Tractor Supply Co (TSCO) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss second quarter results. (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 our host for today's conference, Ms. Cara O'Brien 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 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 those 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. 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.

Now, I'm very pleased to introduce Mr. Jim Write, Chairman, President and CEO. Jim, please go ahead.

Thank you, Cara. Good afternoon, everyone. I am joined today by Tony Crudele, our Chief Financial Officer; Stan Ruta, EVP of Store Operations; and Greg Sandfort, EVP of Merchandising.

As most of you know, the second quarter is very important to our business as it is our quarter with the highest sales and profitability. Our team overcame headwinds and I'm pleased with our performance during the second quarter. I'm also pleased with the diligence and superior execution of everyone on our team.

We made solid progress during the quarter on our initiatives to both grow and to improve our business. At the same time, we gained traction on our expense management program, which was designed to protect our business in the near term. I will discuss these initiatives in greater detail later in the call. But first, let me provide a few highlights from the second quarter.

We grew total sales by 13.6%, earnings per share by 14.8%, while we maintained our commitment to long-term value creation.

Second, we continued to improve our inventory management, and ended the quarter with a 1.3% decrease in overall inventory and a 12.2% reduction in the average inventory per store compared to Q2 of last year. Our ability to control inventory levels, while improving our in-stock position, is attributed to the execution of our merchants, our supply chain and our store operators. This marks the third consecutive quarter of improved inventory efficiency.

Finally, we continued to focus on growing the categories most relevant to the every-day needs of our customers. Our core consumable categories, including animal and pet-related products, remain robust and were a key driver of sales during the quarter and in the first half. Through these categories we continue to experience solid traffic and repeat business in our stores.

We're very pleased that our transactions are up despite higher gas prices, which are forcing consumers to consolidate shopping trips. We continue to closely observe traffic, measure customer sentiment and trends in our stores. All that said, we've never been more confident in our model, in our growth potential, and our capacity to create value over the long term.

As we head into the second half of the year, I want to thank our team members for their continued dedication to carrying out our plans each and every day. During this challenging time we asked the team to step up significantly. They've performed very well and are continuing to execute across all customer service, sales and expense management goals. I commend them for their hard work and appreciate their loyalty.

In conclusion, early in the year we recognized the shifting consumer environment and reacted quickly by developing additional programs to mitigate potential headwinds. We executed quite well in the first half, and I'll go into more detail about our plans for the second half later in the call.

But first, I'd like to turn the call over to Tony to review our financial performance during the quarter and provide a financial outlook for the remainder of the year. Tony?

Great. Thanks, Jim. Good afternoon, everyone.

During the quarter we are very pleased with our top-line results. Our sales performance provided us the ability to effectively manage gross margins and control inventory levels, despite increases in commodity prices.

For the second quarter ended June 28th, 2008, sales increased 13.6% to $898.3 million compared to last year's second quarter, and net income was $47 million, or $1.24 per diluted share, compared to $43.8 million, or $1.08 per diluted share, in the same period last year.

Total comp sales for the period increased 3.4%, and non-comp sales were approximately $78.3 million, or 8.7% of sales. We accomplished this despite another difficult year for outdoor power equipment. We are pleased that we have been able to shape our assortment to add less of a dependency on the outdoor power equipment category as that industry continues to experience weakness.

Please note that we had an additional selling day in the second quarter due to the Easter shift in the first quarter this year. As a result, the additional day positively impacted Q2 comps by approximately 110 basis points. Comp sales in our Del's stores were below the Company average.

Consistent with positive trends from earlier in the year, our core consumable business continued to perform well in the second quarter. Although consumers remain conservative with their spending habits on discretionary and big-ticket items, we did see signs that the consumer would step up for functional or differentiated categories, or when we offered a compelling value proposition. These categories that performed well included recreational vehicles, chainsaws, safes and tillers.

We also -- also very pleased with the improvement in comp transactions which increased 170 basis points. We believe that this increase in transactions supports that our customer has functional necessities and views Tractor Supply as a destination store. The average ticket also was up 1.6%, primarily as a result of our ability to pass through commodity cost increases.

Sales trends throughout the quarter were consistent with our expectations. We had strong comp sales in April as we cycled a very cold April in the prior year. May was the weakest comparison on a year-over-year basis, as we cycled the carryover of sales from the cold April into May last year.

From a weather perspective, June was the most normalized month, and we had a favorable comp consistent with the total comps for the quarter.

With respect to regional sales trends, comp sales were positive in all regions for Tractor Supply stores. The cold weather states performed the best and benefited from a more moderate April.

