Tractor Supply Co (TSCO) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply's conference call to discuss first quarter results. At this time, all participants are in a 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 first 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 SEC. The information contained in this call is accurate only as of the date discussed. And investors should not assume that the statements will remain operative at a later time.

The Tractor Supply Company undertakes no obligation to update any information discussed in this call. And now with that out of the way, I am pleased to introduce Joe Scarlett, Chairman; Jim Wright, President and Chief Executive Officer; and Tony Crudele, Chief Financial Officer of Tractor Supply Company. Jim, please go ahead.

Good afternoon, everyone. Thank you, Cara. Gerry Brase, Senior Vice President of Merchandising, is also with us here today. Stan Ruta, who is normally on the call, is on an airplane as we speak.

Today we’ll be discussing our results from Q1, which is seasonally our smallest quarter of the year. For those of you who have followed our Company, you know well that we call Q1 our get ready quarter, because our primary focus is in preparing ourselves and our stores for the important spring selling season.

As our quarter ends in March, we sometimes see the start of spring in Q1, but in other years, spring begins really with our April quarter, Q2.

This year we saw unseasonably warm weather in January, which caused our winter clearance items to move more slowly than we would have expected. In addition, we are comping up against a very robust January from last year, when we benefited from above average emergency response sales related to several ice and snowstorms.

Though our sales got off to a slow start, February and March were solid months and we began to see spring products selling at a full margin as the weather warmed up. February temperatures versus last year, increased the most in our 2 northern regions where we would actually have benefited the least, because the result was only warmer, but you had winter days.

March, on the other hand, was warmer in all 6 regions. The most significant change was in those northern markets.

Texas and states bordering Texas and the Southeast were dry and continue to suffer from moderate to severe drought conditions.

Same-store sales are strongest in our Ag-Livestock-Pet-Truck Trailer and Towing categories, categories that are core to tractor supply and to our customers’ lifestyle. We’re once again pleased with the performance of Clothing in stores with the expanded assortment, where comps of non-winter clothing were up 35% in those stores with the expanded set, versus a small decline in all other stores.

In sum, at the end of the quarter our comps were 3.7% positive and we earned a penny a share on the bottom line, both of which were in line with our expectations.

I think the most important takeaway from the quarter is that we believe we are very well positioned for Q2, which as you know, is our seasonally strongest quarter.

First, our stores are in great shape. We have solid in-stock positions in our key categories. Our merchants have done a great job in getting those prepared. We have compelling product lined up for this season, that combines a quality selection of spring staples, as well as some exciting new offerings.

We continue to see growth in the sales of high-end Zero-Turn Riders and are testing 2 commercial brands of Zero-Turn Riders at price points between $5,000 and $6,000. We have seen no impact as a result of the two large home center chains selling different brands of lawnmowers than they sold a year ago, and also from the additional emphasis that they have placed on the category.

As always, the team members in our stores are well-trained, enthusiastic about helping our customers find products, tools, any information they need to complete all of their warm weather projects.

Secondly, we’re very excited about our new advertising campaign, which was launched during Q1. It’s a totally new perspective when compared to our previous campaign and we are optimistic that it will be effective in breaking through the television clutter and reaching our target market, going forward.

Thus far our early indicators are very positive, with 80% of the feedback we’ve received being very positive towards the ads. Our new campaign focuses on our customers and their lifestyle, from their point of view, versus our last campaign, where we were speaking to our customers from our point of view.

Each ad also closes with a 7-second product or event feature. And we have yet again refined our programming to optimize CPM against our target. In addition, our existing stores are very well prepared for the spring.

I’m pleased to say that we are on track with implementing our new store opening strategy which we talked about in Q4. Mainly our intention is to open 60% of our new stores in the first half, to allow them to produce more revenue in Q2 and help ensure that we are well-positioned for the important summer holiday season.

We’ve made great progress on this strategy in the first quarter, opening 29 stores this year, versus 13 stores LY. And we expect to continue to execute at this level.

Now I’d like to turn the call over to Tony, who will provide more detail on our financial results for the quarter. Tony?

Thanks, Jim. Good afternoon, everyone. As you know, we like to refer to the first quarter as a get ready quarter and we believe we did just that. As Jim stated, we believe that we are well-positioned as we move into the spring selling season. A good penny a share of bottom line results for the first quarter was consistent with our guidance and we generally are pleased with our first quarter performance.

On a year-over-year normalized basis, our bottom line would have been approximately $0.07 per share. To compare the results on an apples-to-apples basis, consideration has to be given to the impact of the stock option expense and the increased number of new stores we opened in the first quarter. FAS 123R added expense of approximately $0.03 per share. Additionally, we opened 29 stores in the first quarter this year, versus 13 in the first quarter of 2005.

The net change in preopening expense was approximately $1.9 million or another $0.03 a share.

Let’s drill down into the P&L. The comp sales for the period were 3.7%. Non-comp sales were approximately $75 million, or 16.2%. If you attempt to reconcile this to the overall increase for the quarter, let me remind you that we’re coming off of a 53-week year and the comp period does not align with the prior year fiscal period.

We did have the same net comp days in the quarter as in the prior year. We had lost 1 day due to the shift of the New Year holiday and we gained 1 comp day with Easter falling into the second quarter this year. We will lose 1 comp day in quarter 2.

