Tractor Supply Co (TSCO) 2007 Q1 法說會逐字稿

Good afternoon ladies and gentleman and welcome to the Tractor Supplies conference call to discuss first quarter results. (operator instructions) Please be advised that the 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, Ms. Cara Brian of Financial Dynamics. Please go ahead, Cara.

Thank you, operator. Good afternoon everyone and thank you for joining us. 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 factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company's filings with the SEC. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time.

Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call.

With that out of the way, I'd like to introduce Jim Wright, President and Chief Executive Officer. Jim, please go ahead.

Hi, Cara. Good afternoon everyone. I am here today with Tony Crudele, our CFO; Stan Ruta for Store Operations; and Gerald Brase who runs Merchandising for us.

We refer to our first quarter as our "get ready" quarter because we're exiting our cold weather categories, completing major reset activities, and preparing for the important spring season. As you know, our second quarter is typically our strongest quarter. That said, we're very pleased with our much strong than expected results in the first quarter of this year.

The company had record sales for the first quarter, producing a $559 million of revenue compared with $465 million a year ago. Same store sales increased by 8.5%. Our much better than expected top line growth drove our earnings per share to $0.12 compared with $0.01 in the first quarter last year.

Our store and our store support team has executed really very well. We experienced strong demand for products across the majority of our categories. The cold weather drove demand for winter-related merchandise with particularly high sales in insulated auto ware, snow removal, and heating products. We believe that a certain level of pent up demand from unseasonably warm weather in Q4 of last year helped drive the business in the winter-related categories this last quarter.

We acted quickly to take advantage of that cold weather opportunity and implemented a calculated markdown strategy in winter related merchandise. This allowed us to sell through our inventory at optimal margins, however the mix -- the increased mix of end of season goods sold did result in a slight decline in our overall gross margin compared with Q1 of 2006.

Our growth departments, such as apparel, tack, and animal performed very well during the quarter. Our customers have continued to react positively to the expanded merchandise offerings in these areas. We also believe that the decision we made in the second half of last year to raise the minimum in stock position on certain SKUs contributed to sales growth in several categories.

The private label merchandise that we introduced in recent quarters continue to be very well received. Sales of our C.E. Schmidt ware line, as well as the Master hand tool and tool storage line, have continued to grow. We, of course, continue to test and refine our merchandise offering with our strategy items and measure the consumer response.

In summary, favorable weather, solid execution of first quarter, allowed us to surpass our own expectations. We enter the second quarter in a solid position for a seasonally stronger quarter and we'll continue to be opportunistic in managing the effects of external factors on our business as we maximize the short and long term potential of our company.

I'd now like to turn the call over to Tony who will provide more detail on our financial results. Tony?

Thanks Jim. Good afternoon everyone. As much as we refer to this as a "get ready" quarter it was apparent that we were very ready. As Jim stated we were well positioned coming out of a very mild December, and with cooperation from the weather we had recorded Q1 sales and earnings of record proportion.

Sales for the first quarter ended March 31, 2007 increased over 20% to $559.8 million compared to last year's first quarter sales. The comp sales for the period were 8.5%. Non-comp sales were approximately $65.5 million, or 12% of sales. Comp sales were the strongest in January and February and were in line with our expectations in March. We estimate that cannibalization impacted comps by slightly over 1 percentage point. This was consistent with our expectations but higher than previous years as our store opening program in Q1 impacted more stores as we continue to expand within our existing markets. Transactions were the primary driver of the comp increase with a 7.1 percentage point increase over the prior year.

Average ticket on a comp basis increased 1.3 percentage points. Average ticket was impacted by the mix of product in the period and seasonal markdowns. We were pleased to see foot traffic increase, which provided a two year comp transaction increase of over 6%. Although the increase in footsteps was principally water driven, we believe that it also supports our merchandising offer of more consumable items that meet our customers' unique needs.

With respect to regional sales trends, consistent with our seasonal merchandise trends comp sales were above the company average in the Northern and Midwestern regions, and below company average in the southern regions. The Dells comp sales were slightly below the company average due to unusually wet conditions in the Northwest.

