Good morning. I'm Christine Scold, Vice President of Investor Relations and Corporate Communications at Tractor Supply. And welcome to Nashville and to the management presentation portion of the 2015 Investment Community Day. This presentation is being recorded and it will be available for replay attractorsupply.com. We have a full day of information and learning ahead.
And as you're aware, we started the day with a press release announcing that we were raising our long term store growth and operating margin targets. We're excited about the road ahead and believe we have a unique opportunity in retail to have continued growth and operational improvements. We'll get into more details about the new targets as we go through the morning. I want to remind everybody that this presentation includes forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. These risks and uncertainties include, but are not limited to, those factors identified in our filings with the Securities and Exchange Commission.
It's my pleasure to introduce Greg, Tractor Supply's President and Chief Executive Officer, Greg Sanford.
Thank you, Christine. Good morning, everyone. For those of you who were here yesterday, I hope you enjoyed your tours of the Fairview Tractor Store. And also, is it on
my okay.
They can hear me. Yes. You were at the Fairview Tractor store yesterday along with, I think a tour to the Hometown Pet. So you got to kind of see our best thinking of how we would place a store like Hometown close to a tractor and see what happens. But too early to say anything about that just yet.
As Christine mentioned, this is part of our annual sales meeting and the purpose of this meeting is to bring the operators in the field, the distribution center teams, the people in the SSC and F together to learn from one another. They spend quite a bit of time on the floor also with the vendors learning about the new products that are going to be coming to their stores as well as experiencing some hands on things down there with the vendor community. Shortly after today's presentation, you'll have the opportunity to tour the vendor store or the vendor floor and you'll have the chance to observe over 300 of our key vendors, which represent about 70% of our total cost of goods. The vendors have the opportunity to interface not only with you, but with our team members. And we gather a lot of feedback folks.
And I think a lot of what we see is our managers take this information that they've learned at this meeting back to their stores and they educate their team. So this is a learning process as much as it is a celebration of our results from last year. Now prior to going to the trade floor, you will hear from 4 members of management today. We'll cover the I'll cover some highlights and areas that we're focused on as we go forward. Lee will talk about the store growth and our updated long term growth plans.
Steve Barbarick will talk to you about our customers and some of the merchandise initiatives that we have in play and Tony will then review and wrap up with some financial commentary. Let's first talk about a little bit of an overview. Most people that aren't familiar with the story ask the question, who is Tractor Supply? And to be honest with you, we are a rural lifestyle retailer and that's what we do. That's our customer base.
Our stores are typically located outside the counties surrounding metropolitan areas and we just announced a few weeks ago our 1400 store that we opened in Utah. Now, with the exception of Alaska, we're in 49 states. Many of our customers are rural lifestyleers. They purchase items that they're used to care for their land, their homes, their pets and their animals and they're passionate about their lifestyle. They're do it yourselfers, they're very hardworking and they're financially responsible.
That's key. They don't carry a lot of debt. Most of them have little to no mortgages and they buy with cash. And that's one of the things that makes it more challenging for us when we're looking at customer relationship marketing programs. We can only attribute about 50% of our sales today, something we're working on.
One of the things that separates us from other retailers is what we call legendary service. We talked a lot about that this morning at the opening session. And our new moniker of going the country mile is something that is something we've been talking about for a while. But why tractor? Why do we do it different than other retailers?
We take our customers seriously. This is a niche industry and we spend time with our customers and we do what we can to take care of them. Some of the key points about our company are the mission and values. You've heard this many, many times and at every meeting I bring this up, I talk to it a bit about the culture of the company, what it means. It's truly the glue.
It is the secret sauce of the company. I'm just a steward as well as all the rest of management and the other members of our company. But our mission is to work hard, have fun and then make money. And this is really a very simple equation. It's very easily understood by our people and in nearly every presentation and even across the walls of our new store support center and even in our stores and even in the pockets of our team members, you're going to find them carrying a card on mission and values.
It's that important. So I can't stress enough culture is something that Tractor Supply has. It's alive and well. It's growing and it's something that is very straightforward and easily understood. And it's something that we measure people by.
We want to make sure that you understand the culture. Let's talk So let's talk about 2014 and some highlights. It was a record year for Tractor as we continue to grow our business. We opened 107 stores. Now that's no small task.
