Tractor Supply Co (TSCO) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss first-quarter 2011 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) Please be advised that reproduction of this call, in whole or in part, is not permitted without prior written authorization of Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded.

I 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 make a reference to 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 statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call.

Now I am pleased to introduce 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; Stan Ruta, our Chief Operating Officer; and Greg Sandfort, our President and Chief Merchandising Officer will be joining us on the phone. We are delighted with our first-quarter results and starts to 2011. We continued to execute well against our plans and invest in the business. We experienced another quarter of broad-based strength throughout the organization, we achieved double-digit sales and earnings growth, slight margin improvement, and SG&A leverage.

Regarding our performance, we successfully cycled last year's record first quarter by continuing to grow and to improve our business. We elevated our merchandise execution across categories and regions; maintained a prudent approach to expense management, a practice which is now ingrained in our culture; and experienced greater productivity from new stores.

Now, let me go into a little more detail. We continue to refine our merchandise assortment. Our core consumable, usable, and edible categories remain leading sales drivers, and we are particularly pleased with the continued performance of our branded and our private brand of feed products. The sell-through of these items has been strong, and our 4Health brand units were up 250% on a year-over-year basis. Branded feed continues to perform well and comp'd above a chain average. We've produced a 2.3% year-over-year increase in average ticket, which follows a 3.9% increase in the fourth quarter of last year. We achieved the highest in-stock position ever for our business, and exited the winter season very cleanly.

During the first quarter, we made investments in inventory to prepare for the spring selling season. While this resulted in a modest increase in our overall inventory, we are confident that we have the appropriate level of merchandise in our distribution centers and in our stores for the spring selling season. We've all been out in stores, and we are prepared for spring. Our assortments, our in-stock, our merchandise displays have simply never been better. The store team members are upbeat and prepared to serve our customers and to sell our products.

I would now like to turn the call over to Tony to review our financial results and discuss our outlook. I will then be back with a few additional comments.

Thanks, Jim. And good afternoon, everyone. We had another terrific performance in the first quarter, with very broad-based results from nearly all aspects of the business, which was similar to our fourth-quarter performance. For the quarter ended March 26, 2011, on a year-over-year basis, net sales increased 17.7% to $836.6 million, and net income grew by 73% to $18.3 million, or $0.24 per diluted share. Comp store sales increased 10.7%, compared to last year's increase of 2.8%. This is our second consecutive quarter of double-digit comp store sales increase. Non-comp sales were $49.7 million, or approximately 6% of sales.

Comp transaction count increased 8.2%. We continue to serve our customers' basic and functional needs with core consumable, usable, and edible, or CUE items, which necessitate frequent trips to the stores. The trend in average comp ticket continued to be positive at 2.3%, versus last year's 4.2% decrease. Although we had a comp increase in big ticket transactions, it was not a driver of the average ticket increase. The increase in average ticket was throughout our merchandise categories, and was driven by more units per transaction and some inflation. We also continued to see acceleration of the comp for our new stores opened within the last 4 years, as they ramped to maturity.

We have continued to deliver broad-based sale strength with respect to both merchandise categories and geographic regions. The strong sales success occurred across the entire country, as each of our 8 geographic regions experienced an increase in comp sales. The best performing comp categories were our CUE products, principally animal and pet-related merchandise, and heating. Similar to past Q1 regional selling patterns, there was a clear bifurcation of the business this quarter.

As a result of the longer winter season, many seasonal, cold-weather categories performed well in the northern regions. Additionally, spring categories performed well in the South, as we transitioned into this important selling season. We are encouraged by the spring trends we saw in the South, and are optimistic that this will translate into positive sales trends in the North, once warmer weather arrives. For the quarter, we experienced a net estimated inflation impact of 117 basis points on top-line sales. Inflation was most evident in the livestock feed, agricultural fencing, and lubricant categories, as we saw cost increases in grains, steel, and oil.

Turning now to gross margin, which increased 20 basis points to 32.7% of sales. Direct product margin continued to improve, as our strategic initiatives enhanced our gross margin. We are still executing very well in our strategic sourcing, private branding, price optimization, and markdown and inventory management, which Jim will discuss in a bit more detail. Margin was positively impacted by strong sell-through of winter seasonal goods, combined with improved pricing management; and this resulted in effective markdown management. Freight expense increased by 38 basis points over last year. This increase was driven by higher fuel costs than last year, increased import activity of seasonal goods, and a mix shift to merchandise with higher freight costs.

For the quarter, SG&A, including depreciation and amortization, was 29.3% of sales, which was a 90 basis point improvement over the prior year's quarter. This improvement resulted principally from our sales growth. We leveraged occupancy for the fifth consecutive quarter, while growing the store base by 8.3%. Incentive compensation reduced SG&A leverage in the quarter by 37 basis points. The increase in incentive compensation was principally at the store and field level, as a result of the strong sales performance. SG&A leverage was also offset by a 30 basis point increase in marketing spend, as we had one additional circular early in the quarter, and also made investments in customer research.

