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Executives

Jennifer Milan – FTI Consulting, IR

Greg Sandfort – President and Chief Merchandising Officer

Jim Wright – Chairman and CEO

Tony Crudele – Chief Financial Officer

Analysts

Vincent Sinisi – Bank of America

Alan Rifkin – Barclays

Peter Benedict – Robert W. Baird

Aram Rubinson – Nomura

Matthew Fassler – Goldman Sachs

Brad Thomas – KeyBanc Capital Markets

Mark Miller – William Blair

Adam Sindler – Deutsche Bank

Matt Nemer – Wells Fargo Securities

Simeon Gutman – Credit Suisse

Eric Bosshard – Cleveland Research

Wayne Hood – BMO Capital

Tractor Supply Company (TSCO) Q4 2011 Earnings Call February 1, 2012 5:00 PM ET

Operator

Please standby. Good afternoon, ladies and gentlemen. And welcome to Tractor Supply Company’s Conference Call to discuss Fourth Quarter 2011 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. (Operator Instructions)

Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today’s conference, Ms. Jennifer Milan of FTI Consulting. Please go ahead, Jennifer.

Jennifer Milan

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. Before we begin, let me take a moment to reference the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

This conference call may contain forward-looking statements that are subject to significant risks and uncertainties including the future operating and financial performance of the company. Although, the company believes that the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company’s filings with the Securities and Exchange Commission.

The information contained in this call is accurate only as of the date discussed. Investors should not assume that 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 introduced Greg Sandfort, President and Chief Merchandising Officer. Greg, please go ahead.

Greg Sandfort

Thank you, Jennifer. Good afternoon, everyone. I’m here today with Jim Wright, our Chairman and CEO; and Tony Crudele, our CFO.

We are pleased with our fourth quarter performance, which caps off another strong year for Tractor Supply Company. Our team continued to execute well in what remains a challenging environment for customers and retailers.

In the fourth quarter, we experienced another period of strong broad-based performance across the store and achieved double-digit increases in both sales and profitability on top of record results a year ago. This mix of broad-based sales growth across the store continues to mitigate our dependence on weather related merchandise.

The momentum in our business is a reflection of the structural improvements we have made in recent years. Not only have we increased our focus on consumable, usable, edible key merchandise, which has proven to be a successful strategy in meeting the needs and creating loyalty with our customers, but we have also made great strides in our inventory management to better merchandise allocation and expanded regionalization.

These sustainable improvements have enabled us to ensure we have the right products in the right places at the right time. As we continue to learn more about our customers each day, we are working diligently to further refine our product offerings, our marketing initiatives and the in-store shopping experience.

Now, let me provide a little more detail on our performance during the fourth quarter. Our strong topline sales results were reflective of consumers continued support of our unique merchandise mix, which enables us to meet their needs across multiple categories at a compelling everyday value.

As we had anticipated, weather was warmer than last year in the quarter and we planned accordingly. We were nimble and adjusted our merchandise mix to take advantage of the weather trends. Our proactive planning approach to merchandise allocation and regionalization enabled us to deliver higher year-over-year results for the quarter.

During the fourth quarter, our CUE categories remained key sales and traffic drivers. Our feed and food customers shop our stores more frequently and contributed to our 15th consecutive quarter of comp transaction count increases.

And despite the inflationary environment, we continue to provide compelling values to our customers while effectively managing merchandise margin. We were once again capable of improving gross margin dollars per unit in most CUE categories while increasing market share.

We also achieved strong sales performance in a hard lines areas, which include tools, hardware, truck and automotive. Our strategy of balancing our product selection between national brands and increased private brand mix across multiple categories contributed to improved performance for the entire category.

From an inventory perspective, our rigor has enabled us to manage flow more productively. As a result, we continue to execute better than ever. While we did decide to move forward spring deliveries for several of our southern regions to accelerate sales, we were pleased with their year end inventory position and we continued our successful management, the seasonal carryover and minimized forward business risk into the next season.

Operationally, we continue to make great strides in the areas of inventory management, price optimization and merchandise allocation, and regionalization. These collectively have driven meaningful sustainable improvements in our business.

Our fourth quarter and 2011 results further validate that we continue to gain traction from our strategic initiatives and as we look to 2012, we have never been more excited about the opportunities that lie ahead.

I’d now like to turn the call over to Tony to review our financial results for the quarter and discuss our outlook after which Jim will share some closing comments.

Tony Crudele

Hey. Thanks, Greg, and good afternoon, everyone. We delivered another very strong performance in our fourth quarter. Our sales growth remained broad-based and we continue to increase our market share in many of the key merchandise categories. We achieved these results despite being up against robust sales growth last year and experiencing relatively unfavorable weather conditions compared to last year.

For the quarter ended 2011 on a year-over-year basis net sales increased 20.1% to $1.24 billion, and net income grew 40.4% to $70.5 million or $0.96 per diluted share.

As a reminder, the fourth quarter included an extra sales week as part of the company’s 53-week calendar in 2011. The additional week also added one comparable store sales day in the quarter. The additional week resulted in our fiscal year ending on Sunday, December 31st. The comparable week last year ended on January 1st and our stores were closed for the holiday.

For modeling purposes, please note, that we will have one less comp sales day in Q1 of 2012 due to the calendar shift. The additional week represented 6.6% of the overall sales increase for the quarter.

Comp store sales increased 7.6% for the fourth quarter compared to last year’s increase of 13.1%. We continue to drive transaction count increases with our CUE products, while our average ticket was favorably impacted by inflation. We estimate that the additional comp day represented an approximately 110 basis point benefit to same-store sales in the fourth quarter. Non-comp sales were $71 million or approximately 5.7% of sales.

Comp transaction count increase for the 15th consecutive quarter gaining 3.6% on top of an 8.8% increase last year. Our CUE products serving our customers basic and functional needs remained an important driver of footsteps. The trend in average comp ticket continued to be positive at 3.8% versus last year’s 3.9% increase. Inflation which was seen in many of our feet categories was a key driver to the average ticket increase.

Big ticket purchases which we define as items greater than $350 also contributed to the increase. The transaction count of big ticket purchases increased year-over-year which was more than offset a slight decrease in the average ticket for these larger purchases.