Think about that, 107 stores and they were broad based across the country, not just in a few local markets. We grew revenue by 10.6% and store sales comp store sales by 3.8%. We continued to deliver improvement in our operating margin and we have a balanced approach. We drive sales, We look at gross margin and we improve efficiencies to drive SG and A costs down. Operating margin in 2014 was 10.3%, as I mentioned.
We grew our earnings 14.7 percent to $2.66 per share. This represents our 7th consecutive year of double digit EPS growth. And finally, we returned $383,000,000 to shareholders through our share repurchase plan and our dividend program. And our dividend grew 23% to a quarterly amount of $0.16 per share in 2014. Now we are a company with a track record of growth and I love these charts because I love things going up into the right.
And in 2014, our annual compounded growth rate across these last 5 years, if you look at stores, 8.2% CAGR sales 12.2 percent net income 25.3 percent and split adjusted earnings per diluted share of 26.5 percent. These trends indicate that we can continue to grow market share in the communities we serve. It's our ability to be a dependable supplier and I stress that, dependable supplier. Our customers travel a distance to get to our stores and we don't want to disappoint them. So it's our job to make sure we're in stock.
We have the things that they need so that trip is worthwhile. Based on our guidance we provided last month, we anticipate continued growth in 2015 and we will provide more details to the presentation. So what's the road ahead look like? Well, as Christine mentioned, we believe the road ahead includes 2,500 stores now from 2,001 and an operating margin target of 11.5%. Management of the company is completely aligned behind these key initiatives and we're willing and able to execute.
Some of the key points, when you look under sales, you look under gross margin and how we're trying to reduce cost, this chart gives you a little bit of the approach about when we talk about balance. It's not one or the other. It's multiple things working together in unison to drive the company. As we continue to grow these core initiatives that are shown on the screen here, the larger focus is to evolve our merchandise assortments and our national footprint and our omnichannel capabilities, something that our customers are telling us they need. We're also going to be working much harder both short and long term.
So 2015 priorities, both short and long term. So 2015 priorities sort of line up like this. Systems, we're doing a number of things in our distribution centers to upgrade and using not only warehouse management, but labor management. We're continuing to look at our security enhancement. Cybersecurity is a hot topic.
We're doing all we can do to stay ahead of that game. But to be very honest, we're probably still playing catch up with many companies trying to understand where these bad guys are coming from. And then inventory demand planning is an important asset that's coming online. We've started to turn on some departments in the company and this is really going to help us pinpoint our inventories and get ahead of the sales curves in some areas, so we can forecast better, keep our stores in better stock. Supply chain, we're opening a new distribution center in Casa Grande.
It is the facility that will serve most of the Western store growth. So we should see some benefit over time from stem miles coming down. But as we all know, the transportation industry is in flux right now. Driver pay and driver availability is an all time challenge. So some of this is a bit of an offset between stem mile savings and then bringing on some more SG and A costs with the new building.
Hagerstown, the Northeast, we had to really slow the expansion there for the last couple of years until we could determine was there another facility we could acquire or at least lease so we had the capability of opening more stores and servicing them. And we've now completed that. In Hagerstown, the expansion is up and running and we're pleased with the results. And then the mixing centers, a concept that we tested in the Waco DC about a year and a half ago, We are now ready and we're building 2 mixing center units in Texas. They'll be used as more like flow through centers for high bulk, high velocity product.
Customer relationship management, a hot topic and one of which that is more difficult for us as a company than many because of our an influx of cash in our sales versus credit and other uses of tender. Our customer attribution has moved from the 30s into the 50s now, But with the program we're talking about launching, it's more of a loyalty affinity type program and we're going to be testing it this year with Ernst. And I believe if we can see the results that we've gotten from some earlier tests a year ago, it could be a platform for us to gain more insights and we use that information to talk to our customers more directly about the things they're interested in. Loyalty programs can cost you money, but they can also drive tremendous amount of benefit by being able to pinpoint and talk to the consumer about what they're interested in and then giving them offers that drive business, bring them back in and drive footsteps. The last is omni channel.
Omni channel for us is no longer a web business. It's part of the company. It's just another way we transact business with our customers. They can come to us through the web. They can purchase online, pick up at store.
