Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's Conference Call to discuss 4th Quarter 2012 Results. Please be advised that reproduction of this call in whole or in part is not permitted And as a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Jennifer Mullan of FTI Consulting. Please go ahead, Jen.
Thank you, operator. Good afternoon, everyone, and thank you for joining us. Before we begin, let me take a moment to reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This conference 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 that 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. Now, I'm pleased to introduce Greg Sanford, President and Chief Executive Officer.
Greg, please go ahead.
Thank you, Jen, and good afternoon, everyone. I'm delighted to be speaking with you today in my new role as Chief Executive Officer after what has been a very smooth transition between Jim Wright and myself. With me today is Tony Crudell, our CFO. We are very pleased with our Q4 and full year performance, which underscores the continued strengths of our business. Our teams are performing exceptionally well in what remains a very challenging retail environment and our attention to our customers' changing needs has never been more focused.
Each quarter in 2012, we made progress in the areas of new merchandise offerings, refinement of our regional assortments, supply chain efficiencies and management of our inventory, all of which are contributing to our continued growth and profitability. Now let me discuss in a little more detail some particulars regarding our Q4 results. In terms of specific sales drivers, Q categories, the consumable, usable, edible part of our business remains very strong and was a key component in driving both traffic and sales. We are increasing our market share in these categories and are becoming in the minds of our customers the most dependable supplier for their need based products. We also remain very focused on keeping our customers highly engaged with the Tractor Supply brand by providing newness through product innovation.
We continue to see a high level of sales and profit performance from our exclusive brands with mix at roughly 24% of sales, up 150 basis points from last year's 4th quarter. Our immediate plans are to continue expansion of these exclusive brands through brand extension. And because these brands can only be purchased at Tractor Supply, this will ensure Tractor Supply will achieve the product differentiation from other farm store competition and Internet retailers. Pet food and animal feed continue to generate solid results in the Q4 and remain important drivers of repeat footsteps in our stores. As an example, EquiStages, our exclusive brand of equine feed introduced about 10 months ago continues to perform well within our mix of feed due to number 1 brand positioning, secondly quality of ingredient and third the value price proposition it offers versus the national brand comparative.
Our Forage business continues to build momentum as we expand the program to more stores this past year. We exceeded our goal of 600 stores by year end, ending the year with 7 50 stores with forged product. This effort required a tremendous amount of hard work and diligence on a part of our buying teams and is another excellent example of how TSC is meeting our customers' core needs through extension of offerings within an established category, this namely being feed. In the quarter, we experienced a small sales benefit from Hurricane Sandy, which directly drove sales of emergency related merchandise. But more importantly, we are extremely proud of our Northeastern store teams, our distribution team members at our Hagerstown, Maryland facility and across our entire distribution center network who worked selfishly and tirelessly to support the communities in their time of need.
I also want to express my sincere appreciation to those in our vendor community who work side by side with our teams in our store support center to obtain inventory quickly so that we could assist those most in need following the storm. Such efforts as these to go above and beyond to meet our customers' needs in a crisis exemplify the teamwork culture at Tractor Supply. I believe this is one of many reasons for our continued improvement in our customer loyalty scores. And in fact, on a year over year basis, we improved our scores every month in 2012 and ended the year with a record customer loyalty score across all regions within the company. Weather conditions for the quarter for sales of cold weather products remain less than ideal, however.
And as in the past, our team again successfully managed through these unfavorable variables and delivered growth increase in profitability on top of a strong 4th quarter a year ago. Our effective management of inventory through the quarter is another milestone achievement. I'm convinced this was accomplished in part because of the many structural changes we now have embedded into our daily operation. Our team has done an outstanding job managing inventory levels and most importantly, we ended 2012 with our fall winter carryover well below a year ago. So let me conclude my remarks by stating that I am delighted with our team's ability to adapt our business to changing conditions while still driving improved profitability.
Operationally, we made great strides in our key strategic initiatives and this progress has yielded sustainable improvement for our business. As we look to 2013, we have never been more excited about the opportunities that lie ahead. I'll now turn the call over to Tony to review our financial results and discuss our 2013 outlook. I will return following his remarks to share my closing comments. Great.
Thanks, Greg, and good afternoon, everyone.
For the quarter ended December 29, 2012, on a year over year basis, net sales increased 10.8 percent to $1,290,000,000 when you adjust for the one additional week we had in our Q4 last year. Correspondingly, net income grew by approximately 24% to $79,500,000 or $1.11 per diluted share adjusted for that additional week. As a reminder, this year's 4th quarter consisted of 13 sales despite a warm winter season and being up against robust sales growth last year. Comp store sales, which is the more relevant measure, increased 4.7% for the 4th quarter compared to last year's increase of 7.1% adjusted for the 1 week calendar shift. Comp transaction count increased for the 19th consecutive quarter, gaining 2.7% on top of a 3.6% increase last year.
We are very pleased with the core business as Queue products, specifically animal feed and pet, continue to serve our customers' basic and functional needs and drive count increases. The trend in average comp ticket continued to be positive at 1.8% versus last year's 3.8% increase. The impact of inflation was approximately 165 basis points for the quarter, which was within our projected range of 100 to 200 basis points, but significantly less of a benefit than last year's estimated 500 basis points. Big ticket merchandise performed consistent with company's overall comp sales increase and had a favorable impact on comp ticket of approximately 30 basis points. Big ticket was bolstered by Hurricane Sandy emergency response sales such as generators, but this benefit was moderated by negative trends in sales of winter goods such as snowblowers and log splitters due to the unseasonably warm winter.
