Tractor Supply Co (TSCO) 2011 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to Tractor Supply Company's conference call to discuss fourth 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 Ms. Jennifer Milan of FTI Consulting. Please go ahead, Jennifer.

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 am pleased to introduce Greg Sandfort, President and Chief Merchandising Officer. Greg, please go ahead.

Thank you Jennifer. Good afternoon everyone. I am here today with Jim Wright, our Chairman and CEO, and Tony Crudele, our CFO. We are pleased with our fourth quarter performance which caps off another strong year for Tractor Supply Company. Our team continued to execute well in what remains a challenging environment for customers and retailers. In the fourth quarter, we experienced another period of strong broad-based performance across the store and achieved double-digit increases in both sales and profitability on top of record results a year ago. This mix of broad-based sales growth across the store continues to mitigate our dependence on weather related merchandise. The momentum in our business is a reflection of the structural improvements we have made in recent years. Not only have we increased our focus on consumable, usable, edible key merchandise which has proven to be a very successful strategy in meeting the needs and creating loyalty with our customers, but we have also made great strides in our inventory management through better merchandise allocation and expanded regionalization. These sustainable improvements have enabled us to ensure we have the right products in the right places at the right time. As we continue to learn more about our customers each day, we are working diligently to further refine our product offerings, our marketing initiatives and the in-store shopping experience.

Now let me provide a little more detail on our performance during the fourth quarter. Our strong top line sales results were reflective of consumers' continued support of our unique merchandise mix which enables us to meet their needs across multiple categories at a compelling everyday value. As we had anticipated, weather was warmer than last year in the quarter and we planned accordingly. We were nimble and adjusted our merchandise mix to take advantage of the weather trends. Our proactive planning approach to merchandise allocation and regionalization enabled us to deliver higher year-over-year results for the quarter.

During the fourth quarter, our CUE categories remained key sales and traffic drivers. Our feed and food customers shop our stores more frequently and contributed to our 15th consecutive quarter of comp transaction count increases. Despite the inflationary environment, we continue to provide compelling values to customers while effectively managing merchandise margin. We were once again capable of improving gross margin dollars per unit in most CUE categories while increasing market share. We also achieved strong sales performance in our hardlines areas which include tools, hardware, truck and automotive. Our strategy of balancing our product selection between national brands and increased private brand mix across multiple categories contributed to improved performance for the entire category.

From an inventory perspective our rigor has enabled us to manage flow more productively. As a result, we continue to execute better than ever. While we did decide to move forward spring deliveries for several of our southern regions to accelerate sales, we were pleased with our yearend inventory position and we continued our successful management of seasonal carryover and minimized forward business risk into the next season. Operationally, we continue to make great strides in the areas of inventory management, price optimization and merchandise allocation and regionalization. These collectively have driven meaningful, sustainable improvements in our business. Our fourth quarter and 2011 results further validate that we continue to gain traction from our strategic initiatives and as we look to 2012, we have never been more excited about the opportunities that lie ahead. I would now like to turn the call over to Tony to review our financial results for the quarter and discuss our outlook after which Jim will share some closing comments.

Thanks Greg and good afternoon everyone. We delivered another very strong performance in our fourth quarter. Our sales growth remained broad-based and we continued to increase our market share in many of the key merchandise categories. We achieved these results despite being up against robust sales growth last year and experiencing relatively unfavorable weather conditions compared to last year. For the quarter ended December 31, 2011 on a year-over-year basis net sales increased 20.1% to $1.24 billion and net income grew 40.4% to $70.5 million, or $0.96 per diluted share.

As a reminder, the fourth quarter included an extra sales week as a part of the Company's 53 week calendar in 2011. The additional week also added one comparable store sales day in the quarter. The additional week resulted in our fiscal year ending on Sunday, December 31. The comparable week last year ended on January 1 and our stores were closed for the holiday. For modeling purposes please note that we will have one less comp sales day in Q1 of 2012 due to the calendar shift. The additional week represented 6.6% of the overall sales increase for the quarter. Comp store sales increased 7.6% for the fourth quarter compared to last year's increase of 13.1%. We continued to drive transaction count increases with our CUE products while average ticket was favorably impacted by inflation. We estimate that the additional comp day represented an approximate 110 basis point benefit to same-store sales in the fourth quarter.

Non-comp sales were $71 million or approximately 5.7% of sales. Comp transaction count increased for the 15th consecutive quarter gaining 3.6% on top of an 8.8% increase last year. Our CUE products serving our customers' basic and functional needs remained an important driver of footsteps. The trend in average comp ticket continued to be positive at 3.8% versus last year's 3.9% increase. Inflation which was seen in many of our feed categories was a key driver to the average ticket increase. Big ticket purchases which we define as items greater than $350 also contributed to the increase. The transaction count of big ticket purchases increased year-over-year which more than offset a slight decrease in the average ticket for these larger purchases.

We continued to experience broad-based sales strength with respect to both merchandise categories and geographic regions. All eight of our geographic regions had positive comp store sales, the Northeast and Southwest were the strongest regions. While the Upper Midwest was the softest as the region cycled against strong sales from winter storms a year ago. The broad-based nature of sales growth supported positive comps during each month. The relative strength was seen early in the quarter as December was very warm. Inflation exceeded our forecast for the quarter as we estimate that it contributed nearly 500 basis points to top line sales. Inflation was most evident in livestock feed and lubricant categories with cost increases in both grains and oil.

