comp stores approximated 259 million, which represented about 15% of the total year-over-year sales increase. As a percent of sales the new store sales tracked at 12.6%.

We are constantly seeking to grow market share and increase our total sales, and as a result, we will sometimes strategically cannibalize certain stores. Going forward we intend to track and report this metric which we believe will give our investors more insight into our company and another metric by which to evaluate our business. In 2005, we estimate that we cannibalized 75 stores for some period of time during the year. Normalizing the comp calculation by excluding these cannibalized stores from the comp store base, we estimate that same-store sales would have been approximately 50 basis points higher or 6.2 % for the full year.

Our gross margin increased 31.2%, to 191 million in the quarter. Gross margin as a percent of sales was 31.9%, and was flat compared to last year. We faced significant headwinds related to the cost of moving freight due to higher diesel fuel costs, a restricted supply of trucks caused by heavy demand in New Orleans, and new driver regulations that limit the time each driver can be on the road. We were able to offset these pressures through stronger initial margins gained through improved mix, increased imports, and reduced discounting. We also effectively managed inflationary pressures as the likely charge for the quarter was reduced by more than half over that of the prior year. For the full year, our gross margin increased 21.9% to 640 million. Gross margin as a percentage of sales was 30.9% for the full year, compared to 30.2% last year. This 70 basis point increase resulted from improved mix of merchandise, offset slightly by increased freight costs.

LIFO for the year decreased by more than half as well. We leveraged our selling and general administrative expenses as a percent of sales for the quarter coming in at 22.1%, a 70 basis point improvement over the prior year quarter. Our leverage was principally in store expenses, specifically occupancy and advertising. This leverage was a direct result of the strong sales volume. Related specifically to occupancy on a full year basis, this type of leverage has not been the trend as occupancy has generally increased as we have opened new stores. We did leverage the store support center overhead, but this was offset by a higher incentive compensation accrual as a result of our strong Q4 performance. Our SG&A in the current quarter included the pre-opening cost related to 30 new and relocated stores. This number also includes a significant portion of pre-opening for stores scheduled to open in January 2006. This compares to 19 stores in last year's fourth quarter. Pre-opening expense generally runs approximately 80,000 per store.

For the year, SG&A as a percent of sales was 22.7% compared to 22.8% in '04. As a result of this strong performance, operating income was 8.3% of sales for the quarter, versus 7.5% in 2004. Our fourth quarter tax provision was 36.8%, compared to 34.5% in 2004. This resulted from an unfavorable mix among states and an unfavorable comparison resulting from the impact of changes in our allocation factors adjusted in the prior year. Our earnings per share exceeded other initial expectations for the quarter coming in at $0.75 versus $0.54 last year. For the full year our diluted earnings per share was $2.09 compared to $1.57 in '04, and it should be noted that '04 includes approximately 2.1 million in after-tax expenses related to the store support center relocation.

Turning to the balance sheet, the year end cash position decreased 7.7 million, to 21.2 million but at the same time, we decreased our borrowings on our revolving credit facility by 24 million down to 8.2 million. In the prior year, there was some significant amount of deposits in transit that increased our year end cash position. Inventory on a per store basis increased from approximately 750,000 per store to approximately 775,000 per store, and this excludes the Del’s stores and the related inventories. As Jim stated earlier, we believe that we are in a much better in-stock position at year end, which accounts for a significant portion of the year-over-year increase in the inventory. Sales-driving initiatives around clothing and equine products accounted for approximately 8000 of the per store increase. Additionally, we had inventory for 11 stores planned to open in January, and this accounted for almost $10,000 on a per store variance. So generally, we are very pleased with our year end inventory position.

Inventory returns were essentially flat with prior year at approximately 2.8 times. Accounts payable was approximately 40% of inventory at the end of 2005, compared to approximately 38% the prior year. Property and equipment increased on a net basis $45 million, capital expenditures for '05 were approximately 80 million, primarily for distribution centers and opened new stores. Balance sheet includes goodwill of 2.4 million, which is a direct result of the Del's acquisition.

