Good morning. Welcome to the management presentation portion of Tractor Supply Company's 2013 Investment Community Day. Today's presentation is being recorded and will be available for replay at tractorsupply.com. This morning, you will hear from Greg Sanford, President and Chief Executive Officer Steve Barbarick, Executive Vice President, Merchandising and Marketing and Tony Credell, Executive Vice President and Chief Financial Officer. I would like remind everyone 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 is now my pleasure to introduce Tractor Supply's President and Chief Executive Officer, Greg Sanford.
Thank you, Randy, and good morning, everyone. Welcome to Nashville and our annual store managers sales meeting. Those of you who were able to join us this morning for the general session were given the opportunity to experience firsthand the winning culture here at Tractor Supply. We had about 1200 current managers, about 100 unit managers, all of which are the individuals that really are the frontline of Tractor Supply and who serve our customers daily and practice what we call, which is greet, uncover, recommend and ask. And that's really what drives our sales.
The purpose of this meeting is to bring together the team to excite them, to get them excited about the product for the year, to inspire them with the new products with our veteran community downstairs and to recognize them for a job well done. And we did a lot of that actually last evening, I attended a region awards dinner where we presented in that region over 100 awards. It went on for some time. One of the great things about Tractor Supply is that we have a culture of recognizing our top performers and we applaud them as part of our peer group. The culture here is one of recognition and collaboration, and that supports the idea that if the team wins, everyone wins.
We'll spend some time over the next few days building our team's competencies and challenging them to achieve an even higher level of execution. And shortly after this meeting, you'll be touring the trade show floor where you'll have the chance to observe about 300 or so of our vendors who have the responsibility of about 70% of our total cost of goods. They're going to interface with our store managers and to show them products, share information and to teach our store managers how to effectively sell their products. I'd like to start all the presentations even as I did this morning down on the floor with our mission and values and what they mean to us as a company and talk to you a little bit about this being the foundation of who we really are. I will tell you that I tested this before I joined the company back in 2007 by traveling and working with one of our district managers.
And I spent literally a week traveling Texas with this individual and by doing so, I was able to observe what the company was truly all about. Yes, I conducted my own research and I did test drive the company before I joined. I'll also tell you that it's how we hire here and it's also how we sadly say goodbye to some of the team members. It's how we try to conduct ourselves every day with our customers and our vendor community. Our mission is to work hard, have fun and make money and give legendary service and give great products at everyday prices.
That is really what Tractor Supply is about. Our values are straightforward and they're easily understood. They are things that you would probably share with your own children and as they grow into adults. Tractor Supply is a place where we emphasize these daily. We have these in print throughout every facility on the walls of every building that we have and these values are the foundation of who we are as a company.
Let's talk a little about shareholder value creation. In fact, this is our 75th year and yet we are still having opportunities on a daily basis to look at doubling the size of this company, particularly in our domestic store base, while relentlessly improving our results. In today's presentation, our focus will be on shareholder value creation. And later in the presentation, Steve Barbrook and Tony will be sharing with you more information on the many initiatives to increase sales, to improve margins and manage expenses as our capital investment moves forward in the growth of this company. So let's talk about 2012.
We had a very solid performance and we opened 93 stores in 2012. We grew our same store sales 5.2% on top of last year's 8.2%. We increased our gross margin by 40 basis points to 33.6 percent. We leveraged SG and A by 70 basis points and we paid a record $51,000,000 in cash dividends. And at the same time, we repurchased a record $272,000,000 worth of stock.
As a result, our earnings per share grew 26% to $3.80 per diluted share. Now one of the questions we receive a lot is how are you going to cycle those tough comps? And here's our answer to that. As you'll see from this particular slide, the company has posted very strong comps over the past 3 years. And today, we're going to let Steve Barbeek share with you information about how we plan forward for driving sales and the initiatives that our team has in place.
It's exciting to know that despite the strong performance in recent years, the merchant team here at Tractor Supply continues to find that pipeline of opportunities for the next several years. However, rather than rushing to push these products into the stores, our team continues to use a test and learn methodology to grow the business. But what's important to know is that while comp stores can trend to be volatile at times on a year over year comparison, weather events and other product trends and such still impact the business, but we continue to deliver solid year over year growth in earnings and operating margin by quarter. As you can see on this slide, the company has produced solid year over year EPS growth on a quarterly basis. And for the past several years,
we have had solid performance. This has
been a result of us continuing to grow sales, increasing gross margin and managing expenses, all while continuing to invest back into business as we grow it. The operating margin side of our business on this slide demonstrates year over year improvement. And if you look at just a few years ago, operating margin targets were set at about 7.5%. This team has done an exceptional job of improving margin year over year, and in 2012, we ended the year at 9.4%, just shy of our most recently stated goal of 9.5 As you would expect, we have decided it is time to share a new target with you, and I'll cover that in just a few moments. As I mentioned, Steve and Tony will be sharing more detail regarding our initiatives during their presentations.