We've already got a drop shipment component built in, but we're going to take this and roll it out and think of it as 20 fourseven Tractor Supply. Anytime you want to engage with us, anytime you want to find information, you want to go on a social site and post information about us or you want to talk with us, we're going to be there and be available to you. So with that piece of the presentation over, I'm going to turn it over to Lee Downing and he's going to talk to you about the long term growth plans for stores and the operations side. Thank you.
Thanks, Greg. Good morning, everyone. I'm going to speak to you this morning a little bit about the store growth opportunity and our continued cadence of store growth. First, a look at 2014. We opened 107 stores in 31 states, including our 1st store in the state of Utah and the 1st Tractor Supply format store in the state of Washington as we begin the transition from the Dells format to our TSC format in the Northwest.
Similar to prior years, these openings represent a mix of retrofit stores and build to suit. As you can see in this map, we continue to build stores across the country. In 2015, we plan to open 110 to 115 stores across the operating area, and we expect a similar mix of building types. As Christine mentioned, we announced this morning an increase to our store growth target from 2,100 stores to 2,500 domestic Tractor Supply locations. We believe this is very achievable target and the increase is based on several factors.
First, we've captured information about more of our customers, which has resulted in an increased customer base. In learning more about our customer, we learned that the products we sell plus the aspirational lifestyle our stores and team members represent appeals to a much larger consumer base. We continue to understand the markets we serve and we work hard to make sure we have the right mix of products to meet the needs of the out here consumer. As the consumer base in the market we serve evolves, so does the merchandise mix. Based on what we learned about the increasing appeal to a larger consumer base and our ability to evolve our product selection based on the lifestyle needs of the market, we feel there are additional opportunities above and beyond 2,100 that we identified back in 2012.
And finally, we have learned that we can put stores much closer together in many areas of the country, thus increasing total market share without significantly impacting long term profitability of existing stores. Here are just a few examples of our increased store opportunity. The first is a portion of the Northeast in the top left. The green Tractor Supply logos indicate 7 stores that we have opened in the last couple of years that were not part of the 2,100 remodeling. As you can see, our real estate team continues to identify markets outside of the data modeling where the community can support a Tractor Supply store.
The next market in the bottom right is Houston, Texas. The red logos are stores that were part of the 2,100 group and the 2 green logos are examples of stores that we've opened close to 2 higher volume stores while maintaining market share. This map, which you've seen many times before, shows our current Tractor Supply format store count on the left at the beginning of 2015 and the expected count by region when we reach 2,500 stores. As you can see, we have significant growth opportunities in all areas of the country. We have a deliberate growth model and we intend to continue to open stores in all regions.
This includes estimated cannibalization of around 50 basis points, which is consistent with prior years. Our model also considers growth in competitive and open markets. Our goal is to deliver a similar class of store each year with respect to sales productivity and long term operating profit. We have achieved this consistency in the past and continue to find and approve store locations with this goal in mind. Now that we've introduced our new store target and the factors driving the new target, I'd like to speak for just a moment to how we plan to grow the store base.
We have operated at an 8% store growth for several years and we expect to continue to open stores at that growth rate through 2016. Also in 2016, we will complete the transition of our Dells format in the Northwest. It will transfer to the Tractor Supply format and will result in some closings of the Dells locations. We have carefully studied our SG and A model and we believe that about 120 stores is a very manageable growth number for us. As we have discussed consistently, we believe our store team members and in particular our store managers are an integral part of our success.
We identify store managers for new stores at least 6 months prior to the expected open and we ensure they're properly trained. We believe we can maintain a bench of high quality assistant managers and store manager trainees to support 120 new stores and with the expected turnover. Additionally, we believe the new store teams at the store support center, including site location and development, construction and recruiting, as well as investments required in logistics and store operations management are best leveraged at a growth of 120 stores per year. Keeping with our goal of a balanced approach to operating profit through sales, margin and expense control, we believe revenue trends resulting from reduced pace of openings will be more than offset by favorable new store openings and infrastructure costs. Appreciate the opportunity to speak to you today about store growth.
We believe we've got a long runway ahead and are excited to be able to share our revised targets with you today. I'd now like to turn the presentation over to Steve Barber, our Executive Vice President of Merchandising and Marketing.
