Tractor Supply Co (TSCO) Earnings Report: Q3 2015 ...line growth in the quarter, with comparable...

CompanyName:T ractorSupplyCoCompanyTicker:T SCOSector:ServicesIndustry:SpecialtyRetail

EventDescription:Q32015EarningsCallMarketCapasofEventDate:11.74BPriceasofEventDate:86.25

©2014TheStreet,Inc.Al l R ightsReserved Page1of25

TractorSupplyCo(TSCO)EarningsReport:Q32015ConferenceCallTranscriptThefollowingTractorSupplyCoconferencecalltookplaceonOctober21,2015,05:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

ChristineSkold;TractorSupplyCompany;VPofIRGregSandfort;TractorSupplyCompany;President&CEOTonyCrudele;TractorSupplyCompany;EVP&CFOSteveBarbarick;TractorSupplyCompany;EVP&ChiefMerchandisingandMarketingOfficerLeeDowning;TractorSupplyCompany;EVPofStoreOperationsandRealEstate

OtherPart icipants

PeterBenedict;RobertW.Baird&CompanyInc.;AnalystDavidMagee;SunTrustRobinsonHumphrey;AnalystPeterKeith;PiperJaffray&Co.;AnalystSimeonGutman;MorganStanley;AnalystSethSigman;CreditSuisse;AnalystAramRubinson;WolfeResearch;AnalystMichaelLasser;UBS;AnalystBrianNagel;Oppenheimer&Co.;AnalystChrisHorvers;JPMorgan;AnalystStephenTanal;GoldmanSachs;AnalystSethBasham;WedbushSecurities;AnalystDeniseChai;BofAMerrillLynch;AnalystBenBienvenu;StephensInc.;AnalystJaimeKatz;Morningstar;AnalystDanWewer;RaymondJames&AssociatesInc.;AnalystChuckCerankosky;NorthcoastResearch;AnalystEricBosshard;ClevelandResearchCompany;AnalystAdamSindler;DeutscheBank;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheTractorSupplyCompany'sconferencecalltodiscussthirdquarter2015results.

(OperatorInstructions)

I'dnowliketointroduceyourhostfortoday'scall,Ms.ChristineSkoldofTractorSupplyCompany.

Christine,pleasegoahead.

Christ ineSkold (VPofIR):

Thankyou.Goodafternoon.ThankyouforjoiningusforTractorSupplyCompany'squarterlyearnings




conferencecall.

Beforewebegin,letmereferencetheSafeHarborprovisionsunderthePrivateSecuritiesLitigationReformActof1995.Thiscallmaycontainforward-lookingstatementsthataresubjecttosignificantrisksanduncertainties,includingthefutureoperatingandfinancialperformanceoftheCompany.AlthoughtheCompanybelievestheexpectationsreflectedinitsforward-lookingstatementsarereasonable,itcangivenoassurancethatsuchexpectationsoranyofitsforward-lookingstatementswillprovetobecorrect.

Importantriskfactorsthatcouldcauseactualresultstodiffermateriallyfromthosereflectedintheforward-lookingstatementsareincludedintheCompany'sfilingswiththeSecuritiesandExchangeCommission.Theinformationcontainedinthiscallisaccurateonlyasofthedatediscussed.Investorsshouldnotassumethatstatementswillremainoperativeatalatertime.Lastly,TractorSupplyCompanyundertakesnoobligationtoupdateanyinformationdiscussedinthiscall.

I'mnowpleasedtointroduceGregSandfort,TractorSupplyCompany'sPresidentandChiefExecutiveOfficer.Greg,pleasegoahead.

GregSandfort (President&CEO):

Thankyou,Christine.Goodafternoon,everyone.Thankyouforjoiningus.

OnthecallwithmetodayareTonyCrudele,ourEVPandChiefFinancialOfficer;SteveBarbarick,EVPandChiefMerchandisingandMarketingOfficer;andLeeDowning,ourEVPofStoreOperationsandRealEstate.

We'rereallypleasedwiththeoverallperformanceofourbusinessinthirdquarter.Fromatoplineperspective,wefacedourmostdifficultcomparisonoftheyearinthisquarter.Ifyourecall,anextendedspringsummersellingseason,combinedwithearliercoldweather,madeforasolidthirdquarterineachofthepasttwoyears.Ourteamsdidanexcellentjobofpositioningthebusinessforbothtopandbottomlinegrowthinthequarter,withcomparablesalesincreasing2.9%andearningspershareincreasing16%.

Compstoresalesgrowthwasdrivenbystrengthineverydayandspringsummerseasonalcategorieswithconsumable,usableandedibleitems,suchaspetfoodandsuppliesandlivestock,continuingtoperformwellinthequarter.Eventhoughthespringsummerseasonalbusinessstartedearlierthisyear,wedidseeamodesttailwindtocategoriesinthisbusinessintothethirdquarterthatresultedinsolidsalesofitemssuchastrailers,fencing,andoutdoorrecreationproducts.

Wedidnotexperienceearlydemandforcoldweatherseasonalitemsasintheprevioustwoyears.Thisprimarilyimpactedthesaleoffuelandheating-relatedproducts,suchaswoodpellets,logsplitters,indoorfireplacesandwoodburningstoves.Weunderstandthatourcustomerspurchasetheseitemsbasedprimarilyonneed,andasthewinterseasonprogresses,weexpectthisbusinesstoimprove.Weobviously,cannotpredicttheweather,butitisourjobtobereadyforourcustomerswiththerightassortmentsofcoldweatherseasonalproductswhenthedemandarises;andwewillbeready.

Lastquarter,wediscussedanumberofmerchandiseresetsaspartofourtestandlearncontinuousimprovementculture.WecontinuetousePOSandplanogramdata,alongwithstore,customer,andvendorresearch,torefineandimproveourstoreassortments.Wearecommittedtoongoingmerchandiseimprovementsand,withtheexceptionofheavywinter-relateditems,allofourmajordepartmentscontinuetocontributepositivesalesinthequarter.

InSeptember,weheldourannualPetAppreciationWeek,orPAWevent.Thisisaweek-longeventinall




ofourstoresandonline.Thiscentersaboutaroundpetadoptionandpethealth.Wepartnerwithlocalagenciesandcommunitygroupstopromotepetadoptions,andthisyear'seventresultedinnearly2,500petadoptionsacrossourstorebase.Additionally,wecontinuedtoimprovetheeventthroughextensivedigitalsupport,includingthethirdannualRescueYourRescuecontesttofundanimalshelters.

Petandanimal-relatedproductsareanimportantandgrowingportionofourbusiness,andthePAWeventisjustanotherwaywedrivesales,supportandawarenessatthelocallevel.Andthisyear'seventwasanothersuccessandcontinuestopositionTractorSupplyasaleadingauthorityinpetfoodandpetcare.

Alsothismonth,welaunchedFlocktoberfest,aneweventinstoresandalsoonline.Thisisamonth-longcelebrationfeaturingourfeatheredfriendsinourpoultryandwildbirdcategories.Inconjunctionwiththeevent,welaunchedanewlineofpremiumwildbirdseedlabeledTotalCareasasubbrandunderourexclusivebrandofRoyalWingbrandbirdproducts.AsalwayshereatTSC,wecontinuetotestandlearnfromourcustomers,utilizingnewproductintroductionsandextensions.Thisprogramisjustanotherexampleofthissuccessfulstrategyinmotion.

Inthequarter,wealsobeganatestofourcustomerloyaltyprogram,NeighborsClub,inapproximately140stores.Weaskourcustomerstoprovidetheircontactinformationatcheckoutandoptintoreceivespecialpromotionsandupdatesonmerchandiseandin-storerelatedevents.Aswitheverythingwedo,wewillbemeasuredanddisciplinedinourtestingandeventualrolloutofthisprogram.WehaveastrongandloyalcustomerbaseatTractorSupply,andweareexcitedtolearnmoreabouttheirpreferencesandshoppingneedsthroughourNeighborsClubprogram.Initialfeedbackandenrollmentratesfromthecustomerswe'veseenthusfararepromising.

AsImentionedlastquarter,welaunchedanewandcompletelyredesignedwebsite.Thenewwebsiteisamoreresponsivedesignthatdeliversthesameshoppingexperienceacrossallmobiledevices.Thesiteimprovessearchandcheckoutcapabilitiesandprovidesbetterproductdescriptions,customerreviewsandsocialmediatie-ins.Wecontinuetoincreasethemerchandiseofferingsonoursiteandnowhaveover125vendorsinourdropshipprogram.

Duringthethirdquarter,weopenedourfirsttwomixingcentersinTexas.Thesearesmallercrossstockingstyledistributionfacilitiesthathandlemanyofourpalletizedproducts,suchasridinglawnmowers,andfasterturningqueueitems,suchasfeed,animalbeddingandgrassseed.Withourvendorsdeliveringproductsdirectlytothesemixingcenters,weareshorteningthesupplychainreplenishmenttimeanddistancetostoresandloweringourin-storeinventorylevels,whileimprovingin-stocklevels.Thusfar,wearepleasedwiththeinitialresults.

