Tractor Supply Co (TSCO) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss fourth-quarter and full-year 2010 results.

(Operator Instructions).

Please be advised that reproduction of this call, in whole or part is not permitted without prior written authorization of Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference, Mrs. 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 it's forward-looking statements are reasonable, it can give no assurance that such expectations, or any of it's forward-looking statements will prove to be correct. Important risk factors that could cause 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 statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. Now I'm pleased to introduce Jim Wright, Chairman and Chief Executive Officer. Jim, please go ahead.

Thank you, Erica. Good afternoon, everyone. I'm here with today with Tony Crudele, our Chief Financial Officer, Greg Sandfort, our President and Chief Merchandising Officer, and Stan Ruta, our Chief Operating Officer. By any measure, this was an exceptional year for Tractor Supply Company. The team delivered crisp execution and operational discipline. This resulted in broad-based strength across the business, as we exceeded our goals for 2010 and achieved record results including top and bottom line growth, SG&A leverage and margin expansion.

Turning briefly to the fourth quarter, record sales trends were driven by continued strong transaction count, our 11th consecutive comp increase in transaction count, and year-over-year increase in average ticket. Customers responded very well to our merchandising assortment, and we managed expenses as planned. We are delighted that our performance during the quarter, built on our success throughout the year.

Let me provide a few of the key accomplishments that drove our 2010 results. First, serving our customers. Our unique merchandise mix is a foundation of our business. We offered our customers a broad, but yet targeted assortment at compelling values, and they continued to rely on Tractor Supply as their destination store for the rural lifestyle. Consumable, usable, edible, or CUE items, again drove repeat business throughout the year. We successfully cycled the launch of Purina and Nutrena branded feeds, the introduction of our premium private brand label 4Health was also very successful.

Our initiatives to develop, advertise and display compelling big ticket items helped produced an average ticket increase. We also believe we experienced some release in pent-up demand for big ticket items. We once again enhanced our customer shopping experience. And our manager turnover and hourly team member turnover were also at record lows in 2010. As a result, we were able to provide competent and friendly service to customers who continue to reward us with loyalty scores in the top two deciles of all hard-lines retailers. As expected, our refined marketing program continued to benefit us this year, as we maintain our focus on managing gross margin dollars and net of advertising. By adding more discipline to this initiative and channeling advertising dollars to our direct marketing program, we were able to achieve greater efficiency. Additionally, we enhanced our capacity to offer the right product to the right customer at the right time through our CRM program. As a result, these marketing enhancements also contributed to the increase in our transaction count.

Turning to the other priority for the year, managing our business proactively. We achieved a number of process improvements to our business through our continuous improvement program, which we call the Tractor Value System. We are pleased with the ongoing elimination of waste, friction and cost. For example, we saved $12,000 per new store in CapEx by consolidating the number of vendors and internal departments involved in the wiring of our new stores. With the TVS system in place, we've instilled a sustainable discipline, and our team members have become adept at recognizing and solving problems. We believe this has, and will continue to benefit both our margins and our SG&A.

During the year we also benefited from technology enhancements, seamlessly completed rollout of our POS system, and a significant upgrade in our SAP system. Our team has done a tremendous job with inventory management. This year we expanded our focus on the top 30 categories and top 300 SKUs. We've maintained a solid in-stock position throughout the year, entered each season very well-stocked, managed our markdown cadence effectively, and exited seasons cleanly. We also achieved record inventory turn, which exceeded three turns for the first time in the Company's history.

We grew sales with the unique merchandise mix, and a strong connection with our customers. We eliminated waste from the business, and expanded our margin through four key areas, seasonal carryover reduction, strategic sourcing, private brand, and price optimization. We achieved record earnings per share of $2.25. We've maintained a solid balance sheet, and returned value to shareholders through our share repurchase and dividend programs, while we continued to open new stores.

2010 was one of the finest years for Tractor Supply Company, and I'm proud of the team's accomplishments. Our performance reflects steadfast execution against very solid plans. We are only in the early stages of benefiting from our efforts, and expect this momentum to build in 2011, and beyond. I would now like to turn the call over to Tony, to review our financial results and discuss our outlook for 2011. Thank you.

Thanks, Jim, and good afternoon, everyone. We had a terrific performance in the fourth quarter. As you know from our December 1, update, our operating results had already exceeded our expectations at that time. The strong sales trend continued in December, and solidly exceeded our updated forecast. This top line increase was achieved while obtaining gross margin expectations.

For the quarter ended December 25, 2010, our year-over-year basis, net sales increased 19.7% to $1.03 billion, and net income grew by nearly 35% to $50.2 million or $0.67 per diluted share. Comp store sales increased 13.1%, compared to last year's increase of 0.7%. This was our strongest quarterly comp in the last seven years, which was particularly pleasing as we cycled slight -- a slight positive comp from 2009. Non-comp sales were $57.1 million or 5.5% of sales. Comp transaction count increased 8.8%. We believe that our offering has resonated with many new customers, and our customers continue to make frequent trips to purchase basic and necessity items.

The trend in average comp tickets swung firmly positive at 3.9%, versus last year's 4.1% decrease. Although big ticket transactions increased, it is important to note that the increase in average ticket was broad-based, and was not just driven by a significant uptick in big ticket transactions. We were also very pleased with the acceleration of the comp of our new stores opened in the last four years, as they ramped to maturity. Although the years in which they opened were more economically challenged, these stores have begun to return to our more historical comp maturity curve.

Similar to Q3, the sales strength was broad-based, with respect to both merchandise categories and geographic regions. The better performing comp categories were our core consumable, usable, edible, or CUE products, principally animal and pet-related merchandise and heating supplies. Additionally, many seasonal cold weather categories performed well, such as insulated outerwear. The strong sales success occurred across the entire country, as every one of our eight geographic regions had double digit comps. For the quarter, we experienced net estimated deflationary impact of 22 basis points on top line sales. Deflation was most evident in the livestock feed and heating categories. However, we did begin to see inflationary pressures in the second half of the quarter on some of these categories.