The initiatives listed here, comparable sales, gross margin, expense management are all the drivers for growing operating margin to our new target of 10.5 percent by 2017. And as in the past, we do reserve the right to get a little ahead of that schedule as we perform through the next couple of years. Our next 5 year targets. In the next 5 years, we expect to grow our operating margin by to about 10.5%, and we expect that we'll make approximately 20 basis points of improvement on an annual basis. By doing so, we expect that earnings per diluted share will range from dollars to $7.70 by 2017.
Now longer term expectations, talk a little bit about store growth. We still plan to be growing our store base square footage by 8% a year. We still see same store sales growth between 3% 5%. We believe we can continue to improve our margins by approximately 20 basis points. We will be investing approximately $250,000,000 in capital and we will continue to return cash to shareholders through our dividend and share repurchase programs.
EPS growth will be somewhere between 14% 16% on an annual basis as we grow the company forward. As we look at this slide about shareholder value creation and before I turn the presentation over to Steve, I want to speak a few moments about Steve Barbarick. Many of you have probably seen Steve or maybe have even spoken to Steve in the past. He was recently promoted to be our Executive Vice President of Merchandising and Marketing. And Steve has served Tractor Supply over 15 years, holding numerous positions of increasing responsibility here with the company.
He and his team continue to play a very integral role in the company's success and under Steve's leadership and you saw some of this yesterday as you visited one of the stores, you have seen and will continue to see significant improvement regarding our product assortments, the exclusive brand development that we've been putting into our stores for customers, our direct sourcing of product taking cost out and the in store environment, which I believe you got to see yesterday, which was one of our reimage stores, which they looked just fabulous when we put that into play. Steve will play an integral role at TSC as we go forward, and you'll hear more from him over time. But at this point, I'd like to turn the presentation over to Steve and let him walk you through how we're going to drive sales and margins.
Thank you, Greg, and welcome. As Greg mentioned, I'm going to talk about 2 key initiatives now that we have to drive shareholder value. The first being sales and then that will be followed by gross margins. Before I do, I wanted to lay out what we call some key merchandising principles. These principles are guardrails that we give to our merchant team so that we stay down the right path and we don't deviate from ditch to ditch.
The first being focused on being the most available supplier of basic maintenance needs. And for a destination retailer that's really important. We're going to differentiate ourselves through the products and the brands that we carry in our stores. We're going to offer value that exceeds the customer's expectation. We're going to excite our customers with the treasure hunt experience when they come in there's going to be something new and different them to find.
And finally, we're going to maintain our commitment to supporting the out here customer. And what that means essentially is it's taken us 75 years to build the TSC brand. We're not going to lose the authenticity of that brand by chasing what I would consider to be hollow sales. So driving sales, Greg showed some comp numbers up here. And while we're comping against some big years, the one thing that we've had is a plan.
And I'm going to lay out some of that plan for you today. 1st, we're going to talk about new products. You've heard us talk about Q, consumable, usable, edible. A regionalization and what that means to Tractor Supply Company. And then we'll finish by talking about the drive aisle what we can do to improve that to gain incremental comp store sales.
The first, new products. Keeping our assortments fresh. For years, we've talked about the fact that we've had a pipeline of opportunities. And I would tell you that that pipeline still exists. We have a structured test program and we're rigorous about it.
We have assigned owners that go out and look for new items. We get those from customer feedback, from our store managers, and from our vendors. And what we'll do is we'll put them into a grid of 25 stores that are randomly chosen. We will then have that assigned owner lay out a plan when they'll hit the stores. We'll then we'll report on those tests on a weekly basis and determine the viability of rolling those items out.
And that pipeline could have as many as 50 or 100 items in it at any given time. And those items that don't work, we roll off and we roll new items on. So it's a constant rolling methodology by which we use. We also have a culture of risk taking. And we applaud failure at Tractor Supply as much as we do success.