Looking at 2006, for our full year, we anticipate sales to range between 2.350 billion, and 2.4 billion. This is a 13.6 to 16.1% increase over 2005, which I remind you is a 53 week year. We do not expect a significant change in the seasonality of the sales from prior year. Our top-line guidance reflects an expected comp store sales increase of approximately 3 to 4%, and we expect the impact of cannibalization to be higher in -- than in 2005. We anticipate the normalized comp will run approximately 1 to 1.2 percentage points above the guided comp number. This is higher than the 50 basis points estimated for cannibalization in 2005.

We have plans to open approximately 78 to 80 stores, with approximately 60% of those stores being opened in the first half of the year. This number includes the expectation that we will open 2 to 4 Del’s stores in the later half of the year. We're targeting an approximate 20 basis point improvement in EBIT margin. We believe that the majority of this improvement will come from gross profit margin. SG&A is expected to delever slightly. The productivity gains resulting from various SG&A components, such as marketing, distribution center, and store support costs are offset by higher occupancy costs as a percent of sales. This increase results from the lack of leverage from less mature 2005 stores, and the front loading of new stores in 2006. We expect to leverage the occupancy costs as the stores mature, consistent with our past performance. We expect pre-opening costs to average closer to 92,000 per store in 2006, as a result of some planned relocations that will have lease cost subsequent to vacating the premises.

Total CapEx is expected to range between 75 million and 80 million which includes approximately 11 million to purchase certain real estate sites for new store growth. Additionally, we have budgeted 15 million for our POS rollout in early 2007. This expenditure could shift into late 2006, if the initiative proceeds faster than anticipated. Our effective tax rate is expected to be approximately 36.3%. We expect full year 2006 net income to be in the range of approximately 95 million to 99 million or $2.32 to $2.39 per diluted share. This outlook includes the expected impact of adopting the required accounting treatment for stock options, which will result in the recognition of compensation expense of approximately 6.9 million, or 4.4 million after tax, or approximately $0.11 per diluted share. If expensing the 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 $0.10 a share. Our outlook also includes the expectation that Del's will contribute approximately $0.02 to $0.03 per share in 2006, which is included in our full year guidance range.

I would be remiss if I did not stress that our business should be looked at by half, and not by the quarter, given that weather can significantly shift the timing of our sales. We refer to our first quarter as a get ready quarter, and expect the quarter to be approximately break-even. There are a few items impacting the first quarter that I'd like to highlight. First, as I mentioned, we plan to open significantly more stores in the first quarter of '06 compared to last year where our new store openings were weighted towards the second half. As such, the costs associated with these new stores will be incurred earlier this year than last year. Also, due to the calendar this year there was one week that normally falls in January which in 2005 was in December. That means that in 2006 we will not benefit from a week that we normally experience a high level of gift card redemptions as it has shifted into 2005. I hope this covers the essential highlights, and with that, I will turn it back over to Jim for some details on future plans.

Thanks, Tony, 2005 was a great year, one in which we achieved most of our objectives that we had outlined for the year, and in doing so, we further strengthened the foundation for growth, and will look to achieve the same level of execution on our current initiatives and strategies for 2006. The super clothing initiative which you heard us discuss, those stores have been converted to an expanded format, generated significant sales increases, specifically same-store sales of non-seasonal clothing were up 45% in stores with the super sets, demonstrating that these updated stores are providing -- proving effective in generating greater sales. By the way, that 45% is versus the 7-5 in the control stores.

We are very encouraged by the super clothing tests to date and are expecting to convert an additional 100 to 120 stores in more likely Q3 of 2006. As we've previously have said, we do not believe this expanded apparel concept exposes us to any additional fashion risk as we keep the apparel -- as we keep the assortment focused on lifestyle and work wear products. As Tony mentioned, we plan to open 78 to 80 new stores in 2006 which includes 2 to 4 Del’s stores. As part of our new store opening strategy this year, we anticipate opening 60% of our new stores in the first half, versus 50% in last year's first half. The shift will allow the stores to produce more revenue in Q2, and have us very well positioned for the second half of the year in the all important Q4. We continue to believe that there's a significant growth opportunity from our current store base and are on the right path to reach the mark of at least 1300 Tractor Supply stores that we have discussed in the past with Del's growth being on top of that number.