Before I discuss gross margin, I wanted to comment on change in accounting for inventories, on a last in, first out basis, or a LIFO basis, to now an average cost method. We know many of you will welcome this change. And we believe it will have a positive impact for our shareholders, as it will better reflect our consistent growth trends, and provide a clearer picture of our earnings potential, and comparison to other hard-line retailers. To provide for comparability and transparency, we will retrospectively adjust all quarters of fiscal 2010, and for the previous five years in the upcoming 10-K. We have also provided the previous five years retrospectively adjusted, in a supplemental schedule in today's Q4 financial results press release. For the prior periods that I just mentioned, the results will now reflect higher earnings.

And let me remind you, that as we entered Q4 we had estimated that LIFO provision for the year would be essentially zero. Therefore, changing inventory methods for 2010 has no impact on our performance relative to the guidance we provided. Had we remained on the LIFO method, our results would have been favorably impacted in the quarter, as a result of the deflation we experienced during the year. With respect to the balance sheet, as we move forward, the approximate $46 million tax benefit accumulated under the LIFO method is now recorded as a deferred tax liability, and will be paid out equally over a four year period ending 2014 under IRS regulations.

We believe we will experience several benefits by switching from the double extension LIFO method to the average cost method. First, it will provide a better matching of cost of goods sold with revenue, eliminate the related variability in our earnings, and provide a more predictable earnings model. This is affirmed by our consistent operating results, as we have increased earnings the last nine years on an ex-LIFO basis. Second, it will eliminate the common misconception that the double extension method of LIFO is a reasonable approximation of inflation. And third, it will align the Company's reporting practices with the majority of our peers, as well as those in the retail industry, enabling easier comparisons. Ultimately we believe that these benefits will unlock additional shareholder value.

So why did we elect to change now?We believe that there is continued regulatory and accounting momentum, making the elimination of LIFO as an alternative inventory valuation method inevitable. With LIFO having a minimal impact on 2010 results, we believed that it was an opportune time to implement a more preferable inventory valuation method. Additionally, we have a very strong cash position, which facilitates absorbing the elimination of the tax deferral.

So turning now to gross margin. Gross margin decreased by 32 basis points to 32.6% of sales. As we had forecasted freight expense increased over the last year, and we estimate it was 33 basis points higher. This increase was driven by higher fuel costs than last year, increased import activity of winter seasonal goods, and a mix shift to merchandise with higher freight costs. Margin was also negatively impacted by a shift in merchandise mix, as our consumables continue to grow, and by reserves and allowances recorded for less productive and warrantied inventory.

Initial direct margin continued to improve, as our strategic initiatives continued to enhance our gross margin. We are still executing very well on our strategic sourcing, private branding, price optimization and markdown, and inventory management. For the quarter, SG&A, including depreciation and amortization, was 25% of sales, which was 123 basis points improvement over the prior year's quarter. This improvement resulted principally from our sales growth. We leveraged occupancy for the fourth consecutive quarter, and at the same time grew the store base by more than 7.6%. Additionally, as I mentioned earlier our newer stores are still ramping sales very nicely.

We continue to leverage our advertising expense, even as we have been investing in additional customer research. Incentive compensation reduced SG&A leverage in the quarter by approximately 30 basis points. The increase in incentive compensation was principally at the store and field level, as a result of the strong sales performance. The SG&A leverage was partially offset by increased reserves for state sales tax assessments, and write-offs of unproductive assets. This represented an approximate $2 million pre-tax expense.

The Company's full-year tax rate was 36.6%, which is favorable to our projected full-year rate of 37%, as we benefited from 2010 state income tax credits, as well as 2009 credits in our provision return reconciliations recorded in the fourth quarter. The rate is below last year's tax rate of 36.9%, as various favorable book tax adjustments, principally disqualified incentive stock options, had a greater impact on the effective tax rate in the period.

Turning to the balance sheet. At quarter-end, we had $257.3 million in cash, compared to $172.9 million last year. This is higher than originally anticipated, but given the projected capital expenditures next year we believe that it is appropriate. Inventory levels for store at the quarter ended -- at quarter-end increased by only 30 basis points. Annualized inventory turns for the quarter were 3.41 times, almost a 40 basis point improvement over last year's fourth quarter. For the first time, full-year turns exceeded 3 times, ending at 3.09 times, up 21 basis points from last year. We are very pleased with our inventory levels as we enter into the new year.

Capital expenditures for the quarter were $29.4 million, related principally to our new store opening program, and equipment for upgrading our distribution centers. This compares to $24.5 million in last year's fourth quarter. We opened 27 stores this quarter, versus 18 stores the prior year's fourth quarter. During the fourth-quarter, we purchased under our stock repurchase program -- purchases under the program were approximately 373,800 shares or $15.3 million. The impact of the repurchase program on Q4 EPS was de minimis, and on a full-year basis, the program increased EPS less than $0.015.

Turning our attention to 2011. First , our outlook for key metrics for the full-year. We expect full-year sales to range from approximately $4 billion to $4.07 billion. We have forecasted comp sales to increase between 2.5% and 4.5%. We expect the majority of the comp sales increase to come from transactions, with a slight increase in average ticket. We are targeting an improvement of approximately 20 to 30 basis points in EBIT margin, compared to 2010, principally coming from improvements in gross margin. We anticipate net income to range from approximately $191 million to $197 million, or $2.54 to $2.62 per diluted share. And we expect to open 80 to 85 stores.

Let me discuss some of the more specific drivers and assumptions that helped us form our expectations for 2011. We expect that the retail environment will be stable, as we anticipate consumer credit availability to remain at the same level. At the same time, we expect retail to continue to be challenging, due to a cautious consumer, persistently high unemployment levels, and a depressed housing market.

Our guidance anticipates our customers will continue to shop our stores for basic and everyday needs, similar as they did during 2010, and that they will remain price-conscious and value-oriented. We have tailored our assortments accordingly, and we expect that our CUE categories will continue to be sales drivers given the activity we saw last year. We also believe that there is potential that the consumer begin to enter a replacement cycle for those products they have postponed purchasing the last few years.

We expect weather trends to be slightly negative. If you recall last year, we had a very favorable weather in the first quarter, as it was cold early in the quarter, and we had an early spring. Our weather forecasting service currently estimates a later spring in the northern regions. Also, we had significant moisture entering spring last year, which benefited the growing season. We considered the weather in the second half of 2010 to be normalized, as there were no significant weather events.