The Company's tax rate was 35.7%, compared to 34.5% in Q1 last year. The tax rate was reduced by disqualified incentive stock options in both periods; the impact was less than 2011 because of the improved profit base. This rate is below our full-year expectation of 37%.

Turning to the balance sheet, at quarter-end we had $156 million in cash and investments, compared to $138 million last year. This balance is in line with our target range. During the first quarter, we ramped up our purchases under our stock repurchase program, acquiring approximately 1 million shares for $53 million. The impact of the stock repurchase program on the weighted average earnings per share for the quarter was not material.

Inventory levels per store at quarter-end increased approximately 3.2%. This increase relates to seasonal build for the spring and increased import activity. We are very pleased with our inventory position as we exited the winter selling season. Annualized inventory turns for the quarter were 2.85 times, almost 30 basis point improvement over last year's first quarter.

Capital expenditures for the quarter were $28.9 million, compared to $12.9 million in last year's first quarter. This increase in capital spend related to approximately $8.7 million for a new distribution center in Franklin, Kentucky; conveyer equipment for upgrading our distribution centers; and for our new store opening program. We opened 26 stores this quarter, versus 19 stores in the prior year's first quarter.

Turning to our outlook for the full year. As a result of our strong performance in the first quarter, we are increasing our financial expectations for the full-year 2011. We expect net income to be in a range of $2.62 to $2.70 per diluted share, compared to our original guidance of $2.54 to $2.62 per diluted share. We expect full-year sales to range between $4.04 billion to $4.11 billion, compared to our original expectations of $4 billion to $4.07 billion. Correspondingly, same-store sales for the year are expected to increase 3.5% to 5%, compared to our original expectation of an increase of 2.5% to 4.5%.

I'd like to quickly discuss a few of the underlying assumptions for the remainder of the year included in our full-year guidance. We believe that the consumer will remain value-oriented, and the CUE categories will continue to be sales drivers. With respect to the second quarter, we will not have a clear picture of the Q2 quarter trends until we look at April and May together. However, we are comfortable with where we are tracking to date. Last year, we had a very strong Q2, and are cycling against a 6.1% comp increase and a 35% increase in profit. We also experienced very strong April sales last year, as we had a warm and early spring season. We are currently experiencing a very late spring in the North, and a drought is forecasted in the Southwest. Therefore, we expect that the weather trends will be slightly negative for the second quarter.

And finally, we have yet to cycle the Easter shift. This is the latest Easter since 1943, and to many of our customers, Easter signals the beginning of the spring outdoor season. We believe that for the full year, our gross margin, transportation, and logistics initiatives will continue to provide benefits. However, freight costs are running above our forecasted levels, which could provide headwinds in the second half of the year. We anticipate that we will continue to have inflationary pressures throughout the year. We have increased our inflation assumption to 1% to 3%, from 1% to 2%.

Generally, we believe that moderate inflation can be a benefit to us, if properly managed. But on a longer-term basis, it can result in some margin compression, depending on competitive forces. Additionally, a sustained increase in gas prices could impact consumer demand. However, when inflation was significant in the past, we managed it very effectively, as demonstrated in 2008.

We have not changed our estimate of store growth and capital expenditures. We continue to expect to open 80 to 85 new stores, and expect capital expenditures should be $150 million to $160 million. We expect to acquire, in Q2, 3 of our current stores that had been under lease for a total of approximately $7.7 million. We will continue to opportunistically purchase lease stores where we are presented with the right of first refusal, and the economics are accretive to the income statement, as we believe that it is an appropriate use of our capital.

To conclude, we are very pleased with our performance in the first quarter, and are proud that our initiatives are driving top-line and bottom-line increases. We believe that we are well-positioned for another record year in both sales and earnings.

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

Thanks, Tony. We are encouraged by our performance in the first quarter, as it reflects the continued momentum in the business. We are achieving excellent results quarter after quarter, because the foundation of our business has never been stronger. We are firing on all cylinders, and we have a very sustainable and achievable plan for growth in place. Our customers rely on Tractor Supply Company, and they trust our brand to support their rural lifestyle needs.

Our store team members live the same lifestyle, and this allows them to connect with our customers, and foster a long-term relationship with them. As a result, we are gaining new and repeat business, as customers shop our stores more frequently, and as we are discovered by new customers as they adopt the growing rural lifestyle. As you've heard us say before, we have identified specific gross margin drivers that have become increasingly important as we navigate in an inflationary environment. We expect consumer behavior related to price increases and elasticity to be comparable to what we experienced in 2008. Based on our experience, we believe that we have the right plans in place.

Let me briefly review our gross margin drivers. The first area of focus is inventory management. We must exit seasons cleanly to minimize the carryover aspect and the residual markdowns. At the same time, we must enter seasons on a timely basis to ensure that we have product in the stores, as our customers enter the consideration stage of their purchase decision. Second is strategic sourcing. We look for the best place to source product, whether it's international or domestic. To determine the appropriate partners for Tractor Supply, we look for the service level, quality of the product, and the [landed] costs.

