Tractor Supply Co (TSCO) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss fourth-quarter 2012 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 authorization of Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference, Miss Jennifer Milan of FTI Consulting. Please go ahead, Jen.

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 Greg Sandfort, President and Chief Executive Officer. Greg, please go ahead.

Thank you, Jen, and good afternoon, everyone. I'm delighted to be speaking with you today in my new role as Chief Executive Officer after what has been a very smooth transition between Jim Wright and myself. With me today is Tony Crudele, our CFO. We are very pleased with our fourth-quarter and full-year performance, which underscores the continued strengths of our business. Our teams are performing exceptionally well in what remains a very challenging retail environment, and our attention to our customers' changing needs has never been more focused. Each quarter in 2012, we made progress in the areas of new merchandise offerings, refinement of our regional assortments, supply-chain efficiencies, and management of our inventory, all of which are contributing to our continued growth and profitability.

Now let me discuss in a little more detail some particulars regarding our fourth-quarter results. In terms of specific sales drivers, CUE categories -- the consumable, usable, edible part of our business -- remains very strong and was a key component in driving both traffic and sales. We are increasing our market share in these categories and are becoming, in the minds of our customers, the most dependable supplier for their need-based products. We also remain very focused on keeping our customers highly engaged with the Tractor Supply brand by providing newness to product innovation. We continue to see a high level of sales and profit performance from our exclusive brands, with mix at roughly 24% of sales, up 150 basis points from last year's fourth quarter. Our immediate plans are to continue expansion of these exclusive brands through brand extension. And because these brands can only be purchased at Tractor Supply, this will ensure Tractor Supply will achieve the product differentiation from other forms of [our] competition and Internet retailers.

Pet food and animal feed continued to generate solid results in the fourth quarter and remain important drivers of repeat footsteps in our stores. As an example, EquiStages, our exclusive brand of equine feed introduced about 10 months ago, continues to perform well in our mix of feed due to number one, brand positioning, secondly, quality of ingredient, and third, the value-price proposition it offers versus the national brand comparative. Our forage business continues to build momentum as we expanded the program to more stores this past year. We exceeded our goal of 600 stores by year end, ending the year with 750 stores with forage product. This effort required a tremendous amount of hard work and diligence on the part of our buying teams and is another excellent example of how TSC is meeting our customers' core needs through extension of offerings within an established category, this namely being feed.

In the quarter, we experienced a small sales benefit from Hurricane Sandy, which directly drove sales of emergency-related merchandise. But more importantly, we are extremely proud of our northeastern store teams; our distribution team members at our Hagerstown, Maryland facility; and across our entire distribution network, who worked selfishly and tirelessly to support their communities in their time of need. I also want to express my sincere appreciation to those in our vendor community who worked side by side with our teams in our store-support center to obtain inventory quickly so that we could assist those most in need following the storm. Such efforts as these to go above and beyond to meet our customers' needs in a crisis exemplify the teamwork culture at Tractor Supply. I believe this is one of many reasons for our continued improvement in our customer loyalty scores. And in fact, on a year-over-year basis, we improved our scores every month in 2012 and ended the year with a record customer loyalty score across all regions within the Company.

Weather conditions for the quarter for sales of cold-weather products remain less than ideal, however. And as in the past, our team again successfully managed through these unfavorable variables and delivered growth in comp store sales and another double-digit increase in profitability on top of a strong fourth quarter a year ago. Our effective management of inventory through the quarter is another milestone achievement. I'm convinced this was accomplished in part because of the many structural changes we now have embedded into our daily operation. Our team has done an outstanding job managing inventory levels and, most importantly, we ended 2012 with our fall-winter carryover inventory well below a year ago.

So let me conclude my remarks by saying that I am delighted with our team's ability to adapt our business to changing conditions while still driving improved profitability. Operationally, we made great strides in our strategic initiatives, and this progress has yielded sustainable improvement for our business. As we look to 2013, we have never been more excited about the opportunities that lie ahead. I'll now turn the call over to Tony to review our financial results and discuss our 2013 outlook. I will return following his remarks to share my closing comments.

Great. Thanks, Greg, and good afternoon everyone. For the quarter ended December 29, 2012, on a year-over-year basis, net sales increased 10.8% to $1.29 billion when you adjust for the one additional week we had in our fourth quarter last year. Correspondingly, net income grew by approximately 24% to $79.5 million, or $1.11 per diluted share adjusted for that additional week. As a reminder, this year's fourth quarter consisted of 13 sales weeks compared to 14 weeks last year, as our fiscal 2011 was a 53-week year. We achieved these strong results despite a warm winter season and being up against robust sales growth last year. Comp store sales, which is the more relevant measure, increased 4.7% for the fourth quarter, compared to last year's increase of 7.1% adjusted for the one-week calendar shift. Comp transaction count increased for the nineteenth consecutive quarter, gaining 2.7% on top of a 3.6% increase last year.

We are very pleased with the core business, as CUE products, specifically animal feed and pet, continue to serves our customers' basic and functional needs and drive transaction count increases. The trend in average comp ticket continued to be positive at 1.8% versus last year's 3.8% increase. The impact of inflation was approximately 165 basis points for the quarter, which was within our projected range of 100 to 200 basis points, but significantly less of a benefit than last year's 500 basis points. Big-ticket merchandise performed consistent with Company's overall comp sales increase and had a favorable impact on comp ticket of approximately 30 basis points. Big-ticket was bolstered by Hurricane Sandy emergency response sales, such as generators, but this benefit was moderated by negative trends in sales of winter goods such as snow blowers and log splitters, due to the unseasonably warm winter.