With respect to gross margin, while our initial mark-on on the purchases improved to better buying and increased imports, gross margins were below the prior year's period by approximately 50 basis points as we utilized markdowns to take advantage of the opportunity to move through our cold weather merchandise.

Import containers doubled for the quarter and on a trailing 12 month basis rose to approximately 5.3% of cost purchases more than doubling over the prior year. Freight was one of the larger components of the year over year margin decrease primarily due to the increase in import activity, product mix, and increased dead miles between stores. The change in our method of freight expense estimation that we implemented in Q3 last year was not material in the quarter.

Additionally we did experience some pricing pressure in the feed categories as grain prices increased. LIFO accounted for a portion of the year over year margin decrease which was driven principally by our outlook of higher feed prices and continued pressure on oil related products.

It should be noted that for comparative purposes certain expenses, principally the cost of our consumer deferred financing program, were re-classified from SG&A into gross margin reported last year. The year over year impact is not material. SG&A, including depreciation, as a percentage of sales was 28.4%, 170 basis point decrease from the same quarter in the prior year. This decrease resulted primarily from the leverage provided by the strong sales and shift in marketing and pre-opening expenses to later quarters. We still experience slight deleveraging in occupancy expense, but this was substantially moderated with our strong sales.

Our pre-opening expense for new stores was approximately $85,000 per store, which is consistent with our plan. We opened 22 stores in Q1 compared to 29 stores in the prior year quarter. And last year's pre-opening expense category also included almost $800,000 of lease exit costs related to five relocations. We did not leverage our distribution center costs as we continue to differentiate our SKU assortment, increase imports, and bring additional SKUs into our distribution network from the vendor network. While there are additional logistic expenses related to this approach, we believe the benefits of incremental margin dollars and repeat foot traffic that we expect to receive are consistent with our long term goals for the company.

Consistent with our original guidance, our effective tax rate increased to 37.9% from 37.1%. The increase in the effective rate is related to the adoption of FASB Interpretation Number 48, accounting for uncertainty in income taxes referred to as FIN 48, as well as some changes in certain state and tax regulations. Also, the cumulative effect of the adoption of FIN 48 is booked as a retained earnings adjustment of $1.9 million, consistent with the accounting literature.

Now taking a look at the balance sheet, as a result of our solid balance sheet we made two changes during the quarter that we believe will contribute to the strength of our long term financial position. First we initiated a significant stock repurchase program which authorized the company to purchase up to 200 million of our common stock over a three year period. In the first quarter we spent approximately $21 million to repurchase approximately 413,500 shares. Subject to prevailing market conditions we expect to continue to make additional purchases throughout the next three years.

We also entered into a new five year $250 million unsecured revolving credit agreement arranged by Banc of America Securities. This new agreement has more favorable terms and conditions than the previous $155 million unsecured revolving credit agreement which was scheduled to mature in February of 2008.

We will continue to focus on positioning the company for its future capital needs with actions such as the two that I just mentioned. We believe that they support our long term plan to reduce our cost of capital and to increase long term shareholder value.

On a per store basis, inventories increased approximately 3.5% at this year's quarter end. We are pleased with our inventory management for the quarter given the strong sales during the quarter and the strong in stock positions for the upcoming spring season. Our calculation is based on average cost and excludes in transit inventory and adjusts for dells and unopened stores that were carrying inventory at quarter end. Also the 2006 inventory balance was adjusted for comparative purposes to more appropriately reflect in transit inventory and inventory that was initially consigned that was ultimately purchased later in the year last year.

As Jim mentioned, we had a strong sell through of our winter seasonal merchandise and came out of the season a better inventory position on these goods than in the prior year. Based on our internal calculation of inventory turns on a cost basis, turns were essentially flat for the quarter. Although the turns were flat, this is skewed by the excess inventory balance at the beginning of the period as a result of the warm December. As we move through the quarter we are pleased with the decrease in the inventory balance by period end, as well as our turns for the quarter. Although we'll have more data points as we move through the key second quarter, we are encouraged by the results of our inventory reduction initiatives and continue to focus on this area.