Other key notes regarding the quarter. We did an excellent job of managing through the variable weather conditions throughout the country, particularly those impacted by Hurricane Sandy. On a regional basis, all regions had positive comp sales. Sales were the strongest in the Southwest and Southeast as moisture conditions were favorable in these regions and the seasonal business was less impacted by the warm weather. Comp sales trends were generally consistent by month throughout the quarter.
We did end the quarter on a very strong note as holiday sales kicked in and comp sales benefited this year from the additional holiday shopping weekend between Thanksgiving and Christmas. Emergency response, including Hurricane Sandy, had a modestly positive impact on comp sales, which estimate to be approximately 30 basis points for the quarter. We did not suffer a significant number of lost sales days and we are proud of our team members for showing tremendous dedication in supporting their communities with many sacrificing to open stores and going above and beyond to serve customers in their time of need. Turning now to gross margin, which as a percent of sales increased by 50 basis points to 33%. We continue to benefit from our key gross margin initiatives, which are price optimization, strategic sourcing, exclusive brands product margin rate.
This improvement more than compensated for the negative impact of the continued mix shift to Q products, which have a margin rate lower than chain average. Freight increased approximately 13 basis points, partially offsetting the product margin benefit we experienced in the quarter. This increase in freight is principally as a result of the costs related to increased import activity of seasonal goods and the mix shift to freight intensive Q products. Big ticket sales did not have a significant impact on gross margin rate during the Q4. Although the sales of lower margin emergency response products were higher due to Hurricane Sandy, the unfavorable margin impact was offset by softness in sales of other winter related merchandise such snowblowers and log splitters, which also carry lower than chain average margin.
We did have an easier margin comparison in the 4th quarter as we took a $2,700,000 charge last year for the exit of our welding gas program from several 100 stores. This represented 20 basis points of the year over year improvement. Import purchases in the quarter accounted for 9.6% of total purchases, which represents 11.7% increase year over year. Overall, we're pleased with the gross margin performance during the Q4 and that our gross margin initiatives provide us with the ability to maintain gross margin rate in spite of product mix and freight headwinds, while continuing to provide great values to our customers. For the quarter, SG and A including depreciation and amortization was 23.3 percent of sales, reflecting 20 basis points of improvement from the prior year's quarter.
We are extremely pleased with our field and store payroll cost controls and ability to leverage SG and A in the quarter, especially since last year's quarter had an additional selling week as a result of the 53 week year in 2011. We had estimated that the additional week last year had a favorable impact of approximately 15 basis points. We did book adjustments last year in Q4 related to the write down of certain ecommerce assets, which made the comparison easier by 26 basis points. Incentive compensation was less than last year as well. Turning to the balance sheet.
We ended the year with $147,000,000 in cash, meeting our year end target of $100,000,000 to $150,000,000 During the Q4, under our stock repurchase program, we acquired approximately 1,210,000 shares for $108,000,000 We estimated that share repurchase program had a slightly less than $0.01 impact on EPS for the quarter. Average inventory levels per store at year end increased just under 1% compared to last year. The rate of increase was well below our estimated inflation rate and we are comfortable with our year end inventory levels of seasonal merchandise. As a result of our strong inventory management, inventory turns for the year improved to 3.28 times or 5 basis points better than last year. Capital expenditures for the year were $153,000,000 as compared to $166,000,000 last year.
We opened 25 stores in the 4th quarter compared to 31 stores in the Q4 of Our capital spend is generally consistent with the prior year, but below our expectations that would be at the high end of our forecasted range of $160,000,000 to $170,000,000 While our projects remain on target, anticipated expenditures around our Southeast DC relocation, the construction of our new store support center and certain IT projects shifted into 2013. So turning our attention to 2013. We expect full year sales to range from $5,070,000,000 to $5,170,000,000 We have forecasted comp sales to increase between 3% 5%. We are targeting improvement approximately 10 to 20 basis points in EBIT margin compared to 2012, with the majority coming from gross margin as a result of several of our key merchandising initiatives. We anticipate net income to range from approximately $304,000,000 to $310,000,000 or $4.32 to $4.40 per diluted share.
And we expect to open 100 to 105 new stores with approximately 50% to 55% opened in the first half of the year. As we've emphasized in the past, we believe our business can be more accurately assessed by focusing on the halves, not the quarters, as weather patterns can change significantly from year to year and shift the timing of the sales. It is particularly important to keep this in mind as you look at the first half of twenty thirteen as we had in early spring last year and we estimated we pulled approximately $38,000,000 forward into Q1 from Q2. Let me discuss some of the more specific drivers and assumptions that helped us form our projections for 20 Although the consumer will continue to be concerned about the ongoing high unemployment and the impact of higher payroll tax on their take home pay, we do not expect that the current retail environment will change dramatically. Although there were some positive and negative weather events in 2012, such as the hurricane activity and the drought in the Midwest, we believe it was a net neutral year from a weather perspective.
Therefore, we do not anticipate that cycling against last year's weather trends will have a significant impact on a year over year results in 2013 other than the potential shift to sales between Q1 and Q2 as I previously mentioned. We expect that the inflationary impact will be approximately 1% to 2% for the year and that will be at the higher end of the range in the first half of the year and slightly less in the second half of the year. The increase in EBIT margin is net of an approximate $6,500,000 to $8,000,000 headwind or $0.06 to $0.07 EPS drag that we anticipate to incur as we relocate our Southeast distribution center and our store support data center. These costs include duplicate occupancy expense while we transition facilities, temporary labor during the transition, freight movement costs between facilities and equipment depreciation. These costs will be principally reflected in SG and A with the majority of the expense occurring in Q2 and Q3.