With respect to inflation, keep in mind that we anticipate less volatility around inflation, because of our change to the average cost method. Additionally, we anticipate the considerable increases we have seen recently in key commodity prices, such as oil and corn will benefit comp sales. At the same time, it will be important for us to continue managing effectively head winds this will provide to gross margin. We have demonstrated this ability over the past few years.

Overall, our forecast assumes inflation for the full-year of approximately 1% to 2%. We expect gross margin rate expansion, as a result of our several key initiatives, which include our price optimization and markdown initiatives, our assortment and product allocation planning, and our private label and strategic sourcing program. Also, we expect freight costs to be a head wind, as we cycle fuel costs that accelerated in 2010.

We expect inventory turns to be flat, to a slight improvement. We anticipate that per store inventory balances will be up slightly during the year, resulting from investment in key merchandise categories and inflation. We believe that the majority of the EBIT margin expansion will come from gross margin initiatives. And we will have limited SG&A leverage, as we continue our commitment to grow our store base, and the supporting distribution and technology infrastructure.

We will increase our marketing spend by approximately 8 to 10 basis points. Although we do not plan to initiate a television marketing campaign, we expect to increase marketing efforts in direct marketing, circulars, and customer research. We anticipate slightly higher store labor expenses, as a result of higher labor and healthcare costs for the full-year, which will be fully offset by a reduction in store-based incentive compensation. We expect to slightly leverage our store support center costs, as full-year management additions in 2010 will also be offset by more normalized incentive compensation.

As we demonstrated again in 2010, there are several levers we can control when managing expense line items. We will judiciously allocate resources based on the Company's performance throughout the year. We forecast that our effective tax rate will be approximately 36.9%, an increase from the 36.6% in 2010. This will result principally from reduction in expected federal and state tax credits.

We expect to increase capital expenditures, and the total range should be approximately $150 million to $160 million. As I stated earlier, we plan to maintain our store growth rate, and open approximately 80 to 85 stores in 2011. We have targeted opening approximately 50% to 55% of the stores in the first six months of the year, with approximately 25 to 27 new store openings in the first quarter of 2011. We have broken ground on a new distribution center in Franklin, Kentucky. We anticipate this facility to cost approximately $50 million. And when opened, it will be our largest DC. Additionally, we anticipate spending $20 million in incremental capital in our distribution network, as we implement a warehouse management system, and retrofit four owned distribution centers with conveyer.

Although we believe it is likely we will make further purchases under our stock repurchase program, as part of our long-term objective of reducing our cost of capital and maintaining a targeted cash balance of $150 million to $200 million, 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've emphasized in the past, we believe our business can be more accurately assessed by looking at the halfs 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 we have always referred -- viewed Q1 as a get-ready quarter for the spring, and results can vary significantly depending on an early or late spring. While we believe Q1 sales have reached critical mass to achieve profitability, we do not anticipate an earnings increase over last year's exceptionally strong Q1.

Having said that, Q1 has gotten off to a solid start, as we are tracking above our forecasted January sales plan. There are no shift of holidays between any quarters that would affect comparability. Keep in mind, that 2011 is our 53 week year, and Q4 will have 14 weeks. As in the past, we will provide more color on our expectations for the subsequent period at each quarterly conference call. Now I would like to turn the call over the Jim, for more details on our plans for

Great. Thanks, Tony. While we recognize that 2010 is indeed a big year to cycle, and that the environment remains somewhat unpredictable due to volatile commodity prices, rising fuel costs, we are looking forward to another exciting year at Tractor Supply. We have seen our consumers becoming marginally more positive, and we are confident in our model, as well as our ability to meet their needs. We are beginning to benefit from the plans that we've put in place over last several years. And with consistent execution we will build on our momentum, as we both grow and improve our business. At the same time, we intend to leverage the strength of our balance sheet to continue investing in the business, while maintaining expense control, and returning value to shareholders for the long-term.

Let me go into a little more detail about our priorities for 2011. We serve the rural lifestyle, which is growing. We are the leader and the destination store in this niche, primarily due to our unique merchandise mix and customer engagement. Our merchandise assortment has never been stronger across all of our regions. We understand what our customers need to support their lifestyle.

The emphasis that we have on consumable, usable, and edible products has increased the visit frequency. We expect these items will continue to be top line drivers throughout the year, as customers shop for their everyday needs. We will remain focused on strategic sourcing, and private brand development to create additional value for our customers, and improved margins for our Company. While non-discretionary purchases have been relatively steady throughout the economic downturn, we expect that the trend will continue even as the economy normalizes.

We are also beginning to see consumers become a bit more willing to shop for big ticket items. Although we anticipate they will remain value conscious, we believe there is an opportunity to further improve average ticket. Additionally, we will continue to learn from, utilize our marketing strategy to further engage with customers, and drive business going forward. Our CRM program enabled us to gather data, understand our customers, and target them more specifically. We believe there are significant opportunities ahead for CRM, and our direct mail program in 2011.

Turning to other 2011 priority. We will continue investing the business, while maintaining expense control, and returning value to our shareholders. We will leverage technology -- the technology enhancements that we recently put in place to create greater efficiencies. We have begun implementing warehouse management system into one of our distribution centers. As we continue to learn from this initial implementation, we believe that we will be in a position to roll the system out through the remainder of our distribution centers later this year. Additionally, we've taken the same approach with our conveyer systems, and expect that each of our four owned distribution centers will have conveyers in place by mid-year.

Price optimization will also be an area of focus this year. We are in the early stages of this initiative, and believe a more systemic approach to regular pricing, as well as promotional and clearance pricing will drive both sales and margin. Additionally, we will learn the dynamics of how customers respond to pricing across various geographies. Our new point-of-sale system is completely operational in all of our stores, and we expect to continue gathering additional information, while customers benefit from faster transaction time. As we invest in our growth, we will remain aggressive, we will remain -- maintain our aggressive expense management program.

Our Tractor Value System is now an ongoing part of our culture, and will continue supporting our goals to operate as a lean organization. We are able to support our growth trajectory, and return value to shareholders through the strength of our balance sheet. We'll opened 80 to 85 stores, a new distribution center in southern Kentucky, and implement new systems. We expect to remain prudent, with our capital distributions by repurchasing shares and paying dividends as appropriate.

