Tractor Supply Co (TSCO) 2008 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss third quarter results. (Operator Instructions) I would now like to introduce your host for today's conference, Ms. Cara O'Brien of FD. Please go ahead, Cara.

Thank you, Operator. Good afternoon everyone and thank you for joining us today. 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 this 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 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 pleased to introduce Jim Wright, Chairman, President and CEO. Jim, please go ahead.

Thank you, Cara. Good afternoon everyone. I'm here today with Tony Crudele our Chief Financial Officer, Stan Ruta EVP of Stores and Greg Sandfort EVP of Merchandising.

I am very pleased that through our team's hard work we delivered an exceptionally strong quarter. We've been able to navigate the headwinds as consumer sentiment continues to weaken throughout the year and we've leveraged our leadership position in rural markets by taking advantage of key sign opportunities to serve our customers. Let me briefly review a few of the highlights and Tony will go into more detail in his section.

First, our team has remained focused on consistent execution of our key initiatives to both grow and to improve our business. We continue to make progress on our store expansion, on our inventory management and merchandising programs.

Our aggressive expense control manager program has continued to gain traction as we position Tractor Supply Company to operate as a leaner organization. As a result of our solid efforts and the overall resiliency of our business model, we grew total sales by 16.6%, comps by 6.2% and earnings per share by 20.5%.

Second, during the quarter we experienced a significant contribution from core consumables and certain seasonal product categories. We continued to drive repeat traffic and average ticket increases through our compelling merchandise assortment.

Our core consumer categories such as animal and pet-related products continued to perform well. Emergency preparation and response to items such as generators and pumps were driven by demand created from the impact of Hurricane Ike.

As many of you know, in the third quarter we are also focused on preparing our stores for the important fall and winter and holiday seasons. We are pleased that other seasonal products such as our home heating units and wood pellet fuel experienced strong demand in the season, earlier in the season than usual. Our stores are well prepared to support this increase of initial demand.

Finally, we continue to improve working capital management by managing our inventory levels efficiently. And by achieving strong earnings growth we've been able to deliver significant cash flow from operations. Cash flow from operations increased nearly $88 million to $143.6 million for the nine months of 2008 versus the same first three quarters of 2007. This has provided us with ample liquidity to fund both our store growth and share repurchase programs while reducing our debt by $65 million.

As a result of our leadership's anticipation and response to headwinds, we've continued to grow our business at a time when many other retailers have not. However, it's important to note that we are not immune from macro-economic trends. While the soft housing market has had less impact on our customers and our Company the most, we recognize that this along with the increasingly challenging economy are determining factors to the overall weakening consumer sentiment.

Therefore, we believe it is imperative that we remain diligent and focused on what has made our Company successful. All of our actions this year have been consistent with our strategic vision for the Company. We believe that the solid financial and operational foundation we have in place will allow us to successfully navigate the current challenges while concurrently positioning the Company for the future.

I will discuss how we're preparing for the winter and holiday seasons along with our financial long-term growth drivers later in the call.

Now I'd like to turn the call over to Tony to review our financial performance during the quarter and to discuss our full year outlook.

Great. Thanks, Jim, and good afternoon everyone. During the quarter we were extremely pleased with both our top-line results and expense controls. Our sales performance provided us the ability to effectively manage gross margins and control inventory levels.

For the third quarter ended September 27, 2008, sales increased 6.6% (sic - see press release) to $733.9 million compared to last year's third quarter. And net income was $19.8 million or $0.53 per diluted share compared to $17.5 million or $0.44 per diluted share in the same period last year.

Total comp sales for the period increased 6.2% and non-comp sales were approximately $63.8 million or 8.7% of sales.

Going into greater detail about sales in the quarter, our core consumable business remained an outstanding performer in the third quarter. Our customers also responded extremely well to our pre-season heating assortment. We believe they wanted to ensure they secured wood heating stoves, furnaces and pellets as an alternative energy source.

It's important to note that based on our analysis of year-over-year heating sales trends, we believe a large portion of the advanced purchases we saw in Q3 normally would have occurred in Q4.

Total comp sales benefited from an increase in the emergency response sales as a result of the landfall hurricanes in Louisiana and Texas. Although we lost some selling days from store closures, we had an overall sales increase. We estimate the hurricanes benefited comp sales by approximately 100 to 150 basis points and EPS was approximately $0.03. We increased average comp transactions by approximately 90 basis points, an average ticket increase 5.2%. We believe this was primarily as a result of increased retail prices related to commodity cost increases.