For the full year, we expect net gross margin rate expansion of approximately 10 basis points to 15 basis points. We expect to achieve our gross margin rate improvement through the execution of our key gross margin initiatives. These initiatives will provide us the ability to overcome an estimated gross margin headwind of approximately 10 basis points to 15 basis points from the continuing mix shift to our Q products, which carry a below chain average margin rate. We also expect freight cost to remain a headwind as we experienced deleverage from the merchandise mix shift to more freight intensive queue product. Additionally, stem miles per store will increase slightly as we continue to open new stores in the West.
In terms of cadence, we expect gross margin percent will be flat to slightly down in the first half of the year with improvement weighted more to the second half based on our forecasted merchandise mix, our initiatives continue to drive value and cycling softer margin comparisons in Q3. Inventory turns are expected to improve slightly. We would expect per store inventory to increase modestly consistent with investments in key merchandise categories and inflation. We may experience slightly higher inventory levels at the end of Q2 as we transition to our Southeast distribution center. With respect to SG and A, exclusive of the DC and data center charges I discussed previously, we continue to target our SG and A growth to leverage at 3% comp and to manage our business accordingly.
Store support center and store payroll is expected to leverage slightly as we grow our comp sales base and cycle a more normalized level of incentive compensation, which should offset wage and health care increases. Some key points with respect to the quarters. Remember that Q1 last year was unseasonably warm, which resulted in reduced expenses of approximately $1,500,000 related to snow removal and utilities. With respect to the data center the distribution center and data center relocation, we estimate that the majority of the expense will be incurred in Q2 and Q3. We'll be cycling Hurricane Sandy in Q4.
And as is in past, we will provide more color regarding for the subsequent period at each quarterly conference call. For the full year, we forecast our effective tax rate will be approximately 36.5 percent, consistent with 2012. Due to the timing of certain tax incentives that were reinstated on January 1, 13, these incentives will be treated as a discrete tax item in Q1 and we have estimated a favorable impact on Q1 tax rate of approximately 100 to 120 basis points. We plan to have a significant increase in capital expenditures in 20 13 with a range of approximately $240,000,000 to $250,000,000 for the full year as we complete the construction of our Southeast distribution center and begin construction on our new store support center scheduled to be completed in 2014. We expect store growth and general maintenance capital to increase slightly to approximately $110,000,000 to $112,000,000 We also have allocated approximately $30,000,000 as a placeholder for our lease store acquisition program and potentially 4 self developed store projects.
We will continue to make purchases under our share repurchase program as part of our long term objective of reducing our cost of capital and maintaining a target cash balance of $100,000,000 to $150,000,000 For modeling purposes, we estimate that the diluted shares outstanding, inclusive of option grant and share repurchase activity, will approximate $71,000,000 for the full year. Now I'd like to turn it over to Greg for more details on our plans for 2013.
Thank you, Tony. Regarding the retail environment, we have seen very little change from recent quarters regarding our customers' purchasing behaviors. Our consumers are spending conservatively and are seeking out compelling values. Purchases are being driven by necessity and are taking place much closer to need. Today, Tractor Supply is is responding more quickly to the opportunities within our business and we make an effort every day to understand and anticipate the changing needs and wants of Our ability to respond quickly to shifting customer demand has contributed to our performance and will continue to drive our sales in the coming year.
Looking ahead to the spring selling season, although there could be a shift in sales between quarters as Tony commented earlier, we are confident that we have the right plans in place to drive improved results and are pleased with our overall inventory position as we enter spring. Our customers will see newness across the store, which we believe they expect from us and will in turn will purchase from us. The teams remain relentlessly focused on improved execution throughout the business and believes we have considerable opportunity ahead to increase our market share. As we continue to expand our footprint in key regions, we remain very comfortable with our annual square footage growth rate of approximately 8% and with our strong balance sheet, we are investing in strategic capital initiatives that will ensure our growth for the longer term. In closing, I would like to thank every Tractor Supply team member for their ongoing hard work and commitment to our company.
I want to thank Jim Wright, our Executive Chairman and our Board of Directors for their support and our shareholders for your ongoing investment and confidence in Tractor Supply as a growth company. I'm delighted to be working with such a seasoned and talented executive team and acknowledge the opportunity to serve you, our shareholders, in my new role as Chief Executive Officer. Operator, I would now like to open the call for questions.
Thank And we'll take our first question from Mark Miller with William Blair.
Hi, good afternoon everyone. Given the strong outlook for 2013, could you provide updated perspective on where you see the margin potential of the business? I think your prior objective around 9.5%, it looks, if our math is correct, as if you could be there in 2013. So what is the upside potential? And should we think about that more along the lines of gross margin?
Thanks.
Good question. I'd like to remind you that, one, the 9.5% EBIT target is really set as an It's much easier for us to It's much easier for us to state it in that long term perspective of growing the business at the 10 basis points to 20 basis points of EBIT margin improvement each year. We'll continue to reassess and we'll definitely get back to the marketplace as we approach and exceed the 9 point
5%. Let me maybe ask a follow-up. If there were to be areas that you would look to invest at a more aggressive rate, what would those areas that you would consider as trade offs?
Mark, if you're asking what parts of the business potentially could drive sales, but could be a bit of a drag on margin? Is that what you're asking?
Exactly. And to what degree might that play out as we go through the year around next year?
Well, one of the things that we talked about earlier in our comments was the driving force of Q. And we've stated many times that it works at a less than company average margin rate, but the dollars it throws off are considerable. It helps us leverage on the SG and A side. And also we're looking right now at our business a little differently from a mix standpoint because Q is growing, but we're also finding that in the box other components of that box are starting to grow. We've got a business on the outside of the store with live product that Steve and the team has been working on.