Our overall objective for 2011 is to grow and improve our business through execution and through efficiency. I'm confident in the breadth and depth of our team, and our commitment to discipline. From the store support center to distribution centers to the stores, we operate with a spirit of relentless dissatisfaction to avoid complacency. This drives us to seek opportunities to further refine and enhance our initiatives. We believe our momentum and results have reinforced that our performance is sustainable in any environment. And as such, we are looking forward to a great year in 2011, and as another year of continued growth for Tractor Supply. Operator, this concludes our prepared remarks, and I ask that you open the call for questions.

(Operator Instructions).

This will be from Vincent Sinisi with Bank of America. Please go ahead.

Good afternoon, and thanks very much for taking my question, and congratulations on a nice end to the year.

Thank you.

Jim, I wanted to ask first about your price optimization initiative. I know that clearly, it's in the earlier stages, and you just joined up with Revionics a few months ago, just wondering if you could give some commentary on how the implementation of the systems is going so far? And when do you think you will start to truly see some benefits from that?

Vincent, hi. This is Greg. Let me give you the update on that. We are right now in the process of moving information to Revionics. As you can imagine, there is a tremendous amount of downloads that need to take place, so that they can look at past sales histories from the last several years. And then they start to building the modeling, and start looking at what type of pricing optimization we may start to look for. And it will be broken out by category, as we move forward. And we'll start slow, testing, learning and so on and so forth. Anticipate to start seeing some benefit in the latter part of 2011, third quarter. We are continuing with our ongoing process, which is a little bit more rudimentary, a little bit more manual, in our feed -- our food businesses that are still gaining momentum for us. But Revionics will really be not be fully functional until the latter part of 2011.

Latter 2011. Okay, that's helpful. And just as a follow up, maybe switching over to your marketing strategy, I know that you said you are going to remain absent from TV, but also continue to incrementally increase the spend going forward. With your increase in 2010, what do you think has been some of the best takeaways that you learned, in terms of the message that you are getting out?

I think with the research we have done, and the continued build we have on our customer CRM file, attributive customers, we now are much more further down the learning curve with regard to the offer, the timing of the offer, the producting of the offer, and the price incentives we send to various customers for specific items or perhaps specific categories. That has helped us, not only increase the revenue per known or identified household, but also helped us greatly in prospecting for new customers who we believe have the same attributes as the known customers. So in general, we've discovered, as we mentioned before, that direct marketing to against the known or a similar customer has proven to be much more predictive with gross margin lift versus the cost of advertising and television was historically.

Great, that's helpful. Thanks very much, and best of luck.

Thank you.

And the next question in queue will be from John Lawrence with Morgan Keegan.

Good afternoon, guys. Congratulations.

Thank you, John.

Would you comment just a little bit, if you are looking at the categories, and look at -- when you look forward -- I mean some of the changes, as far as spring where you take an advantage of trying to bring in some of that inventory earlier for the spring on a big ticket side, is that part of the freight that we are talking about? And any other changes you see merchandise-wise going forward?

John, this is Greg. For spring, we did plan to accelerate receipts for the first quarter versus a year ago, as far as spring product. The reason being, is we are continuing to improve our seasonal conversion. So we are moving to spring a little faster in those markets where we can, particularly the deep south. As far as initiatives going forward, and I think you are referencing probably to what we saw last year with the moisture levels. This year, again, we are looking at the same type of scenarios with what is moisture, where could there possibly be drought and so on. And we have adjusted our assortments in those regions of the country to take advantage of what we believe are opportunities, whether there will or will not be moisture. Believe it or not, there is opportunities either way. And we are getting fairly well-refined in that process, and feel very good about how we can drive the spring business.

Secondly, as you look at turns, I mean getting over 3, obviously, quite an accomplishment. If you look out, how far -- what do you think terms can go optimistically over time?

Well, first of all, John, I first promised you three, about seven years ago, and we went backwards for a while. And I am delighted to be a three. However, I -- we all collectively believe that 3.3 is within our sights over a period of time. Probably not a lot of progress after the significant increase we had in 2010, not a lot of progress as Tony mentioned in 2011. But on a normalized basis, we see ourselves closing that gap at probably 10 basis points a year.

And last question, Greg, on the DC improvements, conveyers, give us a little bit next level, of what do you think the improvements can be there? What do you really accomplish in your minds from the efficiencies there?

Well, the number one gain for the Company will be the throughput of product into those buildings. As we accelerate store growth, building DCs are expensive. We felt that we needed to get a higher productivity out of the buildings, and the only way we could do that was to really start to automate, and then put in the WMS systems along with that. And that's really going to be the big gain. The gain is going to be speed efficiency, and our ability to handle the growth of stores more appropriately. And it's that simple, John. I mean, it's just something as you grow, and you add that store base, you have to --you have to place it in the hands of systems. You can't physically, manually do it any longer.

Alright, thanks. Is it okay, real quick, to say congratulations to Stan, and thanks for all your help?

Thank you very much, John.

And moving along, we will take the next question. This will be from Christian Buss with ThinkEquity. Please go ahead.

Yes, hello. Congratulations on a solid quarter. Wondering if you could talk a little bit more detail about the feed introductions, and how those performed, now that you are lapping the comparisons from last year?

This is Greg. Let me speak to that for a moment. We are continuing to see in our data bases new customers coming to Tractor Supply to buy the national branded feed, which is delighted -- we are delighted with that. And we continue to see again acceleration. There is a lot of dynamics in the feed business, whether it be from the independent out there, versus the pricing that's happening with commodities and so on and so forth. We continue to see growth, which mean we're taking, we believe taking share.

Okay, great. And then could you perhaps provide a little bit of perspective into what you are expecting from the seasonality of your same-store sales over the course of the year?

Yes, I can address that. This is Tony. Generally within that range, you will see the majority of the quarters perform within the range that we are giving. So that's what we are targeting. So there is not a lot of volatility in our comp store estimates. But generally, each quarter is within -- somewhere within that range or close to that range that we gave you for the full-year.

Okay. Thank you very much.

Okay.

And moving along, we will hear from Dan Wewer with Raymond James. Please go ahead.

Thanks, good evening, Jim.

Hi, Dan. How are you?

