Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's Conference Call to discuss First Quarter 2014 Results. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. 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 now like to introduce your host for today's call, Mr. Rayn DeGeiler of Tractor Supply Company. Please go ahead, sir.
Thank you, Travis. Good afternoon and thank you for joining us for Tractor Supply Company's earnings conference call. Before we begin, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. Although the company believes the expectations reflected in its forward looking statements are reasonable, it can give no assurance that such expectations or any of its forward looking statements will prove to be correct.
Important risk factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. I am now pleased to introduce Greg Sanford, Tractor Supply Company's President and Chief Executive Officer.
Greg, please go ahead.
Thank you, Randy, and good afternoon, everyone. Thank you for joining us on the call this afternoon regarding our Q1 2014 results. With me today are Tony Crudell, our EVP CFO Steve Barbarick, EVP of Merchandising and Marketing and Lee Downing, EVP of Store Operations. As we announced last week, Lee was promoted to Executive Vice President level and has assumed additional leadership responsibilities for the company's real estate team. I want to acknowledge Lee for his contributions, and I want to congratulate him on this well earned promotion.
Now we were very pleased with our overall performance for the quarter and how we are positioned moving toward the all important 2nd quarter's business. Our first quarter results again demonstrate the underlying strength of our core businesses along with our ability to effectively manage through volatile weather conditions, in particular in the month of March. In fact, we experienced a significant number of store closure days and distribution center disruptions due to the weather conditions in the Q1. Our focus continues to be on driving growth and operating income through a balanced approach of managing sales, margins, expenses and inventories. And we believe it is our responsibility to manage these factors effectively, not just for the quarter, but throughout the entire year.
For Tractor Supply, the timing of sales for spring seasonal products is largely influenced by the arrival of spring like temperatures throughout all regions of our business. This year, not unlike some years in the past, spring like temperatures did not occur in many markets until the later weeks of March and into the month of April. Realizing this colder trend in temperature to the Q1, we made a number of operational shifts to improve our selling position as we move forward into springsummer. We delayed the flow of spring related products and altered the shipment of specific seasonal categories such as live goods and outdoor power equipment. We adjusted inventory levels in line with sales and reevaluated our weeks of supply within our replenishment cadence in anticipation of a later selling season.
In addition, we plan changes within our marketing program from Q1 into Q2, allowing for the shift in sales for the Easter holiday timeframe. Our continued ability to read and react early to business conditions continue to improve as a company and it positions us to optimize forward sales when temperatures do warm. Aside from our seasonal categories, the overall business performed very much in line with our expectations in the Q1. Our comp store transaction count was again very strong, increasing 4.4%. We are clearly meeting the everyday needs of our customers and continuing to drive traffic to our stores.
Despite some of the weather impacts affecting the spring season, we do not believe there are any material or fundamental changes in our customer trends and our sales and earnings expectations for the first half and full year are unchanged. Although our Internet sales are quite small at this point, we continue to make additional investments in our platform and saw solid progress in our e commerce sales for the quarter. We now have over 20,000 items on our site with many available for sale through vendor drop shipment. Cold weather related categories such as outerwear and heating products sold very well in the quarter and customers took full advantage of drop ship capability after our stores began exiting these fallwinter categories for the spring transition. Our social presence online is also developing, and we are engaging with customers who want to share their out here experiences with us.
Our mobile presence is growing and more of our website traffic is coming to us through now a mobile device. We are confident that as we add more capabilities to our website and mobile platform, we can continue to grow our sales and believe that our customers are anxious to take advantage of the new features as we make them available. In the quarter, we also made progress on our CRM or customer relationship management program and we recently combined our web traffic insights with our traditional CRM data capture to form one view of the customer in our databases across all channels of our business. We believe over time this will improve our customer targeting efforts. And we also just completed a personalized communication test with our best customers based upon their purchase behavior.
The test results were positive. And with these recent learnings, we now have the confidence that we can move forward toward development of a customer affinity program for 2015. Looking at the Q2, we really remain optimistic and believe there are several positive factors that should benefit our business. The first is the high levels of ground moisture throughout much of the country, which historically has generated demand for lawn and garden products as temperatures warm. The second is the shift in the holiday season.
2013 pre holiday sales were part of our Q1 and this year those sales moved into the Q2. And third is the pent up customer demand for spring seasonal products. While spring may be off to a late start in a number of regions across the U. S, our experience is that the business will come at some point and we have readied our stores with appropriate levels of inventory to take advantage of the sales opportunities as temperatures warm in the Northeast and Midwest. Weather has always been a factor in our business, and that is why we recommend assessing our performance on a first half and second half basis.
Now before I turn the call over to Tony for a more detailed review of our Q1 results and our outlook for the remainder of the year, I want to acknowledge a recent milestone. We opened our store in Bullhead City, Arizona late in the quarter. This was our 1300th store. As we expand our Western footprint, Bullhead City represented our 12th store in Arizona and our 57th Tractor Supply store in the Western region. We are proud of this accomplishment and our growth over the years, and I would like to personally thank each of our team members out there who passionately serve our customers and who drive our sales results.