The left hand side being more the hard lines business with the mix of the products are higher margins. So I guess the blend is what I'm saying to you. We think we can control and we do believe as we move forward, we'll still see some growth in our EBIT margins. But it's hard to say when we'll hit the 9.5% and when we'll go beyond. But we still believe that there is tremendous momentum behind Q and that's going to be more things we have to just monitor and watch from a mix standpoint.
Great. Thanks.
Our next question comes from John Lawrence with
would you mention a little bit you talked about the newness in the spring season, a little bit what we expect there? And if you sort of split that out and take that another step with the regional product? And just how far do we have to go there? And maybe some examples of success there on that regional brand? Well, a knownness factor, John, you know that we talk about changes in the store every year.
And in the 1st part of the year, we make most of our planogram hard planogram changes. And we'll touch between 30% 40% of the store updating planograms and bringing in newness there. The second piece is about what we do in the center court and on the outside of the store. And Steve and the team have done a wonderful job of bringing literally probably 50% to 60% of new product into those spaces year after year. You'll see that again this year as you walk into our stores.
You'll notice new things that are either brand extensions or maybe we'll be testing and trying some new products. And we have a lot of confidence that through the testing of the last 2 years in our live product categories and this whole bargain concept of our consumer being sustainable and growing their own vegetables and so on and so forth in foods that this is going to be a business that's going to serve us well for some time. So there's movement inside, there's movement outside. You'll see more of this as you get into as we use our advertising to talk to it, but quite a bit of newness, quite a bit of newness. Right.
Thanks. And do we have to wait a few weeks to hear more about the crawl stock? Yes. Right. Thanks.
We're analyzing that right now. Right. Congratulations. Thank you.
And our next question comes from Vincent Sinisi with Bank of America.
Great. Thanks very much for taking my questions and congratulations on a nice end to the year.
Thank you.
Wanted to ask first about your gross margin initiatives. Obviously, you had some nice continued progress this quarter. But can you guys just give us an update in terms of where you are? And specifically, maybe where we are from the price optimization standpoint? I know now it's been quite a while since all the items have been loaded into the software.
Can you just give us an update on in terms of where you are today with that?
Yes. Vince, I'll talk a little bit about some of the initiatives and we'll start with price up. As we now are into year 2 of price optimization, what we're finding is that it's a very iterative process And the changes we'll make within the testing module that we have and I'll remind you that we don't just turn the system on and let it run. We do test and then we have against control stores to make sure that we're getting the right result, our anticipated result that we thought. But once we do that and we put that into play and we look at those sets of SKUs, it changes the dynamics of the sales.
We see it sometimes, some sales moving to other SKUs and vice versa. So what it's helped us do longer term is look at our overall assortment and say, okay, do we need to change the depth within XYZ SKUs and maybe we don't need to carry these other SKUs in the assortment any longer because there's been a transferral of demand. And that's the learnings that we're now starting to see along with the fact that making sure that we've got our prices right by district, by store and sometimes across region on a lot of our queue products and the high velocity products. So we're still in my opinion, as I see how this is developing and I see the kind of results that we're starting to measure against, it's a much longer term journey than I think I initially anticipated. We mentioned a little earlier about the other things in gross margin, the direct sourcing of product and our exclusive brands.
I mentioned one earlier about EquiStages. The team continues to find opportunities within our assortments where we can build and place into the assortment a very competitive product under our own brand that our customers will accept and embrace and they'll purchase. And in many cases, it's not cannibalizing. It's actually additive to what we have on our assortment because we've recognized a gap that either the national brands can't serve or the generics beneath it can't. So those businesses continue to grow and we are developing some sophistication now Been in this now almost 2 years, almost going into 3 with our product development side and with our direct sourcing side.
And I'm very pleased with those teams and what products they're developing and we're bringing to market. And the advantage there is, of course, that it's exclusive to Tractor. You can only buy it here. So it gives us that exclusivity and that uniqueness and it that also is going to feed the margin rate over the longer term.
Okay. That's very helpful, Greg. Thank you. And just one follow-up question if I may. For your CapEx outlook for 2013, I know you mentioned that largely the increase is due to just those several timing shifts from this year into next.
Any other color or discussion that you guys can provide specifically around your store locations, further Western states that you may be entering? You mentioned Colorado from last year, of course, was a new state. And then any other color around those 4 potential self developed projects you mentioned?
Sure. Vinny, this is When it comes to our expansion, Colorado was a key state in 2012. We'll continue to expand there as we move into 2013. And then our next state that's targeted is Arizona. And we've been looking at some sites there and improved some sites in our Real Estate Committees already.
So we'll be looking at Arizona in 2013. So those will be the 2 key states as we move west.
When it
comes to CapEx and the drivers, really the only point of note would be that the Southeast distribution center will come online in most likely mid to late Q3. And that's when you would recognize some depreciation around that facility, which is
in the $40,000,000 range.
And then the capital is allocated towards the store support center, our corporate headquarter. Since that does not come on until 2014, you should see very limited depreciation around approximately $40,000,000 there that we've targeted to spend in 2013. So we would not expect to have any depreciation as that stays in construction in progress. When it comes to self development, we have a small team on staff where when we identify sites that might not be cost effective to go in with a developer, we have obviously the financing capabilities and now the in house capabilities to be able to develop that site and either land bank that site and or just develop that site for store location. So it's a small team.
We've been developing the expertise over the last couple of years. And so we expect to continue to accelerate that, so that at some point in time we'll be in sort of the 4 to maybe 15 new stores will be developed by our own team in house.
That's helpful, Tony. Thank you and best of luck going forward.
Thank you.
Our next question comes from Peter Benedict with Robert W. Baird.
Hey, guys. Thanks. Just a couple of questions. First, Tony, just to follow-up on the last question there. Can you give us a sense of just where you think the DNA is going to come in, in aggregate in 2013?
