Tractor Supply Co (TSCO) 2015 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss first quarter 2015 results. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. Please note that each participant will be permitted to ask one question with one follow-up.

Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company, and as a reminder, this call is being recorded. I would like to introduce your host for today's call, Christine Skold 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 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 these 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 Chief Financial Officer; Steve Barbarick, our EVP and Chief Merchandising and Marketing Officer; and Lee Downing, our EVP of Store Operations and Real Estate.

We're very pleased with our performance in the first quarter of 2015 and the ongoing trends within our business. Our comparable store sales for the quarter increased 5.7% and our increase was once again driven by both traffic and ticket. Transaction counts increased 4.8% while average ticket improved 80 basis points in the quarter.

This was our 22nd consecutive quarter of positive comp store sales and our 28th consecutive quarter of positive comp transaction counts. Sales were with balanced across the store and throughout the quarter, with all of our major merchandise categories and geographic regions delivering positive solid comps. Our merchandising and inventory management teams did an excellent job of managing assortments and flow of inventory to deliver strong sales for the quarter.

We have the right products at the right time to meet customer demand in both seasonal and everyday products. In seasonal, we made several strategic investments in heating, footwear, and apparel that met strong demand in cold weather items in the Northern tier of our stores.

Similarly, we had the right assortment of spring merchandise when the weather began to turn warm in our Southern markets. This allowed us to meet the initial demand and drive sales in a number of spring seasonal categories toward the latter part of the first quarter Categories such as fencing, live goods, lawn and garden, and outdoor power equipment all performed very well in the quarter.

We also saw very solid performance from many of our everyday staples and consumable, usable, and edible products. We continued to experience sales momentum in the left-hand side of the store.

The planogram updates we executed in truck accessories and winches, along with several other categories and hard lines this past year continue to resonate with our customers. And as we discussed on our last call, IT systems and our supply chain remain key areas of focus for 2015, and we continue to make solid progress against these initiatives. The rollout of our new demand planning system is on target and we will continue adding categories throughout the year.

Construction of our new distribution center in Casa Grande, Arizona is on schedule, and this new facility is expected to be operational in the fourth quarter of 2015. The two mixing centers in Texas are also under construction and are scheduled to open in the third quarter of this year.

We opened 41 new stores in the quarter and we remain on track to open 110 to 115 new Tractor Supply stores this year. Progress continues with the conversion of the Del's stores to the Tractor format, and we expect to close seven Del's stores this year as we backfill the state of Washington with Tractor Supply formats. And lastly, we're pleased with our ongoing efforts and progress to enhance our omni-channel platform, our customer relationship management platform, and the broadening of our IT network security across our entire organization.

2015 is off to a solid start, and while it is still early in the year, we believe we are well-positioned to benefit from a more normalized spring weather pattern as the momentum of our business has continued into April. In closing, let me thank all of our dedicated team members out there in our stores, DCs, [Mick] and the SSC who go the country mile every day for our customers who live this lifestyle.

We appreciate your time today. I will now turn the call over to Tony for a more detailed commentary on our financials for the quarter. Tony.

Thanks Greg, and good afternoon everyone. For the quarter ended March 28, 2015, on a year-over-year basis net sales increased 12.5% to $1.3 billion and net income grew 18.9% to $58 million or $0.42 per diluted share. Overall, we are pleased with both our top-line and bottom-line performance for the quarter. Comp store sales increased 5.7% in the first quarter compared to an increase of 2.2% in last year's first quarter.

We had a very strong winter selling season, specifically in February, as cold weather drove our sales and assist us in the clearance of winter product. We did enter the quarter in a higher inventory position than in the prior year, which benefited sales but resulted in more clearance, having a slightly negative impact on gross margin.

The sales momentum continued into March. Although the average temperatures were still colder than normal, they were warmer than last year in the majority of our sales regions which spurred strong spring seasonal sales. This was particularly evident in the South and Southwest regions.

We are extremely pleased with these strong sales results for the quarter, and the team should be commended as we accomplished this against several headwinds which included deflation, closed store days, and logistics issues related to winter storms, and challenges from the West Coast port congestion. Comp transaction count increased for the 28th consecutive quarter, gaining 4.8% on top of a 4.4% increase last year.

As Greg indicated, the strength in sales was very broad-based. Queue items such as the pet and heating consumables continued to perform well, but we also had strong sales in key winter categories such as insulated outerwear and rubber footwear, as well as spring seasonal categories such as riding lawn mowers, fencing, and lawn and garden.

Average comp ticket increased by 80 basis points versus last year's 2.1% decline. We are very pleased with the composition of the comp ticket increase given deflation and effectively no impact from big ticket.

The increase resulted primarily from an increase in items per transaction, a trade-up in key categories such as animal and bird feed, and an increase in bulk transactions such as fencing. This increase was partially offset by deflation, which we estimate at 87 basis points, and was consistent with our expectations. The deflation was driven principally by the livestock feed, bird feed, lubricant, and propane categories.

With respect to big ticket, we are pleased with the kickoff to the spring selling season as we saw a nice lift in riding lawn mowers and trailers. This increase in big ticket was partially offset by the continued decline in the gun safe category, and thus big ticket did not contribute to the increase in the average ticket.

On a regional basis, comp sales were positive across all regions, as sales in the North benefited from colder weather in the first half of the quarter, and the sales in the South benefited from favorable spring weather in March. The Western region comp sales were above chain average, as our newer Western stores continued to gain market awareness and share.