Consumers continue to be cautious with their spending on discretionary and big ticket items except where there was a particular need or they perceived a compelling value. For example, categories that performed well included alternative heating stoves, chain saws and welders. Also of note is that the gap between our housing related categories and chain-wide comps has narrowed as we are cycling some of the steep declines of last year.

We had positive comp sales in each month of the quarter. While July was the strongest month, September was also positively impacted by the emergency response and pre-season heating sales.

Other than the hurricane activity, weather did not play a significant factor on a year-over-year comparable basis. Generally, moisture levels across the country improved year-over-year with fewer regions experiencing drought conditions this year.

With respect to the regional sales trends, comp sales were the strongest in the northern states and weakest in the southeast which was impacted by both dry conditions and slowness of the Florida economy.

Comp sales in our Del stores were below the Company average as they were cycling double digit comps in the prior year. Additionally, significantly higher hay prices had a negative impact on the consumer in the quarter.

Turning now to gross margin, we experienced a decline of approximately 97 basis points compared to the prior year quarter. This decline resulted principally from an increase in freight expense, an increase in the LIFO reserve and an aggressive markdown program.

First, let me review a few items that negatively impacted gross margins. Freight expense increased by 39 basis points as a result of increased fuel costs and to a lesser extent a mix of the goods they carried higher than chain average freight costs.

Our LIFO allowance increased by 24 basis points over the prior year driven by escalating grain, oil and steel costs this year. Although we have received some relief in the recent weeks from the various categories and inflation our year-end estimates continue to run much higher than the previous year.

Although we continue to improve our first store inventory levels, we continue to have charges for certain of our LIFO pools because of increasing moving average costs and our overall Company inventory increasing as you would expect from a growing company.

We had a strong emergency response merchandise sales that negatively impacted the margin mix as it generally carries a lower than chain average margin. Additionally, we continue to be aggressive with the markdowns for seasonal product and certain non-go-forward inventory to keep the inventory fresh. All of these were partially offset by product margins which improved principally from better buying, retail price increases and improved inventory turnover.

Import purchases as a percentage of purchases in the quarter increased 10 basis points from the prior year. Although we have not seen our import purchases increase significantly as a percent of purchases this year, as we have stringently managed our inventories, we have seen our sales from import goods increase almost 40 basis points and now represent about 6.6% of our sales.

For the quarter, SG&A including depreciation and amortization as a percent of sales was 26.2%, a decrease of approximately 70 basis points from the same quarter in the prior year. Sales productivity clearly benefited the leverage in the quarter. While we continue to experience higher occupancy costs from our store expansion program, it is beginning to moderate and the expense was offset by other SG&A categories that we did leverage.

In the third quarter we opened 20 stores compared to 21 store openings last year. The opening expenses were approximately $2.1 million compared to $2.4 million in the prior year quarter.

Our cost containment initiative continued to be very effective as we focused on reducing non-essential costs while managing through the tough economic environment. For example, at our summer store manager sales meeting we considerably reduced the number of attendees and had one less hotel night stay to save approximately $500,000 in the third quarter.

Turning to the balance sheet, first we continue to make great strides on the inventory management. This marks the fourth consecutive quarter that inventories on our first store basis have decreased. And, at quarter end, inventory levels per store were down approximately 8.5% compared to the prior year. Our calculation is based on average cost of inventory and excluded in-transit inventory and inventory held in unopened stores.

As we head into Q4, we are pleased with our inventory position and we anticipate that we can continue to drive down inventory per store, albeit at a lesser magnitude.

Inventory turns have improved nearly 20 basis points to 2.75 on an annualized year-to-date basis. This resulted principally from 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 target for improving annual turns by 15 basis points.

We also improved accounts payable financing of inventory from approximately 38.7% up to 48.4% resulting principally from better accounts payable management and vendor dating. The merchant team continues to make progress on this initiative that we commenced last year and has received momentum from the accelerated inventory turns.

Capital expenditures for the quarter were approximately $15.4 million. As anticipated the majority of the spend relates to our new store opening program. Year-to-date CapEx totals $68.8 million which includes $8.5 million for the acquisition of two store properties in the first quarter. No properties were acquired in the third quarter. For the first nine months of last year 2007, CapEx totaled $68.4 million.

During the third quarter we continued to make purchases under our stock repurchase program. Specifically, we bought approximately 465,000 shares for $14.7 million for a cumulative of $192.5 million since the inception of the program in February 2007. The share repurchase program had a favorable impact on the 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. However, generally when there is significant volatility in the equity markets it will temper our purchasing activity.

