Tractor Supply Co (TSCO) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss fourth-quarter and full-year 2014 results.

(Operator Instructions)

Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. As a reminder, this call is being recorded.

I would now like to introduce your host for today's call, Miss, Christine Skold of Tractor Supply Company. Christine, please go ahead.

Thank you, operator. Good afternoon and thank you for joining us for today'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 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 statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call.

I'm 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. On the call with me today are Tony Crudele, our EVP and CFO; Steve Barbarick, our EVP of Merchandising and Marketing; and Lee Downing, our EVP of Store Operations and Real Estate.

We are pleased with our performance in the fourth quarter and our full-year results. Comp store sales for the quarter increased 5.3%, versus an increase of 3.5% in last year's fourth quarter. The comp increase was driven by increases in both traffic and ticket, and we continued to see strength across all our major merchandise categories and geographic regions.

The fourth quarter was our 21st consecutive quarter of positive comp store sales and our 27th consecutive quarter of positive comp transaction counts.

For the fourth quarter, we made early strategic investments in a number of key categories such as heating, cold-weather apparel and footwear, and outdoor power equipment, anticipating that the customer would purchase earlier than the year before. These investments positioned us well to capitalize on early consumer buying trends, driven by colder weather early in the quarter. We also strengthened our commitment to seasonal queue items and achieved a solid performance within this group of products, which also added to our comparable sales for the quarter.

In the quarter, we started the rollout of our new demand planning system to the first few departments. And as we methodically rolled the system out across all our merchandise categories, this system will more accurately forecast the sales and seasonality of products that we carry within our assortments.

During the fourth quarter, we also opened our first Tractor Supply store in Utah, which was the 49th state for Tractor Supply. We also converted our first Del's store over to the Tractor Supply format and nameplate in the state of Washington. We are excited about the opportunity to grow our market share in Washington as we continue to convert the remaining Del's stores to new TSC stores in that market.

We continued to develop our omni-channel improvements to content and product availability online, as well as additions to our drop-ship vendor e-commerce programs. We've seen double-digit growth in visits to our website now that we have added our mobile site capability. And although online sales are not material at this point, we have seen a significant increase in the store locator feature, and believe our online and mobile sites are driving footsteps into our stores.

Now regarding our supply chain, we purchased land and have started construction on our new distribution center in Casa Grande, Arizona. This distribution center is an important part of our western expansion strategy; not only will it support our continued growth in those markets, it should lower our transportation costs and improve delivery times to our stores in that region. The new facility is expected to be operational in the fourth quarter of 2015 and will have the potential to ultimately serve in upwards of 250 stores in the Southwest region.

In 2015, we also plan to open two mixing centers in our Texas region. These are smaller cross-docking style distribution facilities that handle many of our palletized products and faster-turning queue items, such as [speed], shavings, and wood pellets. With our vendors delivering products directly to these mixing centers, which are located closer to our stores, we can shorten our supply chain stem miles and reduce in-store inventory levels to more frequent store deliveries.

Now as we move into 2015, we will continue to invest in the analytic tools and supply chain assets necessary to strategically drive our growth. Our priorities in 2015 include opening approximately 110 to 115 new Tractor Supply stores; opening our new Southwest distribution center and Northeast DC expansion; the addition of two mixing centers in our Texas region; continued growth in the state of Washington through our Del's conversion to Tractor Supply stores; system enhancements to increase scalability and analytic capability for inventory allocation, omni-channel engagement, and CRM; and continued system security enhancements.

As we all know, the cold, hard start to the year and the late spring selling season required us to carefully manage seasonal inventory investments and monitor our product sell-throughs. We had to react swiftly and were successful in meeting the seasonal and everyday needs of our customers in both the first and second halves of the year.

Throughout the year, the team did an excellent job of managing product flow and adjusting merchandise assortments and depth of inventory to capitalize on seasonal demands in the markets that we serve. We believe this continues to be a core competency and strategic advantage for Tractor Supply Company.

In my closing comments, I would just like to say thank you to all of our hard-working and dedicated team members who serve our customers each and every day out there. We are pleased with our fourth-quarter performance and our finish to the year. And while it is difficult to predict the timing of seasonal demand trends, we know our customers do depend on us for everyday basic items, and we continue to stay focused on being the most dependable supplier of their lifestyle.

Our business is more than just transactional. It is building long-term trusted relationships with our customers and having what they need, when they need it, no matter what the season or weather.

We appreciate your time today. And I will now turn the call over to Tony, for a more detailed commentary on the financials and our initial look for 2015. Tony?

Thanks, Greg, and good afternoon, everyone. For the quarter ended December 27, 2014, on a year-over-year basis, net sales increased 12% to $1.58 billion, and net income grew 16.9% to $112.1 million, or $0.81 per diluted share.

Comp store sales increased 5.3% in the fourth quarter, compared to an increase of 3.5% in last year's fourth quarter. Comp transaction count increased for the 27th consecutive quarter, gaining 3% on top of a 5.1% increase last year.

We are very pleased with our ability to continue driving increased foot traffic through our doors by meeting the everyday needs of our customers. Strong winter seasonal business and queue items were key traffic drivers in the quarter.

Average comp ticket increased by 2.3% versus last year's 1.5% decrease. The increase was driven by the mix of goods and the strength of big-ticket sales, partially offset by deflation.

A few key points about the quarter: Sales were strongest in the first half of the quarter. Coming off a very cold winter last year and with the advent of the cooler temperatures in October and November, our customer anticipated another cold winter and started buying winter seasonal items earlier. We believe that this shifted much of the winter seasonal sales to earlier in the fourth quarter versus last year.

