Tractor Supply Co (TSCO) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss second-quarter 2014 results. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Ms. Christine Skold, Vice President, Investor Relations and Strategy of Tractor Supply Company. Christine, please go ahead.

Thank you, operator. Good afternoon and thank you for joining us for Tractor Supply Company's quarterly earnings conference call.

Before we begin, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This 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 the expectations reflected in is 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 statements will remain operative at a later time.

Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call.

I am now pleased to introduce Greg Sandfort, Tractor Supply Company's President and Chief Executive Officer. Greg, please go ahead.

Good afternoon, everyone and thank you for joining us today for our second-quarter earnings call. With me today are Tony Crudele, our EVP and CFO, Lee Downing, our EVP of Store Operations and Real Estate, and Steve Barbarick, EVP of Merchandising and Marketing is out of town today attending a trade show. So he will not be with us.

Now although the second quarter did not fully live up to our expectations, I am pleased with how our team reacted and managed the business. Weather is always going to play some role in our business results, and it is our job to manage successfully through all those types of external factors. What we faced in the second quarter of this year was different than previous years and I believe we reacted accordingly.

Now heading into the second quarter, we anticipated that the quarter would start slow, based on the cool weather patterns and late start to the spring selling season. Based on years past, we expected that weather patterns would begin to normalize in May and we would see a spike in the spring seasonal business mid-quarter.

However, that pattern did not hold true this year particularly in our northern markets where the weather turned warmer much later than normal. Instead of a spike, we saw a much more gradual built in the seasonal business throughout the quarter. We reacted midway through the quarter by enhancing a few remaining key promotional events focusing on things that would drive sales and traffic, while maintaining the integrity of our everyday value pricing model. These promotions included the advancement of our Fourth of July circular by one week. A second and more timely Demo Days sale event for the northern regions and an improved target distribution of our remaining circulars and direct mail.

These actions resulted in improved redemption rates and, while this had a modest impact on our overall margins in the quarter, it did drive sales and seasonal category midway through the quarter. As weather became less of a factor in the northern markets, we noticed a return to more normal sales trends. The momentum continued as the quarter progressed, but, again, this was much more gradual than years past.

June sales were strong and that strength has carried over into the first few weeks of July. This has given us confidence that the weaker sales trends in the first half of the year were in fact weather-related, while our underlying fundamental traffic and core businesses remained healthy.

With the different pattern to the seasonal business this year, we cannot be assured that we will recapture all of the spring seasonal sales that were lost early in the second quarter, and as such we adjusted our full-year outlook and our business update just two weeks ago. Tony will be reviewing the financials of the quarter in more detail, but let me give you a few highlights.

Comparable transaction count increased 2.3%, making this our 25th consecutive quarter of positive comp transaction count. Comparable store sales were positive in each of the three months with the second half of the quarter above our expectation and the first half below our expectations. Regionally, comparable store sales in the South significantly outperformed comparable sales in the North and not all spring seasonal sales products performed the same.

We observed strength in grass seeds, live goods, fencing, and riding lawn mowers. And in riding lawn mowers, it has been several years since we have seen a positive year-over-year sales comparison in that category. But on the flipside, we saw weakness in the outdoor power equipment such as tillers and chainsaws as well as we saw weakness in accessories for mowers, trimmers, and in the safe category.

So for the quarter, we made a number of inventory investments in key categories early on, and we were pleased with how these categories performed. And we know that when we support product category from both a merchandising and branding perspective and we place the inventory, we typically do well and drive those sales where we targeted in those categories.

For example, our Garden Event. Another big success again this year and that benefited from further investments in that category in both live goods and soil products. So, while the early part of the quarter was not fully in line with our expectations, we were pleased with the way it ended and the way that we managed the seasonal business and the underlying strength in our core business throughout that quarter.

I will now turn the call over to Tony for a more detailed review of the financials, after which I will offer a few closing comments and some forward look on the second half of the year.

Okay, thanks, Greg, and good afternoon, everyone. For the quarter ended June 28, 2014, on a year-over-year basis, net sales increased 8.8% to $1.58 billion and net income grew by approximately 8% to $133.4 million or $0.95 per diluted share. Comparable store sales increased 1.9% for the second quarter compared to last year's increase of 7.2%.

As Greg discussed, the seasonal side of the quarter got off to a slow start as a result of the cold weather that continued further into May than in the prior year. Sales did not start to rebound until halfway through the quarter as spring finally broke, and the build was much more gradual than last year. This was especially the case with our northern stores. Sales were consistent with our plan in the back half of the quarter as June posted a solid comp and was the strongest comp month in the quarter.

Comparable-store sales were driven by continued strength of consumable, usable, and edible products, our C.U.E items, and healthy traffic counts. Come transaction count increased with the 25th consecutive quarter, gaining 2.3% on top of a 4.8% increase last year. Certain spring categories performed very well such as live goods, grass seeds, and fencing. These favorable trends were partially offset by weaker than expected sales of other seasonal categories in the North and continued declines in our safe category resulting from difficult comparisons from a year ago.

Average comp ticket decreased by 30 basis points compared to last year's 2.3% increase. The decrease resulted principally from deflation of 100 basis points. An increase in items per transaction and favorable mix impacts partially offset the negative impact of inflation. The impact of big ticket was slightly negative as the increases we saw in the riding lawn mowers were more than offset by the declines in the safe category.

A few key points about the quarter. As Greg mentioned, although we have seen solid comp sales performance in our spring seasonal categories in June and the first three weeks of July, it is difficult to assess whether we will recapture all the lost sales resulting from the late spring. If you recall, last year's third quarter benefited from a late and extended spring and summer selling season.