Good. Good.Actually, a question or two for Tony. On the guidance for FY 2011, 20 to 30 bps of operating margin improvement, primarily from gross margin rate, not SG&A leverage. Frankly, I mean I thought it might have been just the opposite. Let's say, if you were to average a 3% comp sales gain, you would expect maybe some SG&A leverage. On the other hand, it sounds like there is gross margin headwinds between a shift in mix, growing transportation costs, rising inflation, whether or not you can pass that through to the consumer. So if you could just -- say perhaps just kind of respond to that, and what we may have been missing?

Sure. Sure.Absolutely. Clearly, the focus in a lot of our prepared remarks and the comment that Greg has made, are focused on the merchandising initiatives. And that's really where we are placing a lot of our emphasis, and we think we have some terrific programs out there, to drive gross margin improvement. Relative to SG&A, when we look at the investments that we are going to be making in distribution centers, as well as some of the rising costs that we have talked about, relative to either wage and/or healthcare costs. And then, additionally with our store expansion program still in the 8% range, generally, that has provided a headwind. And we still have a target of about 2.5% comp, to be able to start to leverage. So having said that, obviously, we will be as aggressive as possible in controlling expenses. And we believe that there is some opportunities there, if in deed we do get in to the 3.5% to 4.5% comp store sales increase, we will have some opportunity to get some SG&A leverage.

And then Tony, just one other question on the benefits of the extra week, recognize that extra week falls in a seasonally less important time period, so perhaps the incremental benefits, maybe about 1.5%, annually. But can you remind us how we should think about the flow through on that? Do you run through an extra week of operating expenses on your P&L,, or is all the incremental gross profit dollars, does that drop down to the bottom line, and therefore there is a meaningful EPS benefit from that extra week?

Sure. Generally, the guidance we would give, is a little bit closer to your first scenario, where we would say it's an additional week. There is some additional flow through because of that week, and some of the expenses that generally are accrued, are accrued on a monthly basis versus a weekly basis. So there is some additional flow through, however that is offset by it being a lower than average selling week.

Right.

So I think if you look at it the way you were looking at it earlier, being in the sort of 1.5% to 2% range, I think you'd get a reasonable, a reasonable answer to your question.

Great, thanks. Good luck.

Thank you.

Moving along, we will hear from Matt Nemer with Wells Fargo Securities. Please go ahead.

Hi, everyone.

Hi, Matt.

My first question is on the average transaction value. Obviously, it had a very nice move. And I'm wondering how much of that could be related to mix in the fourth-quarter, and how sustainable do you think the current run rate is, on transaction value growth?

Matt, this is Greg. I'll chat, and I think Tony wants to chime in too. As you are well aware, we talked about how we position our merchandise mix in 2010, versus maybe 2009 and years earlier. And we really looked at our pricing, and our value to the consumer. And what we did is, is in some of the -- I will call it larger ticket areas -- we really looked at our value pricing scenario, and brought some of the pricing more in line with where we felt the customer would react, and potentially buy more. We gave you the example of the compressor that was $1200, and one time we brought it down to $999, and how that accelerated business. We did some similar things throughout our mix of products. And that really helped drive the ticket size increasing, and we believe that is not only sustainable, but we believe there is even more than we can do in 2011.

And this is Tony. To support what Greg was saying, it's actually very interesting. You look at it, it really was very broad-based. One of the key metrics we actually looked at was, we saw that the percent of items or transactions under $10 was much less of a percent than it was last year. So it was very apparent that the consumer came and opened up their wallets, bought as a little bit more on each transaction, and that helped drive the ticket. Again, looking at the larger tickets, we had much greater transactions in our large ticket, but if you segregated that out of the average transaction, the average transaction on it's own, still would have increased in the similar amount, in the 3% range. So it wasn't just the big ticket, that was driving it. And what we really saw, was it was across the board, and it was the consumer coming back to the shop.

Okay, that's helpful. And secondly, your SG&A per store was up about 7% excluding D&A and stock comp. And I'm just wondering how much of that is kind of a base increase, how much might be variable relative to the comp upside, in terms of incentive compensation or other variable costs? And then, how much should we think is investments back in the business more marketing, more labor, et cetera.

I tried the detail out for you, Matt, without going into too much detail. We did see an increase in marketing, so I would consider that structural, and the incentive comp we estimated to be about 30 basis points of incremental SG&A. So those were some of the bigger drivers. And then, we tried to isolate what we thought might be a non-recurring items which we had broken out relative to some additional reserve for sales tax and a writeoff of some unproductive assets, which was in the $2 million range. But I think, if you put that together, it should give you reasonable estimates for your model, as you go forward next year.

Okay. And then lastly, there was a statement in the press release, that you were looking to leverage the strength of the balance sheet to invest in the business, and return value to shareholders. Should we read that as, potentially looking to raise debt capital, or buyout leases, or increase owned inventory, all of the above, none of the above?

I don't think we are looking to take on any debt. And the statement really centers around, one, making investment in our distribution network. We think that's going to return significant value. We will continue to make investments in our inventories to drive sales. And then, obviously, we will look at our capital management programs, relative to the share repurchase and our dividends.

Got it. Okay, great congrats. Good year, guys.

Thank you.

Moving along, we'll hear from Peter Benedict with Robert Baird.

Hi, guys. Just following up on that last question. The $150 million to $200 million, I guess is the level you guys want to keep the cash at. Why is that the right level? I mean, obviously, it seems high. Is that just saving for rainy day, or is the level of investment you're expecting in the DC network going to be even more incremental than what you have next year?

Yes, Peter. This is Tony. No, we think it's more of just a prudent amount. We will continue to assess that range, basically based on the economy. And obviously things have changed over the last couple of years, and it may provide us the ability to reduce that retained cash position as we move forward. We will consistently assess that availability. However, looking forward as we entered this year, we just wanted to be conservative relative to the capital expenditures that we are going to be making around the distribution, and some of technology improvements that we are going to make. And obviously, $150 million to $160 million CapEx budget is relatively large, considering our normalized spend on CapEx.

