Ladies and gentlemen, and welcome to the Tractor Supply Company's Conference Call to discuss Third Quarter twenty ten Results. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please be advised that reproduction of the call in whole or in part is not permitted without prior written authorization of Tractor Supply 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.
Erica Pettit of SD. Please go ahead, Erica.
Thank you. 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 the 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 Jim Wright, Chairman and Chief Executive Officer.
Jim, please go ahead.
Thank you, Erica. Good afternoon, everyone. I'm here with Tony Credell, our Chief Financial Officer Greg Sanford, our President and Chief Merchandising Officer and Stan Rutta, our Chief Operating Officer. We're delighted with the results for the quarter year to date. The team executed very well and produced solid results and A leverage.
At the same time, we continue to drive margin enhancement and expect to maintain our momentum. Now turning to our performance during the quarter. We maintained solid in stock positions, while once again reducing our average inventory per store. The team also executed very well against our merchandise planning and marketing initiatives. Let me go into a little more detail.
We recognize that our customers our clothing line to offer great values on key items and are pleased with the initial consumer response. Overall, however, consumers remain hesitant to make discretionary purchases. We continue to refine
our
merchandising. Accordingly, we're getting the right items in the right geographic locations at the right times. We are accomplishing this while exiting quarters with clean inventory and making smooth seasonal transitions. At the same time, our enhancements in marketing are continuing to drive footsteps as we are more effectively utilizing product space allocation within our circulars. During the quarter, we continue to benefit from refined print distribution, which allowed us to reach our highest potential spending households eliminating the low potential households.
We believe we are still in the early stages of benefiting from our efforts to refine printed distribution and leverage our CRM program. We're employing a greater discipline around marketing to grow our profit margin dollars net of advertising spend. We are pleased that our results for the quarter reflect broad based strength across the business and solid store traffic in the majority of our markets. We have developed and are maintaining solid relationships with our customers. We're encouraged that our customer satisfaction scores remain in the top 2 deciles of all retailers.
Overall, we plan for a normalized Q3 and delivered another period of strong performance as we build on our momentum. I would now like to turn the call over to Tony to review our financial results and discuss our outlook for the remainder of the year and I'll then return with some additional comments.
Great. Thanks, Jim, and good afternoon, everyone. We are very pleased with our performance in the Q3. To certain extent, it was simply a continuation of positive trends we've been reporting in the recent quarters. Strong same store sales, high gross margin and expense leverage continued to drive top line and bottom line growth.
For the quarter ended September 25, 20 10, on a year over year basis, net sales increased 10.9 percent to $829,000,000 and net income grew by nearly 46% to $32,000,000 or 0 point Comp previously, although it appears that we are cycling an easy comparison, we believe that 2,009 was a normalized sales run rate for the quarter. The negative comp last year resulted from cycling against hurricane related sales activity, inflation and the pull forward of heating sales in Q3 in 2008. Non comp sales were $44,000,000 or 5.3 percent of sales. Comp transaction count increased 6.3 percent as current and new customers continue to make frequent trips to purchase basic and necessity items. The trend in average comp ticket continues to show year over year improvement with a decrease of only 1.3% versus year's 10.4% decrease.
The decrease in this quarter was attributable to deflation and softness in big ticket. Average ticket excluding big ticket items was flat. Similar to Q2, the sales strength was broad based with respect to both merchandise categories and geographic regions. We continue to experience comp merchandise as well as clothing and footwear also performed well as we focused on key value price points. Geographic regions had positive comp sales with the strongest regions being in the Midwest and Southeast, both areas where moisture levels prolonged the summer season.
Comp sales in our Dells stores exceeded chain average. Dells continues to improve product gross margins, which was offset partially by increased freight cost. Units and transactions for feed at Dells continue to grow. We continue to effectively manage the impact of deflation at the gross margin level as we encountered an estimated deflationary impact of 149 basis points on top line sales. Deflation was most evident in the livestock and bird feed, agricultural fencing, certain lawn and garden and lubricant categories.
Turning now to gross margin, which increased 76 basis points to 33.7 percent of sales. Direct margin remained a strong driver as our strategic initiatives continue to enhance our gross margin. We are still executing very well in our inventory purchasing, allocation, price optimization and markdown management. LIFO had a favorable impact of approximately 67 basis points on a year over year basis. Although we anticipate some 2nd quarter.
This resulted in a credit of $3,500,000 in the quarter or slightly less than $0.03 per share. As we had forecasted, freight expense increased over last year and we estimate it was 31 basis points higher. This increase was driven by higher fuel costs than last year, increased import activity of winter seasonal goods and a mix shift to higher freight cost merchandise. For the quarter, SG and A included depreciation, including depreciation and amortization was 27.5 percent of sales, which was 58 basis points improvement over the prior year's quarter. Our SG and A leverage for the quarter reflects our sales growth and continued expense management.
