Tractor Supply Co (TSCO) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Tractor Supply Company's conference call to discuss fourth quarter and full year 2009 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 reproduction of this call in whole or in part is not permitted without prior written authorization of Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded. I will now like to introduce your host for today's conference, Miss Erica Pettitte of SD. Please go ahead, Erica.

Thank you, Maria. Good afternoon everyone and thank you for joining us. Before we begin, let me take a moment to reference the safe harbor provision under the Private Securities Litigation Reform Act of 1995. This conference call may contain toward-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 expectations reflect 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 results to differ materially from those reflect in the forward-looking statements are included in the Company's filings with the Security and Exchange Commission. 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 under takes no obligation up to date information discuss in this call. Now I'm pleased to turn it over to Jim Wright, Chairman and Chief Executive Officer. Jim, please go ahead.

Thank you, Erica. Good afternoon, everyone. I'm here today with Tony Crudele, our Chief Financial Officer, Greg Sanfort, our President and Chief Merchandising Officer, and Stan Ruta, our Chief Operating Officer. At the onset of 2009, we knew it would be a dynamic and challenging year. To stay ahead of the game, we assessed and responded to a much more cautious and needs-driven consumer. Through our teams of steadfast execution, we deliver strong results quarter after quarter while continuing to make strategic investments in our business. We're delighted we achieved record financial results for the year based on our fourth quarter performance. We continue to experience solid sales, performance, in our consumable usable and edible or Q categories including animal and pet-related products as well as key winter products.

Throughout 2009, we focused on two priorities. Which were to continue differentiate our company in market and execute our retail strategy to ensure that we win the current environment and beyond. I'll briefly review key accomplishments that drove top-and-bottom-line growth for this year.

First differentiating in the marketplace. We've always served an attractive niche and continue to see well and good strength in both the consumers and markets we serve. While our consumers were not immune to the challenges of the economic environment, they are generally more fiscally conservative and less impacted by weak housing and credit markets.

Our compelling merchandise assortment is both wide yet targeted positions as as a one-stop destination for those who live the rural lifestyle. Throughout the year, the team continued to work closely to support our customer's everyday basic needs at compelling prices. In doing so, we expanded our Q item offering, which helped drive traffic into our stores.

Animal and pet-related products grew and we built upon this strength with successful and seamless introduction of select equine and livestock feeds from Purina and Nutrina to our stores nationwide.

In the second half of 2009, wood pellets used for fueling alternative heating stoves also performed well as we had significant better in stocks to support ever-growing consumer base that heats with pellet stoves and furnaces. We also experienced increased demand for replacement parts in lawn and garden items given the self-reliant nature of customers and the continuing relevance of the do-it-yourself and grow hit-yourself trend. Further, as we shifted toward non discretionary purchase, as the shift persisted, we responded strategically by narrowing assortment of certain big-ticket items such as outdoor power equipment.

In light of the consumer behavior in this environment, we refined our marketing program. As part of this, we intensified our focus on managing gross margin in that of advertising. One of the key internal metrics we used to drive merchandise and marketing decisions. It's always been difficult to identify direct correlation between TV spend and store traffic. We view 2009 as an opportunity to test the illumination of our television ad spending. We were pleased to see our assumptions validated and as store traffic continued to trend position in the absence of TV.

In turn, we reinvested a portion of our TV ad budget into our direct marketing program, which includes targeted offers to various customer segments and the direct distribution of circulars to known TSA households. We continue and test and refine our CRM capacities and anticipate and even higher return on advertising spending through direct marketing. As a result of our effective marketing results of 2009, we do not plan to resume TV spend this year but will add one additional circular in 2010.

Turning to second initiative for 2009, executing our retail strategy. We have continued to improve our performance through inventory management initiatives. For example, we focused on the top 250 SKUs with our 20 most important merchandise categories to ensure that the product our customer shop frequently are in stock. And for the ninth consecutive quarter, we reduced year-over-year personal inventories while concurrently improving our in-stocks. We also entered and exited seasonal categories better than ever.

Throughout the year, we maintained discipline expense control. We tightly managed cost here in our store support center and in our stores without sacrificing the customer's experience. As a result, we improved the shopping experience as evidenced by our continued increase in our customer loyalty scores. We also made solid progress with transportation freight to increase the efficiency our distribution network and vary utilization of the fleet.

I attribute these outstanding results to solid planning, the relentless execution by our team. Despite the challenging environment, we remain a true growth company and continue to invest in new store growth. We have a solid capital structure with excellent cash inventory levels and no long-term debt. All of this taken together, positions us very well for the long term. I would like to turn the call over to Tony to review our financial performance and to provide our outlook for 2010. And then I'll return to discuss our priorities for year 2010.

Thank you, Jim. Good afternoon, everyone. We are extremely pleased at both the top and bottom-line results were stronger than expected for the quarter and full year. Additionally we continue to manage our margin, increase customer traffic, and reduce year-over-year inventory levels for the ninth consecutive quarter. We have to thank all of our team members for a great achievement in a very difficult market place.