Thank you, Lee. I get to ask a question a lot from analysts and investors about the lifestyle of our customers that we serve. Questions range from who is the Tractor Supply customer, how will the Tractor Supply company continue to grow market share, and how do we stay relevant in the communities that we serve. Rather than me trying to answer those questions for you, you're going to hear directly from our customers today. Last fall, we traveled to a number of our stores and interviewed random shoppers.
These individuals are typical of the Tractor Supply customer. I shared these videos with our vendor community at our recent fall vendor conference and we feel the information is still very relevant to this audience. I'm going to share 3 short videos and we'll comment after each. As you watch the videos, note what our customers are wearing, the environment in which they live, and listen to what they have to share. The videos will be titled, Who is the Tractor Supply Customer?
What's important to them? And how are they different? And then after, like I said, each video, I'll talk a little bit about it. So why don't we start that first video?
We have a farm just a few miles away, about 3 miles away, about 25 acres. And we built it ourselves. We put the pond in ourselves. And little by little, we started with the horses and now we have pigs.
I am a cattle rancher. I raise red and black Angus cattle.
About 2 years ago we started a special needs riding school and we now have, about 25 kids with, all types of challenges. It's called take the reins.
I cut grass mostly what I do already. I'm not a farmer.
I have 3 horses that belong to me. I rent 12 stalls to other people.
Probably 10 or 12 bulls.
We have, maybe a half an acre, in a Albrick neighborhood. My husband is pretty meticulous with the whole yard.
Chickens, ducks, goats, sheep.
Everything around our property that gets done as far as the animals, that's my responsibility. Whatever it takes, help after calves have been delivered. My husband has no clue how to.
We raise our own beef deep. We have our own eggs deep. We raise our own hogs deep. We raise sweet corn. We have pastures.
We have gardens. Oh, I grow everything. I grow
potatoes, Irish potatoes, sweet potatoes, oak tree. Well, I got 35 tomato plants, So I cut my own hay, bale my own hay, keep up all the equipment, start in the morning early, and you get through when the sun goes down.
So a picture says a 1,000 words, doesn't it? Couple of things here. First of all, we've got a fairly even split between our female and our male customers. The majority of our customers are between the ages of 45 55 years old and the index higher than the national average in terms of land ownership, animal ownership and pickup trucks. They're active outdoors and they're active year round.
And rule matters to them, but it's not necessarily an occupation. So what did we hear him say? And you can see the grid appear on the screen. They said that growing and raising things are important. So whether it be tomatoes, chickens, goats or potatoes, this is their lifestyle.
They're self reliant and Tractor Supply enables them to live life on their own terms. As one customer on the video said, I start in the morning early and I get done when the sun goes down. That's part of the hard work kind of mentality of our customer base. Talk about what's important to our customers. We could show that video please.
Quality number 1. I don't like to buy junk and I like to fix things one time. So from a hardware standpoint, I want to be good bolts.
I want to be good products, good oil, good grease. If I come and buy a pair of jeans or a panel to build an arena to hold cows in and they wear out faster than you expect them to, you're coming back again and you don't want to do that.
I don't want something for a dollar and then go home and break it the first time and throw it away. Quality matters to dog food customers because their dogs are typically an extension of their family.
We value our animals. Therefore, the quality is really important in everything we buy here.
Availability. They want to know that we're always going
to have the product. If not, they're going to go
somewhere else. They carry that full line of different stuff that makes it real easy to just come in, get what I need and be on my way.
It's hard to say today what, I'm going to need because I'm going to tear something up for the days out. If you got it, then I can keep on running. Otherwise, I'm down to a lot and get somebody to order the piece and get it in for me.
Certain minerals for cows, certain minerals for horses, certain milk for baby calves and antibiotics and things like that. You can't just go anywhere anymore and get them and TSC supplies that.
He's an extra large dog where like a lot of pet stores, they would not have collars and leashes to fit this size of dog, and he he they're able to fit him here.
Things that, you know, you just can't go to a regular hardware store and be able to find.
The products, I would say, are second to none. We have a rural king in town that's driving on the other side of town, but I can't seem to find things in there. I think the prices are fantastic.
You get what you pay for. And if you want to buy cheap, you're going to get cheap.
There might be a dollar difference, but it's not worth the drive. And even so, coming into the store means a lot to us too. We just like to come here. And we're probably in here about 4 or 5 times a week.