The warm weather states were weaker than chain average comps for two different reasons. During the quarter Texas cycled very strong comp performance from the prior year, which was driven by a very wet spring last year. In the South, the overall challenging economy continued to particularly affect Florida and, as a result, we experienced softer sales in this market.

Gross margin declined 55 basis points compared to the prior year quarter. This decline resulted principally from an increase in freight expense and an increase in the LIFO reserve.

Although overall gross margin decreased, product margins improved 40 basis points. This resulted principally from better buying and retail price increases. There was a limited impact on margin from the mix of merchandise sold. This was because the favorable impact from fewer Rider sales was offset by lower than chain average margin of the increased consumable mix.

The improved product margin was offset by 33 basis points of freight expense resulting from increased fuel costs and a mix of goods that carried higher than chain average freight costs. Freight expense was favorably impacted by reduced purchases as a result of our inventory management program and less import purchases.

LIFO represented a 42 basis point increase over prior year as grain, oil and steel costs have escalated this year. In the prior year, the LIFO charge was essentially flat as the flow of merchandise, inventory position and our projection of price increase at the end of the quarter did not necessitate increasing the reserve.

Import purchases on a year-to-date basis decreased 115 basis points from the prior year. The lack of increase in import volume reflects our success in reducing inventory and improving turns. In addition, the continued strength of our core consumable business, which is domestically sourced, also contributed to this decline. We expect to have a slight decrease in our importing efforts this year as we continue to manage inventory for certain key import categories such as hand tools and power tools.

For the quarter SG&A, including depreciation, as a percent of sales was 22.5%, a decrease of approximately 15 basis points from the same quarter in the prior year. All key categories of SG&A, other than occupancy, showed leverage as a percent of sales. Additionally, SG&A per store was down for the quarter.

We did benefit from a slight shift of marketing expense into the third quarter related to the timing of a direct mail piece. This had a favorable impact of approximately a penny per share in the second quarter. This improvement in SG&A leverage was offset by expected deleveraging from occupancy expense, primarily as a result of our store opening program. That said, we continue to make progress on reducing this headwind for the long term.

Our cost containment initiative has been very effective and we continue to focus on reducing non-essential costs while managing through the tough economic environment. Marketing was a prime example as we reduced the comparable spend this year in the second quarter. We ran the same number of circulars as in the prior year, but managed the costs better and limited some of the more discretionary spending. Exclusive of the direct marketing shift I mentioned earlier, we reduced our anticipated spend by a penny a share for the second quarter.

In the second quarter we opened 23 stores compared to 20 store openings and 1 store reduction in the prior year as we sold our one Del's store in Canada. The opening expenses were approximately $2.6 million compared to $2.3 million in the prior quarter.

Turning now to a few key balance sheet items. Inventory management has been a key focus, and this is the third consecutive quarter we are realizing the benefits of our efforts. We are pleased with the position of our spring seasonal inventory and have managed to aggressively (inaudible) merchandise while maintaining margins. We believe that Greg and Stan's teams can continue to drive improvement in this area through the remainder of the year.

On a per-store basis at quarter end, inventory levels decreased approximately 12.2% compared to the prior year. Our calculation is based on average cost of inventory and excludes in-transit inventory and inventory held in unopened stores.

Inventory turns improved 11 basis points to 2.77 turns on an annualized year-to-date basis. This was principally as a result of the better inventory management. We believe our improved inventory management will continue through the remainder of the year, and we are well positioned to exceed our annual turns improvement target of 15 basis points.

We also improved our accounts payable financing of inventory from approximately 49.1% up to 55.4%, resulting principally from better accounts payable management and vendor dating. The merchant team continues to make progress on this initiative that we began last year. We are optimistic that it will continue to drive leverage over the next two quarters as we cycle the program.

Capital expenditures for the quarter were approximately $27 million, the majority of which relates to our new store opening program. Year-to-date CapEx totaled $53.5 million, which includes $8.5 million for the acquisition of two store properties in the first quarter. No properties were acquired in the second quarter. In the first half of last year, CapEx totaled $44.7 million.

During the second quarter we purchased approximately 738,000 shares for $25 million for a cumulative total of $177.9 million since the inception of our stock repurchase program in February, 2007. The share repurchase program had a favorable impact on EPS for the quarter of approximately $0.01. Subject to prevailing market conditions, we expect to continue to make additional purchases as part of our long-term objective of reducing our cost of capital.

In addition to our generation of free cash flow from operations, our inventory and accounts payable financing initiatives have been instrumental in providing us the liquidity to fund $178 million of stock repurchases over the last year and a half. Most importantly, we have been able to fund store growth and the related inventory without adding any debt.