As Jim mentioned, we continue to make great strides in generating strong cash flow by managing our working capital position. We anticipate that our peak borrowings which generally occur in February and October timeframes will not exceed $100 million in the fourth quarter. This is a substantial decrease from the prior year and we are committed to continuing to manage our capital structure prudently.

As many of you are aware, we exercised our option to expand our revolving credit facility by $100 million earlier in the year. We are very comfortable with our liquidity position as this facility is $350 million and does not expire until 2012. And our bank group is solid, led by Banc of America.

Turning to our outlook for the full year. With respect to our financial expectations for the full year 2008, as noted in today's press release we have confirmed our previous expectations for sales, comp sales and earnings per share. We expect full year sales to range between $2.98 billion to $3.03 billion with full year comp sales ranging between flat and up 2%. And earnings per share to range between $2.49 and $2.55.

Let me discuss a few of the assumptions underlining these estimates. First, we have balanced our full year guidance based on a combination of current economic trends and our performance for the year-to-date. As we look forward to the fall holiday season, we have taken a very cautious perspective that we believe is appropriate.

The retail environment is clearly uncertain with consumer confidence at a low and current consumer environment and economic forecasts are for weak holiday spending. At the same time, our customers have responded favorably over the past quarter. As evidenced by our results, we have seen over the course of this year that our business has been quite resilient during a very difficult economic period.

The consumer continues to shop our stores for a wide variety of functional, non-discretionary items that are very relevant to their lifestyle. These trends have continued into October although it should be noted that we are facing relatively easy comp sales for October. Additionally, we have a very solid fall and holiday program and Jim will provide more color on that shortly.

From a weather perspective, as most of you are aware, harsh, cold winters generally will have a positive impact on sales when our insulated work wear, heating products, snow removal and emergency response equipment are essential.

In the fourth quarter we anticipate that the weather will have a neutral to negative impact as it will be difficult to cycle some of the colder November weather we experienced in 2007 based on the current weather forecast.

We are planning for lower gross margins for the fourth quarter versus the prior year given the expected fuel costs, our current merchandise mix and our ongoing inventory management initiatives. Our fourth quarter estimates for fuel costs are based on current price levels which are still slightly higher than the fourth quarter last year.

At the same time we anticipate we will continue to leverage SG&A slightly on a reasonable sales base because we have been very successful this year in aggressively managing our operating expenses.

We have continued to manage discretionary projects more tightly throughout the year and now expect CapEx spending to be closer to $90 million which is approximately $5 million below the guidance that we provided on the last quarter conference call.

Related to our store expansion program we expect to open 21 stores in the fourth quarter and finish 2008 with approximately 91 new stores. We will relocate one store in the fourth quarter.

A quick comment on 2009 expansion. As we previously stated on our second quarter conference call we had anticipated holding our store growth constant around 90 stores. Although we had a good portion of the new stores for 2009 already under lease, we will review our proposed sites very critically to ensure proper capital allocation as we maintain our disciplined capital spending program. And Jim will discuss this in greater detail momentarily.

In addition, we are cognizant that some of the real estate partners are very likely to have financing limitations in 2009 due to the tightening credit markets. In the event third party projects are eliminated or pushed to a later period we would not seek to replace those deals in our new store pipeline for the year. Therefore we anticipate as more probable that we'll open 70 to 80 stores in 2009.

In closing, as you may sense from our comments we are very pleased with our performance over the last two quarters in a very difficult retail environment. We have proven that we can execute our strategies and react when a situation dictates. We believe our ability to execute and serve the functional needs of the "out here" customer will be the key differentiators as we manage through the fourth quarter.

Now I'd like to turn the call back to Jim.

Thanks, Tony. Our performance throughout this year has been the result of our team's steadfast execution and our passion to serve those customers living the rural lifestyle combined with our ability to rapidly analyze and adopt our plans to an ever changing marketplace.

I'd like to spend a moment discussing some of the actions we're taking to navigate the current environment as we head into the important winter and holiday selling period.

Clearly, consumers have been heavily impacted by the economic turmoil of the last few months and all the headlines point to this being one of the most difficult seasons in many years.

Our store and store support center teams continue to fine tune our strategies for the season by analyzing the most recent consumer spending behaviors. We know it's essential for us to be responsive not only to yesterday's sales data but even more importantly to be proactive and anticipate where the consumer trends are going.