Right. Okay. Thank you, Tony. And then, Greg, when we look at the comp plans for next year, 2.5 to 4.5, 1 to 2 of that is inflation apparently. Obviously seems pretty conservative, given the traffic momentum that you guys have enjoyed. As you look to merchandise the upcoming year, I know you have tough traffic comparisons, but I mean, is there something there that suggests to you, that the traffic should decelerate materially? Or again, is this kind of a case of conservatism on that front?

I would tell you that -- we are cautiously optimistic. And I will use that terminology. I feel very good about what we've got planned on the merchandise side. We had a very strong fourth-quarter. And I believe the trends will continue, but it's early in the game. As we've always said, the first-quarter is the get-ready quarter, just like third-quarter. There is still -- weather that needs to play itself out. But we are well-positioned. I can assure you of that. We have been aggressive with our plans to drive the business. And it's one of those situations, where if it develops as we believe, we will be talking to you on the next conference call with good news.

Fair enough. And the last one is for Jim. The EBIT margin target that you've talked about historically, getting to the kind of the mid sevens, it's -- we're there. Can you give us a sense of what maybe the next leg, to the margin story could be at Tractor Supply?

Yes, certainly, And we -- and I have really a great deal of confidence that over time, we can shoot for and attain a 8.5% operating profit level, while we continue to gain market share. So we certainly don't want to become one of those retailers that looks at rate of profitability, and leaves some room for somewhere else to come in, and begin to grow business against us. So we think with our scale, and the efficiencies that we have in place, certainly another 100 basis points or so of operating profit, or (inaudible) profit is certainly on the horizon for us. And we're dedicated to closing that gap at 20 basis points a year or so.

Great. Thanks very much.

Thank you.

And the next question in queue will be from Gary Balter with Credit Suisse.

Hi, this is Simeon Gutman. How are you?

Hi, Simeon.

Can you talk a little bit about gross margin longer term, I guess within that 8.5% operating margin, how much is going to come from there? Realizing that besides optimization, the DC's coming on, maybe there is some inefficiency, but eventually that improves, and as these seasonal transitions improve? And then just talk about, what else what other drivers could be there, in longer term opportunities?

Yes, the principle driver of the 100 basis points in EBIT improvement will be gross margin, probably 80% of that would be on the gross margin side. As we mentioned before, the drivers of gross margin will be price optimization, private brand expansion, strategic sourcing, and continued refinement of our seasonal planning and allocation.

Okay, thanks. And then just following up on the sales piece, (inaudible) looking at the range, and I think there is no real gain to guiding aggressively. But you have a little bit of inflation. I think farm incomes are rising. Ticket looks like it's coming back, And you have the CRM piece and targeting. Can you also just talk about -- maybe big ticket as a percent of sales? And what do you define as the big ticket, just so we can contextualize that and model it in, as that comes back?

Simeon, this is Greg. We don't talk about the percentages. What we can tell you, is that we consider anything above, say $350 as a big ticket purchase. Yes, we have seen some improvement in that -- those categories of businesses. We do believe there is pent-up demand out there. It appears to be some of it releasing, but not high levels at this point. We will get early read in our business from the deep south, here in next probably four to six weeks, which will give us indication as to how aggressive we need to be as we approach the all important second quarter of our business, so --.

Okay, and then can you comment on the CRM? And I don't know if it's measurable today, in terms of what it's doing to the business? I don't know if it's going to be measurable every quarter, but to the degree it's helping? Can you, I don't know, just quantify or talk about it directionally?

I think probably the best way to quantify the impact of CRM is maybe a couple of points. One, we are relatively early in the game. We are -- I guess this will be our third year of -- in the pursuit of developing a refined model of a customer segmentation. And then understanding the behavior of each of those segments, and then attributing customers that reside in each of those segments. And then testing promotion against each of those, to see how we can move and improve response rate.

The -- we will not get in to the level of response we get. Obviously, we measure response on every coupon we send out, We measure the margin lift on every event, over cost of the event. But perhaps the most challenging example we look at, is the fact that we have continued to leverage advertising against our sales, as ratio over the last couple of years. And now we, as we've indicated, we are going to invest a little more in advertising to bring us back, a little more closely to -- not all the way back, certainly where we were two or three years ago. But the investment spend is going to be principally on the direct and CRM side of the business.

Okay, thanks you. Congratulations.

Thank you.

Moving along, we'll hear from Brent Rystrom with Fetl.

My congratulations as well.

Thank you, Brent.

A couple quick questions. The wood pellet business, I'm just curious if you'd give us a little more overview on that. I visited quite a few of your stores, and people seem to be pretty excited about it. I am wondering if you could give us a little characterization of how that business has progressed?

Yes, Brent, this is Jim. We have a -- obviously a very significant installed base in rural America of pellet stoves. And we've decided that is a category that we are going to pursue. Heretofore, there was a lot of pellets being sold on the corner at a gas station. With the scale that we have now, the efficiencies we have in distributing it, we can be a price leader in all those rural communities. And it also ties in with our CUE strategy. In season, wood pellets are a significant consumable item for our customers, and we have been pursuing that now, and refining our sourcing and points of distribution. It's a very freight intensive category. We've worked diligently to do that.

And I guess I would say it wasn't easy, but we are in a position today of having a growing share in wood pellets, and something our customers are beginning to look to us for, more and more every year.

I would imagine, with the weight , I mean the typical bag is 40 pounds. It's got to be tremendous, for driving every couple of week traffic for you from a

Well some customers actually buy it by the pallet, and others buy it pickup truck full. So it -- but it does certainly, interesting to look at the average purchase early season, late season, but it certainly does help us drive traffic.

Is it a pallet, a ton? Is it 50 bags, or how does that work?

A pallet is 50 bags of a pallet, 40 pounds each. So that's your ton.

So what I am seeing is that you are pricing that at about a 18% to 20% discount, to the single bag price.

We do offer a bulk discount, Brent. We have done that many, many categories throughout the store, and again cross feed, food, pellets things of that nature.

Okay. And then the fourth-quarter inventory, there actually -- given how well everything went, a little bit higher than expecting. I'm just curious, is that driven more by restocking things, like in our latest survey, we found tremendous sell-through of outer wears, is that restocking season stuff for the winter, or is that more an early stocking for the spring?