Turning now to gross margin which as a percent of sales decreased by 11 basis points to 32.5%. Direct product margin percent improved slightly as we continue to make progress on our four strategic gross margin initiatives. This helped offset negative mix impact of the CUE products. The merchandising team continued to do an excellent job managing gross margins through a period of continuing inflation in many of the core categories. For example, in several of our CUE categories while the overall gross margin rate declined slightly, we increased the number of units sold and the gross margin dollars earned on each unit. So as you can see from the results this approach was very effective in managing gross margin dollars during the fourth quarter.

Markdown cadence was consistent with our expectations during the quarter. We did however book a one-time charge for our marginally profitable welding gas product line that we rationalized and will be exiting in several hundred stores. This negatively impacted gross margin by approximately $2.7 million in the fourth quarter or about 20 basis points. Freight expense increased by 37 basis points over last year. This increase was driven by higher fuel costs, costs associated with increased import activity of the seasonal goods and the continued mix shift to more freight intensive merchandise. As part of our strategic sourcing initiative import purchases in the quarter represented a little over 9% of total purchases, which is a greater than 16% increase year-over-year. Overall we are pleased with our ability to successfully manage gross margin while continuing to provide great values to our customers.

For the quarter, SG&A including depreciation and amortization was 23.5% of sales, which was 150 basis point improvement from the prior year's quarter. The improvement in rate resulted principally from our same-store sales growth and leverage provided by the 53rd week. We leveraged our key store expenses, payroll and occupancy. While growing the store base 8%. Incentive compensation was relatively consistent with the prior year and had a favorable impact of 8 basis points during the quarter. We are very pleased with SG&A leverage that we achieved during the quarter particularly given a one-time charge for the write-off and acceleration of depreciation of certain e-commerce assets. As we move forward into 2012, with our multi-channel re-platforming initiative, we reassessed the useful life of our existing platform. Additionally, we increased our sales tax reserve as states continue to pursue revenue generation alternatives. These two charges amounted to approximately $3.6 million representing a 29 basis point increase in our SG&A rate during the fourth quarter.

Turning to the balance sheet, at quarter end we had $177 million in cash compared to $257.3 million last year. We exceeded our yearend cash target of $100 million to $150 million as our 10B5 plan limited the amount of shares we repurchased in the fourth quarter. During the fourth quarter under our stock repurchase program we acquired approximately 114,000 shares for $7.9 million. For 2011 we repurchased 3.1 million shares or $180 million for an average purchase price of $58.52 per share. We estimate that there was minimal impact to EPS from share repurchase in the fourth quarter. For the full year we estimate that the share repurchase program increased EPS by approximately $0.08.

Average inventory levels per store at quarter end increased 2%. We did an excellent job managing inventories in light of embedded inflation, the opening of our largest DC in September, and the additional week in our calendar as we flowed merchandise for January events. Inventory turns for the year were 3.23 times or a 14 basis point improvement over last year. Capital expenditures for the year were $166 million compared to $97 million last year. This increase in capital spending related to approximately $48 million for the construction of our new distribution center in Franklin, Kentucky compared to $22.5 million expended in the prior year for conveyor systems and equipment for two distribution centers. Additionally, we acquired 12 of our leased stores for $32 million compared to four stores acquired last year for $12 million. We opened 31 stores in the quarter versus 27 stores in the prior year's fourth quarter.

Turning our attention to 2012. First our outlook for a few key metrics for the full year. We expect full-year sales to range between $4.56 billion to $4.66 billion. We have forecasted comps sales to increase between 3% and 5%. We are targeting improvement of approximately 15 to 20 basis points in EBIT margin compared to 2011. We anticipate net income to range from approximately $246 million to $253 million or $3.38 per share to $3.46 per diluted share. We expect to open 90 to 95 new stores.

Let me discuss some of the specific drivers and assumptions that helped us form our projections for 2012. We expect the retail environment will be stable but the consumers will continue to be cautious as unemployment remains high. We expect that our customers will continue to shop our stores for basic and everyday needs similarly as they did during 2011. And that they will remain price conscious and value oriented. Although there were some positive and negative weather events in 2011 such as the hurricane activity and the southwest drought we believe it was a net neutral year from a weather perspective and that we can effectively manage the business against these comparisons in 2012. Therefore we do not anticipate that weather trends will have a significant impact year-over-year results in 2012. With respect to inflation we anticipate that we will continue to have considerable impact ranging from 3% to 4% in the first quarter as key commodities' prices remain high. We expect that the inflationary impact will moderate as we begin to cycle the commodity price increases that we experienced last year. Overall, our forecast assumes inflation of 1% to 2% for the full year. We have demonstrated our ability to manage pricing effectively over the past several years.

We are targeting 15 to 20 basis points of EBIT margin improvement for the year with the majority coming from gross margin rate as a result of several of the key merchandise initiatives. For the full year we expect gross margin rate expansion of approximately 10 to 15 basis points. This reflects our expectation that gross margin percent will be somewhat flat in the first half of the year with improvement weighted more to the second half as the impact of inflation on our merchandise costs subsides. As I mentioned earlier, we manage profit per unit during inflationary times focusing on gross margin dollars instead of rate. We also expect freight costs to remain a headwind until we begin to cycle the accelerated fuel costs we experienced in 2011. Additionally, similar to 2011 we expect imports to increase as a percent of our total purchases which will increase our freight costs but have an overall favorable impact on gross margin rate. We also expect continued headwinds from the merchandise mix shift to more freight intensive CUE products.