And I know that sounds kind of odd to say, but we really believe that the more opportunities that we have out there, the more opportunities we'll have for the future and the success of the company. A comment that Jim always talks about, fail often, and cheaply, that is reiterated on a regular basis around the store support center with the merchant team. We also get ideas from open buying days. And this is something we established about 3 years ago and 3 times during the year, 3 different times for one day, we'll invite vendors in that we do not do business with today. And they'll come in and they'll show us their products.
We'll learn about what's going on in the industry and we'll meet over those 3 days with approximately 1,000 vendors we don't do business with today. Again, finding those opportunities, putting them through this grid and this structured testing that we have and we learn a great deal from that. And finally, category resets and that's an opportunity for us to change our assortments up and down our aisles. Here are some examples of some tests that we've had and where we're going. The first one is live goods.
And 3 years ago, we tested some trees and bushes in a number of stores, saw some success. The following year, we expanded it, built upon it. And the picture to the right is the product that was received by our Lake City, Florida store just recently. So we went from a couple of bushes and pots and a couple of dormant trees that you hear us talking about to what you see today. And this assortment will go to about 500 stores.
So again, as you heard Greg talking about a test and learn approach, we'll see how it performs. But based on the history that we've had, we believe we set ourselves up for some great success. We also talk a lot about differentiation and the fact that we need to tractorize our assortments. And yes, we carry grills and yes, we carry patio furniture, but it's not what you're going to find at big boxes or necessarily at mass. It needs to really tailored they need to be tailored to our customer.
So our grills for example and you're going to see them when you walk downstairs later today are different. They're unique. That first grill that you see up there, it weighs £120. The legs on it are 3 inches in diameter and the wheels are 8 inches cast iron. It's different.
It's unique. The 2nd grill is over 8 feet long and it's over 200 pounds. It's got 1,000 square feet of surface area, again unique and differentiated for our customer. The furniture we carry is completely unique as well and you're not going to just find it anywhere. So when you go down on the floor, take a look at it and you'll know what I'm talking about.
And finally, we look at trends and what's going on in the industry. We know our customers are self reliance. A year ago, we tested greenhouses and they performed incredibly well. We brought in a 4 foot set this year. And I would tell you our sell through that we're seeing today is exceeding our expectations.
So we see more opportunities and following trends, but also at the same time staying true to who we are. Our product refreshes and resets, again, 70 percent of our revenue we look at every year. And that's really important because not only are we looking up and down the aisles, but we're also looking at lowest landed cost in multiple suppliers. Our teams are charged with this. We lay out a full year plan and we go back and assess it and we walk every single planogram change that goes out to our stores.
Nothing is done in a vacuum, it's done in a collaborative manner. Q, you hear us talk a lot about Q. Being the most dependable supplier, again talking about the Q business, our goal here is to grow market share. We've added resources to the team. We've added a few folks that are managing this business for us that are over and above what we had a couple of years ago.
We're also looking at improving our in stocks by adding inventory into some key categories. We've got a pricing group now that is managing our price on a regional basis and in some cases local basis to make sure we're priced where we need to be on these consumables. And where we can, we expand our assortments. 3 years ago, we talked about the addition of the Purina branded feed. We had 15 SKUs at that time we launched.
And over the course of the last 3 years, we've added now up to 30 SKUs the stores have access to. And we'll continue to do that. We've also taken advantage of some other pet brands that we brought into our stores. When we talked recently about the fact that we've had comp transaction growth, we've had 19 straight quarters of comp transaction growth and a byproduct of that is coming from the Q business. This is a picture of a feed room.
And today we have about 60 of these in the store. And where we see the opportunity, we can actually expand our floor space and open that store up and give an opportunity to add more products in a lot of existing stores that we have where we see fit. We're not going to do that until we feel like the entire box is performing where it needs to perform, but where we expand. But it gives us an opportunity in the future should we want to do that. In addition to that, we've talked a lot about the hay business.
And you might say, Steve, we've heard this for the last couple of years. Yes, you have. But a couple of things that you may not know. 25% of the customers that are buying hay are new to file. So we're getting new customers in as a result of it.
In addition to that, we've got about we've got HAY in approximately 7 50 stores now and we will continue to roll that out to more stores. The second phase of it in which we've started already is to add big baled hay to our stores. And you can see here from the picture what a big bale round bale hay looks like. It is £1,000 It retails for about dollars and we have it in over 70 of our stores today and it's performing very well. And where we see more pockets of opportunity, we will continue to roll this program out also.