An update on California, we entered the first end of the region in mid 2004 with 3 stores. As we have shared with you we're delighted with the results of those stores, thus far, and have 7 to 8 stores planned, additional stores planned, for California this year. In fact three of those have already opened in January. California offers a great opportunity for Tractor Supply, and we anticipate growing our business in this market at the same discipline and prudent manner that we have operated there over the last 2 years. We have completed the acquisition of Del's Farm Supply in November. This acquisition provides us with a second retail concept that we are very excited about. It has potential for Del's and for Tractor Supply going forward. Regarding the integration process, to date, we are complete on the personnel and the financial aspects of the integration. We are currently using Del's IT systems and expect to do so until early 2008 when our new POS system will have been fully rolled out to all Tractor Supply stores. We'll continue to open stores at a very measured pace, as we continue to test and refine the concept.

We have been very pleased with the acquisition thus far and are confident that the Del's team members, their culture, and the business are all a great fit for Tractor Supply. In addition to these new stores and to the new store regional expansion initiatives in 2006, we look to continue our emphasis on investing for our future. This includes the ongoing training of our team members, continuing to develop our infrastructure and technology platforms, as well as continuously evaluating our merchandise and strategy, our operations, and the application and ultimately [inculcation] of lean processes.

Tractor Supply continues to be like any other store, and all of our efforts and initiatives are geared towards enhancing our unique business model. Our strong results in 2005 have fueled our enthusiasm and determination to execute our new programs that will drive our sales and profit over the long term. I would now like to open the call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Jack Murphy from William Blair. Please, go ahead.

Good afternoon.

Hi, Jack.

Congratulations on a great quarter.

Thank you very much.

Couple of questions, first, could you get into a little bit the 10% comp, obviously, very strong and you gave some details, but is there any particular product areas beyond the things that you named around heating and the like that had an outsized impact on the comp and also when you look at it from a regional perspective?

We actually, every one of our 6 regions was comp positive, there's obviously some variation, but no, we were delighted with the performance of all geography. The principal categories we mentioned were those that had above the chain average comp, and beyond that, as I mentioned, clothing in the test stores was very, very significant, but when you recognize that was only a small number of stores, it was not really added to the comp.

Okay. And when you look at your guidance for next year on the 3 to 4 comp, is the -- you said how much the cannibalization would be, could you -- number one just give us a sense of how many stores you expect to cannibalize against, and also maybe give us a sense of how much you're taking into account for just the very tough comparison that you created for yourself in the fourth quarter when you look at that 3 to 4% comp guidance?

I can follow up on the number of stores is essentially the same, it’s in the -- I want to say 75 to 80 range, but what occurs is they will be cannibalized for a longer period, and really that's about all the detail and color that we want to give to the calculation itself, but there will be more cannibalized weeks than in the prior year.

And, Jack, we have absolutely considered the fact that we've got a tall hill in Q4 to cycle.

Okay. And then final question, just sort of a housekeeping question, could you tell us the amount of LIFO dollars in the charge this year versus last year?

Yes. One of us will.

I have that. In the quarter, it was 1.3 million, for the full year it was 4.5 million.

That was about 2X that in both cases prior year in --

It was -- I want to say 4.2 and 9, slightly over 9 for the full year.

Okay. Thanks again and congratulations.

Thank you.

Our next question comes from Edward Yruma from JPMorgan. Please, go ahead.

Good afternoon, Edward.

Just one question -- how are you guys?

Fine.

Fantastic quarter.

Thank you.

Just wanted to ask a couple of quick questions, I know you had a number of initiatives underway in the fourth quarter, one of them being your Red Shed merchandising. How additive do you think that was to the comp and kind of to margins?

I have not broken it out on comp and nor to margins, but let me kind of speak to the program. For those of you not aware, Red Shed -- we are now in our third year of offering unique principally equine or equestrian lifestyle type gifts. This is the first year that we've branded them under our proprietary brand, Red Shed, where the packaging is all the same and the look is the same. the product comes in prepriced. We source this product from literally tens of vendors. The result was very positive, we enjoyed good growth. The sell-through percentage by the two important dates are Christmas Eve, December 31, and January 31, and Edward, we are right on track, we're delighted with the margin, and we're delighted with the sell-through.