I'll now turn the call over to Tony to review our financial performance for the quarter. Thanks, Greg, and good afternoon, everyone. For the quarter ended March 29, 2014,
on a year over year basis, net sales increased 9% to 1,180,000,000 dollars and net income grew 10.9 percent to $48,800,000 or $0.35 per diluted share. Overall, we are pleased with our bottom line performance for the quarter. While Q1 sales were negatively impacted by the late start to the spring selling season, we drove strong gross margins that provided us the ability to meet our internal plan. Comp store sales increased 2.2% in the Q1 compared to an increase of 0.5% in last year's Q1. Although it looked like we were up against an easy comparison, let me remind you that comps in the Q1 of 2012 2011 were 11.5% and 10.7% respectively and benefited from an early start to the spring selling season in both years.
This year the winter selling season was very strong in January February as the cold weather drove solid sales performance and assisted us in the clearance of winter product. This contributed to mid single digit comp gain through February. However, the snow and ice storms were very disruptive to the supply chain. As we head into March, similar to last year, colder than average temperatures led to the late start in the spring selling season and resulted in softer sales than originally anticipated. Temperatures in the northern markets were 5 degrees colder than last year on average and almost 9 degrees colder than historical averages.
Although the 2nd quarter has gotten off to a quarter than anticipated start, we have seen our consumer respond as weather has warmed to more typical spring conditions and we are optimistic that this will result in a strong spring selling season. As we have often stated, we believe it is more appropriate to assess our performance by the halves rather than the quarters. Comp transaction count increased for the 24th consecutive quarter, gaining 4.4% on top of a 2.2% increase last year. We continue to drive increased foot traffic by meeting the everyday needs of our Queue items performed well in several categories such as feed and pet as well as seasonal queue items including heating fuel, antifreeze and additives. Average comp ticket decreased by 2.1% versus last year's 1.7% decline.
The decrease resulted primarily from deflation and a reduction in big ticket sales related to softness in our storage category. Although we had a solid start to the riding lawnmower season and strong comps in the big ticket winter items such as log splitters and heaters, it was not enough to offset the softness in the storage category. We estimate that overall big ticket sales reduced the average ticket comp by approximately 50 basis points and overall comps by 14 basis points. On a regional basis, comp sales were positive across all regions except the Northeast, which was the most impacted by the delayed spring. There were several factors that included sales in the quarter.
We estimate that deflation negatively impacted comp sales by 80 basis Although deflation has a negative impact on top line sales, it Although deflation has a negative impact on top line sales, it has a favorable impact on margin rate as I'll discuss in a moment. Although the harsh winter had a favorable impact on sales and margin in the early part of the quarter, we were limited in inventory availability in some key replenishable categories and we consciously did not replenish certain winter categories such as heating and snow blowers as we believed that the markdown exposure was greater than the sales benefit. However, we were nimble enough to restage many of our spring purchases as we experienced the delayed spring. We had 125 days of store closures due to the harsh winter storms and we also had a significant increase in the number of store days with reduced hours. We experienced logistics and transportation disruptions related to the winter storms, including 12 closed days at our distribution centers.
As I mentioned previously, we were cycling strong sales last year in our storage category as a result of anticipated government regulation related to the Sandy Hook tragedy. We were negatively impacted by a later Easter, not only from the signaling of the spring season, but specifically as the Friday Saturday of Easter weekend fell in our fiscal Q1 last year. Overall, the team did a great job delivering strong results despite these obstacles. Turning now to margin, which increased approximately 110 basis points to 33.5%. Our initial direct margin continues to improve as a result of our initiatives around price management, markdown management and strategic sourcing.
Import purchases in the quarter increased 9 0.5% and represent 11.3% of the sales mix. Also exclusive brand sales increased over 13.5% compared to last year's Q1 and were almost 33% of sales. Deflation was the most significant factor margin. As we focus on maintaining margin dollars per unit, this typically will result in an improvement in gross margin rate in deflationary periods. This provided us the ability to drive a healthy increase in gross profit even though comparable sales were not as strong as previous quarters.
The favorable colder weather in January February provided strong sell through of our seasonal winter product resulting in fewer markdowns. These improvements in margin rate offset an unfavorable mix variance of approximately 12 basis points resulting from increased sales in the heating and rider categories, which have lower than chain average margin and an increase in freight as a percent of sales of approximately 17 basis points related to the mix of merchandise and increase in stem miles for our Western expansion. For the quarter, SG and A including depreciation and amortization was 26.8 percent of sales compared to 26.1% in the prior year's quarter. The deleverage in SG and A was caused by several factors, which include higher cold weather related costs, including electric, gas, no removal and building repair. Increased distribution costs related to the disruption in the supply chain caused by the weather and the added capacity of the new Southeast distribution center, increased cost of our relocated data center and as Greg mentioned, we continue to invest in our multi channel platform and tools.
Also, it should be noted that last year in the Q1, SG and A leverage benefited from cycling against a much larger incentive compensation expense in 2012, which made the year over year increase in SG and A last year much more favorable when compared to this year's increase in SG and A. Our effective income tax rate increased 37 point 6% in Q1 compared to 35% last year. Last year's Q1 benefited from the 2012 WOTC tax credit being reinstated. WOTC has not been reinstated this year. Additionally, we had a reversal of tax reserves pursuant to FIN 48 in last year's Q1 that had a favorable impact on the tax rate.
Turning to the balance sheet. Although we had sizable purchases under our share repurchase program at the end of Q1, we had a cash balance of $48,000,000 and borrowings of $80,000,000 compared to a cash balance of $57,000,000 $105,000,000 of debt last year. During the Q1, under our stock repurchase program, we acquired approximately 1,260,000 shares for $84,500,000 Our share repurchase matrix drove aggressive share repurchases and we were able to acquire the larger quantity anticipated. We estimate that the share repurchase program for the quarter did not have a material impact on EPS. Average inventory levels per store decreased 0.6% compared to last year as a result of deflation, the strong sell through of our seasonal merchandise and the restaging of spring receipts to later in the season.