Regionalization. Our customers across the United States expect us to have relevant assortments for their area. For those folks that live in Kansas expect that we are right in Kansas and those folks that live in New York expect us to be right in New York. So it's constantly a challenge for the merchandising team to understand the needs of the local markets. There's also brand preferences.
Our vendors our vendors. But last year, we also took an initiative called Town Hall Meetings. And we worked our store operations team and our 9 regionals and we set up a structured event in each of the 9 regions where once a month myself, one of our VPs of merchandising, a member of the marketing team as well as a member of the inventory management team flew out to these stores and we had 20 store managers come in, sit in the back rooms on bags of feed and talk about their business. We had a structured agenda. It was 3 hours long.
And after the meeting, we got a lot of very direct feedback. We had our team members get up and prioritize those greatest opportunities for the regions. Took the notes back. We put together an action plan. And within 60 days of leaving there, we told them what actions we would take to best support their needs.
Again, we talk a lot about servant leadership. You heard it earlier today. We recognize those folks on the front line, our team members are the ones that can give us the best feedback. And then finally, A through D assortments and I'll talk about that here in a moment. Regional opportunities.
There's different type of regional opportunities. The first is what we consider to be local store assortments. So the product you see right there is for cattle and it's heavy equipment. Cattle equipment. But you know what, there are 100 stores in Tractor Supply that need this product.
And those customers that live in those areas expect it. Not only do we have that product, but we have tillage and I probably could go through another 50 to several 100 items where we have local store assortments. There's also regional brand preferences that we consider. Carhartt for example, the workwear customer is very prevalent up north and we have a Western customer down south. The Western customer wants Wrangler branded products.
So we have a wider assortment of Wrangler down south and up north we have a broader assortment of Carhartt. At the same time, there's needs for livestock feed outside of Purina. So there's about 120 to 130 stores in the Northeast that carry Blue Seal. And then Gallagher is an electric fencing brand that those customers out in the mountain states expect us to have. So we're going to have it.
So again trying to manage and tailor assortments to the customer needs. And finally what I would consider to be geographic assortments. And these are clusters of stores. So this example would be galvanized hardware. In the coastal states, because of rust, customers expect us to have a different assortment there.
The same thing when it comes to board fencing for example in Florida. We have board fencing in Florida. We don't have anywhere else. Why? Because there's a lot of horses down there and that's what our customers expect.
And then we have maple syrup supplies, which again is in the Northeast that our customers expect Tractor Supply to carry. We have that in about 130 stores and every year we expanded to a few more because we see the need. So again, being local and understanding our need the needs of our customer are critically important for Tractor Supply Company. And then finally, drive our merchandising. And this is an opportunity for us to enhance the shopping experience and have the customers find a project type sales to fill their baskets as they're walking through our stores.
Specifically, the center courts, you guys that went to Hendersonville last night saw the center courts that we have out there today. We have an opportunity to really maximize that area of our store. Give the customer a treasure hunt experience of new things that they may not expect from Tractor Supply Company in those events. When we put a lot of items out there in those center courts, we learn from our customers. We learn from the POS data.
All those new items, every year, courts, we learn from our customers. We learn from the POS data. All those new items, every year we find out what they're looking for, what worked, what didn't work and then we can grow from there or add those products back into our assortments. And then finally improve our impulse item offerings that being end caps, power panels, clip strips as we Days event, a great opportunity for us to capitalize on that space and be relevant to our customer. The other one is Wild Game Supplies.
And we know that the number 2 hobby of our customer behind gardening is hunting. And in this case, we every year we expand this event that's in our center courts. It's about a 4 month, 5 month event. We had 30 different assortments. We had 11 buying teams participate in it.
We had over 100 unique items that we didn't have the year before in the event back in 2012 and it again performed incredibly well. And we'll take the learning from that and apply it to 2013. We've also been able to tie our events together better working with our marketing department. Now they're more packaged. We are stepping it up when it comes to the POP in our stores and we're really better able to tailor these events to our customers as they walk in and see we've got something unique going on.
Essentially those are the 4 real levers of driving sales. New products, queue items, regional opportunities and drybio merchandising. Now talking about gross margin. Again, we see this as an opportunity as well. I'm going to talk about price optimization, our exclusive brands, strategic sourcing The first being price optimization.
The great thing about price optimization is you're always testing for elasticity. And this is an opportunity for us to drive market share while at the same time enhancing our gross margin performance. So you can use it either way. This is not about just taking prices up. We've seen a lot of other companies do this and it's failed.
