Tractor Supply Co (TSCO) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss first-quarter results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

Please be advised that reproductions of this call in whole or in part is not permitted without prior written authorization by Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Cara O'Brien of Financial Dynamics. Please go ahead, Cara.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. Before I begin let me take a moment to reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

This conference call may contain forward-looking statements that are subject to significant risks and uncertainties including the future operating and financial performance of the Company. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the Company's filings with the SEC. The information contained in this call is accurate only as of the date discussed. 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 am pleased to introduce Mr. Jim Wright, Chairman and CEO. Jim, please go ahead.

Thank you, Cara. Good afternoon, everyone. I am joined today by Tony Crudele, our Chief Financial Officer; Greg Sanfort, our President and Chief Merchandising Officer; and Stan Ruta, our Chief Operating Officer.

As you know, the first quarter represents a get ready quarter for us as we prepare for the important spring selling season. While the first quarter is always the smallest quarter for us, we are pleased with our performance and believe we are off to a good start for the year.

During the quarter we made solid progress on our key priorities for 2009, which are to continue differentiating our business and executing our retail strategy to win in the current environment and beyond.

Let me briefly discuss some of the highlights. First we grew the business as we increased total sales by nearly 13% to $650 million; improved gross margin by 40 basis points to 30.9. As a result we were able to improve our bottom line on a year-over-year basis by $0.06 per diluted share to a profit of $0.01 per diluted share.

Now, second, our team did a great job of ensuring their stores remain a destination and as a result our customers continued to respond positively and have increased their business. Although average ticket was down, which Tony will discuss later, we experienced a marked improvement in traffic during the quarter, which we attribute primarily to the focus we placed on having the right mix of everyday and advertised merchandise to keep our customers coming back.

Let me go into more detail on both of these items. Starting with our merchandise, as you heard us mention we believe there has been a fundamental shift in consumer shopping habits from wants to needs and from style to value. Due to our response to these trends, we have not seen any real deterioration in our customers' willingness or ability to shop for products that fit the everyday needs for their rural lifestyle.

We continue to emphasize in appropriate stock our CUE items which stands for consumables, usables, and edibles. These products are also highly represented in what we call our [20 250] which represents our focus on be in stock on products in the top 20 categories and the top 250 SKUs within those categories.

We have also built a strong reputation with our communities for being a reliable source for emergency preparations and response items. During the quarter we experienced demand for products such as generators and emergency pumps as a result of the impact of ice storms in the South and flooding in the upper Midwest.

Turning to our marketing program, we are benefitting from our efforts to improve our marketing, while leveraging advertising dollars. Our emphasis on value, less clutter, and more education is working well in our advertising campaigns. Marketing and merchandising remain important elements of our strategy to differentiate our business.

Additionally, we are closely monitoring gross margin dollars in net of advertising on an internal basis to measure the effectiveness and efficiency of each [events]. I will talk more about these major components on our business later in the call.

Third, as part of our effort to reduce costs in the business and to improve margin, I am pleased with the progress we made with transportation and freight. We have increased the efficiency at our distribution centers by insourcing the management of freight movement from our DCs to our stores. We are also utilizing our trailers more productively by improving our cube utilization and reducing empty miles by using common carriers more frequently. The benefits of these actions are beginning to gain traction.

At a recent investment community day, we announced that we have increased our long-term store target to 1800 domestic TSC stores. We have value-added metrics such as county and state demographics, known competition, distance from our distribution centers. We calculate in-depth sales and ROI projections and we further examine characteristics of the rural population within 20 and 40 minute drive times of our desired locations.

We are excited about this growth opportunity and confident that will be able to achieve this target, based on the success of our site selection model and the performance of the nearly 400 new stores we've opened in the last five years.

Overall, in the first quarter we continued to execute our initiatives, which are centered on strong merchandising, sound operational procedures and superior service. These are driven by our commitments to connect with our customers and offer them a complete and impelling assortment of the basic items they need for their rural lifestyles.

We continue to benefit from the strength of our business model, our unique niche and our customers' and our teams' ability to continue to win in this challenging retail environment.

I would now like to turn the call over to Tony to review our financial performance and discuss our full year outlook.

Thanks, Jim. Good afternoon, everyone.

