Tractor Supply Co (TSCO) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss second 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 the reproduction of this call in whole or in part is not permitted without prior written authorization from Tractor Supply Company. And, as a reminder, ladies and gentlemen this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Erica Pettit of FD. Please go ahead, Erica.

Thank you operator. Good afternoon everyone and thank you for joining us. Before we begin, let me take a moment to reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This conference call may contain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the Company. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in the Company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that the 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 today with Tony Crudele our Chief Financial Officer, Greg Sandfort our President and Chief Merchandising Officer. Our second quarter and year-to-date results further underscore the structural changes that we have made to our business model over the last few years and our ability to navigate successfully through a challenging environment. We experienced another record quarter of broad-based strength across the business. We grew sales by 11% with both traffic and ticket positives and combined with margin improvement and SG&A leverage, earnings per share increased 18%.

Now let me go into a bit more detail for the second quarter with respect to our merchandising margin expansion and efficiency initiatives. Our unique mix of merchandise drove our top line. We continued to focus on our core items and were quick to respond as the season evolved. Our consumable, usable, and edible, or CUE categories, are core to the rural lifestyle.

As a result, we've been able to pass through pricing increases while maintaining or gaining market share as we've managed through these inflationary period. Consistent with prior quarters, these non-discretionary items drove traffic and sales across all eight regions. Our results reflect that we've become less reliant on seasonal big ticket items. Unseasonal weather was a headwind early in the quarter for the seasonal items and drought conditions in the South affected approximately one third of our store base.

Accordingly, there was limited demand for outdoor power equipment and reduced demand for repair and maintenance sales in certain areas. However, we are pleased that in regions where we experienced normalized weather patterns, that our repair and maintenance performance was strong. For the South in particular, I'm proud of how our field and merchandising teams anticipated and responded to adverse conditions by shifting the product assortment swiftly towards items that drought affected consumers need, such as animal feed and supplements, water storage and water movement products.

We continue to make progress on our four key margin expansion initiatives. As planned we transitioned into the spring selling season smoothly. We continue to increase our strategic sourcing as we work with partners that provide us with great service quality and attractive pricing.

We are delighted with the conversion of our customers to private brands. For example our customers have continued to respond well to our 4health premium, private brand dog food. And we're beginning to see the positive effects from the initial rollout of our price optimization software.

During the quarter, we continued to enhance service to our stores and to our customers. Our in-stock position is as strong as ever. We maintained our disciplined approach towards our 3300 program, which is focused on prioritizing inventory for the seasonally top 30 merchandise categories and the top 300 SKUs. Additionally, our distribution center team has done an outstanding job moving through the seasonal inventory, despite less than ideal weather conditions and adjusting to the changes as we implement our new warehouse management system. During the quarter, we decided to slow down the implementation of WMS and move the implementation from one distribution center from late this year to early 2012.

The momentum we're experiencing in our business is a direct result of the plans we put in place and our teams' ability to execute effectively. We've been very deliberate in tracking trends, anticipating needs, and building relationships with our customers and business partners, and this has led to continuous growth for our business. I'd now like to turn the call over to Tony to review financial results, discuss outlook, and then I'll be back to share a few additional comments. Thanks, Jim and good afternoon everyone. We had another strong core performance in our all-important second quarter. Our sale strength remained broad-based and we continue to increase our market share in many key merchandise categories.

For the quarter ended June 25, 2011, on a year-over-year basis, net sales increased 10.6% to $1.18 billion, and net income grew by 17.9% to $91.2 million, or $1.23 per diluted share. Comp store sales increased 4.6%, compared to last year's increase of 6.1%. We continue to drive same-store sales increases on top of strong prior year performance. Non-comp sales were $63.8 million or approximately 5.4% of sales.