It's a combination of both. We did go back and restock a number of our northern stores, chasing the business. As I said before, we had a very robust fourth-quarter. We still had some first-quarter business to execute against, so we went back and did buy additional. We did also -- bring some of our spring receipts a little bit earlier in the deep south. We felt there was more opportunity for us to set the floors there, and gain a little bit of advantage on sales earlier. So, and get a better read. So we did both.

Okay. A final question, and then I know you don't like to view yourself as a farmer store, but when you are looking at farm-related income or rural America type income growing, possibly now as much as 40% to 50% for farmers this year, thinking about the velocity of that, are you seeing a difference in your comps?I know all eight of your regions, you said were double digit positive comps. Are you seeing a difference between suburban and rural stores, as far as comps?

Not really. And again, we are not nearly as coupled to farm income, as you might think we are. As a matter of fact, we see really very, very little correlation. The good news for us, however, is that as we watch the unemployment rate drop, or job creation begin a little more robust, we noticed that in rural America, that the unemployment decrease or job formation increase, is 100 basis points better than it is in urban America. So as you look at our business, our observation would be that rural America lagged in to the recession -- and this is early data -- it's only 90 days of data -- but it does appear that we maybe leading on the way out.

Thanks, and congrats again, guys.

Thank you.

Our next question in queue will be from Peter Keith with JMP Securities.

Hi, everyone. Congratulations on the quarter, and the 2010 in general.

Thank you.

Just some follow-up questions on your CRM/direct marketing program. It seems like this is kind of the first time you called it out as a driver to your overall transactions. And certainly, the transaction comp was quite significant on a two year basis. Is it something that had changed within this quarter, that you really sort of ramped up that effort with your customers? And then, as a follow on to that, Tony, had mentioned your people are putting items in the basket, was perhaps the direct marketing program also with some of the couponing, you think getting people to buy more goods?

I would say the primary driver of our transactions would be probably two key areas. One, would be that we are now benefiting from about ten quarters of a real dedicated effort on consumable, usable, and edible products. So we have converted customers. We've become more predominantly, the source of those products that our customers need most frequently. So we see that as a engine that drove us through -- now through Q4, but also through the year.

Specific with Q4, it wasn't just the fact that we are using CRM with more expertise and capacity than we had in the past. If you look at our offering and print ads, Greg, and the merchant developed some very, very compelling values, both on traffic driving and on larger ticket items. I would say both of those contributed to Q4 and the year more than strictly CRM did, but CRM was certainly a factor.

Okay. Thanks, that's helpful. And then -- another question guess maybe best for Greg, on the price optimization efforts that you guys had to date. And he mentioned, it's been kind of rudimentary on the feed and other CUE items, what has the data told you so far? Is it that --are you able to take up pricing, capture a little extra margin, or you've ending up lowering price to drive some of the unit volume?

You kind of hit on it. It is done both. It's told us in some markets that our pricing, as we have adjusted either up or down, we can see the movement in velocity of units. And it really is, you have to determine in price optimization by category, where do you want the category to position. And then, if it's a lead category, and all about market share gain. Or if it's a category where you say, listen, we are going to margin up here, because these are margins that don't necessarily drive the largest volume across in velocity, but there is money to be made. There is no said price behind this, there is no brand behind this, what have you. So it does depends upon how you categorize, but we've learned both. We've learned both.

And just a follow up to that, it has the effort to date driven some gross margin improvement in 2010?

It has. Yes, it has.

Okay. Okay.And last question for Tony, just for modeling purposes. Sounds like EPS could be down year-over-year in Q1. Should we think about that mostly from a weaker comp, or you do also have a difficult gross margin compare, would it be perhaps gross margin might decline year-over-year?

Yes. If you look at the quarter, there is some potential there on the gross margin side. We anticipate having a positive comp, like I stated earlier, generally staying within the 2.5% to 4.5% range for most of the quarters. So -- but as we cycle into the new year, obviously, we had management additions from the year before, and additional expense that are brought in. SO as we cycle those additional expenses into the quarter, and since it is a very light sales quarter, we don't get the type of leverage that you'd like to get on our -- on the SG&A. So slight pressure on margin. Obviously, pressure on SG&A, as we move in to a new year. And that's what causes there -- to look at more of flattening relative to year-over-year comparison.

Okay. Thank you very much, and good luck in 2011, everyone.

Thank you very much.

Moving along, we will hear from Mitch Kaiser with Piper Jaffray.

Thanks, guys, good afternoon.

Hi, Mitch.

Could you talk a little bit about the expectations for the outdoor power equipment? It sounded like 2010 was certainly a little bit better, and it maybe a little more optimistic in 2011 than you are in 2010? Is that a fair categorization?

I would say that 2010 was the perfect storm for us, a perfect opportunity, it was moist with deep ground moisture, really across all of our markets. We read that early. We prepared early. We had the inventory. And frankly, we believe we gained share in that category. As we look at this year, there is considerably more drought across our markets, than there was a year ago. And we think it will be a little more challenging on the outdoor power equipment this year, compared to last. With regard to weather driven sales, the wild card is how quickly the pent-up demand is released. And the -- our calculations tell us there is probably about 800,000 riding lawn mower units that would normally have been purchased over the last three years, that were deferred. And we believe at some point in time, that is going to release, but really have no idea how quickly.

And how big is that market in terms of units on a annual basis, Jim?

Normalized year, it's around a 1.6 million, 1.8 annual unit sales. And it's been in the 1.2 million, 1.3 million level last three or four years.

Okay. That's helpful, good. Tony, just on the inventory accounting change, just shifting to the cost of average inventory. I know -- not to bring up the sore subject here. But when you went back to 2008 and did the restatement of earnings -- I think one of the things you talked about was the advantage of LIFO, and that it reduces the Company's tax obligation, and improves cash flow. I was just wondering how you thought about that, in making the changes at this point? Thanks.

Yes. Absolutely. I have always been a proponent of the tax benefit. But obviously as we talked to investors, and we talk as management team, and we look at the benefits that it would really provide us, by just being more transparent as far as the earnings -- really more predictable. And just really being on what is a more preferred methodology. And as you go through the process, that's what you present between your accountants and the SEC. And making a positive statement as to why this method is more preferable.

Okay.

So as we looked at that, and with the potential of it being eliminated in the future, we really thought that it was the most opportune time. So as much as it was difficult to sacrifice those tax savings, we believed that on a longer term basis, it really will provide more shareholder value.