Fantastic. And one other question, one of your major competitors is making some inroads in terms of the lawn tractor category, and has been making a lot of noise about a big reset that they're doing this spring. What are you doing to keep your offering competitive since I know the Zero-Turn was obviously a great product for you for the past two years?

Sure. Well, let me clarify what you're speaking to, the fact that -- a year ago we went to market with Cub Cadet as did Lowe's, John Deere -- Home Depot went to market with John Deere along with a variety of other brands. Going forward this next year, those two brands will switch where Lowe's will have John Deere, and Home Depot will have a couple of Deere units, a variety of other units, and they will also have Cub Cadet. The first thing we have to look at is the competitive overlap of those stores. We face Lowe's in about 72% of our trade areas, Depot in around 60% of our trade areas. So when you think about that, John Deere is perhaps the most recognizable brand; however, Cub Cadet is the brand that we specifically compete with. So Cub Cadet, the brand we compete with is moving into -- is moving out of 10% of our markets, John Deere is moving into 10% of our markets. And as we have thought this through, I'm really not sure, Ed, what it all, what it all means for Tractor Supply, other than the fact that we continue to focus our efforts on premium front engine riders, and on the Zero-Turn rider business we've had luck at the lines, and specs and price points they are going to market with and frankly, I feel very comfortable with our position for this next year in outdoor power equipment.

Great, thanks very much, and congratulations again.

Thank you.

Our next question comes from Wayne Hood from Prudential Equity Group. Please, go ahead.

Hi, Wayne.

And like everyone else has said, I was interested in the profitability and when you look at the expanded stores, can you talk a little bit about what you're seeing, the difference in profitability? You talked about the volume levels, but is the profitability a hundred -- a couple hundred basis points greater than the control group? And if it is, why wouldn't you move more aggressively in terms of getting more of the chain up to that look?

You're talking about clothing?

Right.

Yes, our clothing, the margin is -- on the clothing that we have added, the margin is slightly higher than the baseline clothing. Turnover velocity is about the same. It is a net add to the store's volume, we are moving at a very metered and measured pace due to the fact that first of all, we can't really move, we chose not to move until the second half. We have a lot going on right now. We wanted to wait through the fourth quarter to get the read, and we've already locked and loaded for the first half in our stores. Secondly, because of the space that is ultimately required, the set we currently are using is only available to be placed in probably 350 of our stores. It's currently in around 100, because we converted 50 stores, then also opened around 50 new stores from midyear forward, with the new concept, so we talk about the 100 to 120 for this next year [technical difficulties] it also includes all 78 or so of the new stores that we will be adding. We also need to validate that it works across a broad range of geography. We tested it pretty thoroughly across the broad range, but there are some markets that we need to make sure that it's the right thing to do yet.

Okay. And the last question I had, I was a little surprised the inventory turnover was flat given the volume you have. Is that Del's in there and if you stripped it out and you looked at comp turn to comp turn, was there improvement and why would it be flat, I guess?

The principal drivers of the inventory, some about, I think about a percent of our cost of inventory is inflation. We filled another new DC, we went from a very small DC that we closed in Omaha. We opened a large distribution center in Waverly in December, so that was several million dollars worth of inventory. Additionally, this time last year, we were in a very critically low position of inventory in our distribution centers, and as I mentioned on the call, we are in the best in-stock position in the DCs and in the stores that we have ever been. We also had, we've opened 15 stores in the month of January this year, and I think 11 of those stores, which is over $8 million worth of inventory was in the system at year end versus I think last year was 3 stores in January or so, so it was a pretty significant net pick-up there.

So as we think of the coming year, that your thought would be maybe even get to 3 or how should we think about the coming year where you would be?

Yes. We are absolutely targeting 3 turns as our internal objective this year. We benefit from E-3 is now installed, we are coming up the learning curve, and I believe that we are ready to capture value, should pick up those 18 basis points or so of inventory turnover this year.

Thank you, Jim.

You're welcome.

Our next question comes from Reed Anderson from MJSK. Please, go ahead.

Hello, Reed.