I know there's a lot of moving parts there, but is there a range you can help us with in terms of what the D and A will be next year?
Yes. We haven't specifically given that. But I would say it's consistent with the growth that we've had and very similar to the prior years. So you're looking at I want to say we're in a close to the $88,000,000 to $90,000,000 range for 2012 and I would expect that to increase by about 10%.
Okay, cool. That's helpful. And then just the small stores or the smaller market store format, how many did you guys get opened in 12? And then what's the plan as you look out to 13 of those 100 to 105 stores? How many you think will be in that smaller market footprint?
Peter, this is Greg. We don't probably won't comment to how many we open in specific. It's part of the overall mix of stores. But we're really pleased with the performance. And thinking about these small stores, it's really not a different concept.
All it is, is a store that's right sized for the size of the market. And what we've done in these stores is modified some depth and breadth of assortment to match the market. In fact, I think you've probably been in a couple of these where you can't tell the difference when you go in. The typical customer thinks it's the same tractor supply. It just is a smaller box.
So what I would tell you is plans are to continue with those backfill of those small market stores. We still believe that it's in the run rate of 2,100 and so far so good.
All right. Good to hear. And then just lastly, any sense of how many stores you think you could get forage into by the end of this year? I think you said you were at 750 at 12. Thanks.
That won't be a specific number either and here's why. You have some restrictions with forage. There are some landlords that we do that we have stores at least with that will not let us place trailers on the lots. And many of those we're in negotiation with trying to figure out is there another way of doing this? Can we put it maybe in our sidewalk or the back lot?
So, 750 is not the end number. There'll be more, but I really can't give you a target yet because we were surprised we could get it as far as we did this year. The team is still working on it. But it won't be all stores, I can tell you that because there will be some restrictions.
Okay. Good. Thanks, Greg.
You're welcome.
And our next question comes from Scot Ciccarelli with RBC Capital
Hey, guys. How are you?
We're good. Good. When you're looking at kind
of SG and A per
store, it was down in almost every quarter of the year. And obviously,
it was out
there was an outsized impact. Quarter of the year. And obviously, it was out there was an outsized impact in the Q4 due to incentive comp. But was there any other callouts during the course of the year that helped that metric? And then when we think about 2013 any other factors we should be considering?
When we look at the quarters, the only thing that jumped out last year really was the warm Q1 that we had. So we didn't have the standard expenses that we normally would have in Q1. Then obviously in Q4, we were up against a period that had additional sales in 2011. So we had additional week of sales in 2011. So that made it a little bit more difficult to leverage against the SG and A.
But those would be the 2 things that jump out relative to 2012.
And when you think about 2013, whether it's health care costs or anything else that you kind of have as top of mind of tougher cost to control?
We do where we've been getting the leverage is really in the management of the store payroll. We had a really terrific year this past year. And as we grow the comp sales, we have seen leverage on the occupancy. And so that's given us the ability to absorb some of the additional expenses that we would have in medical, although medical in 2012 did not exceed what we had originally forecasted. So our in house program has done very well.
We're self insured and so we've been had some fairly good results when it comes to the medical. What we have planned as we move into 2013 that we will have an increase in that area and anticipate that to be offset by a normalized incentive compensation for 2013.
Got it. All right. Thanks guys. That's all I had.
And our next question comes from Matthew Fazler with Goldman Sachs.
Thanks a lot. Good afternoon. Thanks for all the detail so far. A couple of follow-up questions. You quantified the anticipated impact of the mix shift to Q on your gross margin guidance for next year.
I think you said to 15 basis points of mix headwind. Is that similar to where it's been in each of the past couple of years?
It's relatively consistent. It has run-in that range and it will vary quarter to quarter. But overall for the full year, we'll look at it somewhere between 8% to 12% or in this case 10% to 15%. So it's about consistent with prior year.
Got it.
Thank you. And then second question, is it possible to quantify the impact of the incentive comp swing in the Q4? And obviously, you had a very good Q4 a year ago. So maybe on a 2 year basis, does that kind of come out in the wash? Or was this kind of below average quarter from a type of comp perspective?
Yes. Usually, we'll identify if it's a significant amount, we'll highlight it as one of the main drivers. This quarter was a very strong quarter as was last year. The way it was the incentive comp was accrued throughout the year, we did have less in this Q4 than in the prior year, but I do not have exactly what the basis point impact was. Okay.
And then But it was it definitely was favorable.
Thanks, Tony. And then third and finally, Justin, you essentially spoke about very little change in consumer behavior and presumably that pertains to big ticket as well. Any color you could offer on signs of life perhaps or new signs of life in the big ticket arena? The ticket ex inflation was a bit better than it was the prior couple of quarters. I know that the hurricane might have something to do with that, but any sign of inflection there would be
helpful to hear about. Right now, we're not anticipating a significant change. We've yet to declare victory when it comes to big ticket. When we do see an increase, it tends to be spotty and unsustained. But at times, we do see a pickup relatively well, especially obviously when we run into the emergency response categories in the Q4.
Hard to assess the Q4 because the warm winter impacted a lot of the sales of our larger ticket items. But there does not seem to be a resistance when there is a need by the retail community. They will make that purchase. So we believe it will be consistent throughout 2013.
Great. Thanks so much, guys.
You're welcome.
We'll take a question now from David Magee with SunTrust.
Yes. Hi. Thank you and congrats on a
good quarter.
Thank
you. Just a couple of quick ones. On the Forage business, is that expected to comp well? Was the start up such that you could still see growth from those 7 50 stores this year? And I'm just also curious about the margins of that category right now.