Jim noted the unseasonably warm weather we experienced in January. This had a significant impact on our comp trend in the quarter. Generally we don’t discuss month-to-month comp sales, but we did experience a negative comp in January, followed by strong offsetting positive comp performance in February and March.

The resulting comp sale softness from the mild January temperatures were exaggerated by strong emergency response sales related to the harsh storms experienced in various part of the country in January last year.

With respect to the regional sales trends, comp sales were above Company average in the South, Southwest and Northern Mideast regions. Comps were below Company average in the Midwest and Central Mideast.

Average ticket on a comp basis increased 4.4%, while we had a slight decrease in transactions, of 70 basis points. The decrease in traffic for the quarter directly related to the weather-driven January activity, otherwise the comp transactions would have increased approximately 2.6%.

Our estimate of inflation, based on our inflation basket of steel and petroleum-based products amounted to approximately 40 basis points of the same-store sales increase.

The normalized comp impact was only 20 basis points. Let me remind you, this calculation basically excludes the stores that we believe are cannibalized by new stores at the time we approach the store site. And in this quarter, several of the cannibalized stores actually performed above the chain average.

We had a solid gross margin performance for the quarter, as overall margins improved by 90 basis points. This was the result of improved initial margins and improved [shrink] results, offset slightly by increase in freight costs.

Our initial margins improved based on less promotional markdowns and increased importing over prior year. We also had a favorable sales mix among our categories, with our seasonal goods leading the way.

SG&A as a percentage of sales was higher this year, compared to last year, which is in line with our expectations. The 90 basis point increase results from an increase in the preopening expense, the FAS 123-R stock option expense and a shift in marketing expense for our catalogue and one circular. The catalogue expense normally is incurred in the second quarter.

Preopening expense, which includes lease exits costs for 5 relocations, that was accrued in the first quarter. Excluding these costs, preopening costs were approximately $75,000 per store, which is consistent with our new store opening program.

We continue to leverage payroll and occupancy in our comp stores, which was offset by the less productive new store economics, as the new stores progress to maturity.

We are pleased with the leverage that we received on our [four-wall] distribution center costs, our store support center, as well as our field management group, as we have efficiently integrated our new stores into our network.

Interest expense for the quarter is up year-over-year, primarily as a result of additional borrowings for the seasonal buildup of inventory and an increased borrowing rate over last year.

Now looking at the balance sheet, our inventory levels on a per-store basis, excluding Del’s and including some unopened stores that were carrying inventories, actually increased from approximately $950,000 a year ago, to approximately $975,000 at this year’s quarter end. This results from several factors. As a result of following our 53-week year in 2005, our first quarter ended 1 week later into our spring selling season, which is a heavy inventory period.

Our new stores over the past 1.5 years are generally bigger and include the expanding clothing set. The new stores on average, have a higher inventory carry.

We’re still absorbing some inventory into our supply chain from the new DC that we opened in Waverly, Nebraska. And we are still in the MP stages of full implementation of E3R forecasting and replenishment software, which we believe provides better up-front flow of merchandise prior to the start of our selling season.

As Jim mentioned, we are in a better overall in-stock position and specifically on riders and seasonal goods. And also there was an inflation impact on our cost of merchandise.

Based on our internal calculation of inventory turns, on a cost basis we had a slight improvement of 3 basis points. There were pockets of inventory that, quite frankly, we could have better managed, but given the factors I just mentioned, we are comfortable with our inventory position and believe it is appropriate to support our current level of sales.

As we move forward, we believe that the inventories will continue to trend consistent with our seasonally and we expect to drive turn improvement closer to our internal goal of 15 basis points.

We did experience a decrease in accounts payable financing of our inventory, from approximately 53% down to 47%. This reduction is the result of the disappointing sales on certain seasonal goods and increased direct imports, supported by letters of credit.

The year-over-year increase in net property and equipment principally results from our investment in the new stores. Capital expenditures for the first quarter were approximately $18.6 million and we are generally tracking to plan.

Now looking ahead to the balance of ’06, we’d like to reaffirm our guidance for the full year. We continue to expect sales to be about $2,350,000,000 to $2.4 billion, assuming a same-store sales increase of 3 to 4%. Earnings will range from $95 to $99 million or $2.32 to $2.39 per share.

Our new store growth target remains at 78 to 80 stores. One slight refinement, we now believe that the stock option expense related to the adoption of FAS 123-R will be approximately $0.12 on a full-year basis. This is up a penny over our initial guidance.

And now I’d like to turn the call back to Jim.

Thanks, Tony. We’re pleased with Q1 and believe we are on track to meet our goals for the year. As we move through 2006, our team remains motivated and focused on executing against our stated initiatives.

Specifically, we are focused on taking time and cost out of our practices. We are emphasizing Lean initiatives and the implementation of E3, which has allowed us to improve in-stocks and will drive our turns in the future.

We’re also focused on executing our long-term growth initiatives. And we have been realizing that there are some areas within our store support center team that need to be enhanced, so our infrastructure will support our future growth.