ConstructionofournewdistributioncenterinCasaGrande,Arizonaiscompleteandfinishedontimeandunderbudget.ThefacilitybeganreceivinginventoryinearlyOctoberandisonscheduletobeginshippingtostoresinDecember.Overtime,thisdistributioncenterwillhavethecapacitytoserviceupwardsof250storesintheSouthwestregion.

Andlastly,weopened30newstoresinthequarterandremainontracktoopenapproximately114newTractorSupplystoresin2015.OurWesternexpansioncontinuestobeakeyinitiativeandourstoresthathaveopenedinthatregionoverthepastfewyearscontinuetocompfavorablyagainstourchainaverage.

Inclosing,Iwanttosaythankyoutoallofourdedicatedteammembersinourstores,themerchandisinginnovationcenter,ourdistributionfacilitiesandourstoresupportcenter.IrealizethatIcommentonthisalot,butitreallyisourpeoplethatsetusapartandtheydrivethesuccess,innovationanduniqueculturewehavehereatTractorSupply.




IwillnowturnthecallovertoTonyforamoredetailedcommentaryonourthirdquarterfinancials.

T onyCrudele (EVP&CFO):

Great.Thanks,Greg,andgoodafternoon,everyone.ForthequarterendedSeptember26,2015,onayear-over-yearbasis,netsalesincreased8.5%to$1.48billion,netincomegrew14%to$87.3million,andEPSincreased16.4%to$0.64perdilutedshare.Compstoresalesincreased2.9%inthethirdquarter,comparedtoanincreaseof5.6%inlastyear'sthirdquarter.

Similartolastyear,goodgroundmoistureandmildtemperatureshelpedextendthespringandsummersellingseasonintotheJulyandAugusttimeframe.Keycorecategoriesperformedverywell,suchastheanimalandpetcategories,andkeyseasonalcategories,suchasfencing,trailerandoutdoorrecreation.AswemovedthroughSeptember,wedidnotexperiencethecoolweathertrendsinthenorththatdroveearlyfallandwintersaleslastyear.Additionally,sincewewerecomingoffoursecondconsecutivecoldwinterseason,webelievecustomersdidnothavethesamesenseofurgencyforpreseasonwinterpurchasesastheydidtheyearbefore.Asaresult,thecoldweathercategories,suchasheatingandpowerequipment,didnotperformtoourexpectationsandnegativelyimpactedcompsales.

Salesweresolidacrossallregions,exceptfortheNortheastandupperMidwest,astheydidnotbenefitfromthecolderweather,asIjustmentioned.OurnewstoresintheWesternregioncontinuedtoproduceabovechainaveragecompsales,astheygainmarketawarenessandshare.

Comptransactioncountincreasedforthe30thconsecutivequarter,gaining3.8%ontopofa3.3%increaselastyear.Comparabletransactionsweredrivenbycontinuedstrengthofourqueueitemsandthestrongperformanceofthespringsummerseasonalcategories.

Averagecompticketdecreasedby90basispointscomparedtolastyear's220basispointincrease.Bigticketwastheprincipledriveroftheaverageticketdecrease.Comparablesalesofbigticketitemsweredownlowsingledigitsyear-over-year,assoftsalesofwinterseasonalitems,suchasheatingstovesandlogsplitters,wereonlypartiallyoffsetbythestrengthinsalesoftrailersandutilityvehicles.

Weestimatethatdeflationwasapproximately25basispoints,whichalsocontributedtothedecreaseintheaverageticket.Thedeflationwasdrivenprincipallybylivestockfeedandlubricants.

Nowturningtogrossmargin,whichincreasedapproximately60basispoints,to34.7%,comparedtolastyear'sdecreaseof30basispoints.Whilewehadaneasiercomparisonversuslastyear'sthirdquartergrossmargindecrease,ourdirectproductmarginwasbolsteredbystrongpriceandmarkdownmanagement.Pricemanagementtoolscontinuedtohelpusoptimizeourretailpricingwhilenegotiatinglowercostsinsomeofthedeflationarycategories.

Freightwasfavorablebysixbasispoints,whichrelatedtolowerdieselprices.Thefavorablefuelpricemorethanoffsetthe[stemmile]increasefromourWesternstoreexpansion.ThevariancewasnotasfavorableasQ2,aswehadamerchandisemixshifttomorefreightintensiveproductinthethirdquarter.

Themixofmerchandisedidnothaveasignificantimpactongrossmargin,asthefavorablegrossmarginimpactfromsofterbigticketsaleswasoffsetbystrongsalesinanimalfeedandpetfood,whicharebelowchainaveragemargincategories.Weestimatethatdeflationonlyhadaslightfavorableimpactongrossmargin,asdeflationcontinuestomoderateinthefeedcategory.

Importpurchasesinthequarterincreased16.6%andrepresented11.2%ofthesalesmix.Also,theexclusivebrandsalesincreased8.2%comparedtolastyear'sQ3andwasapproximately31%ofsales.

Forthequarter,SG&Aincludingdepreciationandamortizationwas25.3%ofsales,anincreaseof10basispointsovertheprioryear'squarter.WewereverypleasedwithourpayrollmanagementinQ3,as




theteamreactedwellandallocatedpayrollwiththesalestrends.WedidincurstartupexpensesforourSouthwestDistributionCenterandthetwomixingcenters.Weestimate6to7basispointsofSG&Aexpenserelatedtothestart-upcosts.

TheexpansionofHagerstownDCinQ1addedincrementalexpensestoSG&A,butwerealizedthecostbenefitoflowerstemmilesingrossmargin.Wealsoexperiencedslightlyhigherrentalleveragefromthenewstoresastheyrampedtomaturity.ThiswasdrivenprimarilybytheWesternstoreopeningswhich,aswe'vediscussed,generallyopenwithhigherrenttosalesratio.Withtheopeningofover40Westernstoresinthepastyear,thiscontinuestoimpactSG&A.

Incentivecompensationhadminimalyear-over-yearimpactonSG&Aleverage.Theyear-over-yearpercentincreaseinSG&Awasapproximately9%inthethirdquarter,whichwaslowerthanouryear-over-yearincreaseinQ1andQ2.Asareminder,thethirdquarteroflastyearwasimpactedbyexpensesrelatedtothemovetoournewstoresupportcenter.Sothis,alongwithone-timeexpensesavingsthisyear,madeforafavorablecomparisoninQ3.OurrunrateinQ4isexpectedtobemoreconsistentwiththefirsthalfoftheyear.

Turningtothebalancesheet,attheendofQ3,wehadcashbalanceof$51.4millionand$190millionoutstandingdebt,comparedtoacashbalanceof$47.5millionand$150millioninoutstandingdebtattheendoflastyear'sthirdquarter.Duringthethirdquarter,underourstockrepurchaseprogram,weacquiredapproximately1.4millionshares,or$119.4million.

Averageinventorylevelsperstoreincreased1.6%,comparedtoa3.7%increaseinlastyear'sthirdquarter,andannualizedyear-to-dateinventoryturnsdecreased1basispointcomparedtolastyear,asaresultofthesofterpreseasonsalesofcoldweatheritems.Weexitedthespringsummerseasonwithanormalseasonalmarkdowncadence.Wecontinuetomakeinvestmentsinkeyinventorycategories,andwebroughtseveralfallwintercategoriesinearlyandarepreparedfortheseason.

Capitalexpendituresforthequarterwere$66.5million,comparedto$43.3millionlastyear.Weopened30storesandclosed2DellstoresandoneTractorSupplystoreinthethirdquarter,comparedto30newstoresopeninthethirdquarterof2014.TheCapExincreaserelatestotheconstructionexpendituresofourSouthwestDistributionCenter,whichwerehigherthantheexpendituresonourstoresupportcenterwhichwascompletedlastyearatthistime.

Solookingahead,baseduponthethirdquarterresultsandasnotedintoday'spressrelease,wehavetightenedtherangesofourfinancialexpectationsforthefull-year2015.Weexpectfull-yearsalestorangefrom$6.28billionto$6.33billion.Full-yearcompsalesareforecastedtoincreasebetween4%and4.5%.Weareforecastinga20basispointto25basispointimprovementtoourEBITmargincomparedto2014.Weanticipatenetincometorangefromapproximately$413millionto$420million,or$3.02to$3.08perdilutedshare.

Ourcapitalexpenditureforecastforfull-year2015remains$220millionto$230million.Weexpecttofinishtheyearwithapproximately114newstores.Additionally,weanticipatethefull-yeartaxratewillbeapproximately37%.Wewillcontinuetomakepurchasesunderthesharerepurchaseprogramandcurrentlyprojectfull-yeardilutedsharesoutstandingtobeapproximately136.5millionto137million.Principallyasaresultofthesharerepurchasesmadeyear-to-dateunderourprogram,weexpectthatwewillhaveanoutstandingbalanceonourrevolvingcreditfacilityofapproximately$100millionto$150millionatyear-end.