The extended winter allowed us effectively clear through cold winter merchandise and we ended the season in great shape. Capital expenditures for the quarter were $41,900,000 as compared to 49 $300,000 last year. We opened 32 stores in the Q1 compared to 22 stores in the Q1 of 2013. The decrease in capital expenditures relates to cycling expenditures for the construction of our Southeast distribution center last year. Turning our attention to the full year outlook.
With respect to our financial expectations for the full year 2014, as noted in today's press release, we have reiterated our previous guidance. As a reminder, we still expect full year sales to range from $5,620,000,000 to 5,700,000,000 dollars We have forecasted comp sales to increase between 2.5% and 4%. We are targeting improvement of 20 to 30 basis points EBIT margin compared to 2013 coming principally from gross margin as a result of several of our key merchandise initiatives and deflation. We expect SG and A percent to be generally flat. We anticipate net income to range from approximately $360,000,000 to $370,000,000 or $2.54 to $2.62 per diluted share.
And we expect to open 102 to 106 new stores with approximately 50% to 55% of these to open in the first half of the year. We still expect capital expenditures in 2014 to range between $240,000,000 to $250,000,000 We will continue to make purchases under the share program. Given the amount of shares acquired in the Q1, for modeling purposes, we have adjusted our estimate of diluted shares outstanding to be 141,000,000 for the full year. We continue to estimate deflation for the full year to range between flat to 1%. As grain prices have started to rebound, it is less likely that deflation will be at the higher end of the range.
Also to reiterate in terms of cadence, we expect gross margin percent improvement to be greater in the first half of the year as we will benefit the most from the deflation impact. We believe that the 3rd and 4th quarters will have the toughest comparison as we cycle the very strong gross margin improvement and very favorable clearance conditions in the prior year. We expect the 4th quarter to possibly decline in gross margin rate based on our current projections. That concludes our prepared remarks. Operator, we will now turn the call over
Greg, would you comment a little bit? First of all, some of the changes that you made as you went through the period and restaged some of those inventories, can you give us any sense of now that you've got another month under your belt, how is that restructuring process for certain categories look going forward?
John, I'll start and I think I'll ask Steve to probably follow-up with this one. When you start seeing the temperatures, which we focused on quite a bit, continue to stay cool, there are certain products that just aren't going to sell. And it's our belief that you don't need to push those products into the stores prematurely because they just start to age on the shelf. So I mentioned live goods, especially you don't want to be bringing live goods in when there's the risk of cold weather and frost. But things like some of the deeper depths in outdoor power equipment, other garden related type products and things of that nature are the things that we just had to restage.
And the way we can operate with our logistics back house now and how that works is we can push the inventory much easier now to those regions where the business is opening up, for example, the Deep South and the West. And that's what we did. We just reallocated and pushed the inventories there, and we've kind of held off on some of those other inventories until the weather starts to warm. We're starting to see that now here in the upper part of the Southeast, and we'll both follow that same cadence as we go into the rest of spring. Steve, do you want to comment?
The only thing I would add to
that, John, is that a lot of the outside product that we have, especially for the North, we delayed some of those purchases. Those stores have product now. They're locked and loaded and ready to go. And again, it's the value of being somewhat of a nimble company and be able to react to what we're seeing out there in terms of weather conditions.
Great. Thanks. And just a follow-up. Tony, you put some of the comp sort of headwinds in some buckets. You mentioned 80 basis points for deflation, a little bit on the big ticket.
Could you break that down maybe to include the closures in the calendar on that sort of decline?
Yes, John, I didn't give specifics on those because again it's very hard to sort of pull those out. Obviously, you have a lot of different factors to consider such as what is the pent up demand if a store is closed on the next day and how much of a supply chain disruption would have impacted those stores and being closed. So, it's definitely a much smaller amount relative to those 2 that we stated specific numbers for. Great. Thank you.
And we'll take our next question from Michael Lasser with UBS.
Good afternoon. Thanks a lot for taking my questions. So the weather was clearly disruptive in the Q1 and it sounds like it's still been a bit of a drag in the Q2 to date. So what's given you the confidence that the business will turn and such that you're maintaining your full year guidance and not making any adjustments to that at this point? Thanks.
Hi, Michael, it's Greg. Here's why we're confident. We've seen, as we say and here at the office, we've seen this movie before. We've been here before, seen how the seasons can develop like this with a much cooler early spring and business kind of pushes and shifts backward. Now the obvious question probably will be, well, will you be able to capture that business as it is coming later?
And our belief is that we will. We have seen this in years past historically. And so we're concerned at this point that the opportunity for forward sales is it's still there. So we feel pretty good about that.
And then is there a point at which you get into the season where sales are totally until the following year? And what's the risk associated with that to your comp?
There are always those points in time, but it's too early in the season to make that call. What we are confident with is what we're seeing right now in the markets where the weather has improved, where the weather is starting to break. Another thing I should mention too is that the levels of moisture that are out in the markets today, there's only a couple of places in the country, The severe western part of Texas and some of the California area is where there's some drought. Other than that, the weather maps that we look at and we track, that moisture level is going to occur. It's there in some places already.
And when the snow melt occurs, that's going to also be a nice plus for us and that's going to continue this shift of that business a little bit longer. So I'd say that I'm not concerned. I mean last year the spring weather extended. I think we're going to see the same thing this year.