We continue to experience broad-based sales strength with respect to both merchandise categories and geographic regions. All eight of our geographic regions had positive comp store sales, the Northeast and Southwest were the strongest regions, while the upper Midwest was the softest as the region cycled against strong sales from winter storms a year ago. The broad-based nature of sales growth supported positive comps during each month. The relative strength was seen early in the quarter as December was very warm.

Inflation exceeded our forecast for the quarter as we estimate that it contributed nearly 500 basis points to topline sales. Inflation was most evident in livestock feed and lubricant categories with cost increases in both grains and oil.

Turning now to gross margin which as a percent of sales decreased by 11 basis points to 32.5%. Direct product margin percent improved slightly as we continue to make progress on four strategic gross margin initiatives. This help to offset negative mix impact of the CUE products. The merchandising team continued to do an excellent job managing gross margin to the period of continuing inflation in many core categories.

For example, in several of our CUE categories while the overall gross margin rate declined slightly, we increased the number of units sold and the gross margin dollars earned on each unit. So as you can see from the results, this approach is very effective in managing gross margin dollars during the fourth quarter.

Markdown cadence was consistent with our expectations during the quarter. We did however book a one-time charge for marginally profitable welding gas product line that we rationalized and will be exiting in several hundred stores. This negatively impacted gross margin by approximately $2.7 million in the fourth quarter or about 20 basis points.

Freight expense increased by 37 basis points over last year, this increase was driven by higher fuel costs, costs associated with increased import activity of the seasonal goods and the continued mix shift to more freight intensive merchandise.

As part of our strategic sourcing initiative import purchases in the quarter represented a little over 9% of total purchases, which is a greater than 16% increase year-over-year. Overall, we’re pleased with our ability to successfully manage gross margin while continuing to provide great values to our customers.

For the quarter, SG&A including depreciation and amortization was 23.5% of sales, which was 150 basis point improvement from the prior year’s quarter. The improvement in rate resulted principally from our same-store sales growth and leverage provided by the 53rd week.

We leveraged our key store expenses, payroll and occupancy, while growing the store base 8%. Incentive compensation was relatively consistent with the prior year and had a favorable impact of 8 basis points during the quarter.

We are very pleased with SG&A leverage that we achieved during the quarter particularly given a one-time charge for the write-off and acceleration of depreciation of certain e-commerce assets. As we move forward into 2012, with our multi-channel re-platforming initiative, we reassessed the useful life of our existing platform.

Additionally, we increased our sales tax reserve as states continue to pursue revenue generation alternatives. These two charges amounted to approximately $3.6 million, representing a 29 basis point increase in our SG&A rate during the fourth quarter.

Turning to the balance sheet, at quarter end we had $177 million in cash, compared to $257.3 million last year. We exceeded our year end cash target of $100 million to $150 million as our 10b5 plan limited the amount of shares we repurchased in the fourth quarter.

During the fourth quarter under our stock repurchase program, we acquired approximately 114,000 shares for $7.9 million. For 2011, we repurchased 3.1 million shares for $180 million on average purchase price of $58.52 per share. We estimate that there was minimal impact to EPS from share repurchase in the fourth quarter. For the full year, we estimate that the share repurchase program increased EPS by approximately $0.08.

Average inventory levels per store at quarter end increased 2%. We did an excellent job managing inventories in light of embedded inflation, the opening of our largest DC in September and the additional week in our calendar as we flowed merchandise for our January events.

Inventory turns for the year were 3.23 times or 14 basis point improvement over last year.

Capital expenditures for the year were $166 million, compared to $97 million last year. This increase in capital spending related to approximately $48 million for the construction of our new distribution center in Franklin, Kentucky, compared to $22.5 million expended in the prior year for conveyor systems and equipment for two distribution centers.

Additionally, we acquired 12 for our lease stores for $32 million, compared to four stores acquired last year for $12 million. We opened 31 stores in the quarter versus 27 stores in the prior year’s fourth quarter.

Turning our attention to 2012. First our outlook for a few key metrics for the full year. We expect full year sales to range between $4.56 billion to $4.66 billion. We have forecasted comps sales to increase between 3% and 5%.

We’re targeting improvement of approximately 15 to 20 basis points in EBIT margin compared to 2011. We anticipate net income to range from approximately $246 million, $253 million or $3.38 a share to $3.46 per diluted share, and we expect to open 90 to 95 new stores.

Let me discuss some of the specific drivers and assumptions that helped us form our projections for 2012. We expect the retail environment will be stable, but the consumers will continue to be cautious as unemployment remains high. We expect that our customers will continue to shop at our stores for basic and everyday needs, similarly as they did during 2011, and that they will remain price conscious and value-oriented.

Although, there were some positive/negative whether events in 2011 such as the hurricane activity and the Southwest drought, we believe it was a net neutral year from the weather perspective and that we can effectively manage the business against these comparisons in 2012. Therefore we do not anticipate that weather trends will have a significant impact year-over-year results in 2012.

With respect to inflation, we anticipate that we will continue to have considerable impact ranging from 3% to 4% in the first quarter, as key commodities prices remain high. We expect that the inflationary impact will moderate as we begin to cycle the commodity price increases that we experienced last year. Overall, our forecast assumes inflation of 1% to 2% for the full year. We have demonstrated our ability to manage pricing effectively over the past several years.

We are targeting 15 to 20 basis point of EBIT margin improvement for the year with the majority coming from gross margin rate as a result of several of the key merchandise initiatives. For the full year, we expect gross margin rate expansion of approximately 10 to 15 basis points.

This reflects our expectations that gross margin percent will be somewhat flat in the first half of the year with improvement weighted more to the second half as the impact of inflation on our merchandise cost subsides. As I mentioned earlier, we manage profit per unit during inflationary times, focusing on gross margin dollars instead of rate.

We also expect freight costs to remain a headwind until we begin to cycle the accelerated fuel costs we experienced in 2011. Additionally, similar to 2011 we expect import increase as a percent of our total purchases which will increase our freight costs but have an overall favorable impact on gross margin rate. We also expect continued headwinds from the merchandize mix shift to more freight intensive CUE products.