Other key notes regarding the quarter. We did an excellent job of managing through the variable weather conditions throughout the country, particularly those impacted by Hurricane Sandy. On a regional basis, all regions had positive comp sales. Sales were the strongest in the southwest and southeast, as moisture conditions were favorable in these regions and the seasonal business was less impacted by the warm weather. Comp sales trends were generally consistent by month throughout the quarter. We did end the quarter on a very strong note, as holiday sales kicked in and comp sales benefited this year from the additional holiday shopping weekend between Thanksgiving and Christmas. Emergency response, including Hurricane Sandy, had a modestly positive impact on comp sales, which we estimate to be approximately 30 basis points for the quarter. We did not suffer a significant number of lost sales days, and we are proud of our team members for showing tremendous dedication in supporting their communities, with many sacrificing to open stores and going above and beyond to serve its customers in their time of need.

Turning now to gross margin, which as percent of sales increased by 50 basis points to 33%. We continue to benefit from our key gross margin initiatives, which are price optimization, strategic sourcing, exclusive brands, and markdown management. These initiatives, combined with strong merchandise leadership, yielded significant improvement in direct product margin rate. This improvement more than compensated for the negative impact of the continued mix shift to CUE products, which have a margin rate lower than chain average. Freight increased approximately 13 basis points, partially offsetting the product margin benefit we experienced in the quarter. This increase in freight is [principally] as a result of the cost related to increased import activity of seasonal goods and the mix shift to freight-intensive CUE products. Big-ticket sales did not have a significant impact on gross margin rate during the fourth quarter.

Although the sales of lower-margin emergency response products were higher due to Hurricane Sandy, the unfavorable margin impact was offset by softness in sales of other winter-related merchandise, such as snowblowers and log splitters, which also carry lower-than-chain average margin. We did have an easier margin comparison in the fourth quarter, as we took a $2.7 million charge last year for the exit of our welding gas program from several hundred stores. This represented 20 basis points of the year-over-year improvement. Import purchases in the quarter accounted for 9.6% of total purchases, which represents 11.7% increase year-over-year. Overall, we're pleased with the gross margin performance during the fourth quarter and that our gross margin initiatives provide us with the ability to maintain gross margin rate in spite of product mix and freight headwinds while continuing to provide great values to our customers.

For the quarter, SG&A, including depreciation and amortization, was 23.3% of sales, reflecting 20 basis points of improvement for the prior year's quarter. We are extremely pleased with our field and store payroll cost controls and ability to leverage SG&A in the quarter, especially since last year's quarter had an additional selling week as a result of the 53-week year in 2011. We had estimated that the additional week last year had a favorable impact of approximately 15 basis points. We did book adjustments last year in Q4 related to the write-down of certain e-commerce assets, which made the comparison easier by 26 basis points. Incentive compensation was less last year as well. Turning to the balance sheet, we ended the year with $147 million in cash, meeting our year-end target of $100 million to $150 million. During the fourth quarter, under our stock repurchase program, we acquired 1.21 million shares for $108 million. We estimated the share repurchase program had a slightly less than $0.01 impact on EPS for the quarter.

Average inventory levels per store at year-end increased just under 1% compared to last year. The rate of increase was well below our estimated inflation rate, and we are comfortable with our year-end inventory levels of seasonal merchandise. As a result of our strong inventory management, inventory turns for the year improved at 3.28 times, or 5 basis points better than last year. Capital expenditures for the year were $153 million as compared to $166 million last year. We opened 25 stores in the fourth quarter compared to 31 stores in the fourth quarter of 2011. Our capital spend is generally consistent with the prior year but below our expectations that we would be at the high end of the forecasted range of $160 million to $170 million. While our projects remain on target, anticipated expenditures around our southeast D.C. relocation, the construction of our new store-support center and certain IT products shifted into 2013.

So turning our attention to 2013, we expect full-year sales to range from $5.07 billion to $5.17 billion. We have forecasted comp sales to increase between 3% and 5%. We are targeting improvement of approximately 10 to 20 basis points in the EBIT margin compared to 2012, with the majority coming from gross margin as a result of several of our key merchandising initiatives. We anticipate net income to range from approximately $304 million to $310 million, or $4.32 to $4.40 per diluted share. And we expect to open 100 to 105 new stores, with approximately 50% to 55% opened in the first half of the year.

As we have 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 year to year and shift the timing of the sales. It is particularly important to keep this in mind as you look at the first half of 2013, as we had an early spring last year, and we estimated we pulled approximately $38 million forward into Q1 from Q2. Let me discuss some of the more specific drivers and assumptions that helped us form our projections for 2013. Although the consumer will continue to be concerned about the ongoing high unemployment and the impact of higher payroll tax on their take-home pay, we do not expect that the current retail environment will change dramatically. Although there were some positive and negative weather events in 2012, such as the hurricane activity and the drought in the Midwest, we believe it was a net-neutral year from a weather perspective. Therefore, we do not anticipate this cycling against last year's weather trends will have a significant impact on our year-over-year results in 2013 other than the potential shift to sales between Q1 and Q2, as I previously mentioned.

We expect that the inflationary impact will be approximately 1% to 2% for the year and that we'll be at the higher end of the range in the first half of the year and slightly less in the second half of the year. The increase in EBIT margin is net of an approximate $6.5 million to $8 million headwind, or $0.06 to $0.07 drag, that we anticipate to incur as we relocate our southeast distribution center and our store-support data center. These costs include duplicate occupancy expense while we transition facilities, temporary labor during the transition, freight movement costs between facilities, and equipment depreciation. These costs will be principally reflected in SG&A, with the majority of the expense occurring in Q2 and Q3. For the full year, we expect net gross margin rate expansion of approximately 10 to 15 basis points. We expect to achieve our gross margin rate improvement through the execution of our key gross margin initiatives.