For the fourth quarter ended December 26, 2009, net sales grew by 7.9% to $862.5 million and net income grew by 54.8% to $38.3 million or $1.04 per diluted share. Comp store sales increased .7%, compared to 1.3% increase and non comp sales $57.2 million or 6.6% of sales.

New and existing customers are shopping for their rural lifestyle essentials that tend to be purchased in more frequent shopping trips with lower average tickets. Each products in our consumable usable and edible, or Q categories continue to be the key merchandise drivers of our sales. Animal and pet-related products performed well and we had the benefit of additional lift from the rollout of Purina and Nutrina Premium feed SKUs that we began selling in early October. Repair and replacement part categories continue to perform well as consumers remain committed to fixing existing equipment for as long as they can while postponing big-ticket and discretionary purchases.

Although sales of insulated outer wear did not meet our overall expectations for the quarter, we did have brisk sale in later part of the quarter once the cold weather became more pronounced and as we moved into 2010. We were very comfortable with our inventory levels as we exited the season.

We estimate that we experienced 175 basis points of deflation on sales in the quarter and effectively managed this impact at the gross margin level. Deflation was more evident in livestock and bird feed, agricultural fencing and lubricant categories.

Comp transaction count increased 5.1% despite reduction in marketing spent, while average comp ticket decreased 4.1% primarily impacted by big-ticket items and deflation.

In aggregate, we estimate that weather was neutral for the quarter. October and December sales were much better than November as weather was cooler in both of those months on a year-over-year basis. November was significantly warmer in 2009 than 2008.

On a regional basis, sales were the strongest in the Mid-states because favorable weather conditions benefited the beginning and end of the quarter. Sales were the weakest in the southwest as we cycled some residual benefit from the 2008 hurricane activity in Texas and we experienced softness in agricultural fencing as a result of the dry summer and fall season.

Comp sales in Del stores were consistent with chain average. We were please with the Del performance and gross margin improvement as we had feed and hay unit and transaction increases to off set deflation in these categories.

Turning now to gross margin, which increased 247 basis points to 33.1% of sales. The primary driver of the gross margin increase was approximately 270 basis points reduction in the LIFO provision relative to last year's an normally large provision. The LIFO provision was a credit of 17 basis points in the fourth quarter of 2009 compared to a provision of 254 basis points in the fourth quarter of 2008. Gross margin was generally consistent with our guidance that margin would be slightly down, excluding LIFO. The LIFO provision for the year was $6.9 million pretax. This compares favorably to our full-year estimate of $11.6 million when we reported Q3.

The favorable variance resulted from three factors. The deflation that we experienced in Q4, lower-than-forecasted inventory balances has resulted stronger than expected sell through of certain categories and vendor support that exceeded forecast, again, resulting from better-than-forecasted sales.

Freight expense was another gross margin driver as it was 50 basis points lower than the prior year's period. This was due to fuel price decreases relative to last year and the benefit from our transportation cost-saving initiatives. In contrast to the previous quarters, more than half of the freight expense reduction was the result of our freight initiatives as the year-over-year spread in diesel prices has dissipated. These were partially offset by 50 basis points decrease in initial margin principally related to hard-line heating and fuel, which have margins below chain average.

For the quarter, SG&A including depreciation and amortization was 26.2% of sales, which was 60 basis points increase over the prior year quarter. Although we did not leverage SG&A expenses principally due to the low comp sales growth, we're pleased with expense control in the quarter and throughout 2009. Other factors impacting SG&A, we experienced a leveraging from new store growth relative to the mature store base as we expected. Incentive plan accrual was higher as a percent of sales compare to last year's quarter. We increased our sales tax reserves as states have initiated or have notified us of their intent to conduct sales tax audits. Marketing expense was 37 basis points lower as a percent of sales compared to Q4 last year. Consistent with plans we noted in last conference call we did not spend TV dollars in Q4. This proved beneficial again as we reduced SG&A spend, while we continue to drive increased comp transactions, demonstrating our ability to effectively manage gross margin dollars net of advertising expense.

With respect to income taxes, the company's tax rate decrease to 35% compared to 38.2% in the prior year's fourth quarter. This reduction in tax rate result from the favorable impact of certain federal tax credits and lower percentage of permanent tax differences relative to income before taxes.

Turning to the balance sheet, we continue to do a great job managing inventory while maintaining in-stock levels on the key [20 to 50 SKUs], adding brand feed SKUs and managing seasonal purchases during the quarter and the year.

At quarter end inventory levels per store were down approximately 6.9% on top of an 8.2% decrease at the end of Q4 last year. Our calculation of inventory levels per store is based on average cost of inventory in open stores only.

Annualized inventory turns for the quarter were 3.02 times, a 13 basis point improvement over last year's fourth quarter. For the full year inventory turns improved 9 basis points to 2.88 times. And financed inventory decrease to 39.1%, down 390 basis points. And this has been consistent in the back half of the year as we have been more aggressive in working with vendors to ensure we captured discounts.