Inventory turns are expected to improve slightly with per store inventories likely to increase modestly due to investments in key merchandise categories and some inflation. With respect to SG&A, we expect slight leverage as we remain committed to growing our store base and the supporting distribution and technology infrastructure.

We expect to increase our marketing spend by 8 to 10 basis points in 2012, as we planned incremental investment in direct marketing, circulars and customer research, and continue to test various other programs. Store payroll is expected to leverage slightly as we grow our comp sales base and begin to cycle to a more normalized level of incentive compensation, which should offset wage and healthcare increases.

We also expect modestly to leverage our store support center cost as normalized incentive compensation offset increased expense from full year management addition in 2011 and new hire growth in 2012. We anticipate slightly leverage from our distribution network, reflecting a full year of operations from our new Franklin, Kentucky distribution center.

There are several levers that we can control in managing various expense line items. Whereas in the past we will continue as we assess the environment and the company’s performance in 2012 and judiciously allocate resources accordingly.

For the full year, we forecast that our effective tax rate will be approximately 36.8%, an increase from 36.5% in 2011. This will result principally from a reduction in expected federal tax credits.

We plan to increase capital expenditures in 2012 with a range of approximately $160 million to $170 million targeted for the full year. We have included approximately $40 million as a placeholder or at least store acquisition program and $11 million potential land acquisition for Southeast distribution center relocation. Additionally, we expect an incremental $6 million spend as part of our e-commerce re-platforming.

As I stated earlier, we plan to maintain our store growth rate and to open approximately 90 to 95 stores in 2012. We plan to open 50% to 55% of these stores in the first six months of the year with 30 to 33 new store opening is expected in the first quarter of 2012.

We will continue to make purchases under our share repurchase program as part of our long-term objective of reducing our cost to capital and maintaining a target cash balance of $100 million to 150 million. For modeling purposes, we estimate that diluted shares outstanding inclusive of option grants and share repurchase activity will approximate $73.1 million for the full year.

As we’ve emphasized in the past, we believe our business can be more accurately assessed by focusing on the halves not the quarters, as weather patterns can change significantly from one year and shift the timing of sales.

We currently estimate that that the net earnings will be fairly consistent each half of the year, as year-over-year earnings growth will be slightly greater in the first half of 2012. However, if you normalize 2011, adjusting for additional week, growth in the back half of fiscal 2012 is expected to be slightly greater than in the first half.

There is some key points with respect to the quarters. As another reminder, 2012 is a 52-week year thus Q4 will have one less sales week relative to 2011. We estimate that the benefit of the 53rd week in 2011 was approximately $0.09 per diluted share. Due to the calendar shift, Q1 and the full year 2012 will have one less comp sales day compared to 2011.

As a result of the calendar shift back to the 52-week year, Q1 in 2012 will benefit from an added week later in the spring selling season, replacing a below average sales week between the holidays in late December. Therefore, we anticipate that the year-over-year earnings growth will be the strongest in Q1 this year even with the one less comp sales day.

Also related to the calendar shift we will pull some marketing expenditures forward into Q1 to drive the spring sales in the Southern region. We believe that this will pull some sales to Q1 from Q2 and as such anticipate that Q2 will have the lowest quarterly year-over-year earnings growth in 2012.

Thus far in Q1, comps are positive even withstanding the one less comp sales day. We expect the comp store sales will be slightly stronger in the first half of the year as we will cycle stronger comp sales in the back half of 2012.

Except for the one less comp day in Q1 in 2012 as previously mentioned, there are no other calendar shifts between any quarters that would affect comparability to 2011. As in the past, we will provide more color on our expectations for the subsequent period at each quarterly conference call.

Now, I’d like to turn the call over to Jim for more details on our plans for 2012.

Jim Wright

Great. Thanks, Tony. Good afternoon, everyone. Today Tractor Supply is agile and able to respond to regional and seasonal opportunities, and are planning our execution frankly the best in our history. While we are pleased with the progress over last few years, we really believe that we have not arrived and we remain excited about our lean initiatives and other opportunities that lie ahead.

In 2012, we’ll continue to focus rigorously on our long-term strategic objectives. The structural improvements that we’ve made to our business in recent years are taking hold and we believe that we are only in the early stages of realizing the benefits.

While we will continually test and refine the assortments, our marketing programs and the in-store shopping experience. I believe -- we believe that we have a foundation in place to maintain momentum through 2012 and beyond. As we embark, our another exciting year for Tractor Supply, I’d like to speak briefly to our retail environment.

Consumers continue to look for compelling value and purchases are being driven by need and taking place closer to need. What has changed, however, is our ability as a company to anticipate our customer’s needs and react more quickly to those needs. This was demonstrated by our fourth quarter performance and the results we achieved throughout 2011 as we overcame severe drought in Q2 and Q3 and a mild Q4.

Looking ahead to the upcoming spring selling season, we remain confident that we have the right plans in place to drive results and to build our brand. We are expanding a number of assortments and continue to test and refine our product mix. For instant, we will be expanding our live goods test in the spring.

We also remain focused on private label brands to create additional value for our customers and foster even stronger customer loyalty. We are gaining traction as we added generic brands and introduce private brands to replace them.

Now, let me briefly review some of the additional merchandising and marketing initiatives. We continue to refine the in-store experience to exceed our customer’s expectations. In this regard, we are again pleased that our customer loyalty scores improved in 2011.

At the same time, we continue to roll out our price optimization and learn from our customer’s response. Now we also continue to mine data from our CRM and direct mail programs that allows us to further refine our marketing strategies to deliver greater efficiencies from our marketing spend.

As we reflect upon 2011, we are proud of our achievements but we are by no means complacent and we remain relentlessly dissatisfied, and believe that we have considerable opportunity ahead to increase customer spend and to attract new customers to Tractor Supply.

We continue to improve our ability to meet our customer’s needs across multiple categories and garner both high frequency and higher customer loyalty. We’ll continue to expand our footprint in key regions and remain focused on collaborative consistent execution across the board.

Our balance sheet is strong allowing us to reinvest in key initiatives to grow the business. We are more agile organization than ever before and we look forward to building on the momentum through 2012 and in the years ahead.