So what do we hear our customers tell us here? Well, first of all, quality matters. Things like I don't want to buy junk. I don't want to have to come back. Quality is important as I value my animals.
The Tractor Supply customer we have found is willing to step up and buy quality products and it's not always price that matters. What does matter is that exceed that product will exceed the customer's expectation when they get it home. Value, as you can see here on this chart, you get what you pay for. Like I said earlier, what I told the merchant team is that our job as merchants is to exceed the customer's expectation on every single item that's in that store, because it matters to our customers and they remember a bad experience. Convenience.
Our customers come in and they get what they want. That's why there's value in having a small box. That's why our boxes are 15,000 square foot or so on the inside. And we finally, we talk a lot about being a dependable supplier. And our customers tell us here that availability is important.
And that Tractor Supply carries a full line of products that they need and they want. I liked the gentleman who said here, I'm going to tear something up before the day is out. And my father lives this lifestyle. And I can tell you that there's a lot of folks like my father who tore stuff up and was headed into town, as he would say, to go to a Tractor Supply Company and buy something. So this is what makes us unique and it also makes us relevant and important in the communities that we serve.
Let's take a look at the 3rd video if we could please.
Tractor Supply customers are different in that they're down to earth. They're looking for a great value.
A little bit more country in their roots. So Tractor Supply has
made a need for small farmers and large farmers too, but really more animal oriented small family farms.
I live in the country, even though there's a city right next door to me. Everything in this store fits my lifestyle.
Really, Trexfly customers are all about my land, my property.
I'm going to take care of it.
I'm doing anything I can. My grandkids love to come here. It's a great place to get away. And it's just kind of a piece of heaven.
Well, I think one reason we're different is that we don't come into Tractor Supply just to shop. We come here because we need something, and we know it's going to be here.
They want to get what they need and get back to what they're doing. I'm going to
find what I'm looking for at a good price, and I'll walk away satisfied.
There's a Montgomery County co op that is probably a little bit closer. Their hours aren't nearly as good And I don't find their price is nearly as good as Tractor Supply.
Well, a Tractor Supply customer is usually a person that gets out and gets it to get mud up to the knees and sawdust down here and they really could care less. The deal is, is to get the job done. And so when
you come in here and
you get the right product, you don't have
to come back and redo and redo. Tractor Supply because they provide me with everything I need to run my ranch.
I shop at Tractor Supply because, Tractor Supply meets my farm needs.
I shop at Tractor Supply because of the convenience and the value.
I shop at Tractor Supply because I enjoy the experience and they always have what I need. And without Tractor Supply, I honestly don't know where we would shop.
This is the dream store for us.
Again, I just want to remind everyone that these are just random comments from our customers. We didn't ask them to talk nicely about Tractor Supply. We saw them, we interviewed them, we asked them what their thoughts were. And we talked a lot about loyalty and relationship type businesses. And this is what you kind of see when you go into our stores and the connection they have with our brand, but also our team members in our stores.
Words like hardworking, down to earth, family oriented, all these things come up. If you go back through that and listen to the video itself, you will hear the word need no less than 10 times. TSC has what I need. TSC is about a need. TSC fits my needs.
A customer said we don't come to Tractor Supply just to shop, we come because we need something. So it's one thing when management is talking to you all about the fact that we're a needs based business. But when you hear our customers talk time and time again that we're there fulfilling a need, it resonates a little bit more. That's really what makes Tractor Supply special. It makes us part of the lifestyle that our customers live.
So at this point, let's turn to our sales driving initiatives. We've talked about these before. I want to put a little more color around them. And at the same time, I want to tie them back into what we heard our customers telling us in the videos. Q, localization, drive our merchandising and new products.
First, Q. You saw Greg put up a slide that talked about the fact that we've had 27 straight quarters of comp transaction growth. That doesn't just happen by accident. A lot of that growth is being driven by our Q business. And as we continue to focus on that in the future, we will be broadening our assortments.
We'll be investing inventory to be a dependable supplier of basic maintenance needs and that we'll make sure that we're priced right in the communities that we serve using our price optimization system. A couple of things this year that we'll be looking at. We've worked out with one of our key suppliers in Purina, which you'll get a chance to see when you walk the trade show floor, this year an expanded product line that we didn't have access to before. And we're very excited about that. We shared that with our store managers, but that will be rolling out this year as part of our Q program.
