Tractor Supply Co (TSCO) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Tractor Supply Company's conference call to discuss first quarter 2010 results. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A 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, the conference is being recorded. I would now like to introduce your host for today's conference, Miss Erica Pettit of FD. Please go ahead, Erica.

Thank you. Good afternoon everyone, and thank you for joining us. Before we begin, let me take a moment to reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. Although the company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

Important 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 Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statement will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call.

Now I'm pleased to introduce Jim Wright, Chairman 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 Sandfort, our President and Chief Merchandising Officer, and Stan Ruta, our Chief Operating Officer.

We're delighted that the first quarter proved to be much stronger than anticipated, we achieved record first quarter results, including sales of $711 million and earnings of $0.25 per share. While weather conditions were favorable throughout the year -- the quarter, we believe our product assortment, in-stock levels, seasonal preparation were the principle drivers of sales growth and gross margin expansion. The result in revenue, enabled us to leverage SG&A expenses in the first quarter. Let me go into a little more detail around our ongoing strategies that contributed to a terrific quarter.

First, we anticipated that our customers would continue to shop on a needs and value-driven basis. Our core consumable, usable and edible categories remain strong and continue to drive traffic in Q1. In particular, animal feed and pet food remain high-growth categories. We are also encouraged by the recent strength in our discretionary hard-line pet and animal items. Our customers are responding to these new products, new displays and our additional inventory in these categories. Tony will go into more detail about merchandising comp drivers during his remarks.

Second, our high in stock levels and seasonable execution trade a compelling shopping experience for our customers. Our inventory management and execution is simply the best that it's ever been. As you're probably aware, we recently expanded our focus from the top 20 categories and the top 250 SKUs to the top 30 categories and the top 300 SKUs. As part of our never-out program, we're investing in key items and had the highest in-stock positions since we started the program. At the same time, we're very pleased to report a lower per store inventory levels on a year-over-year basis for the tenth consecutive quarter.

With respect to seasonal planning, we have enhanced our regional merchandising, transition more cleanly at the beginning and end of seasons, and their end-of-season markdown cadence allowed us to exit seasonal categories with improved gross margin. We have also improved our in-store presentation. We refined our displays in certain categories and we have seen these categories comp above chain average. We continue to work closely with our vendors to identify ways to enhance the efficiency of the product setup process. In some cases, they're delivering floor-ready and shop-ready displays that reduce store merchandising time and allow increased time for customer service.

At the same time, we're fine-tuning our targeted marketing efforts, as we focus on engaging new and existing customers. We've increased our direct mail program, in an effective and prudent way. We continue to reinvest dollars we previously spent on TV into direct mail. We have also identified seven customer segments and tested various offers with them last year and in the first quarter. We're now compounding our learning about how to efficiently reach each of these customer segments. Accordingly, we'll be able to leverage our marketing expense while still driving traffic growth.

In line with our folks at operating Tractor Supply as efficiently as possible, we continue to apply lean principles throughout the organization with our tractor value system or TVS. We're pleased with the on-going elimination of waste, friction and cost. For example, we looked at the store opening process and identified that low-voltage wiring activities, previously performed by floor vendors, could be consolidated into one vendor resulting in efficiencies and cost-savings every time we open a new store.

Finally, one of the most important factors in our continued success is our store and store support teams. They're proud and motivated to be part of Tractor Supply. And they work seamlessly together as a team and are serving and selling our customers extremely well. As a result, we're developing executable programs and enjoying crisp implementation. We remain focused on assuring that our team members are well-educated about merchandise in our stores.

In March, we held our annual sales meeting, where we bring together all of our field management, to get them rallied up for the spring selling season. The team is focused on our initiatives and we're pleased with the success of the sales training and the excitement generated at the meeting. We have a clear understanding of our customers' needs and how to manage our business very effectively. We have the right products, people and processes in place to continue building on this momentum, all of which makes us confident that we're well-positioned for long-term sustainable growth.

With that, I'd like to turn the call over to Tony, who will now review our financial performance and discuss our outlook for the remainder of 2010. I'll then return to review some of our priorities for the rest of the year.

Thanks, Jim. Good afternoon, everyone. We're extremely pleased with our performance in the quarter and that many of our initiatives are benefiting top- and bottom-line results. Good customer traffic and well-managed margin drove the significant year-over-year improvements.

Our expense management continues to be strong, as we leveraged SG&A by 57 basis points. For the first quarter ended March 27, 2010, net sales increased 9.3% to $710.9 million, from $650.2 million in the first quarter of 2009. Net income grew by almost 1900% to a record for our first quarter of $9.3 million or $0.25 per diluted share. Comp store sales increased 2.8%, compared to last year's 4.2%. Non-comp sales were $42.7 million or 6% of sales.