These initiatives will provide us the ability to overcome an estimated gross margin headwind of approximately 10 to 15 basis points from the continuing mix shift to our CUE products, which carry a below-chain average margin rate. We also expect freight costs to remain a headwind as we experience deleverage from the merchandise mix shift to more freight-intensive CUE products. Additionally, [stem miles] per store will increase slightly as we continue to open new stores in the west. In terms of cadence, we expect gross margin percent will be flat to slightly down in the first half of the year, with improvement weighted more to the second half based on our forecasted merchandise mix. Our initiatives continue to drive value and cycling softer margin comparisons in Q3. Inventory turns are expected to improve slightly. We would expect per-store inventories to increase modestly, consistent with investments in key merchandise categories and inflation. We may experience slightly higher inventory levels at the end of Q2 as we transition to our southeast distribution center.

With respect to SG&A, exclusive of D.C. and data center charges I discussed previously, we continue to target our SG&A growth to leverage at 3% comp and to manage our business accordingly. Store-support center and store payroll is expected to leverage slightly as we grow our comp sales base and cycle a more normalized level of incentive compensation, which should offset wage and health care increases. Some key points with respect to the quarters. Remember the Q1 last year was unseasonably warm, which resulted in reduced expenses of approximately $1.5 million related to snow removal and utilities. With respect to the data center -- the distribution center and data center relocation, we estimate the majority of the expense will be incurred in Q2 and Q3. We will be cycling Hurricane Sandy in Q4. And as in past, we will provide more color regarding our expectations for the subsequent period at each quarterly conference year.

For the full year, we forecast our effective tax rate will be approximately 36.5%, consistent with 2012. Due to the timing of certain tax incentives that were reinstated on January 1, 2013, these incentives will be treated as a discrete tax item in Q1, and we have estimated a favorable impact on Q1 tax rate of approximately 100 to 120 basis points. We plan to have a significant increase in capital expenditures in 2013, with a range of approximately $240 million to $250 million for the full year as we complete the construction of our southeast distribution center and begin construction on our new store-support center scheduled to be completed in 2014. We expect store growth and general maintenance capital to increase slightly to approximately $110 million to $112 million.

We also have allocated approximately $30 million as a placeholder for our leased store acquisition program and potentially four self-developed store projects. 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 get cash balance of $100 million to $150 million. For modeling purposes, we estimate that the diluted shares outstanding, inclusive of option grant and share repurchase activity, will approximate $71 million for the full year. Now I'd like to turn it over to Greg for more details on our plans for 2013.

Thank you, Tony. Regarding the retail environment, we have seen very little change from recent quarters regarding our customers' purchasing behaviors. Our consumers are spending conservatively and are seeking out compelling values. Purchases are being driven by necessity and are taking place much closer to need. Today, Tractor Supply is responding more quickly to the opportunities within our business, and we make an effort every day to understand and anticipate the changing needs and wants of our customers. Our ability to respond quickly to shifting customer demand has contributed to our performance and will continue to drive our sales in the coming year.

Looking ahead to the spring selling season, although there could be a shift in sales between quarters as Tony commented earlier, we are confident that we have the right plans in place to drive improved results and are pleased with our overall inventory position as we enter spring. Our customers will see newness across the store, which we believe they expect from us, and will in turn will purchase from us. The teams remain relentlessly focused on improved execution throughout the business and believes we have considerable opportunity ahead to increase our market share. As we continue to expand our footprint in key regions, we remain very comfortable with our annual square footage growth rate of approximately 8%. And with our strong balance sheet, we are investing in strategic capital initiatives that will ensure our growth for longer term.

In closing, I would like to thank every Tractor Supply team member for their ongoing hard work and commitment to our Company. I want to thank Jim Wright, our Executive Chairman, and our Board of Directors for their support and our shareholders for your ongoing investment and confidence in Tractor Supply as a growth Company. I am delighted to be working with such a seasoned and talented executive team and acknowledge the opportunity to serve you, our shareholders, in my new role as Chief Executive Officer. Operator, I would now like to open the call for questions.

Thank you.

(Operator Instructions)

Mark Miller, William Blair.

Given the strong outlook for 2013, could you provide updated perspective on where you see the margin potential of the business? I think your prior objective around 9.5%, it looks, if our math is correct as if you could be there in '13. So what is the upside potential? Should we think about that more along the lines of gross margin? Thanks.

Good question. I'd like to remind you that one, the 9.5% EBIT target is really set as an interim goal, and we have not yet hit the 9.5%. We will continue to evaluate that position. You know, it's much easier for us to state it in that long-term perspective of growing the business at the 10 to 20 basis points of EBIT margin each year. We will continue to reassess, and we'll definitely get back to the marketplace as we approach and exceed the 9.5%.

Let me maybe ask a follow-up. If there were to be areas that you would look to invest at a more aggressive rate, what would those areas that you would consider as tradeoffs?

Mark, if you are asking what parts of the business potentially could drive sales but could be a bit of a drag on margin. Is that what you are asking?

Exactly. And to what degree might that play out as we go through the year [and] next year.