We leveraged occupancy for the 3rd continue to ramp sales very nicely. We continue to see leverage in the general administration areas, store support center, field Incentive compensation reduced SG and A leverage in the quarter by approximately 17 basis points. The 27% increase in incentive compensation was solely at the store and field level as a result of the strong sales performance. The company's tax rate was 37%, which is consistent with our planned full year rate. The rate is below last year's tax rate of 37.8 percent as various favorable book tax adjustments principally disqualified incentive stock options had a greater impact on the effective tax rate.
Turning to the balance sheet. At quarter end, we had $171,000,000 in cash compared to 95 $1,000,000 last year. Inventory levels per store at quarter end decreased by approximately 3%. Annualized inventory turns for the quarter were 2.8 two times, a 12 basis point improvement over last year's 3rd quarter. Year to date turns were 2 point 98 times, up 16 basis points.
So we're very pleased with our inventory levels as we head into the winter selling season. Capital expenditures for the quarter were $30,200,000 related principally to our new store opening program and equipment for upgrading our distribution centers. This compares to $15,300,000 in last year's Q3. We opened 9 stores this quarter versus 17 stores in the prior year's Q3. We purchased 1 of our lease stores during the quarter for $4,000,000 We expect to open a total of 20 5 to 27 new stores in the 4th quarter.
During the Q3, purchases under the stock repurchase program were approximately 9.2 $1,000,000 This was approximately $33.64 per share adjusting all the shares purchased in the quarter for the stock split. The impact of the repurchase program on Q3 EPS was de minimis. Turning to our outlook for the full year. As noted in our release, we have increased our expectations to reflect our strong Q3 performance and given the consistent consumer behavior we have experienced, we have greater confidence in the Q4. Accordingly, we now expect net income to range from $2.09 to 2 point compared to our previous guidance of $2 to $2.05 per diluted share.
We expect sales for the full year to range between 3 $530,000,000 to $3,550,000,000 compared to our previous expectations of $3,490,000,000 to 3.53 $1,000,000,000 to 3.53 expectation of 2.5% to 3.5% increase. To provide additional detail on a few of the underlying assumptions for of the year, including our full year guidance, our guidance anticipates our customers will continue to shop our stores at the same frequency and that they will remain price conscious and value oriented. We have tailored our assortments accordingly. We anticipate a more stable consumer environment than last year as we move into the holiday season. We have not assumed any strengthening in big ticket sales.
Our Q products and special buys will continue to be sales drivers. Additionally, our branded feed program continues to build momentum even as we cycle the launch of the program in early October 2009. We continue to believe that this program will be additive through 2011 as the large animal bag feed category is still less than 10% of our business and we believe we have years of us in that category. We expect weather trends to be generally neutral. As we mentioned in our last call, October December are projected to be slightly warmer than last year and November should be cooler than last year.
To date, the weather and Tractor Supply's performance in October are tracking in line with our expectations as we are comping nicely against the colder weather of last year. As I mentioned earlier, we experienced slight deflation in certain categories during the Q3 and we believe we will have slight inflationary pressure in the Q4. Our current guidance reflects a full year LIFO estimate of
approximately 0. Recall that in the Q4 last year, we had
a LIFO credit of dollars We believe that our gross margin for the quarter will be flat slightly up. We expect that direct product margin will continue to expand as a result of our gross margin initiatives. However, this will be offset by increased fuel and import costs as well as cycling against the LIFO credit in Q4 last year that I just mentioned. Consistent with the Q3, we anticipate that the marketing spend for Q4 as a percent of sales will be even to slightly higher compared to last year. We do not expect to be more promotional, but we are continuing to make investments in customer research and improving our CRM database.
We've narrowed our 2010 new store and capital expenditure projection. We expect to open 72 to 74 stores and expect capital expenditures should be $93,000,000 to $98,000,000 Our CapEx projection includes $11,300,000 for leased CSC stores, which we purchased during the 1st 3 quarters. Although we will continue to opportunistically purchase leased stores when the economics are accretive, we currently do not foresee making any purchases in the 4th quarter. To conclude, we are well positioned heading into the final quarter of the year. By all accounts, 2010 has been an excellent year so far with great execution driving strong growth.
Now, I'd like to turn the call back to Jim.
Thanks, Tony. Our record of consistent growth and focus on continuous improvement demonstrate the Tractor Supply Company can deliver sustainable results. We've increased our top line quarter after quarter and expanded our margin. We are in the early stages of benefiting from our margin driving initiatives, which include price optimization, strategic sourcing, private brand development and improved planning and allocation of seasonal goods. We remain encouraged by the traction we've gained and are excited about the opportunity to further build on this momentum.
We continue to refine our merchandising strategy and inventory management in response to our customers' purchasing patterns. As I mentioned earlier, our customers are focusing on needs and value and we believe this trend will persist through the winter and the holiday selling season. We prepared our stores regionally, planned marketing accordingly and as a result are ready for this important selling Additionally, we remain focused on reducing waste within the organization. We've instilled a low cost and conservative and conservative operational discipline and we will continue to operate as a lean organization. At the same time, we're making investments to support our growth.