As Jim mentioned, our assortment of rural lifestyle essentials and solid execution on seasonal merchandising is very attractive to customers. The products in our consumable, usable, and edible, or CUE categories, remained the key merchandise drivers of our sales. Animal and pet-related products performed well. We continue to receive an additional sales lift from the rollout of Purina and Nutrena premium large animal feed that we began selling in early October 2009. Additionally, we saw limited pet food inflation and saw an uptick in pet hard-line sales. Jim will discuss that in more detail.

Our appropriate seasonal merchandise assortments and allocations meant that we were well-stocked for the favorable weather conditions we experienced throughout the quarter. This also enabled us to manage markdown cadence extremely well, benefiting margin. We experienced strong sales for our cold weather products, such as heating, insulated outer wear and emergency response product, as January and February were cold. Initial trends for spring seasonal products were good, because March weather in the north was much warmer than prior years' period. Although the south was slightly colder, we still viewed the overall weather in March as a net positive, given that warm weather in the north can jump-start the spring selling season.

We estimate that we experienced 235 basis points of deflation on the sales in the quarter, with depressed top-line sales. We effectively managed this impact of the gross margin level. Deflation was most evident in the livestock and bird feed, agricultural fencing, certain lawn and garden, and lubricant categories. We continue to see customers purchasing products in more frequent shopping trips with lower average tickets. Comp transaction count increased 7.3%, despite a reduction in marketing spend, while average comp ticket decreased 4.2%, primarily impacted by the softness in big ticket items and deflation. It should be noted that we saw a year-over-year decrease in average ticket moderate as we moved through the quarter.

In particular, we began to see revival and big ticket spend, albeit at a slightly lower price point in the last few weeks of the quarter, as we saw riders' sales show a comp increase in units offset to a lesser extent by a lower ticket. On a regional basis, sales were the strongest in the mid-Atlantic states, as we had strong heating sales in the early part of the quarter and emergency response sales related to winter storm activity. Sales were the weakest in the southwest, as unusually wet and cooler temperatures negatively impacted the start of spring in related agricultural fencing sales. Comp sales in our Del stores were slightly below chain average, but we are pleased with Del's improved gross margin as well as feed unit and transaction growth, which are offset by deflationary pressures.

Turning now to gross margin, we increased by 127 basis points to 32.2% of sales. Direct margin was the biggest catalyst, as many of our margin and inventory initiatives continue to contribute to our gross margin enhancement. Our pricing strategies are bearing fruit, while our strategic sourcing is delivering benefit. We have worked with our vendors to support our merchandise programs to drive sales of key items, that resulting in a win-win for both parties. We ended the fourth quarter in near optimal inventory position, which limited markdowns in Q1. We continue to improve our inventory purchasing and allocation, resulting in getting the right merchandise to the right stores, at the right times, and limiting potential markdowns.

Freight expense improved over the last year by approximately 10 basis points. Although, few costs were higher than last year, our initiatives to reduce our stem miles continue to generate freight savings. We expect that these savings will continue to provide some offset to the higher fuel costs to the first half of the year, until we begin to cycle the implementation of the transportation initiatives in the second half of last year. Shrink continues to improve year-over-year as we strategically retrofit high-shrink stores with electronic article surveillance and camera systems, throughout the chain along with operational initiatives. LIFO did not have a significant year-over-year variance, as the provision for the quarter was approximately 15 basis points less than the prior year.

For the quarter, SG&A, including depreciation and amortization, was 32 -- was 30.2% of sales, which was a 57 basis point decrease over the prior year's quarter. As a result of our sales growth and continued expense management, we leveraged SG&A expenses. Other items of note for SG&A, we leveraged occupancy in the quarter for the first time in three years, since we began our aggressive store expansion. Our focus on reducing our new store expense structure over the last three years has moderated the impact of our expansion program, and enabled us to leverage SG&A on comp store sales of 2.8%.

Additionally, other programs for our existing store base have had a positive impact in this quarter. For example, we are replacing HID, or high-intensity lights, for approximately a third of the chain with energy-efficient lights over a two-year period. Accordingly, we estimate that we saved approximately 22% of electricity usage for the 180 stores, for which we completed the re-lamping in the latter part of 2009. This program not only has a significant ROI but supports our sustainability efforts through the reduction of energy consumption.

We had a strong store payroll management, which demonstrates the scalability of our payroll model as comp sales ramp. At the same time, our customer service scores improved. We remain efficient with our marketing dollars as marketing decreased by 17 basis points. We continue to drive footsteps, while maintaining our advertising spend. We do not believe that the lower spend will continue throughout the remainder of the year. And, specifically in Q2, as we have an additional circular planned. Incentive compensation, including store team members' sale bonuses was approximately 20 basis points higher than last year as a percent of sales.

The company tax rate was 34% well below our prior full-year expectations of 37.6%. This decrease was due to a large number of disqualified incentive stock options, that resulted in a tax deduction in the period. We now anticipate our full-year tax rate will be approximately 37%. Turning to the balance sheet, we are extremely confident in our liquidity position, due to the ongoing strength of our cash flow from operations. At the quarter end, we had $138.1 million in cash, compared to $37 million last year. It should be noted that we did not have to draw down on a revolver for working capital needs during the quarter, which tends to be one of our peak borrowing periods. And our cash balance reflects the payment of our first quarterly dividend before the end of the quarter.