With that in mind, we’re looking to build our leadership team for the future. Tony and Cal before him, frankly, recognize the need to strengthen the financial planning and forecasting group with our finance team.

We’re delighted that Alex Stanton has joined our team a few weeks ago. Tony and Alex will drive this activity in this group, going forward. And we’ll more than likely be adding some additional resources to the planning and forecasting team over the next few months.

We’ve also strengthened our merchandising team with the addition of [Roger Hartley], who has joined us as our third divisional VP of merchandising. Roger has extensive retail career in the food, pets, drug and dollar store categories, and was an early leader of Wal-Mart’s hyper market concept, the forerunner to the super center stores. His most recent position was that of a general manager in a small grocery chain that was undergoing a turnaround. We are pleased to have these two recent additions and look forward to continuing to enhance various store support center groups as we build out our base business.

Along with that, we are well along in our search for an executive to drive our multichannel strategy and I would expect to have an announcement some time during Q2 in that regard.

In terms of executing our new store initiatives and sight selection, we are pleased with the success of our new stores, and at the same time we’re relentless in a perpetual refinement of our site selection process.

We have more stores yet to open than we have opened today and we will be rigorous in site selection, modeling and constantly refining that decision-making process.

Regarding our progress on the integration of Del’s, the personnel assimilation is completed. We’re delighted with the Del’s team. We’re in the process of resetting the first store to incorporate expanded pet, equine and clothing assortments, and anticipate that all stores will be converted in Q3.

While we do not breakout performance for Del’s we are pleased with the year-to-date results, which were accretive to earnings in the quarter. As we’ve said in the past, we’re taking a methodical approach with the Del’s concept. We will change it, test it, measure it. We anticipate opening 2 to 4 more stores this year, which will allow us to understand the site selection, sales and profit ramp-up of this new concept.

As you can see, we continue to take steps to support our future growth, while still delivering strong performance in the current periods.

Before we open the call for questions, I’d like to take a moment to touch on the unique niche we serve and how we continue to differentiate ourselves as we grow and evolve. For several years now, you’ve been hearing us talk about you can buy anything we carry somewhere else, but you can’t find somewhere else that sells everything that is carried at a Tractor Supply store. This has been a driving force, not only for our merchandising strategy, but also in the way we differentiate our overall business.

Because this model holds true for all of our stores, we do not directly compete with any other retailer. Instead, we have competition from a few retailers in certain of our product categories. Our trips are the following, a home center, a pet superstore, a discount store, a workwear store and an independent feed and tack store could satisfy a consumer across many of our categories. A few prices would be lower, some might be a little higher. At the end of the day, the market basket would be comparable. A single trip to Tractor Supply would save time, our team members would provide great advice and terrific products that were highly differentiated.

At Tractor Supply we sell solutions as well as products. That said, we remain very confident in our business model, which is designed to reach the unique customer in a growing niche. Macro trend research continues to support our success. A recent Associated Press article reported positively on the growth of rural America, using census data from the year 2000 to 2004, it was noted that 18 of the top-25 metro markets in the US experienced a population decline, while the Out Here world we do business in, continues to grow.

We have a plan in place to reach our long-term target of 1,300-plus tractor supply stores. With the investments we’ve made over the last few years, the core infrastructure is in place, allowing us to reach that goal.

And Joe, any comments before we open for Q&A?

Thanks, Jim. I’d just like to share with everybody the results of my recent travels. I’ve been in a lot of stores and I’ll tell you how many in just a minute. But when we travel stores at this time of year, we’re looking for bright, energetic teams. We’re looking for people with great attitudes, we’re looking for people that are focused on sales, and we look at customer service and how it’s taking place. We also look at our stock levels, to make sure that we’re good in stock situations on key products and we look for well-merchandised stores and stores that are neat and organized.

We also look for good freight flow. This is our busiest time of the year and our internal words are, Freight in 8, or in other words, let’s get the freight from the truck to the sales floor, where the customers can buy it, in 8 business hours. And I might point out that our sales in April and May, which is our Christmas time, so to speak, are about double per week what they are in January and February of the year.

So where have I been? I’ve been in Texas. I’ve visited 10 stores in Texas several weeks ago. I’ve been in the Carolinas, Georgia, Alabama and Tennessee. That’s 14 stores we went to over a 2-week period. And I was also in Nebraska, Iowa and Missouri and visited 10 stores. So as I add it all up, I’ve been in 34 stores in 9 States in the last 4 weeks. I also visited 2 of our distribution centers and was able to speak with both shifts in Braselton, Georgia and both shifts in Waverly, Nebraska.

So what did I see in the stores? Well, I spoke to every team member in every store I was in and I found focused teams, energetic teams, I found people that were interested in customer service, enthusiastic to tell us about all the things they had done recently. Also found a lot of people didn’t have enough time to talk, because they were busy with customers.

We also visited a lot of stores that had the new clothing departments in and those stores are not only doing well, but the people in those stores have great great pride in what they’re doing.

So overall, after being in 34 stores, I think things are looking very very good. We’re moving the freight. People’s attitudes are good. We’re handling the seasonal products well. Our in-stock is great. I take similar trips every spring and I would say that this spring we’re in as good shape – maybe better shape than I think I’ve ever seen before. So I feel very enthusiastic about how things are going in the stores and I feel very enthusiastic about the most important measure of our success, which is the teams that operate our stores.