With respect to gross margin, we anticipated that gross margin would be a tough comparison to last year, but was only slightly down at 8 basis points to 33.4%. If you recall, many winter-related items sold out early in the quarter last year, and gross margin benefited from limited clearance activity. This year we entered the quarter better in stock. Although the favorable colder weather in January and February provided strong sell-through of our seasonal winter product, we had more inventory in our clearance pipeline. This had a slight negative impact on margins but benefited sales.

Additionally, we had less new store discounts in the quarter, as Q1 gross margin last year benefited from several store openings late in 2013. Shrink was also slightly negative in the quarter as we cycled favorable results in the prior year.

We did have several items that favorably impacted gross margin. Freight was favorable by 5 basis points, which was a direct result of the lower diesel prices. The favorable fuel price offset the increase in stem miles from our Western store expansion.

Merchandise mix had a favorable impact as some higher-margin categories increased as a percent of total sales. Deflation had a positive impact on gross margin as we focused on maintaining margin dollars per unit.

Import purchases in the quarter increased 5.2% and represent 11.5% of sales mix. Also, exclusive brand sales increased over 10.8% compared to last year's Q1 and was approximately 32% of sales.

For the quarter, SG&A including depreciation and amortization was 26.4% of sales compared to 26.8% in the prior year's quarter, an improvement of 40 basis points. We are pleased with our expense control in the quarter, which coupled with the strong comp sales provided solid leverage. We experienced favorable trends in medical, marketing, and various occupancy expense categories.

We were able to leverage store personnel despite having made additional investment in store payroll surrounding store initiatives. Incentive compensation had a deleveraging impact of 26 basis points as incentive compensation increased year over year based on the strength of the quarter results. Our effective income tax rate decreased to 36.9% in Q1 compared to 37.6% last year, resulting from the availability of state tax incentives.

Turning to the balance sheet. At the end of Q1 we had cash balance of $57 million and borrowings of $60 million, compared to a cash balance of $48 million and debt of $80 million last year. During the first quarter under our stock repurchase program, we acquired approximately 596,000 shares for $47.9 million. We estimate that the share repurchase program for the quarter did not have a material impact on EPS.

Average inventory levels per store increased 2.7% compared to the prior year. We are very comfortable with our inventory position as we've made strategic investment in certain spring merchandise, and imports were timed a little earlier to work around the Chinese New Year. Annualized turns improved by 1 basis point for the quarter.

Capital expenditures for the quarter were $48.8 million as compared to $41.9 million last year. We opened 41 stores and closed one store in the first quarter, compared to 32 new stores opened in the first quarter of 2014. The increase relates to the construction expenditures of our Southwest DC, which were higher than the expenditures on our store support center, which was under construction last year.

With respect to our financial expectations for the full year 2015, as noted in today's press release we have reiterated our previous guidance. While our Q1 performance was very strong, and Q2 is off to a good start, as we have said in the past it is best to evaluate our performance by the half as we see the spring season play out in full. Therefore, we believe it's prudent to revisit our guidance at the end of the second quarter.

As a reminder, we still expect full year sales to range from $6.2 billion to $6.3 billion. We have forecasted comp sales to increase between 2.5% and 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.

We still expect capital expenditures in 2015 to range between $240 million to $250 million. We'll continue to make purchases under our share repurchase program and estimate full year diluted shares outstanding to be between 136 million and 137 million. We continue to estimate deflation for the full year to average approximately 50 basis points, and we anticipate the impact will be higher in the first half of the year and moderating downward in the second half of the year. In terms of the cadence for gross margin percent improvement, we target slight year-over-year improvement in each of the upcoming quarters.

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

Thank you.

(Operator Instructions)

And we'll take our first question from Peter Benedict with Robert W. Baird.

Hey, guys. Thanks for taking the questions here.

First, just maybe Greg, the current view of consumer's health -- your customer's health, obviously from these numbers it looks to be pretty good, but if you kind of go below the high level numbers, any signs you're seeing positive or negative in terms of the behavior of your customer in any specific regions, whether it be in the oil-related markets? Or anything else that you would call out that's maybe been changing over the last three to six months?

Hey, Peter. I would tell you that steady as she goes.

The consumer that shops with us seems to be in a bit of a predictable pattern. They are still buying needs-based product, they are still repairing, not doing probably as much replacement as they did in the past although we've seen a bit of an uptick in outdoor power equipment in the first part of the year, but that's not to say that conditions can't change.

We're not seeing anything really different. They're not -- they're still buying feed and food. They're still keeping their properties, our fencing business was great as we mentioned, and our feed and food business has continued strong.

So you I would tell you very stable. If anything, probably as the economy could improve a bit, maybe toward the latter part of this year into next year we may see a little bit of an uptick. But no, nothing that would alarm us at all.

Okay, that's good to hear. And then remind us the cadence of spring last year. I remember it set in late and you guys resorted to some incremental promotions.

At what point did that set in in the second quarter last year? And then maybe how are you planning this season differently in some of these key categories like OP and the riders, some of your live good product? Because it obviously sounds like this spring's getting off to a better start.

Well first of all, last year we just had a major delay with Mother Nature and the weather. And until the weather broke, we were managing inventories well and just we're trying to understand how much business could we recapture as we got into the latter part of the second quarter and into third. And as far as adding promotions, all we did was just somewhat remind the consumer we're still there for them, and we made them aware of some of the offers and such.