As Jim mentioned, we continued to do a great job managing inventory while maintaining in-stock levels. At quarter's end, inventory levels per store were down 3.5% on top of 6.9% decrease at the end of Q1 last year. Our calculation of inventory levels per store is based on average cost of inventory and open stores only. Annualized inventory turns for the quarter was 2.57 times and 18 basis point improvement over last year's first quarter. Financed inventory increased to 51.1%, up 330 basis points. The improvement resulted from better flow of goods, which attest to the freshness of our merchandise. Additionally, we began to cycle our program of using our financial stability to accelerate payments to capture additional vendor discounts.

Capital expenditures for the quarter were $12.9 million, related principally to our new store opening program. This compares to $18.9 million last year's first quarter. We opened 19 stores, versus 28 stores in the prior year's first quarter. During the first quarter, the purchases, under the stock purchase program, were approximately 73,100 shares for $3.8 million.

And turning to our outlook for the full year. With respect to our financial expectations for full year 2010, earlier this month, we raised our previous expectations for full-year sales and net income, principally as it relates to Q1 results, exceeding our expectations. As noted in our business update, we expect net income to be in a range of $3.48 to $3.60 per diluted share, compared to our original guidance of $3.30 to $3.42 per diluted share. We expect full-year sales to range between $3.44 billion to $3.5 billion, compared to our original expectations of $3.42 billion to $3.48 billion. Correspondingly, same-store sales for the year are expected to increase 1% to 3%, compared to our original expectation of an increase of 0.5% to 2.5%.

I would like to quickly discuss a few of the underlying assumptions for the remainder of the year, including our full-year guidance. While consumer sentiment has grown somewhat more favorable from when we first provided 2010 guidance, we believed that the consumer will remain value-oriented. We also do not anticipate that there will be a marked change in consumer credit availability or the unemployment rate. While our customers appear to have some resiliency to this, we're not immune to the negative impact that unemployment increases could have on consumer spending.

Our CUE categories will continue to be the sales drivers. In particular, we expect that our new branded feed program will continue to drive momentum. Two points in particular are merchandise. First, we have recently seen signs that the consumer is willing to make big ticket purchases. When he or she does, it's usually at opening or value price point. Secondly, we're very pleased with the strong April sales to date. Let me remind you that the spring selling season came earlier than in the past years. April was a very difficult selling month last year and we'll have a much clearer picture of the quarter by looking at April and May together.

We had anticipated that inflationary pressures would be flat as we moved into the second quarter. We currently believe that we will experience slight deflation in Q2, related to favorable prices in certain categories, but are confident that we'll manage it appropriately. Correspondingly, we had reduced our full-year LIFO estimate to $10 million from our original estimate of $12.2 million. We believe that our gross margin, transportation, and logistic initiatives will continue to provide benefits, that will more than offset the impact of potentially higher freight costs. Although, we leverage marketing in the first quarter, we still anticipate we will increase marketing spend by 8 to 10 basis points throughout the remainder of the year. We have one additional circular planned for Q2 above the number of circulars last year.

We expect to open 70 to 80 new stores and expect capital expenditures should be $90 million to $100 million, which is consistent with our original guidance. During Q1, we committed to acquire three of our current stores, that had been under lease, for approximately $7.1 million. We will continue to opportunistically purchase leased stores, in which we're presented with the right of first refusal and the economics are created to the income statement, as we believe that this is an appropriate use of our capital.

To conclude, we're very pleased with our performance to date. And are proud of the many initiatives that are driving top-line and bottom-line increases as the economy begins to recover. We're well-positioned to have another record year in both sales and earnings. And now with that, I would like to turn the call back to Jim.

Thanks, Tony. We're excited about 2010, as we continue to build on the momentum from Q1 and from 2009. We have even more confidence that our relentless focus on serving customers' rural lifestyle, while delivering everyday value and managing the business proactively, will continue to benefit the company and our shareholders. Our mix of business today is very different than what it was only a few years ago. For example, compared to 2007, our livestock and pet product category has grown from 33% of sales to 39%, with more than $350 million of incremental sales.

On the other hand, we've reduced the dependency on hardware and seasonal products, which have declined from 26% of sales to 23% of sales. During the last few years, we focused merchandise and inventory allocation, advertising, and training on the product categories that our customers need most frequently to live their lifestyle. And we've committed to helping them save money through the recession. As a result, we've gained share and have become more relevant to our most important customers. Additionally, our teams have consistently improved the customer experience, as measured by our customer loyalty scores.