Although Q1 is the quarter with the lowest sales volume, we are pleased with the results, as Jim said. On a year-over-year basis, we achieved double-digit sales growth for the quarter and reduced our per store inventory levels for the sixth consecutive quarter. We believe this continues to validate the resiliency of our business model as we work through these tough economic times.

For the first quarter ended March 28, 2009, sales of $650 million and net income was $470,000 or $0.01 per diluted share. LIFO provision was approximately $0.05 per share in the first quarter of 2009 and $0.04 in the first quarter of 2008.

Total comp store sales in the period increased 4.2%. Non-comp sales were approximately $49.7 million, 7.6% of sales. Comp transaction count increased 5.8% and we are pleased that we continue to drive footsteps into the store. The average comp ticket decreased 1.5% resulting from the softness in the sale of large ticket items.

Although the consumer is making more frequent trips to the store for their essentials, we believe they are not adding nonessential purchases to their baskets. I will go into a little more detail on some of the other sale drivers and trends.

Our stores are not open on Easter and with the Easter shift to April this year, we had an additional comp store day in the first quarter. We estimate that this resulted in an increase of comp store sales of approximately 160 basis points. Our core consumable, usable, and edible categories, including livestock and pet supplies and feed, continue to be the key drivers of the business. It is important to note that we estimate that inflation, which is prevalent in these categories, increased comp sales by approximately 5 to 6 percentage points. I'll further address inflation in impact in a moment.

Overall, weather did not play a significant factor on a year-over-year comparable basis. Recycling and negative comps from the first quarter of 2008 which resulted from extremely favorable weather conditions in 2007. This year, the year-over-year comparisons were much more normalized although there was some variability on a regional basis.

While January was colder in most regions, February was a few degrees warmer and negatively impacted our sales. However there was some storm activity in February that favorably impacted sales in the Northeast and upper Midwest regions, where comp sales were the strongest.

Additionally although March was slightly warmer than the prior year in the same regions, the anticipation of an early spring was tempered by periodic cold snaps throughout these regions. Comp sales in our Del stores were lower than chain average as the Northwest suffered through some extremely cold temperatures which hampered spring sales.

Overall, we were pleased with Del's gross margin improvement and their ability to exceed plan under a less than favorable climatic conditions. Jim will discuss Del's in more detail later in the call.

Comp sales were the weakest in the Southeast, resulting from soft big-ticket sales as we entered the spring selling season, combined with the persistent weakness in the Florida economy.

Turning to gross margins, compared to the prior year quarter we experienced an increase of approximately 40 basis points. Lower freight expense compared to the prior year was the primary driver of this improvement. As we had anticipated we began to realize the favorable impact of fuel prices -- fuel price decreases over the last several months that were capitalized as part of our inventory cost. Additionally, we are seeing some of the benefits of our transportation cost savings initiatives, as Jim discussed earlier.

Our LIFO provision was essentially flat with last year at approximately $2.8 million. This allowed us to slightly leverage this expense on the higher sales we achieved during the quarter.

Before turning to SG&A let me comment on the inflationary impact of the first quarter. As I mentioned, we estimate that inflation had a favorable impact on comp sales. Despite deflation in several categories over the past several months, we expected retail price increase in the first quarter of 2009 would still exceed the first quarter of 2008. which was not characterized by high inflation. The more significant inflation we experienced last year began to accelerate in the second quarter.

At the same time, as we have discussed in the past, we actively seek to manage inflation by maintaining our gross margin rate and per unit profit. And we achieved this successfully during the quarter. We will start to see the year-over-year inflation impact moderate as we move forward in the year. And I will discuss this more during my comments on our outlook for the remainder of the year.

For the quarter, SG&A -- including depreciation and amortization -- was 30.7% of sales, a 10 basis point improvement over the prior quarter. We are pleased with the SG&A leverage we achieved, especially in our lowest sales volume quarter. The main driver was leveraging our advertising cost as we focused more of our marketing efforts on circulars and direct mail and less on television media.

As Jim mentioned, we have found that our focus on driving gross margin dollars, net of marketing spend, has been effective. The pre-opening expenses for new stores were approximately 20 -- $2.9 million compared to $2.4 million in the prior year quarter.

In the first quarter we opened 28 stores compared to 27 store openings last year. Pre-opening expense per store was flat on a year-over-year basis. We strategically opened fewer new stores during January '09 than in past years into this low sales volume period in between seasons. By opening the stores later in the quarter, pre-opening expense that normally would have been incurred in the previous December actually shifted to the first quarter this year.