So we spent a little money but nothing major. We didn't do anything crazy as far as pricing and such last year. We just stayed patient.

Now, this year very different. We're having a more normalized spring season. And we don't plan, at this point, to anniversary any of those, I'll call them reminder type pieces that we did last year, the latter part of second and early into third quarter, if the trends continue as we see them. So we're feeling more comfortable about current trends, but there's no additional plans to go back and anniversary some of those things that we did a year ago.

Okay. Great. Thanks very much.

And we'll take our next question from Simeon Gutman with Morgan Stanley.

Thanks. Good morning. I mean good afternoon.

One quick question on gross margin and then something strategic. Just on terms of the clearance merchandise activity, could you just tell us in order of magnitude what that could have held down gross margin? And if you can't, maybe directionally, what roughly the percentage of items sold on clearance was and maybe terms of magnitude of the markdown?

Simeon, this is Steve Barbarick. I would tell you the magnitude is relatively insignificant.

We did see, like Tony said, a bit of a sales gain. But as you come out of the season like that, the tail of those sales becomes smaller and smaller, and so the magnitude of the impact is pretty immaterial to the total business. There may have been a slight impact but it would be nothing that would be material.

Okay. Thanks.

And then the second question for Greg, just thinking about categories in the store and how it flows, and I know you have the new mock store. I don't know what you call it, but the new planogram area at the SSC. Was that designed to just look at how you execute certain categories or are you thinking there's a bigger wholesale change in how you flow the store over time?

I think this is a two-part question, and Steve, I'll answer as much as I can here. The MIC, the merchandise innovation center, is our ability to take a complete Tractor store and look at it from a standpoint of planogram sets, flow of store, visual signage, just general as you walk into a store.

We didn't have that capability in the former space that we had in the old facility. And we felt like if we couldn't really do the same thing in this new facility because of the ceiling heights and such, so we went off-site and it's been very productive. I think I'll let Steve take it from there.

Simeon, one of the greatest benefits of it is the size has all the products that we have in a normal store. And be able to get the merchants out there, the marketers out there, even people internally that have to deal with stores in a day in, day out basis. We can walk those planograms, we can asses the profitability per square foot, we can try a lot of things out there and get a visual of it all at one time rather than breaking it apart in little four- and eight-foot sections. So, really it's a matter of efficiencies, getting things handed to the stores more timely, and really better execution.

Okay. Thanks. Nice results.

Thank you.

And we'll take our next question from Aram Rubinson with Wolfe Research.

Hi, thanks for taking the question. One of the things that's hard for retailers to do is to have continued success without showing any signs of complacency. I think you've done that.

Just wondering what it is you're doing internally to kind of fight against that trend. It seems like you still have not, let's say, invited in new competition. You're still one of the very few retailers that doesn't have like competitors.

So can you give us a little more color on what you're doing to try and sustain that? It seems pretty difficult to do.

Aram, this is Steve Barbarick. I would tell you that's cultural. That's in the fabric of Tractor Supply Company.

When we talk about continuous improvement, TVS, processes, when you talk about relentless dissatisfaction, everything from stores to operations to everyone else, we are focused on making sure that we are running a little faster and jumping a little higher than we did the year before.

I would tell you when we walk planograms, there is no, this works and we're just going to leave it as it is. We always talk about good is the enemy of great and how we're going to get better at each quarter and each year. So part of what we do and part of what you're continuing to hear from this management team is taking it to the next level.

In terms of competition, we can't necessarily impact people coming in on us or coming into the marketplace, but we're focused on us and making our business better. And really supporting the customers that live the lifestyle that we support.

Thank you for that. Can I tack on a follow-up just to ask about your customer, as you get to learn more about him and hopefully her? Can you help us dimensionalize kind of the shape of your customer today and how you think over time that might change?

Well, today the mix of our consumer base is fairly equal, male to female. What I think we're finding is that their ability to use us for more things as they shop our stores is what we're starting to see. And we're enjoying that, meaning that they may have started out shopping with us, buying for their horses, let's say, products for their horses. And then they notice we're in the pet business and the next you know we get their pet business, and then from there they move to another category, whether it might be clothing, it could be something in the hardware department.

So what we're starting to understand now is that this hobby lifestyler is more open to shop Tractor for more than just maybe the things they'd initially thought. I'll also tell you that we notice in our parking lots, it's not always pickup trucks. You may see a BMW, you may see someone walk in in a suit and tie because they happen to own property and they work in the city, they're an attorney or what have you.

So this crossover of consumer right now, we're starting to track some things and starting to notice that we're not -- there's not a barrier to shop our store maybe as it may have been in the past. The name Tractor Supply sometimes throws people, but once they cross the threshold or they hear about us from someone else, and a lot of this is word of mouth, they're delighted.

We have a lot of families that shop our stores. And if it starts at that age, maybe the grandfather to the son, and then from there to the children, that's kind of a perpetuation of how the business can develop for us over the years.

So I think we're in a great spot. We like what we see with our consumer base. We continue to see more transactions coming through the front door, foot steps as well. So right now there's more for us to do to learn more about these consumers and talk to them in a more direct manner, but I think we're well on our way.

Thank you guys.

And we'll take our next question from Chris Horvers with JPMorgan.

Thanks, good evening, guys. So I wanted to follow up on the weather question. Would you describe the first quarter as relatively normal even in your Northern tier stores through the end of March? And how do you think it plays out over the next two quarters?