Private brand presentation is our third focus. Today, private brand represents about 20% of the business, and we continue to believe that we can grow that to 25% or more, over time. As I mentioned earlier, our 4Health brand is gaining recognition and traction with our customers. Finally, we believe that price optimization will help us drive sales and margins, while we are still in the early stages, as we continue to ramp up our optimization software, we expect to begin experiencing benefits late in the second half of this year.

To further drive [footsteps], we are continuing to enhance our marketing initiatives. We believe we are still in the early stages of benefiting from our efforts to refine print distribution and leverage our CRM program. Additionally, we are employing greater discipline around our initiatives, while learning even more about our customers' preferences and the power and resiliency of our brand. To ensure that we are meeting our customers' expectations while achieving our financial goals, we must continue to operate efficiently and seamlessly from the store support center to the distribution centers to the stores across all regions. As such, we are investing in store growth and infrastructure development. We are on schedule with the development of our new distribution center in Franklin, Kentucky. We are also automating all of our distribution centers, and have already implemented WMS in our Waco distribution center. That system will roll to the remainder of our DCs over the next 18 months.

As many of you are aware from the recent media reports, on Saturday afternoon North Carolina was hit by a series of devastating tornadoes. Our Sanford, North Carolina, store, located 40 miles southwest of Raleigh, sustained significant damage. While it may take a few months to have Sanford back operational, we are extremely thankful that our customers and our team members -- that none of our customers nor team members sustained any significant injuries. Our thoughts and prayers are with the Sanford community and all the other areas impacted by the recent storms.

Overall, we are experiencing broad-based strength across the business, which we believe is sustainable for the near and the long term. We take pride in the high loyalty scores we receive from our customers, and the continuous growth and improvements that we have made in our business. We know there are a number of opportunities ahead, and we are relentlessly determined to seize those opportunities and to overcome obstacles. We focus on continuous improvement to produce ever-increasing results. Our balance sheet remains strong, we're looking forward to a solid spring selling season and another successful year.

With that, operator, I would like to open the call for questions.

Thank you. (Operator Instructions). Peter Benedict with Robert Baird.

Guys, it's actually Justin [Clayburgh] filling in for Pete. A question on the traffic. This is the ninth quarter in a row you have had very strong traffic gains. Just maybe you could talk to, just curious as to whether the complexion of the categories driving that increase has changed in any way over the past few years?

Yes. Well, certainly, if you think about our emphasis on feed, food, other CUE categories, most of those products are within the pet and animal category. That mix, over the last 5 years, has moved from 33% of sales to 39% for the year 2010. And in Q1, we had another fairly substantial increase of mix in that category. As a result of becoming more significant in those categories, we -- by the nature of the categories, the customer shops us more frequently. As an example, a customer buying large animal feed from Tractor Supply visits us around 13 times a year, as opposed to the average customer, who visits us 7 times per year.

Okay. Thanks, Jim. In terms of the transportation costs, Tony, maybe can you just remind us how we should be thinking about the lag between the increase in diesel fuel, versus when these higher costs hit the P&L?

It does vary, relative to the product line. But our general guidelines is that, as we turn throughout the year, which -- we're in a range of around 3, that they would cycle through, through that period of time. So, as we expend the cash, we will capitalize it; as the inventory turns, we will expense it. So, the general guideline is about 3 months.

So, just assuming, if diesel stays where it's at, is it safe to assume that the plan -- the headwind from freight is going to be more pronounced over the second half of the year? Than what you're seeing?

If diesel stayed the same as it is today, we will have a slight increase over what we saw in Q1. However, it would not be substantial from what we currently are forecasting.

Okay, thanks. And lastly, on the guidance, does it include any incremental buybacks over the remainder of year? Or just what was done in the first quarter?

Just what was done in the first quarter.

All right, perfect. Thanks, guys.

Sure.

Vincent Sinisi with Bank of America.

Great, thanks very much for taking my question. Good afternoon, and congratulations on another outstanding quarter. My question is surrounding your increased focus on marketing, including your targeted advertising, direct mail efforts. If you guys could just give some color in terms of what you are learning through your CRM efforts, and where the opportunities, you think, still certainly lie. And as a follow-up question, which maybe I will just ask now, could you give some clarity around the growth that you are seeing in relation to your marketing efforts? The growth that you're seeing within your 7 customer segments, and maybe touch upon what you are seeing in terms of new versus existing customers? Thank you.

Sure. Greg, you want to take a shot at that?

Jim, I will. Vince, this is Greg. First, what we are learning is that direct mail and our CRM approach is giving us far better ROI on the investment behind our out-marketing and advertising efforts. One of the things that we see continually is as we touch those customers in those 7 segments, particularly 2 or 3 that are geared around the animal or the pet category, we're finding that we can move that customer to buying other categories within the store.