To that end we must remain nimble and forward-looking.

Entering the season we focused our merchandise assortment on items that are very relevant to our customers' basic lifestyle needs. Our gift assortment for this season is focused on key basics and compelling values. Much of our gift assortment this year is basic in-line merchandise allowing us to limit mark-down or carry-over risk. And we've also focused on offering a range of gift items as mid- and lower-price levels and we expect that this will be well received by our customers.

We maintain record in-stock levels at this point in time and continue to all through the fourth quarter while we will be able to continue reducing our overall inventory levels per store as part of our efforts to enhance working capital.

We'll complement our merchandising strategies with advertising that features core consumables and compelling gifts to drive customer traffics. And we believe we are well positioned to effectively capture share of wallet.

Now all that said, our stores are in great shape, we're continuing to monitor our customers' spend behaviors closely and we are positioned to execute and to serve the unique needs of those living "out here."

At the same time we are not easing up on the aggressive expense management program that we initiated earlier in the year. We are operating today as a lean and efficient organization. We are rapidly approaching the end of the year and continue to look ahead. We remain committed to being a growth company.

Let me discuss a few of the fundamental long-term drivers of our business that we expect will allow us to maximize our potential in 2009 and beyond.

First turn to store expansion. As Tony mentioned we are being somewhat cautious with our near-term growth plans given the uncertainty of 2009. We believe we are striking the right balance between positioning ourselves to seize potential opportunities and working through the current economic conditions. We anticipate opening around 91 stores this year and approximately 70 to 80 stores in 2009. However, we believe our long-term target of 13% store growth will continue to be appropriate in a more normalized environment.

Again, we strongly believe there is a significant long-term opportunity to expand our store base overall. We've identified 1,400 market opportunities and we believe that that number will prove conservative over time. We've developed the right systems and processes that allow us to operate as a much larger national chain while not losing our home town look and feel.

We've also invested in our people from the store support center to the store level to ensure that we meet and exceed our customers' expectations. Based on our performance in our new stores we'll continue to ramp up as planned -- which continue to ramp up as planned. We see significant evidence that our model is working.

Second, we'll also grow through our mix of relative products. Simply put, we are winning in both thriving and challenging economic cycles by staying true to who we are, a specialty retailer that understands the unique needs of those living the rural lifestyle.

We know that our everyday basic items combined with informed service will keep our customers returning to our stores even in the most difficult cycles. Our customers are committed to the rural lifestyle and that rural lifestyle continues to be aspirational. Those consumers have a lower cost of living, and as a result, they have stronger discretionary income and are less reliant on credit than the national average. They own smaller homes and they have smaller mortgages.

But most importantly, our consumers will always have basic needs that support their chosen lifestyle. They need to feed their pets, contain their large animals, use chain saws to cut the firewood that heats their home.

As we've stated in the past, we believe there are areas where we can expand our gross margin. For example, we continue to focus on strategic direct sourcing and increasing our private label sales. Over long-term we target 13% of our sales from strategic sourcing and 25% of our sales for private label products. We also continue to gain margin through price optimization initiatives.

Third, we also have opportunities to improve the productivity of our inventory and supply chain. We've improved our inventory levels this year to more disciplined purchasing and by executing a strategic markdown program.

We believe there are additional opportunities to increase the efficiencies in our supply chain by applying lean principles which we call Tractor Value System, or TVS.

We've also recently added 250,000 square feet to our distribution center in Waco, Texas. And our distribution network currently has adequate capacity to support our growth plans for the next three years.

Finally, our solid financial foundation provides us with the ability to maximize shareholder value while allowing us to maintain our firm commitment to investing in long-term growth initiatives. We are very pleased to say that we are in excellent standing with our lenders, we remain very well positioned financially for both near and long-term. We continue to effectively manage our capital structure as evidenced by the strength of our balance sheet which carries no maturing debt until 2012.

To that end, I'd like to take a moment to thank our entire team for their hard work. Our team members are critical in responding to our customers' needs and they are doing an outstanding job.

I'm very proud of our team's execution and I'd especially like to thank those associates in hurricane-affected areas who stepped up and did whatever it took.

This concludes our prepared remarks. Operator, we'd now like to open the call for questions.

Thank you. (Operator Instructions) David Cumberland, Robert W. Baird.

On the plan to open up 70 to 80 stores in '09 instead of 90, all else equal, would that have a slight benefit to '09 EPS versus opening 90 due to lower opening expenses?