Inventory turns are expected to improve slightly with per store inventories likely to increase modestly due to investments in key merchandise categories and some inflation. With respect to SG&A, we expect slight leverage as we remain committed to growing our store base and the supporting distribution and technology infrastructure. We expect to increase our marketing spend by 8 to 10 basis points in 2012 as we plan incremental investment in direct marketing, circulars and customer research and continue to test various other programs. Store payroll is expected to leverage slightly as we grow our comp sales base and begin to cycle to a more normalized level of incentive compensation which should offset wage and healthcare increases. We also expect modestly to leverage our store support center costs as normalized incentive compensation offsets increased expense from full year management additions in 2011 and new hire growth in 2012. We anticipate slight deleverage from our distribution network reflecting a full year of operations from our new Franklin, Kentucky distribution center. There are several levers that we can control when managing various expense line items. Whereas in the past we will continuously assess the environment and the Company's performance in 2012 and judiciously allocate resources accordingly.

For the full year, we forecast that our effective tax rate will be approximately 36.8%. An increased from 36.5% in 2011. This will result principally from a reduction in expected federal tax credits. We plan to increase capital expenditures in 2012 with a range of approximately $160 million to $170 million targeted for the full year. We have included approximately $40 million as a placeholder for our leased store acquisition program and $11 million potential land acquisition for our southeast distribution center relocation. Additionally we expect an incremental $6 million spend as part of our e-commerce re-platforming.

As I stated earlier, we plan to maintain our store growth rate and to open approximately 90 to 95 stores in 2012. We plan to open 50% to 55% of these stores in the first six months of the year with 30 to 33 new store openings expected in the first quarter of 2012. We will continue to make purchases under our share repurchase program as part of our long-term objective of reducing our cost of capital and maintaining a target cash balance of $100 million to $150 million. For modeling purposes, we estimate that diluted shares outstanding, inclusive of option grants and share repurchase activity, will approximate $73.1 million for the full year. As we've emphasized in the past we believe our business can be more accurately assessed by focusing on the halves, not the quarters as weather patterns can change significantly from one year and shift the timing of sales. We currently estimate that the net earnings will be fairly consisting each half of the year. As year-over-year earnings growth will be slightly greater in the first half of 2012. However, if you normalize 2011, adjusting for the additional week, growth in the back half of fiscal 2012 is expected to be slightly greater than in the first half.

So some key points with respect to the quarters. As another reminder, 2012 is a 52 week year, thus Q4 will have one less sales week relative to 2011. We estimate that the benefit of the 53rd week in 2011 was approximately $0.09 per diluted share. Due to the calendar shift, Q1 and the full year 2012 will have one less comp sales day compared to 2011. As a result of the calendar shift back to the 52 week year, Q1 in 2012 will benefit from an added week later in the spring selling season. Replacing a below average sales week between the holidays and late December. Therefore we anticipate that the year-over-year earnings growth will be the strongest in Q1 this year even with the one less comp sales day. Also related to the calendar shift we will pull some marketing expenditures forward into Q1 to drive spring sales in the southern region. We believe that this will pull some sales to Q1 from Q2 and as such anticipate that Q2 will have the lowest quarterly year-over-year earnings growth in 2012.

Thus far in Q1, comps are positive even withstanding the one less comp sales day. We expect comp store sales will be slightly stronger in the first half of the year as we will cycle stronger comp sales in the back half of 2012. Except for the one less comp day in Q1 of 2012 as previously mentioned, there are no other calendar shifts between any quarters that would affect comparability to 2011. As in the past, we will provide more color on our expectations for the subsequent period at each quarterly conference call. Now I would like to turn the call over to Jim for more details on our plans for 2012.

Great. Thanks Tony, and good afternoon everyone. Today Tractor Supply is agile and able to respond to regional and seasonal opportunities and our planning and our execution are frankly the best in our history. While we are pleased with our progress over the last few years, we really believe that we have not arrived and we remain excited about our lean initiatives and other opportunities that lie ahead. In 2012, we will continue to focus rigorously on our long-term strategic objectives. The structural improvements that we have made to our business in recent years are taking hold and we believe that we are only in the early stages of realizing the benefits. While we will continually test and refine the assortments, our marketing programs, and the in-store shopping experience we believe that we have a foundation in place to maintain momentum through 2012 and beyond.

As we embark on another exciting year for Tractor Supply I would like to speak briefly to our retail environment. Consumers continue to look for compelling value and purchases are being driven by need and taking place closer to need. What has changed however is our ability as a Company to anticipate our customer's needs and react more quickly to those needs. This was demonstrated by our fourth quarter performance and the results we achieved throughout 2011. As we overcame severe drought in Q2 and Q3 and a mild Q4.

Looking ahead to the upcoming spring selling season, we remain confident that we have the right plans in place to drive results and to build our brand. We are expanding a number of assortments and continue to test and refine our product mix. For instance, we will be expanding our live goods test in the spring. We also remain focused on private label brands to create additional value for our customers and foster even stronger customer loyalty. We are gaining traction as we edit generic brands and introduce private brands to replace them.