Although the general pattern is similar to last year, the build of the seasonal business has been more gradual this year and we do not know how this trend will progress. So while we are pleased with the comp performance so far in Q3, we do face difficult comparison in the third quarter, particularly in July and August when comps increased close to double digits last year.

On a regional basis, our warmer Southern regions outperformed our cooler Northern regions as the Southern regions were least impacted by the delayed spring weather. All three months had positive comp sales, with June tracking at our internal comp target.

Although big ticket items as a group had a positive comp for the quarter, it was still a slight headwind to average ticket. Since the big ticket comp percent was less than chain average and the big ticket sales were a smaller mix of total sales from the softness in the safe category, it had a slight negative impact on average ticket.

Deflation was approximately 100 basis points which is slightly higher than we expected. Last year's second quarter has approximately 140 basis points of installation, making the year-over-year swing 240 basis points.

Turning now to gross margin, which as a percent of sales was flat to the prior year at 34.8%. Our initial direct margin improved as a result of our initiatives around price optimization, markdown management and strategic sources. Import purchases in the quarter increased 8.1% and represented 11.5% of the sales mix. Also, exclusive brand sales increased 9.4% compared to last year's Q2 and were almost 30.7% of sales.

Deflation was the most significant favorable factor impacting margin. As we focus on maintaining margin dollars per unit, this typically will result in an improvement in gross margin rates and deflationary periods. Offsetting the benefits from deflation and our margin-enhancing initiatives was merchandise mix which we estimate had a negative impact of approximately 13 basis points. This was primarily related to the rider category that has a lower than average margin and had a solid year-over-year increases.

And the softness in several of the seasonal categories that carry above chain average margin. The softness in seasonal sales also reduced -- resulted in C.U.E being a higher mix of sales for the quarter which in aggregate carry a lower than average margin.

Freight increased approximately 14 basis points as we had increased transportation rates related to inbound truck capacity and availability, as well as an increase in store stem miles to the new Western store base. Additionally the freight rate will increase as a percentage, relative to sales and cost of goods in a deflationary period.

The enhanced sales driving events in the quarter that Greg referred to also modestly impacted margin. For the quarter, SG&A include depreciation and amortization with 21.5% of sales, an increase of 27 basis points over the prior year quarter. Although we managed SG&A dollars well, we still delevered as a result of the shortfall in sales.

We knew that some of the investments we put in place in the second half of 2013 would make it difficult to leverage SG&A in the second quarter, and this was exaggerated by the limited comp sales increase.

We began to anniversary some of these investments in the back half of this year. For example, we will cycle the added expense of the relocation of the Southeast Distribution Center and the relocation of our Data Center in the second half of 2014.

The largest variance was employee benefits where medical cost and workers comp expense have been running higher than plan. Incentive compensation was favorable and offset a significant portion of the deleverage. Our effective income tax rate decreased to 36.7% in Q2 compared to 37.4% last year. The decrease was due principally to the timing of the recognition of state and federal income tax credits.

Turning to the balance sheet. At the end of Q2 this year and last year we had a cash balance of $56 million and no outstanding debt. During the second quarter, under our stock repurchase program, we acquired approximately 961,000 shares for $62.5 million. We estimate that the share repurchase program did not have a material impact on EPS for the quarter.

Average inventory levels per store at quarter end were 3.4% lower than last year, while annualized inventory turns increased by 3 basis points for the quarter. We are pleased with the productivity of the inventory during the quarter as the team did an excellent job flowing early spring orders as cells demand warranted and managed seasonal inventories throughout the quarter. Overall we do not anticipate any markdown exposure in Q3 outside of our normal clearance activity.

Capital expenditures for the quarter were $40.2 million, compared to $49.3 million last year. We opened 23 stores this quarter, compared to 26 stores in the second quarter of 2013. The decrease in capital expenditures relates to cycling expenditures for the construction of our Southeast Distribution Center last year.

Turning our attention to the full year outlook based on the second-quarter results, the Company believes its fiscal year 2014 results will be at the low end of the previously provided ranges which were net sales of $5.62 billion to $5.7 billion, comparable store sales of 2.5% to 4%, and net income of $2.54 to $2.62 per diluted share.

We have reduced our estimated range for capital expenditures by $20 million to $220 million to $230 million. The new store pipeline is tracking to our full-year goal of 102 to 106 new stores. Based on the volume of our share repurchase year to date, we are also adjusting our estimate for full-year diluted shares outstanding to approximately 140 million.

We now expect the deflation to be higher than originally anticipated for the back half of the year as corn prices, which is a directional indicator, continue to remain low. We are now estimating deflation to range between 50 and 100 basis points in the second half with the third quarter being closer to the high end and moderating slightly down in the fourth quarter.

The safe category will continue to be a headwind, but the merchant team has been together a solid plan to drive total sales in the back half of the year. We expect gross margin to be flat to slightly down in the second half of the year. The fourth quarter will be a tougher comparison in the back half as strong seasonal sellthrough last year minimized markdowns. We will continue to have freight and mix headwinds that will offset some of the benefits of our key gross margin initiatives.

With respect to SG&A, our Store Support Center consolidation into our new campus is on budget and on time, and will be completed before the end of the third quarter. The anticipated lease termination and transition costs will be incurred and expensed in the third quarter which we estimate to be $0.01 to $0.015 per diluted share.

We have a very focused plan to manage SG&A expense in the back half of the year and we expect to leverage SG&A in the back half, principally in the fourth quarter as we begin to cycle the investments made in the back half of last year. We expect SG&A leverage to be closer to flat in Q3 as a result of the Store Support Center transition cost I just mentioned.