As an example, if they are buying, or were not buying, branded feed at one point, and we start to talk to them because we know they are buying some other products, let's say pet products, highly likely they would have maybe large animal, and vice versa. So, we are talking to these customers in ways that -- we are giving them the opportunity to look at us and say, well, I'm not just buying pet there, I could also buy other things. That's one. We are also doing a tremendous amount of research right now on understanding not only the existing customer, but some potential new customers that could be around our stores -- within, say, a 10-mile radius.

The results of that are coming back to us here in late April, and we will start putting that information to good use as we go forward with additional spend in CRM. But what we have found in general is, we can target the marketing dollars with less spend and get higher return. And it really is talking, as you mentioned, to those customer segments, where they may have been spending in 1 category and we can kind of lead them to spend in others.

That's helpful. Thank you very much, Greg.

John Lawrence with Morgan Keegan.

Good afternoon, guys. Congratulations.

Thank you, John.

Greg, would you comment a little bit about the breadth of performance, especially separate a little bit, seasonal categories, and talk a little bit about -- I know several quarters ago, you talked about being able to get better margin performance out of some of those higher-ticket items. Can you discuss that a little bit, please?

Well, let me address your first piece of the question, John. And that was about the breadth. Truly, in the first quarter, across, I would say, most all categories, we saw improvement in sales, and which we were very pleased with. And we also came out of the season, the fall season, very, very clean, so we could transition much faster to spring product. So, we have a good start by having sell-through -- higher sell-throughs on fall, spring product in the South really started to give us a good indication that the assortments were directed correctly. And I would tell you that from what I can see around big ticket -- we are still cautious, everyone wants to ask the question about outdoor power equipment. And as Tony mentioned in his comments, it's still too early to call.

We saw some nice movement in the business in the South, we really have not had the weather in the North to start to make any kind of call on that business. But one thing I can assure you of, we were very happy and very pleased with the positioning of our inventories in that outdoor power equipment category. And when the weather does come -- and it will, we are very confident that we can deliver our plan.

And last question for me, just since we had the meeting on March 8, did the business accelerate in the last 3 weeks of March?

I guess I would say to you that the business continued the course it was on, and we finished the quarter very strongly.

Great. Thanks, guys.

Matt Nemer with Wells Fargo Securities.

Hello. Afternoon, everyone. Great -- great performance. So, I just wanted to touch on this topic of the late spring in the Northeast, and I guess, maybe the upper Midwest. If you look at those categories that are impacted, is all the demand simply deferred, or are there some items where a shorter season could actually mean a decline in units? How should we think about that?

Sure, Matt, let me take that. A couple things. When -- this covers a long time, so you recognize that we asked investors to look at us by the half, not necessarily by the quarter. And that within the second quarter, we have -- several years, we have very good performance in April, and it gets cold in May, and vice versa. Last year, April was very, very strong.

This year, it is -- because of more above-average temperatures this year, it is very cool in most parts of the country. So, our observation is, and expectation is, that May will be much stronger than May was a year ago. Now, with regard to -- at some point in time, the compression of selling opportunity, if it gets warm late May and in through June, we will certainly sell our goods. But there is some loss of opportunity as we get late into the summer months, as opposed to the spring months.

Got it. So, it's not so much a unit issue if the season gets compressed, it's more of a realized margin issue?

Yes. And maybe, -- quite possibly, unit, because we would not chase back the markers for the last few percent of sales.

And then, just a quick follow-up on that, as well. In your stores that are in the South, where you've had nice movement in some of the big ticket items, is there any way -- I realize we are still waiting for the Northeast, but is there any way to gauge the strength in the market, just on a like-for-like basis in the South?

There is. We can see there's pretty much, certainly in the South, and frankly, on a chain basis. When we get a nice day, we sell some product. So, that's why we're -- even though we're off to a slow start, we remain pretty confident in our forecasting, and the fact that there is a direct correlation between nice, warm, sunny days and the sale of product.

Okay. And then, just lastly, you mentioned the 4health brand in your prepared remarks. I think you said that it was up 250%, I wanted to check that. I assume that, that's probably off of a fairly low base, because it was a new launch. But maybe you can just help us gauge the size of that brand versus some of the other brands that you are selling in those categories.

Sure. Greg, you want to take that?

Yes. We typically don't talk absolute numbers, as you know, but I can tell you this -- it is rivaling in sales some of our better selling or our high-end dog foods. But we are very pleased, it's positioning itself to be a meaningful addition to the assortment, and it's a great alternative for the customer who is buying in that better category.

Great, thanks so much. Congrats again.

Thank you.

David Magee with SunTrust Robinson Humphrey.

Yes, hello. Good afternoon, and great quarter.

Thank you.

I just have two questions. One is, with regard to the Southwest, where you are seeing drought conditions -- I know that is a negative, but I think that you also do sell some product because of the drought. Products suited for the drought. Roughly, how much of a differential do you see in terms of comp momentum when there is a drought?

David, the important thing to remember is that, first of all, we have been to this movie this many, many times. And while we certainly do not sell as much big-ticket equipment and grass-cutting equipment, which has a well below-chain average margin, there are other products that we do sell, specifically related to drought -- animal stress, animal feed, water storage, water movement, et cetera, that bear a margin, when mixed together, that is probably at chain average. Feed is certainly lower than that. So, the key to think about is comp margin dollars in a drought-impacted region. And our observation is that we can land the comp margin dollars.