David, I'll answer both questions. Yes, we do still see a ramp in forage. And the reason being is that we have the number of customers that once they start to see that we carry the full assortment now, maybe there were some customers at least what we've seen in our numbers that we're shopping other places. So we're in the early stages of ramping that business. Secondly, on the margin side, it's very similar to what we do in our sales and our margin dollars in feed.
It's not robust, but at the same time, it's the completer and it's a footstep driver. So, it runs around the feed margins.
How does the live plant category compare to that in terms of potential? And is that now in all the stores?
The live plant and what we'll consider will be we'll just call it live goods will not be in all stores, but is from a margin standpoint can be a bit more robust than forage. And it really is how we manage our business. We're not going to run it like the big boxes. We're going to run it basically into the season early and then probably exit the season a bit early so that we can transition. Our need for these types of products are kind of plant, harvest and tan and so on and so forth.
There's kind of a stage to ours. So as we get through that, there's no need for us to continue to try to extend that season. So we're going to get in, set it, take our sales and make sure that we stay profitable and move on. And we've got some tremendous partners who have chosen to work with us. It will be in a substantial number of stores, but not all stores for spring.
And that's versus a limited number of stores last year?
Yes, very limited numbers last year.
And then lastly, and I apologize if I missed this, but Tony, I think you had said that the gross margins would be sort of weighted to the second half. And I'm just curious as what's causing maybe the first half to be a little bit weaker on a year to year basis?
Some of it is the way in which we cycle through some of the seasonal goods from the winter. And also some of the back half of the year generally will have less of the lower margin type products and some of the big tickets. And the way we're looking at the mix and the impact of say the rider season on spring can have an impact as well. So, a lot of it is really mix oriented. And again, it's very difficult when you have 77 different departments and 3 40 different categories to sort of develop that merchandising plan and the mix can obviously impact margin significantly.
So and as we look at the second half of the year, we think we have a little bit easier compare in Q3. We obviously had a lot of conversation on that call about margins as well. So we think we have a little bit easier compare when we look at Q3 as well.
Great. Thanks, Tony.
And our next question comes from Peter Keith with Piper Jaffray.
Hey, thanks and nice finish to the year everyone.
Thank you.
I wanted to ask a question about the gross margin. The performance in Q4 was pretty impressive and I just wanted to compare it against what you saw in Q3. Now certainly, we know there was the easier markdown compared to Q4, but it still looked like you saw some sequential acceleration in the drivers. I'm wondering if you have any color on maybe what was like some key drivers that may have picked up in Q4 relative to Q3?
Peter, I'll take the first shot at this and Tony can I'm sure comment as well. As we looked at the business as it was developing, we had to stay patient. And I guess that's the word I'll use. And the merchant team had tried to understand what was happening and we sell a lot of our products out of need. So when you look at need based products, if you don't have the need, if you don't have the demand like weather and such that can cause you to do some things sometimes if your inventories are too heavy, you start overreacting.
So there's a couple of things here. Inventory management did a great job of keeping our inventories tight. And then as we said earlier, the business really opened up toward the end of the quarter and we were in position and we were still at what I would call robust retails. The other thing is our management of clearance. We are a different company today than we were 5 years ago.
We take that when we move through clearance and we start to see products not selling to the degree that we like, we'll take those first initial markdowns understanding that 20% markdown gets me $0.80 on a dollar today versus if I wait until January, February when I get $0.20 on the dollar, I'm at 80% off. So we're fairly aggressive on moving through inventory when we see issues. And I would tell you that's the other component, really tight management of any clearance as we're moving through the season and then the overall management of inventory and being patient, not pulling the trigger and overreacting. And then just a couple other real
quick points. When we look at the impact of big ticket in Q4, we had less of a drag than we would have anticipated because of the softness of some of the larger big tickets, as I mentioned earlier on the log splitters and snow blowers, as well as in the past, the import strategic sourcing products that we have, have a big impact in Q4 as well and they're a little bit obviously stronger margin items and that tends to benefit Q4 as well.
Okay. That's helpful color. Appreciate it. Just a follow-up. As we think about all of your key drivers, I guess there's 4 of them looking out to 2013, are there any that you think actually have the potential to accelerate as a benefit?
And conversely anything that you think may have already played itself out and probably diminishes as a benefit?
Well, I would comment to this. I said earlier that price optimization has got a much longer horizon. It's teaching us a lot more about how to price our products and it's also teaching us in some cases how to assert our products. So that's got a much longer horizon. I think I know that we've got more opportunity to take the exclusive brand mix of our products and accelerate that in the areas where it sense.
And we're starting to find those gaps. The other thing I will tell you is, when we look at management of clearance and the seasonal conversions, I mentioned earlier that we did a wonderful job of that. But I think it's all about truthfully, it's a balanced equation between all of these. And you some things drive sales, some things drive margin, some things as they blend together can be an offset to SG and A. So from the standpoint of how the margins in those four buckets are working, they're all still working hard.
I would say the one that probably are most developed on is the seasonal conversion piece. We've been working on that the longest. Quite a bit of room ahead of us for price op and as well as deeper exclusive brand development and then more opportunity yet to bring product from overseas in a direct sourcing capacity.
All right. That's very helpful feedback. I appreciate it and good luck for 2013.
Thank you. Thanks.
Our next question comes from Matt Niemeyer with Wells Fargo Securities.
Hey, good afternoon, everyone. Two quick questions. One, could you talk about how you're planning for the timing of receipts this spring and just category changeovers given the unique weather we had last year, are you going to try to go back to normal or do you maybe set a little bit earlier?