Good afternoon, great quarter. It's good that you got rid of Joe and Cal, right? Wow. Look at that performance. Just kidding. A couple of questions. In terms of the -- this relates sort of the gift question, that sort of thing, give us another update on what's going on from the importing standpoint. You've made some early in progress there. What's the next step, what's going to happen in 2006?

Okay. Gerry, are you there?

I am, Jim. Reed, good afternoon. Just in terms of updating you on where we are with our importing initiatives, we've grown imports over the last two years from 5% to 7% of our total cost of goods sold at Tractor Supply. We are still intent on growing that over a period of the next five years from what is today 7% to 15%, and we've already identified a prioritized list of categories that should move that number significantly beginning in 2006, so we look for additional margin gains as well as topline sales opportunities as a result of that initiative, Reed.

Okay. Good. Now then, Jim, in terms, I think this goes back to Jim -- in terms of the decision to kind of what I would say accelerate the real estate roll out schedule this year, at least push it more into the front half, you've opened 15 stores in January, just talk a little bit about the, what was behind that decision or the timing of that. Is that something that you've been planning on doing for a long time, or did you just sort of realize business is good, we've got some stuff in the pipe, let's get it out as quick as we can?

Reed, moving forward, new store openings is an objective that we have had frankly, since 2003 and with growth and filling the pipeline it takes a while. If you look back across the last several years, once we were post the Quality acquisition, we've begun to pick up up weeks of store open each year. This year now, we have a great real estate team, it's the first year that this team's been together now for a full 12 months and we were finally able to get the traction and get the balance of stores where we want them with about 60% in the front half. I'm not sure we'll ever go much beyond that, although again, the sooner in the year you open, you have a chance of catching Q2 business, and being very well prepared for Q4.

Good. Well, great job, thank you.

Thank you.

Our next question comes from David Cumberland from Robert Baird. Please, go ahead.

Hi, David.

Hi, good afternoon. Impressive quarter. Jim, you've mentioned strength in categories affected by energy prices. Can you elaborate on that, specifically on your ability to meet demand for items where supplies seem to be limited at times?

Yes. The biggest challenge, David, this goes back to early in Q4, and it was, while it was chain-wide, there was certainly a concentration of -- if you were to draw a line 200 miles, 250 miles out from the Gulf Coast, we saw a tremendous uptick of course in generators as you can imagine, but also in that area, as well as chain-wide and everything that had to do with fuel storage. As an example the industry virtually sold out of gas cans, we sold everything we had, reordered and sold again, and then eventually the supply chain was out of gas cans. Fuel handling, large fuel storage tanks, pickup truck beds, fuel handling -- stationery fuel handling takes, pumps and everything needed to move that fuel also sold very, very quickly. With that then we saw across the chain a pickup in wood heating, everything from the furnaces to wood splitters to a smaller degree chainsaws and then there was a tremendous demand on wood pellet fuel.

Within the heating equipment specifically were there some supply challenges during the quarter, or were you able to overcome those for the most part?

No, we had more demand than supply. Our merchants did a wonderful job. We generated some very nice comps, but that's an industry -- it comes from one of two sources. It's import with long pipeline, or it's cottage industry with -- where they have inability to build quickly.

If you were perhaps, Gerry could talk about your view on the impact of weather in Q4, neutral, positive, negative?

Jim, I'll take that. The -- David, the weather in the fourth quarter this year versus a year ago was relatively unfavorable for us in the first portion of the quarter, month of October, and really the first half of November. From mid November through mid December, we actually had very favorable selling conditions for cold weather products, and as you all have seen with January, it's really the most significant winter weather that we've had was that period from mid November through mid December. Latter part of December the weather began to become more normal based on historical patterns, but actually worked against us, because we had extremely favorable selling conditions late in December a year ago, so overall, I would say the weather impact on the quarter was relatively neutral, and again, I don't think that was the primary driver of our strong comp performance.

Thanks, and then a couple of quick questions for Tony. How much in revenue did Del's contribute in Q4? And then the second question, Tony, for Q1, you talked about losing a high volume week. How would you describe the week at the end of Q1 that you'll be picking up?