Big-ticket had a comp sales increase greater than the Company average and positively impacted overall comp sales by an estimated 64 basis points. Strength in our seasonal categories, such as heating and outdoor power equipment, drove the big-ticket comp sales increase and more than offset the continued headwind in the same category.

Solid comp sales were widespread and not limited to any particular region, as both the North and the South did well. Deflation was slightly less than we expected, and we estimate that it was approximately 50 basis points in the quarter.

Sales of direct import items increased 14% versus Q4 last year and represented 16% of the sales mix in the quarter. Sales of exclusive branded products were also very strong in the quarter, increasing 11.4% and represented 29.4% of total sales.

Turning now to gross margin, which increased approximately 16 basis points to 34%, our initial direct margin continues to improve as a result of our initiatives around price optimization, mark-down management, and strategic sourcing. The favorable colder weather provided strong sell-through of our seasonal winter product, resulting in favorable mark-down management, accompanied with strong price management on some key winter seasonal products. Deflation also had a positive impact on gross margin.

Partially offsetting the benefits from our margin-enhancing initiatives was freight, which increased approximately 20 basis points due to higher transportation costs, primarily from the increase in stem miles to the new Western Store base. This impact was much greater than the benefit we received from lower fuel costs in the quarter. The overall product mix impact was not significant this quarter.

For the quarter, SG&A including depreciation and amortization, was 22.8% of sales compared to 23.5% in the prior-year's quarter. We are pleased with our expense control in the quarter which, coupled with the strong comp sales, provided significant leverage.

Strong expense control of store payroll, occupancy, and marketing netted almost half of the favorable leverage. Incentive compensation accounted for the other half of the leverage benefit in the quarter.

Our effective income tax rate increased to 36.7% in Q4, compared to 35% last year. The increase was due principally to the reversal of certain FIN 48 reserves last year.

Turning to the balance sheet, we ended the year with $51.1 million in cash compared to $142.7 million last year, with no debt in both years. Our stock repurchase program was very effective in the early part of the fourth quarter, as we acquired approximately 868,000 shares for $51.1 million for an average $62.35 per share price.

Average inventory levels per store at year-end increased approximately 4% compared to last year. We ended last year very light in inventory as a result of the strong sell-through in the fourth quarter. We believe that we are in better inventory position this year to take advantage of the January/February winter business.

Inventory turns for the year improved 3 basis points to 3.32 times, and we are pleased with the productivity of our inventory during the quarter and the full year.

Capital expenditures for the year were $160.6 million, as compared to $218.2 million last year. We opened 22 stores and closed one store in the fourth quarter, compared to 31 stores opened in the fourth quarter of 2013. For the year, we opened 107 stores and closed one.

The decrease in capital expenditures relates to cycling expenditures for the construction of our Southeast distribution center last year. We were significantly favorable to our CapEx forecast, as our land costs and construction jobs for the Southwest distribution facility were below our estimate; the Northeast distribution center expansion was deferred to Q1 2015; and certain IT initiatives were under budget or reprioritized.

Turning our attention to 2015, as Greg mentioned, we will continue to fund our ongoing operational initiatives such as logistics, merchandising systems, and omni-channel to position the Company for future growth, and at the same time, manage the business to deliver our target of mid-teens EPS growth.

We expect full-year sales to range from $6.2 billion to $6.3 billion. We have forecasted comp sales to increase 2.5% to 4%. We are targeting EBIT margin to be flat to 10 basis points of improvement compared to 2014.

We expect a modest improvement in gross margin, and SG&A leverage will be dependent on the sales level achieved. We anticipate net income to range from approximately $403 million to $417 million, or $2.95 to $3.05 per diluted share. And we expect to open 110 to 115 new stores with approximately 55% to 60% scheduled to open in the first half of the year.

As Greg mentioned, we will begin to transition Del's stores to Tractor Supply markets, and we expect to close seven Del's stores as we backfill Washington state.

We forecast that our effective tax rate will be approximately 37%, which is consistent with last year's rate of 36.9%. We are initially targeting $240 million to $250 million of capital expenditures in 2015, consistent with our four-year CapEx plan. The increase over last year results from the new store openings, the completion of our Southwest distribution center, our expansion plans for the Northeast distribution center, and the execution of other key initiatives.

We plan to continue to make purchases under our share repurchase program as part of our long-term balanced approach to shareholder return. We have reduced our year-end targeted cash balance to $0 to $50 million. Consistent with this past year we expect to have seasonal borrowings at the end of the first and third quarters. For modeling purposes, we estimate that the diluted shares outstanding inclusive of option grant and share repurchase activity will be between $137 million and $136 million for the full year.

Let me discuss some of the assumptions that helped us form our projections for 2015. Based on current consumer confidence polls and buoyed by lower gas prices, we believe that the consumer is more optimistic. As a retailer that serves our customers' everyday basic needs, we believe there is potential for upside, but we also recognize that we tend to receive less of a tailwind than those retailers that are more dependent on discretionary purchases.

Deflation was a top-line headwind last year and averaged approximately 85 basis points. This year we expect deflation to continue to be a headwind and average approximately 50 basis points ranging between 10 to 100 basis points during year. We anticipate the impact will be higher in the first half of the year and moderating downward in the second half of the year. As we have previously discussed, it is our responsibility to manage through deflationary and inflationary periods, and we believe we have demonstrated that ability in the past.

There were some positive and negative weather events that impacted the timing of sales in 2014. This was the second year in a row that we had a late spring and an extended spring/summer that progressed late into the third quarter and favorable cold trends in the fourth quarter. We believe it was a net neutral year from a weather perspective.