Actually, Matt, it's about the same time. Last year, we somewhat went south to north in three waves and then that's what we're going to be doing again this year. So if you're in our southern stores right now, you'll see that. You'll see we're relatively set for spring. And Midwest is beginning and North will be quite a bit later yet.
Okay. Then secondly, earlier in the year you talked about spending more on marketing that convert aware non shoppers. Do you think that you've made progress on this goal this year? Is there any way that you can quantify the increase in new customers?
What I would tell you is that we're still trying to find the right mix of marketing vehicles to reach this consumer base. We had some success in the second test. We will be doing more testing this year, but we're not convinced yet that we've we're hitting all 8 cylinders as far as understanding how to get to these people. They're still coming into our stores, but they're coming in sporadically on a test basis. We won't be able to talk to them directly.
So no, more work to be done.
And marketing expense as a percent of sales for 2013?
Slightly up. And the majority of that really is how we're now using our marketing dollars across the company. We're now looking at more of a, what I'll call, a cross channel marketing effort. You will see us do more things and things that tie back throughout the web and print and in store and all that as really one voice to the consumer. So that's the spend will be raised a bit in the, I'll call it, the multichannel or the Web side of our marketing.
Got it. Okay. Thanks so much. Good luck this year.
Thank you.
And we have a question from Brian Nagel with Oppenheimer.
Hi, good afternoon.
Congrats on nice quarter.
How are you?
Good. Hey, Brian.
Thank you.
So the question I had, a
lot of chatter lately over
the last few months within the investment community regarding inflation or maybe deflation in some of your input costs and that any impact you may see on margins and sales. Maybe an update there, I mean, where are we right now with respect to kind of inflation deflation as you're seeing making your way through the cost of sales? And how should we think about as we're modeling out into 2013?
Yes, Brian. We're at the point where the majority of the inflation has moderated. And so as we look at the upcoming year and compare it to the majority of inflation So, it's clearly moderated. The majority of inflation that we saw last year has worked its way through our costs and it's really going to come down to how does 2013 play out.
So, is it fair to say then that now from going as we sit right now, it's much less of a factor going forward?
It should be. As we see the numbers on a year over year basis. Now again, as we work through the year that could change, but it should be less of a factor. As we noted in Q4 last year, it was almost 500 basis points. So it really has moderated.
We currently don't anticipate seeing downturn towards deflation and it will just continue at sort of a very low or moderate pace.
That's helpful. And the second question, it will be a quick one. You called out in your prepared comments, I think the benefit of Sandy on your comps in Q4. How should we think about the ongoing maybe an ongoing benefit of tractor supply from as people repair their land and such from the hurricane?
Yes. We've commented before that a lot of times there's a much longer tail for some of the home centers because it relates to homebuilding and repair. But it really is much less of an impact for us. And so we don't look at it as a tail. We look at it more as hurricane preparedness and then the short response following and the recovery areas efforts.
The one category that does benefit is more the fencing category. So, there's usually some damaged fencing and we'll be able to repair that and that might be extended. But we generally have confined the impact of Sandy just to the Q4.
Got it. Thank you and again congrats.
Thank you. Thank you.
Our next question is from Chris Horvers with JPMorgan.
Thanks. Good evening. So I was just curious if you could talk about incremental margins in the business and as we model out the Q1 $38,000,000 of pull forward and the 1.5 percent $1,500,000 in savings last year, if you use, let's say, a 20% incremental margin on sales,
do we sort of start at the
in the high 40s as an EPS base versus the $0.55 that you did last year?
Well, hopefully, the information that we provided gives you enough to populate your models. I will give you a little bit of guidance saying that our goal and we believe that we have the plans in place to drive an EPS increase and we expect to drive a comp increase as well. And so I think if you put that together with the $38,000,000 adjust for the $38,000,000 sales impact, I think you can come to those same outcomes when it comes to the Q1 as well as the first half.
Understood. That's very helpful. And a couple of random follow ups. Can you talk about what Q did in terms of a comp in the quarter? It had been running in the, I guess, high single digits recently?
And then also on the live product side, is that going to be a consignment basis or do you take ownership of the inventory?
Let me try to break that down for you. On the Q side, we typically don't talk to what kind of sales increases, but I can tell you that there was an increase in our overall mix because of Q's impact on sales. So Q did actually help us drive some additional sales. It was a larger percentage, not a great number, but not a very large number, but it did add some tailwind. On the live goods side of the business, you're right.
Your comment about a lot of this is on consignment or scan based, which helps us on the downside risk. We have a number stores where we'll be having true service of the product by the manufacturers and then some stores we'll be managing it ourselves. So we're testing it both ways to see what seems to work best.
Perfect. Thanks very much.
You're welcome.
Our next question comes from Adam Sindler with Deutsche Bank.
Yes. Good afternoon, guys. Very nice quarter. Just wanted to ask a couple of questions about some of the merchandising programs in the quarter. Those are two questions.
First, about the heating program, just given the impact of the warm weather. I know you guys rolled out a couple of new stoves and things like that. And then just wanted to see how the gift program went as well. And then the follow-up question would be on generators. We did check a significant number of stores.
Was there any negative impact from a lack of supply of generators? We heard that even people like Briggs had actually run out at the supplier end. Was that did that impact you guys in the quarter?
Well, let's just talk about heating first. Heating was, as I said earlier, some of the seasonal businesses weren't as robust, But it did come late and it came as the weather changed. This is one of those demand businesses again that unless you have the demand, you can overreact and really burn margin with no result of sales. So we sat tight, kept our inventories tight and we did see a last minute push on the heating side of the business, particularly in the fuel side. On the generator question, there weren't enough generators in the country when this storm hit to be able to service the need.