We forecast that our effective tax rate for the full year will be approximately 36.9% compared to our previous guidance of 37%.

To conclude, our core business remains strong. We saw seasonal sales accelerate as the weather warmed, and we managed the inventory properly to position attractive supply for a healthy summer selling season.

So now I would like to turn the call back over to Greg.

Thank you, Tony. Looking forward to the second half of 2014, we are focused on driving sales and operating margin growth for the full year.

Last year, the spring and summer selling season extended well into the third quarter and we benefited from having inventory in the right mix of seasonal products. Our success in third quarter last year presents us with a challenging comparison this year, but nevertheless, we feel we are well-prepared, given how well we ended the second quarter with inventory and how we have successfully transitioned our assortments towards fall.

In the second half of the year, we have several merchandising initiatives which we are excited about, including a number of direct mail campaigns, looking at our targeted distribution of our circulars and numerous in-store events focused on driving more footsteps into our stores. While we will selectively sprinkle in a few individual store level efforts, we are diligent in maintaining our everyday value-pricing model.

We also had our Seasonal Center Court that I should mention where we always introduced new products that also support our customers' lifestyle and drive business.

So in closing, I would like to thank our dedicated team members in the field distribution centers and here at the Store Support Center for all the hard work and dedication to our Company and our shareholders in the investment community for your continued support. We feel comfortable about the underlying trends and fundamentals of our business, but we recognize that we need to continuously raise the bar on our execution to address the external business conditions that can change and have changed around us.

We appreciate your time today and we will now open the call for your questions.

(Operator Instructions). Michael Lasser.

I was hoping to dig a little bit further into the gross margin. The last quarter you got about 100 basis points of gross margin expansion. It sounds like largely from the deflation element of your retail prices adjusting a little bit slowly -- more slowly than the wholesale prices, you laid out some factors that restraint that in the quarter like 13 basis points for mix, 14 basis points from freight. You didn't call out promotions, but you made it sound like it was slightly less than that amount. That would add up to around 40 to 45 basis points.

So was there just less of a benefit from the deflation in the second quarter than there was in the first quarter? Or was there something else going on?

No, Mike, I think that summarizes. Deflation was a little bit less of an impact although it clearly was the largest. And then, we did benefit from our price optimization and exclusive brands initiative.

So, but between clearance which you are correct, it was relatively modest -- it was definitely less than 10 basis points and mix and promotion were -- really were the drivers. And when it came to mix, like I had mentioned earlier, you had riding lawn mowers which tend to be well below chain average. You also then were very light in some categories that generally are above chain average, some of the key spring categories. So that was the key part of the mix impact.

And then as consumables continue to increase as a percent of sales, that also caused the mix to be -- to have an impact. But other than that there was nothing significant, relative to the margin.

Okay. In the commentary, about the promotions that you laid out during the quarter was very useful and it sounds like you could continue to follow some of that -- those tactics, continue to use those tactics moving forward. Is there something that has changed about the customer, or are you just digging into customers that are more expensive to attract and that is why you are having to run the promotions? Is there anything different about the competitive environment? And then does that influence your thinking about the long run margin outlook for the business where you have consistently guided to 25 basis points or so overall expansion, but have done quite better than that. Thank you very much.

Michael, this is Greg. First of all, there is nothing significant that we can see that has changed with our customer. They are still being conservative. They are still buying very close to need.

What I think we saw was demand shifted later, and as demand shifts later, a lot of these customers say, you know, maybe I don't need to make that investment in X, Y and Z and we clearly saw them not interested this year in some of the outdoor products that in years past they have performed very well. And by the way those are higher margin products that we count on in our second-quarter mix. So that is the first thing.

I think we saw them pull back a little bit from what I will call discretionary spending on some things. I don't think there are any competitive pressures that we can see that have caused any issues. So I would say to that, no, haven't seen anything.

And I think in general, our consumer will look at forward purchasing a little differently. We are already starting to see a good indication on some early reads and early sellthroughs on fall products in certain categories in our business. And I won't get into specifics from a competitive standpoint, but that is a very strong indication that they are looking forward, not looking back. And that is really what we need from them right now.

Great. That's very helpful. Thanks again.

Peter Benedict, Robert W. Baird.

Following up on that a little bit. The inventory looks very well managed in the quarter. Does that limit your ability to capitalize on any extended spring selling season in 3Q and is that why maybe you are being a bit cautious on that or, Greg, maybe just a comment you just made that your customers are kind of looking forward?

Peter, two things. In some categories like some outdoor power equipment there will be a limited availability because either there's model changeover or those manufacturing facilities have already moved on to making snowblowers and other type of winter products. So yes, there will be some limit to that.

But we were able to grab some inventory before some of those conversions occurred. So I think we are sitting where we want to be with inventory. We think we can maximize what is left of the season.

Again, I think the customers from what we have seen initial here is that they are already looking forward which is a good thing. But they are still buying to need. And in some of our regions where we have had a lot of moisture and heat, some of the outdoor power equipment categories have been just extraordinarily strong. And we are basically feeding that business day to day. So, mix of things going on right now. Good look at fall forward as well as still trying to capture some of those lost sales from spring.

Okay, fair enough. My second question is on the freight headwind that we saw in the quarter. I mean, clearly, the Western expansion is expected to be a freight headwind here, but I guess the inbound capacity issue just seems somewhat new. So, maybe you guys can talk a little bit about that and then whether you expect that to persist going forward. Thank you.