For example, we margin expansion appropriately. We'll be implementing and testing this software in the first half of twenty 11 and expect to begin realizing benefits later in the year. Additionally, we are investing in store growth and infrastructure development. We'll be breaking ground soon on a new distribution center in the Mid South that will be completed in approximately 14 to 18 months. We're also enhancing our distribution network with a warehouse management system and conveyors to help drive further efficiencies.
Given our store growth, we believe it is time to implement a more automated and effective method to process inventory and increase the throughput capacity of our existing 3,200,000 square feet of DC capacity. We are selling the system in our distribution center in Waco, Texas and plan to roll it out to 3 additional distribution to support our unique niche through the collective and cross functional efforts of our teams. We have the right systems, the right capital structure and the talent in place to continue improving our business. During the Q3 and year to date, we have continued our record of making the company better while we also make it larger. Practice Supply is well positioned for the remainder of this year and very well positioned for the long term.
Operator, this concludes our prepared remarks and would like to now open the call to questions.
Thank We'll go first to John Lawrence with Morgan Kiegan. Yes.
Jim, would you talk a little bit about we talked a little bit about the customer with that feed program. Can you talk about that customer now that you're cycling against that and you still got some gains to go? How long is it taking for that customer to move to other parts of the store? And what are you benefiting from that? And is that part of the gains that we do going to 11 with?
Sure. Well, first of all, we've only cycled for 3 weeks now and we're cycling against some very promotional periods from a year ago, but at this point in time, we are performing as expected, which is performing very well. John, when we look at that branded feed customer, the most important thing to recall is that they exist within the 2 most profitable of our 7 customer segments. And they are most profitable because they tend to shop more an average tractor supply customer. So, as we see them coming in and quite a few of them are brand new to the company.
Others were identified as trucks by customers, but are new to the feed category. So, we win in both those cases. Obviously, those who are new to us come in and really buy the entire menu and those who were shopping us for other things who are now buying feed are coming in twice as frequently. So overall, it certainly has proven to be a win. And we also believe that we have several years of growth ahead of us for not only branded feed, but the feed category overall.
Yes. And just lastly, thanks for that. And then would you touch on outdoor power equipment as you sort of end the season here?
Yes. We ended the season extremely well. I guess the momentum slowed a little bit in the Q3 as it normally does. But we frankly ended the season, I believe as lean and drag as we've ever ended. We did.
We're in great shape for next
year. Great. Thanks a lot.
And next we'll hear from Vincent Sinisi with Bank of America.
Good afternoon and thanks very much for taking my question. My question is dealing with your marketing efforts. I know that last quarter you said that total marketing up about 10 basis points, 15 basis points was more of a focus that's for the second half of the year with more of a focus on direct marketing. Jim, wondering if you could just give us any further insight into what specific efforts are working the best for you and how you're looking at your advertising as we get further into the Q4 as well as next year?
Leave. First of all, Vincent, our major benefit is coming I leave. First of all, Vincent, our major benefit is coming from the fact that we changed agencies a little over a year ago and the agency that we went to has very deep competency in the distribution of print. So today, we've now gone through the entire chain literally store by store, trade area by trade area and have done an overlay of where we were advertising versus where we believe our highest potential households are. And where we were not reaching the high potentials, we are.
And where we were advertising to low potential households, we are not. So, as a result of that effort, we've actually been able to increase our distribution about 30%, I think. Is that all right?
It's up about 20 somewhat percent in the net range.
Yes. So, we've actually increased our distribution over 20% and are spending the same or less in total. And concurrent with that, we're also obviously in a position with CRM now through our test and learn cycle that we have been able to continually refine the offer to the target household and begin to get a improved market basket from those on our CRM program. 4th quarter helpful.
I can give you a little color on Q4. We will be basically copying similar events to the Q4. The one thing that we have accomplished, we did a research project on the animal food and care customer, just completed that InSight project. Quite a bit of learning came from that and it was mostly focused around the growth strategies in the company, which of course are feed and food. And we're applying some of that knowledge as we start to move through Q4 into Q1.
But we know a lot more about our
customer and the more we know, of course,
the better we can target them. So, to this consumer through research and then apply
that research. And you'll see
Q4 with some of our CRM efforts and even our distribution of our tabloids.
Okay. That's very helpful. And just one other quick question, if I may. As you had commented in your outlook for gross margin during the Q4, I know you said that you're expecting some higher costs such as fuel fulfillment. Do you feel pretty confident that whatever pressures may be there that you have the correct strategies in place to hedge against them?
I believe that we do. We anticipate a little bit of pressure because of some of the freight impacts and rolling off of that benefit from a year ago, looking at what was happening with container costs, but container costs are coming down. So as we roll into the Q4, those costs are rolling back. We have landed most of the, I will call, the higher freight products, the Q4 season and Q3. So my anticipation is that the margin will continue to improve and I don't see the drag on margin
And from Credit Suisse, we'll move on to Simeon Gutman.
Thanks. Tony, I realize it's only been a few weeks here in October, but I believe you mentioned that the business is comping nicely so far versus the colder weather last year. Should that tell us that comps actually should strengthen then as it gets colder this year?