The past two years had a pretty late start to spring in the North, back to back years, but you also had the seasonal business extend into August and September. So just curious how you're thinking about the flow of the business over the next couple quarters.

Yes, Chris, this is Steve Barbarick. I would tell you that you could probably look at certain parts of the North and say that they may have had even a delayed spring to normal. But I would tell you, based on the prior two years, it was earlier. And we were able to capitalize on that business, both in terms of seasonal sales, cold and spring related products.

We're going to continue to buy into the spring, knowing that there is demand out there. It's just too early at this point for us to pull back for the South or for the North.

So I don't see anything that we would do outside of the way we're operating today and that is just making sure those stores have the inventory they need. I'm not sure I answered your question specifically.

No, I think that's fair. I guess the last part of the question is do you think that last past few years you had a shift into August and September on the seasonal business? Does more of a normalized start result in sort of a shorter season on the back end comparatively?

I would tell you right now it's just too early to predict the full year and even whether or not the selling season's going to be extended. Our guidance assumes a normalized spring selling season. That's really the best I can tell you at this point, at this time of the year.

Fair enough. And then on the margin front, Tony, so the fuel savings offset the freight -- the stem mile pressures. Was there anything one-time in nature out about that? Feasibly one would think that maybe through freight negotiations you could get more of a benefit in future quarters and provide some extra relief as we progress throughout the year.

Hi, Chris. There was nothing unusual in the quarter. As we have talked in the past about transportation costs, there's the costs themselves, there's the fuel component, which is about 20% of the costs, and then there's the stem miles issue that we've talked about.

In this case, we've not seen any significant increase in the transportation costs and obviously fuel was decreased and that's what offset the stem miles. As we move forward, I'll remind you that we will be opening more stores out in the West so that will add to the stem miles. But as we move forward with the fuel prices, obviously that will be an ongoing benefit if the prices stay low and help to reduce the additional costs related to the stem miles.

Understood. And then one last one.

On the incentive comp, was that an overall -- was that basically just a timing shift and there will be a quarter maybe later in the year, in the back half, which was stronger that incentive comp will end up being a benefit? Or was the incentive comp accrual maybe shifted out relative to your original plan?

No, in this case the incentive comp is going to match up with the performance that was in the quarter itself, and again, we'll look at both the quarter and the performance and we'll also look at our expectations for the full year. But when you look on a quarter-to-quarter basis, Q1 this year to last year, this was a much stronger quarter and required us to book additional incentive compensation.

Understood. Thanks very much.

And we'll take our next question from Seth Sigman with Credit Suisse.

Great. Thanks very much.

Tony, I think you talked a little bit about trading up as one of the ticket offsets. At Analyst Day I think you highlighted some plans across a number of different categories to maybe modify the assortment, fill the gap between good and best price points.

Just wondering -- and I think you highlighted power tools as maybe an example that you were going to change over in first quarter. Could you speak a little bit about some of the work you're doing on that front and maybe where there are other categories with opportunities for that? Thanks.

Yes, this is Steve Barbarick. And let me start by saying that the inside of the box is in continual flux and change. And that's part of the whole relentless dissatisfaction talk that we had.

A lot of the resets that we're doing in planogram work that we've got going on in the stores is to tap into missing price points and/or brands that we may not have today, offering a customer, say, value at the middle part of the equation or premium products. I'll give you just one example here because I could probably did through a number of them. But in May we're going to be launching an extended line of livestock feed for our consumers, product that we did not have access to prior to this point.

And working with Purina and having the Checkerboard product, we'll have access to a super premium equine feed. We're going to bring in a new line of cattle feed. And lastly, we'll have show feeds for those folks that do 4-H and FFA, which, again we didn't have access to previously.

So that would be one example in a product category that is queue, that we see will benefit the customer both on the high end as well as in the middle tier.

Okay, thanks for that. And then just a follow-up on the question earlier about the clearance impact in the quarter. I know last year you guys implemented a clearance module to help mitigate the impact.

Did that help at all this quarter or is that something we should expect to build throughout this year? Any more color there would be helpful.

This is Steve again. We implemented it in Q4 and it had -- again, we're rolling this out so it only impacted a very small portion of our clearance inventory. But the results we saw were positive and gave us some enthusiasm as we roll forward with the program.

So at this point it wasn't real material in the quarter, but I can tell you that we will continue to roll forward. And I suspect sometime this year we'll have fully implemented the clearance price optimization program.

Okay. Thanks very much.

And we'll take our next question from Michael Lasser with UBS.

Good evening. Thank you a lot for taking my question.

My first question is on the sales performance in the quarter. How would you characterize the performance relative to your expectations and what was better?

Was it the weather? Was it share gains? Was it the performance of some of your initiatives? Because obviously the performance was better than most were expecting. But I guess we're all trying to understand the sustainability of it.

Let me go ahead and start. This is Steve, and then we'll have some follow-ups potentially. I would tell you in the opening remarks we were really pleased with the four wall sales.

It didn't come out of one specific area, the sales. If you look across all the buying teams and the categories we had, the vast majority of them had positive comp store sales. We saw good business both in all regions of the country as well as when you look at it, was pretty much well balanced across.

So from that perspective, I think we all felt very good about it, and a lot of it has to do with initiatives. A lot of it has to do with new products as well as weather. So I think it was a good quarter across the board.

Okay. And then when you think about the weather for the rest of the year, is the first quarter tend to be -- really the first and the second quarter tend to be most volatile? So if it stays warmer later in the year, into fall, is that less punitive to the performance of the business than if it stays colder longer into the spring?