Let me briefly review some of the additional merchandising and marketing initiatives. We continue to refine the in-store experience to exceed our customers' expectations. In this regard, we are again pleased that our customer loyalty scores improved in 2011. At the same time we continue to rollout our price optimization and learn from our customers' response. We also continue to mine data from our CRM and direct mail programs that allows us to further refine our marketing strategies to deliver greater efficiencies from our marketing spend.

As we reflect upon 2011, we are proud of our achievements but we are by no means complacent so we remain relentlessly dissatisfied and believe that we have considerable opportunity ahead to increase customer spend and to attract new customers to Tractor Supply. We continue to improve our ability to meet our customers' needs across multiple categories and garner both higher-frequency and higher customer loyalty. We will continue to expand our footprint in key regions and remain focused on collaborative, consistent execution across the board. Our balance sheet is strong allowing us to reinvest in key initiatives to grow the business. We are a more agile organization than ever before and we look forward to building on the momentum through 2012 and in the years ahead. I would like to thank all the Tractor Supply team members for their ongoing dedication, hard work and commitment to our Company. Additionally I would like to thank all of our shareholders for their investment in Tractor Supply and ongoing support in our collective journey. Operator, that concludes our prepared remarks and we would now like to open the call for questions.

(Operator Instructions)

Vincent Sinisi, Bank of America.

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

Thank you.

I wanted to ask about your gross margins. As you folks mentioned during your comments if you take out that one-time charge you did have gross margins up on a year-over-year basis for the quarter. Can you give a little more color on your outlook for next year with 10 to 15 basis points of improvement for the full year? I know that in the past you had signaled around 20 basis points, 20 some odd basis points, is that just a case of being a bit of conservatism in there based on the headwinds and how do you weigh that against obviously the traction you are getting on your initiatives?

Sure, Vince. When we look at it, we really have to assess the inflationary environment, the headwinds that we experienced from freight. We were hopeful that we would start to cycle some of the fuel costs a little bit sooner than we did and the prices did stay up but we are hopeful as we move through the year that we can -- those headwinds will be a little bit less limited. But based on where we are currently at we anticipate that between the mix and the freight, we wanted to be more reasonable in our future expectations. We are still very committed to the four initiatives we have around gross margins and we anticipate that they will continue to drive our direct margin as we move forward in the year.

Okay that's helpful, Tony, thank you. Maybe as my follow-up question sticking with margins, can you give an update on your price optimization initiatives in terms of where you are in terms of categories and rollout there?

Vince, this is Greg I will talk to that. First of all, we chose Revionics and we are convinced they were the right choice for us. Remember, price op is one of the four drivers of the gross margin equation that we talked about. We are about one third of the way through the Company's SKUs right now and we have all buyers participating at some level within the program. It is a very iterative process and it's an ongoing learning. You make a change in one category to one set of SKUs, it has an impact on other things around it, so what I would tell you is we are learning as we go. We are encouraged with the learnings. There are three phases to price op. There is the regular price optimization, there's a promotional phase and there's a clearance phase. Today we are really only in the regular price phase. We're still doing some of what I would call rudimentary clearance price ops. I will remind you that we talked about price op as more back weighted over a few years, because even though you may make some changes today and gain some movement in margin rate, that changes as you touch other things in the store and the dynamics of the business as they are, it's not something that you can just touch him forget. So, very pleased, really still very early in the game.

Okay that's helpful thanks very much, Greg.

Alan Rifkin, Barclays Capital.

Thank you much. Thank you very much. I would add my congratulations as well. First, with your exiting of the welding categories can you maybe just provide a little bit of color, Jim, as to what was behind that decision and as you continue to rollout the category management program are there potentially other product categories that are up for review for long-term inclusion at this SKU level?

Sure, Alan. This was welding gas. We are talking about oxygen, acetylene and argon gas that sold to a very, very heavy do-it-yourselfer or a small professional shop. It was a category we began to enter probably five or six years ago and based on early results, felt that it had legs and continued to rollout across the chain. We now have come to understand that there is a limited demand for this product and frankly we have not enjoyed the level of category growth we expect from that investment. So as a result we have rationalized -- we will be rationalizing that category in about half the stores, maybe a little more, keeping it in those stores where it is most productive.

Okay. Thank you. If my math is correct it looks like your average pre-opening expense per store declined rather significantly by more than 10% or so. Can we expect that the average pre-opening expenses that you witnessed in 2011 are a good number for which we should be modeling going forward in 2012?

Alan, this is Tony, we have had some improvement in our pre-opening process and it has been a focus to reduce the days. It hasn't been a significant impact, but I would agree that 2011 should be consistent with our pre-opening expenses as we move forward.

Okay. Tony is that a function at all of more smaller stores being opened and maybe if you can also give us some color on what the prognosis is for those smaller stores? Are you now at the point where we can expect an acceleration in those smaller stores and if so does it raise the overall saturation level for the Company?

I will address the expense side and then Jim and Greg can talk about our small-market concept. There is really just two elements when it comes to pre-opening and that's the payroll it takes to open the store and the rent expense that is related to that period before we open the store. So, it could have a small impact as the rents will be a little bit reduced for the smaller market but it's not going to have a significant impact. It's really sort of the time to open and the payroll that is incurred that drives the pre-opening expense.

Okay.