Well, as we move through the quarter, as we talked, November will be a colder month and then we'll head into December, which will be slightly warmer. When you look at the quarter as a whole, as much as we like the start that we have gotten off to in October, it's really the November December months are the most critical. We had a very weak November as we moved into last year. But again, December is a 5 week month for us and really will tell the tale as far as the overall comp for the quarter.
And if you do get a compression in a given quarter, meaning if it stays mild for October and then it gets a lot colder sort of towards the middle to the back half, In any case, is the compression sort of neutral for your business? Does all the sales end up happening? Or when it gets compressed, do you think something falls off or something actually benefits?
Overall, we like to see it as cold as possible as early as possible to lengthen the winter season as well as the impact of potential or the actual occurrence of winter storms generally will provide a boost to sales. So we believe generally the sales will come, but a prolonged season is most beneficial. And that's why we're generally very pleased with the results we're seeing in the early part of it.
Okay. And then I have, I guess, one more. Well, 2 more. I'll ask them both upfront. Just can you comment on the ticket in the store?
I think last quarter you got very close to getting back to positive. And you have some of these marketing initiatives going after the highest potential households. So what's happening with that so far? I realize it's early days. Are you seeing more items, but just lower price points on those items?
And then just the second question on LIFO, if there's any early guesstimates about next year because realizing you probably had some positive benefits this year, I think next year it will play impact on how gross margin progresses. Thanks.
Sure. I'll take the ticket and let Tony handle life. On ticket for the quarter, if we take out big ticket, which we define as those SKUs above 3 $50 we actually saw flat ticket average. So all of our pressure in ticket, which again was modest to the run rate and certainly compared to last year's 10% decline in ticket average was a result of a decrease in the sale of big ticket items.
Great. Relative to LIFO, I wish I could tell you that I have a great crystal ball, but when it comes to predicting the inflationary impact. But as we move into next year, given the deflation that we have experienced this year, we would anticipate to have slight to moderate inflation overall through out 2011.
Okay. Thanks.
Thanks. We'll hear from Christopher Polly with SunTrust Robinson Humphrey.
Hi. Thanks for taking my question. First, with regard to holiday, you mentioned that you expect customers to remain need and value focused. And I was wondering as far as your offering goes, should we expect a similar focus as last year? More focused on trying to highlight some of the utility items as potential gifts and that sort of thing?
Christian, I'll answer. This is Greg. It's going to be, in our opinion, very similar to a year ago. People will be buying, in our opinion, things that are necessary and needed. And we believe with the way we've set our lineup of product offering and the way we'll have our store set, we can make some of these everyday items with great value offer them with great value and drive considerable units.
So this is really just a continuation of what we've seen all year. We are enhancing our offering from a year ago, but we're not going to go outside basically the structure of useful needed type items. I mean, that's our customer, that's what they expect and that's what they've been spending money on all year. So we anticipate they'll do that the same for the Q4.
Okay. And then thanks. With regard to the store openings, you opened your openings for this past quarter were less than what we had modeled and it seems like you have a fair number of openings slated for Q4. Have a good number of them already been completed? And do you expect them to be wrapped up prior to that sort of Thanksgiving kickoff to the holiday?
Yes. So
the new stores in the Q4 are on target to meet the range that Tony referred to a little earlier in the call, 72 to 74 for the year. And just a little bit about the store, why the stores are later, if that was your question. If you go back to 2,000 and we as a management team, we were very cautious because of the economy at the time. We thought it was important to be very cautious on new store approvals. And we actually approved fewer stores in 2,009 than we did in 2,008 and 2,007 because we were being cautious.
Additionally, we had some, what we call dead deals. They were deals that fell apart because of developer financing or several other issues. We had more deals fall apart in 2,009 than we did traditionally in 2,007, 2,000 2,008. That since reversed itself. We've as we look at 2010 approvals, the approvals we had in 2010 exceed 2,008 and 2,007.
So we're back on
2011.
Okay. And then just one final question if I could. You mentioned that you didn't expect any near term increase in or change in big ticket trends. And I was just wondering if you have any early thoughts yet on next year's mower season and what the current ticket trends might be
And at And at this point in time, we hope it's as green and lush as it was this year. That's really the wildcard in the business.
Thank you.
Sure.
And from William Blair, Jack Murphy has our next question.
Thanks. Let me just ask a couple. First, on the price optimization software, could you just doing price optimization up till the rollout and some specifics on what benefits you think you could see there? And then the second question just on the both the new DC plus the layering in the new conveyor systems, what your early read might be on CapEx for 2011?
Okay, Jack. That's a number of questions. I'll try to start off with price op and maybe let Tony wrap up on the CapEx side as well DCs. The current process that we use here is very manual. We have several analysts and we've been looking at by category some of the, what I'll call, price elasticity on some high volume and even some low, I'll call it, low volume on it to try to get some comparisons of when we move price what happens.
That process has been in the works for probably the better part of 9 to 10 months. What we saw from those results was that there was quite a bit of upside movement we thought on margin and where we had success. So we said it's time to now go out and capture this systemic way. So we did the research, due diligence, met with a number of these price optimization companies and chose Revionics primarily because it was the best fit for what we felt was our needs here at Tractor Supply. The flexibility, the approach that they doing the loading of information into that now.