Peter, Tony. When it comes to the inbound freight, we -- there has been a lot of conversation about some of the incremental costs as far as the truck and availability, driver availability. That has increased our cost. We do expect to have that go forward and we have taken that in consideration in our forecast.

It is somewhat impactful. It does add some basis points to the freight at the impact, but, again, we believe we can manage that through that and have included in our forecast in the back half.

Okay and then I guess looking at the back half on gross margins I know I think you had said supply list is down a little bit in the second half. I figure we are expecting the fourth quarter to be down, given the comparison. Do you also expect that the third quarter gross margin to be down or you think it could be flat? Is there a chance -- if we could have just any color around that and what you are seeing so far. Thank you.

Yes, as we look at the fourth -- as we look at the third quarter, we think that the gross profit is going to probably be more in the flattish range. We think there's obviously more upside in Q3 than in Q4 because we did have such strong sellthrough in the fourth quarter. If we can continue to get good spring, summer sellthrough, some of the higher margin goods, there's some potential upside there as well.

But again, just overall, we try to stay away from specific quarter guidance and try to keep it generic to the back. But we believe there is a little bit more upside to Q3 than there is to Q4 when it comes to gross margin.

Yes. Understood. Thank you.

David Magee, SunTrust.

Good afternoon. You may have said this and I may have missed it, but the new store productivity working around 75%, does that sound about right?

That's correct, yes.

And that number is at the higher end of the range that you have seen overtime. Is there something that you are doing differently with these -- this class of stores that's producing the better number?

Well, there's clearly a lot more research that is going on before we open these stores because we are going into new regions, David, and we have spent time out there with the customer base and our teams here at the Store support Center with our field people that we are placing out there. So, much more focused on understanding that consumer before we are out there opening more stores.

The second thing and I have mentioned this before. We have a team of people here at the Store Support Center that, with any new store that opens in its first 12 months of its life, there is a bit of a -- I will call it a babysitting period, where they really work very closely with that individual store, understanding differences and needs. Whether it be flow product, depth of product, some changeouts, some planagrams, maybe some products that we need to introduce into the store because of customer demands, so on and so forth.

So, we spend that first 12 months with that new store trying to get that assortment and that new store positioned in that market before we turn it over and put it into the run rate of the normal -- the rest of the Company. So it is a unique process. It takes time, it takes people, but it has paid big dividends for us.

David, just to also clarify on that. As we have moved West the mix of the store is going to be a little bit larger. So it is a larger volume store. So (multiple speakers), you see that in the number of sort of increasing as a percent of the sales, total sales of the Company or average store. Some of it is just due to the mix of the stores that we are opening.

Thanks, Tony. And secondly, when you mentioned you got a good look or some look into the fall product demand and it is favorable. What products in particular are you looking at to see that?

Well, unfortunately I can't tell you which category because from a competitive standpoint, but there's three or four that are key to our business just as there are three or four to the spring season. And they are great indicators of a forward look or a forward trend. And what I can tell you with great confidence is, we have started off with very, very positive trends and we expect those to continue.

Great. Thanks, and good luck.

Chuck Cerankosky, Northcoast Research.

Good afternoon, everyone. Want to reflect back on that North-South split a little bit. Can you comment on how that looked among the new stores you opened? The cold versus warm area.

Had more warm than we had cold, that's for sure.

Chuck, the newer stores as we grow in the Southwest, obviously, are going to be warm weather and they -- as we had indicated earlier, the Southern stores did produce better than the Northern stores from a sales perspective. So, for the most part, we felt very good about the new stores. And, again, they were specifically more in the South and, obviously, had a better opportunity to perform well during this delayed spring.

All right. That makes sense. Thank you.

John Lawrence, Stephens.

Good morning. I would like to follow that on a divergence between the North and the South. I mean, was that the biggest spread, the largest spread between those regions you have seen in some time as far as that how say April and May and part of June performed?

Yes it was. Lee, you want to talk to that?

I think the difference in the North-South typically over the last I would say few quarters we've been relatively consistent across all regions. But I think this time we saw quite a differentiation in particular with the Northeast and the MidAtlantic areas that they did not perform up to the area.

And is it fair to say, (inaudible) your comments on some of the forward-looking, is it fair to say that those lines have converged and when weather is sort of at parity in places that they look a lot similar going forward?

That is correct. And I will say that, echoing what Lee said. We still are seem very consistent traffic and what happened really in the North versus the South was the mix in the basket was so different from a year ago. And as the weather's warmed in both locations now, both parts of the country, we are seem very similar selling patterns, but we are also seeing a nice movement forward in business across the country. So, very happy with that so far.

Thanks. Good luck.

Chris Horvers, JPMorgan.

Good evening. As you talk about, as you think about really the first seven months of the year, you always encourage us to look at the business in terms of halfs and maybe including the July, the date is the right way to look at it. What do you think the core underlying trend in the business is? You had some early help from the cold and then it hurt you and then you had this delayed spring, but now it seems to be helping you. So what is the right underlying trend in the business?

Well, let me kind of bracket it for you. The first thing is, there have been some comments about volatility. But it is really not volatility. This is really some -- I think we could give some great examples of how consistent that some things are in the underlying components of the business.

Number one, comp store traffic counts. They remain strong. They are very consistent and that is an underlying piece of the core business, that the customer is still coming and making purchases in queue and in other products in stores.

Second thing, the basket. The basket changed quite a bit in the first part of this year versus a year ago. And as the demand increased, based upon the warmth of the weather and, I hate to use weather, but weather did have an impact. It then started to affect the mix of the basket and sales of products were from the stores. So the North and South look very different in sales for the first five, six months.