I’d like to thank all of our Tractor Supply team members. They’re ongoing dedication, hard work and commitment to our company. Additionally, I’d like to thank all of our shareholders for investment in Tractor Supply and I’m going to support in our collective journey.

Operator, that concludes our prepared remarks and would now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Let’s go to Vincent Sinisi of Bank of America.

Vincent Sinisi – Bank of America

Good afternoon. And thanks very much for taking my questions and congratulations on a nice end to the year.

Jim Wright

Thank you.

Vincent Sinisi – Bank of America

I wanted to, no problem, I wanted to ask about your gross margins. As you folks had mentioned during your comments, if you take out that one-time charge you did have gross margins up on a year-over-year basis for the quarter.

Now, can you give a little more color on your, outlook for next year with 10 to 15 basis points of improvement for the full year, I know that in the past, you had signaled around 20 basis points, 20 somewhat basis point. Is that just a case of being a bit, bit of conservatism in their based on the headwinds and how do you weigh that against obviously the traction you’re getting on your initiatives?

Tony Crudele

Sure, Vince. When we look at it, we really have to assess the inflationary environment, the headwinds that we experienced from freight. We were hopeful that we would start to cycle some of the fuel cost a little bit sooner than we did and the price did stay up but we are hopeful as we move through the year that we can -- those headwinds will be a little bit less limited.

But based on where we’re currently at, we anticipate that between the mix and the freight, we wanted to be more reasonable in our future expectations. We are still very committed to the four initiatives we have around gross margins and we anticipate that they will continue to drive our direct margin as we move forward in the year.

Vincent Sinisi – Bank of America

Okay. That’s helpful. Tony, thank you. And maybe just as my follow-up question sticking with margins. Can you give us an update on your price optimization initiatives in terms of where you are in terms of categories and rollout there?

Greg Sandfort

Yeah. Vince, hi, this is Greg. I will talk to that.

Vincent Sinisi – Bank of America

Okay.

Greg Sandfort

First of all, we choose Revionics and we are convinced they were the right choice for us. Remember, price op is one of the four drivers of the gross margin equation that we talked about. We are about a third of the way to the company SKUs right now and we have all buyers participating at some level within the program. It is a very iterative process and it’s an ongoing learning.

You make a change in one category to one sort of SKUs. It has an impact on other things round it. So what I would tell you is, we are learning as we go. We are encouraged with the learnings. There are three phases to price op. There is the regular price optimization, there is a promotional phase and there is a clearance phase. Today, we are really only in the regular price phase. Still doing some, what I would call rudimentary clearance priced op.

And I’ll remind you that we talked about price op as more back weighted over a few years, because even though you may make some changes today and gain some movement in margin rate, that changes as you touch other things in the store and the dynamics of the business as they are, its not something that you can touch and forget. So, very pleased, really still very early in the game.

Vincent Sinisi – Bank of America

Okay. That’s helpful. Thanks very much, Greg.

Operator

Let’s next go to Alan Rifkin of Barclays.

Alan Rifkin – Barclays

Thank you much. Thank you very much. I would add my congratulations as well. First, with your exiting of the welding categories, can you maybe just provide a little bit of color Jim as to what was behind that decision? And as you continue to rollout the category management program are there potentially other product categories that are up for review for long-term inclusion at this SKU level?

Jim Wright

Sure, Alan. This was welding gas. We are talking about oxygen or sertraline and argon gas that sold to a very, very heavy do-it-yourself or small professional shop. It was a category we began to enter probably five or six years ago and based on early results, we felt that it had legs and continue to rollout across the chain.

We now have come to understand that there is a limited demand for this product and frankly, we’ve not enjoyed the level of category growth that we expect from that investment. So as a result, we have rationalized -- we will be rationalizing that category and about half the stores maybe little more keeping it in those stores where it’s most productive.

Alan Rifkin – Barclays

Okay. Thank you. If my math is correct, it looks like your average pre-opening expense per store declined rather significantly by more than 10% or so. Can we expect that the average pre-opening expenses that you witnessed in 2011 are a good number, which we should be modeling going forward in 2012?

Tony Crudele

Great. Yeah. Alan, this is Tony. We have had some improvement in our pre-opening process and it has been a focus to reduce the days. It has not -- it hasn’t been a significant impact but I would agree that 2011 should be consistent with our pre-opening expenses as we move forward.

Alan Rifkin – Barclays

Okay. I mean, Tony, is that a function at all of more smallest stores being opened and maybe if you can also give us some color on what the prognosis is for those smaller stores? Are you now at the point where we can expect an acceleration in those smaller stores and if so, does it raise the overall saturation level for the company?

Tony Crudele

I’ll address the expense side and then Jim and Gregg can talk about our small market concept. But there is really just two elements when it comes to pre-opening and that’s the payroll it takes to open the store and the rent expense that’s related to that period before we open the store.

So, it could have a small impact as the rents will be a little bit reduced for the smaller market, but it’s not going to have a significant impact. It’s really, so the time to open and the payroll that’s incurred that drives the pre-opening expense.

Jim Wright

Because the small stores, we are pleased we have 25 of them, 28 actually now -- that are now open and we are really delighted with their sales relative to pro from and also every return metric that we measure our businesses by. So we are delighted with the small store.

We do plan to include them in our opening mix moving forward. This next year it will be somewhere between 12 -- 10 to 12 stores. They are of the smaller markets are planned. So, I believe we’ve mentioned before it’s important to began thinking about our growth more on a square footage as opposed to unit growth.

So historically they’ve been growing at 8% units, which I mean square footage. We now be -- may be driving more 9% units and still coming up at 8% square footage growth. And we’ll be talking in great detail at the Analyst Day about the small market concept and opportunity going forward.

Alan Rifkin – Barclays

Okay. Great. Thank you very much.

Operator

Peter Benedict at Robert W. Baird. Please go ahead.

Peter Benedict – Robert W. Baird

All right, guys. First question is probably the increase in the number of transactions over $350. Just can you give us a flavor for may be what items are driving that and then, I mean, any indication or read through you can make towards the spring here what you guys are expecting for the rider season?