In comparing this year's cash flow to the first half of last year, we generated over $60 million of working capital improvement from our inventory and accounts payable financing initiatives. We are extremely proud of this achievement and we continue to allocate our capital efficiently and make strategic investments in our business.

Turning now to our outlook for the remainder of 2008. We remain committed to improving the business while growing the chain throughout the year. As a part of our cost management program we have prudently managed our capital expenditures. We still anticipate CapEx spending to be between $90 million to $95 million, excluding any purchases of store properties, which is consistent with the guidance we provided on the first quarter conference call.

As part of our long-term commitment to grow the business, we are tracking -- we're on track with our store growth target and anticipate opening approximately 88 to 93 stores for the full year. In the balance of this year, the remaining store openings will be Tractor Supply stores as we've already reached our targeted Del's store openings for the year.

With respect to our specific financial expectations for 2008, as noted in today's press release we continue to expect same-store sales for the year to be approximately flat to 2%. Given the expected timing of new store openings, we now expect there will be slightly fewer selling weeks from the new store openings in 2008. Accordingly, we've narrowed the top end of our 2008 sales expectations by $10 million to a range of $2.98 billion to $3.03 billion.

With respect to earnings expectations, at the end of Q1 we indicated we were trending at, or slightly below, the low end of our previously provided range of $2.54 to $2.62 for the full-year 2008. At that time we stated that we could provide a more definitive outlook after we had concluded the first half of the year, since the second quarter is typically our largest quarter for sales and profitability.

With that said, we now expect to achieve annual net earnings between $2.49 and $2.55 per diluted share. Importantly, this range is consistent with our expectations when we reported Q1.

To provide some further detail in fine-tuning our outlook for the back half of the year, we considered several factors. First, to be sure, we are managing through an uncertain retail environment where there can be variability. We have prepared our outlook based on the current consumer environment and not withstanding any potential change in their spending patterns. However, we believe we have strong plans in place that are allowing us to navigate through the second half.

Second, the consumer continues to shop our stores for their functional, non-discretionary items. We continue to see positive trends in consumables, which translates into footsteps. We believe that this was consistent throughout the second quarter, adjusting for the variability, year-over-year weather patterns, and this has continued into July.

Third, based on our forecasted weather trends, we believe there will be less negative impact from weather variability in the second half. As you know, in the first half of the year, specifically February and March, weather comparisons provided a significant headwind. Looking at the second half of the year, there is less variation. We expect moisture levels to be slightly improved over last year as we move through the summer months, and we expect that the cooler weather will come a little earlier in the fall season.

Fourth, there is less dependency on big-ticket items in the second half of the year than in the first half. Although we have a variety of large-ticket items throughout all the seasons, as we move into the fall season we believe that many of the heating-related, larger-ticket items will face fewer headwinds in the event that gas prices remain high and people look for alternative, low-cost heating sources.

Having said all this, we do have a cautious outlook when it comes to consumer sentiment when we head into the holiday season, and we will continue to monitor this very closely throughout the remainder of the year.

Additionally, we are planning for slightly lower gross margins for the second half versus the prior year's period given the expected fuel costs, the current merchandise mix, and our ongoing inventory management initiatives.

At the same time, we have been very successful in aggressively managing operating expenses, and we anticipate this will continue to positively impact operating margins and the bottom line.

As you are hearing throughout today's call, we are very pleased that we have the right strategies in place. Our team has proven they are nimble and flexible enough to execute well in this environment. We believe this will be a key differentiator for us with customers, and we believe this will translate well into positive operating results in 2008 and beyond.

Now, I'd like to turn the call back to Jim and we will discuss more details on plans for the remainder of this year.

Great. Thanks, Tony.

As we enter the back half of the year, we'll continue to be very deliberate in our actions and committed to crisp execution. We're mindful of the current economic environments and are very carefully observing fuel prices.

However, we believe that our efforts to lower cost will continue to allow us to operate as a much leaner and more powerful organization. We also expect that our initiatives to grow and to improve our business, and to focus on our people, will continue to gain traction.

We expect to continue -- and now on to expense management.

As mentioned in our last call, we've been reducing both incremental and discretionary costs in our business. We're managing our costs very tightly and have placed additional rigor around eliminating waste and matching hours to sales on a by-store, by-week basis.

Further, we've reduced expenses in marketing, our store support center, transportation and distribution technology, as well as business travel. If necessary, we are prepared to quickly implement additional cost-cutting actions should the consumer retrench more significantly.