One of the things we talked about earlier in our comments was the driving force of CUE. We've stated many times that it works at a less-than-Company average margin rate, but the dollars it throws off are considerable. It helps us leverage on the SG&A side. Also, we're looking right now at our business a little differently from a mix standpoint, because CUE is growing, but we're also finding that in the box, other components of that box are starting to grow. We have got a business on the outside of the store with live product that Steve and the team has been working on, the left-hand side being more the hard lines business, with the mix of the products are higher margin. So I guess the blend is what I'm saying to you, we think we can control, and do believe as we move forward that we'll still see some growth in our EBIT margins. But it's hard to say when we'll hit the 9.5% and when we'll go beyond. But we still believe that there is tremendous momentum behind CUE, and that is going to be one of the things that we have to just monitor and watch from a mix standpoint.

Great. Thanks.

John Lawrence, Stephens.

Greg, would you mention a little bit -- you talked about the newness in the spring season -- a little bit what we expect there? If you split that out and take that -- another step with the regional product, how far do we have to go there, and some examples of success there on that regional brand?

The newness factor, John, you know that we talk about changes in the store every year, and then the first part of the year, we make most of our hard planogram changes. We will touch between 30% and 40% of the store updating planograms and bringing a newness there. The second piece is about what we do in the center court and on the outside of the store. Steve and the team have done a wonderful job of bringing literally probably 50% to 60% of new product into those spaces year after year.

You will see that again this year as you walk into our stores. You will notice new things that are either brand extensions or maybe where we are testing and trying some new products. We have a lot of confidence that through the testing of the last few years in our live-product categories and this whole garden concept of our consumer being sustainable and growing their own vegetables and so on and so forth and foods, that this is going to be a business that's going to serve us well for some time. So there is movement inside. There is movement outside. You will see more of this as you get -- as we use our advertising to talk to it. But quite a bit of newness. Quite a bit of newness.

All right. Thanks. Do we have to wait a few weeks to hear more about the [cross top]?

Yes.

All right. Thanks.

We are analyzing that right now.

Great. Congratulations.

Thank you.

Vincent Sinisi, Bank of America.

Great. Thanks very much for taking my questions, and congratulations on a nice end to the year.

Thank you.

Wanted to ask first about your gross margin initiatives. Obviously, you had some nice continued progress this quarter. But can you guys just give us an update in terms of where you are, and specifically maybe where we are from the price optimization standpoint? I know now -- it's been quite a while since all the items have been loaded into the software. Can you just give an update on -- in terms of where you are today with that?

Yes, Vince, I'll talk a little bit about some of the initiatives. We will start with price op. As we now are into year two of price optimization, what we're finding is that it's a very iterative process. The changes we'll make within the testing module that we have -- and I'll remind you that we just don't turn the system on and let it run. We do test and then we have against control stores to make sure that we are getting the right result --our anticipated result that we thought. But once we do that and we put that into play and look at those change of SKUs, it changes in the dynamic of sales. We it sometimes -- some sales moving to other SKUs and vice versa.

So what it's helped us do longer term is look at our overall assortments and say okay, do we need to change the depth within X, Y, Z SKUs, and maybe we don't need to carry these other SKUs in the assortment any longer because there's been a [transferral] of demand. That's the learnings that we're now starting to see, along with the fact that making sure that we have got our prices right by district, by store, and sometimes cross-region on a lot of our CUE products and the high-velocity products. We're still -- in my opinion, as I see how this is developing and I see the kind of results that we're starting to measure against, it's a much longer-term journey than I think I initially anticipated.

We mentioned a little earlier about the other things in gross margin. The direct sourcing of product and our exclusive brands. I mentioned one earlier about EquiStages. The team continues to find opportunities within our assortments where we can build and place into the assortment a very competitive product under our own brand that our customers will accept and embrace and they will purchase. And in many cases, it's not cannibalizing. It's actually additive to what we have in our assortment, because we have recognized the gap that either the national brands can't serve or the generics beneath it can't. So those businesses continue to grow. And we are developing some sophistication now. Been in this now almost two years, almost going into three, with our product development side and with our direct sourcing side. I am very pleased with those teams and what products they're developing and we're bringing to market. And the advantage there is of course that it's exclusive to Tractor. You can only buy it here. So it gives us that exclusivity and that uniqueness. That also is going to feed the margin rate over the longer term.

Okay. That's very helpful, Greg. Thank you. One follow-up question, if I may. For your CapEx outlook for '13, I know you mentioned that largely the increase is due to just those several timing shifts from this year into next. Any other color or discussion that you guys can provide specifically around your store locations, further western states that you may be entering? I know you mentioned Colorado from last year, of course, was a new state. Any other color around those four potential self-develop projects you mentioned?

Sure. Vinnie, this is Tony. When it comes to our expansion, Colorado was a key state in 2012. We'll continue to expand there as we move into 2013. Then our next state that is targeted is Arizona. We've been looking at some sites there and have approved some sites in our real estate committees already. We'll be looking at Arizona in 2013. Those will be the two key states as we move west. When it comes to CapEx and the drivers, really the only points of note would be that the southeast distribution center will come online in most likely mid- to late third quarter, and that's when you would recognize some depreciation around that facility, which is in the $40 million range. The capital that's allocated towards the store-support center, our corporate headquarters, since that does not come on until 2014, you should see very, very limited depreciation, around approximately $40 million there, that we've targeted to spend in 2013. So we would not expect to have any depreciation as that stays in construction-in-progress.

When it comes to self-development, we have a small team on staff where when we identify sites that might not be cost effective to go in with a developer, we have, obviously, the financing capabilities and now the in-house capabilities to be able to develop that site and either land bank that site and/or just develop that site for store location. So it's a small team. We have been developing the expertise over the last couple years. We expect to continue to accelerate that so that at some point in time, we will be in sort of the 4 to maybe 15 new stores will be developed by our own team in-house.