Greg Sandfort

Pete, I’ll break that down for you. First of all in the fourth quarter it was really mixed broad-based across the company. It wasn’t any single category that drove that and we typically see storage little stronger in the fourth quarter but it was fairly broad-based.

As far as the rider business in the spring, we are encouraged right now with the amount of moisture that seems to be prevalent across the country, even through Texas. So early indication is, it’s looking better than a year ago.

However, the forecast that we’ve been looking at still are calling for some drought in the south and it’s going to come little later probably in the May, June period and then run through the rest of the summer if those forecast are correct. So, still very cautious on thinking that rider business will be much better than it was even a year ago.

Peter Benedict – Robert W. Baird

Okay. Perfect. That’s fair. And then just on the private label penetration where did they get in 2011 and Greg, what’s kind of the thought process and where you can take that over the next couple of years?

Greg Sandfort

We saw several hundred basis point improvement over the prior year, I had mentioned on an earlier conference call that we would see that movement this fall and we did as such. Mostly on the left hand side of the store as you walk into our store, which is where we place that focus and very pleased with both the heating and within the tool, and equipment categories where we expanded those private brands.

Peter Benedict – Robert W. Baird

Okay. Great. Thanks a lot. Nice job.

Greg Sandfort

Thank you.

Operator

At Nomura, let’s go to Aram Rubinson.

Aram Rubinson – Nomura

Thanks guys. One question and a follow-up if you don’t mind. One, Greg, just hoping you can delineate for us parameters of kind of new merchandising initiatives, if you don’t whether it’s stuff that’s going to be more indoor, more outdoor, whether its vendor-owned stuff or company-owned inventory. Just help us think about the parameters, so we can understand what it is you’re trying to fit and then just remind us what didn’t go right in that gas category, again, just to know, which box I didn’t check?

Greg Sandfort

You’re talking about, let me see if I can clarify the question. Are you talking about fourth quarter performance or you’re talking about full year performance?

Aram Rubinson – Nomura

No. Just in terms of like newness that you’re adding to the mix, I’m just wondering what are the parameters as you look to new businesses to add to the store over time, I know you’ve got a lot of experimentation going on.

Greg Sandfort

Yeah.

Aram Rubinson – Nomura

What are the kind of most important metrics and parameters that you’re trying to fit?

Greg Sandfort

Well, the first thing we look at is product category extension. We know who our customer is. We also know the products that they have interest in. So we’re not going to go out and create a category that you may find in a all-priced discount operation or in a big box that doesn’t fit the customer profile.

But what we have done in some categories, for example, in garden, we have taken a position to look at more live product as we move forward into 2012. And in our feed business one of the things we’ve talked about and are executing against now is the expansion of forage. So that’s the things you’re going to see us do. I’ve said a couple times, there’re many things we could sell in our store, but we’re going to stay true to who our customer is and service them.

Aram Rubinson – Nomura

And then, just as a follow-up, I think you said that Q1 was going to be the best earnings quarter. Wondering first of all, the 110 basis points that shifted out of Q4, what the weight if it will be the same kind of thing that will come out of Q1 and I don’t think you said it was going to be your best comp quarter? How do we think about given the comparisons last year, you’ve got two really tough comps that you’re up against in the calendar shift, which are the quarters you are going to do best from a comp perspective unless I missed that already?

Greg Sandfort

Right. Generally you would look at the 110 basis points relative to Q4. It would have a greater -- a slightly greater impact on Q1 in 2012. So you can sort of work through that math but it should be in that 125 to 135 basis point range.

Then relative to the quarters and the year-over-year, the weakest comp last year was in Q2. And so, generally you would translate that into -- having the best potential increase. However, as I had indicated in the prepared remarks, we anticipate doing some advertising marketing that would push some sales of Q2 into Q1. So that would -- that could be one of our tougher comparisons.

The overall, when you look at the halves, you have -- the second half has a little bit stronger comp that we’ll be going up against. So, now as you look at Q1, Q1 will have some inflation. So, again, that will drive some of the topline growth as well as having that additional week, a stronger sales week in the spring selling season compared to the one that dropped out of Q1. So those are some of the factors, lot of moving parts and hopefully that gives you a flavor for trying to allocate between the haves and some direction for the quarters as well.

Aram Rubinson – Nomura

And so is it likely that we will see a quarter drop below that 3 to 5 range you think or do you think it will fit inside there somehow?

Greg Sandfort

We’d like to look at the comp growth for each quarter be relatively consistent within that 3 to 5 range.

Aram Rubinson – Nomura

Okay. Thanks guys. Good luck.

Greg Sandfort

Thank you.

Operator

Matthew Fassler with Goldman Sachs. Please go ahead.

Matthew Fassler – Goldman Sachs

Thanks so much and good afternoon. First question, if you look at average ticket ex-inflation, I believe it’s a bit of a decline and probably a bit of a decline if you add another quarter, I know you spoke about a couple of different pieces of that equation, but if you could just talk to us about how that’s impacted by mix and any other factors would be very helpful?

Greg Sandfort

Sure. If you look at mix -- mix can be a good portion of the decline in the tickets. I haven’t allocated the portion proportionately. But that clearly is the largest offset when it comes to offsetting the big ticket piece and then the inflation. So, we also had an increase in units per transaction. So, if you look at those three, those three are the key increases, inflation probably being 80% to 90% of the increase and then mix being really the largest and almost singularly the offset to the increase in ticket.

Matthew Fassler – Goldman Sachs

Okay. And then I have a couple of cleanup questions. You gave us traffic and ticket numbers in the release do we net the 110 basis points from the extra day out of the traffic number is that already netted out?

Greg Sandfort

Yeah. It generally the extra day will translate mostly into transactions.

Matthew Fassler – Goldman Sachs

Got it. Okay. So we’re taken out. And also can you tell us the SG&A dollars associated with the extra week, the expense control is exceptional despite presumably some extra SG&A there?

Greg Sandfort

Yeah. We have not quantified that for anyone because it’s difficult to do some of the allocations of the key expenses. We have -- do have a general breakout but my preference is not to disclose the details.