So with that, I’ll turn it back to you. Jim?

Thanks, Joe. Let’s open the floor for Q&A.

[OPERATOR INSTRUCTIONS] Edward Yruma of JP Morgan.

I wanted to discuss, you know, you guys showed, obviously, very strong gross margin improvement. I want to drill down on that a little bit more. How much of that was kind of related to some of the weather and the seasonal effects that you saw and how much of it was the more permanent structural things that you’re doing like imports, if you had to kind of characterize that for me?

Generally speaking, I would say most of it is permanently structured as we’ve said, for the year, we have said several times that we expect our [even] level profitability to increase 30 basis points or so, annually for the next few years, some of that coming from margins, some of that coming from SG&A leverage. And as you can see in this quarter, it principally came on the margin side.

Most of that was structural. We would have had higher sales of some winterwear at lower margins had January cooperated with our plan. The good news is, while we are carrying that inventory, we pack it away and the styles don’t change from year to year, so we’re in great shape there.

We also had a nice shrink improvement on a year-over-year basis, which very positively impacted margin. Obviously, as a retailer we always attack shrink. We began to staff to our LP department about 3 years ago and became fully staffed early last year and then began to use exception reporting and diagnostics on more of a predictive basis. As a result, we believe now we’re beginning to see some traction in shrink reduction.

Thank you very much. And one follow-up, if I may. Obviously, the drought conditions and Texas and that are fairly well documented. How do your stores react to that and are you starting to see significant performance gaps between those stores versus a store that’s maybe not suffering from the inclement weather?

As of yet, we really haven’t seen a significant overall sales shift in Texas with regard to total results. We have seen a change in the product mix. We are experienced with drought conditions. We respond with more water storage, water handling, as an example. Pastures are very dry, so feed sales go up and animals are under stress, so animal stress price go up as well.

However, as we move further into the grass cutting season, the impact of drought does become more significant. The good news, however, is it was very dry in parts of the northern Midwest and kind of the northern Midcentral area last year and right now they look pretty green and lush.

So as we’ve said frequently, the good thing about droughts is they never impact the Company, they only impact the region, where we’re typically cycling out of one as we’re cycling in to another.

Dan Wewer of Raymond James.

You had noted that the same-store sales in the Midwest and I believe you called it the central Mideast, were lagging the Company average. Could you also comment on how the new stores in those regions are performing and what do you think may be contributing to that performance and if there are any strategies to improve their sales performance?

New stores universally are performing well. Tony spoke to that in the aggregate. And we see really no – while there’s always a range. Some beat a pro forma by a little bit, some fall short of the pro forma by a tad, there is no geographic pattern as to stores that are beating pro forma by one measure or trailing it by another.

Obviously the pro forma of the store varies, market to market, and to a degree, region to region.

Fundamentally, when we look at what’s going on in kind of the upper Midwest and the upper Midcentral, it is almost exclusively related to January sales and the weather impact that benefit LY and we did not cycle well this year.

Certainly no long-term red flags in either of those geographies.

Second, you had noted that you had shifted some marketing dollars from the second quarter to the first quarter. I guess presumably that may have helped the first quarter sales potential. Is there any negative offset in the upcoming second period?

Actually, no. We have some benefit. The rationale for the decision is we used a weather forecasting organization and it appeared to us when we were planning our advertising and our promotional calendar, that the last 10 days of March would be very favorable. So as a result, we decided to have an event, our power equipment event, and support that with advertising. Year prior we had that even in April.

So while it was slightly favorable. The weather did come. It wasn’t quite as grand as we hoped it would be. It was positive to the business and I was glad that we had invested the inventory and the advertising in the quarter.

Having said that, we see no negative offset to top-line in Q2.

Okay. And Jim, the last question I had, you’d highlighted that apparel same-store sales were negative during the period. I’m curious as to what the markdown risk will be in soft lines if inventories were heavier than planned? I guess, just a second ago you had mentioned you do pack-aways, which I didn’t recognize that was a part of your strategy. But I guess that does raise issues about obsolescent shrink, etc.

First of all, the overall inventory position in clothing is just fine. The other thing we pack away is winterwear garments, which would be either the Charles E. Schmidt, the CE Schmidt brand. That’s our own brand. Or the Carhartt brand. And there’s absolutely no fashion sensitivity to that product what so ever.

So we will mark it down. I guess we take it down to as far as 20 or 25% off and then pack it away. And we know how to do that well. So the products come back out looking fresh and clean for next season. So, I guess to answer your question, there is really no distressed inventory out there and there is really no markdown risk, going forward, in the clothing side.

Great. Thanks and good luck with the next period.

John Murphy from William Blair.

Congratulations on the quarter. On the clothing rollout, I wonder if you could update us on how many stores have received the rollout, as well as if you want to update us on how many you plan to have by the end of the year. I think you were using a number of 100 to 120 at the end of 2005.

Jack, this is Gerry Brace. I’ll go ahead and field that, if you don’t mind. Between the stores that we converted last year in the third quarter, that was about 50 store locations, coupled with the new stores that have opened since midyear last year, through the end of the first quarter of this year, we currently have approximately 110 to 115 stores that have what we’d call the super-clothing set in them today.