This is probably some of the most extreme weather, honestly, we have ever seen. At least for the time I have been with the Company. And so we dealt with it, but it was clearly a shifting of product mix and demand from the consumer of certain products, based upon the fact they could get out and either work in their yards, work in their gardens, work outside in general. So underlying it is good.

Now, deflation had some impact, no question. Deflation played a role. But I think generally speaking, demand shifted later in the North and the upper Midwest and we saw pretty normalized business in the -- more Midwest than South.

And then did -- as you think about the feed and food category X the -- I guess maybe on a unit basis has the growth and that business moderated? Has there been much change there? I think some of the dog category it seems like there's some consternation out there in the dog category. But overall as you think about dog and horse, has the food and feed category been pretty -- still been very good or pretty good for you?

I can tell you that our unit counts are up in both categories. So we are continuing to take market share.

Okay. And then -- perfect. The July commentary, is it fair to say that July is an unassisted comp? Some of the questions focus in on the promotional level here. I think people, investors, we are trying to understand if you are driving the business or being forced to drive the business through promotion, is the July commentary about trend largely an unassisted or unpromoted?

Yes, Chris. July is a return to more normal what we would expect would be the performance of Tractor Supply as we have known it. Yes, we did nothing to further assist the business. This is just a good solid trend of business that honestly just came later.

Perfect. Thanks very much.

Scott Ciccarelli, RBC Capital Markets.

I guess everyone is talking around it, but can you give us an idea for how big the difference was between the South and Northeast? Whether it is a range or some other way to think about it.

Yes, I think when you look at it I guess we can give you some range, but what was interesting is that as we progressed in the quarter, we did start to see the North come back. So as much as we feel there was a little bit of some lost sales there, it did start to moderate some.

So when you look across the chain and if you look at it from a four-year basis, actually the Northeast came back very nicely. When you look at some of the range it's probably somewhere between 300 to 400 basis points of swing between North and South as far as the performance of those regions. When it comes to the spring categories.

That is very helpful. And then I don't know how you really answer this. Greg, you talked about you didn't really see a change in consumer behavior, but obviously there's some people out there thinking that there's significant deflationary forces on some of your core customers with corn, et cetera. Maybe you can just give us some of your thoughts on if that could have some sort of impact on your loyal customer base or what is the right way for investors to think about that as the potential impact on the business? Thanks.

Well, the first thing I would say is that what gives us comfort is the fact that we are having consistent growth in our transaction count at the store. So, our customer base continues to shop with us and it continues to grow.

I would tell you that in many of the products we sell corn is a very small component. However it is a good indicator of what can happen with the rest of grains and other mixers of products and feed and food. We have not seen any shift downward in quality of product that the customer is buying or them buying any less of. And we saw that back in the early part of the recession if you remember who have been following the Company back in 2008. We saw customers trading down into lower price deeds and foods. We are not seeing that at all. Not seeing that at all.

As a matter of fact, many customers I think are seeing great value and understanding that a better quality feed or food that is better for their animal. So no indications of that. There were some challenges, no question, in the early part of the year with weather and being able to run trucks and get product to stores. But that was past us. So the second quarter really was more of -- it circled around demand for other seasonal products C.U.E and the C.U.E categories are performing very well. We are very pleased with those and we believe, because of that traffic count and the unit increases, that business is solid.

That's very helpful. Thanks.

This is Tony. We have done some analysis in the more rural areas where we would expect the farm income to have an impact. And we have not seen any large disparities, relative to the performance of those stores in those areas.

All very helpful. Thanks.

Seth Basham, Wedbush Securities.

Our question tonight is really around the consumer and I am trying to understand your read on consumer a little bit better. On the one hand you are talking about strength in some big-ticket discretionary categories like riding lawn mowers. On the other hand, you are talking about more limited behavior or sales in other high-margin discretionary things in the spring. How do you juxtapose those things? What you think the consumer is really thinking right now?

Here's what -- this is Greg. I think it is a simple answer. Some of those what I will call discretionary purchases are more ornamental and decorative type things. And there's a life to those. Typically you buy them early. You use them and they transition from year-to-year.

Our customers typically shop on need. So I think because of the delay and their ability to use some of those products, particularly some of the outdoor products, they may make some decisions to say, no, I am going to continue to support the things I need and I am going to move on now and look for to next season.

And what we did was once we started seeing that trend we started to moderate our inventory levels in those categories and manage ourselves to a successful conclusion. So I don't think that's anything unusual, particularly given how late the season developed.

Got it. That's helpful. And then, secondly as you think about the gross margin being a little bit more limited going forward, are you changing your cost control measures to offset that in any way?

Yes, we have taken a hard look at the back half and we believe we have a very focused approach around SG&A. And that is why we adjusted our outlook relative to SG&A where we believe that we can derive some leverage from SG&A in the back half of the year.

Anything specifically you can point to?

Well, obviously there's some discretionary spend. There is also some initiatives that we are being able to manage more efficiently and some that we discontinued to make sure that we don't spend ahead of the benefits that we received from some of the key initiatives. And we have been able to manage some of the CapEx spend as well around those projects.

So we believe that those are a few things that we have done, relative to drive some expense. And obviously we are always looking at things like managing labor and some of the key occupancy expenses when it comes to repairs and maintenance.

But at the same time, we want to make sure that we take care of our store base. So it is a balancing act, but we really feel that as we move into the back half, the plan that we put together we can achieve some SG&A leverage.

Got it. Thank you.

Simeon Gutman, Morgan Stanley.

Good afternoon. Can you talk about if you can estimate the magnitude of the comp lift or the sales lift that the promotions grow the business? And then and if I interpreted it right were the promotional levels -- were they similar to the cadence of sales growth? Meaning the promotions were, let's say, more prevalent in the month of June versus the other months of the quarter?