Regarding small stores we are pleased we have 25 of them, 28 actually now that are now open and we are really delighted with their sales relative to pro forma and also every return metric that we measure our businesses by. So we are delighted with the small store. We do plan to include them in our opening mix moving forward. This next year it will be something between 12 -- 10 or 12 stores of the smaller markets are planned. So I believe we have mentioned before, it's important to begin thinking about our growth more on a square footage as opposed to unit growth, so historically they have been growing at 8% units, which mean square footage we'd now be maybe growing more at 9% units and still coming up at 8% square footage growth. We will be talking in great detail at the analyst day about the small-market concept and opportunity going forward.

Okay great. Thank you very much.

Peter Benedict, Robert W. Baird.

Hi guys. First question, just on the increase in the number of transactions over $350. Can you give us a flavor for maybe what items are driving that and then any indication or read through you can make towards the spring here what you guys are expecting for the rider season?

Pete, I will break that down for you. First of all in the fourth quarter it was really mixed broad-based across the Company. It wasn't any single category that drove that and we typically see storage a little bit stronger in the fourth quarter but it was fairly broad-based. As far as the rider business in the spring, we are encouraged right now with the amount of moisture that seems to be prevalent across the country. Even through Texas. So early indication is it is looking better than a year ago. However the forecasts that we have been looking at still are calling for some drought in the south and it is going to come a little later probably in the May, June period and run through the rest of the summer if those forecasts are correct. So still very cautious on thinking that the rider business will be much better than it was even a year ago.

Okay perfect, that's fair. And then just on the private label penetration where did that get in 2011 and, Greg, what's the thought process on where you can take that in the next couple years?

We saw several hundred basis point improvement over the prior year. I mentioned on an earlier conference call that we would see that movement this fall and we did as such. Mostly on the left hand side of the store as you walk into our store which is where we placed that focus and very pleased with both the heating and within the tool and equipment categories where we expend those private brands.

Okay great. Thanks a lot. Nice job.

Thank you.

Aram Rubinson, Nomura.

Thanks guys. One question and a follow-up if you don't mind. Greg, just hoping you can delineate for us the parameters of new merchandising initiatives, if you don't -- whether it's stuff that is going to be more indoor, more outdoor, whether it's vendor owned stuff or Company-owned inventory. Just help us think about the parameters so we can understand what it is you are trying to fit. And then just remind us what did not go right in that gas category again just to know which box that didn't check?

Are you talking about, let me see if I can clarify the question. Are you talking about fourth quarter performance or are you talking about forward performance?

No, just in terms of newness that you're adding to the mix. I'm just wondering what are the parameters as you look to new businesses to add to the store over time, I know you've got a lot of experimentation going on. What are the most important metrics and parameters that you are trying to fit?

The first thing we look at is product category extension. We know who our customer is. We also know the products that they have interest in so we are not going to go out and create a category that you may find in a off price discount operation or in a big box that does not fit the customer profile. But what we have done in some categories, for example in garden, we have taken a position to look at more live product as we move forward into 2012 and in our feed business one of the things we've talked about and are executing against now is expansion of forage. So that's the things you are going to see us do. I said a couple times there are many things we can sell in our store but we are going to stay true to who our customer is and service them.

And then, just as a follow-up, I think you said that Q1 was going to be the best earnings quarter. Wondering, first of all, of the 110 basis points that shifted out of Q4, what the weight if it'll be the same kind of thing that will come out of Q1. And I don't think you said it was going to be your best comp quarter. How do we think about given the comparisons last year, you've got two really tough comps that you are up and then the calendar shift, which of the quarters are going to do best from a comp perspective? Unless I missed that already.

Generally, you would look at the 110 basis points relative to Q4. It would have a greater -- a slightly greater impact on Q1 in 2012. You can sort of work through that math but it should be in that 125 to 135 basis point range. Then relative to the quarters and the year-over-year, the weakest comp last year was in Q2. So, generally you would translate that into having the best potential increase, however as I indicated in the prepared remarks, we anticipate doing some advertising and marketing that would push some sales from Q2 into Q1. So that would -- that could be one of our tougher comparisons. The overall when you look at the halves, you have, the second half has a little bit stronger comp that we will be going up against. As you look at Q1, Q1 will have some inflation. So again that will drive some of the top line growth as well as having that additional week, a stronger sales week in the spring selling seasons compared to the one that dropped out of Q1. So those are some of the factors, a lot of moving parts and hopefully that gives you a flavor for trying to allocate between the halves and some directional for the quarters as well.

Is it likely that we will see a quarter drop below that 3% to 5% range do you think, or do you think it'll fit inside of there somehow?

We'd like to look at the comp growth for each quarter to be relatively consistent within that 3% to 5% range.

Okay. Thanks guys. Good luck.

Thank you.

Matthew Fassler, Goldman Sachs.

Thanks so much and good afternoon. First question, if you look at average ticket ex-inflation I believe it's a bit of a decline and probably a bigger decline than you had in other quarters, I know you spoke about a couple different pieces of that equation but if you could just talk to us about how that's impacted by mix and any other factors, it would be very helpful.

Sure. If you look at mix, mix can be a good portion of the decline in the tickets. I haven't allocated the portion proportionately but that clearly is the largest offset when it comes to offsetting the big-ticket piece and then the inflation. So, we also had an increase in the units per transaction so if you look at those three, those three are the key increases inflation probably being 80% to 90% of the increase. And then mix being really the largest and almost singularly the offset to the increase in the ticket.

Okay. And then I have a couple of cleanup questions. You gave us traffic and ticket numbers in the release, do we net the 110 basis points from the extra day out of the traffic number or is that already netted out?