We're going to use it the right way. We're going to use a test and learn approach. We are not going to risk market share. Right now, we're focused on regular price. We've got a pricing team that's working with the merchants and every day talking about recommendations that we can make within the assortments.
And then later we have the opportunity to look at promotion in clearance modules. The great thing here is that we're doing some low tech things today that are improving the performance, but we know we've got more opportunity in the future. Exclusive brands. There's a lot of reasons to capitalize on exclusive brands. First of all, we control the quality and the specifications.
We can buy it from multiple sources, therefore improving our consistency of supply and our in stocks. We can develop loyalty and with that exclusivity and customers coming back to Tractor Supply Company. Pricing is less transparent because it's not brand to brand across different retail outlets or the Internet for that matter. Certainly, it helps Tractor Supply when it comes to our profit margins. But probably the most important thing here is it gives the customer a choice between branded and exclusive branded product.
And it offers them value should they choose to pick an exclusive brand. Today, we do over $1,000,000,000 in sales in exclusive brands. It represents over 25% of our sales. We've got a product development team working with our merchants and marketing when it comes to our approach. We believe it provides value as I mentioned to our customers.
And there's still a lot of opportunity in front of us to national branded house. We will never national branded house. We will never get away from that. It is entrenched in who we are. Our customers expect us to carry national brands.
And you can see from this slide in Livestock and Pet, we're going to have Purina Blue Buffalo Science Diet. When it comes to seasonal and gifts, we're going to carry MTD in ortho. In Hobart or in tools and truck, we're going to carry Hobart and Ingersoll Rand. Clothing, there are some key brands there that we're going to have in our stores. And finally, there's some brands in agricultural products that we're going to always carry.
At the same time, we know we can offer value to our customers with our own exclusive brands. And in this case, in Livestock and Pet, 4 Health, which we've talked about, Do More, Paws and Claws, which is in Cat and Royal Wing, which is our bird aisle. In Seasonal, you've heard us talk about Groundwork and Redstone, JobSmart over in Hardware and Tools. Certainly, the opportunity we have in front of us with C. Schmitt and Workwear and then finally in agriculture.
Couple of things here. First of all, 4 Health, you've heard us talk about it, has done very well and exceeded our expectations. So in February, we rolled out 4Health Grain Free. It's 3 different formulas. And I would tell you that our team members have gotten behind it.
And as a result, they've talked it up to our customers and it's doing very well. The launch has been very successful. At the same time, we recognize the opportunity to upgrade our existing leather footwear line in C. E. Schmidt.
We will in May roll out 6 styles, a 7th that's regional, it's a longer boot, talking about regionality here. But all these styles will be waterproof and they will have a much better comfort for the customers. Strategic sourcing. Again, this does not just mean importing. It means strategic sourcing.
It could be domestic. We're always looking for product quality first. We need to make sure that we've got a sufficient supply chain and looking for vendors that can take care of our needs and have the the capacity long term for Tractor Supply Company. We're also looking at landed cost because in many cases you can reduce your expense significantly if we pick it up from the right locations. And where we can, we prefer multiple suppliers for obvious reasons.
Managing the seasons. Any retailer that has a seasonal business recognize that the money to be made is an allocation in sell through and in clearance. And the team has done a fabulous job with that. We're allocating more productively today. Our assortments are being more regionalized.
We're adapting and we can react very quickly as an organization. Tractor Supply is bureaucratic. When we make decisions, we go and we go as a team. We seize the opportunities and we've done a nice job ending our seasons clean. In summary, we have a really good balance between sales and margins and you can see that through our track record.
We're not going to risk market share for margin rate. We will continue as an organization to take calculated risks and to test and to learn. We're going to learn through our TVS process, a continuous improvement in our correction of error process. And we're excited about the future and the pipeline of opportunities we have in front of us. I would go as far as to say that in the time that I've been with the organization, some of the biggest changes we've made is going from what is really an arts based organization to one that's much more science based and using data turn the microphone over to Tony Credell to talk about the other phases of shareholder value.
Thanks, Steve.
As you may have gathered, Steve has a lot of energy, a lot of passion, generally makes me look like I don't have much of a pulse. However, I will attempt to wow you with expense management. Taking a look at we don't talk a lot about SG and A, but we think we have some opportunities here and we've highlighted 4 areas that we're focused on, although there are several others that we feel that we can leverage areas that we can leverage as well. Tractor value system, we've talked a lot about property ownership. We think that's a way to reduce the expenses on the P and L.