As we have stated in the past, we generally benefit from an early spring. Therefore if the weather pattern returns closer to normal, we would anticipate slightly stronger comp sales improvement in the first half of the year than in the back 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 will change from year to year and shift the timing of sales between quarters.

Although the first quarter has gotten off to a solid start, let me remind you that March is the most impactful month in the quarter and is very dependent on spring weather. We would expect improvements in gross margin rate to come from the execution of our key gross margin initiatives, continued strong mark-down in inventory management, and gross margin rate tailwind provided by a deflationary environment.

We believe these factors will offset the approximately 10- to 15-basis-point headwind from increased transportation costs and the mix of merchandise. Although we have modeled a decrease in fuel costs, it does not offset the stem mile increase as a result of the significant number of stores as we opened last year in the West and project to open this year.

In terms of cadence for gross margin percentage improvement, we target slight year-over-year improvement each quarter, except for Q1, where we may experience a decrease as we cycle against limited mark-downs as a result of last year's strong sell-through. And we may also experience a slight headwind from the mix of queue items. An early spring would benefit Q2 margin, as the spring mix of goods could have a positive impact.

Inventory turns are expected to improve slightly. We would expect per-store inventory to increase modestly, consistent with the investments in key merchandising categories.

With respect to SG&A, as we grow the business, we have been able to absorb many of our ongoing initiatives into our expense run rate. We will continue to grow our business and the infrastructure with long-term perspective. And as we do so, some of the expected benefits may come in future periods, but with the goal of driving mid-teens EPS growth.

We continue to target maintaining SG&A growth, in line with our sales growth. With this in mind, we expect leverage SG&A in the 3.5% to 4% comp sales range for 2015. With respect to SG&A by quarter, we believe that Q1 will be the most difficult quarter to leverage SG& A, as it has a lower sales base and we will be executing our Northeast DC expansion.

We expect the Southwest distribution center to open in Q4. We will be incurring pre-opening expense in the quarter with no transportation benefits until Q1 of 2016. We expect to leverage SG&A slightly in Q3, as we will be cycling our move to our new store support center last year. As in the past, we will provide more color regarding our expectations for the subsequent period at each quarterly conference call.

That concludes our prepared remarks. Operator, we will now turn the call over for questions.

Thank you.

(Operator Instructions)

Alan Rifkin with Barclays.

Thank you very much; I appreciate you taking my question. First question is with respect to the demand planning system. Can you maybe provide some color as to how much you think that will help you improve your turns, or how much you think it will help you improve your working capital? If you could provide a little bit of color on what we can expect for that. Thank you.

Alan, this is Greg. The system itself is designed to do, really, several things. It's to help us understand that we're probably not maximizing, I would say, individual SKUs within the assortment as they sell through in the stores.

For example, if we've got an item on a peg and we are selling through three items by Wednesday or Thursday of the week, but yet we still have Friday and Saturday as selling days before replenishment runs and then pushes inventory back to the store, demand planning is looking at that and recalculating that throughout the week. And saying wait a minute, potential missed opportunity. Let's push more than three as a replenishment; let's push four or six, depending on how it's pre-packed.

That's the basic sales side of this, and what that can mean we don't know yet. We just turned on several categories. We do think it will give us some sales lift over time, but this is a new system, worked with SaaS on it.

And the other thing it should do for us, it should enable us to push more inventory to the stores on a more ready-time basis. Meaning that instead of us waiting for several weeks for things to get adjusted, this will start pushing inventory a little faster which should move it through the supply chain a little faster.

But what we may find is our turns may speed a little bit as we go through this, but I'm not going to give you any forecast or guarantees at this point, because we've just turned it on in several departments. We like what we're seeing so far, but it's more about capturing and maximizing that inventory that's in the store today, making sure that we are not running out of inventory in certain periods of time for our customer.

Thank you, Greg, and one follow-up, if I may. With respect to converting the former Del's stores, can you maybe provide a schedule, either by half, as to how many stores we can expect will be converted? And what are the dynamics of those conversions compared to an average store, with respect to incremental revenue increases? Thank you.

Alan, the way we look at it, as we go through the year, we will try to update it -- the schedule and how we will handle the Del's stores. But generally, we look at it more on a top-level basis that as we open the new stores, the Del's stores would represent about half of a TSC store. And our general direction would be count them basically as half a store net against the new store count.

Is the comp ramp of those stores similar to the comp ramp of a new store, a new Tractor store?

Yes. We're modeling it as such; potentially it could be a little bit faster because we do have name recognition. So they may come out of the box a little bit stronger, but until we start to open them, we don't have any data on how they will open.

Okay, thank you, and congratulations on a solid year.

Thank you.

Michael Lasser with UBS.

Good evening, thanks for taking my question. It's on the guidance for the upcoming year. You are looking for a flat to up 10 basis points on the operating margin. Your longer-term outlook calls for 25 basis points of annual improvement. Maybe you could walk us through what's going to be unique about this year that is resulting in a little less operating margin expansion than you expect?

Michael, this is Tony. When we look at the EBIT and our overall guidance, obviously, over the years there will be some ebb and flow relative to our long-term targets. However, when we look at the numbers, we believe that our initiatives will continue to drive the gross margin improvement. We do anticipate obviously that headwind when it comes to freight and transportation costs, as we have opened up all the stores our West, so that does provide an additional headwind.

And then relative to SG&A, we think that there is some more potential upside, as depending on where we fall in the sales target. But as we have that incremental deflation that's in our forecast, that dampens the sales forecast. So that limits some of the upside when it comes to the potential SG&A leverage.