This improved inventory management had a significant favorable impact on our cash management as our outstanding borrowings at the quarter end were down over $11 million since prior year. This was achieved in light of the $21 million we spent on stock repurchases that I had mentioned earlier.

We did experience a decrease in accounts payable financing of our inventory from approximately 48.2% down to 43.5% due to the increase in imports and the slow turn of inventory that we experienced in the second half of last year.

Capital expenditures for the first quarter were approximately $16.4 million and we're generally tracking to plan.

Currently we reaffirmed our new store growth target range of 85 to 90 stores. While we originally anticipated that we would open approximately 60% of the stores in the first half of the year, we now expect to open 50% of these stores in the first half of the year. As we have been working diligently to reduce our occupancy expense over the long term we have eliminated some deals that were not consistent with our new guidelines, and therefore some of the additions are back waited in the year. The harsh winter weather also impacted the timing of some store openings.

In our first quarter business update press release earlier this month we increased earnings guidance a range of $2.49 to $2.56 per diluted share. As I noted earlier, compared to prior year we shifted pre-opening and certain marketing expenses from the first quarter into later quarters with the majority of the shifted marketing expenses anticipated to be incurred in the second quarter.

We expect sales to be approximately $2.7 billion to $2.75 billion with an assumption that same store sales will increase approximately 3% to 4.5%. The weather in the first three weeks of April has been unseasonably cool and our comp sales have trended below our annual expectations, however we are cautiously optimistic that a late spring will result in a shift of sales into the May and June timeframe.

And with that I'd like to turn the call back to Jim.

Great. Thanks, Tony. As Tony mentioned, due to our strong balance sheet we were able to implement a significant share repurchase program while at the same time we remain firmly committed to investing in key strategic growth initiatives. We're very confident in our company's future and we remain committed to using our capital efficiently for shareholder benefits of long and short term.

Again, I'd like to reiterate that we were very pleased with first quarter results and the solid preparation in place for Q2. Although the weather in April has been seasonably cool throughout most of the country, when the weather was warmer in March we saw a very good reaction to our spring products. If the weather patterns materialize as forecasted for both warmer and wetter weather going forward we anticipate a solid, sunny climate for spring product in May and June. We're also encouraged that in Texas and Oklahoma, which experienced drought conditions in 2006, are both experiencing moisture levels that are normal or trending toward normal in most areas in those two states. We believe that continued round moisture in these states will have a positive effect on the demand for lawn and garden and agriculture products in that region.

Throughout the year we'll continue to focus on great merchandise offerings and values, superior customer service, expanding our store base efficiently, and managing our inventory. While Tony and I have already touched on certain key strategic initiatives, I'd like to spend a few moments talking about a few others at this time.

Specifically for the second quarter we are excited about both our spring merchandise offering as well as our new TV ad campaigns. Early customer reception to our new high-end Zero-Turn riding mowers, as well as roping in price point riders has been strong and the all new outdoor lifestyle and dcor assortment results are also encouraging.

As previously mentioned, we created a new television ad campaign for this season with a more direct call to action message than prior campaigns. We expect this will help drive additional store traffic and sales from new and existing customers. Our stores, they are in great condition, the inventory's in place, and we are very well prepared for peak business.

We also continue to focus on customer service initiatives. Many of the improvements that we've made to our product offering in specific categories and department resets have helped encourage repeat business to our stores and cross-selling opportunities within our stores.

We are on track with the development of our multi-channel strategy and continue to be excited about launching our e-commerce site in the second half of this year. This additional channel will allow us additional touch point with our consumers, contribute to our development of a single view of our customers' shopping and purchasing habits with the company across products, departments, and channels.