In addition to that, we'll be adding new lines of pet food and that will include the expansion of our 4 health programs. So just two examples of what we're doing in Q and I could go through many others. In terms of localization, you heard Lee say that we're in 49 states. And in each one of those states are certain products and brands that our customers expect us to have. We're making progress, but this will be a long road for us to eventually get to all the opportunities out there because once you think you finally captured it, new opportunities pop up.
And that's the exciting thing about being in the communities that we serve. So it's an ongoing opportunity for us as an organization and we are making improvements. We're also using science in our Intactics system to look at productivity by square foot. And there are some markets where clothing is not as important as say feed or pet products, where we've taken the floors in and clothing and given more room to other categories, merchandise. Some examples of localization would be black storage tanks.
In drought stricken areas where we see opportunities, we'll add products such as black storage tanks, whether it be in Texas or out West. We've also had a high demand for Western apparel. And a good example of that would be the brand Cinch, which we're testing in quite a few stores in our chain today. And that recently just rolled out. Dry valve merchandising.
This is about making efficient use of our end caps, our power panels and our center courts. Events such as Chick Days and our Garden event, our 2nd annual Purina Days, for example, provide an opportunity for us as an organization to offer a treasure hunt experience for our customers. While they're coming in for a need, they also like the opportunity to pick things up and be excited about new things that we're bringing to them. So those center courts allow us to do that. This year, for example, our Chick Days event, which many of you all saw when you traveled our stores, had 25% new items.
Our Garden event, which we have out there today, has 50% new items. So throughout the store, we're bringing in new things again to excite our customers. We don't want to have stale assortments. And finally, new products. They're the lifeblood of any retailer.
Our customers expect to see new products in our stores. Our merchants take advantage of open buying days, trade shows and feedback from our stores to bring new products in. The philosophy of filling often and early and cheaply has served us well. We are we have a risk tolerance. We applaud failure as much as we do success as an organization.
We bring new products into our stores through events, like I mentioned earlier, assortment refreshes and product resets. And as stated previously, there's really no silver bullet every year that we look for, rather the merchant team is challenged to find 1,000 BBs because we know we'll hit the target. So I'll finish here with really some key principles, things that we stand for within the merchandising area. We will be a dependable supplier and you heard our customers talk time and time again in the videos about the fact that we're there to serve them. Differentiated products, they come to us because they can't find it just anywhere.
And we are buying agents for those customers. Quality and value is important for these individuals and they're willing to pay for it. They expect newness and we're going to deliver on that in 2015 beyond. And finally, we don't want to be all things to all people. We've got to make sure that we're focused around that customer who lives the lifestyle that we talk about being out here.
So with that having been said, I'd like to introduce our Executive Vice President and Chief Financial Officer, Tony Credel.
Thank you. Thanks, Steve. It's a pleasure to be here today. And for the chart, of course, we'd like to start off with a picture of the family and the farm. Unfortunately, it's not my family or my farm.
But more importantly, we always talk about comp traffic trends. We've had 27 consecutive quarters of positive same store traffic increases. Now what's important about that is number 1, it shows that we are the dependable supplier. But secondly, we continue to grow market share and that's really critical. Now we couldn't do that without solid execution, actually superior execution from the stores, the distribution center and the store support center.
And what we do is we continue to incrementally improve. For example, this year we opened up what we call the Merchandise Innovation Center. It's basically a place where it's a full store where our teams can go and we can set different planograms and we can test things and we can be much more efficient how we roll that out. And it's been a tremendous benefit. Greg talked about omnichannel.
And obviously, we want to be top of mind and we can use omnichannel to be top of mind to our customers. So they were always thinking tractor supply when it comes to the purchases they're going to make. But we can also use it to be to facilitate them finding the stores. We can enrich the content and we can continue to drive traffic to the stores. So we feel very confident that we can continue to drive footsteps into our door.
Now when it comes to margin, we've shown that we continue to perform well not only year over year, but quarter after quarter. And so I'm really excited to be able to raise our target to 11.5%. And what you'll see through the rest of the conversation is consistency. So we will continue to use that balanced approach that Greg talked about just driving sales, margin and operating efficiency. Again, it doesn't sound glamorous, but we've been able to consistently deliver through those through that format and that plan.