Capital expenditures $24.5 million related principally to our new store opening program. This compares to $22.9 million in last year's fourth quarter. We opened up 18 stores versus 21 in the prior year fourth quarter. For the year, cap expense was $74 million, related to 76 new stores and two relocated stores. During the fourth quarter, purchases under the stock repurchase program were approximately 98,000 shares for $4,515,000 for accumulative total of $219.2 million in returned to shareholders since the inception of the program in February 2007. We estimate share repurchase program had approximate $0.02 impact on EPS for the full year.

We are extremely confident in our cash flow and liquidity position. we did not have to draw down on our revolver during the quarter and we had $173 million in cash at year end compared to $37 million the year before. We remain commit to carrying higher cash balances and more liquidity in the current environment to ensure managing our balance sheet prudently.

Turning our attention to 2010, first our outlook for some key metrics for the full year, we expect full year sales to range from approximately $3.42 billion to $3.48 billion. sales to range from approximately $3.42 billion to $3.48 billion. We have forecasted comp sales to be in the range between .5% and 2.5%. We are targeting a flat to limited improvement in EBIT margin compare to 2009. Excluding LIFO, we expect EBIT margin to increase approximately 8 to 12 basis points for the full year driven by gross margin improvement. Currently, we are forecasting a pretax LIFO provision of approximately $12.2 million compared to $6.9 million in 2009.

We anticipate net income to range between $122 million to $126.5 million or $3.30 to $3.42 per diluted share. And we expect to open 70 to 80 stores.

Some of the more specific drivers or assumptions that helped us form our expectations for 2010. We anticipate that the retail environment will remain challenging due to cautious consumer and persistently high unemployment levels. While the consumer sentiment is more favorable than a year ago, we do not anticipate that consumers will return to the same spending levels prior to the recession. We also do not anticipate marked change in consumer credit availability. As a result, we believe our consumer will remain value-oriented and hesitant to make big-ticket purchases.

Our consumable usable edible categories will be sales drivers. In particular, we expect that our new branded feed selection program will continue to drive momentum.

Our forecast include limited inflation for the full year of approximately 1%. When we look at the year-over-year comparison we expect to have some deflationary pressure in the first half of the year, which will begin to moderate in Q2, making it essentially flat for the second quarter. We anticipate year-over-year price increases in the second half of the year. While this could impact sales, we have demonstrated that we can effectively manage gross margin in a deflationary or inflationary environment as we did in 2009. We expect gross margin rate expansion exclusive of LIFO as a result of several of our key merchandising initiatives. First inventory management, which include our price optimization and mark down initiative, our assortment and product allocation planning and our private label and strategic sourcing program. Second, we expect freight costs to be a slight head wind as we cycle low fuel cost in 2009. We anticipate this will be largely mitigated by our freight initiatives that we implement in 2009 and began to realize in the second half of the year. As I mentioned earlier, the benefit of freight initiatives contributed to the majority of our Q4 freight leverage.

With a relatively low comp sales growth anticipated, we believe there will be limited opportunity to leverage our SG&A expenses as we continue our commitment to grow store base. We expect expenses will offset the favorable gross margin benefits. We will increase our marketing spend to 8 to 10 basis points. Although we do not plan to initiate television marketing campaign, as Jim mentioned, we expect to increase our marketing efforts in direct marketing and circulars. We anticipate higher store labor expenses as we incur the roll out cost of new POS beginning the first half of the year and higher health care costs for the full year. Additionally, we expect that payroll taxes will increase as states continue to increase unemployment insurance taxes.

We expect leverage on store support center cost as we anticipate incentive cost compensation expense to return to a more normalized level compared to 2009. And finally, new store payroll and occupancy cost at the stores we had deleveraging impact and we expect this will continue until new stores reach maturity. We have successfully executed several initiatives to drive down occupancy cost and this headwind has moderated nicely.

As we demonstrated in 2009, there are several leavers that we control when managing expense line items. We will judicially allocate resources based on the Company's performance throughout the year. We forecast the effective tax rate will be approximately 37.6% and increase from 36.9% in 2009. This will result principally from a reduction in the expected federal tax credit along with expected state income tax increases. We expect to increase capital expenditures to arrange totaling approximately $90 million to $100 million.

As I stated earlier, we plan to maintain our store growth at the current levels of approximately 70 to 80 stores in 2010 and don't expect to open any Del stores. Similar to the store open strategy executed in 2009, we expect to open approximately 60% of the stores in the first half of the year. Additionally, we anticipate spending incremental capital in our distribution network on a warehouse management system to help drive further logistic efficiencies. This include software acquisition as well as potential purchase of conveyor equipment for up to two facilities. Most likely we would implement in the later half of the year. Although, we believe it's likely we will make further purchases under our stock repurchase program as part of long-term objectives while reducing cost of capital, we do not include potential future repurchases in our forecast. As always, this will be subject to prevailing market conditions and overall market volatility.

As we emphasized in the past, we believe our business can be more accurately assessed by looking at the halves, not the quarters, as the weather can significantly change and shift timing of our sales. Some key points with respect to the quarters. as you know, Q1 is to get ready quarter for the spring and results can vary significantly depending on an early or late spring. It's generally a quarter that produces limited earnings.