With that in mind, let me share with you some of the ways we're addressing consumer trends we're seeing for 2010. First, we know that consumers will continue to expect everyday basic items with compelling value. As an example, our animal feed and pet food business, which continues to drive both footsteps and sales, is well-assorted and strategically positioned with a mix of private and national brands at great prices. Since we introduced Purina and Nutrena in our stores in the latter half of 2009, these products have been additives to our business. Brands, a branded feed, have brought in new customers and increased the basket from some of our existing customers who had not bought feed at Tractor Supply in the past. Overall, we believe that a feed can be a cart starter and as one of the initiatives that we believe will help drive average ticket growth.

Our private label program within pet is also very important to our business. Earlier this year, we launched 4health pet foods, which are specifically formulated to provide the best nutrition available. So far, we are delighted with the consumer response to our six different formulas. While the initial product assortment focuses on dog food, we see an opportunity to expand this brand strategically for cats and into adjacent categories, like treats. This type of brand extension is part of our long-term focus on increasing private label from approximately 21%, where it is today, to 25% of the business, which will further benefit margin.

Turning to hardware and a season of products, which have decreased in mix in recent years, we're very well-prepared for the spring selling season. Given the big ticket nature of outdoor power equipment, we've reduced our dependency on this category. Even at the start of this year, we were uncertain that 2010 would be the year, we experience the benefit from some of the pent-up demand from consumers who have delayed purchases. However, early indications showed a renewed interest in OPE. We increased our forecasts and are seeing strong trends in the OPE unit sales. We have -- we had expected, though, these customers are focusing on value, and are coming in for lower and mid-price point models.

Because we have placed emphasis in this part of the category during our purchasing and planning, we're well-positioned on our inventory level and margin management initiatives, especially, if the current favorable weather patterns continue through Q2. Overall, we expect OPE will be another ticket growth driver in 2010. Through our strategic initiatives, we're serving the daily needs of customers and they're responding very well. From our store support center to our stores, we're focused on consistent execution.

In 2010, we're enhancing our technology and freight and logistics programs to drive efficiency across the organization. It's truly an exciting time with Tractor Supply Company. The retail engine, that we've developed, has enabled us to manage well a challenging macro economic landscape and position us well for long-term. We are a growth company with a strong capital foundation, as proven by our commitment to expand the store base, invest our infrastructure, and return cash to shareholders, for share buyback and dividend programs.

The team is encouraged by the momentum thus far in 2010. Our stores are preparing for the spring selling season and we look forward to a bright future as we both grow and improve the business. Operator, that concludes our prepared remarks. And we'd now like to open the call for questions.

Thank you. (Operator Instructions) One moment, please, for the first question. Our first question comes from -- (inaudible) of Banc of America.

Good afternoon and thanks very much for taking my question. Congratulations on another, very nicely executed quarter.

Thank you.

Question, Jim, in the opening comments and certainly throughout, you noted weather as certainly being a benefit throughout the entire quarter. Just wondering if you can give any type of quantification in terms of the amount of weather impact on comps, how much it helped during the quarter? We appreciate the geographic color, but any quantification on weather specifically?

We cannot break it out that way. I guess maybe -- let me suffice to say -- there are really two things that driving it. One, as Tony mentioned, it was warmer in the north, in the month of March. We had a cold weather front end that helped us a great deal. Most exciting though is the fact that America is wet and green right now and that continues to auger well in 2Q for results in Q2.

Okay. And another question, if I may, on your capital priorities. Do you think that as you go throughout the year in terms of ranking it in order, do you think there is a potential for share repurchases to increase? And how are you looking in terms of where you're going to be allocating your cash?

Yes. Vinny, this is Tony. We feel that we have the leverage in place between the dividend and the stock repurchase program as well as the some of the isolated programs that we have relative to the acquisition of some of our real [estate] sites. We look at it at times -- we like to focus more on the stock repurchase using a matrix repurchase program.

So, as the stock moves and we look at the intrinsic value of the stock, we'll continue to move that matrix accordingly. So, as much as we have target internally, where we like to have a balance between the dividend and the stock repurchase, at times given the way the stock performs, it will affect the way we purchase the stock. But we do anticipate to continue the program and do it on a very disciplined, methodical approach using our matrix.

All right, thank you very much.

Our next question comes from Brent Rystrom of Feltl. Mr. Rystrom, your line is open.

Yes, thank you. Congratulations, guys, as well. Real quickly, a couple of quick questions. Tightening a lot of stores in the northern states, I'm hearing comments from store people about selling two or three mowers at this time of year and in previous years, they have never sold mowers at this time. Any particular thoughts on mower sales in the north? I know you mentioned the weather is really helping, but I am hearing from the people it's exceptionally strong.

Brent, hi. This is Greg. What you're hearing is correct. We're seeing early indication that the customer is coming back, and probably that pent-up demand that we talked about in the last call is starting to play out a bit.

I would say, so far for April, we're pleased. But, as Tony mentioned, you really have to look at April and May combined to really get a good read to see if the trend is really developing the way we had anticipated. So, initial read is good. We're pleased, and yes, it did start in the north earlier, because of the break in weather in March.