Our purchasing department is relatively new. We'll talk a little bit about that and then some energy management initiatives as well. So looking at Tractor Value, this has been a terrific program for us and really, really fits our culture because not only does it focus us on a continuous improvement
who
has been dubbed the father of TVS. I'd like to say Jim, I'd say who has been dubbed the father of TVS. I'd like to say Jim, I didn't use grandfather just to let you know, but I had to get at least 1 big in the program here. But what we do is we get the whole team together, we look at a process, if the process is broken, we will get every functional group together. And what's even better is that when it involves a store, we can bring in that store person.
And we'll have teams together that have store managers, district managers, we'll have receivers from the backroom and they'll be working with the logistics folks from the store support center or they may be working with the operators, they may be working with the finance group. But we'll get the team together in a rapid improvement event and we'll solve that problem in a 2 to 3 day period and we'll have a working solution that we can roll out. We believe that over the last 3 years in the process that we've had just with the stores that we saved over 400,000 hours of store time. And we either reallocate that or to sales initiatives or we'll take that to the bottom line. So it's been a terrific program for us.
And our next focus is to develop continuous improvement leaders out in the field. So we brought in 4 DMs and they're going through a rigorous training program so that they can bring the principles out to the stores. We're also investing in growth and we believe that given the current interest rate environment that it makes a lot of sense for us to use our capital to drive some efficiencies on the P and L. So in the first two instances, when we talk about self development and the store purchases, One, when it comes to self development, we believe that by taking out some of the developer expenses, working directly as sort of overseeing the contractors ourselves, We can take out costs and we can use our financing to drive some savings that will inure to the P and L. At the same time, when it comes to store purchases, we have the right of first refusal on all our leased properties.
And when they come up as an attractive number where we believe that there'll be a positive benefit to the P and L, we will purchase those store sites. We believe that this gives us some flexibility as far as how we allocate our capital. And so it's just not focused strictly on either dividend and or share repurchase. So it just gives us a little bit more flexibility and it is subject to the interest rates and the favorability relative to that store and the available purchase price. Also we're going to we take a look at the lease versus buy when it comes to distribution network.
And as in the past, we have owned all our distribution centers and that will be the case going forward. In addition to the relocation we're currently doing in the Southeast, we also plan to open up 2 distribution generally targeted for 2015 2017 out on the West Coast in the South part Southwest United States and then in the Northwest United States. The store support center, we had purchased land last year and we are targeting mid to late next year to have the store support center built. It's going to be a great facility, but it will house the entire store support center. Currently we're in 3 different locations in the Maryland Farms area of Brentwood, Tennessee.
We believe again by using our capital and the low interest rates that it makes the most sense to own the property reduce the expense. Purchasing department was established about 4 to 5 years ago. And prior to that, we basically would purchase through each department. So each department had its own function and had to carry the purchasing activities on their own. We brought on an individual to start up a department and really just work as a facilitator working with the departments.
And we have had significant success in managing the costs. So this is really for all the non merchandising spend. We've instituted very formal bid processes. We've utilized reverse auctions, especially when it comes to store supplies and we've saved close to $500,000 just in 1 year in reverse auctions. We have the opportunity to aggregate services.
So we're no longer decentralized when it comes to buying certain services and that gives us some leverage and we can scale that as well and get some efficiencies. The next phase of purchasing as we enter into last year we started to build the team and now we are truly becoming more of a centralized purchasing group. And we're doing that on behalf of the entire company and we've relieved that function from each of the individual departments. And that's why we believe there's even more savings to be had as we centralize that Energy Management, you listened to Ben in the company presentation talk about some of the things that we're doing from a sustainability standpoint. The main focus and where we've got had the most success in is obviously reducing our electricity and gas usage.
And we've also been taking a hard look at the deregulated marketplace and deriving some benefits there. So currently we have over 700 stores with an energy management system, but we are currently testing and have 85 in place of a new system that is much more impactful and much more high-tech and we believe will deliver even greater savings. So we have some significant benefits that we anticipate getting from that new energy management system. There's some alternative energy saving alternatives or tests that we're conducting that relate to energy efficient lighting. And that's one of our main initiatives there.
In the past, we've had some efficiencies on transportation. We've reduced the number of stem miles by basically eliminating the backhauls that we do. So we've saved some significant gas usage there. We're actually testing CNG trucks of compressed natural gas. It's in a test space and we'll be analyzing that.