Matthew Fassler – Goldman Sachs

If we were to try to back into it -- given the extra -- the sales associated with the extra week would we assume kind of an average gross margin or gross margin is different because allocation is rolling when you think about that period?

Tony Crudele

It might be slightly lower but the general guidance that we’ve given is that you look at it as an average week because sales are a little bit lighter but there’s less expense structure. So, you could probably back into it that way.

Again, $0.09 is our best estimate based on just trying to sort of assemble that that particular model and then trying to allocate a certain amount of rent expense to that particular week as well. So it is a couple of again moving parts when it comes to assessing that particular week from an SG&A standpoint. So, I’d rather not disclose any details around that.

Matthew Fassler – Goldman Sachs

Okay. Thank you very much.

Operator

Moving on, let’s go to KeyBanc Capital Markets, Brad Thomas.

Brad Thomas – KeyBanc Capital Markets

Thanks. Good afternoon, let me add my congratulations as well. I was hoping to talk a little more about your advertising plans for 2012. I know you’ve been testing some new opportunities in advertising. Could you talk a little bit about what you’ve learned lately and what you’re going to be ramping up in 2012?

Greg Sandfort

Yeah. Brad, this is Greg. Let me talk a little bit about a couple of things, one is the CRM focus and what we continue to learn, and we continue to improve upon is our targeting of this customer. We’ve said before there’s seven segments and within those seven segments, we are doing a far better job today of using our dollars much more effectively.

The NS ratios were actually quite good for the fourth quarter and that was part of that. We did mention that there is shift as we talk about in the first quarter to second quarter, within the advertising cadence for ‘12 and what that is in reference to is the southern markets need to have the advertising focus on spring a bit earlier than the northern market.

And in the past we’ve tried to split the difference and run the advertising, somewhat down the middle, between both seasons. And so this year we really believe that by making that change, shifting the south a few weeks earlier and the north a few weeks later we’re going to capitalize on when the customer is ready to buy. And not be ahead of them and at the same time not be behind them. So that’s some of the things that we’ve looked at.

We talked a little bit -- I think the last call about this where a non-shopper, which is a segment of consumer that we’re looking at that is aware of our store, probably doesn’t see themselves shopping in our store, because of the name Tractor Supply. And we’ve done some testing in a few markets with some media trying to bring that consumer back in. I would tell you the right today but we have more work to do. We are not satisfied with the initial results and we’ll continue to test throughout 2012.

Brad Thomas – KeyBanc Capital Markets

That’s helpful, Greg. And if can just follow up on your performance in the seasonal category, clearly you did a great job in the fourth quarter. Can you just talk a little about where inventory was at the end of the quarter and how things have played out in January as perhaps the weather’s gotten a little bit better for you?

Greg Sandfort

Well, one of the key things that we talked about was our improvement in allocation of the inventory and we’re trying to -- we’ve really held the inventory as long as we could and either at the manufacturer or in distribution centers to push it up the right time, so we could take advantage of the sales as they develop.

We did down the fourth quarter, the inventory today as far as heavyweight and cold weather is sitting in the right stores and we are starting to see some benefit from that, even though the winter weather has come a bit later. So we’re very pleased with how we came out of this season and we did a far better job of targeting the right stores with that mix.

And again when we looked at our overall inventory levels, as we ended the year, the 2% per store was really -- when you look at it, there’s the inflation built into that there’s new DC startup built into that and then there’s the shift forward of some products into the southern region. So if you run the numbers net to net. And we’re actually, slightly behind or down in inventory per store. So very pleased with how we managed, they give a team a lot of credit in the merchant groups they did a fine job this fall.

Brad Thomas – KeyBanc Capital Markets

Great. Thanks very much.

Operator

Mark Miller at William Blair, go ahead please.

Mark Miller – William Blair

Hi, for my first question I would like just a follow-up on the average ticket again. Given that you had again inflation above the average ticket increase in the some of the larger ticket items and then I think you said increase in units per transaction. So what within the mix was an offset was that coming in a peril perhaps with the warm weather or Tony if you could just expand on what was happening there with mix?

Tony Crudele

Sure, it’s really in the Q items of -- not only -- they run just slightly below chain average and with a significant increase that we’ve had throughout the year, but as well as specifically in Q4. Those are the items that are driving that mix variants. They’re also obviously the items that drive sort of that freight intensive category that we talk about that also causes a mix headwind when it comes to freight.

Mark Miller – William Blair

Okay. And then, with the transition from your comment there on freight. I think you talked about the same calendar EPS growth being better in the second half than in the first half. Is that due to higher expected freight costs in the first half or why would that be?

Tony Crudele

Just looking at the performance, in the first half, with a calendar shift, we drop off a lesser week. So there’s a lesser sales week. So that is a trigger. We’re cycling with some of the inflation we’ll assist in some of the comps. But what’s interesting is that if you look at year-over-year and depending on how you factor that additional week, we would expect higher growth in the first half if you look at the second half as comparing against that -- the 53rd week.

If you back out the 53rd week out of the second half of the year, then you’ll have a slight increase in the second half of the year. So, directionally I was just trying to sort of give you some flavor as to the background and to try to -- to be able to try to allocate between the halves. I think the easiest way to look at is that if you look at the full year we earned about the same in the first half as we do the second half.

Mark Miller – William Blair

Okay. Fair enough. And then, final question, Greg, I understand that you’re looking at the footwear category and I think you’re planning a re-assortment there. Can you maybe expand on that initiative and how material that could be and are there other resets here that we should expect that you haven’t commented on yet? Thanks.

Greg Sandfort

But we’re always experimenting with the interior of the store. We have multiple tests that are out there, but we made a decision to rework the footwear assortments and we spent the last year actually studying what we have done and looking at the competitive nature of the business. And yeah, we will be looking at a reset as we get into the latter part of the first and second quarter.

We’re very excited about it. We believe that we’ve done the right homework. We believe we’ve got the assortments much more pointed by region. This is a very regionalized approach. We’ll wait and see, we’ll be able to talk more about it as we go through the reset.

Mark Miller – William Blair

Great. Thanks.

Operator

Moving on to Deutsche Bank, let’s go to Adam Sindler.

Adam Sindler – Deutsche Bank

Yeah. Good afternoon, guys. How you’re doing?