Between additional converted stores, as well as the remaining new stores that we will implement the expanded clothing sets in for the remainder of this year, it will take us to about 225 store locations by the end of this year.

Jim had commented in his remarks about the fact that we continue to be pleased with the elevated sales performance, top store sales performance that we’re seeing in the stores that we converted last year in the third quarter, and as a result, have the confidence to move forward with the expanded clothing set in additional store locations.

Okay thanks, that’s perfect. And now just one other thing, a clarification on the clothing. The apparel in total for the entire chain, was that negative or was it just – I just wanted some clarification on that. I thought it was only a particular part of the clothing that was negative?

Overall, Jack, for the first quarter in the stores that did not have the super-clothing set that I was referring to a moment ago, they experienced slight negative comps and a significant portion of that was the impact of the loss of insulated outerwear sales, due to the mild January that we experienced this year.

Okay. And just last question, shifting gears. Tony, I think you said that the cannibalized stores actually performed above the base. I realize it’s just one quarter, but as you look at that – and I’m sure you’ve kind of dug into the numbers on this – does that cause you at all to rethink about what criteria you’re using to define a cannibalized store and maybe say something about how much tighter you can open stores next to each other without really considering them cannibalizing each other?

I think it really centers around sort of the simplicity of the calculation. The stores that generated above – and I believe in the quarter it was about 50% of the stores actually were above the Company average. But that doesn’t mean those stores didn’t suffer some form of cannibalization.

Our calculations, being somewhat simplistic, but really the only way to be able to manage it, is just to exclude them from the calculation itself. So I think some of the confusion is from the calculation and its simplicity. There probably was a greater impact on the comps from the cannibalization than the calculation would indicate. But that’s really the easiest way of measuring it from a metric standpoint. So we’ll continue to measure it in that way. But in this case, I think potentially the cannibalization could have been greater.

David Cumberland from Robert Baird.

Jim, in the press release you noted business trends improving recently. Were you referring to the later part of Q1 or early Q2 or possibly both?

I was referring to late Q1.

Thanks. And for Tony, to confirm on the Q1 comp calculation with the shift of a week, were comps calculated on a fiscal 13-week basis?

The comp calculation in 2005 would be weeks 2 through 14, compared to in 2006, weeks 1 through 13. So the comp calculation is comparative, hence the name. And it is the exact same days.

Right. So it’s really on a calendar weeks basis then?

Right, on a calendar week basis, when you look at the quarter, the quarter last year would include a different set of weeks than this current year quarter.

Right. And so would that be the main reason for the unusually large total sales growth in Q1?

That explains why, if you take your new stores or non-comp base and add it to the comp base, it doesn’t equal the total of the increase for the quarter. That is the difference. It’s a week shift. And it represents, I believe, about 3%.

And then on the tax rate for 2006, that was a little bit higher in Q1. Is that going to result in a change in guidance for the year or are you still expecting around 36.3% for the year?

We’re sticking to the guidance. It is reflective of the FAS 123-R and the way that the options are handled, in particular, the ISOs. So let me get back to you on that. I would expect that there would be a slight increase throughout the year.

And then last question. Gross margin was noted as being helped by less promotional markdowns. Is that the approach planned for the rest of the year?

Not really. No. I have not significantly changed our advertiser strategy or promotional strategy for the year. So I think that was probably cycling what we had done last year in Q1.

Matthew Nemer of Thomas Weisel.

Just a quick question. I was pleased to hear that it sounds like you’re not seeing much impact on the riding mower category from the home improvement stores. I’m just wondering, is it too early in the season to really gauge that or what you think you guys are doing that allows you to sort of be protected in that market?

Sure. We’ve already cycled. I look at this, we see the data by store grouping, by week. And we look at stores that have one of the home centers, the other or both and stores that have neither. And we are now a couple of weeks into pretty strong selling season and the trends have not changed at all.

I think it’s due to the fact that really nothing significant has changed in the market, except you used to drive to an orange store to find an assortment of John Deere and now you find 2. And you used to drive to the red and blue store to find [Compudet] and now you find John Deere there.

A number of outlets selling those brands has not changed over the last year and I also believe that Tractor Supply has a unique selling proposition when it comes to selling big ticket goods and to a degree, that isolates us from [mining] price and a massive display of brands.

Okay. And then secondly, on the gross margin side, can you give us an update on the direct import percentage, did that move materially or is it just a small tick in the quarter.

Basically, in the first quarter we have talked about accelerating our direct import initiatives and programs. And the total number of containers that we landed in the first quarter this year were up 71% over what we did last year. This is right on track for what we have forecast for the entire year of 2006.

The primary benefit of the expanded direct import programs were not felt in the first quarter. That’s when we were flowing the goods through the system, through the network into the stores. But we should see that both in top line selling, as well as gross margin benefit in the second quarter.

Okay, that’s helpful. And then lastly, I may have missed this, but can you just explain the catalogue of marketing shift?

We have a catalogue that you cannot buy from it, you can’t order from it. It is the wish book for Tractor Supply. We call it the Blue Book, you may have seen it at one time or another.