There are no shift of holidays between any quarter that would affect comparability. As in the past question will provide more color on our expectations for the subsequent period at each quarterly conference call. Now, I would like to turn the call to Jim for more details on our plans for 2010.

Great, thanks, Tony. We expect retail environment to remain dynamic and will need to maintain crisp execution in order to reach our desired goals. We have an experienced and energized leadership team in place with a roster of individuals who are focused on getting the job done. While we've had some management changes over the last few years, even our newest executives are now entering their second and third years with the Company. As such, we are fully ramped up and very confident in our ability to build on our positive momentum throughout 2010.

To guide our actions, we will remain relentlessly focused on serving our customers and managing our business proactively. Let me get to more detail on to both of these priorities for 2010. First, we'll maintain relentless focus on serving our customers with our unique mix of merchandise, elevating our customer's shopping experience and refining our marketing program. More specifically, unique mix of merchandise is a driver of our business. We remain in line with customers needs, therefore emphasis on Q items will continue. We will continue to increase our direct sourcing to offer the best products for our customers from both a quality and value perspective. We're also strengthening our private brand, which provide great value for our customers and improved margins for us.

With respect to discretionary purchases, we believe there's a pent-up demand in big tickets but we believe it's also too early to say whether we will see that demand come to fruition in 2010. As such, we will carefully manage inventory levels for discretionary and big ticket merchandise to support customer demand. We've proven the ability to navigate well and adjust appropriately during inflationary and deflationary periods.

Urban lifestyle is still growing. Let me reference a few high-level comments from December, 2009 article of Wall Street Journal which stated young families and singles are heading back to rural areas in this country. The article references three demographics. Young people buying land as an investment, ex-urban commuters escaping the brawl and back to the land types dabbling in hobby farming. Clearly, we view this as an opportunity to gain customers. We know that there are associates' expertise combined with the right merchandise assortment as Tractor Supply Company positioned to gain the most from this continuing migration to rural America. We believe the refined marketing program we implemented in 2009 will continue to benefit us this year as we maintain our focus on managing gross margin dollars and that of advertising. The marketing team has proven we are able to deliver efficiency and effectiveness as we adjusted our advertising dollars to focus more on our direct marketing program. As we continue to refine our CRM program, we enhanced our capacity offer the right product to the right customer at the right time.

Turning to other 2010 priority, we will managing our business proactively. We will maintain our aggressive management program. We allocated a low cost and conservative operational discipline. Our Tractor value system, which ensures we rigorously apply lean principles throughout the Company. We'll continue to support our goals to operate as a lean organization focused on continued process improvement. We will continue to add technology enhancements to drive efficiencies across the organization. We will be completing the rollout of our point to sale system in all stores. We look forward to seamless integration across our stores to enhance shopping experience which include quicker transaction speed on all transactions. Additionally, we will improve our ability to capture customer data. And this will benefit CRM and customer transaction analysis. We will also enhance our internal controls and ability to monitor real time inventory.

Our supply chain will also benefit from technology enhancements. We'll continue to leverage the freight and logistics initiatives we began to implement in 2009. Additionally, we plan to install warehouse management systems, which will drive efficiencies in shipping and receiving, putting away and taking. We'll get into more details about this system in the second half of the year. We'll continue to focus on manage inventory efficiently.

We are expanding 2250 program to 3300. This program ensures that we have a solid in-stock position with an emphasis of a top product categories of the most important SKUs within those categories. We'll also benefit from a metric proof capacity to plan and allocate seasonal and promotional buys as well as our ongoing price optimization and mark down initiatives.

Now, before we answer the call for questions, I would like to reiterate our commitment to being a growth company. In 2008 and 2009, during the deepest recession of our lifetimes, Tractor Supply opened 162 new stores, hired 1500 new team members, distributed nearly $70 million toward shareholders through our stock repurchasing program, generated more than $430 million in cash flow from operations, and increased our EPS by more than 30%. I'm proud to say our team truly rose to the challenge and delivered a very strong performance. Today, we are better positioned for the future than any time in our history. We have a clearer focus strategy. We have a bright and highly engaged team and we are excited executing at a very, very high level.

While we are proud of our performance last year and last decade, we are satisfy with nothing and look forward to continue improvement and growth. We do recognize and appreciate the contributions from each of our 15,000 team members, particularly those of our great store teams that serve our customers every day. As Tony mentioned, we anticipate achieve top and bottom line growth while continuing to deliver strong cash flows in 2010. We believe our outlook for the year is achievable. We also recognize that the retail market is dynamic and that we'll need to remain nimble and responsive to that market. We have a resilient business model focused on serving a unique market. The capacity to operate at least 18,000 stores and a strong capital foundation. In short, Tractor Supply is never stronger, better positioned than we are today. Operator, that concludes our prepared remarks and we would like to open the call to questions.

Thank you. (Operator Instructions). One moment please for the first question. Our first question come from the line of Vincent Sommese of Bank of America/Merrill Lynch.