Greg Sandfort

Good.

Adam Sindler – Deutsche Bank

Good. So I wanted to -- just three very quick questions here. First, on the 73.1 million shares out, you did mention that there was some share repurchase assumed in that amount. Could you maybe just detail sort of either a number or a number of shares or dollars that you’re looking to spend in 2012?

Tony Crudele

Yeah. Adam, at this time we’re not giving any detail background on the share repurchase. Obviously, it is dependent on the market vagrancies. And so we have some estimates and we actually have generally some ranges and therefore we just wanted to try to provide guidance because looking at the various models we see that that share count based on everybody’s projected net income need to be in a lot of -- in a fairly wide range. So we’re trying to help narrow that down for you all.

Adam Sindler – Deutsche Bank

Okay. And then real quickly also, so I understand that you’ve lost a day because of the calendar shift, does the leap year not impact that at all? Does it in stores just gets shifted out so that the number of comp days is the same?

Tony Crudele

Correct. As you see relative to the leap year we still have 13 weeks in each quarter, it’s the same number of days so you wind up using a day that you never get back in 2012.

Adam Sindler – Deutsche Bank

Okay. And then just last real quickly. How many stores will have the hay and forage by the spring and summer seasons?

Greg Sandfort

Well, I won’t give you an exact number, but I can tell you that we plan to increase the penetration of those stores. It really depends, Adam, on availability. And so I would tell you that a substantial increase this year over last year is probably the answer I’ll give you.

Adam Sindler – Deutsche Bank

And just for reference what did you have last year?

Greg Sandfort

About 150 stores.

Adam Sindler – Deutsche Bank

Great. Thank you so much.

Operator

And a question now from Matt Nemer, Wells Fargo Securities.

Matt Nemer – Wells Fargo Securities

Good afternoon, everyone. The first question is can you just comment on where you’re at in terms of regionalized assortments across all the product categories either in terms of what inning you’re in and kind of what you plan to attack next to regionalized?

Greg Sandfort

Matt, this is Greg, we are in the early innings still. We’ve been doing regionalization for a period of time but to really say that we’re as proficient as we’d like to be and as far as us capturing many of the opportunities there in front of us there’s still plenty of running room for us.

There’s hundreds of different assortment combinations today. My guess is it will go into 1,000 range as we get further developed here. And it may sound complex but it’s really not. Its numbers of stores, certain groups of stores, expansion of assortment, contraction of assortment so we’re still in the early stages probably the second, third inning to be honest.

Matt Nemer – Wells Fargo Securities

Okay. And then secondly, can you just provide some detail on the e-com platform that you’re writing down and then I guess what are you planning to use going forward, you’ve talked a little bit to the CapEx impact but how much income statement impact will it be could there be for e-com and adding count this year and then what’s the rollout schedule for that functionality?

Greg Sandfort

I’ll talk a little bit about the platform side. We’re going to stay with Webster, but we’re going to upgrade to the Webster 7. And that particular platform gives us the ability to institute special order drop shift and many other functionalities that we believe we will need as we build this business out.

We have added some talent. We just recently hired our VP. He is a seasoned person, understands the space, was an ex-merchant. So I’m thrilled with that. And the fact that we’re going to be making some other additions to the team this year, we’re not going to see a dramatic move in sales in that this year, because there is a lot of platform work that has to be accomplished first.

But we’re positioning ourselves, we’re getting ourselves in the right technologies and that, so that as we start to add assortment and that expand into the, what we call the (inaudible) scenario, which we talked about before, we can service it now.

The other aspect is our ability to be able to replenish and fulfill from our own facility. And that’s something we’re going to transition to over time as well. So timeline is going to be the next 18 months to two years.

Tony Crudele

And so Matt, relative to the P&L impact, we don’t see a significant impact from any additional cost related to this initiative. And we expect that pretty much that the run rate we’re currently at relative to the e-commerce impact on the P&L will be consistent year-over-year.

Matt Nemer – Wells Fargo Securities

Okay. Congrats on a great year and good luck.

Greg Sandfort

Sure.

Tony Crudele

Thank you.

Operator

Moving on to Simeon Gutman with Credit Suisse. Please go ahead.

Simeon Gutman – Credit Suisse

Thanks. Greg can you talk a little bit more about moving into forage and maybe talk about how the customer typically today gets the forage because our understanding is that as a percent of food, forage is a bigger piece, what could that do to the traffic as a complement to the existing customer and then if you can just talk about maybe the margin profile?

Greg Sandfort

Simeon this is a very regional business that has to be literally bought and sourced locally. So you can imagine we have a full-time buyer now for this category. He is on the road most of the time. And he is contracting with the local growers to provide us hay and other forage products.

From a margin standpoint, it’s similar to the rest of the feed business but what it’s done for us, is it’s now -- we’re now holistic in our approach. We’ve got the branded feed mixes. We’ve got the base feed mixes. We’ve got our own mixes of feed as the middle tier. We now have forage and we have all the other components.

So we have now become a destination. There’s no reason for someone who lives this lifestyle to have to make several trips. We can fulfill all their needs inside our store now. I mentioned earlier that we had 150 stores up and running by the end of this year. We plan to increase that number substantially, but it will all depend upon to be honest, our ability to source it locally and it will be a growing business over the next probably two to three to four to maybe even five years.

You can imagine when you’re in a drought situation like in Texas, they are just not growing hay. So that presents another challenge we have to bring it in from other regions, but we’re very excited about it. Very excited about it.

Simeon Gutman – Credit Suisse

Okay. And then can you talk about private label, I think at last update was around 23 and maybe the last target that’s been out there was 25. And it seems like a lot of the merchandise categories that you’re expanding into it seems like either it’s going quicker or better than you thought. I don’t know if you can comment to that and how 25 get pushed to something else over time?

Greg Sandfort

Well, my only comment about the private brand expansion is when the customer continues to give us the green light to take it further we’ll take it further. I do not believe in the strategy of build up and they will come because that’s dangerous when it comes to private brand. You can’t anticipate and force the customer to buy something that they’re not interested in. However, that being said we had nice improvement this fall and we’ve been talking about that improvement and it did execute. I won’t give you a specific number, we’ve said around 25, but I think the number is going to be larger over time.