And then lastly, as we open up the Southwest distribution center in the latter part of the year, we don't anticipate having benefits from that until we move into 2016. That is a snapshot of the year.

When you say the -- collectively, the amount of spending on the initiatives this year is going to be less than it was last year?

It all depends how you define the investment. A lot of people look at investment as capital. So as we move into 2015, it does appear that our capital will be much higher because we just came off a much lower year than I had anticipated.

But when you look at investment as far as also the related expenses, for example, is this demand planning and additional headcount that we have to incur there? If it's opening up mixing centers and some of the start-up costs related to a particular center. There is several things that are included in our forecast that are part of the expense structure as well that I would consider to be investing in the future and driving some of our key initiatives.

So when we look at investment, we look at both the capital side and the expense structure. And clearly, as a growth company, we will continue to incur those, and I believe that we have a significant portion of those already in our run rate and that's why we're focused on still delivering mid-teens EPS growth.

Okay. And a quick follow-up. You have just over 10% of your store base in Texas and North Dakota. Obviously, those economies could be in for a bit of a slowdown given what has happened to the price of oil. How impactful would that be to your total business and your comp, given that those stores have probably been above average for the last couple of years?

Hey, Michael, it's Steve Barbarick here. We do have a number of oil drilling stores that we track and monitor. And we went through an analysis over the last three or four months. And right now, those stores are tracking in line with our comp store sales. So we don't see any major changes or material impact at this point in those stores.

Okay. Do you think that it would be an offset to -- if there were a slowdown, there would be an offset from the 90% of your stores that are not in oil-levered areas, given that your typical customer drives a greater distance to your store than the average consumer to a store?

No, I would tell you at this point when it comes to those oil-drilling stores, if the comps are in line with the existing store base, that trend will likely continue, and we are watching it closely. And the next time we get together, if that question comes up, we will give you more information on it.

But to answer your question, as I said in the prepared remarks, we believe that there is potential and we are optimistic as to consumer behavior and the additional funds available because of lower gas costs for our consumer. But again, we are a basic-needs Company and less susceptible to discretionary spend.

Peter Benedict with Robert Baird.

Hey, guys, thanks. A quick follow-up on that one. Steve, when you did the analysis on the oil market, how many stores would you guys consider to be really exposed to the fracking activity and things like that?

Looking at the numbers, we think right now it is about 10% of our store base. But again, that ebbs and flows depending upon new rigs and what we're doing out there, but that's what we see right now.

Okay. Thank you. And just on the average ticket strength that you've seen, even despite the deflation, we have now had a couple quarters in a row. Do you think we're turning the corner on some of the big-ticket stuff? Or what do you need to see on that front in order to play a little bit more aggressively on those items? Thank you.

Peter, I would tell you this last year was a good year in big-ticket for us and the [trends are] nice. But I don't think anyone here is ready to declare victory when it comes to big-ticket.

We are watching the POS data very closely, and we're making tweaks to replenishment if we see any changes in our consumer's spending patterns. But right now I think we've got a good plan laid out and we're just watching the trend line. So again, we're being cautiously optimistic when it comes to big-ticket.

Great, thanks very much.

John Lawrence, Stephens.

Good afternoon, guys.

Hi, John.

Real quick, Steve, you mentioned on the last quarterly call about some of the resets and how successful that was with product being in line and across all departments. Can you -- did that momentum continue into the fourth?

John, you heard Greg talk a little bit about the balance of our sales in Q4, and I would tell you we talk a lot internally about making sure that the four walls of the box are working. And we came out of Q4 feeling pretty good about the fact that we [heard] customers all the way around the building. A lot of that is a byproduct of the resets that we have done.

I would tell you we talked a little bit about the left side resets in the last call, and we continue to see some nice sales momentum out of the work that we did back in 2014

Great, thanks. And, Tony, can you give any insight on that gross margin; freight was up [20]. What was the offset or -- related to lower fuel?

The offset was just in the direct margin on our products. And again, Steve and the team did a great job in driving gross margin through our initiatives. And in particular, we really drove our price management, especially on some key seasonal product, and that helped drive the initial margin on the product.

Great. Thanks, last one. Is it too early to give us any kind of sense, the new Southwest DC reduction in stem miles or cost savings for that facility?

John, Greg. The only thing I can tell you is when I'm having to move freight to those stores in the far west and over 1,000 miles, you can imagine the savings when I can say I can now get it within a 300-mile radius. We've got some numbers we've run against it, and we are not going to share the specifics yet, because that building really won't come online until late next year. We're [really] going to see the benefit in 2016. But it will be considerable, yes.

(Operator Instructions)

David Magee with SunTrust.

Hi, good afternoon and congrats on a good quarter.

Thank you.

Could you help us quantify the big-ticket opportunity, if, knock on wood, it continues to be more robust for you over the next couple of years? Maybe indicate what percent of the mix it was back in its peak before and where we are now? Anything you could say to help us get our arms around that would be helpful.

David, this is Tony. It really is very difficult to quantify. I would tell you what we classify as big-ticket is a really, really, really small percentage of the sales, and you can imagine those items over $350 compared to an average ticket of $46 to $48. But just a swing in that number of a few basis points can have a nice impact on the average ticket.

As we look at the year, or in the quarter in particular, items that are needs-based, it could be a log splitter or a snowblower, do particularly well. And those are the items that generally are some of the drivers when it comes to big-ticket.