Further, last year's opening included three Del stores which require less pre-opening expense. We also closed one Del store in the quarter when we opted not to renew an expiring lease.

Turning to the balance sheet, we continued to improve our inventory productivity. At quarter end, inventory levels per store were down approximately 6.9%. That, on top of an 8.2% decrease at the end of Q1 last year.

Our calculation is based on average cost of inventory and excludes in transit inventory and inventory held in unopen stores. Annualized inventory turns for the quarter were 2.39, nearly a 20 basis point improvement over last year's first quarter. We also had a slight increase in inventory financing to 47.8%, up 80 basis points, principally as a result of the improved terms.

We believe that we have created a true business partner relationship with our vendors and believe that we are at the top of the vendors' list when it comes to allocation of merchandise if production limitations occur.

Capital expenditures for the quarter were approximately $18.9 million, related principally to our new store opening program. This is a decrease compared to last year's spend of $26.5 million which included the acquisition of two stores for $8.5 million.

During the first quarter we continued to make purchases under our stock repurchase program. We bought approximately 281,000 shares for $9.1 million or cumulative total of approximately 213,000,000 since the inception of the program in February of 2007. The share repurchase program did not have a significant impact on EPS for the quarter.

We are extremely confident in our cash flow and liquidity position. Generally our peak borrowings will occur during the first quarter as we prepare for the busy spring season. This quarter our peak borrowings were cut in half as we were below $75 million and our average borrowings were cut by two thirds in the prior year.

This provides a significant flexibility as our revolving credit facility is $350 million. We believe it is important to maintain our prudent balance sheet management in the current environment.

Turning to our outlook for the full year, with respect to our financial expectations, for the full year 2009 as noted in today's press release, this confirmed our previous expectations for sales, comp sales and earnings per share. As a reminder we expect full year sales to range between $3.2 billion and $3.3 billion; full-year comp sales range in between a decrease of 1.5% and an increase of 1.5%; and earnings per share to range between $2.58 and $2.74.

While we believe it is difficult to draw conclusions or extrapolate performance to the next three quarters, based on our small get-ready first quarter, let me discuss a few of the underlying assumptions including our estimate.

With respect to sales, consumer spending remains in line with our expectations outlined at the beginning of the year. As I mentioned we continue to see our customers shopping our stores, for a wide variety of functional nondiscretionary items that are very relevant to their lifestyle.

In April, we are losing one selling day related to the Easter shift. Early spring sales this month have also been softer than expected as cold weather has stalled sales of seasonal merchandise.

However we expect overall that weather will be neutral for the quarter as the cold start of spring season will be offset by more moisture in some areas of the country.

Consistent with our expectations at the beginning of the year, we have seen prices moderate in several key categories that were highly inflationary last year. This will provide a difficult sales comparison particularly in the second and third quarters.

With respect to margin, we expect some margin pressures as we move forward in the year. As I mentioned, we had anticipated the inflationary impact experienced in Q1. As we move forward during the year, we do not expect the inflation tail winds we experienced in 2008 or in Q1 of 2009 to repeat, as costs have been more stable.

We have demonstrated that we can successfully manage margin pressures with respect to the inflationary impacts due to [ickier] retail prices than we had originally anticipated at the beginning of the year. We expect the firmness in the retail prices will provide us the opportunity to realize the beneficial impact of cost reductions on our moving average inventory costings.

Additionally, freight and LIFO at our current projections levels could provide a favorable offset to any incremental margin pressures. Fuel prices are running substantially below last year prices and, as Jim mentioned, we believe that our freight initiatives will continue to gain traction.

With respect to LIFO, based on our expectations for year-end inventory levels and mix, we are currently estimating a full year LIFO provision of $14.1 million which is essentially in line with our original guidance of $15.7 million. We continue to project the LIFO provision despite ongoing cost reductions and concessions in several of the key product categories. We expect this, given that our mix continues to shift to fresh fast-turning goods especially in light of our [2250] in stock merchandise initiative and as we continue to clear recognize.

Also as we expand our store base we will have a net increase in aggregate total inventory. This results in adding merchandise that has higher indices than the current Company average and therefore a higher LIFO provision even as inflation moderates. So let me remind you that provides us the opportunity to realize a substantial income tax deferral.