Thanks helpful, Tony. Thank you. Best of luck going forward.

Thank you.

Peter Benedict, Robert W. Baird.

Thanks. Just a couple questions. First, Tony, just a follow-up on the last question there. Can you give me where you think the D&A is going to come in in aggregate in 2013? I know there is a lot of moving parts there. But is there a range you help us with in terms of what the D&A will be next year?

We haven't specifically given that. But I would say it's consistent with the growth that we've had and very similar to the prior years. So you're looking at -- I want to say we're close to the $88 million to $90 million range for 2012. And I would expect that to increase by about 10%.

Okay. Cool. That's helpful. The small stores or the smaller-market store format, how many did you guys get opened in '12? What's the plan as you look out to '13 of those 100 to 105 stores? How many do you think will be in that smaller-market footprint?

Peter, this is Greg. We probably won't comment to how many we open in specific. It's part of the overall mix of stores. But we're really pleased with the performance. The thing about these small stores, it's really not a different concept. All it is is a store right-sized for the size of the market. What we have done in these stores is modified some depth and breadth of assortment to match the market. In fact, I think you have probably been in a couple of these where you can't tell the difference when you go in. The typical customer thinks it's the same Tractor Supply. It just is a smaller box. What I would tell you is plans are to continue with those backfill or those small-market stores. We still believe that it's in the run rate of the 2,100. So far, so good.

All right. Good to hear. Lastly, any sense of how many stores you think you could get forage into by the end of this year? I think you said you were at 750 at the end of '12.

That won't be a specific number either, and here's why. You have some restrictions with forage. There are some landlords that we do -- that we have stores -- lease with that will not let us place trailers on the lots. Many of those we're in negotiation with, trying to figure out is there another way to do this. Can we put it maybe in our side lot or the back lot. 750 is not the end number. There will be more. But I really can't give you a target yet, because we were surprised we could get it as far as we did this year. The team is still working on it. You know, it won't be all stores. I can tell you that, because there will be some restrictions.

Okay. Good. Thanks, Greg.

You're welcome.

Scot Ciccarelli, RBC Capital Markets.

When you are looking at SG&A per store, it was down in almost every quarter of the year. Obviously, it was out -- there was an outside impact in the fourth quarter due to incentive comp. But was there any other call-outs during the course of the year that helped that metric? When we think about 2013, any other factors we should be considering?

When we look at the quarters, the only thing that jumped out last year really was the warm Q1 that we had. So we didn't have the standard expenses that we normally would have in Q1. Then, obviously, in Q4 we were up against a period that had additional sales in 2011. So we had an additional week of sales in 2011. So that made it a little bit more difficult to leverage against the SG&A. Those would be the two things that jump out relative to 2012.

And when you think about '13, whether it's health care costs or anything else that you have top as mind as tougher costs to control?

We do. Where we have been getting the leverage is really in the management of the store payroll. We had really a terrific year this past year. As we grow the comp sales, we have seen leverage on the occupancy. That's given us the ability to absorb some of the additional expenses that we would have in medical, although medical in 2012 did not exceed what we had originally forecasted. So our in-house program has done very well. We're self-insured. We have been -- had some fairly good results when it comes to the medical. But we have planned as we move into 2013 that we will have an increase in that area and anticipate that to be offset by a normalized incentive compensation for 2013.

Got it. All right. Thanks, guys. That's all I had.

Matthew Fassler, Goldman Sachs.

Thanks a lot. Good afternoon. Thanks for all the detail so far. Couple follow-up questions. You quantified the anticipated impact of the mix shift to CUE on your gross margin guidance for next year. I think you said 10 to 15 basis points of mix headwind. Is that similar to where it's been in each of the past couple years?

Relatively consistent. It has run in that range, and it will vary quarter to quarter. But overall for the full year, we'll look at it somewhere between 8% to 12%, or in this case 10% to 15%. So it's about consistent with prior year.

Got it. Thank you. Second question. Is it possible to quantify the impact of the incentive comp swing in the fourth quarter? Obviously, you had a very good fourth quarter a year ago, so maybe on a two-year basis does that kind of come out in the wash? Or was this a below-average quarter from incentive comp perspective?

Usually, if it's a significant amount, we'll highlight it as one of the main drivers. This quarter was a very strong quarter, as was last year. The way it was -- the incentive comp was accrued throughout the year. We did have less in this Q4 than in the prior year. But I do not have exactly what the basis point impact was.

Okay.

But it definitely was favorable.

Thanks, Tony. Third and finally, you essentially spoke about very little change in consumer behavior, and presumably that pertains to big-ticket as well. Any color you could offer on signs of life perhaps or new signs of life and the big-ticket? [Or even the] ticket ex-inflation was it a bit better than it was the prior couple quarters. I know that the hurricane would have had something to do with that. But any sign of inflection there would be helpful to hear about.

Right now, we're not anticipating a significant change. We've yet to declare victory when it comes to big-ticket. When we do see an increase, it tends to be spotty and unsustained. But at times, we do see it pick up relatively well, especially obviously when we run into the emergency response categories in the fourth quarter. Hard to assess the fourth quarter, because the warm winter impacted a lot of the sales of our larger-ticket items. But it does not seem to be a resistance. When there is a need by the retail community, they will make that purchase. So we believe it will be consistent throughout 2013.

Great. Thanks so much, guys.

You're welcome.

David Magee, SunTrust.

Hi. Thank you, and congrats on a good quarter.

Thank you.

Just a couple ones. On the forage business, [is] that especially comp well? Was the start-up such that you could still see growth from those 750 stores this year? I am also curious about the margins of that category right now.