We do have some items that are more discretionary, such as all-terrain vehicles and/or utility vehicles that we have, so that are very high priced as well. So there's several things that will drive that. But again, our customer is much more needs-based, and it's around that versus their discretionary spend.

Thank you, Tony, and just as a follow-up, can you tell us what percent of the e-commerce volume is being picked up in the stores? And is that a number that would surprise you?

Yes, it's actually -- I don't know if it's surprising; I think it's in line with what a lot of others see. Could potentially be a little bit higher for us, because the main things that we have are very large and bulky and the transportation is high, so they find it much more efficient to come to the store to pick it up. But we ship about 30% of our products go to the store, which again, we think is great because it will take our customer to the store and could lead to potential increase in sales at the store level.

Got you; thank you.

Thank you.

Chris Horvers with JPMorgan.

Thanks, good morning, guys. You mentioned a back-to-back late spring, and this past year didn't break until seemingly late May. Are you planning for an earlier spring, like how you plan for an early cold and you saw great sell-through there? And are there any notable assortment changes in the seasonal category, whether it's live goods or other consumable tests, like you did with mulch and other tests that you ran this past year?

We learned over the course of our careers and retail that trying to guess the weather, you are never right. So you are always better going into a season with your carts loaded and your assortments out there for customers to see. Because if you missed that first window, a lot of times you don't get that customer back.

So we made some strategic inventory investments, [no] different than we did in the fall. You heard Greg talk a little bit about that. So many of our outside products, whether it be the fencing category, (inaudible) outdoor power equipment, a little more careful of live goods because you have got to be careful with the weather there. But we'll be ready for the season, should we get an earlier season than we had the last two years.

We do plan for a normal spring, I will mention that as well. A normal spring typically comes earlier than what we have seen in the last two years.

Okay. And then as a follow-up question, Tony, what was the drag from [safes] or whomever? What was the drag from safes in the fourth quarter? And does that flatten out as we look forward, now that you lapped the down year-over-year comparison? And then on depreciation and amortization dollars, how you are expecting those in 2015? Thanks.

Chris, when it comes to the safes, we haven't provided that information as to what the percentage is and to what the drag was. As we've work through the year 2014, we were lapping some very strong numbers. So we would expect over 2015 that that headwind will moderate to a certain extent. So as we move into 2015, it should be less of a headwind.

When it comes to depreciation, we're really looking at it -- and again, we don't give quarter guidance, but overall we're looking at it similar proration relative to 2014. We don't see anything unique about 2015 when it comes to depreciation and how you model it.

But what was the dollars you're modeling for the entire year?

We usually let you guys try to figure that one out. But generally, we are going to see around a little bit over a 10% increase when it comes to depreciation.

Okay, very helpful, thanks very much.

Denise Chai with Bank of America Merrill Lynch.

Thanks for taking my question and congratulations on a strong quarter.

Thank you.

Just wanted to get some more color on comps in the pet category, and also could you give a bit of an update on HomeTown Pet? Are you planning to expand the test at all? How do categories that you are seeing -- categories and customers there differ from your core stores? And have you found any learnings yet that you are already being able to transfer to your core stores?

Let me start with this one. In terms of the pet business and Tractor Supply, we've talked a lot about queue as an organization and this fits into that area. We talked about the strength of the four walls; the pet business for us continues to perform well, and it's had continued momentum for a number of years now.

We continue to modify assortments and bring in new and different things for our customers and it really suits their lifestyle. In terms of HomeTown Pet, Lee?

Denise, this is Lee. HomeTown Pet is still -- it's probably too early to call. We are very pleased with the progress and learning that we had, but after only three months of being open with the two locations, I don't believe that it is time for us to make any solid decisions on what we are going to do going forward. Right now it is a test, and we are going to continue to learn and see how it applies to Tractor Supply.

Understood. Just as a follow-up, in terms of your new stores this year, should we see those weighted more towards newer markets like the West, as compared to fill-ins? And how would the mix of markets compare to 2014?

I think this is a year where we will continue to see a balanced approach throughout the country. I think we really like the West, and we like the performance. But I think this year we went across a number of stores, probably one-third, one-third, one-third, if you look at it West Center and East. So I don't feel it will be anything different this year.

Great, thank you.

Simeon Gutman with Morgan Stanley.

Thanks, good afternoon. Tony, a follow-up question on the gasoline, more the cost of goods side, the stem miles. I guess if you have 1,300 or so stores or almost 1,400 now, the savings that you would get in the existing store and existing stem miles conceptually would seem like they should start to offset some of the higher costs you are getting from the new western markets. I realize you are not going to give us what stem miles is, but maybe percentage-wise just order of magnitude, why is that not enough to offset what's happening for the greater mileage out west?

A couple things. One, we absolutely did include a projection as far as some of the fuel prices throughout the year. And again, it's difficult because fuel is extremely low right now. We are not sure how that will hold up throughout the course of the year.

When it comes to the stem miles, it is significant because it's not necessarily just the West stores. But as we open it up and backfill in the East, a Maine store or a Massachusetts store could be very far from our [Hagerstown] DC. So we incur some additional stem miles, as well with some of the backfill stores.

I know you don't have a lot of details and we really don't provide it, but the stem miles, the additional cost exceeds the benefit of the lower diesel price. In addition to that, obviously we continue to increase our imports and so we have rising costs relative to imports. We also have -- we anticipate having some driver cost increase to the transportation. And then obviously, there is always EPA and other government regulations that tend to drive up the cost as well. But we do model some additional cost outside of the stem miles.

Okay, that's helpful. And then my follow-up on also gross margin but more on the product side. Can you remind us what the product margin advantages for exclusive brands over national? And then I don't know if you have said it, about same thing for direct import over non-imported and then how that spread is? Is it static or is it getting better for you over time?