As Jim alluded to, weather had a very pronounced impact on sales trends in the early part of the quarter, as we experienced a late spring in the North and -- compared to an early spring in April last year. Although this resulted in negative comp in April, our two your comparison was still solidly positive. As spring began to break in May, we captured much of the pent-up demand and experienced a solid comp sales increase that continued into June. We're very pleased with the sales acceleration throughout the quarter.

Comp transaction count increased 3.1%. This increase was on top of a 6.9% transaction increase last year. We continue to drive footsteps into the store with our CUE items, serving our customers basic and functional needs, which results in more frequent trips to our stores. The trend in the average comp ticket continued to be positive at 1.5%, versus last year's 0.7% decrease. Although we had a positive comp in big ticket transactions, it was not a driver of the average ticket increase. The increase in average ticket was broadly distributed throughout our merchandise categories and was driven by inflation and by the mix within each transaction.

We also continue to see acceleration of the comp for our new stores opened within the last four years as they ramp to maturity. We have continued to have broad-based sale strength with respect to both merchandise categories and geographic regions. The strong sales occurred across the entire country as each of our eight geographic regions experienced an increase in comp sales. Sales were the strongest in the Northeast and North-Central regions, as spring conditions drove seasonal sales. While the Southwest suffered from an extended drought, and was the weakest region, we are still pleased with the positive performance it delivered. As Jim noted, we did an excellent job in shifting the assortment to meet our customers drought related needs.

The best performing comp categories were our CUE products, principally animal and pet related merchandise and various seasonal lawn and garden categories. Although the drought in the Southwest made sales within seasonal categories a challenge, we were better merchandised this year and had several product line expansions and new product lines -- product introductions that drove the comp sales increase.

For the quarter, we experienced a net estimated inflation impact of 220 basis points on top line sales. Inflation was the most evident in livestock feed, agricultural fencing and lubricant categories as we saw cost increases in grains, steel, and oil.

Turning now to gross margin, which increased 30 basis points to 34.1% of sales. Direct product margin percent continued to improve, as we have been making progress on our strategic gross margin initiatives, which include improved strategic sourcing, private branding, price optimization and inventory management. Freight expense increased by 49 basis points over last year. This increase was driven by higher fuel costs than last year, costs associated with 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 21.9% of sales which was a 30 basis point improvement over the prior year's quarter. This improvement resulted principally from our sales growth. We leveraged occupancy for the sixth consecutive quarter while growing the store base by 7.9%. We leveraged several key SG&A categories including advertising, store support center, and field management. Incentive compensation was consistent on a year-over-year basis and had a slight leveraging impact on SG&A. SG&A leverage was offset by approximately 10 basis points of deleverage from distribution center costs as a result of the increased product flow during the busy spring season and additional temporary labor cost as we implemented our new warehouse management system.

The Company's tax rate was 36.7% compared to 37.3% in Q2 last year. The tax rate was reduced by higher federal tax credits compared to the prior year. We anticipate that our full-year tax rate will be 36.8%.

Turning to the balance sheet. At quarter end, we had $185.5 million in cash and investments, compared to $181.1 million last year. During the second quarter, we ramped up our purchases under our stock repurchase program, acquiring approximately 1.15 million shares for $69.7 million. We estimate the impact of the stock repurchase program on the weighted average earnings per share for the quarter was approximately $0.01.

Let me remind you that we increased our dividend by 71% this quarter and increased our share repurchase plan by $600 million. These levers will provide value to our shareholders and at the same time we remain solidly tracking to our year end cash target. Inventory levels per store at quarter end increased proximally 1.7%. We are very pleased with our inventory position as we enter the summer selling season and in light of the inflation that we experienced, which is embedded in the inventory valuation.

Year-to-date annualized inventory turns were 3.18 times, almost a 13 basis point improvement over the same period last year. Capital expenditures for the quarter were $45.2 million compared to $24 million in last year's second quarter. This increase in capital spending related to approximately $18.5 million for the construction of our new distribution center in Franklin, Kentucky. We opened 16 stores and relocated one store in this quarter versus 19 stores opening in the prior year second quarter.