Good afternoon and thanks very much for taking my question. Jim, if you could give any color or mainly on the gross margin. And I know Tony, that you had mentioned the factors going into your outlook for the 2010 period. If you can give any further color in term of how you foresee that throughout the year on both the inventory management front as well as the freight opportunities or slight head wind as you mentioned in 2010, that would be great.

Hey, Vincent, this is Greg Sandfort. Let me ask that for you. In regard to margin, there's a number of things that we are doing. One is we are moving our model from I would say indirect sourcing to direct sourcing to factory. And that is a big move for us that has substantial impact on gross margin. We won't see much of that until the late part of 2010 but it is the works today.

Pricing optimization is another piece. We talked about the focus on the 2250 this past year and is moving up to be a 3300 program. So we found more things to support. But you have to understand there's high velocity SKUs as well as low velocity. And what we're going to be doing is looking at price optimization on as many of the high-velocity SKUs we can as well as taking a look at that bottom 3,000 to 4,000 SKU's. So things turned a little bit slower. There's another opportunity.

Another thing that we have done in margin protection and (indiscernible) margin growth is looking at multiple sources for our commodities. The dynamic of understanding there are several places we can go to fulfill those needs and then having that dynamic of comparison of price is something that we have definitely stepped up this year and will continue all the way through 2010. And then the last thing on the margin side is -- and Jim mentioned this and so did Tony -- the ability of us to move through an exit cleanly on seasonal products. It really limits the back side on markdowns and it really adds to the gross margin equation.

Now, talking about on the logistics and transportation side, the big wins here are really several things. One is, we went through a dedicated fleet bid process over this last, well 2009. And as was mentioned, we found tremendous savings by reconstructing how we operate our trucks and how we actually run stem miles. So there are savings yet to be seen through 2010. Secondly, there is a vendor compliance roll out program that will be in the initial stages in March, probably gain momentum towards end of year. And this is all about saving efficiencies not only from a movement of product in transportation but once it enters the building and then is distributed, put away, taken down, picked, pushed and back out to stores. So, those are two things to note that I think will definitely impact margin.

Okay. That's very, very helpful. Thank you. And just one quick follow up if I may, a quick question on your Purina and Nutrina products. I'm assuming they're in the higher velocity category that you folks had mentioned. Just wondering if the 15 SKUs that are currently in stock, if or I guess more importantly, when would we see a greater number of SKUs coming from those two brand? Thank you.

As far as SKU expansion, we are in discussions with both the branded feed provider at this time. It would probably be the latter part of this year. We have yet to really, in my opinion, maximize and understand the impact of those SKUs in our assortments. So you won't see probably much SKU expansion until the latter part of 2010, possibly into 2011.

Great. Thank you very much.

Thank you.

Our next question comes from the line of David Magee with SunTrust Robinson Humphrey.

Yes. Hi, good afternoon, guys. A couple of questions. One, can you talk about your assumptions for 2010 with regards to the composition of the comp? And do you expect a continuation from what we saw in the fourth quarter?

Yes. Just briefly and if Greg wants to add, generally, we see that the Q items will be the drivers and obviously there's the potential lift from the feed program and the hand SKU assortment. And additionally, the repair and maintenance piece as we move into spring we think will be very critical as well as people continue to maintain their equipment. So I think you will see a similar pattern. My only hesitation on the question as far as Q4 goes, is that Q4 is our strongest apparel quarter with the insulated. So if you draw the comparison for the full year relative to that quarter, that would be erroneous. But the general trend of the Q items driving the business through 2010 would be essential.

Ok, Tony. What I'm looking for is a traffic versus average transaction size relationship. Does that continue as it was in the fourth quarter, you think?

I believe directionally that would be correct.

Okay. The second question has to do with just the inflation impact on the margin. You mentioned the impact on the margin itself this year. I'm curious, could you give more color regarding the fuller picture in terms of your ability to pass on inflation and what the net impact would be to EBIT dollars?

Let me handle that one. David, this is Greg again. We have demonstrated throughout the year that with either inflation or deflation, we have a mechanism and a process in the Company to not only track that, forecast that, but react to that. And using that mechanism, we can get a little bit out in front of what we see coming towards us in either category. And we make the adjustments. What we found through the inflationary period, it's easier because as prices move, it's easy to kind of move prices up and the customers in many cases will accept that. Deflation is a little more difficult and more of a stair step process as you start seeing prices coming down because of the move and the average cost of your ownership of inventory. But to reiterate, we have a plan here. We have a process. It works and we manage through both of those cycles very very well in 2009 and see no reason we won't do the same in 2010.

Great. Thank you. Good luck.

Thank you. Our next question comes from the line of John Lawrence of Morgan Keagan.

good afternoon. Just real quick, Greg, I don't know if you want to follow on that as well, but when you talk about the Purina and Nutrina items, the traffic that came in as part of those items, did the basket look what you expected it to? Is it mostly good feed or do they cross over to other parts of the store?