Second, Tractor Supply is a growth company. Despite the overall consumer environment, there are several opportunities for us to grow sales and profits by maintaining our store expansion program, refining our merchandise selection, improving margin by price optimization and strategic sourcing, and building out our e-commerce platform.

In addition, we'll continue to find ways to increase sales within our existing stores by refining our merchandise assortment and presentation.

We expect our core consumable products will continue to produce solid and consistent results, driven by our ability to serve a functional and non-discretionary need.

As we enter another get-ready quarter, we are preparing for the next seasonal shift, and we believe that we are in a good position to capitalize on our home heating related merchandise.

We also expect to continue growing in the second half by building out our e-commerce offering. We're seeing success with our online strategy. We currently have 11,000 SKUs for sale online. And we expect sales to continue ramping up in the back half of this year so we can begin leveraging e-commerce in 2009.

Third, as we look to improve areas of our business, we'll pay particular attention to certain merchandising initiatives such as price optimization, price elasticity, and inventory management in the second half.

Although we had to modify our approach to price optimization due to inflationary pressures occurring concurrently with an increase in consumer price sensitivity, we remain confident in our ability to achieve a profitable balance of growth in margin and in market share.

In addition, we've been pleased with the improvements in our inventory management process. As a result of a more rigorous focus, we've decreased our average inventory per store for three consecutive quarters. We anticipate that we'll continue to effectively execute our inventory management goals in the second half.

Finally, turning to our people. In recent years we've placed an emphasis on reducing store manager turnover. Today, I'm delighted that our year-to-date store manager turnover rate is 2% less than last year's record low. Our store managers and their teams have a very direct impact on customer loyalty and, in turn, the sales and profitability of the chain.

With that said, it's important to remember why Tractor Supply Company is unique and well positioned to succeed in the near and the long term. We serve a unique niche. We are dedicated to, and understand the dynamics of our niche and, as a result, we are able to successfully operate and grow in this market.

Additionally, we have limited and fragmented competition. As we often like to say, you can buy everything we carry someplace else, but you can't find someplace else that sells everything we carry. We are one of a kind.

As a result, we are able to meet the functional and non-discretionary needs of those who are committed to living the rural lifestyle. As a category killer, we bring efficiencies to our market, which drives customer loyalty. I'm very pleased to say that, during these challenging times, their reliance on Tractor Supply remains strong. We have a solid foundation in place, we have no debt, and we can be nimble in this environment.

Lastly, we have an experienced and focused management team that has managed successfully through many challenging cycles.

In short, our merchandise assortment is on target and getting better each quarter. Our customers are resilient, our team is committed, our financial position is strong, and our Company is growing.

This concludes our prepared remarks. Operator, we would like to open the call for questions at this time.

(OPERATOR INSTRUCTIONS.) And our first question will come from Mitch Kaiser.

Thanks, guys, and congratulations on a very solid quarter. One of the first questions I wanted to talk about -- I know it's difficult to quantify, but is it possible to look at what impact the stimulus checks may have had on your business?

Mitch, it's very difficult for us to quantify for a couple of reasons. One, they came out over an extended period of time. And frankly, when we look at kind of a sales rate that we experienced, it's very, very difficult for us to correlate that. We did nothing special. Some retailers cashed the checks free. We did not take that initiative.

Okay. And you mentioned a couple times in terms of merchandise for the back half of the year that home heating might be a nice opportunity as you head into the back half of the year. Certainly, with what people are talking about with natural gas prices and heating oil costs, I would assume that that would be a good product for you. Could you talk maybe a little about what you're going to do on the merchandising side there? And assuming there's strong demand, does it feel like the product's going to be available?

Mitch, hi. This is Greg Sandfort. Now, first of all, we identified this trend early on in the year. And we actually did some early testing in a number of stores in the northern part of where we serve our customer. The initial response was so strong that we quickly went back to the manufacturing base and started laying the foundation for growing this business.

All I could tell you is that we're well prepared, we're well positioned. We work closely with the manufacturers and we believe that this is going to be a significant opportunity for us in the third quarter.

What we're not sure about is whether or not the business will come early and will stay with us through the remainder of late third and fourth, or it will just come early and come fast and furious. But, we're well prepared and feel very solid about the business as we go forward.

Okay. So, assuming that you do get strong demand in the third quarter, does it feel like you could back-fill in the fourth quarter if that demand followed through then?

We have plans to do so, yes.

Okay. Thanks, guys, and good luck.

Thank you.

Our next question will come from Jack Murphy.