Michael, this is Tony. I would tell you that actually each quarter has its own uniqueness to it. And as we've said in the past and sort of mapped out a year, we like it to have a strong cold January, February, we like it to warm up and be wet as possible starting in March.

And then as we've experienced in the last couple years, that cool weather's extended the spring, summer season into the July, August timeframe. And that tends to be beneficial. As we get into the latter part of the year, we like to have cold weather relatively early in the fourth quarter to generate some of the winter good sales.

So that's generally the way that we look at the year. As we go into this year, looking year-over-year and our statement that it's more normalized, we're looking at a spring that's coming in sort of the standard period of late March and April, which we did not have the last time.

And as we stated last year as we went through the weather, we felt that at times when you have that late spring, you'll miss some sales, you will pick them up later on, but you may not recapture all the sales. So as we move through the year, we're very optimistic that with this earlier spring onslaught that we can continue to drive sales throughout the second quarter.

And as we move into the third quarter, as Steve has indicated earlier, it's just a little too early to call if the early spring will mean a shortened tail compared to last year. But again, we're relatively optimistic when we look at the weather patterns.

Okay. And then I want to circle back to a question that was asked earlier. I don't think there was much detail provided on the performance of the stores in the energy producing areas. Are you seeing any variability in those stores versus others?

When we look at the total energy-related, so that includes oil down in the Southwest as well as some of the fracking territories, we compare those to sister stores and we do not see any significant reduction in the performance of those stores. As we carve out a much smaller group of stores relative to the more Midwest and mid-central fracking areas, we see just a slight decline. But again, we see overall positive comp store sales across the board relative to that portfolio of oil/fracking stores.

Okay. Just to clarify, so if you take out the North Dakota, the Pennsylvania, and just look at Texas, that's where you may see a little bit weaker performance, just in the Texas area, is that --?

Actually, the opposite.

Okay.

The opposite.

Got it.

And the issue is when it comes to the fracking stores, obviously we've had strong comps in those stores overall, and as we continue forward, we continue to see positive comps in those stores even on a two-year stack.

That's very helpful. Thank you so much.

(Operator Instructions)

We'll take our next question from Stephen Tanal with Goldman Sachs.

Thanks, guys. Good afternoon.

Wanted to just follow up on the discussion around the impact of transport on gross margin. Are you able to tell us if diesel were unchanged year-on-year what the impact would have been on grosses?

Could you rephrase that? I'm not sure exactly --

Sure. So you said transportation was 5 basis points favorable to gross margin driven by the decline in diesel fuel prices. But if we were to assume that diesel were flat year-on-year, would you have a sense for where you'd be just driven by the stem miles, in other words?

We had anticipated that we would have a negative impact of somewhere between 5 basis points and 15 basis points. As we walked through it and looked at our transportation costs, I think they were extremely well managed during the first quarter and we were able to benefit from the diesel fuel.

But I think where you're trying to go is, you're trying to look at what's the benefit of the next several quarters if diesel stays where it's at? And I think we'll be able to have a benefit but what have you to take into account is the additional stores that we will be adding and the stem miles that we'll be incurring. So I wouldn't say that net-net you can add 10 basis points to 15 basis points every single quarter.

Understood. And the 5 to 15 that you were planning, that assumes diesel prices being sort of flat year on year or that baked in some assumption for fuel price decline?

It baked in some assumption of reduced fuel prices.

Okay, fair enough. And then just the last question here, you mentioned a new demand planning system. Can you sort of frame that a little bit, tell us what exactly is changing and what the impact may be?

This is Greg. Let me tell you kind of in layman's terms what this could do for us.

The demand planning format will give us a much more accurate way of forecasting forward sales based not just only on current trends and future trends, but it's reading the sales much more regularly than the other system. The other system that we've got in play to he day is more static. It takes a snapshot pretty much of the sales on a week-to-week basis and it can't react as fast.

So if we've got something that's trending quickly, that something is really selling well, we'll see it in our sales but it won't be able to -- our system today won't be able to really forecast that trend as it goes forward. The new demand planning system can do that for us and help us, and you can imagine with 18,000 SKUs, many of these being seasonally driven in the spring and in the fall, it's important to have some eyeballs that are on that from a system standpoint that can give us some more accurate forecasting. So simply put, better forecasting forward, whether it be on promotion or whether it be on a regular price sales on both what I call it would be our queue products and our seasonal products.

Great. And the timing of that?

We are in the first phase of rollout. It will be at least another year before we're complete with all the departments, and they're being done by division by stages. So it will be the end of 2015, early 2016 before we're complete.

Very good. Thanks a lot, guys. Appreciate it.

And we'll take our next question from Jessica Mace with Nomura Securities.

Hi. Good afternoon. My first question is about some of the new stores.

When you increased your store -- long-term store target at the Analyst Day you mentioned that you found you could put some stores closer together. And I was wondering if you have any results you can share with us from some of those stores open in higher density areas or closer proximity?

Hi, Jessica, this is Lee. I don't know that we've got anything specific for you. I will tell you that our new store performance this year has been in line with what we had planned and those stores that are opening closer to others are performing in line with our other new stores.

So we're very confident and happy in the results that we're having from those stores. So I would say that they're in line with our other new store performance.

Great. Thank you.

And then my other question is just wondering if you could give us an update on where you are in the process of regionalization. Maybe this has a little bit to do with the demand planning, but it seems like you had a great example of having the right product in the right place for the turn of the difference in the turn of spring in the North and South. Any other opportunities that you can share with us?