Oursalesoutlookiscautious,basedonthefactthatweatherandoilpricescanimpactsalesthistimeofyear.Lastyear,wehadacolderthanaverageNovemberandawarmerthanaverageDecember.Thisyear,weexpectthattoflipandanticipatetheimpactwillbeneutral.Additionally,withtherelativelylow




heatingoilprices,therecouldbelessconsumerdemandforwoodburningstovesandsomeoftheheatingandfuelcategories.

Wehaveseenintheearlypartofthefourthquarter,astheweatherturnscold,theconsumerresponsetoourwinterseasonalassortment.Asinthepast,ourmerchantteamhasbeennimbleinadjustingtoweathershifts,andweareconfidentthatourteamhasputtogetheragreatplantodrivewinterseasonalmerchandisewhenthecoldweatherarrives.

Inthefourthquarter,weexpectdeflationtocontinuetomoderateandwewillcontinuetouseourpricemanagementtoolstodrivebothsalesandmargin,whileremainingfocusedonourgoalofgrowingmarketshare.WeexpectEBITmargininthefourthquartertobeslightlydown,withamodestincreaseingrossmargintobeoffsetbySG&Adeleverage.Ourgrossmargininitiativescontinuetodriveimprovementinmerchandisingmargin,andlowerdieselpricesshouldbenefitfreighttransportation.

AsImentionedearlierregardingSG&A,thethirdquarterthisyearbenefitedfromthecomparisontolastyear'sleasewrite-offsandaccelerateddepreciationrelativetoourstoresupportcentermove.WeexpectSG&ArunrateinthefourthquartertobemoreconsistentwiththefirsthalfoftheyearandestimateSG&Aincreaseintherangeof10%inthefourthquarter.ThekeyelementsdrivingtheincrementalincreaseinourSG&Arunrateresultsprincipallyfromthestart-upoperationsofournewSouthwestDistributionCenter,whichweestimatetobe$0.015to$0.02EPSdrag,andrentdeleveragingresultingfromtheincreasedmixofthenewWesternstores.

AlthoughIwillprovidefullguidanceatouryear-endconferencecall,Iwantedtoprovideyouwithsomeconsiderationsforyourmodelingof2016.FY16willbetheyearthatweadda53rdweektoourretailfiscalyear.Basedonpasttrends,weestimatethatthiswillprovideanEPSbenefitofapproximately$0.02to$0.03.

ThiswillbethefirstyearofoperationsoftheSouthwestDistributionCenter.ThiswillincreaseSG&Aonayear-over-yearbasiswhileimprovinggrossmarginthroughreducedtransportationexpense.WeexpectanetEPSdecreaseofapproximately$0.04.WewillcontinuetotransitiontheDellstorestoTractorSupplystores.WeexpectamajorityoftheDellstorestocloseinthefourthquarterandanticipateitwillnegativelyimpactEPSbyapproximately$0.02.

Aswehavestatedinourlong-termcapitalplan,welooktomanageannualcapitalexpendituresinthe$200millionto$250millionrangeinordertoberatableinourallocationofcapitalandleveragedepreciationexpenseoverthenextseveralyears.In2016,wewillnothaveasignificantcashinvestmentofadistributioncenterandwilllooktocontinueinvestinginourstoresandkeyinitiativestobenefitlong-termgrowth.OurgoalcontinuestobetoexecutetheseinitiativeswhilemanagingthefinancialimpacttodeliverourannualEPStargetofmid-teensgrowth.

Toconclude,wearepleasedwithourresultsandexecutioninthethirdquarter.Webelievethatwetookadvantageoftheextendedspringsummersellingseasonandarewellpositionedtodeliveranothersolidgrowthyear.

Thatconcludesourpreparedremarks.Operator,wewillnowturnthecalloverforquestions.

QUESTIONS&ANSWERS

Operator :


PeterBenedict,RobertBaird




PeterBenedict (Analyst-RobertW.Baird&CompanyInc.):

Hello,guys.Thanks.Acouplequestions.First,justonthethirdquarter,theSeptemberwiththecoldweatherproducts.Tony,yousaiditweighedoncomps.Canyouqualifymaybetowhatdegreethatshiftweighedonthesecondquarter--oronthethirdquarter?AndwasSeptembercompspositiveorwasitsuchthatitactuallydraggedthosenegative?


Pete,asfarasthecompsgo,wedidhaveapositivecompinSeptember.Andreally,wesawthedragjustimpactthelastfewweeksofthemonth.Soasmuchaswedon'treallygivemonthlycomps--Idon'twanttogointospecificdetailsastowhattheimpactwas--butitdidhaveanimpactonthequarterrelativetowhatourexpectationswere.


Okay.No,that'sfairenough.Andlookingatthenewstoreproductivity,Iknowthatthewaywecalculateitisn'talwaysperfect.Butithadbeenrunningmidtohigh70s.Itwasinthelow70sinthequarter.Idon'tknowifthathadsomethingtodowithsomeoftheclosingsorthetimingoftheopenings.Wasthereanythinginterestingwithintheproductivityofnewstoresthatyousawduringthethirdquarter?


No,there'snothingunusual,andanydifferencesreallywouldrelatetotimingofthestoreopenings.


Okay.MylastquestionisjustaroundtheD&Aprofile.You'regoingtoopenuptheDC.You'vebeenrunninglike$30millionofD&AperquarterhereforthefirstthreequartersofFY15.Howdoesthatstepupinthefourthquarter,howmaterially?Andthenaswethinktonextyear,justathoughtonD&Agrowthyear-over-year.Youmayhavementionedthatinyouroutlook.Ifyoudid,Iapologize.


Wedidn'tspecificallyfocusonD&A.ButIwouldnotexpecttherunrateinthefourthquartertostepupsignificantly.AnditwouldbemoreimpactfulnextyearastheDCcomesonlineandwehaveafullyearofdepreciationrelativetotheDC.


Okay.Allright.Thankyou.

Operator :

DavidMagee,SunTrust

DavidMagee (Analyst-SunTrustRobinsonHumphrey):

Hello,everybody.Goodquarter.


Thanks,Dave.





Wastheremuch,orhaveyouseenmuchofanimpacttodatefrom,onsalesintheoilpatchareasatthispoint?

SteveBarbarick(EVP&ChiefMerchandisingandMarketingOfficer):

David,thisisSteveBarbarick.Andfirstofall,Ithinkonthelastcallwementionedthattheoildrillingareasrepresentabout10%ofourtotalstorecount.AndalargemajorityofthosestoresaredowninTexas.SoI'llusetheexamplehere,we'vegotcontrolledstoresdownthereandwe'vegotwhatweconsidertobetheoilandgasstores.Theoilandgasstoresarerunningpositivecompsandtheyhavepositivetraffic;however,withthatsaid,they'rerunninglessthanCompanyandchainaverage.Wherewe'reseeingtheimpactisonsomeofthecategoriesthataremorebiggerticket,sotruckboxesandfueltanksandsomecompressors.We'remakingthatup,however,inalotofthebasicneedsthatourcustomershavedownthereintermsofconsumablebusinesses.Sogenerallyspeaking,weareseeingsomelittlebitofanimpact,butgenerallyit'snotbeenmaterialenoughtoimpacttheoverallCompany'scomps.


Wouldyousayit'sbeenrunningstableatthatlevelorhastherebeenanychangeinthepastcoupleofmonths?


Imean,it'sbeenprettystable.It'strendeddownalittlebit.It'snotsignificant.It'snothingthatwouldbeworthnoting.


Okay.Thankyou.AndthenasecondquestionhastodowithfurtheropportunitywithregardtohigherASPitemstobringintothemixasyoulooktonextyear.Doyouseemoreadditions,moreupsideinthatarea?


Yes.Actually,thisisanareathatweseeanopportunitywith.Andwe'vetalkedalotonthemerchantteamaboutthefactthatourcustomersarelookingforvalue,butvaluecanbeonthehigherendoftheticket,aswell.Andwe'veseensomenicemovementinrecreationalvehicles.We'vebroughtinsomehigherendtrailers.We'realsolookingatanumberofcommercialproductsaswemoveforward,forexample,someheavierdutycattlehandlingequipmentupintheNorthwest.We'relookingat,likeIsaid,higherendtrailers,premiumrubberfootwear,pricepointsthatmayrangeuptothe$200pricepoint.We'realsoexpandingsomerecreationalvehicles,andwe'vegotaunitrightnowthatwe'retestingthat'supto$9,000.Sogenerallyspeaking,we'reseeinganopportunitywithourcustomerstoactuallytakethemupscalebyofferingnewproductsthat'sdifferentiated.


Great.Thankyou.

Operator :

PeterKeith,PiperJaffray.