In the past, we have printed, expensed and launched that catalogue in Q2. Our stores have asked us for a number of years now, let’s have it in Q1. So we printed it this year in Q1 and as a result, spent quite a bit of money that shifted from one quarter to the next.

Okay. And actually just one last one. Have you put a timetable on when you will be able to sell products over the internet?

As I mentioned in my comments, we have a search out now for a multichannel retail executive. And I hate to put a deadline on it, but we’ll certainly be out there in 36 months and likely well before that.

John Lawrence of Morgan Keegan.

Jim, would you comment just a little bit on, first of all, I guess Del specifically and some of the things you’ve learned there. Earlier you commented on when you’ll rollout the resets, etc. Just some of the early learnings there. And is there any chance we could look for, I guess, some of the reverse logistics or bringing some things back from Del’s into the chain, over the next 6 to 8 months?

The initial learning is that we’ve confirmed the fact that the smaller box, smaller market holds, we think, significant promise for us. It will allow us ultimately to grow well beyond the 1,300 store locations, the number yet to be determined and announced.

The learning is going both ways. We have taken one of our buyers, who has now become the senior buyer for Del’s, so he has bought over the years, several categories here at Tractor Supply. He’s taking the wherewithal of Tractor Supply there and at the same point in time, bringing back, in some cases – really not categories, but items and philosophies and in a couple of cases, actual vendors, from Del’s.

They buy seed a different way than we do. We will be investigating to see if something can work on a chain-wide basis. And as I mentioned, we are significantly relaying their stores out to take better advantage of the inside selling space that the Del stores have.

And just secondly, just real quick, how did the California stores do in the first quarter?

They continue to do well and we opened I think it was 2 or 3 additional stores in California and they continue to hit our pro forma.

Michael Cox from Piper Jaffray.

My first question is on a comment you made in your prepared remarks about traffic trends and I believe you said excluding, was it weather related areas, but you said it was up 2.6%. I was just wondering if you could define that calculation and give a little bit more detail around that?

I said that the weather in January had a significant decline in comp transactions, basically. So in February and March combined, the comp transaction increase was favorable 2.6%.

Okay, that’s clear. I appreciate that. And my second question is on gas prices. I know that this was the topic of discussion late last year when you saw gas prices spike higher. I was wondering if you could give any commentary around what you’re seeing this time around as gas prices have moved higher once again?

Obviously, that is fairly recent. What we spoke to last time is we saw a decline in transactions that build a ticket. We have not seen any change in trend over the last 3 or 4 weeks. In fact, our phones have stayed busy since the gas spike of last September-October.

We do continue to see a nice sell-through in fuel handling and fuel storage categories.

Okay. And my last question is on the inventory. It was up less than sales was in the quarter. I was wondering if that’s a function of the timing of your quarter this year versus last year or if that’s something we should expect as we move through the course of the year?

Yes, absolutely, you should expect almost as an evergreen pledge, to see inventory growing at a rate slower than sales. Frankly, we’re not real proud of our position right now. It’s not bad by any means and there’s nothing to be concerned about. But I think and I always will think that we’ll continue to have the opportunity to make our inventory investment more productive and to increase inventory turnover. Hence our longstanding objective of increasing turns 15 basis points a year.

Okay, great. One last quick question. In terms of the apparel resets, could you give us a sense for what percentage of the additional apparel is private label?

Private label apparel last year for Tractor Supply represented 18% of our apparel sales.

Any expectation what that would look like under the expanded set?

When we rollout additional private label categories of merchandise in clothing right now, Michael, that is going chain-wide. So it’s really not directly tied to the expansion of the clothing departments. We’ve been that pleased with the success we’ve had with the CE Schmidt line. So that percentage will climb.

Twice a year we launch new initiatives in private label clothing, generally Q1 and Q3 and this year will be no different.

Michael, to clarify further, most of the additional space, or much of the additional space in super clothing stores, frankly, goes to lifestyle branded apparel.

Vivian Ma of CIBC.

Just a few questions. The 2.6% transaction comp, what was the comparison from last year? Like, what was the comparable number from last year?

We’re looking. While Sarah’s looking for that, do you have another question?

Yes. I’m interested in the stores without the expanded apparel set, what was the performance of non-winter apparel?

That was marginally down. I mentioned it in my comments. The expanded sets were up 35% and were down marginally in non-seasonal in the base stores.

Okay. And I think you mentioned it as well, but I kind of missed it. Did cannibalization hurt comps at all in the quarter?

Yes. It was about 20 basis points, is our estimate, based on our calculation, which just excludes stores that we believe are cannibalizing. We take them out of the comp base and it improved comps 20 basis points.

Okay. And can you comment on the profitability of the California new stores compared to the profitability of the New England new stores, which is the ones you entered in New Jersey or Massachusetts or Vermont?

No. In the past, Vivian, I have said that the 4-wall profitability of California, we find to be quite good, due to the fact that they are producing well above chain average revenue per store per foot.

Okay. What about those in the New England new stores? How do they compare on the same basis?

How does California compare to New England?

Right. I’m just thinking of the new stores that you entered into, I mean the new markets, like say in Vermont or New Jersey, and how does their performance compare?