You know, Jessica, this is Steve. I will tell you that what we call localization will be an ongoing process for probably an eternity. We'll never be right because things change and customers' demands change.

Earlier, I guess in Q4, give you one example. We recognized a need for a Western line of apparel in a lot of our Southern stores, and we added the brand Cinch, for example, and we put those in a number of stores. Thus far, we recognize that the productivity of that brand is incremental to what we had previously, and that would just be one example of many that I could probably go through and talk about. So the team is focused on localization and see that as one of our four key sales drivers.

Great. Thanks so much for taking my questions.

And we'll take our next question from Dan Wewer with Raymond James.

Thanks. In the prepared comments you talked about the West Coast stores achieving comp sales growth above the chain average. Does that reflect the fact that those stores are younger and therefore have the inherent sales ramp in the early years? Or does it just reflect that there's less direct competition in that market and big demand out West?

Dan, this is Lee. I would tell you both of those things. They're performing as our new stores often do which is better than chain average, and the Western stores, as we said a few times, they typically run above the average of the chain. So I would say both of those things are giving us benefit.

And given the higher costs out West, when you look at the returns, I know it's early, but when you look at the returns in those Western stores, are they generating sufficiently higher revenues to offset the higher cost structure?

Dan, this is Tony. It's very similar to the way we modeled them out and they hit their pro forma numbers and they give us the expected returns based on a higher sales level and a higher cost structure.

And then Tony, also a follow-up question for you relating to the share buyback program, given the stock is up another 15% year-to-date, easily outperforming the market as a whole. When you look at your matrix and buying back shares, does your model say about how active you should be or not be at the current levels?

As we go into each quarter, we will adjust the model accordingly and then we will set a matrix in a 10b5 plan. So as we adjust and obviously as we continue to have these sales increases and bottom line increases, it drives our calculation of the intrinsic stock value. So it will generally keep us in the marketplace throughout and what the matrix really does is as the stock moves up and down between the matrix, we'll adjust the number of shares that we purchase.

So philosophically we like to be in the marketplace. We like to support the stock and we believe that if we're out saying that it's time to buy the stock, we want to be in the marketplace along with our investors.

Okay. Great. Thank you.

And we'll take our next question from Alan Rifkin with Barclays.

Thank you very much. Greg, in the past you've talked about the very small proportion of your customer base that uses tax IDs, likely less than 10% of revenues. And one would certainly infer that these are perhaps the small portion of your business that are commercial customers.

We now have very significant deflation for six quarters and counting. How is this small segment of your customer profile performing lately?

To be honest, Alan, what we track, it's not much different. We look at those customers closer than we do the rest of our portfolio because we have more information on them.

Remember, they are primarily still hobby farmers. We can't identify that they are production people but they're in our store more regularly. So they truly are the core lifestylers.

But we have not seen any dropoff. As a matter of fact, we talk to them on a more regular basis and we find that the more we do talk to them, the more we can bring them back into the store and their spending habits increase. So very steady. Deflation really hasn't had much of an impact either way.

So no change at all on discretionary versus core products for this small group of your base?

Not that we've seen, no. I know it sounds too good to be true, maybe, but it's true. That's how it's working for us.

This customer has not changed. They're very steady.

Okay, so obviously the numbers support that.

And one last question if I may. Obviously in this quarter it appears that you traded off a higher propensity for clearance and driving the comp. As you think about the dichotomy between those two variables going forward, are you more or less willing in the future to possibly trade margin for comp?

Let me clarify something. I think the comment about clearance is maybe being taken a little bit out of context. We had a more normal clearance cadence this year than we had in last year.

We came out of 2014 very, very clean into -- or 2013 into 2014, and this year I would say it was a more normalized clearance cycle. It aided some in the comp but it wasn't a major driver of comp. What drove the comp, as Steve said earlier, was a plethora of product across the store in many categories and it was how we had our inventories positioned North to South that really helped us drive the business.

We're now a national chain. So the assortments in the Northeast can't look like the assortments in Florida, and we've done a fine job with our inventory management group and planning people to assort that differently. So clearance had a very insignificant impact in overall, probably a little bit of drain on margin because the year prior we were so clean and we were actually chasing business.

Okay.

So we're not going to trade -- we're not going to buy comps to drive -- buying into clearance sales. That's not how we operate.

Okay, understood. Thank you very much.

And we'll take our next question from Matt Nemer with Wells Fargo Securities.

Good afternoon. This is Omair Asif on for Matt.

It sounds like Western stores have performed well. But as you think about continued expansion in the West and the severe drought in California and some of the other markets, does it change the return metrics of new stores at all? Or is it more of a function of shifting the product mix in these markets?

This is Steve Barbarick. I'll start with the answer here. I would tell you that we have shifted product mix. We bought into categories we know that are going to be more related to those customers that are living out there.

But I would tell you, this drought didn't just happen yesterday. It's been going on now for, looking at our numbers, a couple years now.

So those stores are still performing. That's why we continue to see more opportunity upside out West. So again, I would tell you that it's just a matter of managing the mix and managing the productivity of the stores.

All right. And then just a follow-up, somewhat unrelated here. Can you talk broadly to some of the early responses to both the personalized marketing campaign and then the loyalty program test?

Yes, I'll go ahead and start with the loyalty test. At this point, we've got our requirements together, our crack team in IT is working through the process of putting it all together for us, and we anticipate doing a test in the second half of this year. So we're up and running.