Okay. My follow-up question is on the deflation. Do you see any evidence when prices do come down that the consumers stock up? Just that you could be seeing an artificial benefit to your traffic associated with the deflation?
I would say that, no, that would not be the case. We sell our products that customers are buying are needed products. If you have animals, you have to feed them, you have to care for them. And Michael, the only time that I could say you may see someone do a little bit of front loading or we call it pantry filling is when we may get very aggressive on price in a certain promotional window. And as you well know, we run only about 15, 16 rotations of promotion a year.
So that is it's just not our model.
Okay. Sorry, go ahead.
No. One thing I would add
to that, because I think there is value in this, is that there are some discretionary categories like bird feeding that when the prices do come down, you get a lot more people that are interested in it. If you look at our comp transaction growth, we continue to see a lot more footsteps in the door. And I think that there's value over that because we've seen it over time. It's not like this has been a short window of deflation. Okay.
That's very helpful. Good luck for the rest of the season. Thank you.
Our next question comes from Peter Benedict with Robert W. Baird.
Hey guys. First question is on the seasonal products. I think Greg you mentioned that the riders were actually off to a decent start. So trying to square that with the late spring, you talked about the ground moisture. Was there regional strength in the riders?
Or what do you think is going on there?
You're absolutely correct, Peter. There's very strong regional strength in that category. And I think Steve and the team did a great job this year with the lineup of products. I think in the store side, Lee would echo that comment. And that gives us some confidence knowing that the moisture levels are what they are as we move further north, that you're going to need to have probably either that machine or you're going to be buying parts and replacement parts from the machine you have.
So we think the category is going to perform fine for the year. We would not today tell you that we think it's going to be anything more than it probably was maybe a year ago. It's too early again to make that call, but we're encouraged with the early business that we're seeing in the markets where we have the weather.
That's helpful. And then your new store productivity, it continues to be very strong and consistent despite some of the weather challenges, etcetera. But can you just talk about what you're seeing in the new markets now as you're opening and how kind of how you see the openings coming going forward?
Peter, this is Lee. The range of stores that we have, we continue to have a mix across the country. So to distinguish between the West and the East is probably not really worthy of the time. But I will say that we continue to perform above our pro form a across the entire network, and we're very happy with those results. So I feel like that seasonally, a new store is not necessarily quite as impacted as some others just because of the new customer base that starts to come in.
So we typically plan for that when we see when we put our new stores out
there. Our next question comes from Chris Horvers with JPMorgan.
Thanks. Good evening. So just not to beat up the weather too much, but I was curious if you could talk about generically Barbarick.
And you heard from Barbarick. And you heard from Tony and Greg that January February actually started off pretty strong. And a lot of that we gave back in March. So if you look at the Q categories, and Tony made reference to this in his opening comments, they continue to perform very well. We continue to believe we're picking up market share in a number of those categories.
We continue to broaden our assortments, make sure we're priced right and we're a dependable supplier. So we feel very good about where we're positioned there.
And Chris, this is Tony. Clearly, when you look at the numbers, the drop off that we saw in March was related to the seasonal categories. And so as Steve alluded to, the Q items really were very strong throughout the entire quarter.
Understood. And then as you think about the deflation, maybe you can talk about how quickly that price tends to get passed or the inflation that you're starting to see emerge, how quickly that gets passed through? How quickly maybe it turns? And is there actually a chance that perhaps as you get to 4Q, you could see some inflation reemerge in your ticket?
Yes. As we've talked in the past, the inflation deflation is most impactful on some of our higher turning categories. Depending on how the product or the prices increase throughout the year, there is the potential that we could have some slight inflation in the 4th quarter. But currently as we see it and again our forecasting is based on this point in time looking at today's price as compared to what we're cycling for the rest of the year. And that's how we'll generate our forecast.
But right now we see the prices increasing. It hasn't had that dramatic of an increase. So we're still anticipating on a full year basis that we'll be at somewhere between the flat and 1% in deflation.
Okay, perfect. And one just one last one. Could you actually maybe quantify either the closures year to year or how we saw spring play out in the non weather affected markets in March? That'd be great. Thanks very
much. Well, I would say that you've got it's a very small percentage of stores that were closed for any significant period of time. But the disruption of just for example, if you open a store at 8 in the morning, which is a typical opening time, and then the weather hits and the store has to close by 10 or 11 and we lose the sales for the remainder of that day and maybe possibly the next day. Those are the kind of impacts that in the upper Midwest and the Northeast, we faced considerably in the month of March. Not so much we had some of it in February, but a lot of it in March with those storms coming through.
And then on top of that, Chris, if you can imagine, the manufacturing base also experiencing issues where they couldn't even could not ship the product from their locations either to our dealing with a lot of that shift, but it was primarily dealing with a lot of that shift, but it was primarily the we call them regions, I think, 2, 45. It's say the part of kind of Michigan across Pennsylvania up into the Northeast, which really in the latter part of spring season is where we see a lot of our outdoor power equipment businesses and things of that nature. And we will still see that business. So the disruption was short term. We've lived through it.
We've worked our way through it. We're comfortable with our forward assortments. And I think we've got an opportunity to capture the sales yet.
Chris, Tony, real quick. We estimate there was about 25 closed store days last year in the Q1. So obviously a significant larger number. And the one takeaway that I would have on the January, February timeframe is that the business could have been even stronger than it was if it wasn't for some of the store closures and the disruption in the supply chain. So we're really pleased with the way the business had performed in January February.