Turning to our outlook for the full year. As a result of our strong performance in the second quarter, we are increasing our financial expectations for the full year 2011. We expect net income to be in a range of $2.75 to $2.82 per diluted share compared to our Q1 guidance of $2.62 to $2.70 per diluted share. We expect full-year sales to range between $4.1 billion and $4.14 billion compared to our previous expectations of $4.0 billion to $4.11 billion. Correspondingly, same-store sales for the year are expected to increase 5% to 6%, compared to our expectations of an increase of 3.5% to 5%.

I would like to quickly discuss a few of the underlying assumptions for the remainder of the year included in our full-year guidance. We believe the consumer will remain value-oriented and the CUE categories will continue to be sales drivers. The very positive sales trends that we experienced in June have continued into July.

We are optimistic that the late start to spring and the moisture levels in the North in May, we will have an extended spring/summer season. We are very pleased with July sales, and they have been factored into our forecast. We expect that gross margin will continue to benefit from our initiatives, however freight costs continue to run above our initial planned levels as a result of higher fuel prices, which will provide headwinds in the second half of the year.

Even with the freight as a headwind, we believe that we can drive gross margin improvement in the back half by 20 to 30 basis points, similar to the first half of the year. We believe that weather will not have a significant impact on second half sales and we consider it to be neutral year-over-year.

We anticipate that we will continue to have inflationary pressures throughout the year. Our full-year inflation assumption remains at 1% to 3%. We will begin to cycle against a less inflationary period in the fourth quarter and thus we anticipate that inflation will be closer to the lower end of the range and will have less of an impact on the top line in the fourth quarter than the second and third quarters. This inflation assumption is considered in our comp guidance and estimated average ticket.

With respect to earnings growth in the second half, we had a very strong Q3 in 2010. And our cycling against a 5% comp and a 46% increase in profit. Also, let me remind you that this is our 53rd week year, which adds one week to our fourth quarter.

Although we had a strong fourth quarter last year as a result of the additional week, we expect that year-over-year, the earnings growth rate in each of Q3 and Q4 will be about the same as you model the back half of the year. We estimate the benefit of the additional week to earnings is approximately $0.05 per share. Obviously the additional week in 2011 will not recur in 2012, and that should be considered for your year-over-year earnings growth when modeling fiscal 2012.

With respect to store growth and CapEx, we anticipate that we will be at the high end of our estimate of store growth and capital expenditures. We expect to open approximately 85 new stores and expect capital expenditures should range close to the $160 million level, as a result of the purchase of some lease stores. Year-to-date, we have acquired three stores for $7.7 million anticipate a minimum of five or six additional purchases based on the opportunities that are under consideration. We will continue to opportunistically purchase lease stores when we are presented with the right of first refusal when the economics are accretive to the income statement and it improves our long-term returns on invested capital.

To conclude, we are very pleased with our performance in the second quarter and are proud that our initiatives are driving top line and bottom-line increases, and 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. Great, thanks, Tony. We are confident in our ability to meet our increased financials for the year. We believe that the momentum and solid performance in the first half will carry into the second half. We've demonstrated that Tractor Supply is sustainability capable of continuing to build market share, profitably opening new stores while increasing return on sales, and ROIC.

For a number of reasons we believe our company is a one of a kind retailer. We serve a unique niche. We have a very limited and fragmented competition. We have an experienced, energized and focused management team.

At this time I'd like to get moment and thank Stan Ruta my business partner and our Chief Operating Officer for his dedication, commitment, and leadership at Tractor Supply Company since 1994 when the Company went public. As you may recall, earlier in the year we announced Stan's planned retirement. Over the next six months Stan will stay with us and handle special projects on assignment. We have effectively completed a smooth transition of the primary store operating responsibilities to Lee Downing, who is now reporting to our President, Greg Sandfort.