I was in Texas this week and talked to a few of your stores there. And they're already starting to hit some of your replenishment programs, as far as in-season re-stocks, focused on some of these lower-priced riding mowers. But, things that have already sold through, they have specific dates for when they're going to be back in stock. Are you pleased with how that replenishment program is running?

Very pleased. As a matter of fact, at the time as we sell through product, I think the stores would tell you the trucks are pulling up to the back door with the replenishment there for them and for the customers. So, we really have a pretty well-oiled machine this year for flowing inventory back to the stores as it's sold.

And in two final real quick questions. Remember, years back, going back old days and covering this back in the late 1990s and early 2000s. Typically, when you have a big spring selling riding mowers, you tend to have a big summer and late summer with accessories, like lawn rollers, lawn sweepers, stuff like that. Do you think that that pattern holds?

You know, it's going to be hard to say. Again, we're going to have to see how April and May develops, Brent. But, I assure you that we're looking forward with our inventory. I'm looking forward into what we believe the weather will bring. But we need another, I think, another good month's worth of sales to forecast that that will extend. As Jim said earlier, the fact that throughout the United States, there is quite a bit of moisture. That moisture plays well for continuance of business and other product categories throughout the entire spring and summer season. So, a little early to say that there is a big win. But it's looking promising.

Final question. Looking at the in-stocks, particularly on the branded equine food, I am never finding it out of stock, but I'm finding you getting right down close to being out of stock. I'm assuming you are finding the equine feed to be just surprisingly good response with consumers. Is that fair to say?

Brad, I would say we're still learning the high watermark on feed. With the introduction of the brands and the consumer basically changing their buying pattern, moving to tractor supply from possibly the small feed store that was there locally. We still have a lot to learn.

Our in-stock levels have been more than acceptable, but we do have a few pockets here and there, where we will acquire a new customer that will literally run pallets worth of products. So, I would only tell you that we're still learning. We don't know what the high watermark is just yet.

Wonderful. Thank you very much.

Our next question comes from John Lawrence of Morgan Keegan & Company.

Good afternoon, guys.

Hi, John.

Would you comment just a little bit, I don't know if you'll get this granular or not, but when you look at the branded feed that contributed to the quarter. Can you give us an idea of how much of that increase came from existing customers versus new customers?

What I can tell you, John, is that we look at attributed sales, which are the customers that we track. And we saw a 5% increase of attributed new customers coming to us, due to branded feed in the first quarter. That's about as granular as I think I can really get with you on that.

So it's 5% of new customers came in the door?

Newly acquired customers in the attributed data that we have.

Okay.

Which is not all of our customer base, as you know.

Right.

John, this is Tony. Just to clarify. As we develop our database on the customers, which we call attributed customers. It directionally, I think, it gives us an idea, but it's not a number I would extrapolate. But directionally, we see that 5% of new people coming into our database, are buying branded feed for the first time. We make the assumption that they're coming to the store as a new customer.

And secondly, those sales that you have seen in OPE. Cash versus credit percentage buying habits, what are we seeing?

The actual credit purchasing has been about flat to last year and cash purchasing is about the same. So there really hasn't been too much of a dramatic mix from what we can tell.

Okay. And last question -- I'm sorry.

Remember that they're buying more in the opening price point, mid-price point versus where they may have been in the past. And John, and that's -- maybe it's more affordable. I'm not sure, but it sure looks that way.

Great. And the last question for Stan. Obviously, with turnover improving a little bit, can you talk a little bit about the associates and the store level as you're adding stores and the economy getting better? A little bit about employee turnover and that type of thing.

John, we see team member turnover and manager turnover continuing to improve now for over the last several months. We're delighted with the number of people that we're able to develop from within the company. We're going out of the company less and less, and developing more and more people from within. And I would tell you our people bench is stronger than ever.

Great. Congratulations. Thanks, guys.

Thank you.

Our next question comes from Peter Benedict of Robert W. Baird & Company.

Hey, guys, thanks for taking the question. First off, the improvement and the pet hard lines that you guys noted. I don't know if you can expand on that a little bit. What exactly you are seeing on that front?

What I can tell you, Peter, is it's across the board with respect to containment and with respect to treats and with respect to toys. So it's -- the categories that are kind of supplemental except for the containment piece, have all shown nice increases and that's playing alongside of the increase that we have seen in the food category as well.

Is it anything that you guys have done in the store or you just think it's the -- just a customer returning to that category? Is there anything specific you have done to drive that, do you think?

Yes, it's really a new product. It's new products that's driving it and it is the display of the new product in the store.

Okay, terrific. And then the thoughts on re-accelerating the new unit growth, kind of an ongoing question for you guys. Is this very good, confident in your operations, at what point do we maybe get the unit growth back up to that 12%, 13% level or is that something that is on hold for the foreseeable future?