Thank you, then. Secondly, are you seeing any difference with how your competition is coming to market this spring, with changing prices or promotions or anything else?

The feedback I have gotten from the field is that, generally speaking, the competition is a little more in the game this year on riding and walk-behind mowers. There is a lot more noise out there. How impactful that will be is yet to be determined, but I think a few more folks raised their level of play a little bit this year.

Are you seeing any change in terms of pricing?

Not significantly, no, no. I think a little more promotional activity, certainly 1 of the players came out very aggressively against 2 of the others, but that has very little impact on us. Of course, we do track our comps against the proximity of all the competitors that you would think of in that business. It's too early in the season (inaudible) if any of it's had any impact on us.

Great, thanks a lot.

Sure.

Christian Buss with ThinkEquity.

Hello?

Oh, hello. Sorry about that, I had you on mute. Congrats on a nice quarter, first off. A couple of questions. First, you have been rolling out some new feed product and moving around the equine pad a bit. Is that process complete, and do you have an initial read there?

Okay, Greg?

Chris, I will take that. The initial read on the new product that we have now -- basically, we lapped over a year, has been very positive. It has been additive. You will also notice that there will be some additional SKU additions in some of the larger based stores, as we go through the latter part of this year. But it has all been additive, that's the good point of this.

Okay. And at the analyst day, you talked about some smaller format stores and real estate team that was evaluating the potential there. Do you have an update for us?

Not at this time, Christian. We are probably not going to have that for a while, as -- for a couple of reasons. We have about 21 of those stores open today, so the group of stores we have open is very small. And it's important we get a good read on their performance by geographic area and by category before we can really go out and forecast a number that we would feel comfortable sharing with you.

We can say, however, that in aggregate, the 21 are working, they are hitting their numbers, actually, marginally exceeding our -- the revenue and margin numbers that would allow us to achieve our targeted IRR. And of the 21, there is really no laggards. So, so far we feel very good about our ability to choose the small markets for those stores.

Additionally, they are meeting their numbers out the blocks. And we have some that are 2 and 3 years old now, and we like the comps very much.

Okay, thank you very much. Best of luck.

Thank you.

Matthew Fassler with Goldman Sachs.

Thanks a lot. Good afternoon, congratulations on a very good quarter.

Thank you.

The question I want to focus on really relates to the expense trends. When you back out the 2 items that you isolated -- incentive comps and the incremental marketing spend, on a per-store basis, you are still up -- and excluding pre-opening as well, you're still up in excess of 4%. Which is higher than the growth run rate that you would have through most of the last year. Can you talk about how much of that has varied with sales? And as you contemplate your plan for the rest of the year, what kind of expense productivity you would be factoring in?

Yes, Matt -- this is Tony. Good question. We take a hard look at the SG&A structure. And what we will find is that, obviously, the items that we mentioned, incentive comp, plays a key role. When you look at the variability in the expense structure, clearly payroll and the leverage that we can obtain in a much larger volume quarter, which is generally our second and fourth quarters, we believe that we can get more leverage in those particular quarters. Additionally, there has been a shift by the consumer to debit, and debit costs have increased. So, that's a variable cost that continues to increase, relative to the sales increase. So, you will continue to see an increase, both on the payroll as well as some of the debit costs, tender costs, that we have.

So, now as we move forward in the higher-volume months, we will see -- or higher-volume quarters, we will start to see some better leverage. However, also included in those numbers, there are fixed increases, as we've invested in the infrastructure -- mostly in sort of the computer software and maintenance categories. So, as we move through this year, as much as I target to be in -- near the store growth increase of 8% to 10%, we have trended to be above that number slightly. So, we need to see a reasonable amount of that increase that you're seeing in Q1, you'll see that continue through the year.

And just to clarify, as we think about expenses per foot, which have been far less seasonal than in sales, that clearly will leverage better in the higher-volume quarters. But what would you say that the year-on-year growth in the expense dollar number also probably has a close relationship to space growth in those higher-volume quarters?

Yes, it does. And again, that clearly is our target. And -- but I would expect, as we have made investments in obviously the distribution as well as some of the systems, you will see that number run slightly above the growth and store count.

Got it. And then, just by way of follow-up, clearly, the initiatives you have in branded feed and related categories have been exceptionally successful and have built year-on-year. Are there -- to the extent that you did guide to some deceleration in comps, are there particular milestones as you think about -- that you think about cycling or (inaudible) that we should have in mind as barriers for you to surmount, or are those basically all behind us at this stage?

With regard to the feed and food category, we cycled the launch extremely well. We did call out that branded feed continue to comp above the chain average in Q1. So, Matt, I think, no, there is no significant milestones ahead of for us, with regard to those categories.

Got it. Thank you so much, guys.

(Operator Instructions) Adam Sindler with Deutsche Bank.