--On the quarter. Just a couple of questions as it relates to guidance. Could you talk about your view into the trends on freight on the next couple of quarters? I know you kind of ticked up from a 25 basis point drag to a 33 basis point drag. Just what's sort of assumed in the guidance for that?

And then, secondly, when you look at the ramp on merchandising initiatives that you kicked off, I guess late last year into early this year, what type of impact -- how do you view the sort of ramp on those merchandising initiatives for the back half of the year?

First, on the freight, we assumed $4.70 a gallon diesel for the remainder of the year. Our initial planning was based on the Department of Transportation $3.30 for the year. So, when we talk about our EPS range for the year that's already calculated in. Any relief would be certainly appreciated.

With regard to merchandise, Greg, you want to take that?

Yes. Jack, we put together a number of initiatives for '08. And I think we talked briefly the last couple of calls about certain aspects of the business. Particularly, what we were working on was new product flow, resets in our store, the execution on those resets, trying to make the store -- and for Stan's team that's out there -- much easier to operate and run. We've got new processes in place for planograms, for line reviews, for what we call SDIs, our sales-driving initiatives.

So, we are well planned. We believe we can execute very easily to these plans. We work very closely with the store ops group. They are integrated into what we do now. So, I believe we're going to execute at a very high level.

As you look at the overall impact that you've seen so far, it's mostly been an offset to some other drags on the gross margin. Could you kind of characterize how far along you are in terms of realizing the benefits are in the very early innings, or is this sort of a multi-quarter benefit that you see accruing, not just the back half, but '09 and beyond?

I would say that we're in the early stages of seeing the benefit. One of the things I mentioned last call was that we were going to clear the stores of clutter, and we've been working diligently on that. If you'd been in our stores, you'd notice that we've been moving through a number of what I'll call discontinued or old-age products and reinvesting those monies into forward product, into our core basics and so on, which are going to benefit us on the margin side because those are much richer in margins.

So, that's just one aspect. There's numerous other things that we're doing, Jack. But as I said, we're in the early innings here.

Okay. Thanks.

And our next question will come from David Cumberland.

Thanks. Hi, everyone.

Hi, David.

Hi. Have you seen a change in the extent that you're able to pass through cost increases related to commodities?

Yes, we have. For the first part of the second quarter, we were able to pass commodity increases through and maintain the margin rate. Obviously, we watch unit velocity and market share very, very closely and we've began to see some measure of units decline or some resistance. And have changed our strategy to the point now where, in most categories, in most commodities, our strategy now is to maintain a dollar or penny per unit profit. And thus far -- and I guess we've been moving against that now for probably seven or eight weeks -- it looks like we're doing just fine.

And then, Jim, in some past calls you've talked about recently starting to measure customer service levels. What kind of update can you give us on that, particularly as you've been managing down expenses?

Sure. Stan, you want to take that?

Sure. David, we're seeing -- we're in the early stages of measuring customer loyalty in our stores. We're very pleased with our initial response from our customers. We're getting great information by store, by day, by hour of day, which is helping us correct staffing adjustments and react by store to our opportunities in customer service.

So again, we're very early in that program. We see great benefit in front of us. And our customers that we can see are reacting well, our customers recognizing it and rating us high.

As we compare the actual output, what we measure is top box score. Customers rate us one through five. We count fives only. And frankly, we've seen very, very little degradation as we got into season and with the relatively rigorous control on expenses. And it is so minor that we are unable to discern if this is a result of more tightly managing salary or just the fact that our stores get much busier in Q2 than they are in Q1. So, I guess overall, our customers continue to give us very good marks on overall customer satisfaction.

Thanks. And then my last question then on price optimization. Have you put all of your efforts there on hold, or is there some aspect of it that you're still moving forward with?

No, David, we have -- we're still moving forward on that front. With the inflationary pressures, we've been very cautious to look at how those two are going to blend. And basically, what we've done is a bit of a blend program right now, where we've estimated where we think the customer threshold will be on price and what were our plans initially. So, no, we're moving ahead, but it's being very judicious in how we go about it.

Thank you.

And our next question will come from Matt Nemer with Thomas Weisel Partners.

Good afternoon, everyone.

Hi, Matt.

So, my first question is on the slower store growth that's planned for the second half. Can you just comment on any impact that would have to expenses that's implied in your guidance? And then, can you give us maybe a preview of what we should be thinking about in 2009 for new stores?

Hey, Matt. Relative to the new stores, the guidance that we gave at the end of Q1, we had said that we had anticipated at the very beginning of the year about 95 to 100. We said that we would not be concerned if 6 to 8 stores were pushed back into 2009. So generally, the guidance that we're giving today is consistent with what -- with our discussions at the end of Q1.