Now as a company, our primary goal is to grow profit dollars and operating margin. But we focus on growing market share rather than simply managing margin rate. So we won't risk market share gains just for margin rate. We have a pipeline of opportunities for many years to come. We'll talk about some of those, but we just can't get it all done today.
And again, we will continue to be very methodical in how we roll these programs out to make sure that we can ensure our mid teens EPS growth. So how are we going to get there to the 11.5 percent? In a sort of steady state SG and A level, we believe that the comp sales will drive about 50 basis points of improvement in our operating margin. Steve talked about his plan. I think he's got a tremendous plan.
I have the utmost confidence that he's going to continue to drive sales. I think that bears repeating. Steve, I have the utmost confidence that you will continue to drive sales. Our gross margin initiatives will again be consistent and I'll talk about those briefly on the next slide, but we expect to drive about 50 basis points of improvement through our gross margin initiatives. And then we continue to look at cost savings and efficiencies.
We have our continuous improvement program that we refer to as TVS, Tractor Value System, that we always are looking at processes. But in addition to that, we have teamed up some talent from the finance and accounting areas to work with the various departments in looking at their cost structures and continue to drive out expenses. So the 2 combined, we believe that we can continue to drive cost efficiencies and manage our expenses. So talking briefly about the gross margin initiatives. We've done a great job as far as inventory management and utilizing that to make sure that our we manage down our markdowns.
But we still have a couple of levers to pull. Demand planning is up and running in test basis and we will expect through 2015 and through 2016 to get more experience, get our teams to understand it, look at those forecasts and we will become much better at forecasting and understanding our demand. When you couple that in the next couple of years with an allocation system, then we get the right purchase and we get it to the right store and we'll be able to again minimize our markdown exposure. When you look at price management, we continue to see real benefit in our pricing team being more integrated with the merchants and we're making great progress when it comes to price optimization. We introduced the clearance module in the back half of twenty fourteen.
So that should give us some value in 2015 as we move forward. And we also see some upside when it comes to promotional pricing and the module that's available to us there that we plan to implement in the following year. When it comes to exclusive brands, we there's 3 key concepts behind it. 1, it gives us the opportunity to develop our product specs, so we can meet our customers' expectations, so we can continue to drive footsteps, so and we can control the quality. It also provides us multiple sources that we can source the product from and we can control the costs.
So again, hopefully better margins. And then you can only buy it at TSC. So getting a tractors supply and it creates that brand quality. So we think that exclusive brands will continue to drive improved margins. And then when it comes to strategic sourcing, we're continuing to look at our vendor base and work with them as we move to more importing and we can reduce the expense relative to the supply chain.
And just in last year, we increased our imports over 30%. We will have one headwind that we talk about frequently and that's the freight impact. So I wanted to give you hopefully a pictorial that shows you as far as the impact of this 10 miles and the magnitude of it. If you look at 2013, you can see that our Waverly, Nebraska distribution center went out to the West Coast for the stores that we had out there in 2013. Waco service Waco, Texas serviced mostly the New Mexico and Arizona area.
If you move to 2015, you can see as we've added about 35% of the stores in 2014 were out West And as we plan about 40% of the stores in 2015 to be in the Western region, you can see how those lines increase relatively dramatically. And the shipping lanes are much, much greater. So when it comes to the West, the stem miles are 4 times greater than that of the rest of the chain. And so obviously that puts some pressure on the freight costs. Now as you move to 2015 in the 3rd picture that shows Post Southwest Distribution Center, once we open up, see that those lines are minimized.
Now where I will caution you is that the freight savings that we will get will offset the cost of the facility. So we time the store openings so that we'd have enough volume to be able to push through that distribution center when it opens at the end of this year and we can offset those costs. The real advantage is in the future years as we will start to mitigate the impact of our future expansion out West. And the other topic that we talk about relative to freight and we get a lot of questions about the impact of fuel. So to give you a couple of statistics and then you have to put your calculators down, but our inbound and outbound freight costs excluding fuel is about 80% of the freight expense.
So you can see that fuel is a much smaller percent of the freight expense. Now definitely as the fuel prices come down that has been an added benefit, but it hasn't been to the extent that it's offset some of the pressures from the added stem miles. So moving to the long term outlook. When it comes to the store count, Lee's talked to you about our plan to continue to grow and then plateau at about 120 stores out in 2017. That will still take us to about 1800 stores out in 2018.