And again, with a cold March, we would expect sales to be a little bit softer.
Thanks very much.
Our next question comes from Chuck Cerankosky with Northcoast Research.
Good afternoon, everybody. If you could talk a little bit about the great start to the store openings, you're at a pretty good run rate with 32 openings in the Q1. What does that tell us about their ability to contribute to earnings as the year progresses? Do they ramp up that much faster?
Well, Chuck, this is Tony. We definitely like to get off to a quick start. There are some significant benefits, but obviously a full year of productivity with a new store will benefit the full year. Since we opened so many stores on a year over year basis, I don't think it will have a dramatic impact. But clearly in our model where service is a key driver and it continues to drive additional footsteps as we become more aware in the particular community, it clearly will help drive some incremental sales for the full year.
All right. And then returning to the near term, if can you tell us, Tony, what the delta in comps was between March and what you're seeing so far in April without giving us the actual comp numbers for those periods?
Well,
as we alluded to in the prepared remarks, when we see the weather break, we the customer clearly responds. And so as we have had warmer the warmer trends in some of the areas of the country, the consumer has responded actually very well. And that's what's giving us the indications that the weather pattern this year is relatively consistent with what we experienced last year. And as we went through last year, we saw the real expedition of sales in the May timeframe. So we feel that we're tracking very close to our expectations given the weather pattern that we've experienced through March and into April.
And I would tell you that it is trending positive relative to our March sales pattern. All right. Thank you.
Our next question comes from Scot Ciccarelli with RBC Capital Markets.
How are you doing guys?
We're good.
Excellent. As you move into some of these new markets, I guess as a follow-up similar to I believe it was Peter's question. As you move kind of west, what kind of return how does the return profile of some of these stores change? And specifically regarding kind of labor and occupancy, does that actually ease? Or is it dependent on what kind of market you're heading into or is California actually more expensive?
Can you just give us some general clarification on that?
Sure, Scott. This is Tony. As we talked about in the past, our model when we approve a store, we're driven based off of a 10 year discounted model. And we set a hurdle rate. So when we look at a particular store, as much as you like to have that higher volume store, the key is going to be the bottom line results and how much cash it throws off over that period of time.
So as we move out in California, generally you're going to have much stronger sales base. And obviously the rents are going to be much, much higher. What we see and the only differences between a store in the Southeast and the store in California or the Southwest is the various ramps. So as we have a significant ramp in a store with say $100,000 of rent, you can really start to drop that to the profit to the bottom line. In California, again, you start with a higher base and if you have that acceleration, again, you can really start to leverage those fixed expenses.
So the model will work very consistently throughout. Payroll is a little bit higher out west as well as the supply chain. And obviously, we'll start to cure that as we develop a Southwest distribution center over the next year and a half. So when we look at it across the board, again it really is centered on making sure that we meet the hurdle rate when we approve a store. After that point in time, on an aggregate basis, the stores will perform fairly consistently.
And because Tony, because you don't have as much store density out there, does the maturity curve look much different than what you would see on the, let's call it the East Coast?
No, it actually right now just based on the stores that we've had out there and we've had California stores actually since 2004. I would tell you that they performed consistently with those on the East Coast.
Got it. Thanks a lot guys.
Our next question comes from Alan Rifkin with Barclays.
Thank you very much. Greg, you mentioned that due to the weather, you made some shifts in the marketing expenditures, pushing some programs from 1Q to 2Q. If you hit your revenue goals in Q2, whatever that may be, what is the anticipated effect on the marketing spend in Q2?
Well, as a percent of sales, it will probably come down. I think now that we've seen what's happening. But remember, we made a conscious decision to make that ship due to the movement of Easter. And we also anticipated that we could have a bit of an extended spring, which is exactly what we're now seeing. So as a percent of sales, it'll probably be a little less than what we initially planned.
But for the half, it'll be relatively the same, probably be on plan.
Okay. And then just a follow-up, if I may, with respect to the DCs. So if you do the math, the store closures represents a pretty small fraction of the total store days in the quarter, maybe onetenth of 1%. I was wondering, the 12 days at the DC was closed, what was the how many stores did that affect? And as a follow-up to that, for how long do you anticipate deleverage coming from the new Southeast D.
C?
Okay. Let's take it in 2 steps. So DC closures, you have to put it in perspective to into 2 buckets here. 1 is closure of the DC due to weather and our inability to operate because the team members can't get there. And secondly, the inability of the manufacturers to move product by truck, which typically how it comes to us, to the DCs.
So we've got 2 variables working here. It's hard to say how many absolute stores. I can tell you that probably 3 of our regions were most affected, some in the Southwest, some in the Northeast primarily or the two areas. It was kind of where that swath of weather kept coming through. It would come from the Southwest and sweep up to the Northeast, hit a little bit in the Midwest.
So it really hit 3 of our buildings. So if I look at that, they're going to serve somewhere probably 4.50 stores in that range. Now it didn't affect every store every day depending upon the days that these storms came through and the disruptions, but it was quite disruptive, I will say that. As far as the deleveraging on that Southeast DC, we're going to cycle through that here as we get through the summer period because it was a June, July when we opened that building a year ago. And so that's going to be behind us here shortly.
Okay. Thank you very much.
Our next question comes from Denise Chai with Bank of America Merrill Lynch.
Great. Thanks for taking my questions. Just want to follow-up on what you're saying about restaging your spring seasonal products. Was this actually disruptive to your store operations? What kind of lead time do you need to give your vendors?