There is some limited pre-opening capable impact. The rents will adjust accordingly for the unopened period and -- but again, relative to those 6 to 8 stores. Some of the other stores that are opening are opening a little bit later than we had originally planned so we're having less store selling weeks.

So, there will be some operating impact, but not significant, relative to the reduction that we've given in sales. And again, that sales estimate really was on the top end of the sales range. And we're just trying to, again, manage the expectation there relative to the comp guidance that we're providing as well.

Okay. And then I guess, thinking about '09, any early indication for where we should be relative to the '08 number?

Yes. We're thinking at this point in time -- and this is still subject to some change because we've not put the plans to bed -- but kind of giving the current conditions, we believe that we'll be probably close to flat in units next year. Historically, the last four or five years now we've been running roughly a 13% unit growth rate. We think that we will stay flat at the 90, 95 units next year is our current thinking.

Now, having said that, if we find that things come to us opportunistically, obviously we're likely to change that number.

Got it. And then secondly, could you just talk about your performance in the OPE category during the quarter, and then maybe from both a growth and market share standpoint?

Yes. The industry -- I'm sure you've seen the reports. It turned out that, once again, as the year went on the industry continued to issue increasingly soft results. The industry's at 11 to 12 down for the year.

We -- I'm not sure how we're going to come out for the year due to the fact that it is greener and we're still selling in some parts of the country. But I would say that market share for us in the higher price points we'll probably be fine. We may even gain some. Mid-price points we may not be performing as well as overall industry. But we really need to see the year-end.

Plus, it is not a good year. And as Tony mentioned in his remarks, we have worked now to decrease our dependability when it comes to profitability, not necessary comp sales, but when it comes to profitability we have decreased our dependency on particularly riding lawnmowers in Q2.

Got it. And then lastly, can you talk to your marketing plans in the second half of the year given the election and the Olympics? Do you plan to be aggressive or a little bit quieter than normal?

Our share of print and share of [lights] will be very, very similar to last year. We will -- the discretionary spend on market research and things along those lines we obviously have reduced as part of our project trim initiative. But for the most part, we'll have the same number of events, maybe some greater emphasis on direct mail. Perhaps a little less emphasis on television. But for the most part we'll be, I guess, as noisy as we were last year.

Great. Thanks. Nice performance in the quarter.

Thank you.

Our next question will come from John Lawrence with Morgan Keegan.

Yes. Good afternoon, guys.

Hi, John.

Yes, Jim, would you comment just a little bit -- I mean, congratulations on getting the cost cuts, but can you talk about those cost cuts first half compared to second half? Would it be basically the same type of mix of those items that you talked about, the store expenses and marketing?

The marketing was -- we had one non-recurring piece of marketing, right Tony?

Correct.

Yes. So -- why don't you--.

Yes. John, Tony. Relative to the expense management, we would anticipate to be able to impact SG&A to the same extent, other than that shift of the $1 million -- or that penny that we talked about on the direct mail piece. So, we'll see that shift into Q3. But other than that, we believe that we'll be able to manage the expenses to the same extent that we did in the first half.

Okay. Thanks. And secondly, just a product question, Greg. I mean, with I guess three summers now of tough outdoor power equipment sales, have you seen any correlation with more accessories, more belts, that type of thing as people keep their mowers longer?

John, it's ironic you mentioned that because we forecasted early on in the year -- actually, last fall -- that we felt that there could be a little bit of a downturn in unit purchase. Customers were going either high-end or very low-end. But we thought that there would be a ramp-up in the accessories and the replacement parts and, sure enough, that's what happened. It didn't come until later, but it has become fast and furious now since early part of May. And we've seen a nice improvement there in our business. So yes, absolutely, that's what we saw.

Great. Thanks.

Thank you.

And now our next question will come from Dan Wewer with Raymond James.

Tony, did you indicate that the extra day added a percentage point to same-store sales on the quarter?

That's correct, 110 basis points.

Do you have a sense to what the EPS benefit was from that extra day?

We'd have -- we could estimate, but I would prefer to get back to you on it. But it's generally -- you would just extrapolate through to the expense operating model.

One or two cents maybe?

Yes.

And remind me, is that just an extra day for the year, or did that come out of the first quarter?

That did come out of the first quarter.

Okay. Greg, on the reduction on the inventories, down 12% per store, what did you have a year ago that you don't have today?