David, this is Tony. Yes, it should just have a slight benefit. We'll obviously make that up in some of the pre-opening expenses. Generally, since we have targeted the majority of these stores, we may be front loaded this year and obviously the longer the store is open the better they will perform throughout the year so it should have a slight benefit.

And then in home heating, in the typical Q3 what percentage of the cold weather season's sales of home heating are in that typical Q3 and then maybe what increased percentage did you see in this just past Q3?

A little bit more difficult to answer and only because the analysis winds up being very subjective based on the trends that we saw. We tried to benchmark versus last year and tried to look at the seasonal pattern and, again, since there's a lot of different assumptions that we use to try to track it I'd rather not get into the specific details.

We did see a significant trend of sales in the third quarter that generally we have not seen in the past and that ramp was a lot quicker and earlier in the third quarter which generally drives us to believe that some of those sales were pulled forward into the September and late August timeframes. But other than that we can't give you too much more details.

Can you comment on whether you've seen a fall-off in that category in early Q4?

Generally our overall comment is that through October we have had generally the same trends as we've seen in September.

Great. And then my last question is historically on stores that have benefited from storm activity and sales of disaster relief items, what type of follow-on business or increase in traffic in the customer base might those stores have seen in later periods?

A bit of a step-function in comp trend and average volume per week and, David, it sticks with us. We believe that is principally due to the fact that customers previously not aware of or shopping Tractor Supply are exposed not only to the service but the assortment that the store holds. But it's certainly not a double digit kind of a number. It's a mid-single -- historically, it's been a mid-single kind of a step-function for the stores that are most significantly involved and then that goes -- the further out the less -- more involved they were. With hurricane emergency response the less significant that step-function becomes.

Great. Thank you.

John Lawrence, Morgan Keegan.

Jim, would you start off with talking just a little bit about private label for holiday, how much is inventory up for both Schmidt and Red Shed going into the holiday?

Greg, do you have a comment on that?

Yes, John, I'll answer that. Red Shed is actually slightly down. We had some earnings from last year and we have tuned up those assortments - I'll use that terminology - and trued up those assortments so it's slightly down. But Schmidt is up double digit. Schmidt continues to perform. It's a terrific alternative to the brands that sit above it. Continues to sell across the board in every category that we have in place so you'll see an increase there.

Thank you.

David Magee, SunTrust Robinson Humphrey.

This is Chris Rapalje. First question is just with your clearance activity in third quarter. Can you say whether that was generally on plan? You mentioned some seasonal items that drove that activity and I was just wondering if there were any particular categories that were maybe weaker than you expected?

Yes. For the most part it was a little accelerated from a historic level of clearance activities. There were several test initiatives, most significantly those involved in our "My Garage" initiative, also the Master Hand tool brand.

While we had some successful learning in "My Garage" and were able to take a few lines and some skews of merchandise chain-wide, on the overall we have -- that was, I guess, a failed concept and we are moving and have already moved some of that merchandise out of the store through markdown processes.

And, additionally, we also chose to launch the Master Hand brand of prior branded power tools and hand tools a year ago, a little over a year ago, actually coming up on two years and we have determined that we pretty much over shot the price value proposition that our customers would be attracted to so fundamentally we built too much into the product and we are now, again, moving through that product.

Beyond that, it was perhaps a normalized environment with a little more rigor placed around the slowest selling product and a little more rigor around the regionality of inventory.

And then secondly, can you describe what sort of advertising venues you are focused on for the holiday period?

Yes. We will see an equal number of print events as with last year with a more compelling assortment of both product and price point. We will shift some TV spending to our CRM effort and ultimately to direct mail as we continue to gain expertise with CRM and continue to increase the number of attributed sales.

Thanks very much.

You're welcome.

Jack Murphy, William Blair.

Couple of questions. First, if you look at the comps excluding the hurricanes in September, in particular, was the traffic and ticket roughly similar to the first couple of months and could you just talk about the trend line across the three months for consumables in particular?

Yes Jack -- Tony. Generally we saw throughout the quarter that it was fairly consistent from both the consumables and from a traffic standpoint. As I mentioned in my points, comps were a little bit stronger in July and September's strength was driven by the hurricanes but throughout the quarter we felt that the trend was relatively consistent for both traffic and consumables.

And I'd just like to follow-up on the real estate question from earlier in the comments you made. You talked about rationing down to 70 or 80 stores because of the financing with developers and the like but given the fact that real estate for retail is likely to continue to soften, it's already softening a lot, would you consider being opportunistic as you move throughout the year in that if sites are kind of coming up, these second sites are coming up, that you could -- you would consider getting to 13% for '09?