Our store managers' seasoned advice and experience not only allows us to meet the unique needs of our customers but also helps to differentiate Tractor Supply stores in other ways. In February we held our annual store manager sales meeting which had the highest attendance with over 800 regional and district store managers and trainees from across the chain. There was a lot of excitement throughout the week as we educated our store managers on new products and customer solution selling strategies.

In addition we asked the attendees to walk through a prototype of the reset we are planning for our hard lines departments and to provide their feedback. We believe this new offer in merchandise assortment will enable us to continue meeting our customers' unique needs for tools, hardware, and truck maintenance products. We are now incorporating many of the suggestions we received from our field people and are on track to being piloting this new concept in the third quarter of this year. I would expect to role this concept out to initially the 50 test market stores and further refine the concept before expanding it in 2008.

This test and then refine strategy is consistent with previous department resets and expansions. In recent years we are focusing on updating and refreshing the right-hand side of our store which is where apparel and the animal health departments are located. We're excited to now be turning our focus to the left-hand side of our store and will continue to spread the learning from our right hand initiatives across the chain as we accelerate change and development on the left hand side of our store.

We remain focused on our long term growth, continue to be very excited about our initiatives we're implementing in 2007. The markets and lifestyle we serve are growing. We continue to successfully and uniquely meet the needs of our customers through our stores, our service, and our merchandise approach. Our leadership team is strong. Our future remains very bright.

And I'd now like to open the call to your questions.

Thank you. (operator instructions) One moment please for the first question. Your first question is coming from David Cumberland of Robert Baird. Please go ahead.

Hi. Thanks. On the marketing you talked about a shift from Q1 to Q2. What was the impact of that roughly in Q1?

We looked at that as approximately a total between pre-opening and marketing of about $0.05, sort of an even split. Maybe $0.03 of that related to the marketing. Some of those marketing funds really are discretionary. We anticipate expanding them in the second quarter depending on how the business pans out during the quarter and/or subsequent quarters.

So could the marketing spent as a percentage of sales in Q2 be higher than in last Q2?

We would anticipate that to be the case, yes.

Thanks. On another subject, Jim you talked about moisture being normal in markets like Texas and Oklahoma that had dry conditions last Q2. Those markets have an earlier season for lawn equipment. Have you seen the positive impact of the normal conditions in the early part of the season?

Yes, we certainly did in the month of March. There was an Easter weekend snowstorm in west Texas. Obviously we did not during that time period, but yes. Whenever the weather is what I would call "normal" as far as temperature, the grass is certainly growing and being cut in Texas and Oklahoma at a much higher rate than a year ago.

Thank you.

Thank you. Your next question is coming from Brad Thomas of Lehman Brothers. Please go ahead.

First of all, congrats on a great quarter.

Thank you.

I just wanted to ask a little bit about the rider sales and in terms of the trends at the end of the first quarter and maybe what you're seeing so far in the second quarter -- without necessarily having to get into detail could you maybe talk about your sense for how that category's going to perform this year?

Certainly, Brad. A couple of things. When we look at -- first of all it's very, very early in the season. If you look at the distribution of our stores we're less than 20% through the season so it's very hard to get a read. When the weather is there, the business is there. As I mentioned in my comments we moved to some almost some commercial grade Zero-Turns; we're delighted with that. We strengthened our assortment in the $1000 to $1500 range this year; we're delighted with that. And I mentioned earlier that Texas is moving.

Now a caveat on that business is that the Outdoor Power Equipment Industry Association last year, as we've discussed several times, reported 9% decline in industry ship outs and was forecasting a 3% for this year, revised that forecast as of February and they're now predicting a down 8% this year on top of last year's down 9%. So we all await with baited breath to find out if the consumer responds as anticipated by the manufacturer.

Okay, and from a promotional and competitive environment standpoint, are you seeing any big changes from your major competitors in terms of pricing or the type of offering that they're providing this spring?

Well, we look across the competition, we see -- yeah, there's some, certainly some increase in the amount of space -- print space being allocated to the category. There's been, I think, a lot -- this is only observation; I don't have hard data. A couple of the chains have been fairly aggressive on error, and when we look at our lines, price point to price point, feature to feature, we feel really very good with where we are on line strategy. And of course, we continue to see the use of consumer-deferred dating as a promotional initiative on this category.