Yes, good afternoon, everyone. Very good quarter. I was hoping to dig back into the first quarter a little bit, and sort of the commentary that sales really never were -- I guess, stayed strong from the end of the -- from the conference to the end of the quarter. Historically, a favorable March is the most important to the first quarter; and March, certainly from a weather standpoint, was not very favorable this year. So, just wondering sort of what you were able to do to offset that. And then, sort of how that applies to the second quarter when certainly, again, very favorable weather last year, a little bit less so this year -- what maybe flows through, and what is less seasonal?

Again, a good question. As we look at the quarter and how it transpired, clearly, the January and February time were the strongest comps. But March was very strong, as well. So, we were very close in all 3 months to the overall aggregate for the quarter. What we saw was a nice spring acceleration in the South. And again, we believe that, that can translate as we move forward, as the North becomes warmer. If we look at that acceleration in the South, we could probably attribute about 1.5 to 2 percentage points of that comp to that -- to the strong performance in the South, as spring broke. So, looking at the trends, we feel very good about the spring business. Again, a lot of it is very dependent on how the North warms up, and how quickly it does.

Okay. Thanks, I appreciate it.

Simeon Gutman with Credit Suisse.

Thanks. For Jim, or for Greg, I was going to ask about the vintage, of newer versus older. But I take it from all the broad-based sales comments that they were pretty much across the board. But maybe Greg, can you talk to -- I think we were talking about new versus existing customers, can you talk about that? In some of the older markets, are you seeing any difference in traffic in those stores?

Well, as we stated, we are seeing in general, across the Company, the foot traffic still continuing to increase. In some of those more established markets, as we've added some new product, whether it be branded feed or as we have updated other products inside the store, what we typically find is, as we talk to those consumers -- again, using the CRM database, pinging them on things that maybe they weren't aware of in our assortments, we've now changed, and so on, we do believe that those customers -- that is driving footsteps back into the store. But there's really -- it's very difficult for us to say, I could pinpoint that in a store that's been up and functioning for 3 to 5 years, versus a fairly new market.

Yes, Greg, I just started to look at the performance of our stores. We group our stores by year, by -- yes, year of open, and we had universally good comp performance across all age groups. As you can imagine, the older are a little more mature, but they had very good comps. And perhaps most excitingly is that we've seen the stores we've opened over the last four years accelerate their comps back to the level of growth that we had seen prior to the recession. So, the class of 2006, 2007, 2008, and 2009 are all growing at very, very solid comps.

Okay. And then, one more on merchandising. You seem to be doing a pretty good balancing act with sourcing the right merchandise, but also the right amount of inventory. And I think the -- this 11%, 13% last quarter says you're doing a great job. Are you leaving anything on the table, by being so careful with that balance? Are you still, in general, hitting, sort of maxing out, and still having some areas where you're not getting to out of stock?

Well, our out of stock position -- actually, our that'd be said as our in stock position, has been better than it's ever been. So, what we are really learning about our systems is the tweaks and the adjustments that we are making -- we are just refining. We also took some positions in certain markets with certain products. We talked earlier about what's happening in the South. It's -- there are some areas there that are in drought at this time.

That gives us a different set of focus on sets of SKUs there that we would put inventory behind, let's say, versus the North, where we have a lot of moisture and we put inventory behind a different set of SKUs there. So, the balancing act of the inventory is something that we do on a day-to-day, week-to-week basis. And we are very agile and rigorous to keep that balance in sync, but I would tell you that we're not still -- we haven't maximized this yet. There is still plenty of room for growth.

Okay, thanks.

Wayne Hood with BMO Capital.

Yes, I had a couple questions. One, I was just curious, Jim, how much the extra circular added to sales in the first quarter, and will you repeat that next year? And is there any changes in the circular program for the second quarter, in terms of timing or anything that we need to be aware of?

Greg, you want to take that? I can speak to the whether or not we will repeat. We will -- we have not yet determined that. We have a review scheduled, to take a look at the absolute lift. And I think you recall, we measure -- we measure the productivity of our advertising in gross margin dollar lift over the cost of the ad. And we've -- I'm not yet -- haven't been part of that meeting. Greg, if you can clarify that, and then also talk about the second half of the question?

Wayne, right now what we have done for the first quarter, we just talk to the customer about what was already inside the store. The Dollar Days event, which was the event we talked to, this year we just formalized a vehicle that went out to the customer base. The same event ran a year ago, and we felt that we just did not inform the customer enough about the event, and so this year we took that shot. Still don't know that we will or won't repeat it -- as Jim said, we're still evaluating whether we thought it gave us the right lift or not. Second half of the year right now, appears to be an offset. So, we are basically looking at the same type of cadence. The shift for the spring was really around Easter, and that caused the little bit of the lag between weeks, with the promotional cadence. But for the second half, very similar to a year ago.

Okay, and Jim, my second question was Lowe's, the home improvement retailer, has been subtly adding pet supplies, I'm sure you're aware of that. And it may be a precursor to them adding food. So, as you look and watch what they are doing and talk to your suppliers, do you feel like that the suppliers will not sell to them, and therefore it's not a competitive threat to you if they decide to get into the food business, in addition to pet supplies?