PeterKeith (Analyst-PiperJaffray&Co.):

Ithankyou,andgreatresults.Iwantedtodiginalittlebit,Tony,onthegrossmargindynamic.Theup60




basispointsyear-on-yearwasalittlebitbetterthanQ2.Atthesametime,itlookslikeyougotlessbenefitfromfreight.Soareyouseeingsomeacceleratingbenefitsaroundyourproductmarginfromtheclearanceoptimizationeffort?


Yes,Peter.Aswetrytobreakoutthecomponents,itisobviouslydifficult,becausemanythingsoverlap.Butwefirmlybelievethatprobablythemostsignificantdriveroutsideofthefuel,thefavorabilityofthefuel,reallywasinthepricemanagementandreallythebetternegotiationinworkingwiththevendorsandcomingupwithsomegreatprograms.Sothat,alongwiththepricemanagementtoolsandgettingbetteratoptimizingtheprices,Ithinkreallywasthekeycomponentinthatlargeincreaseinthegrossmarginpercent.


IsthereanythingwithinQ3withregardtoseasonalityandmaybethatsummertofalltransitionthatgivesyoumoreopportunityinQ3withregardtopricemanagementrelativetootherquarters,orcanitbeprettyconsistentthroughtheyear?


Peter,thisisSteve.Iwouldtellyouitcanbeconsistent.Therearetimesoftheyearwhereit'sspringseasonal,we'retransitioning,andfallwinter,we'retransitioning.There'salwayspivotalmonths.

Thispastquarter,wetalkedalittlebitaboutclearanceoptimization.Andwhileitonlymakesupasmallpartofthetotalpricingmanagementtoolsthatwehave,wewereabletoleveragethattool.Wehadabout60%ofourclearancemerchandiseonthattool,andearlylearningssuggestedthatwetakemarkdownsearlierandwetakethemalittledeeper,whilewe'vegottheminthehome,beforewehavetoliquidatetheminthebackofthestore.Sotheteamdidanexcellentjobexecutingtothat,andwethinkthattool'sgoingtogiveusmomentumaswerefineitandwegetbetterwithit.


Okay.That'sgreatfeedback.Thankyouverymuch,guys.

Operator :

SimeonGutman,MorganStanley.

SimeonGutman (Analyst-MorganStanley):

Thanks.Goodafternoon.Onemoreonmacro.Ihatetowasteoneofmyquestionsonit,buttheage-oldquestionoffarmincome.Iknowwetalkaboutitprobablyonceeveryfourorsixquarters.Butyouprobablyhavebettergranularityonitbyregions.Andsocurious,anyimpactthatyou'reseeingfromitasyougetbigger?Maybeyouhavemoreimpactwiththewiderreachofcustomers.Curiousifthere'sanycorrelationtothatorstillirrelevanttoyourbusiness?


Simeon,Ihatethatyouwasteyourquestiononthatone,aswell.Wedonotseeanycorrelationwiththefarmincome.Andaswelookattheperformanceacrossthecountryandintheparticularareaswherethefarmingis

stronger,again,wecan'tdrawacorrelation





Fairenough.Andthenanotherquestiononstemmilesorgrossmargin.It'salittleearly,Ithink,totalkaboutnextyear.Yougaveusacoupleofclues.Youmentionedtheheadwindthisyear,stemmiles.DoestheheadwindstaythesamenextyearordoesitmoderatewiththenewDCopening?


Goodquestion.Whenwelookatitandmodelitout,ourgoalistoobviouslysupporttheoperationsofDCbyreducingtransportationcosts.Andaswemoveintonextyear,andasImentionedthatwedoanticipatehavingadragnextyear,anetdragbetweenthetransportationimprovementsandtheoperationsoftheDC,oneofthekeysistoreducethestemmiles.AndthatisverydependentonourvendorbaseandmakingsurethattheyhavekeyshippingpointsoutWest.Andsowedoanticipate,andwe'vemodeledaccordinglytoshowsomereductioninthestemmiles.Butwestillhavesomemoreworktodoaswecontinuetoimprovetheshippingpointsfromthevendorbase.


AndIguessjusttoclarifythatpoint,Iknowwedidn'tputanumberonwhatthestemmilesareholdingbackgrossmargin,butisthatbasispointamount,couldthatendup--isitlessofadragbyvirtueofcomparisonorcoulditbethesamenumbernextyearasthisyear?


No.Definitelythestemmileswilldecreasesubstantially,sowe'llhaveapositiveimpactrelativetothegrossmargin,justnottotheextentthatitwilloffsetthefullfour-walloperationsofthedistributioncenter


Right.Okay.Thanks.

Operator :

SethSigman,CreditSuisse.

SethSigman (Analyst-CreditSuisse):

Great.Thanks.Congrats,guys,onagoodquarter.Justdiggingintotheticketcomponentofcompsthisquarter,whenyoulookatbigticket,itslowed,itseemedprimarilyrelatedtoweatherandmaybethecomparison.Anythingelsetoreadintothatorshouldweexpectthattopickbackupastheweatherturns?


Seth,thisisSteve.Itwasalittlebitofamixedbag,becausewesawsomeimprovementsinthingslikerecreationalvehiclesandtrailers,butthedragwasincategoriessuchas,andTonyhadmentioned,stovesandlogsplittersandgenerators.Thosetypicallytendtobealittlebitmoreweatherdriven.Andbeinganeeds-basedretailer,youkindofsee.SoIwouldtendtoskewtowardthatandnotashiftincustomerspendingbehavior.


Okay.Andthenaseparatequestionontheloyaltyprogramthatyouguysaretesting.Irealizeit'searly,butmaybetothatlastpoint,giventheneed-basedaspectofthebusiness,canyoudiscusswhereyouseesomeoftheincrementalopportunitiesfromthatprogramandmaybethecostassociatedwithrolling




thatout?


Well,itisearly.Letmejustsaythatfirst.Andtogiveyouasenseforhowearlyitis,wejuststartedpilotingit,Iguess,21daysago.It'sinabout10%ofourstores.Andit'sindifferentregions,sowecantrackit.Rightnow,asIthinkGregsaid,we'repleasedwiththeinitialresponsefromourcustomers.Whatthedataisgivingusistheabilitytotracktheirpurchasesgoforward,aswellasanemailaddress,sowecanbemoreefficientinthewaywecommunicatewiththemandpersonalizethatcommunication.

We'restillworkingthroughthenextstepsinhowwe'regoingtomanagethis.Icantellyouthattoday,workingwithourmarketingdepartment,noteverythingwedoishighlyefficient.Andwe'regoingtobeabletotailorsomeofthosedollarsandmovethemintoourloyaltyprogram.Andattheendoftheday,Ithinkwhatwe'regoingtodoisweshouldseeanimprovementofloyaltywiththesecustomerswhichshouldfollowsales,anditshouldoffsetthecoststhatwewouldputintotheprogram.


Gotit.Allright.Thanks,guys.

Operator :

AramRubinson,WolfeResearch.

AramRubinson (Analyst-WolfeResearch):

Hello,guys.Thankssomuchfortakingthequestion.Ihavetwothings.Oneis,you'vedoneagreatjobovertimeofbroadeningouttheassortmenteven,asyousaid,gettingintoRVsupto$9,000.Couldyoujusttalkalittlebitabouthowyourassortmentlooksversusatypicalgeneralstoreinthemarketsthatyouoperate?Whatmightbemissingfromyourmixthatothersmighthave?I'mtryingtofigureoutwhatnewcategoriesmaybecouldberelevant.


Youknow,Aram,Iwouldtellyouthatwehavegotadifferentiatedassortmentandit'swhat'smadeourorganizationverysuccessful.Wealwaystalkaboutthatinretail,plagiarismisfreeandhighlyefficient.Soweareshoppingourfarmstorecompetitors.We'reshoppingbigboxesandautomotivecenters.Andwelookforthosecategoriesthatwethinkarerelevanttoourcustomers'lifestyle,thosefolksthatliveouthere,aswecallit.

Soagain,there'savarietyofthingsthatwe'retestingandtrying.AndIdon'tthinkthere'sanyoneortwospecificthingsthatIcouldmentiononthecallrightnowthatwe'reprobablynotattemptingsomehowinourstores,noworinthefuture.


Butifyoulook--let'ssayweweretotakealookbackatyourassortmentthreeyearsfromnoworfiveyearsfromnow,doyouthinkwe'reseeingthetipoftheiceberginyourstore,orarewestillseeingthevastmajorityoftheiceberg?


Aram,I'vebeenwiththeorganizationfor18years,andIamhasbullishtodayasIwas17or18yearsagowhenIgothere,workinginmerchandising.





Wellsaid.Letmefollowupwithasecondquestionaroundhowyouwanttouseyourinternetbusiness.Canyoutelluswhetherornotyou'relookingtouseitprimarilyforinformationalpurposes,fornewproducts,orforexistingproducts?Andifitisforexistingproducts,doyouhavecategoriesthatareinthestoretodaythatyouthinkyoucanalmostmigrateonline?