This is Greg. I would say a few things on that. One is, it was moderate as far as impact on sales and moderate impact on margin. So, minimal.

What it -- we already had -- as weather started to change we happened to be I would think in the right place at the right time with some of the promotions we had already put into play. And for example by shifting the July 4 piece up a week, that just gave us a little bit of more time to understand, where is the customer on some of these products?

It typically -- all you are doing is shifting the business typically a little earlier sometimes versus extending it out. But we tried that to see if we got -- we would get any kind of comp increase out of it.

So it had some effect, not a large degree of effect. We were already starting to see some turning of the business in the positive direction and the comps, as Tony had mentioned were significantly better in June and it continued into July. So, and July has been a month where we have changed nothing. It has been exactly the same. And we didn't do anything really significant in the month of June, nothing like going out and dropping another piece of circular or circulation for 2 or 3 million customers which would be a normal drop for us. We didn't do that.

This was more local store type of events. Something we could do from inside the store, and I will leave it at that.

Okay and then on the feed business, you mentioned your units and dog are in one of the categories was up, you are probably taking share. Can you talk about where you think that is coming from? Is it the same customer who is buying large animal feed? Are you pulling from more of a suburban market so maybe from the strip center customer? Where is that coming from or is there also -- and is the private label or your private offering within that growing faster than the brand?

I can't tell you exactly where it is coming from. I wish I knew. We do our best to try to track that. I think in general our pricing structure, our in stock levels and our offering and mix tends to drive customers to our stores. We are seeing nice growth, continued growth in our own exclusive brands. That's the reason for people to come to our store. You can only buy those at Tractor.

So, I think this has been something we have seen for a while. And we see continuing as we increase the depth and breadth of those assortments in our stores.

Okay, thanks.

(Operator Instructions). Alan Rifkin, Barclays.

Greg, understanding the perishability component of your commodities side of the business, is there anything at all that can be done by you guys on a proactive basis to try to take advantage or somehow not be as susceptible to the declining prices in commodities? Be it slowing your terms or anything?

Well, a couple of things we have done. We have made some significant investments in inventory that we would forecast with our suppliers. But we don't buy -- we are not buying commodity type products. We're not out there. And the fact that we have been able to build exclusive brands in our Company and that is a base of business that we can control from a flow of margin and exclusivity standpoint helps us. But I am not in the futures business. Don't plan to be. And I think we do a fine job today working that inventory and turning that inventory.

We are not having out of stock issues. What we are having more of is trying to look at what is the next level of business in some of our exclusive brands more so than even some of the national brands on occasion. So, it is a good mix right now. It is a good healthy mix. We need both.

Okay. I mean you said on more than one occasion that the buildup was more gradual than what you anticipated. What do you think is really behind that? Is it a macro issue? (technical difficulty)

No. I think it is a --. We are convinced now looking at how the business developed it was primarily weather. Because as things normalized, when weather normalized, business was back to, like I said, the typical we would call Tractor Supply performance.

So I don't like to use weather as any type of issue, but it clearly was driven primarily North and the coastal side of the Midwest and that area of the country just didn't respond until the weather actually warmed. And once it did, business normalized. So we are clearly convinced it was weather.

And one more question if I may. I know it has been asked 10 different ways, but with respect to the weather, besides the North, did you hit your plan in all other areas whatever that plan may be?

When you say hit the plan do you mean sales in other regions? The answer to that would be, yes, we did. We actually accelerated in a number of regions beyond plan. So significant weakness in the North and in the MidAtlantic -- significant strength in other parts of the country.

Got you. Thanks very much.

Mark Miller, William Blair.

Good afternoon. It seems like one of the swing factors of the gross margin near-term would be some of these spring seasonal categories that you talked about. And you highlighted the importance of three or four going forward three or four looking back.

Could you give a little more perspective on what some of the three, four spring categories that you are hoping to see could follow through late in the season?

Well one of the categories is the riding lawn mower business. It has been exceptional this year and we don't know if it is because, honestly, the season just developed late and it could have been from last year wore out or it's -- we are in just an advantageous cycle. We have inventory and quantity product and maybe people we compete with have sold through.

Things like sprayers and chemicals. Those are businesses that typically start early in the season and when they come later, as they have this year -- I will give you an example. We are hearing that cuttings of hay this year. There's probably still two cuttings left.

Well, at this time a year ago there would have been maybe one. The twine business is extremely strong and why is that? Well, there's forecast in more cuttings and things. So there's some unusual things year-to-year here that are happening, but they are delayed. And they are still coming.

So our biggest challenge right now is managing trying to gain the maximum return on the inventory we have in those categories and then also transitioning to fall. As I said earlier, we are very pleased with what we're seeing in some of the early indications of some of the fall sets in some of the Northern regions.

So I feel quite good right now about the mix of inventory, how things are selling through. But, it is unusual. This is not a typical year. We wouldn't be seeing some of the selling of some of these products this late in the season.

Great, that's helpful. And then something I guess apart from the weather. On the import purchases up around the high single digit in the first half. That had been growing a little bit faster than total sales in the past. So I guess, can you give us a sense for what is your current outlook for higher penetration on import? Which of the categories again are you really focusing on and do you think that will start accelerating again or are you getting closer to where the business can go? Thanks.

Mark, I have always stated that there is no set number for us as far as a target. But it will shift between seasons this year. We did pull back a little bit on some, I will call it import products in the outdoor category. And I think it was a good move on the merchant's part because it was a category unfortunately that was soft this year. It wasn't because of inventory, it was because the customer just decided that that disposable income was going to go somewhere else.