John, what we tracked thus far is it's very similar to the purchasing that you would see as far as basket size in our own private brand. Traffic probably brought some new customers but in the same respect the composition of the basket was very similar.

And secondly on private label, Jim's comment for the year, you will continue to expand that. You think weather was the single sort of factor there related to CE Schmidt. And would you look to expand that going into 2010?

First of all, weather did play a little bit of a role in the fourth quarter with the insulated product. But ironically, our CE Schmidt products did perform very well. Secondly, yes, there will be an expansion in CE Schmidt and are pleased with what we saw for her. We plan to dial that assortment up into 2010 and actually probably add some other categories in CE Schmidt as we go into the second half of 2010.

Great, thanks a lot.

Thank you. Our next question come from the line of Jack Murphy of William Blair.

Yes. Just a couple of questions. First, I wonder if you could, if you had mentioned how you had started the year, how January is progressing. I know you mentioned one specific category but any overall comments on the total comp and how that's looking?

I guess if you look at, again, Q1 is kind of a break-even quarter historically. Winter came early in Q1, early in January. So as a result, I guess the only year-over-year difference would be that we were in a position to have sale through of the remaining heating and cold weather outer wear early in the season at the first mark down as opposed to sometimes happen to us later in the season at the second or third mark down.

Okay. So stemming back to maybe more longer-term question, could you talk about how the new stores are performing. And what point we may see greater real estate acceleration. And are you seeing any real benefit from the kind of relative weakness of the real estate landlords at this point?

Yes, Jack, Stan here. New stores are performing very well. We are please with their performance. And we're going to continue to grow the stores at the pace Jim outlined little bit earlier. We are seeing some on the retrofit side, those costs are coming down. Our rent has come down now for the last three years in a row. Combination resulting in the work we have done to value engineer our prototypes. And frankly the economy is bringing the price of real estate down. So we're going to continue to open 70 to 80 stores a year for the near term and keep our eyes on the economy and trends. And hopefully we'll ratchet that up when the time is right. And will keep you posted.

Okay, thanks.

Thank you. Our next question comes from the line of Matt Nemer of Wells Fargo.

Good afternoon, everyone. Great quarter, great year.

Thank you.

My first question -- just wondering if you could drill deeper on the animal and pet category. And maybe Greg chime in, I'm sort of wondering what categories are strong? It is just consumables or seeing some up tick in the hard goods items as well?

I'll take that first. This is Greg. no question that the consumables are the majority of the drivers but we are seeing some nice add-on business with animal care. And other things like minerals, part of the business and so on and so forth. So, it's not just feed. There are other thing that are selling. In the equine business it's a little different. We have seen a little bit of a slowdown on the hard goods side and continue to see the feed and care side driving that business. But in general, the basket is relatively healthy right now. It's not just feed.

And anything we need to be aware of that's changing competitively either pricing or resets at some of the competitors or new product introductions, etc ?

As far as what we can see and acknowledge that we have, we're probably the one that got the most change, adding Purina and Nutrina and repositioning our overall mix. There's continued, I'll call it drop off of the independent feed stores out there. they have been, with the economy the way it is and money being as tight as it is. The independents are struggling. But I don't see anything on the horizon from some of the big box or whatever. We feel very comfortable about the assortment.

Thanks. And then, just switching gear to expenses, SG&A per store was up a little bit this quarter versus a little more flat last quarter. Is the difference mainly explained by the incentive accrual and tax reserves that you mentioned or is there anything else we should be aware of?

Matt, those are the two big ones that were incurred in the quarter. And in particular on the incentive compensation, relative to quarter over quarter, it was a significant increase just due to last year, Did not have a significant accrual.

And then lastly, just to follow up on Jack's question. Are you still thinking longer term if you like what you see, the store growth rate could come to low double digits? And new store productivity, we're coming up with a number that suggests higher than it's been in a very long time. Does that mesh with how you track it internally?

Yes. As far as the new store productivity, and we will continue to look at the environment and if we like what we see, we would potentially ratchet up the store growth. The new stores, we like the 2009 stores. We generally see them as a little bit stronger group than the 2008. However, straight across the board over the last several years, we like the new store groups. But there was a slight up tick in 2009.

Great. Okay, thanks so much. Good luck this year.

Thank you. Next question come from the line of Peter Benedict of Robert Baird.

Hey, guys. A couple of questions, first of all, would you be willing to quantify to the degree that you can, the lift that you saw in the fourth quarter from Purina and Nutrina? Certainly, there was probably a traffic benefit there. Any metrics you can kind of give us to give a sense of maybe how impactful that was?

Peter, I would rather not comment on that. The thing I will tell you is we saw increased foot traffic and new customers.

Okay. Fair enough.

Peter, this is Jim. It's partly to recognize that those SKUs from -- I guess 20 SKUs roughly from both companies -- represent premium feed and to the degree they impact our existing business is only in the premium section of livestock and equine feed, which is a minority of overall feed business. So, while it's very, very important to us and are delighted with the results, it is not like we have moved the entire category from, to a branded option from a private brand only option.