David, I'll answer both questions. Yes, we do still see a ramp in forage, and the reason being is that we had a number of customers that once they start to see that we carry the full assortment now, maybe there was some customers, at least we have seen in our numbers, that were shopping other places. So we are in the early stages of ramping that business. Secondly, on the margin side, it's very similar to what we do in our sales and margin dollars in feed. It's not robust, but at the same time, it's the completer and it's the [footstep] driver. So it runs around the feed margins.

How does the live plant category compare to that in terms of potential? And is that now in all the stores?

The live plant and what we consider to be -- we'll just call it live goods -- will not be in all stores but is -- from a margin standpoint can be a bit more robust than forage. It really is how we manage our business. We are not going to run it like the big boxes. We are going to run it basically into the season early and then probably exit the season a bit early so that we can transition. Our need for these types of products are plant, harvest, and [tan] and so on and so forth. There is a stage to ours. As we get through that, there is no need for us to continue to try to extend that season. We're going to get in, set it, take our sales, and make sure that we stay profitable and move on. We have got some tremendous partners who have chosen to work with us. It will be in a substantial number of stores, but not all stores for spring.

That's versus, say, a limited number of stores last year?

Yes, very limited numbers last year.

Lastly, and I apologize if I missed this, but Tony, I think you had said that the gross margins would be weighted to the second half. I'm just curious as to what has caused the first half to be a little weaker on a year-to-year basis?

Some of the way is which we cycle through some of the seasonal goods from the winter. Also, the back half of the year generally will have less of the lower-margin type products on some of the big tickets. The way we are looking at the mix and the impact of say, the [rider] season, on spring can have an impact as well. A lot of it is really mix-oriented. Again, it's very difficult when you have 77 different departments and 340 different categories to develop that merchandising plan. The mix can obviously impact margins significantly. As we look at the second half of the year, we think we have a little bit easier compare in Q3, where obviously we had a lot of conversation on that call about margins as well. So we think we have a little bit easier compare when we look at Q3 as well.

Great. Thanks, Tony.

Peter Keith, Piper Jaffray.

Thanks, and nice finish to the year, everyone.

Thank you.

I wanted to ask a question about the gross margin. The performance in Q4 was pretty impressive, and I just wanted to compare it against what you saw in Q3. Now, certainly we know there was the easier markdown compare in Q4, but it still looked like you saw some sequential acceleration in the drivers. I am wondering if you have any color [on what] some of your key drivers that may have picked up in Q4 relative to Q3?

Peter, I'll take the first shot at this, and Tony, I'm sure, can comment as well. As we looked at the business as it was developing, we had to stay patient. I guess that's the word I'll use. The merchant team had -- tried to understand what was happening, and we sell a lot of our products out of need. When you look at need-based products, if you don't have the need, if you don't have the demand like weather and such, that can cause you to do some things sometimes, If your inventories are too heavy, you start over-reacting. There is a couple things here. Inventory management did a great job of keeping our inventories tight. And as we said earlier, the business really opened up toward the end of the quarter. We were in position, and we were still at what I would call robust retails.

The other thing is our management of clearance. We are a different Company today than we were five years ago. We take that -- and when we move through clearance and we start to see products not selling to the degree that we'd like, we'll take those first initial markdowns understanding that that 20% markdown gets me $0.80 on a dollar today versus if I wait until January or February when I get $0.20 on the dollar, and I'm at 80% off. We are fairly aggressive on moving through inventory when we see issues. I would tell you that's the other component, really tight management of any clearance as we're moving through the season, and then the overall management of our inventory and being patient, not pulling the trigger and over-reacting.

A couple other real quick points. When we look at the impact of big-ticket in Q4, we had less of a drag than we would have anticipated because of the softness of some of the larger big-tickets, as I mentioned earlier on the log splitters and snow blowers, as well as -- as in the past, the import of strategic sourcing products that we have a big impact in Q4 as well. They are a little bit, obviously, stronger-margin items, and that tends to benefit Q4 as well.

Okay. That's helpful color. Appreciate it. Just a follow-up. As we think about all of your key drivers, I guess there's four of them. Looking out to 2013, are there any that you think actually have the potential to accelerate as a benefit? Conversely, anything that you think maybe have already played itself out and probably diminishes as a benefit?

I would comment to this. I said earlier that price optimization has got a much longer horizon. It's teaching us a lot about how to price our products, and it's also teaching us, in some cases, how to assort our products. So that has got a much longer horizon. I think the -- I know that we have got more opportunity to take the exclusive brand mix of our products and accelerate that in the areas where it makes sense. And we're starting to find those gaps.

The other thing I will tell you is when we look at management of clearance and the seasonal conversions -- I mentioned earlier that he we did a wonderful job of that. But I think it's all about -- truthfully, it's about the equation between all of these. Some things drive sales. Some things drive margin. Some things, as they blend together, can be an offset to SG&A. From the standpoint of how the margins in those four buckets are working, they're all still working hard. I would say the one that probably we are most developed on is the seasonal conversion piece. We have been working on that the longest. Quite a bit of room ahead of us for price op, and as well as deeper, exclusive brand development, and then more opportunity yet to bring product from overseas in a direct sourcing capacity.

All right. That's very helpful feedback. I appreciate it, and good luck with 2013.

Thank you.

Thanks.

Matt Nemer, Wells Fargo Securities.

Two quick questions. One, could you talk about how you're planning for the timing of receipts this spring and category changeovers given the unique weather we had last year? Are you going back to normal, or do you maybe [sat] a little earlier?