I will answer that, Simeon. When it comes to the private label or exclusive brand, generally, we will see somewhere between 400 and 600 basis points. On a pure import, we're probably going to see somewhere between a 600- and 1,000-basis-point improvement.

Now when I say a pure import, what I'm talking about is when we are taking what is normally being sourced domestically and we move it over and bring it in from, generally from the Far East. There are times where our domestic distributor is also bringing in the product from the Far East, and we insert ourselves into the process to reduce some of the transportation costs. In those cases, we will not experience the 600- to 1,000-basic- point improvement; it will be much lower. But generally our guidance is about 400 to 600 on the exclusive brands and around 800 ballpark for the imports.

Okay, thank you. Nice results.

Thank you.

Adam Sindler with Deutsche Bank.

Just to follow up on that and the fuel costs, clearly with stem miles being such a big issue, and with fuel cost much lower, the headwind from stem miles should be lower in 2015 versus 2014. Is that correct?

Yes, that is correct.

Okay. Great. And then just on the mixing centers, any reason why you chose Texas as the market to test that?

Yes, simply put, that's where we have the largest concentration of our feed business and the highest velocity of that business, so there's no better place to test it done there.

Got it. Very good, guys, great results. I appreciate it.

Thank you.

Jessica Mace with Nomura Securities.

Hi, good afternoon.

Hi, Jessica.

The first question I had was a follow-up on the demand planning. You mentioned that you just this quarter began to turn it on in a few categories. What's your timeline or expectation for how that will progress over 2015?

This is Greg. Let me give you a little bit of some insights about how this really works. Demand planning is being layered on top of our replenishment system. So it's going to make that system work a little harder, a little smarter. And we tested it initially, had good results, but this is no different than when we turned on [rivionics] and pricing optimization.

You want to make sure that as you start to layer these systems on, they're doing what you expect and each category will act a little differently. Different in hardware than it will probably be over in, let's say, pet toys and things of that nature.

So we're going to be very careful that we don't jump the gun on this, and make sure that we know the types of results we expect get. So it's going to be a slow (inaudible). It's probably going to be sometime in 2016, maybe over 2016 before it's complete.

Great, understood. And then my second question is on e-commerce. Even though it is still a small part of the business, are there any overall categories that translate best to online, where you see a lot more volume in the merchandise mix?

I think you can easily understand that some of the very, very large ticket items can be challenging, because they have to go LTL delivery. They can't be pulled out of a distribution center as easily and dropped into a box and shipped to the customer. Things like apparel, footwear, things that are smaller in size are easier picks for us.

But it's interesting though, we have had a nice LTL business, the safe business and some of the large categories. So for us, you have to think about why the customer would choose to shop online versus coming to the store. And it's primarily they have the time to be able to take the receipt of the product; they don't have an urgent need to have it today. Many of our customers come in and I need it now, so online would not serve that.

But they are looking at it from the standpoint of convenience and ease of shopping with us, and that's why we look at our business as more of an omni-channel business today, where we are trying to give the customer the ability to shop with us anytime, anyplace, anywhere.

Would you say customers are finding that is a good solution for the queue business, or more so the other ones you mentioned, like apparel?

I would say less for queue probably, and more for the other things that are more unique. It could be tractor part, it could be a pair of shoes, it could be something that they see in seasonal. But I think for the heavy, heavy high-velocity queue items at this point, it doesn't seem to be that desirable for the customer just yet.

Great, thank you so much for taking the questions.

Matt Nemer with Wells Fargo Securities.

Hi, good afternoon. Just two quick ones. First, how many stores will pull from the new Arizona DC when it launches in the fourth quarter? And then secondly, could you just -- could you give us a little bit of insight into any product resets or updated planograms that you are planning in the first half of this year? Thanks.

When the DC in the Southwest opens it will be servicing less than 100 stores initially. And as far as new planogram sets and such, I will let Steve take that one.

We rarely get into the specifics around planograms and resets, but I can tell you one of the focused areas for us as an organization is going to be around newness. And in terms of newness, you're going to see it through resets, you're going to see it through testing, and you're going to see it through localization.

The team is highly focused in those areas as well as on the queue side of our business, we're looking at broadening assortments, managing the inventory so we'll make sure that we're a dependable supplier, making sure we are priced rate in the market. So, generally speaking, we are not going to give specifics about the resets, but I can tell you there is a lot of work being done behind the scenes.

Can we expect any significant changes to the outside of the store or the outside area of the store?

Here's what I can tell you; we have talked about this on several calls, and we tested a number of things in 2014 that were unique and different. And we just didn't gain a whole lot of traction relative to those initiatives.

I can tell you that the sales on the outside of the building are better than they have been. We continue to see comp store sales pretty strong in a couple key areas out there, but there is still more work to be done and we will be doing more testing in 2015. We just haven't figured out how to get more traffic into that side yard.

Okay, very helpful, thanks so much.

Mark Miller with William Blair.

Hi, everyone. I think in, Tony, your prepared remarks in the headwind calling for gross margins, you mentioned the mix of merchandise. So can you elaborate on that? Are you highlighting simply the effects of continued growth in queue and possibly big-ticket?

And then I have a question on private label. You'd had nice growth there over the years, but I think in the back half it was pretty flattish or maybe down a little bit as a percent of sales. What is the outlook for that on key initiatives, if you think you can grow that in 2015?

Sure, Mark. This is Tony. I will let Steve handle the private label, but very briefly, you are correct. The main driver when it comes to mix merchandise and the potential headwind is really around queue and our continued increase in queue as part of the mix.