As our business continues to grow, we remain focused on shareholder return, through our margin initiatives and balance sheet strength. We are in early stages of benefiting from price optimization, strategic sourcing, private brand development and merchandise planning and allocation. We expect to add exit the spring selling season cleanly, despite a late start to the season, a drought, and are preparing for the fall.

Our efforts in these areas are further enhancing our profitability and balance sheet strength, which is a key to our capital allocation strategy. We remain focused on investing in the business by expanding our footprint with new stores and distribution centers and improving technology and systems. At the same time, we have the financial flexibility to grow while continuing to return additional value to our shareholders.

As Tony mentioned we recently increase our share buyback program allocation, and we are buying back 1.15 million shares in the quarter, at an average price of $61. We've also increased our quarterly cash dividend last quarter -- this quarter by 71%. We believe these actions demonstrate our confidence in our business over the long-term.

Overall, we are delighted with our performance in the first half, and we'll continue investing in and executing against our plans. We remain nimble and look forward to an exciting second half of the year and beyond. Operator, this concludes our prepared remarks and we'd now like to open the call for questions.

(Operator Instructions) We'll take our first question from Dan Wewer with Raymond James.

Thanks. Jim, I wanted to follow-up on your comment about the warehouse management system implementation. Did I understand correctly, you'll be delaying that until 2012? And maybe you could discuss, maybe some of the challenges that you're seeing with that?

Sure, Dan. What we did, is we installed the system in our Waco, Texas distribution center, and had intended to install the additional unit this year before we installed it in our brand-new distribution center in Franklin, Tennessee. We had a little bit of slippage on time, and felt, frankly, it would be best to shift our emphasis to the new distribution center in Franklin, so that we did not have to bring the entire team up to speed on the old system and then convert. It's simply -- nothing more than a matter of few weeks of slippage and a decision to minimize risk by bring -- and cost by focusing on the Franklin, Kentucky is distribution center instead of one of the mature DCs.

Okay. And then a question for Tony, just want to make sure I understood the sales guidance for the balance of the year. So, it sounds like you're expecting the third quarter comp sales growth to be stronger than the fourth quarter, because the fourth quarter will have less of an inflation benefit? But then the reason why the EPS growth rate would be comparable for the two periods is the benefit of the extra week during the fourth quarter?

That would be correct.

And then finally, just Jim, for you, I know in past quarters, you've talked about some of the smaller stores that you have opened, which could potentially expand the potential numbers of Tractor Supply stores in the US. Could you remind us how many of the smaller stores are now operating and what kind of sales growth they're achieving compared to the traditional prototype?

Dan, I'd be delighted to. First, we anticipate to have a lot more information available, probably first quarter of next year, more likely in our analyst meeting. We're spending a great deal of time now assessing the 48 contiguous states to determine the ultimate opportunity. Having said that, we currently have 21 of those stores open and operating. They are, in aggregate, exceeding their sales target and their IRR target and their Return on Sales target.

So, we are, frankly, delighted with the performance of those stores. And beyond the in aggregate performance, when we look at the over/under, there's very few that are under, and those that are, are very marginally under our initial sales performance. So, it's very positive at this point in time.

Great. Thank you very much.

And your next question will come from Vincent Sinisi with Bank of America.

Good afternoon and thanks very much for taking my question. I wanted to ask about price optimization. Jim, you mentioned toward the beginning of the call that you're starting to see some positive effects from the initiative. If you could just give a bit more discussion around what you've seen so far. Lubricant and paint were the first two categories to the allies and kind of the processes that you're going through. What you're seeing there and going forward how that will be further rolled out?

Sure. We are in a test and learn environment now. I'll let Greg give a few more specifics.