Aram,it'sGreg.Thestrategybehindouromnichannelbusinessisverysimple.It'scalledthethreeCs.Anditfirststartswithcontent.Andcontentmeansgivingthecustomertheinformationtheyneedtomakeadecisiontoeitherbuyonline,buyinourstore,orresearchproductsthattheythinktheyhaveeitheraninterestinoraneedtohavetosatisfysomethingthatthey'reeitherdoing,buildingaproject,orsomethingthattheyneedtoreplaceontheirproperties.

Thesecondpieceofitiscommunity.Andwhatwe'refindingisthroughourexperiencerightnowoutthereinsomeofthesocialsitesandouractivitythere,ourconsumersliketoconversewithusandwithoneanother.Soallthat'sdoingisbringingthemclosertousasaconsumerbase,makingusmoreofthedesired,Ithink,retailerforthemtoexchange,hopefully,commercewith.AndthatisthenthethirdC,commerce.

Andwedidn'tsetoursiteupnordidweeverthinkthatitwasgoingtobealargepercentageofoursales.Ourstoresarelocatedoutwherethecustomerlives.Wearemoreconvenient--iftheybreaksomething,let'ssay,onaparticularpieceoftillageequipmentortheyblowagasketonasmallengine,they'renotgoingtodialintothewebsiteandexpecttogetthatdeliveryandwaitfortwoorthreedays.They'regoingtoexpecttogotothestore,findthepart,replacementpart,repairwhatthey'redoing,andgetbacktothetask.

Sothecommercesideforus,aswebuildoutthisentireomnichannelpiece,istohaveimmediateproductavailabletothembecauseweliveclosetothem.SothestrategyisthefirsttwoCsfeedthethirdC.Andwe'renevergoingtosaythatit'sgoingtobealargepercentageofourbusiness,butweareconvinced--andthroughtheNeighborsprogram,we'regoingtobeabletotrackmuchcloserthosecustomerswhoareengagingwithusthroughthewebandthentyingthatbacktoafour-wallstoresalesnumber.


Well,thatworldisevolving,anditsoundslikeyou'vebeenprettyconsistentinyourapproach,soIappreciatetheupdate.


Thankyou.

Operator :

MichaelLasser,UBS.

MichaelLasser (Analyst-UBS):

Goodevening.Thanksalotfortakingmyquestion.Tony,yououtlinedanumberofputsandtakesthataregoingtoimpactthebusinessnextyear.Itwasn'tclearintotality,shouldweexpectmid-teensearningsgrowthnextyear?





Yes,absolutely.OurtargetistoalwaysgrowtheCompanyEPSinthemid-teens.Sothatisourgoalandwewillmanageaccordingly.


Andisthatgoingtobeinclusiveoftheextraweek,orwilltheextraweekbeontopofthat?


Youknow,sinceit'sgenerallyarange,andIknowmostpeoplearegoingtoprobablybedoing15%and17%,butIliketosaymid-teensissomewherebetween13%and17%.Sogenerally,withorwithoutthatadditionalweek,sinceitisonlyafewcents,weanticipatethatwe'llfallwithinthatrangeofmid-teensgrowth.


Okay.Mysecondquestionishowareyouthinkingabouttheinflation-deflationenvironmentaswemoveintonextyear?


Goodquestion.Whenwelooktonextyear,weanticipaterightnow,atthispointintime,slightdeflationinthe,say,firsthalfoftheyear,andthenaswemovetothebackhalf,weexpectittobeflatoractuallysomesmall

levelofinflation.


Andaretherethingsthatcoulddriveeitherupsideordownsidetothat,andanythingthatwouldchangethealgorithmwheredeflationleadstoalittlebitbetteronthemarginside,sogrossprofitdollarcompremainssustained?


No.Aswelookatit,inthepast,it'salwaysbeentheimpactonfeedandonpetroleumproducts.Andthosearereallythetwolargedrivers.Steelelementhasbeenlessimpactful.Andwebelievethatwecycledthroughthemajorityofsomeofthedeclinesinfeed.SoIthinkthatthatwouldbethebiggestdriver.Soweexpectittodefinitelymoderatenextyearandstabilizesome.Andaswe'veshowninthepast,beitmoderateinflationormoderatedeflation,we'vebeenabletomanagethebusinesssothatwecangettotherightbottomline.


Great.Thankyousomuchandgoodluckwiththerestoftheyear.


Thankyou.


Thankyou.

Operator :




BrianNagel,Oppenheimer.

BrianNagel(Analyst-Oppenheimer&Co.):

Hello.Goodafternoon.


Hello,Brian.


Nicequarter.


Thankyou.


Soacouplequickquestionshere.Myfirstone,Ithinkit'safollow-uptoapriorquestion,butjusttodialdeepermaybeintoTexas.Iknowyou'vetalkedaboutthisinpriorquarters,too.ButthenumbersyoulaidoutheremakeitsoundthattheTexasmarketisperformingokay,maybealittleworsethantheCompanyaverage,doingokay.Butifyoulookatthestoresthere,isthereanymoretroublingsignsbelowthosebigaggregatenumbers,meaningthatwe'veseenawiderdispersionofperformanceinthestoresorsalestrendsgenerallymoreerraticthanthechain?


No,Brian.Asamatterfact,theonlythingIwouldsayisthattheTexasmarketintotalwasrightaboutCompanyaverage.TheoildrillingstoresweretheonesthatwerebelowCompanyaverage.SoTexasasawholeisstillhealthy.


Okay.Andthennottobelaborthis,buttheoildrillingstoresyoumentioned,istheresomethingyou'reseeingthere,areyouseeingmoreerratictrendsthanyouwouldexpectandtheygetlostinthataggregatecomment?


No.It'snotthatvolatile.Iwilltellyouthatwhenwesawanicerampupandcompressorsandsomeweldersandbigticketmerchandise,someofthat'scomedown.Butifyoulookatthetotalnucleusofthestore,inthoseareas,thosestoresarestillcompingpositiveandfoottrafficisstillpositive,evenwiththedepressiononsomeofthebigticketthatwesawthere.SoIdon'tseeanythingthatleadsmetobelievethatTexas,themarketitselforthestate,shouldbeaconcernforus.


That'shelpful.Thenthesecondquestion,morejustamaintenancequestion,butwithregardtotheDellstores,howmanystoresthatarelefttobeclosedandwhenshouldweexpecttoseethoseclosed?


Generally,whatwe'retryingtodo,Brian,istimetheclosingsrelativetotheleaseexpirationsanddoitascloseaspossible.Butatthesametime,wewanttobeabletoopennewstoresandmakesurethatwe




transitionstaffappropriately.Soasweseeit,webelievethemajorityofthestoreswillcloseinthefourthquarternextyear,andweanticipatethatbeingsomewhereinthe16to17storerangeinthefourthquarter.


Gotit.Okay.Thanks.

Operator :

ChrisHorvers,JPMorgan.

ChrisHorvers (Analyst-JPMorgan):

Thanks.Goodevening.Acouplefollow-upquestions.Soonthesupplychaininvestment,youspentabout$60millioninCapExandsupplychainyear-to-date.Curious,allin,howmuchtheDCwillcostyouontheCapExside?Andwerethemixingcentersabigcapitalinvestment,aswell?


Sure.Thenumberthatyou'reseeingincludes,obviously,investmentthroughoutallofthedistributioncenters.AswecompletetheSouthwestDistributionCenter,weanticipatethatthat'sgoingtobeinthe$70millionrange;andthenthemixingcenters,theywillvarydependingonwhetherit'sleaseoracquisition,butweanticipateputtingsomewhereinthe$6millionrangeforeachoneofthemixingcenters.Soit'snotasignificantlylargecapitalinvestment.


Soasyouthinkaboutthe$200millionto$250million,thelong-termcapitalguide,whatcouldbesomeotherchunkyitemsthatcouldfillinforthat$70millionrange?Inotherwords,whywouldn'tCapExmaybebealittlebitlowernextyearthanthisyear,givenyoulapthatDC?


Well,partoftheissueisthatwestartedthisdistributionprojectlastyear.SosomeoftheCapExissplitbetweenthetwoyears.Sowhenyou'relookingatadelta--butwhatwelookatasfarascontinuedinvestmentsinthebusinessisone,wealwayswanttocontinuetoinvestinourstoreinfrastructureandmakesurethatthey'rekeptascurrentandup-to-dateaspossible.

Butwehaveotherprograms,oneprograminparticularnextyear,thatwethinkhasasignificantreturnoninvestmentisLEDlightingchangeout.Andnotonlydoesitmeetourstewardshipprogram,butwe'rereallyexcitedaboutthecostsavings,aswell.Sothatwillbeacapitalinvestment.Butwebelievethatpaybackwillhelpthroughoutnextyearaswellasinfutureyears.Sothosearethetypeofinitiativesthatwe'regoingtobecontinuingtodrivesothatwecancontinuetocapturesavingsandbeabletoutilizethosesavingstocontinuetogrowtheCompanyinaveryefficientandproductiveway.