That is on hold for right now. We feel very comfortable at the 8th and 9th level growth rates. This year will be, you know, around 75 stores. We're expecting a modest increase in 2011 to that number, but we don't see a reacceleration to 13% on the horizon just yet.

Okay, then last question. With the earnings guidance that you have out there right now, what type of EBIT margin expansion are you guys thinking about at this point?

For long-term?

No, for this year.

Peter, this is Tony. We're looking at -- obviously our target is to be somewhere in the 20 basis point range. That is our ongoing and we obviously would expect that that can have stronger years and lesser years. Generally, we see that we're going to be somewhere in maybe the 30 basis point range. So we think we can exceed that target and finish the year really strong, and be somewhere in that 30 basis point range.

Great, thanks, guys.

Sure.

Our next question comes from Dan Wewer of Raymond James.

Thanks, hi. Jim, you've in the past, discussed the first quarter as the get-ready quarter. Typically very small earnings during the period, I guess, it was in the first quarter of 2007. You'd made about $0.12 a share and now $0.25. Has this has become the new bogey for the first quarter going forward? Have we permanently changed the seasonality of the quarterly earnings contribution?

Well, as I speak to my team, absolutely. Realistically, though, we have to look at Q1. It's always going to be our get-ready quarter. And, as a result of that, we are temperature and moisture and weather dependent. Having said that, we've learned a great deal about driving business and driving profitable business in the first quarter, so I suspect the we won't be talking about a break-even quarter going forward but frankly a quarter with some modest EPS.

Why would the significant upside in the first quarter gross margins and the benefits to EPS not carry through into the other following quarters -- of a similar amount?

Well, there's a couple of questions that I guess I would -- we have to answer. One is, we're seeing some compression right now with transportation costs. Freight -- overseas freight is a difficult area right now for costing because of the -- we have new contracts in place on that, but unfortunately, the overseas carriers are demanding much higher cost for containers.

Secondly, there with fuel prices starting to move now more toward the $3 a gallon scenario. We see a little bit of compression there and so, I would say we're just being a little conservative, because the transportation piece is a little -- we're not 100% sure right now. I will also say to you that we had improved margins as we came out of the fourth quarter and the first quarter because of the sell-off of old season product earlier. And that's helped us do a little bit of a run on margin versus a year ago where we did not come through as cleanly. So there's a couple of moving parts here.

That makes sense. Is one other, maybe issue, over the very near-term? You noted at the Investor Day last month that gross margin rates and OPE are low, and then I think, this afternoon, you had noted that the strength on the OPE is still on the value price points. So is there some thought that maybe we're going to see a change in mix during the second and third quarter that could challenge merchandise margin?

That is always a risk but I believe that we mitigated that in the way that we purchased and assorted our OPE mix this year. We were very early to make commitment. We worked to build product in off season to try to enhance margin. We have done a lot of things to really improve our overall OPE margins versus a year ago. And this year, we started this season with probably 98% fresh product, the cleanest we have ever been probably on this to the last six to seven years and that is also margin product. So that's helping us right now. I expect that to continue, as a matter of fact. I don't see the OPE compression -- if anything, I think it is going help us.

Great, terrific. Thank you very much.

Our next question comes from Peter Keith of JMP Securities.

Hi. Thanks for taking the question. And congratulations on the nice results, everyone. Circling back on the branded feed, I know there's been a couple of questions, but I was wondering, if based on the technology that you guys have to track customers, are you seeing an accelerating benefit from new customers coming to the store? Because I would imagine there's some ramp up in consumer awareness of that product that takes some time to unfold.

I think the number one thing that we have seen is transferal of customers, from possibly the local feed operations to tractor supply. It will probably be the initial read that we would have. And then as we look at our attributed database, we have seen some customers that were coming into our stores, not buying our feed in the past, who are now purchasing branded feed from us. So we have seen some increase in the business there as well. That is probably the best I can give you.

Okay, thanks for that. I have one last quick question for Tony. I noticed that the depreciation actually only increased about $0.5 million year-over-year. That is one of the smallest increases that I have going back on my model. Is there anything specific to Q1 on depreciation or do you have items that might be rolling off the schedule?

We anticipate that, that number will continue, you will see that decrease. One of the leading causes, as you may remember in 2002, when we did the acquisition of the Quality Farm Stores, there is some depreciation that is rolling off into those schedules. So we added a significant number of stores and some of those lease hold improvements will be rolling off. So that trend you see should continue through the rest of the year.

Okay. Great. And if I can sneak in one last quick question. You talked about inflation for the year at about 1% and you changed your numbers for Q1 and Q2 slightly. Does that 1% number still hold for the full-year?

I think, generally it does. When we originally gave guidance, we expected Q2 to moderate. We're seeing that there's still some deflation. We expected the back half to be somewhere around 1% for Q3, 2% for Q4. We do see some categories having some inflation pressure, in particular the oils and steel. But obviously it's a little bit too early to determine how that will react in the back half. So generally we believe the 1% is still a good number.