So, in my mind, it's shaping up to be a very competitive year once again.

Okay, great. And then, maybe just one last question, if I may. On the pre-opening line, even drilling down and looking at it on a per store basis, it looks like it's down year over year. Sounds like part of that is still from timing, but at this point, are you starting to realize some of those cost saving opportunities that you had talked about last quarter; or have you not had a chance to implement those yet?

Generally, the cost savings -- we would not anticipate to see that in the pre-opening line item; and I think the major difference year over year is that in Q1 of last year, we had approximately $800,000 of what we call lease exit costs. So it would be dead rent on some locations that we were relocating out of. I think that's really what's driving the larger part of the difference.

Got it. Okay, thank you so much.

Thank you. Your next question comes from Mitch Kaiser of Piper Jaffray. Please go ahead.

Good afternoon, guys. You've made some nice improvement on the inventory on a per-store basis. I was wondering, on a dollar basis, if you could provide us apples-to-apples comparisons if you were to strip out the in-transit numbers?

Yeah, I think, Mitch, if you look at the balance sheet, you'll have an apples-to-apples comparison.

Okay. So, it's up 16%. I guess, sequentially, if you look back at the end of the fourth quarter, it was up 29%, but I don't think that included, or x'ed out, the in-transit, so I was curious what that might be. I don't know if you have that or not, Tony, but --

Yeah, I think if you add in the in-transit, it would be about 22% as of the December year-end.

Okay, so it went from 22% to 16%?

Correct.

Okay. Okay, that's helpful. And then --

And Mitch, just to clarify that, that's why we adjusted last year's inventory balances going forward, for the in-transit and some others, so the balances would be reflective.

Okay. Fair enough. Good. And then, I was wondering if you could talk about when would we -- when might we be able to expect that to be more in line with square footage growth, then?

I think, generally, you're going to see that the new stores will trail from an increase because when we go in on a new store, we will tend to have a larger inventory balance than the sales driving that we're going to get out of those particular stores; as well as those stores being lower sales volume. So you're -- we're generally going to run a little bit higher than our square footage growth when it comes to inventory increase in those new stores. The critical path really is in the mature stores as we drive those inventory levels down.

Okay. Okay, fair enough. And then, you mentioned the weather impacting April sales, and trending below, kind of, what your year expectations were. Would you be willing to kind of quantify where things are, in the quarter-to-date?

No.

Due to the fact that obviously May and June are very, very important; as you've heard us say before, don't really judge us by the first half, because the business doesn't move a great deal within the month, period. If we look at how it flowed last year versus how we anticipate it flowing this year, if we were to give you monthly granularity, it really does become very, very confusing.

Okay. But April's the -- seasonally, the smallest month of the quarter?

I guess on sales.

It's fairly consistent, and we throw in June as a five-week month, it's sort of -- then it will SKU a little bit. But generally, that's what smoothes it out.

Okay. Got it. Okay, thank you, guys.

Thank you. Your next question is coming from Matt Nemer of Thomas Weisel Partners. Please go ahead.

Good afternoon, guys. Just a quick question on the pet and equine department; I'm wondering if you've seen any impact from the pet recall. If you could comment on what you're seeing there; the pet food recall. And then also, any competitive impact from one of your larger equine competitors exiting the business.

Matt, this is Jerry, and I'll take both of those. First comment on the pet food recall. Obviously, this has been significant across the industry. We've been fortunate in that we've had a very limited number of SKUs and overall pet food assortment that have been affected by the recall. We are right on top of it. We have communicated clearly to both our customers as well as our stores; obviously pulled the products off of the shelf. Most of the SKUs affected, Matt, by the recall, were what we call "wet" pet food -- canned pet food, if you will, which is a much smaller piece of the business than is the dry pet food that Tractor Supply focuses on and really makes up the bulk of our sales.