The overall kind of macro retail real estate trends are not impacting our markets or our size boxes nearly to the level that you might imagine. The further from the mall, the further from the urban suburban areas you get, the less of a trend that is. Frankly, Walmart's slowing growth is also -- ultimately will dry up a little bit of the pipeline for us as we fairly frequently will use the garden shop end of a Walmart when they move to a Supercenter. So thus far we have not seen a significant changing cost or increase in availability. Obviously, with our balance sheet and our pipeline of capable store manager trainees we have some dry powder should that situation change.

Great. Thank you.

Peter Benedict, Wachovia Securities.

Just a couple things. First of all in the fourth quarter it sounds like the range that's implied for comps is pretty wide but it sounds like from your comments that at least so far you are running kind of up in that low- to mid-single digit range but you're saying that October's the easiest comparison? I just wanted to clarify that.

October is easiest, November is the toughest and at this point in time it looks like the model is working, customers are responding. Obviously, when the news was the darkest they changed their behavior for two or three days but they have subsequently returned to the stores.

Good. On the inflation front, Tony, maybe you can talk a little bit about how much inflation is impacting the comp. You kind of mentioned it last quarter. Is it getting stronger? And when did you first start to see it? As we look to '09 when do we start to anniversary the lift, the comps, that came from price inflation?

It clearly has been staggered throughout the year and we've seen it ramp each quarter. We definitely, in the third quarter, are running above what we saw in the second quarter. And I think as we continue to have our moving average cost ramp up we will continue to see that retail move along with it.

We do expect to have some relief and we've seen some relief over the past few weeks on some of the commodity price increases. It will be some time before that translates through our moving average cost and/or the vendors translate that back into lower prices. I would anticipate starting to anniversary more at the end of the first quarter next year and that's when we started to see it more significantly impact the retail prices.

That's fair. And then as you think about SG&A next year, what type of comp you'd need to kind of leverage that number. I know the occupancy trends are supposed to get a lot better next year. Can you just talk about how we should be thinking about that?

Yes. Generally in the past we've said about 4.5 is the comp number we'd like to leverage. With our expense control this year and the sustainability of that program through next year I would anticipate that we are closer to 4, potentially 3.5. I don't want to get overly aggressive or ahead of ourselves but I would say somewhere in that range we can achieve leverage depending on the quarter. First quarter will always be very difficult for us to leverage since it's such a light sales quarter.

Right. And you said that you do expect to leverage SG&A in the fourth quarter. Is that right?

Yes, slightly.

Good. Thanks so much, guys. Good luck.

Dan Wewer, Raymond James & Associates.

Jim, did you not get the memo we're in a recession?

Yes. We were at the manager's meeting when I told them we would not participate. They believe me, Dan. And they are doing a terrific job. I think frankly, we obviously anticipated early, we reacted early, laid our plans. We're also fortunate in that I really believe and we have data to support this, that our customers have lived in their houses for a long time, they are truly smaller houses, their mortgages are smaller and more mature and our customers are credit or debt conservative. So we are well positioned.

A question I had, maybe it's for Greg. Question relating to the clearance activity and I was a bit surprised given you entered the third quarter with lean inventories, obviously sales were strong during the period, as well. Again, if you could just give us a little clarification as to why the clearance would have increased year-over-year?

Well, a couple of reasons. The main is what Jim referred to in the "My Garage" category. We made a decision that we had learned enough from the test. It was time to move on the problem merchandise. So that is -- that's the primary reason, that is the primary driver.

We also, to be honest, put in some new tracking and planning tools to ensure that we would sell clean through the third and fourth quarter on seasonal. And we've identified early on some things that weren't working to our satisfaction so we acted on those as well. So it's quite simple, actually. It's a combination of several things but it's just really us addressing an issue and also staying on top of the business.

Is that a -- it was the idea of taking the markdowns earlier. Is that something we would likely see for the next two or three quarters?

Well, that's part of our forward planning, yes. In the seasonal categories, absolutely. We want to sell cleaner. We believe that there's an opportunity for us to transition a little faster than we have been so -- but, again, it's part of what we've already projected and forecasted for.

And, Tony, you had alluded to diesel price still higher year-over-year as one of the reasons why margin could be lower in 4Q but is that still true given what's happened in the last seven to ten days or are you expecting a bit of a rebound with the idea that diesel costs will be higher?