And can you give us a sense of those one off weather related costs in terms of utilities and snow removal and SG and A?
Denise, I'll take first. This is Lee. As far as store operations goes, when you start restaging product, it really doesn't hurt whole lot because in the Northeast or in the northern areas where there's still snow on the ground, a lot of that product is outside. So it actually helps us to restage so we don't have try to do work in the snow. So I think it's really actually helpful when we restage the product.
So it probably makes us much more productive in stores. I'll let Steve answer the rest of that.
Yes. In terms of working with our supplier community, we have weekly calls with our key suppliers when we go into spring. They see this not only with Tractor Supply, but with a lot of their other customers. Because of our purchasing power, we're typically prioritized and we haven't seen any real hiccups or supply chain issues relative to those goods that we've delayed.
Okay. Thanks. And is there anything you can say about the additional costs from snow removal and utilities?
I would tell you that it actually was a significant increase over last year. And it really when you look at the various numbers, the occupancy increase in the occupancy because of those line items was the most significant one as far as the deleveraging that we experienced in the Q1.
Okay. Thank you. Just one follow-up here. What categories do you think that you're taking market share in?
Yes. We typically talk about the Q business in general. And we've always talked a little bit about the fact that when it comes to livestock feed and some of the other categories, we're we go into a community and there's a lot of people who carry what we have, but we offer a different experience. We put it all under one roof. We're open typically more hours and more days, and our customers tend to gravitate to us that way.
So we think there's a variety of categories where we continue to win, and we'll continue to make sure that our assortments are right, that we're priced right and that we're a defendable supplier.
Okay. Thank you.
Our next question comes from Seth Basham with Wedbush Securities.
Thanks and good afternoon. First question is on gross margins. You talked about deflation being the largest driver of gross margin improvement year over year. Can you help rank order the other drivers you mentioned, which 1 or 2 were most important?
Sure. This is Tony. When we look at it and again, when we analyze gross margin and the improvements, there's a lot of overlap. So, if I were to break it down, because of the deflation was obviously the largest. Then when we look at imports, I would probably categorize as next depending on how you break out the price optimization piece, because again there is a portion in which we managed deflation through the price optimization.
I would probably say that falls in as your 2nd category and or 2nd or 3rd category and then the way we manage the clearance throughout the quarter. So and again, some of that is the improved management and the tools that we're using as well as the weather giving us the ability to be able to clear with less markdowns. So, it's difficult to rank them. And I think that once you get past the deflation, those categories for the most part are all in about the same ballpark.
Got it. That's helpful. As we think about the go forward through the balance of the year, is it appropriate to think about the same type of magnitude of benefit to gross margins from those drivers outside of deflation?
Generally, when it comes to our initiatives around price optimization, strategic sourcing, they have been fairly consistent. My one hesitation on that question is around the markdowns because obviously a lot of it has to do with how much inventory we're buying, how the season ends and then obviously then the tools that we have around that to try to maximize the clearance. So I would look at a couple of those as being very consistent, But when it comes to the markdown management, that is going to vary from quarter to quarter.
Great. You. And one last follow-up, could you quantify for us the Easter shift, how much benefit is expected to shift from Q1 to Q2 because of the timing of Easter?
Yes. When it comes to that, we had obviously 2 days last year and it obviously was the sort of the build up to Easter. We are closed on Easter Sunday. So we actually lose that comp day, which does match up between the quarters. So there's no change in comp days through the quarter.
So you're really looking at just a fairly limited impact when it comes to that subsequent Monday because there is a pent up demand since we're closed on Sunday and those 2 days before. So net net between the two quarters, you're probably looking at around low double digit, maybe 10 basis points.
Very good. Thank you.
Our next question comes from Matthew Fassler with Goldman Sachs.
Thanks a lot and good afternoon, excuse me.
Hi, Pat.
Two questions for you. First of all, as you think about the shift in your business associated with the weather, the delayed spring, and you think about that, how that plays out respectively for traffic, ticket and gross margin versus what an
Matt, this is Greg. I believe that when you have the temperatures to sell springsummer product, the traffic count typically from and what we've seen historically is there. It can be fairly violent, meaning that it could come quick, fast and furious in a matter of 10 days to 2 weeks to maybe stretching to 3 weeks depending upon how late that temperature impact occurs. We're expecting some of that honestly in the Northeast where there's still snow on the ground. And it's going to be probably mid to late May scenario.
But the big impact of what I look at when I look at ticket and look at that is traffic count. And the fact that our footsteps were up in that first quarter and we continue to see strength in that footstep, when this weather does open up and it will, we do not anticipate that that's going to slow at all. As a matter of fact, it should accelerate.
And in terms of the average transaction size associated with that traffic, given the mix that you would anticipate to see and also what that mix would mean for gross margin? Obviously, the mix benefited grosses a bit in Q1. Does it go the other way in Q2 or not necessarily?
It could move back a little bit with the sale of a lot of big ticket product. That is true. We know that. We manage to that. But I would tell you that the average ticket will also move up.
So we'll start to see a little bit more leverage in SG and A costs. So it's kind of a there's good guys and bad guys in that mix, but we anticipate that. We plan for that now, and we've recalibrated for that. So I'm fully fairly confident that it could be a little later, but it will still come.
And then the quick follow-up. You had discussed at various times some discrete investment spending for 2014. I think you'd quantify that. Is there any way to quantify the degree to which that impacted Q1 and whether the cadence of the impact is on plan with your original thought process?