We've actually had a lot of our customers coming to us because of the trust that they have in Tractor Supply and our brand positioning there, knowing that we would do the right thing and that the products that they found on our shelves were in fact safe for consumption by their pets. So, if anything, this may have a halo effect, positively for us in the pet food business.

The second question you had was, I know, PetSmart has announced that they are getting out of the State Line tack business. We've studied that business extensively; we overlap with them, I believe, in 87 of our existing locations today where they have PetSmart stores that have the State Line tack assortment in those particular facilities. Right now, they're going through clearance in their stores on a lot of the equine products, so we're monitoring that very closely. We expect, longer term, that we will see some benefit as a result of them exiting this piece of the business.

Clearly, we are, we believe, ideally positioned to pick up a piece of the business that they are walking away from. However, we really don't anticipate seeing that benefit until 2008 and beyond on that, Matt.

Okay. How is the overlap in terms of the product, either the sub-categories or the high-end/low-end, the type of product that you're selling?

Probably 40% of their assortment today is in English, riding products, and categories or merchandise, which is a very small percentage of what Tractor Supply plays in, so we will see very little benefit as a result of them exiting the English piece of the business. Western, and just core equine products, we have a lot of overlap with brands and categories, as well as positioning from a good/better/best standpoint, so that is roughly where we will see the majority, we anticipate, we hope, longer term, of a pick-up for Tractor Supply.

Okay, that's very helpful. And then, just turning to the TV ad campaign; has that actually launched as of yet? Can you give us an update on where the new campaign stands?

We ran three weeks of TV during -- featuring riding lawnmowers during the coldest weeks of April, so there's not much I can tell you.

Plus the fact that the weather forecasting wasn't -- didn't match what we -- our timing on advertising.

So we have several weeks of campaign ahead of us, and I think by end of Q2, we'll be able to assess the impact of the new creative and higher product feature. We'll be spending more time on products that have a higher call to action.

Great. And then lastly, this is more of a housekeeping question, but looking at relocated stores in the next couple of quarters, or actually looking at the year-ago comparison, were there any lease exit costs in the second and third quarter? I think you relocated maybe six in -- four or five stores.

I would have to get back to you. We did eighteen last year; five in the first quarter. There definitely was some additional lease exit cost. I don't believe that it was in the magnitude of what was expensed in the first quarter, but I would have to get back to you with what the number was.

Okay. That's all I got. Thank you.

Thanks, Matt.

Thank you. (operator instructions) Your next question is coming from David McGee from SunTrust Robinson Humphrey. Please go ahead. Mr. McGee, your line is live.

Good afternoon, gentlemen.

Hi, David.

This is actually Cory McCallum for David this afternoon.

Okay. How are you, Cory?

I'm doing well. Congratulations on a good quarter.

Thank you.

Couple of quick questions here. Have you seen any impact in -- from getting your mowers to the stores earlier this year, especially in the southern portion of your footprint?

If we were to look back at March, when spring-like weather came, I was delighted that we were able to take care of the initial burst of business, and then be in position to care of the second weekend without scrambling to reload. I believe that was a very good move on our part.

Okay. And just, curious here. You said you had seen early success in the high-end, maybe, the industrial zero-turn rider; and I've noticed the Bad Boy brand is in some stores. Do you happen to know the number of stores that that SKU is going to be in, or that product line?

Cory, this is Jerry. That particular line of product is in principally our southern tier stores today, and are in between 225 and 250 stores, with the Bad Boy product line today.

And if you were to see some good success in that product line, would that be something that you could expand this year to take advantage of that, or would that be something you would like to look at in the future?

Tough to do that, Cory, because of the acquisition time required for components and raw materials to significantly expand beyond the commitments we've made for this year. We're watching it closely, and we'll make decisions principally for 2008 on that product line.

And then, one more question, if I may. On the -- you mentioned with some of the gross margin pressure was coming from some of your feed expenses and the components that go into that increasing. Is that something that you anticipate being able to pass along to the consumer in the future?