And that would be my overall statement from what we knew. We were continuing to pull generators from all four corners of the U. S. With our suppliers and there was probably some missed business. I think what we're going to see from the Northeastern quadrant is individuals wanting to put what I'll call standby generators, not the portables, but standbys in their homes because this is the 2nd year now that they've been without power.
So we're
I can't tell
you we've seen a real major uptick there yet, but I think as the rebuilding occurs, I think Generac and companies like that might see a nice push in their business.
Okay. Thank you. I appreciate it.
Our next question comes from Simeon Gutman with Credit Suisse.
Thanks and nice results Greg and Tony.
Thank you.
Can we talk about gross margin maybe in a little different perspective? I guess, if we're sitting a year from now and gross margin ends up being better than the 15 basis points, 20, 30 basis points, Do you think that will be more a result of mixed issue, meaning, Q growing slower than the rest of the house? Or is it maybe due to some of the initiatives ending up being bigger contributors than you expected?
I would tell you that we like what we're seeing in the growth of Q. There'll be no plans to slow Q. What we're working diligently on is how we can grow at a faster pace the other mixes of our business. And some of that's going to be with some high velocity products, but other side of that coin is going to be what we're doing within exclusive brands, where we should be able to gain some additional margin. And then our ability to source product internationally or really just strategically source product and gain better cost.
And all those mixes combined, we track, we monitor and I think that's going to help us continue to better predict as well as keep our hands around the gross margin equation.
And with regard to the product acquisition costs in Q, given that you're taking more market share and you're becoming a bigger customer probably for some of these vendors. Are you seeing improvement in margin in that category?
Well, here's how we do that. To be honest with you, yes, size and scale does matter, does help. One of the things that we've done over the last few years is we've multi sourced products, particular categories that are high velocity and low value. So we are able to use multiple vendors. And through that prospecting between, we're able to find advantages to bring our supply chain cost down because we're getting closer to what the manufacturing is.
And that's the biggest cost in most of that product is the transportation side. So that's how we're doing it.
Okay. And then my follow-up is, can you talk about new space productivity? It looks like it's still very strong. Maybe our math just took a step back. The way we look at it could be very skewed.
So curious what your thoughts on new stores are?
Yes. The new stores have been extremely productive in 2013. And some of that has to do with as we move into new territories where there might be a little bit less cannibalization, maybe some areas where it's a little bit less competitive. But as we look at the stores, we believe that there's not a significant variation in how we've approved the stores or looked at the stores. And we just believe that as the Tractor Supply name becomes much better known throughout, it's easier to open those stores and be able to penetrate the marketplace a little bit more rapidly than in the past.
So, again, we're very pleased with the new stores and the program and the marketing around it and that's helped to drive the business as well.
Okay. Thanks, Tony.
Our next question comes from Eric Bouchard with Cleveland Research.
One question. In terms of 2013, a competitive pricing environment and what you're thinking about in terms of promotions, interested in how you're thinking about that from a competitive standpoint and how you're thinking about that balancing that relative to the gaming market share and driving sales?
Bert, great question. And we look at this constantly. Again, in our gross margin equation, there's really 3 things we look at. Are we trying to grow this business from a market share standpoint? And if we do, we understand there'll be some compression on margin.
We look at it from a mixed business and saying, listen, this is a project complete tour. Probably we don't need to be as competitive because they've got to have it to make the project work. And then there's that blend of a little bit of both. So we're going to stay very aggressive on growing market share. What we find is that with the price optimization tool that we are now using, it's giving us some insights to where we need to be priced.
And it's not always about being the lowest price. It's about being the right price by market. And that's why another reason why we had to have this system. We've got in the range of 1200 stores in many, many 46 states and you've got to have some type of tool to help you work through that. And we're very confident that we run our advertising based upon regional need and regional sometimes even down to the district level.
So it's not about just driving it by price. There's a mixture of things that we do and we're learning as we go, I'll be honest. We're not we still got things that we can do to improve our performance.
Philistophically though, we will not come into a marketplace and drive price down. But we will be extremely competitive in some situations. What we've learned is and what this tool has given us is the ability to be able to better manage the price. So in the event that we focus on market share and drive increased sales, then we will get the leverage that we would expect from leveraging SG and A versus improved gross margin rate. So that's where we see the trade off and it gives us great flexibility in determining whether we increase EBIT margin through gross margin or leverage SG and A.
And then as a follow-up, as
you think about 13 in this realm, does the behavior to your actions to do anything materially different in 13 than 12 with the learnings, the experience and the environment?
Well, I would tell you that from what we see now the customer is still responding very similarly to what they did back in 2012 with the exception of the weather patterns. Again, our business is a need based business. And if you have animals, you have property and you have equipment, you're going to need to shop tractor supply. There are other things we carry in our assortments that are more seasonally sensitive. And if we see movement in seasonal, we seem to see a more of an uptick, but we're less sensitive today than we've been.
We've somewhat be able to moderate that by really bringing the business across all four walls of the store. I think right now we feel very comfortable from a mix standpoint. And there's some upside, of course, if the weather plays in our favor. And moisture in the spring is a good thing and cold in the fall is a good thing.
Perfect. Thank you very much. You're welcome.
There are no further questions. Please continue with any closing remarks.
Good. Thank you, operator. Well, thank you all for joining us on today's call. While we are very pleased with the progress we've made in the past few years, we are more committed today than ever to continue growing Tractor Supply to be a more profitable retailer and returning greater value to our shareholders. Our teams are planning, preparing and executing and reacting better than ever before.
We're committed to provide the right merchandise in the right regions at the right time to our customers while bringing quality products and great values. Our business model is solid and we continue to build momentum in our business. Thank you for your continued support of Tractor Supply Company and we look forward to speaking with all of you again in about 90 days.