That will take about 3 months, maybe to 4 months. And we'll do some testing starting in the first part of twenty eleven and really start to gain some benefit from it in the second half of twenty eleven. So it's not like you just turn the system And we'll do this thing basically running parallel with the old system to make sure that we check ourselves as we go along. As far as absolute gross margin improvement, too early to tell. We have some internal estimates, but it's just probably not something we should share at this time.
Switching to the new DC and what we're doing with automation. Due to the store growth, we knew that we needed to add more DC capacity. The automation side of the current distribution centers is to add efficiencies and also throughput capability. So we are working right now in the Waco DC in Texas and we install on WMS, which is the Manhattan system. That will be here in the Q4.
We anticipate working our way through some of the typical snags and hang ups that you have in a WMS system when you turn it on. At the same time, we're moving to the other distribution centers with automation and we'll do the same thing as as getting them up and running on WMS. So this is a staged approach that will take a year to possibly 18 months. The benefits will be efficiency, throughput, probably an improvement in our labor capture. And overall, it's the network that we're going to need to support the store growth for the next 3 to 5 years.
Now, Tony, may you want to talk about the CapEx allocation?
Yes. Jack, as far as
CapEx
allocation, generally, allocation, generally, a normal year, we're going to be running somewhere in the $90,000,000 to $95,000,000 range that supports our store growth. Top level, we're looking at about $45,000,000 for the new distribution $20,000,000 for retrofit for a conveyor at the other distribution centers. So, general guidance is in the range of $90,000,000 $95,000,000 plus another $55,000,000 to $60,000,000 So it gets you into the $150,000,000 to $160,000,000 range next year. And of course, in January, we'll give you sort of precise more detail updated to the CapEx projection.
And next we'll hear from Matt Niemeyer with Wells Fargo Securities.
Unseasonable weather at the end of the year, could we see an accelerated markdown cadence this year versus last year? How are you feeling about margin rate, merchandise margins in the 4th quarter?
We're still I'm still this is Greg. Matt, I'm still feeling very good about it. It's early in the season. We are seeing some initial reads on some of our heavyweight product that's been good. But if it stays very moderate, you can bet that we're inventories.
We haven't receded everything. So we've got some flexibility there. So right now, I'm still very positive on how we're in the season and the 4th quarter's margin.
And then on the store growth shift into the Q4, does that have any impact on the financials? It doesn't seem like your pre opening expense was all that different from last year, but could that be a good bit higher in the Q4?
Generally, it will run a
little bit higher as we move
into the Q4, but we don't think that it's significant impact to the quarter and obviously taken into consideration in our full year guidance.
And then lastly, just to piggyback on someone else's question on LIFO for next year. Could you just give us
a sense
of where you'll see the most pressure by category? I assume that feed and pet food is probably pretty high on that list. But as you look to 2011, where will you see the most inflationary
pressure? Yes. Currently, you're correct in your assumption, Matt. We'll most likely see it in FEED. Steel has been a little slow this year and there could be an uptick as we move into next year.
Petroleum, we're not necessarily projecting a significant increase there. So overall, I think you're correct in your assessment where we will see most likely in the grain. The good thing about the grains is we can it turns the quickest, so we can make the most quick assessment as to the impact when it comes to the margin and the LIFO implication.
Great. Okay. That's all I've got. Nice quarter.
Thank you. Thanks.
And next from JMP Securities, Peter Keith.
Hey, good afternoon, everyone. Congrats on the good results.
Thank you.
I was curious on the ocean freight contract, it sounds like maybe that reset in Q3. Is that true? And I guess, would it the next time it would reset itself would be in Q3 of 2011?
No, actually we negotiate these contracts in 6 months increments and you basically allocate for the container usage. And we knew that going into Q3, we had to pay more. That was just part of negotiation period. Take advantage of that, of course. And we may not if we can front load some of the spring into the latter part of the
year in
December, benefit everyone, benefit us. But that's really what happened. The industry is, I guess, at this point has more in the fleet than they may have anticipated and the cost will come back.
Okay. Thanks. That's helpful. And then one other question for Tony, kind of with your expectations right now for slight to moderate inflation.
If you just look back
at history, it looks like you guys have
historically had maybe
$4,000,000 to $7,000,000 pre you guys have historically had maybe $4,000,000 to $7,000,000 pretax LIFO charge. Is that something that we should kind of expect based on what you call a slight to moderate inflation environment as you see it today?
Yes, I would agree with you. Generally, LIFO has been between $10,000,000 I think $4,000,000 to $7,000,000 is somewhat of a sweet spot and that would be generally very consistent with sort of slight or moderate inflation.
Okay, thanks a lot and good luck in Q4.
Thank you. Moving on
to Peter Benedict with Robert W. Baird.