We remain pleased with everything northeast and with California as well. We believe that there is a lower competitive index. Lots of our lifestyle is being led in those areas. There is a density of our kinds of customers in both New England and California. Unfortunately, everything is higher. Sales are higher, costs are higher on the rent side and taxes are higher and wages are higher. But when we wash it all out, we will continue to grow in both California and the West Coast and New England.

Vivian, on the comp, I do not have the exact number. I believe it was 3%. But before we end the call, if Randy finds that number I’ll give it to you. If not, we’ll have Randy get back to you with that.

I think we may have been split. In Q1 of last year we were split evenly on traffic and tickets. We’ll confirm that to you.

David McGee of SunTrust Robinson.

Just a quick question I have here on the advertising changes. You talked about the change in the timing. I’m curious just in terms of the change in the content or how you go to market. Are you being responsive to something that you see out there or is this just opportunistic? Just a little color there would be helpful. Thank you.

Are you speaking about electronic or print on your question?

Actually both.

Okay. We’ve not changed our print philosophy. We continue to feature seasonally appropriate goods. We are principally everyday low price. The average printing event of which we have 15 per year, will have around 140 different SKUs advertised in it. And of those will be 10 to 14 that are off price to one degree or another. And that has been our fairly consistent strategy for the last 3 years or so.

Although last year we reduced the number of print events down to 15 from 19 or 20.

With regard to television, we did change the concept completely this year. Historically, the last 3 years, we have had our team members in front of our store talking about our categories to our customers in their words.

The consistent theme there was hopefully a message of discovery where a problem would be proposed, the doors of our store would open, the product and goods and expertise would come out of our store and before the 30 seconds was up, we had solved a hypothetical problem for consumers. That worked well. Our team members enjoyed it.

We decided to change that and today, we have launched a new campaign, where we have characters, not real people, but characters, who are speaking about the lifestyle to one another and referencing Tractor Supply as their source for the product and advice that they require to live the Out Here lifestyle.

We just launched that campaign about 2.5 weeks ago. Too early to track any financial results. The response we’ve had from the folks who communicate with us has been about 80% positive, 20% negative. We see that as being very favorable.

Thank you, that’s helpful. And then secondly, the higher freight cost, do we begin to [lack] those in the third quarter?

Not at the current fuel run rates. We certainly had hoped to, but if you look at what the Department of Transportation is predicting for the rest of the year, unfortunately – hopefully we’ll get back to the situation where we are comping high freight rates, but not with even higher freight rates for this year.

And you’ve assumed that in terms of your guidance for the year?

Yes, obviously. Our objective is to cover it. But when we said we are confirming our year, yes, we’re assuming that we’ll figure out how to do that and digest it. But there’s no question, anyone who moves freight has a headwind, certainly for the 5 months and quite possibly beyond.

Thanks a lot. Good luck.

Anthony Lebiedzinski of Sidoti & Company.

A couple of questions. I know in the past you have given sometimes Q2 guidance saying and I’m not sure if you choose to have any comments there, but if so, I would be definitely glad to hear them.

And also, I was wondering if there was any unusual expenses hitting in the second quarter that we should expect? And also store opening schedule for Q2 as well?

Okay, no guidance given historically and no guidance going forward. We have nothing unusual projected, I think, in the quarter.

And as far as the store openings for the second quarter?

I think we said we would have 60% of our stores open by the half. That will be around 52 stores. We opened 29, so somewhere in the area of 20-23 stores.

Okay. And as far as the stores that you opened in the first quarter, I was wondering if you could comment on whether or not most of them are existing markets or new and also what your plans are for 2006 as well?

It is a mix. Generally, when you think of States, certainly they’re all in existing States. The drive distance from an existing store may be 80 miles, it may be 20 miles, Anthony. So it is a mixture. But nothing outside the kind of normalized patterns that you’ve seen over the last several years.

Okay. And in your press release you mentioned that you’re pleased with some successful new products and some initiatives. I was wondering if you could maybe touch on that a little bit? Other than the super clothing, if there’s any other new products that you’re particularly pleased with?

We continue to be pleased with premium and Zero-Turn Riding lawnmowers with the sell-through and the mix of product. Gerry, anything else broadly that we could--?

Anthony, we’ve made a number of changes and continue to make changes in our pet supplies and the pet equipment side of the business. And those are paying significant dividends for us right now. We actually made some sweeping changes going into the first quarter this year, in an old line business for us. That being agricultural sprayers and accessories. We’ve got some [great] thinking and some new ideas. It’s early yet, but we’re extremely pleased with the results we’re seeing as a byproduct of those changes.

Okay. And last question, as far as private label, where is that as a percentage of your overall sales and what are your plans for this year?

Anthony, rolling 12-months we’re at 17% of our total sales coming off of private label. We continue to have a desire to drive that up to 25% of our total sales. And interestingly enough, you heard me speak earlier about the expansion of our CE Schmidt line of private label apparel.

We’ve also significantly expanded for this spring, our line of private label lawn and garden products, under the Ground Works name. And in early Q1 of this year, we launched a brand new private label in the equine supplies area under the name Mile Post, which you will see that expanded to a number of other categories of merchandise in equine as we go forward.

RJ Hottovy of Next Generation Equity.