In terms of exclusive brands or private label, what we saw really in the back half had a lot to do with deflation. A lot of our exclusive brands are around some of the queue items, and they weren't as high a percent of sales.

Okay, and then a separate question on incentive comp. In your 2015 plan, are you assuming that incentive comp is a similar percent of sales? Is it back to normal? How is that changing? Thanks.

Generally, we will look at it in 2015 as a similar percentage relative to 2014.

Great, thanks.

Brian Nagel with Oppenheimer.

Hi, good afternoon. Congratulations on a nice quarter and a nice --

Thank you.

Couple follow-ups, quick follow-ups here. With all the talk about stem miles and gas prices, just remind us, do any type of hedging with respect to fuel costs? Or were there any type of contracts that could delay a benefit from lower fuel prices on your distribution?

Brian, no. We currently have not hedged, nor have we in the past. It is something that we would evaluate, but there is nothing that would prevent us from capturing fuel cost in the current environment.

And , Tony, you commented in your prepared remarks that this year we saw a stronger sales of winter product, early in the season as people stocked up. Did that pose any potential risk to comps for the sales in the first quarter? As maybe those demanders per quarter, is that largely washed out through the course of the fourth quarter?

Yes, I was trying to give a little bit of color as to the quarter and how it shaped up. But as we moved into 2015, I had also indicated that we really felt that we were in a great inventory position to be able to actually in better shape than we were last year to take advantage of the cold weather in January and February timeframe.

And we feel very good about the replacement cycle and our ability to get goods into the store as we move through the fourth quarter and into 2015.

Okay. Thanks. I will keep it quick. Thank you.

Thank you.

Matthew Fassler with Goldman Sachs.

Thanks a lot, good afternoon. My first question, guys, relates to deflation. It moderated a bit in the fourth quarter versus the third. As I look at the inputs you often talk about, obviously fuel was down substantially, the metals piece down as well. Grains looked like they were a little bit less of a drag. Was it that grains piece impacting deflation in queue products or were there other factors there?

And in tandem with that question, Tony, during your run through the quarter, you talked about price management and seasonal products. Just wanted to understand what that meant and how that might have factored in.

Sure. Matt, on deflation, again, you hit the nail on the head. It was really the corn prices and the feed; they tend to cycle through a little bit quicker. As much as we did have the benefit on the oil and the steel, they take a while for that to cycle through. So really the corn was the main driver.

Sorry, go ahead. I was going to move -- and then to the price management?

When we came into the season, I think we had strong retail price points. We got the early season sales, which certainly benefited us. So we didn't get them on the back half of the season. And we also saw a lot of strong demand on certain categories and some shortages in some areas. So rather than bringing prices down, we were able to maintain and we saw a lift in margins as a result.

Any particular categories where that played out?

Seasonal, mainly in the heating categories.

Got it. And then just finally to go back to your initial answer. As you modeled deflation, it sounded like probably deepening a little bit, again, a couple tenths, perhaps, from Q4 through the first part of the year. Is there anything that you've seen in grains, which remain under some pressure year to year? Or is it more the flow-through of petrol and metals, et cetera, and the impact that that will have on some of the slower cycle businesses?

Again, to start of the season, we expect to tick up in the deflation more related to the corn prices and cycling against last year. The oil and steel, a little bit more of a wild card; as we move through the year, we will have a much better feel for that and how those prices adjust and how that can flow through our inventory cost.

Got it, guys. Thank you so much, I appreciate it.

Thank you.

Chuck Cerankosky with Northcoast Research.

Good afternoon, everyone, and great quarter. Guys, when you're looking at the big-ticket merchandise, can you spell out for us what's driving that? Was it the pickup in demand by a more confident consumer or some other stuff wearing out so they need it now? Or was it certain aspects of the weather helping that?

I would say that it was probably a little bit of all of that, but weather certainly did help. We talked earlier about a lot of the seasonal businesses taking off early, things like log splitters and some heating products, snowblowers and the like. So we saw the benefit of that in the back half.

But like we said, this has been a trend and we finished the year with a big-ticket increase. We tend to be cautiously optimistic as we go into next year, and we're looking at assortments. And if the customer is willing to vote up, we're willing to bring them the product to service their lifestyle.

Excellent. And how about strong dollar and cost of imported product? What's that doing to margin and what do you expect it to do to margin?

At this point, we haven't seen a material impact one way or the other. We're watching it very closely. The team has just gotten back from overseas, right now putting together a spring program for the following year, and we're watching it very closely. But I don't see that having a material impact on the business.

All right, thank you.

Aram Rubinson with Wolfe Research.

Last on the call here. Good job on the quarter and thanks for taking my question. I think, Tony, you mentioned that you thought the consumer was feeling more optimistic and I know your results were terrific. They didn't really show necessarily acceleration from prior quarters, so I'm just wondering what it is underneath that you are seeing, whether it's a particular customer types or just small nuances in the business to help us get confident in that trend.

Again, relative to the comments in the prepared remarks, we were looking at 2015, and the consumer, and what we keep hearing about the consumer. When we look at our business, I think Steve talked about it a little bit, they will step up to the plate when it comes to some need-based purchase, and we have seen them move to some higher price point and larger-ticket items.

So we see that in our consumer. We see a little bit of an increase in items per transaction. So they're coming in and they're putting a little bit more in their basket.

So there are some minor trends. But again, as much as we are optimistic that the consumer is more confident coming into 2015, we do realize that we are more of a needs-based retailer and may not get the uptick that other retailers that are more focused on discretionary benefits.