Okay. Thank you very much and good luck this quarter.

Thank you.

Our next question comes from Matt Nemer of Wells Fargo.

Good afternoon, everyone.

Hi, Matt.

Good afternoon. So I just wanted to follow up on a couple of items that have already come up. First, on the riders, it sounds like typically the mid-shift to low and mid-priced models would potentially cause some rate compression. But because of the factors that you mentioned, do you think the margin on what you're selling this year will be similar to the next, say '04 and '05 during the peak of the cycle?

No, Matt, it's actually going to be better. It should be better and it will be better.

And is that just on a margin rate basis or also dollars per unit?

That will be both. From the standpoint that in a lower price point, it wouldn't probably be more dollars. But in general, as we go up the scale, and I'm not talking about trying to sell nothing but opening (inaudible) products for -- when we get to modest-price point, we'll see more dollars but in the opening price point, we will not. The rate will be better but the dollars will not.

Okay. And one more follow-up on this same topic. Which is when someone buys a rider, how much attachment of other product typically goes along with that -- concurrent with that transaction?

That is a great question and I don't think that I could give you an answer as far as what attachments. What I can talk to you about is the program of power plus, which is a program that we do sell. It's a bit of an extended warranty program for the product. And I would say there is a high percentage, probably in the range of 33% or better, that, when we sell a rider or a large piece of OPE that we convert with that, that adds to the margin base as well.

Got it. And what is the average ticket on that product? I guess it depends on what you're buying.

Yes, it is going to depend on what you buy. Somewhere between $150 and $200, I think is the range.

Got it. Okay. And one more question on the riders, which is, what are you seeing in the competitive environment this year in terms of discounts or rebates or offerings?

Well, many of the competitors are out there pushing and pitching the discounts for early purchase, with better financing or improved financing. Because, you know, the laws have changed. So there are some things you can and can't do any longer. The 12 no-no is off-limits. I would say that as we stock up against the competition, I'm very pleased and proud of what our group did and that is, we stepped back and said not going to worry so much about what everyone else is doing. What do our customers want from us?

We've always started with a clean sheet of paper this year and built our assortment from that standpoint. And focused in on -- the good better best mentality and really laid the inventory investment behind fewer SKUs -- I mean, more narrow and I think our customers are responding to it. From a competitive standpoint, I don't see a lot of change from the other guys. We made significant changes.

Got it. I wanted to clarify one item on the hard-line pet comments. Is the strength in that category entirely related to new product or are you seeing any strength on existing product, i.e., real apples-to-apples existing SKU improvements.

I would say it's a combination of strength. New is definitely working as we have repositioned some products through some resets. We've gained more exposure for some existing product -- it's done well alongside the new. It's a combination of both.

Great, that is all I have got. Good luck this spring.

Thank you.

Our next question comes from Christian Buss of Thomas Weisel Partners. Christian, your line is open.

You might be on mute.

Oh, hello there. Sorry about that. I was wondering if I could get a little bit of an update on the warehousing program and where you are with that?

Christian, could you be more specific?

Yes, on the new systems you're planning on rolling out.

The WMS, okay. The warehouse management system.

Yes.

We are right now in training with Manhattan. We have a number of our team members in Atlanta training alternate weeks. Our first DC rollout is still targeted for the latter part of this year. So far, everything's on schedule. We're very excited about it, and we look forward to getting some efficiencies once we put that into place.

All right, thank you very much and congratulations on the nice quarter.

Thank you.

Our next question comes from Mitch Kaiser of Piper Jaffray.

Thanks, guys, good afternoon. Nice quarter and -- I'm sorry. On the inflation, Tony, what was the expectation for the back half? And if you said that, I apologize.

No, we anticipated in original guidance that we have not changed was about 1% in Q3, 2% in Q4.

Got you and I guess the principle drivers behind that. It looks like corn is down a little bit year-over-year, but certainly the oil-based products and steel are up.

Right.

Is that the assumption you have going forward?

That is correct. We expect to see some pressure in the steel and oil. Currently we're experiencing the majority of our deflation more in the grain categories. And that is why we anticipate Q2 to be more of a deflationary impact with that potentially moderating as we move into Q3.

Okay. I got you. Thanks, guys. All my other questions have been answered. Thank you.

Our next question comes from Chris Rapalje of SunTrust Robinson Humphrey.

Hi, good afternoon.

Hi.

Just wondering, second quarter to date, if you could speak at all about apparel trends and then, more broadly, with what sounds like some of the loosening in higher ticket demand. Are you seeing anymore in more discretionary item demands, any more add-on products and things of that nature?

Let me take the first question in regards to apparel. I can only really speak to first quarter and just a few weeks here into April. Very pleased with current performance, where we came out of fall, how we transitioned into spring. Short sleeve products doing well. We do go through a reset of our men's denim program and it is doing extremely well. It's basically a new-fit jean and the customers responded very, very favorably to that. So, pleased with apparel.