We still see growth. We still see the machine behind our product development and sourcing piece of the Company growing. I still think that we will see, I don't know, it could be 3 or 4 [prominent] basis points more growth, as we get into the latter part of the year and into next year still. So there is no slowing of that conversion, but I don't have a target number to give you. I think it would be wrong to say because it is a totally different mix between parts of the business. Some pieces, a higher percentage, others low. So look for continued improvement and increases in the mix.

That's helpful, Greg. Thanks.

Adam Sindler, Deutsche Bank.

Good afternoon. Two questions. One -- sort of both on weather. One if you could remind us what a extended season needs for you guys specifically. What was it about the weather last year that helped drive double-digit comps in July and August?

And then as it relates to the commentary on fall, just wondering if that was concentrated in the Ohio, Michigan, Western New York, Pennsylvania areas which did see a -- for whatever reason very late polar vortex over the last couple of weeks with temperatures dropping very well below average. Just to make sure we are not getting a false read on that.

Let me address your last piece. There's no false read here. What you have got is our consumers last year, honestly, were caught a little short on a number of categories of products because we had a very, what I would say veracious long winter. So what we typically have seen in the history of our Company is when that happens, they start to buy earlier for the next year in an effort not to get caught short and an effort to make sure that they are well-stocked on products. So that is what I think is happening there. Polar vortex aside.

As far as the other weather things, what you see is an extension, ironically this year, as they are still planting grass seed. They are still putting in gardens. They are still cutting hay. There's a number of things that typically [would have] start to be winding down at this time of year that are still very vibrant upper Midwest out in the coastal areas and the Carolinas and up through the Northeast.

So that is going to play itself out for a while. And we are still seeing, again, some forward buying, but I like what we are seeing as far as the reaction to I'll call it a late spring. But there will come a point in time and it could be right around Labor Day or shortly before, where that will shift again, and we are in great shape to take advantage of that.

Okay. Very good. Thank you. I appreciate it.

Aram Rubinson, Wolfe Research.

What I am trying to get a handle on is the historical perspective of the promotions. You mentioned you are sprinkling in some promotions which I understand, but just remind us of the history of that when you have done that last and how it developed, if you don't mind?

We have been doing that for a number of years now. And it is not really promotion. What it is is store level, I will call it customer interactions. Whether we would do a farmers market on a weekend in a group of stores in a certain part of the country or we would have a pet swapmeet or something. It is all kinds of interesting things that our marketing department has researched and developed and the really local store events that we give the stores the opportunity to execute to.

We actually put together a marketing package for them that is done at the store. So, understand. It is not about more promotion and it is not about quote, on sale. This is we are an everyday priced value company and that is how customers have come to trust us on pricing.

So these are events that draw customers to the store. They are primarily geared on the weekend and there is really a menu of things that they can use. And we usually give them some guidance, but we have been doing this for a number of years now.

And maybe just help, last question is, return of rebound to get back to normal which is kind of, let's say 3 1/2 or 4 something maybe for the back half. In years past doing a 3.5 and a 4 wouldn't pass muster because you were comping up 6, 7's, and 8's.

I and just wondering is the new normal 3 to 4's, and what can you do to get back to the old normal, because those were even better still?

Great question. Not a simple answer. Some of the things that I am encouraged about is that we are continuing to find new products and able to take some businesses that we thought had cycled through and were mature and actually breathed some new life into them. We talked a little earlier about the safe business.

That business was running hot for a number of years and we knew it was going to soften at some point. So, it is one of those things where you look at those business -- and you say, how do you offset that? How do you continue to grow it? Well, sometimes if a pie gets smaller you have to go out and look at how to get more of that pie.

And but I think it is in general, we are going to continue do the things that we think we do best. And that is introduce new products. Use in-store events and things to bring customers through, introduce to them to the new products. Make sure we are in stock and watch those in-stock levels and make those investments and really look at maximizing probably three or four key categories each season where, we believe, we have a dominant position.

We have learned that when we get behind some of these categories from a merchandise presentation and branding and promotional level, we can drive the business. And I think and we can do it at healthy margins. So there's more for us to do.

Unfortunately, we have seen a little bit of some weather challenges that have gotten in the way. But I believe we will get back to being the Tractor you know here shortly.

Thanks. I hope so. Bye.

(Operator Instructions). Peter Keith, Piper Jaffray.

This is actually [Jon Berg] on for Pete tonight. It sounds like you guys have talked about corn being a deflation indicator on the business. And curious about what you have seen with oil and steel in your business so far this year and how you are looking at those categories for the second half?

The big driver as far as our adjustment to deflation is really the corn prices. When we look at the other two factors, which is oil and scrap steel are the other two indicators for our business, we did see some flattening out when it came to oil. But as we look at the back half of the year, we don't believe that those two indicators will be a significant driver of the deflation/inflation in the back half.

Okay, great. Just quickly, a second question. When did the softness in the safe category really start to set in and I mean how long do you anticipate that core category being the headwind?

Right, the safe category has really been a headwind just the last two quarters. So, really, 2014. And obviously, the big driver has been some of the gun-control issues that are out there. Especially that -- when it surfaced after Sandy Hook.

So last year was very, very strong. Gun safe sales year, and again, most retailers have talked about that, especially those in the sporting goods area about the softness of the industry.

Okay, great. Thanks a lot. Good luck in the second half.

Thank you.

Eric Bosshard, Cleveland Research Company.