I think we're excited about seeing our customers' response to the program. But again, it will be limited to a number of stores, and we will test and learn and from there we'll roll forward if we think it's something that's viable.

In terms of personalization, there's a number of activities going on. One of such is e-mail. We had a much better response in Q1 this year with our targeted campaign versus a year prior. And we'll continue to do more of that.

As well as personalization is one of the organization's key strategic initiatives. And we've got a team of people working on how we become more connected to our customer base.

Got it. Thank you so much.

And we'll take our next question from Chuck Cerankosky with Northcoast Research.

Good morning or good afternoon. Couple things. Could you just give us a little detail on the timing of the new store vendor support payments that you mentioned in the press release?

And then I have a second question. Thank you.

Sure. New store discounts, when we open up the store, we have a program, we work with our vendors as far as merchandise goes and what it is, it's really part of the inventory. So when we receive it, we capitalize it and it's earned over a period of time.

So as we have stores open in the latter part of a quarter, it will benefit the following few months. So as we fine-tuned our store opening program last year, we had very limited stores open in the November, December timeframe, whereas the year before we had several stores open in the late November timeframe. So some of those discounts get amortized into income in the subsequent quarter. So we saw that have a slight impact in Q1 this year.

Okay. So very simple. It's a promotional payment that you don't get until you earn it, is another way to look at it, I guess.

In looking at your full range of merchandise that you're moving, can you talk about, a little more specifically about trading up in categories? Do you see evidence when somebody is buying a tractor or a riding mower that they're buying a little more horsepower or a little more Helly Hansen product in the stores where that's sold or a little more Carhartt? Is any of that going on?

Very good on the Helly Hansen. Yes. I would tell you that there is some of that that's taking place and you can see it across different categories.

I would tell you that in one case particularly, this year we're testing, for example, a commercial zero turn rider. And it retails for nearly $6,000.

And as our customers continue to see interest in stepping up, we'll continue to test different products to try to accommodate their needs. So that would be just one example. But I could give you numerous examples of where we're trying to tap into that demand.

All right. Thank you. Nice quarter.

And we'll take our next question from David Magee with SunTrust Robinson Humphrey.

Hi, thanks, good quarter. I just had a question on the traffic number being so strong. I'm curious if you're seeing, or first of all, who do you think you're taking share from? It seems like the first quarter has been particularly opportunistic with regard to traffic.

Who are you taking share from? And also are you seeing any sort of response that you haven't seen in the past? Thank you.

This is Greg. I would say that number one, we focus more on being better season-to-season, year-to-year, in the offering to the customer. And we do that through a lot of the initiatives that you've heard about already on the call, whether it's localization or it's timing of flow of product North to South because of weather and so on, so forth. I think we do that far better today with our logistics sophistication than those who we compete with at the what I'll call local or regional level.

There's some very good competitors out there in the farm store business. Don't think there aren't. But they don't have some of the capabilities that we now have as a Company. So I think that's first and foremost.

I don't believe that it is about who we're taking it from. I think what's happening is the consumer is deciding that we are probably a better place to shop, and I don't know specifically any particular competitor that I could talk to, but we sell a number of products in that store. And there's a number of other people who sell a number of those products.

So I think the key behind Tractor, why we grow, is we make it easier for the customer because we can consolidate that shopping trip under one roof in one store, we're priced right every day, we're in stock, we have great customer service, we're convenient, you can get in and get out of our stores quickly. I think there's a lot of variables there that are playing to our favor. And we said it earlier: we're relentlessly dissatisfied to keep improving and improving our business and our customer interface and that's what's driving our business.

Okay. Great. Thanks, Greg.

And we'll take our next question from John Lawrence with Stephens.

Good afternoon, guys. Steve, would you comment a little bit on the May rollout of Purina and just compare and contrast number of SKUs, et cetera? Several years ago that extension of Purina was pretty positive and is the intention the same?

Well, it's a little different this time, John, in that the first time we went forward with it, it was a completely new brand to the organization and to our customer base. In this case, you're looking at, oh, probably somewhere, 10 SKUs or so that are meaningful to the customer who lives our lifestyle. But a lot of those customers may still be shopping us already because we do carry the brand.

So I wouldn't expect the impact to be what we saw when we originally launched back in, I believe it was 2009. I will tell you, though, that we're very excited, and one of the biggest requests we get from our store managers all the time are this brand and the extension of this brand. So if our team members and our customers are telling us, you know what, this could be okay and we're pretty excited about the launch.

All right, thanks. And follow-up: any update on the mixing center project? Thanks again.

Mixing centers are go-live, as I said, early third quarter. The test that we ran a year and a half ago proved positive. I'll be testing these two facilities in Texas. More to talk about once they're up and running, John.

All right, thanks. Congrats.

We'll take our next question from Denise Chai with Bank of America.

Thank you. So just a big picture question to start with: how are you thinking about wage increases both in terms of the health of your customer and also from a cost perspective?

Denise, this is Tony. We always wanted to be out there as far as paying a competitive wage, and we think as we analyze it that we're very competitive in the marketplace. Additionally, we pay all our team members a monthly sales bonus. And we think that is an added incentive and benefit.

Additionally, we hire our customers. So our team members really enjoy living the lifestyle, they enjoy working with other folks and engaging with them and talking about what they're doing around their farms or out in the field. So we think that we have a significant advantage when it comes to working with our teams.