Yes. Matt, Tony. Our capital spend is very consistent with what we had anticipated going in. And we continue to make investments in several different areas, in particular, e commerce. And then as we move forward through the second half of the year, we'll be making investments in our clearance optimization as well as in demand planning.
So, those are 3 of the big ones, as well as I guess the 4th would be the CRM that Greg talked about as well in his prepared remarks. So, when we look at the Q1, one of the variables that occurred is, if you remember back at the end of 2012, we had taken a charge relative to our e commerce platform. And so as we cycled through into Q1 this year and we had made some investments last year in our new platform, we started to see that come through the Q1 and obviously in the form of depreciation, whereas we had very minimal last year. So from an impact on the quarter, there was definitely $1,000,000 to $1,500,000 of what I would term additional investment that was charged in this quarter versus what we saw last year in the Q1.
Understood. Okay. Thank you so very much.
Our next question comes from Aram Rubinson with Wolfe Research.
Hi there, guys. Good afternoon. Somebody approached the topic of outdoor space earlier. So I wanted to just dig into that again, which I do often. But by my calculations, your sales per square foot in the outdoor area are about 15% of the sales per square foot of your inside area.
Home Depot and Lowe's by my calculations do like 40% to 50% outdoor to indoor. I'm just wondering where that fits on your priority list and if you can help us just dimensionalize the opportunity there. And if you haven't closed any of those areas to kind of get more business out of them, what kind of results you see from those types of stores? Thanks.
Yes, absolutely. This is Steve again. We do see opportunity with the outside of our stores and we continue to test and try new things. Last year, we got more into live goods, bagged mulches, some soils that are outside. We've got a number of stores right now that we're testing an ability where customers can go directly into the yard without going through the door first.
And we'll see how that pans out for us as we get through the spring season here because it's a relatively new change that we made. We've also got forage product, which we didn't have a few years ago that's outside. And we've got some other new things that we're testing out there as well in terms of product. So we recognize that this could be a potential opportunity for us. We've just got to figure out how we get customers in there, comfortable in that area, open those doors.
And while we don't have an awning today, we believe that there's more potential as well. We will continue to test and try. I can promise you that.
And then if it's okay on the segmentation, it was mentioned at the top of the call as well. I know you've kind of been prioritizing that recently and probably are learning something from it every week. Can you kind of just help us figure out what types of surprises you're learning as you segment your customers? What you're seeing and maybe what actions have been taking and results or response you see from kind of that CRM implementation?
Yes. This is Steve again. There's always a lot of learning with the evolution of a retail store and chain. And I would tell you that, over time, and I've been with the organization, this is my 17th year, we've seen a change and a modification in our customers and their behavior. We talked a little bit about our lifestyle customer.
They tend to live closer to our stores. They tend to buy more convenience type products. There's a reason we've had multiple quarters of comp transaction growth, and we believe a lot of that is bringing in new customers because of the products that we're carrying in our stores and how we're marketing them. So we've talked about gardening products, we've talked a little bit about pet products and there's other categories within our store that are more broad based. And we're getting the word out on those categories, bringing in new products and expanding our lines without necessarily disenfranchising our core customer because I think you can do both at the same time.
Recently, Greg mentioned that we did a test on one of the segments that we have. It was a personalized test with touch points in digital, e mail along with direct mail. And of the groups that we talked to within the segment, we saw positive ROI with each one in their shopping behavior back to us. That gives us confidence that as we move forward with an affinity program in 'fifteen that it's going to work and pay dividends for us in the future. We've also made a strategic hire, a Director of Customer Marketing, a position we didn't have before, and we believe that, that will add tremendous value for us in the future as well.
That sounds great. Thanks for the thoughtful response.
Our next question comes from Peter Kuft with Piper Jaffray.
Great. Thanks. This is actually John Berg on for Peter tonight. Thanks a lot for taking our questions. We're just curious in looking at how a tough winter may or may not drive stronger lawn and garden sales.
And I know it's probably difficult at this point to tell whether or not it's improving demand in the northern parts of the country, but maybe in a state like Georgia that saw greater snow and ice this year, have you seen a stronger than expected
again, we again, we don't talk in specific state, but I can say that in the Deep South and in the South where Tims have warmed and they were much cooler earlier and kind of somewhat suppressed customer demand, the business is opening up and we're very encouraged with what we're seeing. As Steve said earlier, the number of new programs that are out there in the stores that are really temperature sensitive. And I think anyone that's in some of these businesses would tell you the same. So comfortable, confident that we've got a good trend going there, and we believe that trend will just continue to move north as temperatures warm.
Okay. And then as my follow-up, Tony, is there any way you could provide any color or quantification maybe around what markdowns did for your gross margin in the quarter?
We don't provide that information again because as we work through technically what is clearance and what the impact is on sort of price optimization or what the impact of price optimization had on the clearance, some of the mix changes. I don't think it would benefit to try to quantify specifically. Net net, you're going to be somewhere in the again just the low double digit territory.
Okay. Thanks a lot guys. Good luck in the coming quarter.
Our next question comes from Adam Sandler with Deutsche Bank.
Yes. Hi, guys. Good afternoon.
I was
hoping you could just walk us through sort of what the trends were like last year in the quarter? I believe that as you said, April did start a little bit weak again and then sort of how it ramped and then maybe if there's any sort of just geographic differences this year versus last year. And then on the call side, just remind us what you guys are expecting for the DC, the headquarters relocation and some of the other projects you have planned for the back half of the year? Thanks.