And then as we develop the new store support center, we've made it highly efficient and we have designed it to the extent where we anticipate having it LEED certified. One example is we're using sort of the raised floors and doing the air conditioning and heating under the floor, which has tremendous savings as well. So again, we believe this plays very well into our sustainability program and will also benefit the P and L by reduced expenses. So how does this all play into the financial engine? Clearly, sales is the main driver.
We have anticipate same store sales growth as we move forward and we're going to continue to grow the number of units at about an 8% clip. As we grow sales, that's going to drive profitability. Obviously, just talked briefly about managing the SG and A and driving expenses down. That is going to generate significant cash flow. As we continue to manage the inventory that will add to the cash flow as well.
We're going to take some of that cash and obviously funnel it back into the company to continue to drive our growth as well as use some of those cash for technology advancements so that we can continue to manage the expenses and continue to fund our initiatives around gross margin to be much more efficient and drive bottom line results. Additionally, then the remaining cash is going to be returned to the shareholders. Our plan is a balanced approach As we continue to drive shareholder value through the stock, through EPS growth, we also intend to return cash to this to shareholder through dividend payments as well as the share repurchase program. So Greg talked about our new target of 10.5 percent EBIT goal. What we see is we believe that through the comp sales, the gross margin and expense management that we talked about today, we see anticipate a pool of about 170 basis points of value that we think we can take to the bottom line.
Now before we get too excited and start a new goal of 11.5%, I want to remind you that we do have a headwind that comes from the impact of the queue items. So we know that they are sort of lower average than chain average margin, they're high bulk. They're low average ticket and they're not freight efficient, all right. So there's going to be a headwind from the impact of Q. Obviously, on the flip side, we love Q.
It's tremendous driver of the business. It's high frequency, builds customer loyalty. It makes us the dependable supplier as well as continues to drive market share for us. So it's obviously a plus, but we anticipate that there's about 10 basis points to 15 basis points of gross margin headwind when it comes to group to Q items and growing the Q items. So net net, we feel very comfortable in that 10.5 percent EBIT target that Greg outlined.
So how do we get there? When we look at the components, looking at these variables, we believe that just driving sales will bring us about 0.3 or 30 basis points of improvement. So really that will give us some leverage from the comp sales. Biggest driver will be the 4 key gross margin initiatives and that's about we estimate to be about 60 basis points. And then from the true expense savings that we're getting, not necessarily the leverage that comp sales will drive, but from the expense leverage that we anticipate, we look at about 20 basis points and we believe that's what will carry us to our goal of 10.5 EBIT 5 years out.
So what are the assumptions behind the modeling that gets us to that 10.5? Number 1, we have square footage growth of 8% annually. Generally, that's going to translate into about 5% to 6% of sales growth. Add to that your comp store sales growth of 3% to 5%. So generally, we anticipate being around the 10% sales growth.
Our operating margin improvement, we've always talked about the 20 basis points annually. Year end cash balance, again, we've consistent with our target of the $100,000,000 to 150,000,000 dollars Inventory turns, we expect to get about 5 basis points annually that will continue to help our cash management. And then that will translate into over that 5 year period shareholder payout ratio of about 70% to 90%. So looking at it in a little bit more detail, that will take us out 2017, our estimate is about store count of 1800, sales at close to $7,500,000,000 will grow margin, gross margin of 10 to 15 basis points matched up with expense leverage of about 5 to 10 basis points. And that'll get us that operating margin of 20 basis points annually.
And then that will take us to an EPS and this will also include an estimate for share repurchase of around $7.20 to 7.7 $0 So and net over CAGR over that period of time EPS growth would be about 14% to 16%. So we think just tremendous returns obviously this is critical as obviously this is critical as far as looking at our capital allocation, but we anticipate generating close to 2,500,000,000 dollars in total cash flow. Now CapEx, again to fund the business, we anticipate $1,200,000 approximately to funnel back into the business to drive our operations and that will result in about 1,350,000,000 dollars that's available to return to the shareholders. So when we look at the capital allocation targets, again, we're looking at a very balanced approach. We're going to invest in the growth.
We have dividends and share repurchase and we believe that the years. So if you look at the last 5 years and then compare that to what we anticipate seeing in the next 5 years, you can see the allocation is very consistent. Dividend will increase slightly because as a reminder, we only started the dividend program in 2010. So there's 2 less years in the past 5 years where we've had a dividend. So we look at the allocation being very consistent and again very balanced.