We were pleased with our SG&A leverage in the first quarter. As we indicated in our original guidance, SG&A leverage will be difficult on a low-comp sales increase, especially as we cycle some of our cost savings initiatives implemented last year.

However as I mentioned, we believe the more efficient advertising spend should provide us some benefit, particularly in the spring selling season before we begin cycling some of the shifts we implemented for the fall-winter 2008 season. Overall, we believe if our sales are somewhat softer and/or we experience gross margin pressure, we will be able to offset this through the related freight and LIFO benefit, and additional expense management levers that we are planning such as to reduce TV advertising spent in favor of more efficient direct marketing spend.

We continue to expect to open [70] to 80 new stores this year although we now expect our openings in the first and second halves of the year will be split evenly. We have not changed our expectations. The CapEx will range between $85 million and $95 million.

Overall, we believe our ability to execute and serve the functional needs of the Out Here customer will be the key differentiator as we manage through the reminder of the year. And with that I'll turn the call back to Jim.

Thanks, Tony.

As I mentioned earlier, we will continue differentiating our business and executing our retail strategy to win in the current environment and beyond. Same time, we believe we are well-positioned to react quickly should any changes in consumer buying patterns occur.

That said we are enthusiastic about the opportunities ahead for our Company. As you know our merchandise mix is the cornerstone of our business. We continue to provide our customers with basic and key items that support their lifestyle.

As previously mentioned, we've intensified an assortment a promotion of our CUE categories. We continue to see an increase in trend towards grow it yourself hobbies like gardening and patch farming, and we've adjusted our merchandising plans accordingly. Customers spending more time tending to their gardens for personal consumption we expand the depth and breadth of spring seasonal goods by adding more seed packets, vegetable plants and tillers to our store assortment.

Additionally, we expect consumers will continue to defer big-ticket items, a trend that we began to see nearly three years ago. Accordingly we've shifted our focus to meet our customers' growing replacement part needs as they are increasing the repair on maintenance of their existing equipment. We have tightly managed the inventory levels on many big-ticket items by narrowing the assortment while simultaneously ensuring that we have the depths to support big season demand.

We are also pleased with our refined marketing strategy. The marketing team has stepped up to the challenge to do more with less, as we adjust our advertising dollars to focus more on our CRM program. We continue to reinforce our value proposition and our position as the authority on the rural lifestyle.

Additionally, we are leveraging our advertising to drive repeat business and customer loyalty efficiently. In Q1, we generated significant savings from advertising expense and we expect this trend to continue. This is primarily the result of shifting ad spend away from television towards more direct marketing, which allows us to offer the right products to the right customer at the right time.

Also we've improved the look and shopability of our print ads. I am also very pleased with the continued improvement in our customer loyalty scores. While we currently rank in the top quartile of hardline retailers, we are committed to further strengthening the bond that we have earned with our customers.

With respect to new stores, we made a few changes that have generated increase sales earlier in the life of new stores. We reduced the timing gap between soft opening and grand opening.

Previously we had scheduled most of our grand openings to be during the peak season of selling weeks. Initially it appears that this change has driven stronger out of the gate sales at many of our new stores. We've also developed new grand opening print ads to introduce a broad merchandise assortment with greater impact.

As you are aware, we held our store managers' meeting in Nashville last month, which provides our vendors with the opportunity to showcase their products and discuss their products with our store managers. We also held our first-ever vendor conference in Asia last week. In the current environment we find that it is more important than ever to ensure that we consistently work with our vendors to quickly translate the benefit of the decreased raw material costs to our mutual end users resulting in win-win solutions which, ultimately, drive the best outcomes for our vendors, ourselves and our shareholders.

As we previously stated, we viewed 2009 as another year of learning per Del's and we continue to closely monitor our progress. That said, we are continuing to better position this business. This began several quarters of ago when we initiated an organizational shift by lining the merchandise and store operations under Greg and Stan, respectively.

We refocused the product categories in which Del's has historically done most successful and have added only modest line extensions. The stores are well staffed, energized, and we are ready for the upcoming spring selling season.

Before we turn the call over to questions, I would like to reiterate that we have a very solid capital structure, a very strong balance sheet for generating significant cash flow from operations, and have minimal debt. Though we continue to be conservative and anticipate a persistent challenge in the macro environment in the near term, we remain a growth company and we expect Tractor Supply Company will continue to deliver on our expectations to win both now and in the future.

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

(Operator Instructions). Dan Wewer from Raymond James.