All right. Adam, this is Tony. Just to give you the background when we went into Q2 last year, obviously April was the softest month and the significant spike occurred in May. And then a strong June, but not in the same ballpark as the strength of May, but still a very strong performance in June. As we move into this quarter, as we've said before, it appears as if we're running the same pattern.
And so that's what we're looking at and anticipating as we move into Q2. The one big advantage we had last year and again we're very hopeful that that trend will continue is it was not only a delayed spring, but an extended spring and it even moved into Q3 and we had a very strong July August. So that will be a key. And again, one of the main drivers is the moisture that's in the ground. Obviously, rainfall that occurs through the Q2 will be beneficial as well to drive that spring into Q3.
Adam, this is Greg. On some of the initiatives and some of the capital outlays, Tony mentioned about demand planning for the latter part of this year. I mentioned earlier in my comments about some of the work we did in CRM early in the quarter and now we'll be working toward 15 for some of that implementation. The headquarters building, our store support center will be completed and will begin occupancy with our first move sometime probably in July, early August, hopefully to have everyone under one roof by the end of the year. But again, that all depends upon how smoothly the first move takes place.
But right now, I think everything that we're working through and working on from a spend standpoint is coming falling within the plan. We've got some things we're doing in a distribution network as well. So I think we're in good shape.
Great. Thank you so much.
Our next question comes from Eric Bouchard with Cleveland Research.
Thank you. Two questions. You talked about the loyalty card and you talked about online. Just curious if you could frame what success looks like in terms of those initiatives in terms of the payback that we might see in results?
Eric, you said loyalty and we missed the Loyalty and online.
Okay. And online. Okay. Steve, you want to talk
about that? Yes. I'll talk to the loyalty program. We call it an affinity program here. Again, this is about capturing data from our customer, bringing them to an opt in position with us and then communicating with them over the course of time the way they want to be communicated to that's relevant to their lifestyle and their needs.
We haven't put a dollar amount to it at this juncture. We're still in the process of the RFP and trying to understand all the dynamics of that. But at the end of the day, we want to get to know our customer better. And whether that be the content that they want to see online, how they want to be talked to and what kind of what they're looking for from Tractor Supply Company. We believe we've got a customer base out there that wants to be more engaged with us, and this will open the opportunity for us to do so.
Eric, this is Tony. Just to tag on to what Steve said, we have been very deliberate in our approach to the loyalty program and it all centers around designing something that the customer wants and isn't necessarily something that would aggregate margin. So, when we look at that and design that, we want to be very careful because we understand that we're a destination store and it's not as critical to try to entice people to come into our into the store. So the design is going to be very critical for it to be successful so that we can capture information about our customer and be able to correspond with them.
Eric, this is Greg. I'll talk about the online for a moment. We mentioned in our prepared remarks about drop shipment and what we saw was the consumer still having a need for certain fall winter products that we were already starting to exit in the full wall store, but they took full advantage of because they were available through the drop ship program with certain vendors online. That was a bit of a surprise, but a great learning for us. It helps us extend some of the seasons with no risk.
The mobile business, we don't have we have a mobile site that's capable now, but we're seeing people come through the mobile, some type of mobile platform into our website and exchange not only information with us. Or looking to exchange commerce. So we've got some interesting things happening. It's still very early for us. There's still lots of learning, but we're excited about what we're seeing.
Perfect. Thank you.
And our last question will be from Gary Volter from Credit Suisse.
Hey, I made it. Congratulations on another good quarter guys. One question is just a follow-up. On the gross margin, obviously, you talked about spring seasonal getting delayed. If we think about the gross margin on the different merchandise, is that a higher margin category putting aside the deflation impact, etcetera, than Q, some of the things that you did sell through in Q1?
Yes, Gary. Tony, the spring assortment and seasonal categories will generally be a higher margin and will be beneficial. My only caveat would be strong riding lawnmower season, which tends to be well below chain average. But we obviously love to get that customer in because then we turn into hopefully a customer for life and we can service their repairs and their other needs relative to that. So we anticipate right now a reasonable season that generally will correspond from a margin standpoint to the prior year.
And then just to follow-up, Greg, maybe I go back too far with this company, but in the past years ago, you used to talk about resetting the right side of the store and then the left side of the store. And obviously, it's been extremely successful. As you look at the inside of the store, are there areas that you still feel are underperforming that are focus of resetting or remerchandising?
Yes, this is Steve. I will tell you that this is a culture of being relentlessly dissatisfied.
I can
tell you we're probably not happy with the majority of the inside of our store and we think we've got upside just about everywhere. So the merchant team working with our space planning team is looking at every square inch, every peg, every four way and every shelf to optimize the opportunity. So I would tell you, yes, we are still working on it.
Thank you.
That concludes today's question and answer session. Mr. Guiler, at this time, I will turn the conference back to you for any additional or closing remarks.
Okay. Thank you, everyone. In closing, I'd like to thank all of you who are invested in Tractor Supply and all of our team members out there living the lifestyle, serving our customers and driving our company's performance. We believe 24 consecutive quarters of comp transaction count growth and 18 consecutive quarters of positive comparable store sales is evidence that customers are increasingly looking to Tractor Supply as a one stop shop for rural lifestyle needs, and we continue to strive to be the most dependable supplier of those needs. Thank you for spending time with us today, and we look forward to sharing our Q2 results with you during our next call in late July.
That concludes today's presentation. Thank you for your participation.