Well, we have been watching what they've been doing, Pat, and as you can imagine, we, again, by category where we see someone entering a category that is important to us, we watch the stores that are 1 mile away, 5 miles away, and where there's not a competitor in the market. And, at this point in time, we've seen -- we see no impact from Lowe's efforts to get into the pet accessories side of the business.

Okay. Do you think you have a lock on the suppliers, where they wouldn't sell to them if they decided they wanted to get in the food business?

Well, I think that the -- no, we do not have a lock. But what I do think is the manufacturers have a tendency to determine their channel of distribution, and my belief is that Lowe's certainly could, if they chose, get into the grocery brands of dog food. I think it would be highly unlikely that those who choose the vet channel, the pet specialty channel, and the farm channel for their premium, high-performance dog foods would go into a home center with them. And, with regard to them getting access to the grocery brands, they would just be one more of the 20 stores within our trade area that carries the grocery brands. So, any share they grab would come from everyone, not exclusively from us.

Okay. Thanks, Jim. Good quarter.

Thank you.

Chris Horvers with JPMorgan.

Thanks. Good evening, guys. Wanted to follow up on the inflation question -- the acceleration that you -- or potential acceleration in the inflation lift that you're perhaps expecting over the balance of the year. What aspect is driving that? Is that the feed side, is that the chemical side, is that the metal side? And then, in particular, on the feed side, how do you think about the pricing pressure, particularly in that category, for the balance of the year?

Well, Chris, as you can imagine, we will experience the inflation on those items that turn the quickest. So, obviously, as Jim alluded to earlier, feed is one of our faster turning categories. We have experienced the inflation in that category much, much quicker than we have on the steel. So, obviously, the grain component that we are realizing, the quickest. On a long-term basis, as I had said in my prepared remarks, that inflation can work in our favor, depending on the competitive pressures. Obviously, at some point in time, if prices are raised too high, there will be a withdrawal of demand.

But until that point comes, it's really a competitive issue. And we believe that -- what we have experienced in the past is there is usually irrationality regarding the prices, and the consumers understand that those price increases have to be passed on. So, to the extent that there is irrationality, it can clearly have an impact on margin. But as we've managed in the past, we believe that we can work through that, and at the same time, enjoy the benefits of increased sales that will help us on the SG&A leverage side, to the extent that we give up anything on the margin and compression standpoint.

So, do -- will inflation in feed increase into the back half of the year? From what you saw in the first quarter?

As it rolls through our prices, I would anticipate that we will see an increase in inflation, that hopefully will moderate as we move into the back half.

I got you. And then, on the gross margin side, you have a lot of drivers -- you have a lot of drivers currently in your business. You saw [XD] pressure from freight, gross margin was up, and the direct was up 60 basis points, let's say. Shouldn't that benefit accelerate into the back half as WMS, the automization of the distribution centers, and price optimization?

The best way to think about it, our margin drivers, as we've stated before, we see around 80 basis points of lift coming from these initiatives. And each of the 4 initiatives will contribute to that improvement at different times, in different sequences -- and, frankly, at different times of the year. So, I guess, if we were to kind of annualize 80 basis points over 4 years, the output of those 4 initiatives would be around 20 basis points a year for 4 years.

So, how is that compared to the 60 that you just achieved in the first quarter?

Yes, the first quarter this year, we benefited from -- and Greg, jump in if I'm not clear on this. But the primary benefit we had in margin this year was in fact that we had a very, very profitable and clearing sellout of winter goods up North, and then we enjoyed early spring selling -- sales down South. So, we had no drag from clearance, and we had the acceleration of some fresh, new goods in the South.

I got you. And then, finally, on the Easter shift side, it sounds like it's a big driver of traffic for a lot of retailers, just more people out there doing things. So, it doesn't sound like you saw any detriment in March related -- or early April, let's say, or late March, related to the shift?

Relative to the shift, it -- what I was referring to in my remarks was that, just given the shift within April, and the impact on each of the weeks, it makes it much more difficult to assess the performance in April. So, we wanted to get through that time period. Relative to our business, compared to some of the other retailers, that shift is less impactful. And -- though we do believe that it does signal to many of our customers that it's time to get out and work the fields and do their gardening and the lawn season. So, we think that there will be a clear acceleration as we hit that mark, and again, as the weather gets warmer in the North, which I think is actually a much bigger factor than the timing of Easter.

I got you. Okay, thank you very much.

Sure.

Raymond James with Dan Wewer.

Thanks. Jim, actually, I had two very long-term type questions. First, on the cash the Company is generating, and how you are using it to buy back shares, Tony, you had called out that there was minimal impact, minimal benefits to EPS growth. And that makes sense, given the earnings yield on your stock is so low. Obviously, you are continuing to grow the store base at a very rapid rate. But I'm trying to figure out if the Board is looking at something else besides buybacks, on how to better use that excess cash and return to shareholders perhaps a more exciting dividend.