Actually, Matt, it's about the same time. Last year, we somewhat went south to north in three waves, and then that's what we are going to be doing again this year. If you are in our southern stores right now, you will see that. You will see we are relatively set for spring, and Midwest is beginning, and north will be quite a bit later yet.

Okay. Secondly, earlier in the year, you talked about spending more on marketing to convert aware non-shoppers. Do you think that you have made progress on this goal this year? Is there any way that you can quantify the increase in new customers?

What I would tell you is that we're still trying to find the right mix of marketing vehicles to reach this consumer base. We had some success in the second test. We will be doing some more testing this year. But we are not convinced yet that we are hitting on all eight cylinders as far as understanding how to get to these people. They are still coming into our stores, but they're coming in sporadically on a test basis. We want to be able to talk to them directly. So no. More work to be done.

And marketing expense as a percent of sales for 2013 --?

Slightly up. The majority of that is how we are now using our marketing dollars across the Company. We are now looking at more of a what I will call cross-channel marketing effort. You will see us do more things and things that tie back throughout the web and print and in-store and all that as really one voice to the consumer. So that's -- the spend will be raised a bit in the -- I'll call it the multi-channel or the web side of our marketing.

Got it. Okay. Thanks so much. Good luck this year.

Thank you.

Brian Nigel, Oppenheimer.

Congrats on a nice quarter.

Thank you.

The question I had, a lot of chatter lately over the last few months within the investment community regarding inflation or maybe deflation in some of your input costs and any impact you may see on margins and sales. Maybe an update there? Where are we right now with respect to inflation and deflation as you're seeing -- make your way through the cost of sales? How should we think about it as we're modeling out into 2013?

Brian, we are at the point where the majority of the inflation has moderated. And so as we look at the upcoming year and compare it to the pricing of last year, that's how we come up with our inflation expectations of 1% to 2%. So it's clearly moderated. The majority of the inflation we saw last year has worked its way through our costs, and it's really going to come down to how does 2013 play out.

So is it fair to say then -- as we sit right now, it's much less of a factor going forward?

It should be, as we see the numbers on a year-over-year basis. Now again, as we work through the year, that could change. But it should be less of a factor. As we noted in Q4 last year, it was almost 500 basis points. So it really has moderated. We currently don't anticipate seeing a downturn towards deflation. It will just continue at a very -- a low or moderate pace.

That's helpful. The second question, it will be a quick one. You called out in your prepared comments I think the benefit of Sandy on your comps in Q4. How should we think about the ongoing -- maybe an ongoing benefit to Tractor Supply from as people repair their land and such from the hurricane?

We've commented before that a lot of times, there is a much longer tail for some of the home centers because it relates to home building and repair. But it really is much less of an impact for us. So we don't look at it as a tail. We look at it more as hurricane preparedness and then the short response following and the recovery-area efforts. The one category that does benefit is more the fencing category. There is usually some damaged fencing, and we will be able to repair that, and that might be extended. But we generally have confined the impacts of Sandy just to the fourth quarter.

Thank you. Again, congrats.

Thank you.

Chris Horvers, JPMorgan.

Thanks. Good evening. I was just curious if you could talk about incremental margins in the business as we model out the first quarter, $38 million of pull-forward and the $1.5 million in savings last year. If you use let's say a 20% incremental margin on sales, do we start up in the high 40s as an EPS base versus the 55 that you did last year?

Hopefully, the information that we provided gives you enough to populate your models. I will give you a little bit of guidance saying that our goal, and we believe that we have the plans in place to drive an EPS increase, and we expect to drive a comp increase as well. I think if you put that together with the $38 million -- adjust for the $38 million sales impact, I think you can come to those same outcomes when it comes to the first quarter as well as the first half.

Understood. That's very helpful. A couple random follow-ups. Can you talk about what CUE did in terms of a comp in the quarter --have been running in the, I guess, high single digits recently? Also, on the live products side, is that going to be a consignment basis, or do you take ownership of the inventory?

Let me try to break that down for you. On the CUE side, we typically don't talk to what kind of sales increases. But I can tell you that there was an increase in our overall mix because of CUE's impact on sales. So CUE did actually help us drive some additional sales. It was a larger percentage. Not a great number, but -- not a very large number, but it did add some tailwind. On the live goods side of the business, you're right. Your comment about a lot of this is on consignment or [scan]-based, which helps us on the downside risk. We have a number of stores will be having true service of a product by the manufacturers, and then some stores we'll be managing ourselves. So we're testing it both ways to see what seems to work best.

Perfect. Thanks very much.

You're welcome.

Adam Sindler, Deutsche Bank.

Very nice quarter. Just wanted to ask a question couple questions about some of the merchandising programs in the quarter. Two questions. First, about the heating program, given the impact of the warm weather, I know you rolled out a couple new stoves and things like that. I wanted to see how the gift program went as well. The follow-up question would be on generators. We did check a significant number of stores. Was there any negative impact from a lack of supply of generators? We heard that even people like Briggs had actually run out at the supplier end. Was that -- did that impact you guys in the quarter?

Let's talk about heating first. Heating was -- as I said earlier, some of the seasonal businesses weren't as robust but it did come late, and it came as the weather changed. This is one of those demand businesses again that, unless you have the demand you could overreact and literally burn margin with no result of sales. So we sat tight, kept our inventories tight. We did see a last-minute push on heating side of the business, particularly in the fuel side. On the generator question, there weren't enough generators in the country when this storm hit to be able to service the need. That would be my overall statement from what we knew. We were continuing to pull generators from all four corners of the US with our suppliers, and there was probably some missed business. I think what we're going to see from the northeastern quadrant is individuals wanting to put what I'll call stand-by generators -- not the portables, but stand-by's -- in their homes, because this is the second year now they have been without power. So I can't tell you that we've have seen a real major uptick there yet. But I think as the rebuilding occurs, I think Generac and companies like that might see a nice push in their business.