It generally, the extra day will translate mostly into transactions.

Got it. Okay, so we take it out of there. Also can you tell us the SG&A dollars associated with the extra week because the expense control is exceptional despite presumably some extra SG&A there?

We have not quantified that for anyone. Because it is difficult to do some of the allocations of the key expenses. We do have a general breakout but my preference is not to disclose the details.

If we were to try to back into it -- would we, given the extra -- the sales associated with the extra week would we assume an average gross margin or is gross margin different because of allocations as well when you think about that period?

It might be slightly lower but the general guidance that we have given is that you look at it as an average week because sales are a little bit lighter, but there's less expense structure, so you could probably back into it that way. Again, $0.09 is our best estimate based on just trying to assemble that particular model. And then trying to allocate a certain amount of rent expense to that particular week as well. So it is a couple of again moving parts when it comes to assessing that particular week from an SG&A standpoint so I'd rather not disclose any details around that.

Okay. Thank you very much.

Brad Thomas, KeyBanc Capital Markets.

Thanks, good afternoon. Let me add my congratulations as well. I was hoping to talk a little bit more about your advertising plans for 2012. I know you've been testing some new opportunities in advertising. Could you talk a little bit about what you've learned lately and what you are going to be ramping up in 2012?

Brad, this is Greg Let me talk a little bit about a couple of things. One is the CRM focus and what we continue to learn and we continue to improve upon is our targeting of this customer. We have said before there is seven segments and within those seven segments we are doing a far better job today of using our dollars much more effectively. The [NS] ratios were actually quite good for the fourth quarter and that was part of that. We did mention that there is a shift as we talked about in the first quarter to the second quarter within the advertising cadence for '12 and what that is in reference to is the southern markets need to have the advertising focus on spring a bit earlier than the northern markets.

In the past, we have tried to split the difference and run the advertising somewhat down the middle between both seasons and so this year we really believe that by making that change, shifting the south a few weeks earlier and the north a few weeks later we are going to capitalize on when the customer is ready to buy. And not be ahead of them and at the same time not be behind them. That's some of the things that we have looked at. We talked a little bit on the last call about this, aware non-shopper, which is a segment of consumer that we are looking at that is aware of our store, probably does not see themselves shopping in our store because of the name Tractor Supply and we have done some testing in a few markets with some media trying to bring that consumer back in. I would tell you that today we have more work to do. We are not satisfied with the initial results and we will continue to test throughout 2012.

That's helpful, Greg. If I could just follow-up on your performance in the seasonal categories, it's clear you did a great job in the fourth quarter. Can you just talk a little bit about where inventory was at the end of the quarter and how things have played out in January as perhaps the weather has gotten a little bit better for you?

One of the key things that we talked about was our improvement and allocation of the inventory and we have really held the inventory as long as we could in -- either at the manufacturer or distribution centers to push it at the right time so we could take advantage of the sales as they develop. We did that in the fourth quarter. The inventory today as far as heavyweight and cold weather is sitting in the right stores and we are starting to see some benefit from that even though the winter weather has come a bit later. So we are very pleased with how we came out of the season, we did a far better job of targeting the right stores with that mix. And again, when we looked at our overall inventory levels, as we ended the year, the 2% per store was really, when you look at it, there's inflation build into that, there's a new DC startup built into that, and then there's the shift forward of some products into the southern region so if you run the numbers net to net we are actually slightly behind or down in inventory per store. So very pleased with how we managed it, I give the team a lot of credit and the merchant groups, they did a fine job this fall.

Great. Thanks very much.

Mark Miller, William Blair and Company.

Hi, for my first question I would like just a follow-up on the average ticket again given that you had inflation above the average ticket increase in some of the larger ticket items and then I think you said the increase in units per transaction. What within the mix was an offset? Was that coming in apparel perhaps with the warm weather or, Tony, if you could just expand on what was happening there with mix?

Sure. It's really in the CUE items. Not only, they run just slightly below chain average and with the significant increase that we have had throughout the year, but as well specifically in Q4. Those are the items that are driving that mix variance. They are also obviously the items that drive sort of that freight intensive category that we talk about that also causes a mix headwind when it comes to freight.

Okay. And then, with the transition from your comment there on freight I think you talked about the same calendar EPS growth being better in the second half than in the first half, is that due to higher expected freight costs in the first half or why would that be?

Just looking at the performance in the first half, with the calendar shift, we pick -- we drop off lesser week. So there's a lesser sales week. That is a trigger. We are cycling with some of the inflation will assist in some of the comps. But what is interesting is that if you look at year-over-year, and depending on how you factor that additional week, we would expect higher growth in the first half if you look at the second half as comparing against the 53rd week. If you back out the 53rd week out of the second half of the year then you have a slight increase in the second half of the year. So, directionally I was trying to sort of give you some flavors to the background and to try to be able to allocate between the halves. I think the easiest way to look at it is if you look at the full year we earn about the same in the first half as we do in the second half.

Okay. Fair enough. Final question, Greg, I understand you are looking at the footwear category and I think you are planning a re-assortment there. Can you maybe expand on that initiative and how material that could be and are there other resets here that we should expect that you haven't commented on yet? Thanks.