Okay. Understood. When we think about 2010, in terms of the comp outlook, does it assume traffic continues mid single digits? I mean. That's been one of the strong points of 2009. Do you think that could continue into 2010?

We think that will moderate somewhat. And obviously look at our comp forecast. we see probably a little more stability than we have had and a growth in traffic but somewhat diminished rate compared to what we experienced in 2009.

Okay. Good. Then, on SG&A, it was up about 10% or 11% in dollar terms versus last year in the fourth quarter. I noticed there were some incentive things. How should we think of SG&A growth in 2010? Is 10% a good starting point. I know the square footage is going to be up about 8. Is that where we should be thinking in term of SG&A dollar growth for 2010?

It's probably not quite that high. Because I think there were more significant adjustments relative to the incentive comp than some of the other year end entry. But I think you're looking directionally, you're in that upper single-digit range.

Thanks, Tony. last on the use of cash, I know your outlook doesn't assume buybacks. Can you give us some parameters? What's the right level of cash for you guys to operate at? Kind of get a sense of when you decide to do more buybacks?

Again, as much as we have internally set some targets, we have not disclosed those yet. When it comes to the share buybacks, it's not necessarily driven by the quantity of cash. We really look more at the marketplace and volatility in the stock. And again, directionally where we feel the company is going and where the stock is trading. So that is more of a determinant than the cash balances. I think as we move forward in the year, we'll give more direction as to what our sort of cash requirement is going to be. We currently want to take a look at the real estate and how the real estate market progresses and if there's some opportunities there. And again, we can further clarify as we move throughout the year.

Okay. And actually, one additional, if I can, on the inflation outlook for 2010, you are expecting 1% net inflation. 1Q you said deflation, will that hit be less than what you saw in the fourth quarter so kind of a less deflation in 1Q, versus 4Q?

Yes. We anticipate it to be a little less than the Q4 impact. And again, it's difficult to model but we feel that it would subside a bit as we get through ten of the first quarter. And that continue to moderate as it moves into the second quarter.

What is's expected to inflate in the second half of the year, to kind of get you, I mean to at a pretty decent rate, I guess to get you to platform for the year?

Yes, but not significant. If we plateau or get to flat in Q2, you're generally looking at to balance out about 2% over the course of the second half.

That is going to be more of the feed items, do you think, or?

Again, difficult to project but we have seen that elevation in the feed items. And again, it's difficult because you're really looking at year-over-year increases. And so we did have some inflation in those categories so there is potential as we cycle through against those items. But again, it's driven by the core commodity items and the big three -- the grain, the petroleum and steel products. So we need to monitor those categories.

Okay. Great. Thanks a lot.

Thank you. Our next question comes from the line of Christian Buss with Thomas Weisel.

Hi, there. Congratulations on a great quarter.

Thank you.

Just wanted to ask where private labels shook out for the year as a percentage of revenues.

Generally we were actually up and cracked through the 20% mark. I want to say were approximately 21%. So, we had a strong performance in 2009.

Okay. And then on related question, could you talk about what percentage of revenue coming from direct source product? I think you had been saying 7% before?

Yes Again, we were up slightly in 2009 and closed out around the 8% number.

Okay. Is there any help you can give us on what the margin lift you're getting from the private label product is on a relative basis?

Fairly consistent with prior years. We believe that it ranges between 500 and 1,000 basis points. When it comes to the direct imports, it's slightly lower. When it comes to the private label categories, dependent on whether it's used as an entry-point product or not or if it's higher up the ladder in a premium category, it could stretch as high as 1,000 basis points. But overall, the private label will run a little less than the direct import.

That's very helpful. Thanks a lot.

Our next question come from the line of Robert Higginbotham with Goldman Sachs.

Good evening. A couple of questions. To follow up on the brand introductions on the horse feed business, could you give us any kind of color on any impact you saw in regional brand exits there? You talked to gaining that incremental customer. I was wondering if there was any kind of offset. And really looking to the future and wondering once that negative offset maybe dissipates, when you'll have a really powerful net incremental impact. That's the first. I have a couple of follow-ups. Thanks.

Robert, this is Greg. That we saw was a relatively easy transition for many of our customers from some of the regional brand moving over to Nutrina or Purina. So we did not see any real negative impact on the business. They were more than delighted of these of those brand in the stores.

Got it. Thanks. And on 2010, your sales outlook for this year. When you think about big ticket how do you expect big ticket trend to development through the year? As part of that maybe you could talk to what kind of signs you're looking for out there to manage your approach to that business. You pretty effectively narrowed your assortment in that business to really kind of optimize where the demand transfer really going. What signs are you looking for those trend to reverse?

Sure, Robert. Jim. There are two trend. On big ticket one, we expect continuing very tight credit market for consumers as well as consumer continue to be kind of adverse to taking on more short-term or credit card debt. So that would speak to compression of big ticket. The upside will come as consumers recognize that the aggravation continue repair of what big ticket product will make replacement more attractive to them. We believe that is going to happen. Certainly when we look at riding lawn mowers, we believe there's a tremendous pent-up demand. We done know if that's coming to us this year. We're planning for it not to. But have a response plan in place all the way back to manufacturers so that we see anything, any easing in any big ticket products. Our supply chain is poised to respond very, very quickly.