They are very small teams, most stores are 12 to 15 folks, and we do a tremendous job in making sure that they work their expected hours. So again, we think we have significant advantage when it comes to the competitive wages that we pay our team members.

Okay. Got it. Thanks.

And just going back to the new Purina feed lines, who do you compete with on this? Where are your customers currently going to get these?

Purina uses their independent dealers for the most part to get distribution out to the customers. And so it's been somewhat of a dealer brand up to this point. And there may be a few regional and independent farm stores that carry it, but for the most part this is incremental for Tractor Supply.

Okay, got it. And just last one: your new store opening this year looks somewhat front loaded. So can you give us a sense of the cadence for the remainder of the year?

Yes, when it comes to Q1, it is a little bit front loaded. It will slow down a little bit in Q2. So we anticipate that we'll be in somewhat of a normalized cadence relative to last year where we'll be about 50% to 55% of the stores will open in the first half, which is similar to last year.

Got it. Okay. Thank you very much.

We'll take our next question from Joe Feldman with Telsey Advisory Group.

Hi, guys. Thanks for taking the questions. Just a couple quick ones.

With regard to shrink, I know you said that it was down a little bit because of the comparison was very difficult from last year. But I was curious, is there anything in particular within that that drove the shrink?

And also, what should we expect as the year progresses? Will it ease a little bit? If you could just remind us of that, that flow.

Joe, as you mentioned, in the prepared remarks we talked about it being relative to last year. And so it's really more of a cycle against last year's number. It is not something that's structural and it was related more to the distribution centers. So as we move forward in the year, we do not expect it to have a significant impact on our gross margin.

Got it. Thanks. And then just one kind of minor one.

But I know you'd kind of touched on the West Coast port a little bit. Can you remind me, I may have missed it, but can you quantify how much that you think the impact was from the West Coast port delays? And have we fully cycled it at this point?

This is Steve. I would tell you that based on some reporting that we've done, it's relatively insignificant. The team did a really nice job, as we talked about earlier, we brought some product in early because of the Chinese New Year.

We rerouted some of the containers that were on the water to the ports to get some of the access to some of that product. So we think that the impact from the sales line and the profitability line was very minimal.

Great. And it sounds like the inventory that you managed pretty well and the complexion of it seems to be in pretty good shape. Is it in the right areas, the right spots?

At this point we've pretty much gotten through all of it. We've been able to get it through the distribution network and out to the stores. We're locked and loaded for the demand.

Great. Thank you guys. Good luck with this quarter.

We'll take our next question from Adam Sindler with Deutsche Bank.

Yes, thanks, good afternoon. Also my congrats on a good quarter.

Wondering, though, if you've had potentially your correction of error meeting that you do after each quarter? Just given everything that went right this season potentially maybe one or two examples of something that you think you potentially could have done even better.

Okay. Well, this is Steve. I would tell you we break our correction of error meetings into specific areas of the business, and we get the owners of those businesses to talk to the opportunities.

There's plenty of opportunities. We are far from perfect.

I would tell you in some cases we ran low or out of product where we could have been better in stock and we disappointed some customers. We know what those categories are and we've got a plan to fix that for next year. And I would tell you that across the board there's plenty of opportunity. That's how I'd put it.

Okay. And then just quickly, I did notice a pretty nice increase in payables this quarter relative to some of the past quarters. Anything different there, just maybe potentially with the timing of the new store vendor support payments or -- ?

It really -- you shouldn't see any significant difference as we move forward through the course of the year.

Okay. Thank you so much.

We'll take our next question from Seth Basham with Wedbush Securities.

Thanks and good afternoon. My question is around your comp average ticket trends. They seem to have slowed a little bit sequentially in terms of year-over-year growth. Just trying to get a sense of whether there's something specific behind that that you can pinpoint and your outlook for comp average ticket growth for the balance of the year.

Seth, as we've talked in various different quarters, the comp ticket can be affected significantly by the big ticket purchases. Additionally, things that we mentioned just in this quarter where we had some bulk purchases, say, in the fencing category. So there can be several different factors that will impact the average ticket. In this quarter in particular, the increase -- we really were very pleased with the increase because we like to see it coming from items per transaction versus just, say, big ticket.

But in this quarter in particular, big ticket did not have an impact at all on the average ticket. And we're also dealing, as we have over the last couple quarters, with deflation. So between big ticket not having an impact and the deflation, coming up with an 80 basis point increase in the average ticket, we were extremely pleased.

Got you. And as it relates to big ticket specifically, understand the headwinds from safes, and some strength in lawn mowers. But when will that safe headwind dissipate and how do you expect big ticket to benefit or not going forward?

Let me just respond to that because I get that question all the time internally as well. I would go as far as to say that we're still continuing to cycle some decreases from a year ago.

The team is looking at where the lines will cross on safes. We've got renewed energy and a plan around that. But I don't -- it will continue to diminish as a headwind, I'll say it that way.

Thus far, we are still very cautiously optimistic as we go into the second quarter about big ticket. Some of that may be seasonal, some of that may be discretionary. But we're cautiously optimistic as we move into this quarter based on some of the early learnings in April.

Great. Thanks very much and good luck.

This does conclude today's question-and-answer session. I will now pass the call back to Greg Sandfort with any additional or closing remarks.

Thank you operator, and thank you all for your interest and support of Tractor Supply. We look forward to speaking to you again in July regarding our second quarter performance.

This does conclude the presentation. Thank you for your participation.