We are always experimenting with the interior of the store. We have multiple tests that are out there but we made a decision to rework the footwear assortments and we spent the last year actually studying what we had done and looking at the competitive nature of the business, and yes, we will be looking at a reset as we get into the later part of the first into second quarter. We are very excited about it. We believe that we have done the right homework. We believe we've got the assortments much more pointed by region. This is a very regionalized approach. We will wait and see, we will be able to talk more about it as we go through the reset.

Great thanks.

Adam Sindler, Deutsche Bank

Good afternoon guys, how you doing? Three very quick questions here. First, on the 73.1 million shares out. You did mention that there was some share repurchase assumed in that amount. Can you just detail sort or either a number or a number of shares or dollars that you are looking to spend in 2012?

Adam, at this time we are not giving any detail background on the share repurchase. Obviously, it is dependent on the market vagrancies. So, we have some estimates and we actually have generally some ranges and therefore we just wanted to try to provide guidance because in looking at the various models we see that that share count based on everybody's projected net income seem to be in a lot -- in a fairly wide range. We're trying to help narrow that down for you all.

Okay. And then real quickly also, I understand that you lost a day because of the calendar shift. Does the leap year not impact that at all? Is it just get shifted out so that the number of comp days is the same?

Correct. As you see relative to the leap year we still have 13 weeks in each quarter, same number of days so you wind up losing a day that you never get back in 2012.

Okay. Last one real quickly. How many stores will have the hay and forage by the spring and summer seasons?

I won't give you an exact number but I can tell you that we plan to increase the penetration of those stores. It really depends, Adam, on availability. So I would tell you that a substantial increase this year over last year is probably the answer I will give you.

Just for reference what did you have last year?

About 150 stores.

Great. Thank you so much.

Matt Nemer, Wells Fargo Securities.

Good afternoon everyone. The first question is could you just comment on where you are at in terms of regionalized assortments across all the product categories, either in terms of what inning you are in and what you plan to attack next to regionalize?

Matt, this is Greg, we are in the early innings still. We have been doing regionalization for a period of time but to really say that we are as proficient at it as we would like to be and as far as us capturing many of the opportunities there in front of us, there is still plenty of running room for us. There's hundreds of different assortment combinations today. My guess is it will go into the 1000 range as we get further developed here. It may sound complex but it's really not. It's numbers of stores, certain groups of stores, expansion of assortment, contraction of assortment, so we are still in the early stages, probably second or third inning to be honest.

Okay. Secondly, could you just provide some detail on the e-com platform that you are writing down and then what are you planning to use going forward? You talked a little bit to the CapEx impact but how much income statement impact will it be, could there be from e-com and adding talent this year and then what is the rollout schedule for that functionality?

I'll talk a little bit about the platform side. We are going to stay with WebSphere, but we're going to upgrade to the WebSphere 7. That particular platform gives us the ability to institute special order drop ship and many other functionalities that we believe we will need as we build this business out. We have added some talent, we just recently hired our VP. He is a seasoned person, understands the space, was an ex-merchant so I'm thrilled with that. The fact that we are going to be making some other additions to the team this year. We are not going to see a dramatic move in sales in that this year because there is a lot of platform work that has to be accomplished first but we are positioning ourselves, we're getting ourselves in the right technologies and that so that as we start to add assortment and expand into the, what we call the endless aisles scenario, as we talked about before, we can service it. The other aspect is our ability to be able to replenish and fulfill from our own facility. That is something we are going to transition to over time as well. So the timeline is going to be the next 18 months to 2 years.

Matt, relative to the P&L impact, we don't see a significant impact from any additional costs related to this initiative. We expect pretty much that the run rate we are currently at relative to the e-commerce impact on the P&L will be consistent year-over-year.

Okay. Congrats on a great year and good luck.

Thank you.

Simeon Gutman, Credit Suisse.

Thanks. Greg can you talk a little bit more about moving into forage and maybe talk about how the customer typically today gets the forage, because our understanding is that as a percent of food forage is a bigger piece, so what could that do to the traffic? Is it a complement to the existing customer? And then if you can just talk about maybe the margin profile?

Simeon, this is a very regional business that has to be literally bought and sourced locally. So you can imagine we have a full-time buyer now for this category. He is on the road most of the time. He is contracting with the local growers to provide us hay and other forage products. From a margin standpoint, it is similar to the rest of the feed business, but what it has done for us is it is now -- we are now holistic in our approach. We've got the branded feed mixes. We've got the base feed mixes, we've got our own mixes of feed as the middle tier. We now have forage and we have all the other components. So we have now become a destination. There's no reason for someone who lives this lifestyle to have to make several trips. We can fulfill all their needs inside our store now.

I mentioned earlier that we had 150 stores up and running by the end of this year. We plan to increase that number substantially, but it will all depend upon, to be honest, our ability to source it locally and it will be a growing business over the next probably two to three to four to maybe even five years. You can imagine when you are in a drought situation like in Texas, they are just not growing hay. That presents another challenge where you have to bring it in from other regions but we are very excited about it, very excited about it.

Okay. Can you talk about private label, I think the last update was around 23 and maybe the last target that's been out there is 25, and it seems like a lot of the merchandise categories that you are expanding into, it seems like either it's going quicker or better than you thought and I don't know if you can comment to that and how if 25 gets pushed to something else over time.