We did our projection within the last week and we used the current diesel price at that point in time. So generally not forecasting up or down, just using the current trend.

And I just had two other real quick questions. One, what is the rate of inflation in pet food and then the other also related to merchandising apparel and most other soft line retailers are struggling. I know this is a category you've added space in the last couple of years. How would you evaluate your performance in soft lines?

We won't speak specifically to inflation in pet food. We do believe it's going to moderate as inputs come down and with regard to the apparel side of the business we never claim that we sold anything that was fashionable and I'm really glad we are not. We sell basic, functional work wear and, frankly, have quarter-by-quarter are getting better and better at planning and allocation by size, by climatic zone and I think we're really extremely well positioned right now.

Great. Thanks and good luck.

Sean [Tisoro], BlackRock, Inc.

Just a couple quick questions, and I apologize if I missed it. Did you quantify the basis point drag from the clearance activity in the quarter?

No. We did not. When we look at that activity a lot of it is either blended into the initial margin, some of it is identified up front as longer term potential markdowns so we do not quantify it.

That's helpful. And then in terms of inventory per store, where can we go over time? Over a couple year period, is it possible that this gets into the low 8s or maybe even 800 a store or is that probably something too much to ask for?

Yes. I think we'll continue for another probably three or four quarters to see some incremental gain. Over time we'll see turnover inventory efficiency continue to increase. But frankly we're excited about the fact that we have some successful test programs that we'll begin investing in to further drive top line.

So look at absolute dollars per store. I would think that we are near the bottom of that curve. Again, we could see some gain for awhile but then we'll begin to reinvest and drive the top line as our tests gain traction.

So we'll see probably more in the turn column going forward?

Correct.

Great. Thanks, guys.

Stephen Chick, FBR.

I guess first off maybe for Tony, the aggressive expense management program, can you -- is there a way you could maybe assign some type of number on how much that's saving SG&A dollars? And I know you gave the example of the lower attendance, I think you said at a meeting and one last day, is it really just a lot of little things like that or is there other things you can point to that's helping with expenses?

Generally it is a lot of little things. I would say the largest function is really at the store level in our payroll management. And we just had much tighter control in that area and obviously it's one of the larger expense line items outside of the occupancy and SG&A.

So a good portion of the expense control I would attribute to that. However, on sort of more the traditional G&A side of the SG&A, it's been really just a lot of little things.

So it's -- if you leveraged SG&A, I think you said 70 basis points on the quarter, is there a way to assign kind of a basis point benefit to these little things in total? Like what part of 70 basis points would you say came from this aggressive push on expenses?

It would be difficult to quantify but I would identify that relative to our original forecast at the beginning of the year it makes up a substantial portion of the benefit that we've derived as we've moved across the year.

And can you remind me, I apologize, did this -- the initiative, did that start at the beginning of the second quarter? Is that correct?

Basically in the middle to last month of the first quarter.

That's helpful. And then, second, if I could really just to clarify on your comp store sales guidance, does the flat to positive 2% for the year, what does that kind of imply what you're looking for for the fourth quarter? I'm coming up with that you -- that that mathematically implies something that would be, I think, like flat-ish as a reported number in the fourth quarter. I don't know if my math is correct or not.

Yes. Generally when we looked at it it is fairly a wide range. What we're implying is that we believe that if you looked at the entire year we're tracking relatively consistent with the initial guidance and would expect to continue to track at slightly lower than what we've seen over the past two quarters.

That's helpful. Thanks.

Mitch Kaiser, Piper Jaffray & Company.

It's Peter Keith calling in for Mitch. Congratulations on a very nice quarter in a tough environment, by the way.

Thank you.

Just two quick questions for you. I guess they are both for Tony. Just as it relates to the LIFO charge that we've seen pop up here in the last two quarters, so it's a 42 basis point drag in Q2 and then 24 in Q3. Did you quantify what your expectations might be as of today how it might impact Q4?

Yes. We did not identify that in the forecast. Obviously it's blended into my guidance when it comes to margin. And, again, the freight component and the LIFO are the two largest as far as the drag on the gross margin in the fourth quarter. Did not specify the percentage on either one of those components.

We do expect that LIFO will moderate slightly over what we've seen during the past two quarters.

That's helpful. And then also, I think, in past quarters you were using a full year share count of 38.5 million which was excluding no share repurchases. Is that still the full year share count that you're using in your guidance?