Just a follow-up, as you look into 2015, I understand the composition of sales, but can you tell us about new merchandise ads, new brands, things that you are super-excited about that we should be thinking about as accretive to the year?

I would go back to the philosophy of continuous improvement and risk-taking with that question. The merchant team and the organization is excited about a lot of the new things we will be bringing out for this next year and it's not in any specific area. And I would tell you it's across the board.

Like I said earlier, we are going to focus on newness when it comes to resets and things we're doing in the center course of our stores. A lot of testing and localization is going to take place, and the focus will continue to be on queue items. We are not going to get off track of what's has got us here. We're just going to be better at what we've done.

Sound like a good plan. Thanks for taking the question.

You're welcome.

(Operator Instructions)

Seth Basham with Wedbush Securities.

Thanks a lot and good evening.

Hey, Seth.

My question is around fuel price as well; just trying to understand this a little bit better. If I go back and look at what happened in 2009 where there were big declines in the fuel prices, diesel was down between 40% and 50% for most of the year.

You guys were saving anywhere from 40 to 50 basis points of gross margin as a result. Is there anything different about your business now? I would think that result this time around should be magnified in terms of the amount of savings per percentage-point decline in fuel prices, given the increased stem miles that you're running.

History does have a tendency to repeat itself. But again, as we move into 2015, we're looking at the trend in the business, and we put together what we believe is a model that is very consistent with how we've modeled in the years past.

Got you.

I think there's some factors that are different, a lot more stores in the West. There's other conditions with just the availability of equipment and drivers and all that, those things didn't happen back in 2009. So if you talk to the trucking industry people, they will give you a little bit of education on what is really different today versus back then.

Got you. And then secondly, different question on queue. In terms of the margin headwind for 2015, would you expect it to be bigger or smaller relative to 2014?

Relative to the merchandise mix headwind, it should moderate relative to 2014, and similar to what we saw in the fourth quarter, it was a little bit more limited relative to what had transpired in the first three quarters of the year. So we expect it to moderate, but we still anticipate it to be a headwind.

Got it. Thank you very much.

Eric Bosshard with Cleveland Research Company.

Thank you. A question for Steve, interested in the experience in 2014, specifically with the infill stores and the West Coast stores. Anything that you have learned that you are applying in 2015 in terms of merchandising to sustain productivity in those stores or enhance productivity in those new stores?

Out west, I'll tell you, our model, I would go as far as to say about 85% of our model, our basic model, will work most places geographically. There's probably maybe another 15% that need to be tweaked by area of the country. And when we went out West, I would say that, you know what, our first effort was fair; it wasn't right on. We continue to tweak and modify those assortments.

There are things that we will learn out there that probably will be applied back at this point, but I'm not prepared to go through a litany of those items. But there are a lot of tests that we do with the existing stores that I'm sure the West Coast stores will benefit from as well. In general, I would say there's still a lot of learning to be done out west when it comes to assortments.

That is helpful. And secondly, within HomeTown Pet, similar type of question. I know it is early days, but the experience and the outlook for learnings from that being applicable across the store base. What are your thoughts or experience to date in that regard?

I would say at this point, it's still so early in the game to take much from that. We're watching it closely, and as we learn from that, we will be applying it back to the model. But it will be a test at the tractor stores before a roll.

That is helpful. Thank you.

Joe Feldman with Telsey Advisory Group.

Hey, guys, thanks for taking my question as well. Wanted to ask just a couple of quick follow-ups. The couple of mixing centers that you are going to open this year, can you remind us what the long-term target for mixing centers are? And what kind of impact it does have on the margin?

Joe, this is Greg. Mixing centers as we have scoped them, and this is an initial pass, probably 20 to 30 across the country. Again, placing these where we have a high large animal count and where we do a tremendous amount of, I would say, feed-type business. There are some that we will place in the Northeast because of the wood pellet business and things of that nature.

But remember, these are going to be used to push full palletized, high velocity product to the stores much faster and away from putting it away in a normal distribution center and pulling it back. So it's going to really bring the stem mile usage way down on some of that kind of product.

Got it. That's helpful. Thanks. And I guess initially, have you seen any -- is it a significant margin benefit? I guess it cuts the stem miles pretty significantly, but . . .

It's a little bit of a drag, because there some SG&A you have got to put into place initially, and there is a benefit on the other side where the stem miles are cut and the turnaround time of holding of inventory is going to be substantially less. If I can push inventory to a store four times a week versus having to do it in large quantities once a week or once every two weeks, there's a lot of benefit to that.

That make sense. One other quick question. How are you guys doing in terms of tailoring the stores to the local markets? I know it's this ongoing evolution, but where do you think you are at this point? And I know where you want to be, but where are we in that process?

This is Steve. Every time I feel like we're making progress, I realize that there is a lot more work to do. I don't know if you will ever be able to get it exactly right, because there's so much opportunity out there.

And our merchant teams are tasked with traveling to different markets. We get a lot of feedback from the field; that's one of the great things about our organization. And we work as a team to make sure we're taking care of the customer in the right markets and serving their lifestyle.

I couldn't even give you an inning at this point. All I can tell you is there is a lot more work that we can do.

That is helpful. Thanks. And good luck with this quarter, guys. Thank you.

Thank you.

There are no further questions at this time. I will turn the call back over to Mr. Greg Sandfort for any closing remarks.

Thank you, operator. Thank you all for your interest and support of our Tractor Supply Company, and we look forward to speaking to you again in April, as we will then review our first-quarter performance.

This does conclude our conference. Thank you for your participation.