Got you. Okay.Well, I think it will make our lives easier, so thanks for that. (Laughter). Good luck, guys.

Thank you.

Moving along, we will hear from Steve Chick with FBR.

Hi, thanks. Congratulations.

Thank you.

I guess you, maybe for Tony. I was wondering if you could clarify -- when you spoke to us last, and you gave us a preliminary result for how to quarter was, I guess on December 1st, the guidance for the year for sales. I think was about a three point or $3.57 billion -- or a $3.5 billion in sales. And you came in, obviously, ahead of that, $3.6 billion plus. It looks like about -- call it $58 million ahead of plan. Was there -- can you talk about intra quarter, did things actually pick up in that last month of the year, or were you running pretty nicely at the time, and you're trying to be a little conservative heading in to the last month of the year? I was wondering if you could speak to that?

Sure, Steven. I would say that we were running very strongly. And obviously, we were very confident, as we came out -- off of the day after Thanksgiving with our update. However, you are correct. The momentum was actually much stronger than what we had forecasted. And the majority of the gain, although I don't believe it was in the $58 million range, it was a little bit less -- it was related to the additional sales that we accrued in the last three weeks of the period. So having said that, actually our strongest sales month in the quarter was November, but it was followed very, very closely by December. And again, you obviously, have to assume both of them were very strong double digit increases.

Okay, yes, that's helpful. As we move in to the first-quarter here, sounds like you've had a solid start. And I think you said that your January trends were above plan. Are you thinking about -- is plan for that month the same, as what you would think about for the quarter the 2.5% to 4.5% range? Or would you think about January being different than what the quarter plan would be? I don't know if that makes sense.

Yes. Again, we don't shed light on the intra quarter, but I would say, as a rough estimate, you can use that as a guide that we are exceeding that quarterly range.

Right, okay. And so, but I mean -- because the fourth-quarter obviously was so good. I mean you are probably still running in double digit type of levels. I don't know if you can kind of speak as closely as that.

No, I would say would rather just keep it at exceeding the 2011 guidance of 2.5% to 4.5%. We are -- of those levels.

Okay. And last, I mean, related to the inventory question, did some of the change in inventory, does that change the balance that's on the balance sheet, or is that unchanged with the change of accounting?I know the LIFO reserve gets confusing and all. But so the balance that you reported today, did that change at all from the change in accounting?

Well, when you look at 2010, technically we wind up going off LIFO in the quarter, at the end of the fourth-quarter. So it did not have an impact on the balance sheet. However, as you roll through the adjustments from the prior year, it did have a impact on the balance sheet. So I believe the way you are looking at it, the answer would be your inventories are going to be higher. You are going to have increase in deferred taxes, that will generally offset that. And any of the amount that occurred prior to the beginning of the year, will flow through retained earnings. So that is how your balance sheet will change from the beginning of the five year period. So that's what you will see. Obviously, the income that you generated throughout the prior periods will run through your retained earnings.

Okay. All right, that's helpful. Congratulations again, thanks.

Thank you.

And your next question will be from Brian Nagel with Oppenheimer Funds.

Hi. Good afternoon. I, too, would like to add my congratulations on a real nice quarter, and a nice year.

Thank you.

I have a rather basic question, but a lot -- we've obviously discussed sales trends in your press release, in your prepared remarks, and a lot -- in response to a lot of the questions. But I guess, I'm sitting here, and I look at the trends. And if I stack it up two or three years, I mean there was clearly a very significant acceleration in your business, from Q3, Q4. And what I am hearing you -- it sounds like a lot -- and people in response to some of the other questions, as why are sales so good, it seems like it's a lot of the same initiatives that have been in place for a while, and really benefiting you guys. So my question is, if you had a point to one or couple of things that really drove that -- isolating that significant acceleration in over the last three months, what would it be?

Brian, hi, this is Greg. There isn't any single one. There is no silver bullet here. We said it all along -- we have been on the journey for several years, to improve the business, a number of things we were doing. We were looking at our in stock levels. We were building CUE items, we were looking at the [3300] mix, which is kind of the key SKUs, and how we keep those in stock. Our promotional cadence, we kept it very tight, but our offers were better, our values to the consumers were better. I think what we are seeing, truly, is a consumer out there, that has now come to believe the Tractor Supply is the first stop for them when they have needs. I'm not saying that we weren't in the past, but I'm clearly hearing when I'm in the stores, as I'm talking to customers and talking to our team members, that our customers really come to us, and rely on us, I think first and foremost. And that's driving I think, a number of these things.

So recognizing your category is still very fragmented, do you have -- do you look at data that would suggest that you are taking more share than other retailers?

We do have data points that we use, in comparison in a number of categories. And where the data is available, we can measure that. I won't -- I will tell you that we have seen some market share gain, no question in some categories.

Okay, thanks a lot, and best of luck for the next quarters.

Okay. Operator, is our queue empty?

We have one more question in the queue.

Okay. We will take the last question.

Okay. This will be from Peter Benedict with Robert Baird.

Hi, guys. Sorry, just a follow up, easy one. Tony, depreciation outlook for 2011, the CapEx is going up. Should we expect that to grow double digits, in terms of percent in 2011? Thanks.

Yes, we would expect it would grow double digits. Just to give you a recap, we did see in the last year, sort of a moderation relative to depreciation, because we were going through a cycle where we had brought on our doors in 2002, relative to the acquisition from Quality stores. So that helped moderate depreciation, but I anticipate as we move into next year, that you will see us - a double digit increase as far as depreciation goes.

Great. Thanks a lot.

Great. Well, thank you all. And in closing, I would like the discuss a couple of things. Today, we've presented several initiatives that will help us grow and to improve our business. And I would like to add a little perspective to that. Nine consecutive years now, we've increased our profits. Today, less than 60% -- we're less than 60% built out against our known and stated goal of 1800 stores, 300 of our stores are less than four years old. And we have opportunities to improve gross margin, and SG&A leverage over time. So we are still very young Company, very excited about the opportunity, very confident that we continue -- we can continue to improve our EBIT margins. And we're delighted that you are with us on the journey, and look forward to talking to you at the end of Q1. Thank you.

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