No. We update that share guidance as to what the actual was at the end of a particular quarter. Obviously at the end of this third quarter. We do not assume any share repurchases go forward in our estimates.

And so you're at 37.1 basically going forward through the rest of the year?

Correct.

Thanks a lot and good luck.

Thank you.

Joan Storms, Wedbush Morgan Securities, Inc.

This is a question probably for Greg. Now that I think you first started probably halfway through the fourth quarter of last year and what your take is on, you and Jim have your discussion on the holiday inventory assortment and how you've planned that as far as seasonal goods since that's likely to be weak and what are maybe some inputs that you had on the thought process there.

Joan, I started last year the first of November so I was here a little bit more than halfway through the fourth and let me give you a quick recap on what I think we've done.

First of all from a planning standpoint and from a delivery standpoint we've done a far better job this year flowing product to the stores. We've still got room for improvement but I felt much more comfortable this year than last year with the flow.

The second thing is on our allocation side of the business, which is critical in any seasonal business. The read and react strategy in seasonal is where you win. You lose when you allocate too much of that product up front so we have been reeling backward a little bit in saying listen, "How much of this can we hold and not allocate it until we start seeing some forward sales?" And we've done a number of things to assist ourselves this year with that process and that makes us feel also very strong about what we think our sell-through rates will be and how we'll come out of the fourth quarter.

So the biggest risk for us is always the heavyweight outer wear and whether or not we'll get that ferocious winter that we need from say the upper Midwest through the Northeast.

Everything that we've seen so far from Planalytics who we use to forecast some of this tells us that that weather will continue so we're feeling very good about it.

And the last thing would be the gift assortment Jim touched on earlier but we really mind our own current basic assortment products and said, "What are the things that our consumers will buy?" We know that the economy is tightening so how can we take those products and highlight those in the store in the fourth quarter, pass on some advantageous pricing and really drive those as gifts? And if you'll be in our stores in the fourth quarter you'll see that and you'll note that. We have those called out and we feel very, very good now given the economic conditions where we're positioned.

That was helpful. Thank you.

Andrew Wolf, BB&T Capital Markets.

Thank you. Good afternoon. Kind of a follow on to that answer. Can you give us the relative sales mix in the fourth quarter? That is apparel and seasonal? I know you give us on an annual basis but could you give us a sense -- you never index to the annual number, the actual number, for apparel and seasonal?

Andy, we don't have that number for you right now. We can have Randy circle back with you on that. Obviously overall for the year it's 9%. I would estimate that it's probably in the 12% range but I'd rather wait until Randy gives you the exact number.

Does seasonal index higher too because of gift giving or is that just really -- it's so high in the second quarter that we shouldn't think of it that way?

Yes. Seasonal is definitely highest in second quarter followed by fourth. But fourth is only marginally higher than third is seasonal.

And also in reference to the last answer, my follow-up is, Jim, in your press release you talk about specific steps you're taking and maybe I didn't listen well but it sounded like in your discussion up until this last answer we didn't quite hear that but should we look at it as essentially you've got a windfall, if you will, from the hurricanes and that business yet you didn't raise your guidance and as we look at your plan, not your relative conservatism and obviously that's prudent in this economy, just as we look at your plan did you basically look at what's going on and say we've got to get a little more promotional, vis-a-vis our customers in various ways, is that essentially the plan side of it?

I would say that on a year-over-year basis, Andrew, we would be more promotional but we are not going to be what I would classify as promotional as I would suspect some other retailers might become.

We have principally benefited over the years as we've evolved into a everyday competitive price, value priced strategy with occasional sales. We have 15 print events a year and print plus the direct mail we're doing right now are the only ways that we communicated off price. So we are not increasing the frequency of print. We are marginally increasing the promotional flavor to our ads but that has as much to do with the type of products, being consumables and lower price point products, than it does with dropping the price of those products if that answers your question.

Yes. It does. Thank you.

Thank you.

We have reached the allotted time for questions. I would now like to turn the call back over to management for closing remarks.

Well, thank you all very much. I'm glad you are with us on this trip. I am extremely proud of every member of the 1,400 team here at Tractor Supply. We asked them to do different things starting mid-Q1. We asked them to do things differently and they, at every level, have done that. I would remind you that the performance this quarter against the last two quarters and, frankly, year-to-date are testament to the fact that we have a unique customer, we serve a unique and, I think, more viable, somewhat economic isolated market and we have a model that is resilient in the cycle that we are going through.

Again, thank you for being along on the trip and we remain a growth Company. Thank you very much.

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