Hey guys, I just want
to dive into the Q4 plan a little bit further here. I think during the call you guys had said that you've now got increased confidence in your 4th quarter given the strong results in the Q3. Do we take that to mean that you haven't changed that 4th quarter operating plan versus where you were, let's say, at the end of the Q2? I mean, I understand the LIFO outlook has changed, but core operations, are you guys expecting kind of the same thing?
Yes. As we move into the quarter, it's really the performance to date has just been a confirmation of where we had our original operating plan for Q4. So that's a big portion of it. We believe as we headed into the quarter that we've added some upside as we look out at the quarter. But generally it's consistent with our original outlook as we planned at the beginning of the year.
Okay. Thanks, Tony. And then, and as for the comp, I mean, it looks like you guys are expecting 2% to 4% or so, a slight slowdown versus the Q3 comparisons get a lot tougher, but you're expecting a favorable swing in terms of inflation, maybe as much as 200 basis point sequential swing. Help us understand what that 2% to 4% plan for comps in the Q4 assumes in terms of traffic growth and average ticket?
Well, generally, we think that the trends will be consistent. We expect the traffic will be slight decline in the average ticket. So again, as we move into the 4th quarter, we look at those two components as being relatively
quarters.
Okay. And then just lastly on the flat average ticket excluding the big ticket items, I guess that was the experience in the Q3. Remind us how was that in the first half of the year? Is that better than what it has been or was it similar to that in the first half?
We had a nice move in the average ticket in Q2 and the big ticket came back a lot stronger in Q2. As we moved into Q3, it did not necessarily be soft. We have less exposure in the Q4 to big ticket items. Heating is the only one that is critical as far as some of the wood burning stones, stoves, etcetera. But we feel we have less exposure.
And so we again expect that as the average ticket excluding big ticket has continued to be flat and improved, we believe that we can maintain that in the 4th quarter with just a limited impact from the softness of big ticket.
That's right. And one last one, Do
you guys have the sales mix breakdown available where you kind of talk about the breakdown by category for the quarter or do we have to wait for the Q for that?
Yes, we generally do not disclose that and just I would look at it in the Q.
Q.
And from ThinkEquity, we'll move on to Christian Budds.
Yes, congrats on nice quarter.
Thank you. Just wondering if
you could provide some perspective into the real estate environment, if you've seen any changes there looking forward into 2011? Nothing significant, Chris. Over the last 18 months so, we've had some obviously, with the financial situation out there, financing continues to be challenging for some of our look
at the
there's There's some out there, but most of the inventory on vacant buildings out there today is in newer plazas and they're very expensive and they really don't fit our needs. Construction costs remain to be in favor of tractor supply and we're seeing that contractors are wanting to work and the prices have been very competitive tractor supply. We're seeing no significant changes on material costs, although they're edging up slightly, nothing significant. And land prices remain about the same. There is some softening in some markets, but overall, they're basically the same they've been over the last 18 months.
Okay. And then one housekeeping question. It looks like payables came down on a year over year basis. Wondering if
you could provide some color there? Yes.
Significant progress as far as streamlining payments and had a very stringent program in place to make sure that we receive all the available discounts that we can. And so with that, we have seen the accounts payable balance decrease relative to
our inventory balance. We monitor that
metric on a monthly basis. Our inventory balance, we monitor that metric on a monthly basis. But the incremental income that we're receiving from the discounts from our vendors has far exceeded the carrying cost of the inventory.
Okay. Thanks and good luck in the Q4.
Thank you. Thank
you. Next we'll move on to Brent Rystrom with Feltbrokerage.
Good afternoon. Thank you. A couple of quick questions. Being in your stores recently, looking at some of the seasonal stuff, noticing a lot of the stores particularly here in the Northern States selling through very well on log splitters. Is that something you consider kind of a continuation of that strong outdoor power equipment trend?
Yes, Brett, this is Greg. Log splitters, as you know, we are one the key fall items along with heating. And we have seen an uptick. You've probably seen a little bit of expansion in the assortment, but very pleased with the overall first pass performance. We really haven't hit the peak of the season
yet. That's what I was going to ask you because there were stores that I've been at 2 weeks ago that had 6 or 7. You know when you lay them up in the sidewalk coming in on the both sides of the sidewalk, not the sidewalks going parallel with the buildings, but the ones walking out the parking lot, stores that had 6 or 7 of them a couple of weeks ago and there was one today or the last couple of days when
I bought
the same store. So I mean how quickly can you replenish that assortment?
Very quickly, within the week.
Okay. Inventory has been pushing.
I'm noticing Greg or Jim or whoever also, the wood pellet presentation appears to be much, much more aggressive this year. Is that an attempt to kind of build another consumable business tied to that?
We
heating that we've had over the last probably 3 to 5 years, fuel was going to be the key element. And so we did buy up, we did a store deeper. We selected our stores. And yes, there's a commitment on that consumable just like it is on feed.
And are you seeing out of curiosity, are you seeing is it what percentage of people pre buy and then what are in store purchases of that product?
Well, I won't share with you what the pre sell numbers were, Brett, but we had a significant improvement this year over last year. And once you're in season, of course, what you hope for the business will continue. We're seeing we're getting it both ways. We've got preseason and then we're also seeing it now as the season is starting. Our stock position is the best it's ever been.