Well, Tony mentioned it earlier in his remarks about the reduction in imports. And what we did, I guess a year ago, was we got a little too aggressive with some of the hard line categories and we pushed a lot of inventory in early on. And of course, once you're -- you sit in a situation where you're overstocked it takes you time to burn that off.

So, as we worked our way through that we've now right-sized our deliveries and right-sized the inventories. And that's why we're in much better shape. We really didn't overbuy. We bought more closer to need. And we're managing things on a month-to-month basis. We're really watching the spend and placing our dollars where we see the business that's opening and developing, and where it's not we pull back. We just have a much more disciplined approach now than we had in the past.

I recognize the pressures of inflation on LIFO but, at the same time, with a 12% reduction in inventory, you must be digging into some of the lower-cost LIFO layers. Tony, is there some point where that would actually give you a LIFO contribution to earnings?

Yes. Currently, we're not forecasting that. That could be a potential. But the way that we project the LIFO expense, we try to maintain a reasonable percentage throughout the entire year versus match it specifically to each quarter and the impact on that quarter. So, several variables are impacted. Clearly, what we forecast as increases in prices, what we forecast the inventory to be, all come into play as far as determining the LIFO impact.

But clearly, what I would state is that we feel at the current point in time that we have the proper reserve set up for LIFO. And clearly, dependent on the variables in the second half of the year, will determine at what point in time additional charges or decrements need to occur.

I was thinking just the opposite, given that you're eating into those lower LIFO layers. I think the last question I had, Greg, on the pet food category, can you talk about what kind of inflation rate or what kind of pricing you're seeing per bag compared to a year ago?

I can give you one example and I'll give you one on a bird feed category that we've seen. The cost jumped about $7 to $8 per bag over a period of time. We made pricing adjustments, but we didn't make the adjustment all at one time. We were very cognizant that that could be shock to the consumer. So, we kind of stepped it in on a month to every six week basis, and finally brought it up to the -- what we consider to be the new target retail.

By doing that we actually preserved our unit sales to a large degree. And I think the consumer understood that there's inflationary pressures out there. So, we didn't jolt them overnight. We really took a step-by-step approach and that's worked well for us.

Alright, great. Thanks.

And now our next question will come from Wayne Hood with BMO Capital Markets.

Hi. I just wanted to go back to Dan's question for a second. Tony, are you just saying that there'll be no LIFO provision in the third and fourth quarter? You'll measure it into the fourth quarter and then determine it?

And then also, for '09, given what you're seeing in inflation, you would think that you'd have some kind of credit or charge, not something that would be flat, even for '09, given what you're seeing with price increases.

No. What I'm saying for the second half is that it will be ratable through the second half. As we analyze the charge we will have a ratable charge to LIFO. Relative year-over-year, it may be less than the prior year. But again, there's too many variables to estimate and we need to determine it as we move through the second half.

As we move into next year, we'd have to make that assessment. But again, too early to judge. It'll be very dependent on year-end inventory balances.

And the thing that I think we're missing here is really -- is taking a large -- taking a hard look at the pools that we have set up. Intuitively, you may be sitting back looking at certain product categories that may be inflationary, but depending on how our baskets are set up and how they offset each other has a significant impact on the LIFO reserve.

Okay. And that leads to my next question, I guess. Out of the 3% or so comp that you had in that, looking at that basket, how much of it was driven by price increases versus unit?

Generally, we try to -- not to get into a detailed discussion about it, an inflation calculation, because of the subjectivity. When I look at inflation relative to the LIFO charge, there's clearly -- as much as you would like to say that there's a relationship there, there's really a disconnect, because there's different variables that are involved in determining the LIFO charge versus your inflation charge.

Having said that, clearly the inflation impact has ramped up. Generally, we have been impacted from 1% to 1.5%. I would say as we move through this year it's more than double that impact and represents somewhere between the 3% to 4% impact on retail prices.

And can we assume that kind of into '09 as you get -- as you're looking at the vendors coming through the price increases for '09, a similar kind of thing?

Well, if you're a vendor I'd say so. The real question for us is -- the wild card here is what happens to commodities. And it looks like, frankly, we may have peaked or have some decline there. Steel's a wild card. And obviously, we bought a lot of our steel product for Q2 on last year's base. As we are now beginning to renegotiate for next year, we're seeing obviously the impact of what has happened to steel pricing over the last -- really, since April 10th I guess is when it really spiked.

So, the answer to that is it really depends. We negotiate price and commodities on almost a week-to-week, month-to-month basis. We watch commodity prices. So do our vendors. And steel, we have to see what comes through as we begin negotiation for next year's -- next spring's steel-intensive categories.