Thanks. Jim or Tony, when you were commenting on the April sales trends, can you determine if the weakness is due to smaller contributions from inflation we are beginning to see? Or is it related more to traffic?

It's really weather. When we look at our business in the month of April by day and by region, the ground moisture, first of all, with the exception of Texas, is very, very good. And what we have is the combination of nice weather on a Friday or weekend we do see a response in the business and a response in [tracting] and mowers. But we simply have not had consistently springlike weather across most of the chain.

So that would be impacting traffic I would assume and not the ticket size?

Actually traffic while not as robust perhaps as Q1 has been much better than the average ticket.

So I guess I'm a bit confused then. At what point during the period will be inflation benefit the same-store sales begin to taper off?

Basically late. Most of our inflation benefit last year came to us late Q2 and then through 3 and 4.

Just one other question related to sales. You had noted that consumers are shifting away from style to focus on value and from wants to needs. I am curious as to what those implications are for your apparel business which I know you had been expanding the last couple of years.

The good news is that very few people would ever state that we have any style in our apparel or very much of it. So our -- we think --.

You are selling yourself short.

Pardon me?

You're selling yourself short.

Well, we do have some but the vast majority of our business is in Q3, 4 and it's heavyweight outerwear. Our boots are principally workboots and it's very much a replacement business as it is an aspirational business.

So I see frankly very little risk in the clothing business. Yes the consumers do trade down to our private brands. That's fine and we maintain equal gross margin dollars per unit. It will be obviously soft on the comp store sales side, but we will win on the margin side.

Okay, great. Thank you.

Jack Murphy of William Blair.

Good afternoon. Congratulations on a solid start to the year. I just want go back to the inflation question for a minute.

Tony, did you say that you thought you got about 500 or 600 basis points inflation in those consumable-related categories? Is that what you said earlier?

Yes, that's correct.

So help us scale this a little bit. When you are talking about those categories in particular that are inflation-impacted, what percent of the mix were we talking about in the quarter? And then on a related note, given the fact that you saw some deflation or the beginning of deflation in other categories, if you look at the mix as a whole, how much do you think the comp was impacted by inflation?

Let me correct the question as you stated. Overall we were looking at 500 to 600 basis point increase not necessarily specific to those categories. So directionally, we see that.

As far as quantifying between the categories we wouldn't drill down into that type of or provide that level of detail because, again, it's really just an estimate trying to look at the retail prices and what the increases are year over year. And there are obviously a lot of factors that will go into that, not just inflation.

So again we want to give it more at a higher level directionally. We feel that year over year, we understood that based on the run-up or the inflationary impact in the prices over throughout 2008, we knew that we had a significant increase in the first quarter. And that will continue to moderate as we move through the year when we really go up against comparable numbers that had significant inflation in it.

So the 500 to 600 is versus the total Company count?

Right.

And then on the transaction count, obviously, a pretty big number, best in about two years, I guess. Given the calendar, was Easter much of a factor in that? And, also, how do you think traffic should progress as you move throughout the year given these other factors?

Yes, if you want to break down just generally on the 160 basis point impact on Easter about 140 would be attributable to the transaction side and 20 basis points attributable to the average ticket. So that is out it would break down.

Again, we would anticipate to maintain relatively firm traffic patterns and that has been consistent over the last couple quarters. And it really truly is driven by the consumer and trying to satisfy their basic needs continues to drive footsteps into the store. We are looking forward to a continued increase in traffic.

Okay. Thanks.

Peter Benedict of Robert W. Baird.

What was the inflation benefit last year in the first quarter? I know you said it wasn't much. But was it 1 to 2%? Is that a fair estimate?

I would say it ran in that range. Probably more than the 2 to 3% range last year.

Okay, thanks, Tony. And can you quantify the fuel impact benefit to gross margin in the first quarter? Was it somewheres in the neighborhood of 10 basis points or so?

Of that -- of the freight increase we attributed about -- I want to say about 70% of it related to fuel. So you can break it down that way and we had just a total of 40 basis points.

So I would say about 30 basis points related to the fuel increase.

And then on the ad spend, I think last year, advertising was just under 2% of sales. It improved about 24 basis points year over year. Can we expect a similar level of improvement this year in terms of the basis point improvement, given what you guys are doing on the ad front?