Got it. I'll leave it at that. Thank you.

Thank you. Our next question comes from the line of Brent [Ristrom] with FELTL and Company.

Hi, good afternoon. I just have three questions. On the apparel site, are the markdowns on the winter apparel coming any later? It appears last year when I shopped in stores at this time, it seemed the markdowns were a little bit heavier already.

This is Greg. The difference is we didn't have near the carryover we had a year ago, to be honest, and we acted faster. We started taking some intermittent markdowns in early part of fourth quarter, which really reduced the carry over. And of course, we really had that nice push in weather the early part of January, which really cleared us of a lot of carry over. So we're in great shape.

And from that perspective we did a survey back in December mid to end of December into early January and found that close to like 90% sales (indiscernible) on a lot of private label product. Is that pretty consistent with what you sell at that time? Talking to CE Schmidt outer wear?

I would say the sale throughs on CE Schmidt were above what we expected. We are very happy with the performance and again, very little carryover. I'm sure you have been in the stores recently. You will see we relatively sell through.

The remark I getting consistently from store managers is last year on the remaining clothes they had they put that more in the middle of the store to make it more visible as people came in this time of year looking for that mark down. You haven't done that this year. Is there a reason?

Well, part of the reason was we engineered the set of the store this year to feature toys and holiday decor and things. And we positioned the left-hand corner at the front of the store the heating and warmth shop, if you want to call it that. And that was really the positioning. What we found was the customer could find the product where destination for insulation. So it wasn't an issue. And I will tell you that we're very pleased with the sale throughs. And as we pulled our stores, the majority of our stores liked the set this year versus last year.

Any branding or pricing strategies planned for our equipment as far as the riding lawn mower season?

Well, we said we were going to narrow the assortment and we have. I would rather not get into the assortment exacts. But what you will find is a focused, pointed assortment right for the TSC customer. And that's how we approached it this season. So we're very happy with the positioning and as Jim said earlier, if the season opened, if the pent-up demand starts to materialize, we are well position to take advantage of them.

Final question, just from the perspective of the snack bar, how would you characterize it relative success of that? Again, my store source tell me that the managers say that the water and the fatty salty treats, stuff like that are doing real well. The Powerade, for example, not doing so well. How do you evaluate what is in there and how to change that? It doesn't seem to have a lot of change fall to winter here.

Snack Barn is a concept. It's new for the second half of the year. There's no question that we have done our own due diligence on what sold best and what did not. And store managers, I'm sure you've heard, have a pretty good feel for that as well. It's changing out in the first quarter again. And what we've learned is that both the front wall and the placement products sell differently. So we have 2010 and believe the concept is not only viable but can add substantial volume for us in profitability as we go into this 2010.

Thank you. Congratulations.

Thank you.

Thank you. Our next question come from the line of Mitch KAISER.

Thanks, guys. Good afternoon Tony, could you take us through your average costing pools? I think I'm on the Q 3 call you were talking there may be some gross margin rate pressure. And then just maybe what your assumption is for diesel pricing. I know it's up about 25% kind of year-over-year and recognize there's a three to four month lag. But if you could take you through your thinking. Thanks.

We don't talk in too much detail on LIFO pools themselves. However, we did receive an obvious benefit as we had the deflation in the fourth quarter. Go forward, when we look at inflation in the coming year, we like it to be somewhat moderate because significant inflation can have more pronounced LIFO impact. One thing I wanted to point out is that over last decade, outside of 2008, LIFO has always been a very small number. It's always been less than $10 million. So we don't believe that either have a significant impact at these lower inflation rates. And we do believe that it's very, very manageable as we move into 2010. So relative -- is second question was --

Assumption on diesel pricing and one follow up.

Generally, we expected to increase throughout the year, but we will look at the federal guidelines and we'll utilize that as our projection. So we do anticipate to have some increase but it's relatively moderate.

Okay, so maybe some of the initiatives you're taking on the transportation side will help alleviate that?

Yes. That is our goal and we look at the initiatives and the potential savings could be and we believe that it will offset it maybe not in its entirety but feel we can have significant offset from the initiatives we have in place.

Okay. And then just to be clear, in the release you talked $0.20 of LIFO or charge. Is that about $10 million to $12 million in pretax, then?

Correct. We said it was $12.2 million pretax is the full year guidance for LIFO in 2010.

Okay. Sound good, guys. Thanks. Good luck.

Thank you.

Thank you. We have reached the allotted time for questions. I will turn the call over to management for closing remarks.

Okay, well, thank you very much. Glad you're on the call with us and on the trip with us. It's been an exciting journey for the last ten years, two years, and certainly last year was just terrific. I'm extremely proud of the team, delighted with store readiness. I visited 120 stores last year and frankly have never found us better, more prepared for business. We're doing a great job from stores all the way back here to the store support center. And I look forward to another good year in 2010. Thank you.

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