We'll continue to drive sales and anticipate being over $8,100,000,000 in sales and we'll be doing that with again very consistent assumptions driving our operating model. We plan to have same store sales at 3% to 5% increase each year. We expect through our gross margin initiatives to drive 15 to 25 basis points of gross margin improvement. We expect to get some expense leverage between 5 to 10 basis points. Hopefully, those 2 together will get us to approximately mid-twenty basis point improvement on our operating margin.
That combined with our share repurchase program, we believe that we can drive EPS to be in the 13% to 15% range, which I define as mid teens. When it comes to cash flow, as we continue to operate, our operating profit is going to grow. We'll continue to generate free cash flow. Our priority 1 is store growth and infrastructure and systems. So we will allocate CapEx.
And again, it does not increase significantly above the run rate. Our target was about $250,000,000 We were well below that in 2014, but we anticipate running between $250,000,000 to $280,000,000 over the course of the next 4 years. Allocating $1,100,000 out of the free cash flow of $2,500,000 it still leaves us $1,400,000,000 that we can return to our shareholders either through the share repurchase program or dividends. The capital targets, again relatively consistent. Our main focus is the new stores.
We expect to range between $100,000,000 to $120,000,000 Now the timing of that could be impacted by the mix of our retrofits and the built to suit stores, so the numbers that we lease versus own. And we may do a few more self developed stores, but we believe that we'll most likely range in $100,000,000 to $120,000,000 So it's about 50% of the CapEx that we intend to spend. We will continue to support our stores, maintain them and allocate about $50,000,000 to $60,000,000 there. The distribution centers, we're basically on every 2 year cycle, we're going to be looking to add a distribution center. Obviously, at the end of this year, we've talked about the Southwest distribution center.
Potentially in approximately 2 years, we'll be looking at the Northwest. And then 2 years after that, we'll be looking to go back to the Northeast and fill out given the density of the store count that we expect to have in the Northeast. Technology is a priority as well and we expect to be to allocate capital about $30,000,000 to $40,000,000 a year. The focus will be obviously on key systems that we talked about such as demand planning. Obviously, security is a high priority for us as well as our continued investment in our omnichannel platform.
So net net, we're looking between $250,000,000 to $300,000,000 of CapEx annually. When it comes to our capital allocation targets, again, very consistent. I was going to stir the martini glass a little bit there, but as we talked about investing for growth, we have the $250,000,000 to $300,000,000 CapEx. The dividend, our target is to have a payout ratio of 20% to 30%. Again, very consistent to where we were that we expect to be somewhere around 15% to 20% dividend growth each year.
And then the share repurchase with the additional cash flow that we're generating that may increase a little to 50% to 60% of our operating cash flow. That could range anywhere from $280,000,000 to $400,000,000 depending on the year. But we think we can take at least 2% to 3% of the shares outstanding out of the marketplace and hope and again drive improved EPS bottom line. If you look at the last 5 years compared to the next 4 years coming up, again, very consistent capital allocation philosophy. You see the dividend increasing just slightly as a percent of the total pie.
So reasons to invest in Tractor Supply. We talked about being a growth company. We're in a very unique niche. You can see just with the films about the customers that it's different for us. And we have a very loyal customer base and that customer base is really expanding.
And Lee talked to you about looking at the marketplace and that we have a clear runway to 2,500 stores. We have a very clear strategic plan with a lot of rigor and vision. We're very focused on driving to the 11.5% target. And again, we have a clear path to that target. It's a balanced approach.
We talk about driving sales, improving gross margin, managing the growth investments and we've demonstrated that we can continue to grow the company and deliver results to the shareholders and meet their expectations. So with that with our model in place, we continue to drive significant cash flow. We have a defined capital allocation strategy and we believe that it is very, very focused on shareholder value creation. So with that, I thank you for being here today. This concludes management's formal presentation and the webcast portion of the meeting.
Thank you.
All right. So the rest of the day, similar to years past, we'll divide you into 4 groups and that's based on the colored dots on your name tags. And we'll meet by the colored signs outside the room. We have each of our divisional merchandise managers lined up to take you through their sections of the trade show floor and point out what they're excited about in the business and what's new. And then we'll bring we'll come back as a group.
We have to walk across the street.