And, yeah, we have seen acceleration in that part of the business. I had mentioned that most of last year we were working to build new capability with our private brand side of the business here with not only the sourcing piece, but also the product development piece. And we’re starting to see very solid traction there and, again, a very exciting piece of the business that will drive our sales.

Simeon Gutman – Credit Suisse

Okay. And then last for, Tony, on the freight piece. I think last year it started getting called out in Q1. And so the reference this year to still cycling or dealing with freight is that more because of rates, price of gas or is it just the mix of business, the higher tonnage that’s coming from the C.U.E. categories.

Tony Crudele

It’s really a combination. When we look at fuel, we anticipate cycling fuel more of the significant rise in sort of the May timeframe. So again, as we look forward, we were really looking at -- we have static view saying, where’s the fuel cost today relative to where it spiked up during the year. So we look forward at fuel sort of in the May timeframe where we really start to cycle there, so we potentially could have some relief if the prices stay at this level.

The mix, when it comes to C.U.E., we just continue to drive significant increases in those categories. And therefore, it’s a little bit more difficult to predict as we move into 2012. But, again, bottom line, we would enjoy the continued transaction count increase that we get from the C.U.E. items and absorb that -- the impact that we take on the freight line.

Simeon Gutman – Credit Suisse

Okay. Thanks.

Operator

Up next, Eric Bosshard with Cleveland Research Company.

Eric Bosshard – Cleveland Research

I know on weather, you commented -- I think you commented that weather for the year was neutral. Can you narrow it down and talk about what the weather impact was on 4Q sales and gross margin and what the expectation might be for 1Q?

Greg Sandfort

Well, I think I can generally speak to the weather side of it. We anticipated a warmer fourth quarter. We also anticipated that the first quarter would probably not be as cold as it was a year ago, so we bought accordingly. We ran our inventories accordingly and I would say that we’re pleased with what we’re seeing so far. It somewhat played out the way we had expected.

Tony Crudele

When it comes to Q1, what’s interesting is that generally March is as impactful as both January and February. So the key to the first quarter will be the spring selling season that we incur and that we look forward to in March. So it’s very difficult to predict.

Obviously, as a standard, we like to have a very cold January and February and really spring like conditions as soon as we hit March. So, again, with the shift in the Q1 with the one week and having a stronger sales week at the end of the quarter potentially could bode well for us in that quarter.

Eric Bosshard – Cleveland Research

And so with that, and that’s helpful, [it frame a bit] within 4Q, was there then I -- it doesn’t seem like if there is material gross margin impact, was there a material comp?

Greg Sandfort

No there was not. There was not.

Eric Bosshard – Cleveland Research

Okay. Thank you.

Operator

A question now from Wayne Hood, BMO Capital.

Wayne Hood – BMO Capital

Yeah. Thank you, guys. I know it’s getting late. But I just wanted to -- Tony, just to ask you a question, your implied guidance for ‘12 would assume maybe an operating or EBIT margin of 8.5% against the GAAP number was that 833 this year. If you adjust kind of the ‘11 numbers for the exiting of product and the write-off, that would put you probably around 8.5% which would imply kind of a flat margin or EBIT given your implied guidance and so I’m just wondering where I’m off relative to that math?

And kind of relating to this, Jim, I think there was a comment I think at various conferences that you expect gross margin rate to be up 20 or 30 basis points per year. And yet we’re coming off a year that was up 15, now you’re saying 17. And then you’ve also made a comment that over the next three to five years you expect a 200 basis point increase which would imply pretty significant sharp increases in ‘13, ‘14, ‘15 so on those two topics can you help me through just thinking that through a little bit? Thank you.

Jim Wright

Sure, I think the one point that needs to be emphasized is the 53 week. Obviously, we’ve given guidance that represented about $0.09 from an impact overall to the SG&A, we estimate that it’s probably in the 15 basis point range. So, that attributes to some of your logic relative to adding back some of the adjustments that were recorded in Q4. So, I think if you look at -- if you normalize for the 53 week year and then handle the adjustments as you see it.

What’s interesting as well is that in each year we are run up against some type of potential adjustment that may not be in our model. It could be something as simple as e-commerce or something like the welding gas. But there’s always going to be various things. Some of them aren’t overly material and then there are some that aggregate up to more material numbers. So I wouldn’t necessarily discount that and just have it additive to your 2012 numbers but again I leave that up to your modeling.

Wayne Hood – BMO Capital

Okay. And then on the gross margin side, just kind of what you talked about 20 to 30 yet your 15 to 17 in ‘11 and ‘12 it implies a pretty sharp increase in ‘13 to ‘15 to hit those numbers and is very given year should we be thinking 50 or 60 basis points in ‘13, ‘14, ‘15?

Jim Wright

Sure. Well, let me address that. First of all we calibrate we talked about 200 basis points of initial margin and then at the other end of that we talked about improving EBIT margin at a rate of 20 basis points or so per year.

And the stuff in the middle is obviously the landing margin. To-date our landing margin is being impacted by two things. One, the mix of C.U.E. items which we are delighted with because that drives loyalty and traffic, but it does kind of lower margin rate, it’s dilutive to margin rate. And that’s obviously the impact of freight, which is deluded as to the dilution of initial margin down to landed margin.

So, I think, as we look forward, we’re certainly committed to improving our EBIT margin rate. But I think we realize now that what we’re really after is EPS. And I think EPS in time may purvey to be driven as much by gross margin dollar growth as opposed to gross margin rate growth. So, we’re not -- I’m not restating what we had year or so ago. But I think that we’ve seen some new variables introduced that are frankly quite positive for us and we remain comfortable that we’ll continue to be able to drive EPS.

Wayne Hood – BMO Capital

Okay. Thanks Jim.

Jim Wright

Okay. I believe that finishes everyone in the queue. I want to thank you for your time today and thank you you’ve been on trip for us -- with us and for your support. And we look forward to talking to you at the end of Q1 in about 90 days. Thank you.

Operator

And ladies and gentlemen, that does conclude our conference call for today. You may disconnect and thank you for your participation.

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