Okay. And my last question, Jim, I guess is for you. You talked about 90 to 95 stores next year. But if you had 6 to 8 stores moving from '08 to '09, that would mean a step down, I guess, on the absolute numbers that you normally would have been opening. I mean, is it your view now that maybe this is going to be maybe little bit longer term and that you don't mind at least -- implicitly implied by this -- that you've run with a lower rate, or is there something more secular that you're thinking about there?

No. We're just -- we're being somewhat cautious. I mean, but I think 12% growth in today's retail market probably would not be in anyone's conservative scale. We feel it is. We feel it's the right path to set more opening new stores with the market as we understand it. If the market changes and dirt or building prices soften significantly in the market we serve, which has not happened (inaudible) yet, we may choose to be optimistic and accelerate beyond that 90 to 95 stores.

We've also done a model where we looked at the four to five-year impact of slowing growth (inaudible) to 12%, 10% and 8%. And frankly, unless you have an extremely short-term focus on earnings, there's a marginal benefit, a few pennies a share in year two or three, and then a significant drag on earnings year three, and four or five forward.

So, by bringing it down just a little bit to I guess around to a 12% growth, we feel we've reached the right balance of keeping some powder dry in case there's an opportunity, and of working our way through whatever consumer environment we may face in the next 12 to 36 months.

Alright. Thank you, Jim.

Our next question will come from Jay McCanless with FTN Midwest.

Good afternoon.

Afternoon.

A couple questions. First, wanted to start on the inventory. I guess the best way to term it is sort of the clutter reduction benefit. Is that coming to and end now that -- and I believe, Greg, you said earlier you were comfortable now with store inventory levels, excepting for the normal seasonal fluctuations?

Jay, that's only one piece of where we're at. And am I satisfied or do I think we're all the way through it? And I would -- and the answer would be no.

I think there's other pieces I should mention. One is the new planogram line-review process really helps us do a lot of SKU rationalization right up front as we go through and change assortments moving forward. So, that in itself is already in play. We're already starting to see the benefit of that.

I would also tell you that, as we look at each category of business right now, we're really trying to determine what is -- what's the absolute inventory level that we should operate at on a day-to-day basis. And it is we have seasonal fluctuations. As we peak seasons and drop off in seasons.

One of the challenges that Stan and I both have with our teams here is to understand what's the appetite? We like to do a lot more promoting from within our core assortments when we can. And I'll be honest with you. We probably have more opportunity there than we've taken advantage of. And so, there's still a lot of learning. And that continues to bring inventory down as we run some promotions and offer the consumer some great buys.

We seem to blitz out of merchandise. I hate to say that, but we're selling out, selling through faster. And if you talk to some of our store folks they would say we need to be buying deeper. But we just don't know right now with the new strategy, cleaning our stores up from within and really rationalizing the SKU base, we're all learning. We're learning how high is high.

Okay. And that follows on to my second question which is, with the amount of promotions that I got in my email this month, and then also seeing it at the store levels, if you look at 2Q sales this year versus 2Q last year, what percentage would you say were full-boat sales, i.e. non-discounted, and how did that change versus last year?

Probably the best way to answer that question is that at the merchandise margin line we've picked up 40 basis points while we cleared more old merchandise than in the prior year. So, when you add up the promotional activity that we have, and the relative pricing that we employed to hopefully drive some more transactions, bear in mind that our burn rate on old, heavy inventory was higher than last year. Frankly, I'm really pleased with the balance we had and delighted with the fact that we ended up with a 40 basis point merchandise margin improvement.

Okay. And then one more question, if I could. With recent layoffs, etc., that are making the headlines, what are the trends that you're seeing now for store level payrolls and store level hourly rates? Are you all able to pick up some of these people who are being laid off, etc.? Maybe pick up some more experienced folks at a cheaper rate? Or how should we be thinking about that going forward?

Jay, we haven't -- this is Stan, Jay. We haven't seen anything significant in the markets we serve in either hourly -- at the hourly level or at the manager-trainee level. It's been pretty much the same.

Okay, great. Thank you.

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

Okay. Well, thank you very much for being onboard with us. We again are extremely confident about the future. I'm personally very proud of the team and their ability to anticipate, execute very well, serve our customers during these times.

Remind everyone that we have a very unique position in the marketplace. We serve rural America. We serve those who live the lifestyle. And we truly are the category killer in providing the non-discretionary and basic needs to the growing number of people who live in that wonderful place we call Out Here.

Looking forward to talking to you all next quarter. Take care.

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