Very good. Thank you. I appreciate it.

Simeon Gutman, Credit Suisse.

Thanks. Nice results, Greg and Tony.

Thank you.

Can we talk about gross margin maybe in a little different perspective? If we're sitting a year from now and gross margin ends up being better than the 15 basis points, 20, 30 basis points, do you think that will be more a result of mix issue, meaning CUE growing slower than rest of the house? Or is it maybe due to some of the initiatives ending up being bigger contributors than you expected?

I would tell you that we like what we're seeing in the growth of CUE. There will be no plans to slow CUE. What we are working diligently on is how we can grow at a faster pace the other mixes of our business, and some of that is going to be with some high-velocity products. The other side of that coin is going to be what we are doing with the exclusive brands, where we should be able to gain some additional margin, and then our ability to source product internationally or really just strategically source product and gain better cost. All those mixes combined we track, we monitor. I think that's going to help us continue to better predict as well as keep our hands around the gross margin equation.

With regard to the product acquisition costs in CUE, given that you are taking more market share and you're becoming a bigger customer probably for some of these vendors, are you seeing improvement in margin in that category?

Here's how we do that. To be honest with you, yes. Size and scale does matter, does help. But one of the things that we have done over the last few years is we've multi-sourced products, particular categories, whether they are high-velocity and low value. So we were able to use multiple vendors. And through that prospecting between, we're able to find advantages to bring our supply chain cost down because we are getting closer to where the manufacturing is. And that's the biggest cost in most of that product, is the transportation side. So that's how we're doing it.

Okay. My follow-up is can you talk about new space productivity? It looks like it's still very strong. Maybe our math just took a step back, but the way we look at it could be very skewed. Curious what your thoughts on new stores are?

The new stores have been extremely productive in 2013. Some of that has to do with as we move into new territories where there might be a little bit less cannibalization, maybe some areas where it's a little bit less competitive. But as we look at the stores, we believe that there is not a significant variation in how we approve the store to look at the stores, and we just believe that as Tractor Supply name becomes much better known throughout, it's easier to open those doors and be able to penetrate the marketplace a little bit more rapidly than in the past. So again, we're very pleased with the new stores and the program and the marketing around it, and that's helped to drive the business as well.

Thanks, Tony.

Eric Bosshard, Cleveland Research.

One question. In terms of 2013, the competitive pricing environment and what you are thinking of in terms of promotions, interested in how you are thinking about that from a competitive standpoint and how you are thinking about that balancing that relative to [the] in gain in market share and driving sales?

Eric, great question, and we look at this constantly. Again, in our gross margin equation, there is really three things we look at. Are we trying to grow this business from a market share standpoint? If we do, we understand there will be some compression on margin. We look at it from a mix business and saying, listen, if this is a project completer, probably don't need to be as competitive because they have got to have it to make the project work. And then there is that blend of a little bit of both. So we are going to stay very aggressive on growing market share.

What we find is that with the price optimization tool that we are now using, it's giving us some insight to where we need to be priced. And it's not always about being the lowest priced. It's about being the right price by market. That's why -- another reason why we had to have this system. We have got in the range of 1,200 stores in many, many -- 46 states. You've got to have some type of tool to help you work through that. We're very confident that we run our advertising based upon regional need and regional price, sometimes even down to the district level. So it's not about just driving it by price. There is a mixture of things that we do, and we're learning as we go. I'll be honest. We still got things that we can do to improve our performance.

Philosophically, though, we will not come into a marketplace and drive price down. But we will be extremely competitive in some situations. What we've learned is and what this tool has given us is the ability to be able to better manage the price. So in the event that we focus on market share and drive increased sales, then we will get the leverage that we would expect from leveraging SG&A versus improved gross margin rate. That's where we see the tradeoff, and it gives us great flexibility in determining whether we increase EBIT margin through gross margin or leverage SG&A.

As a follow-up, as you think about '13 in this realm, does the behavior -- do your actions -- do you do anything materially different in '13 than '12 with the learnings, the experience, and the environment?

I would tell you that from what we see now, the customer is still responding very similarly to what they did back in '12 with the exception of the weather patterns. Again, our business is a need-based business. If you have animals, you have property, and you have equipment, you're going to need to shop Tractor Supply. There are other things we carry in our assortments that are more seasonally sensitive. If we see movement in seasonal, we seem to see more of an uptick. But we are less sensitive today than we've been. We have been somewhat able to moderate that by really bringing the business across all four walls of the store. I think right now we feel very comfortable from a mix standpoint. There is some upside, of course, if the weather plays in our favor. Moisture in the spring is a good thing, and cold in the fall is a good thing.

Perfect. Thank you very much.

You're welcome.

There are no further questions. Please continue with any closing remarks.

Thank you, operator. Thank you all for joining us on today's call. While we are very pleased with the progress we've made in the past few years, we are more committed today than ever to continue growing Tractor Supply to be a more profitable retailer and returning greater value to our shareholders. Our teams are planning, preparing, and executing, and reacting better than ever before. We are committed to provide the right merchandise in the right regions at the right time to our customers while bringing quality products and great values. Our business model is solid, and we continue to build momentum in our business. Thank you for your continued support of Tractor Supply Company, and we look forward to speaking with all of you again in about 90 days.

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