Vince, hi, it's Greg. A couple of points to recognize with price optimization is a bit of a trial and error as you first start. And you mentioned several categories that we're now testing it in. What we are noticing is that there is price elasticity, on the upside. It's also telling us -- and looking at the relationships of retails within category, within skew base. And this is something that we could not have done with our past processes. So we believe what will happen over the term of this, and this will be a three to five year rollout, is that our pricing across categories, across regions, districts, and even within stores will make a lot more sense to the consumer, that shopping in that particular market will also find ways to drive some market share gains as well. We've noticed within one of the categories that as we moved some price and made some adjustments that we've actually seen gains in sales. And we believe that's also gaining market share because the units are increasing. So far, very, very good response and we're learning a lot. There's more to be said as we get further in the year.

Great. Thank you. Just as a quick follow-up question, just turning to the inventory. Obviously up over the quarter, but you said that you're comfortable with levels as your further going to the spring and summer months. Just any color in terms of if there is going to be any changes in your advertising within any of the categories or do you think it's just the case of you had, as expected a slower start to the quarter, and it should be working itself out going forward?

You just said it correctly. We do not anticipate any additional advertising as a need for merchandise. We're very comfortable with our inventory levels. As Jim mentioned earlier, we work the inventory levels day-to-day, week-to-week. We made the adjustments early we saw the business was not developing early enough in the quarter. And as we move into the second half of this year, we feel very strongly that, as we said, the summer season is going to extend a bit, particularly up in the North. We're well-positioned with the correct inventories and we plan to capitalize on those sales opportunities.

Next we'll go to Alan Rifkin with Barclays Capital.

This is actually Helen [Pen] calling in for Alan. And I was wondering how well is underlying demand holding up for your more discretionary products?

Well, I can speak to that for a moment. Discretionary products are not the mainstay of our business overall. We talk about CUE a lot. We talk about 3300. We did mention, and I'll reiterate, that the entire store is working today. All four corners. That would include the discretionary components as well, but I would tell you that we're seeing accelerated growth and in the CUE and the 3300. We have not seen discretionary fall off to any great degree.

Let me add a little bit to that. If we look at the northern parts of our Company, where the grass got green eventually, and has stayed green, even in the OPE category, we are actually pleased with the performance. Obviously, as you get into the drought areas, that is not the case. But we really see more relationship between the weather and demand on big-ticket discretionary than we do anything coming from consumer sentiment.

Okay. And a follow-up question, did you see any increase in your private brand sales as a percentage of total sales?

Yes, we have. We're very pleased with how our private brand mix in pet foods is performing. I mentioned on last quarter's call about the left-hand side of our store and the emphasis we've had in growing our private brands there, Job Smart and a few other -- the products in our lawn and garden categories. So we've been very pleased, very pleased with our performance and we're growing market share and our brands.

Next we'll go to Brent Rystrom with Feltl.

Hey, guys. Just a couple quick questions. Is there any share back -- buybacks embedded in the guidance?

This is Tony. No, there's not. Only what's currently purchased in the first half of the year.

All right. And then just a quick question. A lot of stores have told me that -- not a major thing but just out of curiosity, you (inaudible) going to put the nursery stock program that you put in place this year, a lot of issues as far as the wrong kind of plants for the climate. Does that make sense? That they were seeing the plants that were being sold in a climate area, let's say a four rating, were getting plants that are more adaptable to, say a six. So, a tree that would grow in Georgia was trying to be sold in Illinois. Do you have issues with that?

Brent, this is Greg. Very little issues. It's still a test program. It's possible that a store could've been miss-shipped by one of the local suppliers. But I'll be honest with you, overall, we're very pleased with what we've seen in that performance, and we plan to expand on that, if the results at season end continue to be as they are.

And last question then, from implementation of putting the hay in the stores, Is the hay going to be all on pallets in all stores or will it be shelving in some and pallets in others?

A combination of both, Brent. It's a space issue that we've had to work through. You'll see some stores with hay in trailers in the side lot or in the back, so it really is on-demand and it's also in space.

(Operator Instructions) Your next question will come from David Magee with SunTrust Robinson Humphrey.

Just a couple questions. One is, do you have anything to do with hurricane season this? Last year, as I recall, it was somewhat subdued as far as the impact in let's say the Southeast and the East Coast.