To answer the first question, we are trying not to give too much color to Del's, because it's fairly small, it's 16 stores, and operates about 2/3 of our volume. So we're making a conscious decision not to give too much details relative to the Del's chain. So we'll try to work around that. It was not a significant amount of money that came in in mid November, so it's only 6 weeks of selling. Relative to the week that we pick up in 2006, January tends to be, like I said earlier, it's a get ready month, and just was trying to give some overall guidance that the one week after Christmas does tend to be a heavy gift card return, brings a lot of traffic into the store, and generally, the extra week that we're picking up now in January where the fourth week of our fiscal month tends to be more of a normal January week. So there's definitely a small decrease in sales relative to that week.

But just to clarify, the week that this Q1 will have that last Q1 didn't have is I think at the end of March, which tends to be a higher volume period; is that correct?

Yes, it is correct on that, the -- what you don't -- what we don't know at this point is really the comparisons year-over-year, but the week we do pick up at the end of March this year, which we didn't have last year included in our first quarter is a considerably higher volume week than the week we gave up, between Christmas and New Year's which fell into the fourth quarter of '05.

Great, thank you.

Our next question comes from Anthony Lebiedzinski from Sidoti & Co. Please, go ahead.

Good afternoon. How are you? A couple of questions. You talked about the, how much the extra week contributed to sales. How much did it contribute to your earnings growth in the quarter?

We didn't disclose that because obviously, a lot of the color is around the sales growth, and what we are trying to do is to normalize that. Again, having an extra week in December, a lot of the accounting is driven on a monthly basis, so some of the expenses tend to be reduced in a five week month, so there is some leverage pickup there. It's not significant, but overall, it does have a slight impact that I would estimate to be closer to our general expense structure on a percent to sales for one week. I think you could add that into your calculation.

Okay. And also, if you could just talk about private label, where that is right now as a percent of your overall sales and what your plans are on a go-forward basis.

For Gerry.

Yes, Anthony, this is Gerry Brase and I'll go ahead and comment on that for you, for a moment. We continue to work aggressively in expanding our private label programs. A year ago we reported that we were at 17% of our cost of goods sold, were under private label. We have not put a pencil to it for the full year 2005 yet but I expect that it will have grown to somewhere between 18 and 18.5% of our cost of goods sold. We saw significant expansion in 3 key areas that will continue to see growth in 2006, and the first is our private label clothing line, this is under the CE Schmidt private label brand that was introduced two years ago; just delighted with the growth of that initiative. You heard Jim earlier speak about Red Shed, and this is our fine gift wear program that was launched in the fourth quarter of 2005, very successfully. That will be built upon and expanded in 2006 and we added significantly to our premium line of private label feeds in the livestock feed category. This is under the Dumor, D-u-m-o-r brand, and again, this is a -- another key focus area, certainly the growth of livestock feed so we are on track to grow our private label brand merchandise to 25% of our cost of goods sold within the next five years. That's our target right now, Anthony.

Okay. That's helpful. Now, in terms of your distribution center capacity with the recent expansion there, how much -- how many stores can these distribution centers support right now?

900 about 950 as we currently use our DC's and currently use our stores, it may not be the next 950, due to our expansion, or the next 350, as we expand out to the West, but that at this point in time, is our target.

Okay. And in terms of the capital expenditures, you gave a range for '06, what was the CapEx in 2005?

(inaudible) add 80 million.

I'm sorry? How much?

80.

80 million. Okay. Okay. Thank you very much.

Our next question come from John Lawrence from Morgan Keegan. Please, go ahead.

Good afternoon, guys.

Hi, John.

Gerry, would you comment just for a second, go further on the merchandising? Every year, obviously, you've got tests and everything going on for the spring season. Would you just comment, I know you won't talk about products, but is that pipeline of tests just as strong as it has been the last couple of years?