AndthenontheWestCoastDC,howmanystoresareservicedoutofthatDC,roughly,attheendofthisyear?Andwhat'sthestorelevelthatyoustarttogetbetterleverageon,likeyoumentioned,thefour-wallrentandoperatingcostofthedistributioncenter?


Weanticipatebytheendoftheyear,we'regoingtobearound100storesthatwillbeservicedbythat




distributioncenter.Andgenerally,wemapthecenterouttobeabletohandleabout250to300stores.Soitwillhavesomesignificantadditionalcapacity.

Aswemoveforward,again,asImentionedearlier,alotofithastodowithvendorshippingpoints.Andwewillcontinuetocoordinatewithourvendors.Andasourvendorbasegrows,hopefullythey'llgrowwithus,aswell,andhaveshippingpointsoutWest,aswellasitwillhelpourcapacitywhenwehaveimportscominginfromtheWest,andthatwillreducesomeofthestemmiles.Sooneofthekeysisthatasweprogressmoretowardsaboutthe150storerange,wewillstarttoseesomebenefits,andhopefully,we'llhavemoreofanetimpact,anetneutralimpactwhenitcomestotheP&L.


SoitseemslikebasedonthetimingoftheweightingoftheWestCoastopens,thatstartstobesomethingreallylater,laterin2016,whereyoucouldseesomeleverageoratleastflatteningout.


Clearly,aswemovethroughtheyear,we'llstarttosee--we'llstarttogathermoreofthebenefitstothedistributioncenter.Andsoasyoumodel,whenyoulookatthedragthatweidentified,inaboutthe$0.04range,Iwouldsayinthefirstyear,itsgoingtobeslightlyweightedmoretothefirsthalf,butit'snotgoingtobesomethingthat'ssofrontweightedthattherewon'tbeanyimpactinQ4.


Perfect.Goodluckwiththefourthquarter.Thanks.


Thankyou.

Operator :


StephenTanal,GoldmanSachs.

StephenT anal(Analyst-GoldmanSachs):

Thankyouguysforthequestion.YoucalledoutabunchofdifferentpressuresintheSG&Aline.Andconsideringallthat,Iactuallythoughtthatitlookedverywellcontrolled.Iwaswonderingwhatmight'vewentinyourfavorthisquarter.Canyoucommentonthat?


Sure.Whenwelookedat--thebiggestnumberwaswhatIhadidentified,whichwasrelatedtothestoresupportcentermovethathappenedlastyear.AndIthinkasweaccumulatedtheadjustmentsrelativetoleasewrite-offsandaccelerateddepreciation,ittotaledinaboutthe$3millionrange.Sothatclearlywasthelargestone.

Aswelookedatthebackhalfoftheyearcomingintoit,wehadsomeexpensesavingsinitiativesoutthere.Andwefeltthatwedidagreatjob,inparticular,inthethirdquarteritself;butsomeofthosearereallyjustone-timesavingsthatrelatejusttothethirdquarter.Again,we'refocusedonthefourthquarter.Butasweforecastout,webelievethatwewon'thavethatbenefitofthestoresupportcenterexpenseslastyearinQ3.Soweexpectto[skinch]backupintothe10%rangeversusthe9%thatwewereatinQ3.





Gotit.Canyoujustreminduswhatsomeofthosesavingsinitiativeswere?


Relativeto--theyreallyjustrelatemoretosomeofthediscretionaryexpensesthatwehaveinthequarter.Andevenitcouldbejustbasiconesrelativetohowwe'vemanagedthestorepayroll.Aswementioned,inQ2wewentinalittlebitheavierwithsomeofourpayrollinitiatives,butaswecameintoQ3,theteamdidatremendousjobinmanagingthat.NowaswemoveintoQ4,it'sabigsellingperiodforusandweexpecttocontinuetodriveoursaleswiththeproperadequatestaffingtodothat.


Gotit.Okay.Andjustlastly,canyoujustreminduswhatkindofacompyouneedtoleveragerentandoccupancywithinSG&A?


Youknow,itwillveryquartertoquarter.Andoneofthebiggestimpactsistheincentivecompensation.SoIwillalwaysqualifywiththat.Butwhenitcomestoleveraging,wehavereallybeenmoreinthe3.5%to4%rangewhenitcomestoleveragingSG&A.Andagain,myotherstandardqualificationisthatalotofthethingsthatwedoasfarasimprovingthebusinessandtheinitiativesthatwehave,thatexpenserunsthroughourSG&Awheresomeofitwillbenefitourgrossmargininitiative.Sothingslikethedemandplanning,obviouslythemixingcenters,expensesinSG&A.Thedistributioncenter'sinSG&A,butwe'llgetthebenefitonthegrossmarginline.Sothat'swhyIbelievethatitmakesitalittlebitmoredifficulttobeabletoleverageSG&A,andthat'swhyyouseethenumberrunninginthe3.5%to4%comprange.


Sure.Thanksalot.

Operator :

SethBasham,WedbushSecurities.

SethBasham(Analyst-WedbushSecurities):

Thanksalotandgoodafternoon.Myfirstquestionisonnewstoreproductivity,justwanttofollowupthere.Younoted,Tony,thatthere'snothingwithtimingthisquarter.Isthedeclinethatwesawinnewstoreproductivityyear-over-yearrelatedtotheproductivityoutofsomeoftheWesternstores?


Well,whenIlookatit,Ireallythinkitwouldbejustthetimingofthestoreopenings.Ourstoresthatareopeningthisyearareexceedingourproforma,veryconsistentwithpastperformance.Soit'sreallyanon-issue.Someofit,fromasalesproductivitystandpoint,reallycanbethemixofthestoresthatwe'reopening.Andthatwouldbetheonlyotherimpact,otherthanthetiming.


Gotit.Okay.That'shelpful.Andthensecondly,justintermsofthemerchandisingtrends.Youtalkedaboutpetfoodandanimalfeedbeingaprettystrongcategory.CanyoucommentonhowyoufaredwiththePurinafeedlineexpansion?





Absolutely,Seth.ThisisSteve.Youknow,thatlaunchwasreallypartandparcelofsomethingmuchbigger.Andthat'sourqueuestrategy.Andweaddedtheproductintoourstores.Itwasreallyaroundmorepremiumforhorse,cattleandshowfeeds.Itallowedustohitahigherpricepoint.Therewasaquestionearlierabouthigherpricepointsandhowourcustomersarereacting.Youknow,it'sstillrelativelyasmallportionofourtotalbusiness,theexpandedlinethatweputin.ButIcantellyou,it'sbeenincremental.Andwe'veseennicegrowthinourfeedbusiness.AndIbelievetheadditionoftheseSKUshaslentcredibilitytotheentireline.Sowe'repleasedwithit.


Great.Thanksalotandgoodluck.

Operator :

DeniseChai,BankofAmerica.

DeniseChai(Analyst-BofAMerrillLynch):

Great.Thankyouverymuch.Justgoingbacktotheweatherissuetowardstheendofthequarter,couldyoutalkaboutthedeltabetween,say,theNortheastandupperMidwestandtheotherregions?


Relativetotheweatheritselfortheperformance?


Compsinthoseregionsonceyoustartedtoanniversarythestrongdemandforfallandwinterproductsthathappenedlastyear.


Sure.Clearly,upnorthduringthatperiodoftime,wherewewereexpectingalittlebitcoolerweather,thecompsintheupperMidwestandtheNortheastranslightlydown.AndwhenIsayslightly,it'sverylowsingledigitsduringthattimeperiod.Butotherthanthat,therestofthechainperformedverywell.Soclearly,itwasn'taweatherissuewhenitcametothesoftnessinsales.


Okay.Gotit.Thanks.Andareyouabletobreakouthowmuchbigticketwasadragonoverallticket?


Wehadquantifiedthatatbeingaboutthe90basispointsthatitimpactedaverageticket.Whenitcametothetransactions,forusbigticketisarelativelysmalltransactionimpact,andtheimpactgenerallyisgoingtobeontheaverageticketitself.SoIwouldjustusethe90basispointsthatwetalkedaboutonaverageticket.


Okay.Gotit.Andjustlastone.Sinceyou'verelaunchedyourwebsite,couldyougiveusanupdateintermsofwhatsortofgrowthyou'reseeingonline,averageordersize,howmuchgetspickedupinstore,andwhatcategoriesyou'rereallyseeingthemosttraction?