This year as last year, they are calling for an above average number of named storms. Obviously that didn't mature last year, hasn't come to fruition, so we really have no idea. We have planned no emergency response in our plans the second half. So, if we have landfall hurricanes, that would be somewhat accretive to our results.

Thanks, Jim. And, Tony, given what you know now with regard to early results of price optimization, how would you rank the three major factors, the private label, the sourcing, and price optimization towards future contributors to gross margin?

I would say consistent to what we had forecasted earlier in the year and had discussions on. That the price optimization will be most impactful early on and we're very hopeful and optimistic that we'll see some benefit as we move into the second half. But mostly more as we move into 2012. The import private-label, a little bit more of a slower impact and I think you'll see that more in the next year and a half to two years as that process matures.

Thanks. And lastly, with regard to e-commerce, anything happening there that changes your thinking about what you should be doing towards investment or otherwise?

I can speak to that. As we mentioned earlier, with the 3C strategy, which is content, commerce and community, is the platform are working from. We are diligent today in bringing the site back into focus against those three things. We believe that over time, and I'm saying this as the next 18 to 24 months, that we will have a more pronounced presence out there on the web with more product, because that's the content piece first, getting the content out in front of the consumer, having availability for sale and as we bring into play our ability to be able to transact drop shipment and as we sift in the tides, the special order process, we believe there is nice upside in those two components, just not ready to quantify what that'll be yet.

Next we'll go to Matt Nemer with Wells Fargo Securities.

Hi, guys. A great first half. So a couple -- three questions. The first question is, given the late spring and summer, it sounds like you're going to potentially hold the merchandise a little longer and the mark down cadence will come a little later. Do you push out fall receipts or are you just going to end up being a little heavy with both at some point later this summer?

Matt, we're not going to push out fall receipts, and we're really not heavy as we go into the third quarter. As we said earlier, we made some maneuvering early on the quarter as we saw business develop and we took action. We have already moved through a lot the categories where we felt we had excess inventories, we're very comfortable actually with where we are and what we believe we'll sell through the third quarter as we get into fourth, so, no great concerns here at this point.

Okay. And then from a broader standpoint, as you're planning for the fall weather transition, could you highlight -- maybe give us a couple highlights in terms of new products or any planogram changes, marketing cadence changes so we can be thinking about what to expect this fall?

Well, I won't to give you all of the things you asked for. I'll give you a few tidbits though. We just rest reset our equine area, and initial response from the consumer and our store people have been just terrific. Customers love the new offerings. It's an area of the store on the far right-hand side that we've been working on for the last year and a half. I'm very happy with the results of that.

We continue to work our private brand mix throughout the store, I've talked about that earlier. You will see heavier penetration as we hit the midrange of the third quarter with the receipts coming. And I'm very excited about seeing how the customer will respond to those values. And then again, the business of seasonal. We will transition cleanly, we will have our positioning for the early third and then holiday season in place this year. And not only are the assortments more tuned by the region, but I'm confident that the depth of inventory and the flow of that inventory is going to be far superior to a year ago. So, I believe we're going to see a nice performance there.

Okay, great. And lastly, I know this is probably not a huge category for you, but there are some generic flea and tick medicines that are coming to market. I'm wondering if you're planning on carrying them and what impact you think that might have on the market.

We have already several in our assortments. We do plan to pick up one of the new releases. And it may have some impact on the branded product. We'll just have to wait and see how the customer responds.

Okay, great. Congrats again.

Your next question will come from Mark Miller with William Blair.

Hi, good afternoon. On the increase in the comp sales guidance by a point to a point and a half for the full year, how much of that was stronger sales in the back half of the second quarter versus the strong performance you're seeing thus far in the third quarter? And then to clarify, is there any change in what you would've thought for the fourth quarter previously?