Sure. Good question, and timely. We review the use of cash with our Board of Directors annually. We obviously talk about it every meeting, but we review it in the greatest depth at the meeting that we are having next week. So, we will have more reports on that, if not between quarters, at the end of Q2.

Okay. Well, let us know what they say.

Sure, will do.

The other question, Jim, seasonality of the business. Up until 2 years ago, Tractor Supply was fortunate if they were able to squeeze out a few pennies per share of profit. Last year was a remarkable change. But I think investors were unsure if that was a one-off achievement last year. And clearly, the progress that you made this year suggest that there has been a permanent change in the quarterly seasonal contribution. When you look at the business today, say compared to back to 2008 or 2009, what profit pools are you tapping into today that the Company was not reaching 24 or 36 months ago, during the first quarter?

Sure. I will let Greg speak to the merchandising side of it, but let me add a little color on the composition of our fleet of stores. Over the last 4 years, our mix of business -- and we kind of define roughly a line between I-40 and I-70 will define North and South for us, in very broad terms. If you went back 4 years ago, our mix of stores was about 47% below that line, 53% above the line. Today the mix is about 50%-50%. So, as a result, just due to our -- and this is not necessarily strategic, but it was market opportunistic, we have now -- have a much greater equalization of stores that benefit from the arrival of the spring, as opposed to stores that benefit from the arrival of winter.

So, that has had the effect of level -- marginally, it's not a huge swing, but it's certainly marginally leveraged our quarter, or marginally smoothed our business by quarter. And when you're not making money in a quarter, as we did for so many years in Q1, a little bit of revenue adds a lot to the potential to make money. And then, in addition to that, Greg and his team have done some wonderful things in our merchandise. And then, maybe Greg, you can speak to that.

Let me, it's really -- it's simple, to be honest with you. It talks about -- but what we talk about a lot is newness. I think that in our channel, we probably bring more new products in the market than any other. I would tell you that our processes and our rigor, as to how we operate the business today, and how we operated a few years ago, was very, very different. And we use a process of correction of error, which we've mentioned before, which helps us challenge each and every season -- no matter how good the performance may have been, we always find ways to improve it to the next year.

The seasonal conversion, I can't speak enough to that, and the inventory control of having the right depth behind the right items. The whole CUE process and that CUE program was instrumental in helping us stay focused and giving the customer the confidence that we would have the merchandise in stock in our stores when they made the trip. And then, finally, to be honest, we take some calculated risks on occasion with some inventory, depending upon certain -- how we see a trend developing. As an example, last fall, we saw some things happening in some categories. We stepped out, the buying group went back and pushed the envelope, and it paid off in big dividends. So, this is a very highly energized, very focused, aggressive group. Steve Barbarick is our leader of that group now, and they do a fine job. And I'd stack them up against anybody in the industry right now.

Dan, another point on that is CUE items, which are particularly large animal feed and pet food, sell disproportionately well in Q1. So, as we've driven a mix of those categories up on an annual basis for the Company, due to our CUE strategy, we are disproportionately benefiting from the growth of those categories in Q1.

Well, Jim, I appreciate it.

Sure.

Talk to you soon.

Thank you.

John Lawrence with Morgan Keegan.

Yes, thanks. Tony, just a follow-up. You've always encouraged us to look at the Company in 6-month intervals. I would assume this guidance is basically taking the first quarter's sort of upside and then cautious second quarter, and leaving the second half pretty much the same. Is that a fair, simplistic read?

Generally, I like to have a disconnect between the way we are looking at things internally, versus the way you all are looking outside from the business. I would say, to answer your question, overall, from a fair, simplistic standpoint, I think your assessment is in the ballpark.

Great. Thanks.

John Berg with Piper Jaffray.

Great. Thank you. Thanks for taking my questions, and congratulations again on the quarter. Just one quick one for you. Given that you are currently in your largest quarter, what do you think poses the most risk to you at this point? Do you think it's the effect of elevated fuel prices on your customers, or do you think it's the late start to spring in the northern part of the country?

Without a doubt, for us it would be the arrival of spring. The later it comes, the total selling window does close a little bit. With regard to the customer, I think if you think about the customer on a year over year basis, the cost of fuel has probably done nothing more than to offset the benefit of a payroll tax give-back. So, I think as we move out, if we had a bit of a tailwind from the tax reduction in the first quarter, early in the first quarter, I think that's probably lost -- not just to us, but to all retail as we move forward into the year. But on a year over year basis, I don't think it is -- it will be the absence of a positive, as opposed to the introduction of a negative.

Great, thanks. Good luck.

Thank you.

We have no further questions in queue. I would now like to turn the call back over to Management for any additional or closing remarks.

Okay. Well, thank you all for being on the call and being on this fine journey with us. We -- as we always say, we believe that we have much to be proud of, and absolutely nothing to be satisfied with. So, we are in relentless pursuit of constant improvement and delivering great results for our shareholders. Thank you very much, and we look forward to talking to you again in Q2.

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