When I look at the pricing on the price per ton versus the price per big, there's about 11% discount. Is the pre sell a bigger discount than that?
Typically, we do give customers more incentive on the front side of the season, but we're very cautious about the local market pricing on that commodity. So what you'll see in one market may be different in another.
Couple of other quick questions. As I walk into stores, managers are very excited about the fashion this fall compared to last year. I mean, they're really starting to sense the colors, the patterns, stuff like that. Any particular comments on how casual apparel is doing this fall?
Well, casual apparel, I would say is, we look more as it's workwear, it could be probably worn in both ways, but initial response has been very solid. We made a buyer change about a year ago. We are very happy with the performance of the business, the flow of the
store. Of the John Deere type crackers and toys and stuff. I don't recall that being in the stores at least in visible quantities as much this early last year.
The difference, Brett, is that last year some of that product we separated, if you remember correctly, the Center Court last year was set a little later in some stores, and we had a split between our insulated outerwear and our gift business. We had all stores basically set similar. This year, we decided to move the gift business in the north to the
left front
side of
the store.
Yes, it's off,
yes, to the left. Exactly.
And use the center court for the expansion of insulated because we needed more space last year.
Is that exactly it's up about 25% in square feet, the insulated outerwear.
Probably and approximately, probably about correct.
All right. And final question for you. New price cut drops on Sunday. Every store I walk into when I grab the price cut sheet, the managers mentioning how many people keep asking about the price cut for each quarter. Has that been a huge driver for business?
It has been a very nice program. We're very happy with the performance of it. And as you know, it changes out quarterly. It also gives us some indication on some price elasticities on certain products in certain categories. We're happy with it.
All right. Thanks guys. Congratulations.
Thank you.
And from Raymond James, Dan Weaver.
Tony, I wanted to double check a number from your script. When you were discussing LIFO, you mentioned that this had a $0.03 impact, I wasn't sure for which period you were alluding to us getting something closer to 0.0 $4 to
0 point 0 $5? In Q3, the amount of the credit was 3.5 $1,000,000 pre tax, which amounted to approximately $0.03
Okay. I was comparing it to the charge from a year ago. I'm looking at total swing of about $0.045 Is that the accurate?
Yes. If you look at the point 5. If you're looking at a year over year swing, you point 5. If you're looking at a year over year swing, you'd have to look at the credit that was that you had in last year in Q3.
So when you look at gross margin, I don't know if you call it FIFO or margin excluding LIFO, it was essentially unchanged slightly higher year over year. Is the takeaway that the drag in transportation costs was almost like exactly offsetting the improved merchandise margins?
It was not a direct offset. There are obviously some other components that are in the margin. We look at just the direct margin and sort of the markdown management piece, we would look at that as really closer to 30 basis point improvement. The offset from freight was a little bit less. Obviously, there's other components in there as well that we did not detail out.
But when we look at sort of the direct product the freight deleveraging.
And then in backing into your 4th quarter guidance, it looks like it's $0.51 to $0.55 a share. I was checking the consensus estimates and they were at $0.55 several were above that. You noted that business is starting well during the Q4. What do you see as a headwind in the Q4 that perhaps the analysts aren't recognizing?
I think first the one thing that we mentioned obviously is there is a LIFO credit of $1,500,000 in Q4. And then also, as we discussed, think that generally business will be conducted consistent with the way it has been throughout the second half of the first half of the year as well as the Q3.
So kind of thing for the Q4, it'd be good sales, good expense management, but there's going to be some
Okay, great. Thank you. Next from Janney Montgomery Scott, we'll move to David Strausser.
Thank you. Two questions. The first one, just understanding a little bit about from an Investor Relations standpoint, you had a very strong quarter. In the can you give a little bit of thought process behind what would drive you to do one versus the other and how you think about it? Not exactly to the day to day operation of the company, just trying to understand it a little bit.
Sure. A lot of different variables are evaluated as far as looking to pre release. First, we're going to look at our own operating performance
and our
expectations. I think that's 1st and foremost critical. Obviously, we'll make an assessment of where the Street is because that's part of the deliberation. We're going to look at to see if there's any unusual events in the quarter that would drive the performance one way or the other. And so it's a myriad of things.
We'll look at the as many analysts refer to the quality of the earnings. So if there's certain items in there that may not have been impactful or non cash related, Obviously, LIFO is one of those that we'll make an assessment on. So we'll look at those variables. And then given the magnitude of the quarter itself, make a determination of how significant that beat is. Obviously, when we're in the Q1 and it's early in the year, we've always made the assessment that we want you to look at the whole half.
So unless the beat is sizable, especially on such a small number that generally ranges from 0 to 0 point the beat would have to be significant. Whereas we move into a larger income quarter such as the Q2, you're working off a larger base. So then again, the beat would have to be significant. As we move into the Q3, we believe that Street expectations were managed properly. We believe that we had significant improvement over last year, but we were in a very reasonable range relative to what we perceive the Street to be at as well as our own internal observations.