Sure, Mark. This is Tony. When we look at the back half, we really look at the overall trends relative to the first half. There was no dramatic change in our planning for the back half. There might be a slight uptick in the third quarter, and potentially we increased the fourth quarter, as well. When I look at both first half and second half, obviously just from the overall guidance, you can calculate that the back half will be lower than the first half. We do expect both quarters to be positive, with the stronger quarter being the third quarter.

It looks like on the incremental sales that you're projecting, a pretty strong drop-through rate to profitability. And my question, followup question is on the leveraged expense -- leverage point for expenses for comps, do you expect that still to be in the 2.5% to 3% range or is that also floating up a little bit? Thanks.

Generally, it should remain in that 2.5% to 3% range as we had it calculated. Again, there is a productivity lift when it comes to the 53rd week in the fourth quarter. That should have a positive impact.

Thanks. Just a final one, can you actually indicate what the private label percent is? And what the year-to-year change is?

Last year was approximately 22%. And I think we just broke through the 23%, so it was about a point to a point and a half increase.

And moving on we'll hear from Matthew Pfeffer with Goldman Sachs.

Thanks a lot and good afternoon to you. My question relates to pricing and inflation. Can you talk about what consumer acceptances look like? It seems like the past year has been pretty good. Has that been consistent across categories?

Matt, this is Greg. Yes, I would say that what we see is -- and we've talked about this before, how we try to move ahead of the curve of price increase by starting today, let's say, if we know price is moving -- and we won't accept that increase for a period of time, and we'll start escalating and moving a price up to where we believe it needs to be, once that move in average cost has arrived within our inventories. Now, we watch closely, weekly, we monitor the amount of units that are being sold in all of our key categories, and that's part of the pricing optimization flywheel, I guess, as well. And what I will tell you is that when we see any consumer resistance, we will course correct. But at this point we're very pleased to say that we're seeing -- because of the way we operate, we stair step, the consumer seems to be accepting and understanding in the pricing. And it's not always if prices are going to go up, by the way. Sometimes we can maintain and offset other places. But not seeing any real resistance at this point.

And it sounds like, based on your comments, that the third quarter, I guess, is probably what you anticipate to be the peak in terms of year on year inflation at this stage, based on what you're seeing from vendors and on comparisons?

That's correct. One of the driving forces there that is not a large part of our business, but it is out in other industries is, is cotton. Cotton is probably the most extreme of the increases. We've been seeing some increases across the last several quarters within grain and within, of course, oil products, but cotton will be the one question mark as we get into the third quarter, and then things will start to escal -- drop back down, I believe.

And next we'll go to Simon Gutman with Credit Suisse.

Thanks and good afternoon. Jim, you had mentioned normalized weather, I think, in the prepared remarks. Can you talk about comps in the regions where the weather was normalized and more importantly the ticket to give a sense maybe that some of the power equipment was selling there?

Yes. We don't break it out by region, but what we look at, as I guess I mentioned globally, where we had a good solid late, but solid spring-type weather which means, grass was growing in the North-Central, Northeast. We actually had a good unit increase in riding lawn mowers and we had a nice mix, positive mix adjustment in riding lawn mowers as well.

Okay. And I guess, is it safe to assume that the ticket would be higher then, as well, if you're seeing higher units in that category?

Actually, our ticket was up across the chain.

Right. But in regions where I call it normalized weather -- not speaking specifically to any region, but kind of directionally?

Right. That would be correct.

Okay. And then second, I think in the press release it mentioned on the expense side that there was some control in the occupancy and the advertising lines. Can you talk about that? Whether those controls were in place beforehand, meaning you were looking to increase the leverage rate, or were those in response to the way the sales plan was developing in the quarter?

Yes, Simon. This is Tony. We quickly adjusted when it came to the marketing plan and based on the sales trends early in the quarter. But what was good about our plan was that even as we pulled back on some of the expenditures to get some additional leverage, we continued to drive traffic. And drove it right into the strong, pent-up demand in the May and June time frame. So, we felt that not only did we get the traffic, but we were able to control that expenditure. We did look at it lot of the discretionary expenditures as we moved into the quarter and managed those as effectively as well when it comes to some of our general administrative expenses.