Denise,it'sGreg.Iwon'tgiveyouwhichcategoriesaredoingbestorworst.IthinkitfollowssuittowhatyouheardfortherestoftheCompany'ssales.Wesufferedalittlebitinheatingandotherplaceslikethat.Whatwe'refindingisbecausethesiteismore--it'seasiertonavigatewith,thecustomersarestartingtoaddmultiplethingstobaskets,ouractualtrafficisup.Ourconversionisaboutflattowhereitwas,butthat'sanytimeyougothroughachangelikethatinanewwebsite,therearesomethingsyouhavetodowithinGoogle'ssearchenginetogainsomeofthatback.Butwe'reveryoptimisticthatthechangeswe'vemadeaswegothroughtheholidayseasonaregoingtobenefitusinabigway.


Gotit.Okay.Thankyouverymuch.

Operator :

BenBienvenu,StephensIncorporated.

BenBienvenu (Analyst-StephensInc.):

Yes.Thanks.Goodevening,guys.SoyoutalkedalittlebitaboutthemixingcentersinTexas.You'vealsotalkedabout20to30centersthatyouthinkyoucouldbuildlongerterm.Doyouhaveanysenseofthevelocityofthatbuildout,orisitjusttooearlyatthispoint?


Yes,Iwouldtellyou,Ben,thatit'samodelweneedtomakesurethatit'sgoingtoproveitselfout.We,asyouknow,hadabouta18-monthtotwo-yeartestofthisinthebackofoneofourotherdistributioncentersthatwherewehadspace,we'venowrolledtwophysicalfacilitiesintoplay.Sofar,Iwouldsaywe'repleased.Butsomeofthechallengesaregoingtobedifferentindifferentmarkets.Rightnow,weplacedthesetwoinTexas.Andthesearehighvelocityfeedfoodmarkets.Aswe'llusetheseintootherpartsofthecountry,andthekeybehindthisistobringinventorymoredirecttothestore,fasterreplenishment,pullthatinventoryoutofthebackofthestore,sothatIdon'thavetoholdtwoandthreeweeksworthofsupply,butmakesitsomucheasierforthatstoretooperate.

Butsofar,sogood.Butit'sgoingtobealittledifferentbyregion.AndallIcantellyouis,wemaynotneed30or25,wemayfindthat15to18isenough.Butitreallyis,supplychainbuildoutissomethingwe'restillworkingthrough.Andwe'llgiveyoumoreinformationonthatastimeprogresses.


Okay.Fairenough.Thanks.AndthenmaybeswitchinggearsbacktotheSouthwestDistributionCenter.Asthatcentercomesonline,obviously,you'vetalkedaboutthereductioninstemmiles,buttowhatextentdoyouexpectittopositivelybenefitstoreproductivityfromasalesperspective?Andcanyoupointtoinstancesinthepastwhereyou'vebuiltnewDCsandhowthatmayhaveimpactedsalesatsurroundingstoresthatwereserviced?


Well,thelastseveralDCswebuilt,onewasareplacementDCfromaGeorgiaDCtoanother.TheotherwasonelocatedintheMidwesthere,early,I'llcallitbeginningoftheSouth,whichisupinFrankllin,Kentucky,andthatwasjustbaseduponvolumeofstoresthatwewereopeningintheregion.

SoherewouldbesomeofthebenefitsinthisArizonafacility.StoresontheWestCoastnolongerhavetohavemerchandisemovingfromWaverley,NebraskaandWaco,Texas.Thetransittimeislong.Sowe




shouldbeabletoturnthattransittimeandmakeitmuchshortertoreplenishthosestores,ifweseearunonacertaincategoryofbusiness.

Secondly,we'llholdalittledifferentmixofproductinthatdistributioncenterthanyouwouldhave,say,intheeasternpartoftheUnitedStates,becausetheclimateandtemperaturesaredifferentoutthere.SosomeoftheuniquenessofproductsthatwewouldnottypicallystoreintheotherDCs,we'llputintothisdistributioncenterinhopesofhavingmoreofthemanufacturersthatbuildthatspecificproductsittingintheWestCoastwitheithermanufacturingortheirowndistributionfacility,sowecanmoveittoourDCandthenbacktoourstores,notmovingitfromtheeastallthewayacrosstoourDCandthenfromtheretothestores.Soit'sreallyaboutreplenishmentcapabilityandturnaroundtime.


Okay.Thanks.Bestofluckinthefourthquarter.


Thankyou.

Operator :


JaimeKatz,Morningstar.

JaimeKatz (Analyst-Morningstar):

Goodafternoon.Thanksfortakingmyquestion.Ijustwantedtofollowonthatmixingcenterquestion.I'mcurioushowthatplaysintohowyouguysthinkaboutinventoryturnslongerandthenhowthatflowsthroughtopossibleimprovementinthegrossmargin.Doyouguyshavemaybeagoalofwhereyou'dlikethosetrendstogo,becauseyou'vemadesomeprettyimpressivestridesoverthelasthandfulofyearsthere?


Jamie,greatquestion.Here'sacouplethingstothinkabout.Oneis,mixingcentersarecloserdistancetothestorebasethenthelargeDC.Sothewholephilosophybehindthatwastobeabletoturnmerchandisefasterbacktothestores,replenishandkeeptheweeksofinventoryoutofthebackrooms.Becauseourstoresdon'thavelargebackroomsandweliketobringinventoryinsomewhatjust-in-timeandpushittothefloors.

Sothemodelingwe'vedoneonallthiswouldtellyouthatnumberone,itmakesthestoreeasytooperate,andnumbertwo,weshouldseesomegaininturn.Butthefactsarethatwe'veonlygottwoupandrunning.It'snotsignificantenoughtoprobablyimpacttheoverallCompanyturnatthispoint.Butlongerterm,itshould.


Okay.Andthendoyouguyshaveanycommentsonthehometownpet,oreitheronhowthoseconsumersaremaybeconvertingtoregularTractorSupplyconsumersoradoptingsomeofthebrandsalittlebitmorebroadly?Idon'tknowifthere'sanyanecdotalevidencethatthat'shappeningyet.

LeeDowning (EVPofStoreOperationsandRealEstate):

Well,thisisLee.We'vejustabouttocycleayear.Sowecontinuetostilllearn,becausewe'rejustnow




goingtoseesomecomparisonscomeup,sowe'reexcitedaboutthat.

Asfarasbrandconversion,whatweareseeingisthatcustomersaresomewhatdifferent.TheyarealittlebitsmallerdogsandsmalleranimalsthantheyareinTractorSupplythatmaybeoutsidedogs.SoIthinkweseealittlebitdifferencethere.Weareseeingthatcustomersareeagertoadoptourexclusivebrands.SoIthinkthat'sagreatlearningthatwecandelivergoodvalueonbothsidesoftheequationthere.AndIthinkoverall,wefeelveryconfidentthatwe'regettingsomelearningsforTractorSupplyaswemoveforward.SoIthinkwe'reverypositiveaboutit.


Thankyou.

Operator :

DanWewer,RaymondJames.

DanWewer (Analyst-RaymondJames&AssociatesInc.):

Thanks.Greg,attheinvestormeetingbackinFebruary,youhaddiscussedtheopportunitytoopenstoresinmarketsthatareabitlargerthanyouhavehistorically.YougavesomeexamplesintheHoustonarea,storesthatwereabitcloserto,say,aHomeDepotandLowe's.Canyoudiscusshowthedoorswiththatchangeintherealestatestrategyareperforming?

LeeDowning (EVPofStoreOperationsandRealEstate):

Dan,notreallyachangeinrealestatestrategy,moreofalearningfromourrealestateportfolioandwhatwe'veseenthatcontinuestoworkforus.Today,ourbaseofstoresislittledifferentthanitwasmaybe10yearsago,whenwewerepurely,forthemostpart,arurallifestylestoresittingagood15,20milesoutsideofmostcitylimits.Today,withsomeoftheurbancrawlandsomeoftheotherlocationsthatourrealestatemodelhastolduscanworkforus,wedositlittleclosertosomeoftheHomeDepotsandLowes'.We'renotasfaroutasweoncewere.About67%to68%,Ithink,isthenumberofourstoressitwithinaproximityofaHomeDepotandaLowe's.Sowecomplementoneanotherinthosemarkets,tobeveryhonest.

Ithinkyoumayhavehadoneofthestorewalkswiththeteamandyounoticedthatwebothhavehardware,butit'sverydifferentassortments.Webothhavetools,butwe'reheavilyintoweldingandintopowerequipmentthat'sused,airtools,wherethey'reintomorehandtoolsandelectrictypeproducts.Sothestorebasewillcontinuetoevolve,Dan,asthemodeltellsuswherewecanplacethosestores.Butithasn'tchangedreallythatmuch,it'sjustevolving.


Okay.Andthenjustonequickfollow-up.Weestimatethattheinventorypersquarefootfinishedthequarterupabout1.2%.HadtheCompanynotseenthesoftnessinsomeofthewinterproductduringthelastcoupleofweeksinSeptember,wereyouexpectingyourinventoryperstoretobeessentiallyflatyear-over-year?