I would say throughout the year and particular in Q2 we anticipate a similar run rate. As we move forward into the second half of the year, we will continue to assess the program and make sure that we are not trading off marketing dollars in lieu of driving sales.

So but generally we do expect to have a leverage of marketing but probably not to that extent, as we work through the remainder of the year.

One last question. On the softer start to the spring seasonal business, can you talk about or maybe break it down between the OP business and then the lower ticket lawn and garden. Is it kind of across the board or is it more weighted in one versus the other?

Again, it is mostly in big tickets and mostly in riders walk behind Moore's. The whole category of really of cutting grass is the vast majority of a weakness.

Thanks Jim.

Mitch Kaiser of Piper Jaffray.

Good afternoon. Could you talk a little bit on the [food] deflation or the deflation? What impact do you think that might have on transactions because I know transaction becomes a bigger component -- or becomes bigger in the second quarter relative to the first. So what should we be thinking about there, just on efforts, transaction size in the second quarter?

With regard to feed and pet food?

Yes.

Yes, we have thus far found that first of all on -- the closer we buy to the commodity which would be, for example, large animal feed are much more closely linked in our purchasing agreements to commodities that our costs are coming down. And that retail is somewhat sticky.

On the pet food side it's a bit of a mixed bag with brands attempting to hold costs. As a result retails are staying. And there's another tier brands where costs are beginning to come down. Retails again seem to be fairly sticky and, generally, because private brand is pegged to the national brands, private brand retails are staying a little stickier than private brand costs. Is that correct, Greg?

So I would not suspect to see a lot of ticket inflation on food and feed. And the good news is that we continue to gain unit share in those categories.

Okay, great.

As far as the average ticket goes as we move into Q2, I would suspect that the sale of -- where the softness and the large ticket items would probably be more impactful than the inflation's last deflation impact. So since we have obviously the riders are a large portion of the sales and they are a large unit ticket. That will have an impact.

Got you. So you are not seeing the benefits of [DIY] that people are maybe foregoing lawn service care and doing it on their own? That benefit hasn't really come through, I guess, at this point?

(technical difficulty) riding lawnmower sales. Not necessarily -- obviously, it has a significant impact when it comes to the repair and maintenance of those items. (inaudible) which again tends to be much higher gross margin category for us.

Got you and then, I know you did a [reset] on the lawn and garden area. Could you talk a little bit about the results you're seeing there?

We are very pleased with the success this year and we have had a tremendous amount of learning about our customer, particularly in the categories that Jim mentioned in his comments about them wanting to grow their own foods and really tend to their own property.

It is a little early right now for us to draw any conclusions on all of the P/E, but when we redirect to the business and decide that other parts of the (inaudible) equipment category could play a larger role this year i.e., maintenance, the parts business, push mowers, blowers and other types of categories, we have been very pleased with those initial results. A little disappointed as Tony mentioned and Jim mentioned on the rider category at this point, but we have confidence that we have got it planned correctly.

It is just a matter of time. We need a little weather. That's all we need.

Lastly I know there is some change in legislation or tax credit associated with alternative heating. And I know it was a very strong category for you last year and often had some stock outs and back orders. Could you just talk about what you are seeing or how you think you are positioned for the alternative heating category, especially in light of these tax credits that might be coming through?

Obviously, the tax credits as they materialize and get communicated would be a benefit. We expect that the full year will not be too much unlike last year, although the timing of that business is likely to change. Last year if you recall, we accelerated normal Q4 business into Q3. Then we got into Q4 and we in the industry were very -- sporadic out of stocks on both stoves and fuel.

So the consumer today is exiting -- they exited last year saying, "Boy there's a shortage in both the whole goods and the fuel. Perhaps we ought to buy earlier."

But bear in mind that as the consumer went into the season last year they were looking at alternative heating being much, much cheaper than electrical, natural gas and in our case most importantly, propane and fuel oil. So to a degree we are expecting some moderation demand as it is unlikely that we will see fuel oil and propane prices where there were a year ago.

That said, we think that the fact will be in stock during actual peak season. We will probably offset that, but we will see a shift from Q3 to Q4.

One follow-up on that, Mitch, will be the essence of the [pellet] business. The fuel actually for the units. Because we had such increase last year in the install base we believe there's still room for us to grow in fulfilling the needs of that customer as it comes to the fuel itself.

Very good. Thank you and good luck.

John Lawrence from Morgan Keegan.