(Operator Instructions) Your next question will come from Adam Sindler with Deutsche Bank.

Yes, hi, good afternoon and also congratulations on a good first half of the year. Understandably you guys don't want to talk about the regionality too much, but just to help us get a sense as to -- looking at the ticket, most specifically, fell off in the mid to high single digits to a low single digit. What gives you the confidence that would ramp going to into the back half of the year, given that comparisons remain in these levels? And then maybe if you just -- what was impacted most by the weather and sort of how that played out between sales and gross margin? I know that the drought related items have higher margin but lower ticket and then in the Northeast it was the opposite of that, so how it all played out.

I think Greg and I will each answer a piece of that. You're absolutely right that we responded well in the drought areas, supported that business very well. Our customers did lower ticket business at higher margins. I think what's most important to think about our business going into the second half is that the composition of our business and the composition that drives big ticket is very different in the second half of than it is in the first half. First half is very dependent on the OPE category, for ticket increase. And the second half is much more dependent on heating, stoves, furnaces. And while it's not what we would declare a big ticket item, it's a well above average ticket item, and that would be insulated outerwear. None of which we sell in the first half.

In addition, as we move into the fourth quarter, of course the cattle aren't out in grazing, the feed becomes more prevalent relative to the sales level as a percentage of sales. And obviously, that's been a very strong suit for us. So, generally as we move into the back half of the year, we're less dependent on some of the outside variables that would drive the business.

And next we'll go to Christopher Horvers with JPMorgan.

This is actually Mark Becks on for Chris. First question, you called out weather as being a headwind. Did you quantify that, or have any guess as opposed to how significant it was in the quarter?

No, we didn't. We did not provide any ranges, and it would be very difficult to do, as we try to quantify the shift between the two months of April and May. The one thing that we have noticed is that it did get off to a very late start. It accelerated tremendously in May and it continued to be very strong in June. Which gives us a lot of optimism that the season will continue longer than what we normally would consider that spring selling season. And obviously, as we've moved into July, that trend has continued and so we feel very optimistic that we will regain a lot of the sales that were lost because of the cold weather in April.

Just looking at the big acceleration into May then. Have you guys ever disclosed what the mix is by quarter or, excuse me, by month, so from April, May, June. What the split is there?

Relative to comp sales, no, we give general direction, but we do not give specific comp trends on a month-to-month basis.

If we were to think about the mix being say, 25, 35, 40, 45, does that seem realistic or -- in terms of percent to total?

Are you talking about the three months?

Yes. So just looking at the contribution by month to the total. If we thought about April being 20%, May 35% and June 45%. Does that sound realistic?

No. It does not. The norm is that generally April has the strongest sales per week, with May being second, June being the weakest, but June being a five week month. Generally there's a fairly equal distribution between April, May, and June. So, you could look at it that way. In a normal weather environment, you would look at it generally flat between the three months.

Okay. And then just looking at how it sort of transpired this year, does that seem realistic based on how was this year versus historicals?

Clearly weighted to the back half.

And at this time there no further questions. I would like to turn the call over to management for any additional or concluding remarks.

Great. Thank you very much. There's an old military saying that the greatest battle plan changes when the first shot is fired. And if we look at Q2, actual plan, mix of business, mix by region, that would certainly be the case. I'm extremely proud of this team and their ability to anticipate the change in dynamics, to respond to those dynamics and to land yet another record quarter. So I'm very pleased with that. A number of years ago, I had experienced the late spring and the drought. We would not have reported the strike strength that we are pleased to report. That and the fact that we have a very good momentum going into the second half makes me feel very confident in the continued development and success of the Company. I thank you all for being on this journey with us, and look forward to talking with you at the end of Q3.

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