Great job. Good job with the get ready quarter here. One question for you. I just wanted to know, with aluminum and steel prices at record highs, are you seeing any pressure from OEMs to take up price points in the lawn and garden product category?

At this point we’ve locked in our pricing for the spring, as far as any of our steel products are concerned. We do not expect any midseason cost adjustments as a result of the fact that these prices were negotiated and settled on early last fall. And obviously, raw material was purchased at that particular time.

We’re starting to hear whispers of additional movement in steel products, but it is not specifically related to big ticket steel products that we’re selling for spring.

Okay, thank you. And just a point of clarification here. Of the $2.2 million shift in marketing, was any of this related to the new advertising campaign or was it all strictly coming from the Blue Book?

It was just moving 1 print event. We have one additional print event in the quarter and then the Blue Book.

But the new ad campaign, we had production cost last year for TV and we have them this year.

Okay, so none of that was coming straight in the first quarter?

No.

Joan Storms of Wedbush Morgan.

I was wondering if you could comment on your progress with E3, where you are now and where you’re going to be going with that sort of this year and ultimately and potentially if you could sort of quantify how that’s helping your in-stock?

E3, we’re fully on the platform today. We believe we’re beginning to see – actually our in-stocks are very strong compared to a year ago. We are seeing the system work very well against seasonal profiles. We know it’s having some impact on our inventory build in the weeks prior to seasonal peak. It looks like it’s going to be working down on the backside of the seasonal bell curve. We are pleased with that.

When we see inventory lumpiness, it’s in those categories that we do not have on replenishment or have chosen to override for one reason or another. It’s in, it’s stable. We are continuing to invest in training and development and I think by fall of this year we’ll be in a position to really begin to achieve optimal benefit from that investment.

So what percentage of your SKUs are on E3 right now?

North of 90.

Okay. And then for you, Tony, how many Del’s stores did you end the quarter with? And I think I missed the number of the new ones that you’re going to be opening this year. And also potentially if you could comment on the seasonally of that business compared to the core Tractor Supply’s?

We opened 1 Del’s store right at the end of the first quarter. Going back to when we originally acquired Del’s, we acquired 16 locations. There was a 17th location in Hawaii that we opted not to include in the portfolio. And we subsequently reopened that one store in a different location. So, that is the 17th store. We anticipate doing 2 to 4 stores for Del’s this year.

Seasonally, Joan, is much flatter, due to the fact that the Pacific Northwest is much more temperate than the range of Florida to New England and upstate New York that the rest of the chain has.

So, compared to you, your big quarters are Q2 and Q4, it would be much more evened out than that?

Yes. I guess. It’s a very small piece of our business at this point in time, but yes, that would be true.

Andrew Wolf of BB&T Capital Market.

I have a few follow-ups to most of the topics and questions. First, on the practice of putting away some of the non-seasonal apparel, I just wanted to double check. It was sort of implied by the questioner that that’s a practice the Company’s been doing for a while. Is that, in fact, accurate, or is this sort of the first time you’ve done it in a substantive way?

Well, the preferred practice is great weather and 100% sell-through, Andrew. But unfortunately, it doesn’t always happen. So yes, we have a packing away, again, non-fashion insulated Carhartt-like apparel, to one degree or another, every year. That is not a new practice and frankly, the pack away this year in dollars and cents hardly shows up on the radar screen.

Great. I just wanted to check that. The second thing I want to check is on the $2.2 million shift in the marketing cost, the Blue Book, I understood that explanation. On the extra circular, is that all due to the calendar shift or did you actually choose to print an extra circular in the period?

It is partially due to the calendar. It is also due to the fact that Planalytics gave us a forecast for a very strong last 10 days of March. And we sought to support that with some advertising.

Great. Lastly, sort of using your January negative same-store sales statement, you have like a 6%-plus type of run rate for the February and March period for same-store sales. I don’t want to take that too far, but could you just sort of compare that period, that 6% type number to what your plan was?

Well, we look at the plan more on a quarterly basis. But generally, February and March ran higher than our internal plan, obviously. It was somewhat flat as far as plan goes. There were some slight spikes, but for the most part, we did not plan to show a significant change month to month.

We did plan January slightly down, relative to the other month, because we knew we were going to be comping a strong performance from the prior year. But relative to plan, you are correct, that number exceeded what we had planned. The actual comp exceeded what we had planned for February and March.

And I know you don’t like to talk about the months too much, but you put it out there. What is your sort of internal explanation or what do you want to share with us about why the numbers were good in February and March?

It’s not so much they were so good in February and March, it’s the fact they were so bad in January, was the point we were trying to make. That we were cycling a strong January from a year ago, that was driven by [stone] ice storms in the north central and upper northeast of the United States. It did not happen at all this year. There simply were no snow storms at all, no blizzards, and January was 8 degrees warmer in many parts of our northern geography.

So it wasn’t so much the fact that we want to call out Feb/March, it was the fact that we wanted to say look, Feb/March were normalized, January was a problem for the quarter.

Okay, thanks.

Thank you very much. Appreciate your input. The questions are always welcome and appreciated. Glad you’re on this trip with us. We look forward to a great continuing story here at Tractor Supply and look forward to reporting on Q2 in about 90 days. See y’all.

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