Again, just responding to your question on that, Cory; the answer is we're doing everything that we can to pass along the higher grain prices, most of which are being driven by the significantly higher corn prices that have been widely written about this year. We cop-shop feed product on a weekly basis across the chain, and we are very dynamic in how and when we move. Some markets, we're able to leave the marketplace up because of our market share; others, we have to be very sensitive to where local competition is.

We feel good about where we are at the present time, but again, this is a very dynamic market that we're in today.

Thank you.

Your next question is coming from John Lawrence of Morgan Keegan. Please go ahead.

Good afternoon, guys.

Hi, John.

Jim, first of all, would you give us a little more update on -- I know you made some comments weather-wise about Dell's -- after some of the learnings out there, would you just comment on some of the things that you brought back from Dell's and where is that sort of transition taking place?

Sure. We are delighted with Dell's, John. We have converted all the stores to the new format now that have the space to do so, so they're all representing clothing, pack, expanded equine, and expanded seasonal. We remain pleased with those results. The learning that's coming back from Dell's is, I guess, principally in delivery. We are testing that in two districts, basically; one in Florida, one in Texas; we are testing the delivery of bulk purchases. We expect to have a lot of learning there in the next few months. We also recognize that Dell's is very good with hay and straw, and we're beginning to test that in stores that have the greatest potential for hay sales. They also are in the bulk propane business, and we are studying bulk propane for the possible addition to some of our stores; interesting business, not easy to do; something that we think may be a unique opportunity for Tractor Supply.

And remind us, the footprint of Dell's is how far now?

As far as --

As far as the geographic?

Geographic, we are entering this late spring/early summer, we'll open our first new store in eastern Washington, state of Washington. Other than that, everything they have is from just north of Portland up to north of Seattle.

John Lawrence. Right. And last question: Jerry, as far as the 50 test stores, for what we saw in February, those would start in early fall?

Yeah, late third quarter for us on that, John. We'll be doing the reset work for that in September and hope to be teed up by 1st of October.

And what are the changes that you guys -- on the feedback? Were they substantial or just minor as far as the feedback from your field?

First of all, we got a lot of feedback from the field. Lots of people had lots of opinions, and we've digested it all, at this point.

The changes that we're making, I guess I would characterize them as relatively minor. We drew lines through a couple of categories that just didn't look like they were going to be a good fit for us, and John, we went through -- and we needed to do this -- we did a lot of what I call SKU rationalization. We were over-assorted in some categories. We pulled that down substantially before we banged the gavel on those tests.

Okay. Thanks, guys.

Thank you. Your next question is coming from Jack Murphy of William Blair. Please go ahead.

Good afternoon.

Hi, Jack.

Wonder if you just remind us of what kind of macro picture you're assuming for the existing guidance, particularly around the housing market. I know you've mentioned the impact that gas prices sometimes have on your consumer; and then, if you could just talk about that, as it impacts both traffic and ticket. Thanks.

Yeah, Jack, if we look at the macro indicators; housing, applied housing wealth, consumer savings rates, interest expenses, the impact of fuel -- certainly in my mind, the overall retail climate has not strengthened in the last few months. We saw Target's announcement earlier this week, and while we're not backing off from any of our projections for the year, we are taking a very studied approach. We're watching trends; we're watching expenses; and I think we will have to earn every dollar we get this year, both in sales and in leverage. I don't think it's going to be an easy year for anyone in retail, unless you happen to be selling luxury goods.

Okay. Thanks.

Thank you. There are no further questions. Please continue with any closing comments.

Bill, thank you very much. Again, we're very proud of our team. They've proven the ability to generate terrific sales; great calms, great leverage, while concurrently doing, I think, the best job ever, for the company, for the spring selling season. So we are solidly in position. The inventory that we have on hand is the right stuff; it's in the right places, and we are ready; and when the weather comes, we're going to sell some goods. And I look forward to speaking to you with great results in about 90 days. Thank you, and glad you're on the trip with us.

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