In addition, you can see that LIFO it did have a LIFO impact as well. So those are some of the criteria that we go through, but it's obviously a little bit more art and science.
Okay. No, I just was sort of just wanted to make sure I understood because I've gotten that question a little bit in the last
few weeks, last week or so.
If you don't mind, I'll change the topic a little bit. Looking at going back to the marketing, direct marketing, as you look at that, what was the biggest surprise? Is there anything that really like surprised you and say, wow, about your customer, about who your customer is or which type of customer is doing what?
There are several great points of discovery in the last, I guess, 18 months. First and probably most significant, we did the most rigorous customer segmentation research that we've ever done and really began to understand the 7 kind of macro profiles of our customers and then the relative annual and lifetime spending by thirds rather. And then we began to set about using CRM to move are in and then moving them across segments through different couponing and different offers. There's a significant lifetime value variability from the lowest to the highest. We understand the common denominators of the 2 or 3 highest and we're beginning to learn now how we move the consumers up the continuum within their own segment and then begin to move them across segments.
So, I guess we learned a lot of our customers. We were maybe not surprised by what we didn't know, but we're delighted with what we learned and what we are now learning to and the learning we now have that we're applying to making them even more valuable in the future. The other piece was a tremendous discovery on the capacity we had to make our print more productive on the distribution side and also then to make our print more productive with space allocation to the categories and the cuts or the SKUs within the categories. So we will apply a lot of rigor to measuring our advertising today. And as a result of that, event by event, is becoming more profitable for us.
So, it sounds like there's still a huge opportunity. It's just really starting in some respects.
We are not done by any means. We have several initiatives to improve both print and direct mail and then we have the opportunity over the next couple years to develop a great content and community on our multichannel website.
All right. Listen, thank you very much.
Sure. Thank you.
Next, we'll move on to Mitch Krieser with Piper Jaffray.
Thanks guys. I know this has gone a long time. Just a couple of quick questions. Just in terms of capturing the information and how many customers do you actually have in your database now and kind of how that's expanded and how do you track those on a go forward basis,
if you don't mind?
Yes, I don't think do we disclose the actual number of customers? No, we haven't. It's less than half, but not much less than half, I guess, is how we look at capturing volume. But the way we track them is warranty, tax exempt customers, which is a fairly significant subset of our customer.
Hello, Mitch? The sustainability of that's pretty robust. So that's how we should take away. That should be our takeaway from this?
Yes. There are several things. We will continue to grow the list of customers and we'll continue to refine our capacity to increase their frequency and their average ticket.
And then just lastly, Tony, you talked about the payables and the ability to recognize discounts. Where do you think you are with that? Is that something we should see continuing going forward? And what sort of impact do you think that had on margin?
I think we probably have another quarter ahead of us where we might have a decrease in our AP to inventory ratio. But after that, I anticipate that we'll be cycling. And so you'll see that flatten out. We have not disclosed, but I would tell you that the extremely well in not only necessarily just pure discounts, but in supporting some of the programs that we have out in the stores. But it has been a very significant effort and the reward has been significant throughout the year and as well as half of last year as well.
Okay. So just as you think about that, is that going to limit your ability to drive margin on a go forward basis? Are you still feeling good about that?
No, we feel that we'll continue to have that type of relationship with the vendors as we continue to build. Obviously, as we purchase more merchandise and expand the chains, we have the ability to capture more discount through volume purchases. So we would anticipate that although it has been a significant push over the last couple of years and we would anticipate that it wouldn't increase at the same volume. We do think there's still potential to improve our purchasing.
Okay, great guys. Thanks and good luck in the Q4.
Thank you.
And Adam Sindler from Deutsche Bank has our next question.
Yes. Hi. Sorry, just real quickly. First, looking at the 2 year comps, you guys have more difficult comparisons in the front half
of next year relative to the back half. Do you think that the price optimization software as
you roll it out could impact sales? Is there a risk to sales at any point? And then just secondly, just to make sure I have this understood correctly. On the ocean freight, the freight is really the rate that you negotiate and container costs, those are more sort of market price depending on how many are available. Is that the correct way to think about that?
This is Greg. Yes, for the most part, that's correct. You basically on the container side, you place your order for your allocation and you do your best to use all that allocation because the next cost could be up. Typically, they were, but this time around, look, the costs are coming down. On the price up, from a risk standpoint sales, that will not happen.
We will roll this slowly. We will test it. We will understand it. We will stay with our current system until we are comfortable that the systemic approach is right.
No benefit in first half either?
No, they're all second half.
Okay. Very good. Thank you. Thank you. Operator, do we have any calls holding?
No, sir. We have reached our allotted time for the questions today. I would now like to turn the conference over to management for closing remarks.
Okay. Thank you very much. Well, again, I'm delighted, very proud of the team, delighted with the quarter and remind everyone that we are a growth company, that we have the capacity and the demonstrated ability to both grow and improve our company. And we are also delighted with our new store performance as we look back across the 1st 3 quarters of this year. So things are going very well here at Tractor Supply, and we look forward to talking to you at year end.
Thank you.
Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect. Thank you for