You spoke briefly on the West stores and the relative size in sales volume. Curious if you could talk a bit about the margin experience at this point and what you think it should go forward as you open more stores out there specifically on the gross margin opportunity, what you are seeing and learning from those stores?

As we move West, obviously, we like the sales volume of those stores. As we talked in the past, the real estate costs are more expensive. So from a modeling standpoint they fit into our model from an economic standpoint. What we see in the gross margin side, it is going to vary slightly, but we do like what we see from a gross margin perspective. Those territories that are a little less competitive obviously are going to be much stronger.

Some of that gross margin that we -- that is above chain average can be eaten up a little bite the additional freight. So as we eventually get our distribution center out there at the end of 2015, hopefully some of that freight degradation will moderate some.

So net net, we really like what we see out there from a sales standpoint and from a gross margin standpoint and we believe that they will be a very profitable segment of the business.

From a mix, I understand the comments from competition -- from a mix of what you are selling there and I suppose competition as well when the smoke clears and the infrastructure is there to supply the stores. Is it likely to be a similar, better, worse gross margin, relative to the existing business?

I think net, it will be a better gross margin business.

And then secondly as it relates to, Greg, I understood the comments on some of the marketing things you have done with promotions and connecting with customers, but from a merchandising standpoint, curious if there is anything new or incremental, either specifically or strategically that you are doing, merchandising to help growth the sales as we look out this year and into next year if there is anything changing materially there that you can speak to?

Eric, there are a number of things that we are doing differently, but, again, I am reluctant to speak to it in specific terms. But I can tell you this that we still drive a lot of newness into our stores. That is how we learn really where our customer is headed. They give us great indication very early on. So the testing programs are still robust. And you will see as you travel our stores you will be able to tell where the focus is at. There is no question. You will see the investment [volume] inventory. You will see it in some other promotions that will run out there in print and online.

So I would say to you that there is -- the pipeline is still full of new initiatives and new products and we continue to learn from the Web business which is interesting. There's some things that the Web is teaching us about demand and about some products, even in some price tiers, that we can sell on the Web and we now figured out we can sell in stores. So both are working nicely in tandem.

Great. Thank you.

Matt Nemer, Wells Fargo.

This is [Omare] on for Matt. You had previously mentioned a high level of moisture on the ground, which is traditionally a tailwind to sales. Is that moisture still on the ground and is it a potential benefit in Q3? Or does that benefit sort of disappear when we get around this time of the year?

Well, traditionally, we start seeing the -- if you look at the -- we look at weather maps and we look at NOAA's forecasts and what we have seen is that this year in the Southwest and as we go move through the Midwest in that, no question that more moisture drives broader sales. It drives weed control and bug infestation and all those types of things. So those businesses still have a little bit of running room.

Well, we haven't seen that kind of moisture in those areas for a while. We have typically seen the map showing a lot of drought. So that has helped us this year a bit in the South and the Southwest. I don't think it is going to give us any great benefit in the third quarter. I think it is more in the second-quarter period where we see the benefit from that.

Great. Thank you.

Joe Feldman, Telsey Advisory Group.

Good afternoon. Wanted to ask, I know we have talked a lot about the marketing and promotion and the cadence. And I apologize if I missed it during the call, but any update on an affinity type program? I know you guys don't want to give away anything, we have talked about that in the past, but any new -- anything new on that front? Because I know you have talked about testing different things on the affinity side.

Yes. Well, you are correct. We are still in the testing modes and we are, I would say, developing a position now on what we believe will work for Tractor Supply. It is not an additional discount type program as many of these programs turn out to be. This is different. And we will be able to tell you more about that as the year progresses.

That's great. And I wanted to go back to something, I think a question or two ago, you brought up some comments about learning some things from the Web and online sales. And I guess I wanted to broaden that out to are you seeing anything shifting toward the Web? Because I think there is this general view out there and certainly we have it that your business is somewhat defensive against the Internet. And I am wondering if you have seen any shifts in the business model that may suggest there's categories that do lend itself to e-commerce and maybe not threat from Amazon, but at least maybe more benefit for you to sell via the Web.

I think generally speaking because we continue to see footsteps and traffic being very consistent in the store, what happens for us is the Web becomes a facilitator. And people use it for research. There are some products we are learning, though, that we can sell on the Web.

And I will give you an example of one. Chicken coops. Now you may say that is kind of a silly category to talk about, but we can sell very high-end coops on the Web and much larger scale coops on the Web that we can even sell, really facilitate a presentation in our stores for. And that was an interesting category that to be honest with you we weren't sure it was going to work as well as it did. And it has been terrific.

I will also say to you that the Web also teaches us a little bit about price transparency. And when it comes to things like a DeWalt drill, that is not going to be a category I am going to spend a lot of time and money on because honestly, that drill is out there from everybody at a price.

But I will have it and I will have an assortment for my customers so it meets their needs. But what I will find is other products in other categories of things that are unique to me that I can offer my customer out there that can't be found on other Websites. Or if it is you have to search multiple places to find it.

What our whole focus is is to use that Web piece as an extension of the store and to use it as a piece of communication as well as to drive commerce. And we are very pleased with the progress we are seeing there. And what it is, again, there's some teaching going back and forth between both of those groups. The [floor] group and the Web group on how to manage some of our businesses and what we can sell. So.

Got it. That's helpful. Thanks. And have a good quarter, guys.

Thank you.

And that does conclude today's question-and-answer session. At this time I will turn the conference back over to the speakers for any additional or closing remarks.

Yes, this concludes our second quarter earnings call. I would like to thank you all for your interest in Tractor Supply and we look forward to speaking to you again on our third-quarter earnings call in October.

That does conclude today's conference. Thank you for your participation.