Yes, John, if anything it's stronger today than it's ever been. We had another very successful open buying days in December of this past year. We saw about 600 different suppliers that have an interest in doing business with Tractor Supply, and about a third of those suppliers will have products that will be put in test during the first half of 2006, to fuel future sales growth beyond that, but today, we have in excess of 300 active tests that we just got done reviewing with our buyers, and a significant number of those will be fueling our growth initiatives in the first half of the year 2006 and ,John, you've seen a number of these -- whether it is additional expansion in some of the clothing categories that we've been focused on. We're doing some things in equine and pet which have proven to be very successful for us and, again, not all of the tests have been successful, but the ones that have been will be added to significantly more stores during the first half of the year. You heard Jim talk about a significant commitment to clothing expansion in the second half of the year, and again, one of the reasons why we hold on that until the third quarter is approximately 50% of our annual sales in clothing come in the fourth quarter so getting it locked and loaded in the third quarter allows us to immediately generate an ROI on the investment that we make in those stores.

And just one follow-up there. As far as -- when you reset the store last year, in I guess Q3 of '04, when did that, did a lot of that product contribute and comp very well this year?

Depending upon the categories, yes, it did on that, John. We were delighted with some of the growth we had in some of the tool categories, most notably, for example, the hand tool categories that were significantly expanded. We had some significant wins in equine that were basically rolled out in the third quarter of 2005 and helped to contribute to some of the second half sales performance that we had in 2005. Those tests are over at this point. Roughly 70% of those tests I would deem as having been successful. I would tell you about 20% of them were not successful and have been killed. The other 10% are still under evaluation at this point, John. The challenge for us is that basically those tests can't immediately be rolled out to all stores. We have been very selective based on our perception of the opportunities in each location, and in some cases, the physical size of the stores themselves as to which stores we can put these successful initiatives into, John.

Right. Thanks, Gerry. Last question. Stan, as far the labor model, I know what you want to find and store labor, does the expanded clothing offer you any challenges in finding people in certain markets where you're rolling out apparel?

John, it has not up to this point. We've been very fortunate in finding qualified people to come in and fit in that department for us. And as part of the initiative, I think we've mentioned this on the last call, we are adding an extra person in the store just to be in charge of that clothing area because it's so high maintenance and -- so we've got a lot of attention. When we put the clothing program into our stores besides putting in new fixtures and new merchandise, we also target a specific person and run them through a training program to make sure that we not only have the product but we have the expertise to sell the product.

Great, congratulations, guys.

Thanks, John.

Our next question comes from David Magee from SunTrust. Please, go ahead.

Yes, hi, guys. Great quarter.

Thank you.

Thank you.

Getting back to the same-store sales number of 10% and some of that wasn't helped by the extra week and the average [inaudible] was up about 4% you said, but still that would imply a pretty nice turnaround in terms of the traffic trends from the third to the fourth quarter. Should we see this as kind of an inflection point with regard to traffic? I'm curious how you'd view that going into the new year and how that's modeled into your comp expectation for '06?

Our comp [inaudible] for this next year in [inaudible] I belive, is about half ticket and half traffic. And ultimately the consumers will be able to find and we'll respond too, but our thinking is that it may be, we don't know if it's sustainable it 's only a quarter, but we think we may very well have reached a point where traffic will begin to drive more and more of our comps. I doubt that we'll return to where we were from the period of 2000 through halfway 2003 where our comps were driven principally by traffic.

Did you tweak advertising going into the fourth quarter?

No actually we did reduce advertising in Q3 as we've talked about but our print campaign for Q4 was exactly equal to last year. We did add an additional week of television coverage in Q4.

Thank you, good luck.

Thank you.

Our next question comes from Mike Blahnik from Piper and Jaffray. Please, go ahead.

Congratulations on a great quarter, guys.

Thank you.

Thank you, Mike.

I appreciate the comment on the expanded clothing assortment having better margins than the standard clothing set. Is there any way to quantify then with that in the mix how the clothing margins compare with the rest of the merchandise?

Clothing is generally a little higher margin than the chain, a little slower turnover than the chain.

Okay. And taking a look at real estate, are you satisfied with the availability and the cost of real estate available for new store growth?

Never. There's not enough of them and they cost too much. But within our model, yes, we have to continue to work very, very hard. But, yes, I can say that we've [inaudible] recognize it as we spoke before that both coasts are more challenging and more communities are instigating the addition of landscaping, more trees, more knee walls, less outside display but that's all kind of baked into our run rate for some period of time. So while it is challenging, we view it as nothing that we cannot overcome.