Probablyalittledown,tobeveryhonest,becausewecameoutofthespringseason,Steveandtheteamdidagreatjobmanagingthroughtheinventories,andwe'reactuallychasingsomeproducttowardthelatterpartofsecond,earlythirdquarter.Butwhatcausedalittlebitofmovementupwardwasreallyalltheforwardmovementofleadingproductsandthingsintotheassortmentsandintothestoresalittle




earlier.Yes,thatwastheimpactofit.


Okay.Great.Thankyou.

Operator :

ChuckCerankosky,NorthcoastResearch.

ChuckCerankosky(Analyst-NorthcoastResearch):

Goodafternoon.Nicequarter,guys.


Thanks,Chuck.


WhatI'dliketoaskaboutisalittlebitmorerelatedtoprecipitation,whichoftenisaffectedbythetemperature.Butwhereit'sbeenparticularlydry,whatareyouseeingintermsofwaterhandlingequipment,thingsrelatedtopumpsandtankage,andhowwasthatperforming?


Chuck,we'vetalkedalotaboutbeinginaneeds-basedretailer.Andwhenitcomestoeitherwetweatherordryweather,weseeourbusinessthriveinmanyofthosecases,becausewe'readestinationforthosetypesofproducts.Soifit'sdry,peopleneedtotransferwater,wesellwaterpumps.We'vegotafulllineofdifferentproductstosupporttheirneeds.

Sowedon'tgetintothespecificsofit,butIcantellyouasaneeds-basedretailerandthedifferentiatedassortmentslikewehave,wetypicallydoprettywell.AndIwouldusetheexampleoftheWestCoast,forexample.We'veseendryweatheroutthereforquiteawhile,butyetwecontinuetoopenstoresandsee,asTonysaid,aboveaveragecompsinalotofthosestores.Soagain,itworksforourmodel.


Allright.Great.Thankyou.


Thanks,Chuck.

Operator :

Eric[Yassard],ClevelandResearch.

EricBosshard (Analyst-ClevelandResearchCompany):

Goodevening.Twothings.Firstofall,thesalesthatwereimpactedbyweatherattheendofthequarter,dothosegetrecapturedatfullmargin,istheexpectation,in4Q,andisthismaterialinthewholeschemeofthings?


Eric,thisisSteve.WhatIcantellyouiswhenitgotcoldafewweeksandafewdays,wesawourcold




weatherbusinessmove.WhatIcan'ttellyouishowcoldit'sgoingtobeinQ4andwhatpartofthecountryit'sgoingtobereallycoldin.ButIcansay,andTonysaiditearlier,Ithink,onitsinitialcall,wasthatlastyearNovember,itwascolder,Decemberwasalittlewarmer.Wethinkthat'sgoingtoflip.ButIcan'tsaywhetherornotallsalesaregoingtobedeferred.Q4,wedomuchmorecoldweatherproductsthanwedoinQ3.SoQ3wasasmallportionofthetotal.


Okay.That'shelpful.Andthensecondly,ongrossmargin,theupsideinthequarter,thepaybackfromsomeofthepriceandmarkdownoptimization.Notaskingifthere'smorequartersabove60basispointsofgrossmargin,butaretheremorequartersofnotablebenefitfromthoseefforts?Howshouldwethinkaboutthat?


WhatIwouldtellyouisthatwe'veinvestedinavarietyofsystems.Andwedoexpecttogetsomebenefitsfromthosesystems,butthere'sanumberofvariablesthatplayinthemargin,aswell.Wewillcontinuetobecomemoreefficientasweusescienceratherthanart.Andthat'showwe'reoperatingtoday.SoIthinkwe'vegotagoodtrackrecordandagoodrun,butIdon'tknowwhatpercentyou'regoingtoseethoseimprovementsovertime.We'regoingtocontinuetooperateaswehaveinthepast.AndTony,Idon'tknowifyouhaveanythingto--


Iwouldagreethatthemostimportantthingisalotofitistheyear-over-yearperformanceandmarkdownsandclearancethroughaparticularcycleorseason.That'sgoingtooverridethebenefitofanyofthepricemanagementtoolsthatweputintoplace.Butthekeyis,aswecontinuetodevelopthesetoolsandutilizeitandbecomemoreadept,we'llbeclearlylayabasisofimprovementsothatwecancontinueto,eveninatoughquarter,beabletodrivemoreefficientandbettersales.Andobviously,drivethecomps.Soit'sreallyacriticalelementofourcontinuousimprovementprograms.


Okay.That'shelpful.Great.Thankyou,guys.

Operator :

AdamSindler,DeutscheBank.

AdamSindler (Analyst-DeutscheBank):

Yes.Hello,everyone.First,IguessI'dliketosayI'mgladIwaswrongonthequarter.Verysolid,asalways.


(Laughter)Everybodygetsthetractor,Adam.


Yes,Iknow.That'swhatyouguystoldmelasttime.Ilearnedmylesson.SoIwanttofocusmyquestiononthecontinuedstrongtraffictrends.Asyoulookattheresults,I'mhopingmaybeyoucouldprovidealittlebitmorecoloronthedrivershere.Iknowyouguyshavebeendoingalotwithcustomeracquisitioninitiatives,maybemoreshareofwalletfromexistingcustomers,andthenasyoulookatthenewWesternstores,maybehowmuchiscomingfromthere?





Adam,whatIwouldtellyouisthatalotofithastodowithourstrategyaroundqueue.Wecontinuetogainmomentuminalotofthosebusinesses.Andasaneeds-basedretailer,whenyousellalotofconsumablesandyoubuildloyalty,andwe'vegotgreatteammembersinourstores,yougetalotofrepeatcustomerscomingbackthrough.

There'salsotheword-of-mouthmarketingthatwegetthebenefitof,becausewe'relocalcommunities.Andalotofthefolksthatshopustelltheirneighbors.AndsoIthinkit's30straightquartersofcomptransactiongrowth.AndIthinkalotofthatstemsfromalotofwhatwe'redoinginsidethestore,butIwouldalsotellyouithasalottodowiththeassortmentsthatwe'veputstrategiesaround.


Andasyouthinkaboutmaybewhoyou'retakingsharefrom,Iknowinthepastyou'vediscussedanumberoranumberofhowmanyofthesesmaller,reallymom-and-popoperations,youhave.ButthenrelativetoDan'squestionearlier,youfindthatyouaremaybealittlebiteasiertoevolveyourrealestatestrategyintolargercities,maybesomemore,fromsomeofthebigboxguys.Asyoulookatthatreallysmallmom-and-pop,though,isthatnumberstillcomingdownquiteabitandhowmuchhowmuchdoyouthinksharedotheyreallyhaveofthemarket?


Wedon'ttypicallygetintothesharenumbergamehere.Whatwecansayiswe'reaconsolidatorforthelifestyle.Andourgoalasanorganizationistobringtheneedsofourcustomerunderoneroofandallowthemtocomein.Andourhopeisthatthey'llshoppeghooks,shelves,fourways,incentercourtsandendcaps.AndIthinkwe'vedoneanicejobwithourassortmentstailoringthemtothatlifestyle,andtheycontinuetorewarduswithtraffic.


I'dalsosay,Adam,thattheemphasisSteveandthemerchantteamandthemarketingteamandthestoresteamhaveputintothislocalizationofproductandreallybeing--understandingthemarketneedshasplayedoffandpaidbigdividendsforus.Ourstoresmaylookthesameasyouwalkthroughthem,butasyougodownthoseaisles,asStevewaysaying,andthoseendcapsandthat,you'regoingtonoticeveryspecificproductsgearedtowardthoseindividualmarkets.Andinthisbusiness,andthosewhowecompetewithinthisbusiness,they'regoodatthat.Andthat'ssomethingthatwe'vegottenfarbetteratoverthelastseveralyears.


Great,guys.Iappreciateit.Thankyou.

Operator :

Andwithnofurtherquestionsinqueue,I'dliketoturntheconferencebacktoMr.GregSandfortforclosingremarks.


Okay.Well,thanks,everybody,forjoiningustoday.Andwe'relookingaheadandwe'repleasedwithourperformance,asIsaid,forthefirstninemonthsoftheyearandwereallydofeelverypositiveaboutourpositionheadingintofourthquarter.Alongwithourcontinuousimprovementefforts,asStevehadmentioned,we'vegotthingshappeninginmerchandinmarketing,andwewillcontinuetoinvestinour




systemsandinfrastructuretosupportthelong-termgrowthofTractorSupply,drivingreturnoncapitalandachievingourgoalofmid-teensannualearningsgrowth.

ThankyouforyourcontinuedsupportofTractorSupplyandwelookforwardtospeakingwithyouagaininJanuaryregardingourfourthquarterandfull-yearof2015results.

Operator :

Ladiesandgentlemen,thatdoesconcludetoday'sconference.

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Tractor Supply Co (TSCO) Earnings Report: Q3 2015 ...line growth in the quarter, with comparable...

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