My only comment about the private brand expansion is when the customer continues to give us the green light to take it further we will take it further. I do not believe in the strategy of build it and they will come because that's dangerous when it comes to private brand. You just -- you can't anticipate and force the customer to buy something that they are not interested in. However that being said, we had nice improvement this fall and we have been talking about that improvement, and it did execute. I won't give you a specific number, we have said around 25 but I think the number is going to be larger over time and yes, we have seen acceleration in that part of the business. I had mentioned that most of last year we were working to build that new capability with our private brand side of the business here with not only the sourcing piece, but also the product development piece, and we are starting to see very solid traction there, and again, a very exciting piece of the business that will drive our sales.

Okay. Last for Tony on the freight piece, I think last year it started getting called out in Q1. So the reference this year to still cycling or dealing with freight, is that more because of rate, price of gas or is it just the mix of business, the higher tonnage that's coming from the CUE categories.

Is really a combination. When we look at fuel we anticipate cycling fuel, more the significant rise in the sort of the May timeframe. Again, as we look forward, we are really looking, we have been a static view saying where is the fuel cost today relative to where it spiked up during the year. So we look forward at fuel sort of in the May timeframe where we really start to cycle there so we potentially could have some relief if the prices stay at this level. The mix, when it comes to CUE, we just continue to drive significant increases in those categories. Therefore, it's a little bit more difficult to predict as we move into 2012. But, again bottom line, we would enjoy the continued transaction count increase that we get from the CUE items and absorb the impact that we take on the freight line.

Okay thanks.

Eric Bosshard, Cleveland Research Company.

I know on the weather you commented -- I think you commented that weather for the year was neutral, could you narrow it down and talk about what the weather impact was on Q4 sales and gross margin and with the expectation might be for Q1?

I think I can generally speak to the weather side of it. We anticipated a warmer fourth quarter. We also anticipated that the first quarter would probably not be as cold as it was a year ago so we bought accordingly. We ran our inventories accordingly and I would say that we are pleased with what we are seeing so far. It somewhat played out the way we had expected.

When it comes to Q1, what's interesting is that generally March is as impactful as both January and February. So the key to the first quarter will be the spring selling season that we incur and that we look forward to in March so it's very difficult to predict. Obviously, as a standard, we like to have a very cold January and February and really spring like conditions as soon as we hit March. So again, with the shift in Q1 with a one week and having a stronger sales week at the end of the quarter, potentially could bode well for us in that quarter.

So within, and that's helpful, in framing within Q4, was there then, it doesn't sound like there was a material gross margin impact, was there a material comp?

No there was not. There was not.

Okay. Thank you.

Wayne Hood, BMO Capital.

Thank you guys, I know it's getting late. But I wanted to, Tony, just ask you a question. Your implied guidance for '12 would assume maybe an operating or an EBIT margin of 8.5% against a GAAP number that was that 8.33 this year. If you adjust the '11 numbers for the exiting of product and the write-off, that would put you probably around 8.5%, which would imply a kind of flat margin or EBIT given your implied guidance. I'm wondering where I am off relative to that math. And kind of relating to this too, Jim, I think there was a comment at various conferences that you expect gross margin rate to be up 20 or 30 basis points per year. Yet we are coming off a year that was up 15, now you're saying 17. And then you've also made a comment that over the next three to five years you expect a 200 basis point increase which would imply pretty significant sharp increases in '13, '14, '15. So, on those two topics, can you help me through just thinking that through a little bit? Thank you.

Sure, I think the one point that needs to be emphasized is the 53rd week. Obviously, we've given guidance that it represented about $0.09. From an impact overall to the SG&A, we estimate that it's probably in the 15 basis point range. So, that attributes to some of your logic relative to adding back some of the adjustments that were recorded in Q4. So, I think if you look at -- if you normalize for the 53rd week year and then handle the adjustments as you see it, what's interesting as will is that in each year we will run up against some type of potential adjustment that may not be in our model. It could be something as simple as e-commerce or something like the welding gas but there's always going to be various things. Some of them aren't overly material and then there's some that aggregate up to more material numbers. I wouldn't necessarily discount that and just have it additive to your 2012 numbers, but again I leave that up to your modeling.

And then, on the gross margin side, just kind of what you talked about 20 to 30, yet you're at 15 to 17 in '11 and '12. It implies a pretty sharp increase in '13 to '15 to hit those numbers and is there a given here, should we be thinking 50 or 60 basis points in '13, '14, '15?

Sure. Let me address that. First of all we calibrate, we talked about 200 basis points of initial margin and then at the other end of that we talked about improving EBIT margin at a rate of 20 basis points or so per year. The stuff in the middle is obviously the landing margin. To date our landing margin is being impacted by two things. One, the mix of CUE items which we are delighted with because that drives loyalty and traffic, but it does come at a lower margin rate, it is dilutive to margin rate. And next obviously the impact of freight, which is diluted, adds to the dilution of initial margin down to landed margin. So I think as we look forward, we are certainly committed to improving our EBIT margin rate but I think we realize now that what we are really after is EPS. I think EPS in time may prove to be driven as much by gross margin dollar growth as opposed to gross margin rate growth. So, we're not, I am not restating what we had said a year or so ago, but I think that we have seen some new variables introduced that are frankly quite positive for us and we remain comfortable that we will continue to be able to drive EPS.

Okay. Thanks Jim.

Sure. Okay. I believe that finishes everyone in the queue. I want to thank you for your time today and thank you for being on this trip with us and for your support. And we look forward to talking to you at the end of Q1 in about 90 days. Thank you.

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