Okay. And finally taking a look at inventory, are there any imbalances by region? For instance, given the warmer than expected weather we've had in the northern states for the past six weeks, maybe, is there more seasonal inventory in the northern region?

Want to take that, Gerry?

Yes. Mike, in looking at our inventory at the end of the year, our inventory in seasonal categories was frankly in the best shape that it's been at any point in the last three to four years, particularly on the fall and winter categories. January has been very slow when it comes to sales on the seasonal fall and winter categories. We've reviewed our markdown plan, and we've actually accelerated markdowns in order to snap those inventories back into line and I would tell you today we're heavier than we'd like to be in the Northern markets. But anticipate some -- some remaining selling season based on the long-term forecast that we have through February and the early part of March.

Okay, great. Thank you very much and congratulations again.

Our next question comes from R.J. Hottovy from Next Generation. Please, go ahead.

Thanks, guys, great quarter.

Thank you.

Two quick questions here. The first, you guys have discussed that you guys are going to be losing one week of gift card redemption. Could you sort of characterize what the gift card sales were like during the fourth quarter?

Generally we don't get that granular as far as providing that information. We have had sizeable increase year-over-year in the gift cards. We do not have the same impact as some more fashion-type retailers. However, as our program has improved, the volume has increased.

Okay. And I guess my last question is, could you break down the revenues by category for either the quarter or the year?

Our top 6?

Yes, the top 6 categories.

Yes, yes, we spoke to that. Do you -- just a second. I guess we [inaudible] spoke to that in balance of sales; is that right? Is that the quarter? Okay. Yes, livestock and pets was about 17% of our sales for the year. Ag 10 over 14. Clothing and footwear was --

Jim, those numbers are not right on that.

Those are not -- that's -- I just was given a -- somebody gave me a total sales increase line. Now we will -- we will get that out and have that at our next presentation and on the website once we have a chance to -- so what you really need is you want to see a trendline on our top 6 the balance of sales year-over-year which I think you've got a couple of years of history. I don't have that in front of me. We will get that out and we'll include it in our next presentation as we always do and it will be on our website.

Our last question comes from [Stan Pesciatto] from Arnhold Bleichroeder.

Hi, it's Stan Pesciatto with Arnhold Bleichroeder. I think you mentioned that advertising was compelling in the fourth quarter and it sounds like you didn't do anymore on the print side, so is there anything you think you've done significantly better or different with direct mailing this year versus last year that could have driven some of this comp?

A couple of things, well, our print expenditures were the same as a percent of sales, the same number of events. I think the presentation was very, very good. Next, we continued to refine our capacity to target the right direct [inaudible] consumers and as a result our response rate continues to go up. And I also think that the -- we had some very compelling television ads this last Q4 and we had some change up in the stations and programming that we were running the ads on and I think we've probably a little better hit on the impressions against our target customers than we've had in the past.

And then in '06 I think of the television advertising being more brand building and the print more call to action. In '06 do you plan on changing the mix of print versus TV?

The overall mix will not change significantly but you'll see a new genre of television ad that has more of a call to action in it.

Got it. And do you expect that change to have any material effect on the merchandise gross margins or do you think you can keep it neutral?

It'll be neutral. Yes, we are not going to become high low. While we may be offering product and price, we're not going to become a high low retailer.

Okay. Thanks a lot.

You're welcome. That being our last question I want to thank you all for your support. We continue to learn, and we're restless, and we're never satisfied. We continue to experiment and test the competition. A quick story, last quarter 6 of us jumped in a car, drove a thousand miles visited 13 of the newest retail concepts we conceived from auto parts stores, to discount stores, to drug stores, to warehouse clubs. Walked in each one of those spending an hour or more looking for things they were doing better than we were, have no interest in what -- whatsoever in learning finding things that we're doing better than they are. Ended that three-day trip back on our newest prototype and began a critical review of what we need to do better and as always, we find things. So the great thing about retail is that it's an open book, and we tend to be fast learners, [inaudible] adapters and look forward to reporting some more good news when we talk to you at the end of the fourth quarter. Thank you very much.

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