Greg, would you comment just a little bit to take it one step further on lawn and garden? A lot of those products you just sort of reset and brought into the category. Will some of those products you have been selling for a long time still have seen some increase because of the reset and the way you put them together in that frontline part of the store?

You are correct. By pulling that together in one area, it's created a destination in the store and it's paid off very, very well for us. We are very pleased with what we've done.

And if you take that, obviously, as you look at things down the road, other categories, other parts of the store you think you can maybe play that again?

I would tell you that we have plans to do things similarly as we move forward. Yes, you are absolutely correct.

And then, the last question. Any comments, Jim, on the labor profile in the store, economic environment, turnover down, attracting better talent, anything going on there?

Yes. Turnover is actually probably modestly up. But that is the fact that we are upgrading the team and we have a wonderful opportunity to hire some very strong talent. So we are in really very, very good shape right now.

Congratulations. Thanks.

(Operator Instructions). Matt Nemer from Thomas Weisel Partners.

Good afternoon, everyone. My first question is not to harp on the softness in April and some large ticket items, but you sound very comfortable that this is more of the weather impact than an economic impact and I'm wondering if you have seen any consumer studies that confirm that? Or is there any chance that it is potentially the other way around?

I certainly couldn't rule that out but the greatest data that we have is the response we see when we get a bright sunny warm day. And it is very, very significant. We can see our business move in several, several points of comp just due to the fact that we have a combination of -- and it's already wet. It's wet in every place in the country and as soon as we get a sunny day when people are out in their yards and then out shopping, we seek immediate pickup.

So while we realize that there is certainly a persistent big-ticket problem for all reasons that we all understand, we think that because as has been the case for a while now, certainly recycling that, that at this point in time we believe it is dominantly the weather.

Fair enough. That makes sense. And then secondly in terms of the OP category what are you forecasting this year in terms of year over year? I guess it would probably be a decline, maybe slight growth versus what is the industry saying this year?

That is a real interesting question and I don't think there's anyone real answer. The industry OPEI has said that shipments -- and I will refer to that -- are going to be down double digits. So taking that in light, I'm sure that many retailers have planned their businesses accordingly.

We really just -- we went through a real rationalization of SKUs. We looked at our store base. We looked at the mix of our SKUs. And we feel so very comfortable that we have a very compelling offer, we've sorted it by store, and it's really -- I agree with Jim.

This is a matter of when the weather breaks and we believe it will be shortly, I think we are well-positioned. So OPEI data would tell you that it is going to be tough. I'm, I guess, rebelling against the odds a little bit.

So I guess digging a little deeper does that mean that you are going to have -- your inventory in that category will be -- still be down year over year but not down as much at double digits?

We have planned the inventory down to last year. I can't go any further than that to tell you but it's appropriate to our sales potential that we believe it is out there for us.

Also we've narrowed the line. So we have fewer choices of riders. That allows us to have more depth so we can be in stock at the price points that have proven to be most important. And again this is we are [shorter] this year not just by region but by store based upon their two-year history by feature benefit price point.

The other end, you recall, is that riders have over the last really four years now become a much less significant portion of our business and the plan that we shared -- actually the data we used in our planning which we have shared with you all is that a good rider year will be beneficial to our results but we don't need one to achieve our objectives.

And part of the narrowed line. it sounds like from something you said earlier that there will be more push mowers, more sort of accessories and parts and (inaudible) takes your ticket down in the category this year versus last year?

Within the category yes. But bear in mind we have a $45 ticket average. So every string trimmer on average is double that. So as we can gain share in riders or in walks rather, string trimmers, ball blowers, we have already had a very good tiller season. We expect more that up north yet. We have the opportunity to offset many of the sales dollars but more significantly the margin dollars.

Then, lastly, in terms of the price moderation you've talked about -- what -- can you get more specific on which categories are starting to moderate? It sounds like it is potentially not the feed and the pet food categories from what you said earlier.

When we look at the three main categories, if you look at the grain prices, we look at oil and we look at steel. We have already experienced significant decrease in those raw material prices.

So it's a matter relative to each other as categories and how they impact our merchandise categories, as we work with the vendors, for us to realize those savings as well. So we believe that we have worked through a lot of the price decreases and, again, as we relate back to some of our comments that we feel that the retail price has been sticky in many of the categories to the extent where as those costs as we receive those cost reductions, which we believe have already been experienced by many of the vendors and manufacturers and the raw materials -- as we receive those price decreases and they work through our average cost, we will be able to maintain reasonable margins during that time period.