As we invest for growth, we have $250,000,000 annually targeted for CapEx. Now this breaks out into a couple of buckets. We have our growth that's about 8% square footage growth. The maintenance piece is clearly about updating the stores, updating the technology in the stores, enhanced loss prevention, capital as well as the energy management that we talked about. So those are some key maintenance items relative to the stores.
And then from an infrastructure build, we've talked about consolidating store support center, the distribution network that we have planned as well as any technology enhancements to support that infrastructure. So how does that actually break out into details around the capital investment? New stores, generally our investment in 2013 is around $60,000,000 We expect that to grow over time as we increase the store base to about $90,000,000 out in 2017. Now the existing store purchase, we've always had a placeholder of about $20,000,000 to $30,000,000 We're going to keep that relatively constant through this period. We're going to be very opportunistic when it comes to buying new stores.
And again, we use it as a little bit of a flexibility because at times as we exercise a share repurchase program depending on how we see the share price and how it's moving against the marketplace will dictate how aggressive we are in the marketplace in repurchasing shares. So this gives us a little flexibility in our use of capital. The existing maintenance, we anticipate being about $25,000,000 to $35,000,000 The distribution centers is $50,000,000 to 60,000,000 dollars And that really has a lot to do with the 2 new centers that are coming on. And as much as we anticipate them coming on in 20152017, generally the construction of the facilities spread over 2 years. So that tends to smooth the capital out when it comes to the distribution centers.
From a technology standpoint, there is some maintenance technology in here as well as additional technology to drive new initiatives about $40,000,000 to $50,000,000 a year. And then the store support center is currently under construction. It will run through 2014 and so we see about $75,000,000 in expenditures relative to years 2013 2014. So what happens is it tends to smooth out the capital expense each year. So it comes out to around 250, even though there's a couple of big tickets that are spread throughout those periods, it tends to be fairly ratable throughout the next 5 years.
As we move to dividend, we wanted to be a little bit more specific as to our capital allocation thoughts and targets. And so when we look at the dividend, we are targeting 20% to 25% payout ratio for the dividend. So we can be a dividend grower and anticipate that this will translate into 15% to 20% dividend growth. So when we do some benchmarking, we take a look at some of the peers and we broke it into a couple of different categories, fast growth retailers, core comps and then other best in class retailers. And one note is the PetSmart and Whole Foods are really the only dividend payers in the fast growth retail group.
And as you can see from a yield standpoint, we're slightly below, we're at 0.9. And so we have some room to grow there as well as when you look at the payout ratio, we're at 12.3%. So we believe as we move towards that target of 20% to 25%, we have a lot of room and we can be considered a dividend grower and still be a store grower and continue to grow the chain itself. When it comes to share repurchase, again, a balanced approach, but we expect over the course of the next 3 to 5 years that we'll be in the 40% to 45% of our operating cash flow will be allocated to share repurchase. So that translates to about $170,000,000 to $290,000,000 annually And also represents about 2% to 3% of the shares will be repurchased annually as well.
So we benchmark here, this is very interesting. Given the amount of cash flow that we have, you can see that in the last 5 years, we have been able to fund our expansion program and we've allocated about 50% towards that, which really fits very well within the peer group. When you look at your dividends and your share repurchase as a group, we're at 46.7%.
Now as we showed in the
pie chart, we sort of anticipate as we go out to be relatively consistent as we've been in the past 5 years. So we believe that we not only have a cash flow to fund our growth at 8% unit growth, our square footage growth, but we also have significant amount of cash that we can return back to the shareholder through dividends and share repurchase. So we think that it's a tremendous value for our shareholders. And just sort of in summarizing the cash flow distribution, you can see how again it's very ratable as we continue to move forward over the next 5 years. So this translates into as far as shareholder return, we believe that just growing the operating margin through the growth of chain represents about 12% to 14% return.
We believe that the share repurchase will drive about a 2% to 3% return for the shareholder with the dividend contributing about 1%. And that will translate into a total shareholder return of about 16% to 18%. So really in summary, we believe that we are a growth company in a unique niche, clear winning strategy, a lot of passion, a lot of rigor. Hopefully, you saw that today at our store manager meeting. We have tremendous opportunity ahead of us.
We have initiatives around sales, gross margin, even expense management and we can drive some SG and A savings. We have a very defined capital allocation strategy. Hopefully, we communicated that well to you today. And we've just continued on focusing on creating shareholder value. And we think we have the right economic model to do that.
So with that, I really appreciate your continued interest in Tractor Supply. And that will conclude the webcast presentation portion of our