As far as the other discretionary products, most of that falls into what I would call our CUE category. Our performance there, we talked about -- or Jim talked about the 3300 program, and how we had expanded from 20 categories to 30. We continue to see strong, solid unit comps as we invest and target that inventory toward those SKUs. I just think that there's -- that demand has been there. We probably just weren't servicing it to the levels that we could have in the past. So, very pleased with that as well and all indications are a continued increase in units.

Thanks very much.

The next question comes from Chris Horvers of J.P. Morgan. Morgan.

Thanks, guys. Good evening. Two follow-up questions. First on the merchandise margins, you guys have done a great job over the past couple of years here. And we're hearing from different channels that inventory was really tight in the fourth quarter. And you have a coming out of -- into the fourth quarter, out of the fourth quarter -- it seemed to have some favorable weather there in clearing cold weather apparel and in heating product. Is there any way that you've been able to look out and say hey, look, this was company specific, contribution versus -- you know what, the weather maybe helped us out 20, 30, 40 basis points?

Very difficult to pin a number on that. I will tell you that we planned for a much cleaner transition to spring from fall. We did go back and re-buy a product for the first quarter in cold weather, believe it or not. And it was a -- we saw the read and we said, yes the weather is going to stay. So we pushed more inventory, and we still -- when we sold through it as we'd expected. I would say a lot of this is just us being better at planning, forecasting our businesses right now, reading, reacting. We took advantage of it and the weather definitely played to our favor.

Chris, this is Jim. It's a classic retail example of ending a season clean and early at good clearance margins. And restocking or fresh new seasonal goods and having the weather help us sell through those quickly.

Okay. Absolutely. On the big ticket side, we're hearing a lot of retailers talk about some rebound in big ticket and discretionary categories -- just the willing, the consumers are willing to buy them where they weren't a year ago. Are you able to look at -- and it sounds like, you know, tractors up in the past few weeks to the quarter and up so far quarter-to-date. Are you -- can you -- are you able to look at it and say hey, if I looked at this in the two-year trend, the consumers, the rebound is in line with the drop in the business last year or do you think the rebound is greater than just easy compares?

If what we've seen so far in April continues, which we have no way of knowing, the rebound is greater than the loss over the last two years. But again, this is a snapshot, the quarter is more of a motion picture. My assessment of consumer sentiment and this is not very scientific. My assessment would be that 80% of Americans, who are neither underemployed nor unemployed, are feeling better about not joining the 20% who are. And I think, like every American, you wait long enough, people come to a new place. So my observation is I look granularly into some categories that we're beginning to see a little more robust consumer than we've seen over the last two years.

Okay. So then, to try to maybe [narrow it] down a little bit on 2Q, if you don't anniversary the Purina and Nutrena until October, that is driving traffic to 3300 expansion driving traffic. So, you have the traffic tailwind that should continue, and if we see a ticket rebound, in spite of a little bit of deflation, why wouldn't we be comping high single digits?

Again, we're three weeks into Q2 and look forward to talking to you in July.

Fair enough. Thank you very much.

Our last question comes from Stephen Chick of FBR.

Thanks. For Tony, it's a little bit more of a question surrounding OPE and a contribution to comp transaction value. In March, it looks like the comp transaction value was probably down 3% or so? In the last month of the quarter. If my math is right. And that is with the pickup in unit -- OPE sales. And so, I guess, I'm wondering given what you're seeing in April so far in the second quarter. Is your expectation that transaction, comp transaction value will actually be positive in the remaining three quarters of the year here? And what is kind of the granular split between count and transaction value within your 1% to 3% comp guidance for the year?

We don't get that granular as far as breaking out those components in the comp assumptions. I will agree with several points that you made. One, throughout the first quarter that average ticket begins -- the decrease began to moderate.

So it was much lower in March and the majority of that was driven by the big ticket as spring goods started to sell in the last couple of weeks of March. When you look at April, if the big ticket trend continues, then I would agree that, that would drive our average ticket to be positive.

Okay. That helps. And you said minimal impact from deflation in the second quarter -- what would -- how do you -- what would you say minimal would be?

I think we may be in a similar range as Q1. Somewhere between 1% and 2%.

Okay. And that deflate -- did you say deflation in Q1 was 235 basis points?

Correct.

Okay, how did that -- what was the trend during the quarter of that? Did it pick up as the quarter went on or -- because I think that is a pick up from the 175 basis points that I have from the fourth quarter.

It was an increase over the fourth quarter and throughout the quarter, I would say that it was relatively stable.

Okay. And last, if I could, I'm not sure if you have given this, but what -- how much of -- what percentage of your sales roughly is OPE?

Generally, we don't give out that number. We just talk about it in the seasonal category, which is 23%. Obviously, it contains a lot more than just the riding lawn mowers.

Okay, thanks. Good quarter.

Great. Thank you.

Thank you. This will conclude our call. We certainly look - thank you for your support and very much look forward to talking to you at the end of Q2.

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