So we think that, obviously, it is our responsibility to work through that. It is part of our responsibility to manage the margins. And we think that we have been successful and that we have seen a stabilization of the prices over the last couple of months.

Of those three, in response to another question that was asked earlier, it sounds like on the feed and -- on the pet food side specifically you haven't seen as much of a decrease as you would like?

We've not seen as much of a decrease as we expect. That would be correct. Right.

Great. Thank you for your time.

(Operator Instructions). David Magee with SunTrust Robinson.

Just a question going back to the inflation impact on the comp. You had said it was 500, 600 points or bips. I guess that means then I guess next step in the average transaction size was really down about 8% on a FIFO basis year-to-year?

When you say the average --.

You said the average basket side was down a couple of points earlier. If you exed out the impact of inflation as a positive influence there, wouldn't that -- in terms of just taking price out of the equation mean that the basket size would be much less?

Right. You would allocate inflation more to the average ticket. It would have less of an impact on the transaction so that is correct.

I guess what I'm getting to is that as inflation -- the positive impact there begins to lessen as the quarter goes on, the second quarter. And your traffic probably moderates certainly from the strong first-quarter performance.

I guess the second quarter comp though, you didn't get give guidance would be it looks like to me it would be roughly offsetting what you did in the first quarter. Is my logic correct there in that regard?

Not necessarily. And obviously we don't give specific guidance for the second quarter. We do agree that generally we will not have the tail wind that we've had in the past for 2008. However, as we look at it and we become focused on the margin rate and margin per unit, as much as it may have an impact on the comp sales, we think what is critical is to drive the margin (technical difficulties).

And that is where we feel that we have been successful as we analyze categories that have already experienced that type of deflation.

Two things to remember. One in Q2, we are going to have 100 basis point negative comp because Easter is in the quarter versus not being in the quarter last year. And secondly, for the next three quarters with us reaffirming our revenue guidance, our projections are comps of negative 29 to a positive 80 basis point.

So that is the range that we are planning and yet we fully anticipate landing the EPS to 258 to 274 with that range of [console] performance.

Also could you talk a little bit about what the competition might need doing this spring in the mower business? Is that having an impact different than expectations of any sort?

Frankly that is why we've not seen any, I guess, any new tricks or any role strengthening by any of our competitors. Obviously the next six weeks it will be the flurry of activity, but we've seen nothing out there where you think someone else will win at our cost.

Great. Congratulations and good luck.

(Operator Instructions). Peter Benedict of Robert W. Baird.

If I could, was the inflation impact on the first quarter the highest you have seen the cycle so far? I think it was. It was higher than what you saw in the fourth quarter. Correct?

Yes, that's correct. Generally for the year last year we were in slightly above 4 range for the whole year and the fourth quarter was the highest quarter in 2008. It was sort of in the of 4.5 to 5 range. Yes.

Tony, so what's the -- what type of impact are you guys assuming in the full year comp plan in terms of inflation that down 1.5 to plus 1.5?

We really don't breakout the inflation components when it comes to the comp sales. Obviously we do sensitivities around that number and try to understand what the potential impact is. And again, that is how we come up with the ranges, but we have not disclosed any specific inflation guidance.

Is it fair to say it's not a negative number? Meaning the impact for the full year.

Not necessarily.

Okay. Thank you.

It's generally closer to the mid range of comps.

That's fair. Thanks. Then on the expectations for your SG&A leverage plan over the balance of the year, what type of comp do you think you guys need to get leverage on SG&A for the balance of the year?

Generally like we stated in the past we are still looking at sort of the 2, 2.25 range. I would like to sort of stay in the 2.5, but I think 2, to 2.25 potentially, I think, given the marketing spend that we anticipate, I think that we have a good opportunity to leverage at that comp range.

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

Okay, well, thank you all very much. I'm glad you are on this journey with us. We again -- we are delighted that we have confirmed the opportunity to open 1800 stores. As those of you who have known us for a long time recognize that we run the business against a long-term opportunity. We are diligent by the day. Certainly by the quarter, but we run the business to deliver value and continue to build the brand and the relationship with customers, to serve the aspirational lifestyle, as we call this wonderful place Out Here.

Look forward to speaking to you next quarter.

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