Tractor Supply Company (TSCO) Q1 2014 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss first quarter 2014 results. [Operator Instructions] Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mr. Randy Guiler of Tractor Supply Company. Please go ahead, sir.

Thank you, Travis. Good afternoon, and thank you for joining us for Tractor Supply Company's quarterly earnings conference call. Before we begin, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This 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 the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. I am now pleased to introduce Greg Sandfort, Tractor Supply Company's President and Chief Executive Officer. Greg, please go ahead.

Thank you, Randy. And good afternoon, everyone. Thank you for joining us on the call this afternoon regarding our first quarter 2014 results. With me today are Tony Crudele, our EVP, CFO; Steve Barbarick, EVP of Merchandising and Marketing; and Lee Downing, EVP of Store Operations. As we announced last week, Lee was promoted to Executive Vice President level and has assumed additional leadership responsibilities for the company's real estate team. I want to acknowledge Lee for his contributions, and I want to congratulate him on this well-earned promotion. Now we're very pleased with our overall performance for the quarter and how we are positioned moving toward the all-important second quarter's business. Our first quarter results again demonstrate the underlying strength of our core businesses, along with our ability to effectively manage through volatile weather conditions, in particular in the month of March. In fact, we experienced a significant number of store closure days and distribution center disruptions due to the weather conditions in the first quarter. Our focus continues to be on driving growth and operating income through a balanced approach of managing sales, margins, expenses and inventories. And we believe it is our responsibility to manage these factors effectively, not just for the quarter, but throughout the entire year. For Tractor Supply, the timing of sales for spring seasonal products is largely influenced by the arrival of spring-like temperatures throughout all regions of our business. This year, not unlike some years in the past, spring-like temperatures did not occur in many markets until the later weeks of March and into the month of April. Realizing this colder trend in temperature through the first quarter, we made a number of operational shifts to improve our selling position as we move forward into spring/summer. We delayed the flow of spring-related products and altered the shipment of specific seasonal categories such as live goods and outdoor power equipment. We adjusted inventory levels in line with sales and reevaluated our weeks of supply within our replenishment cadence in anticipation of a later selling season. In addition, we planned changes within our marketing program from first quarter into second quarter, allowing for the shift in sales for the Easter holiday timeframe. Our continued ability to read and react early to business conditions continue to improve as a company, and it positions us to optimize forward sales when temperatures do warm. Aside from our seasonal categories, the overall business performed very much in line with our expectations in the first quarter. Our comp store transaction count was again very strong, increasing 4.4%. We are clearly meeting the everyday needs of our customers and continuing to drive traffic to our stores. Despite some of the weather impacts affecting the spring season, we do not believe there are any material or fundamental changes in our customer trends, and our sales and earnings expectations for the first half and full year are unchanged. Although our internet sales are quite small at this point, we continue to make additional investments in our platform and saw solid progress in our e-commerce sales for the quarter. We now have over 20,000 items on our site, with many available for sale through vendor drop shipment. Cold weather-related categories, such as outerwear and heating products, sold very well in the quarter, and customers took full advantage of our drop ship capability after our stores began exiting these fall/winter categories for the spring transition. Our social presence online is also developing, and we are engaging with customers who want to share their Out Here experiences with us. Our mobile presence is growing, and more of our website traffic is coming to us through now a mobile device. We are confident that as we add more capabilities to our website and mobile platform, we can continue to grow our sales and believe that our customers are anxious to take advantage of the new futures as we make them available. In the quarter, we also made progress on our CRM or customer relationship management program, and we recently combined our web traffic insights with our traditional CRM data capture to form one view of the customer in our databases across all channels of our business. We believe, over time, this will improve our customer targeting efforts. And we also just completed a personalized communication test with our best customers based upon their purchase behavior. The test results were positive, and with these recent learnings, we now have the confidence that we can move forward toward development of a customer affinity program for 2015. Looking at the second quarter, we really remain optimistic and believe there are several positive factors that should benefit our business. The first is the high levels of ground moisture throughout much of the country, which historically has generated demand for lawn and garden products as temperatures warm. The second is the shift in the holiday season. 2013 pre-holiday sales were part of our first quarter, and this year, those sales moved into the second quarter. And third is the pent-up customer demand for spring seasonal products. While spring may be off to a late start in a number of regions across the U.S., our experience is that the business will come at some point, and we have readied our stores with appropriate levels of inventory to take advantage of the sales opportunities as temperatures warm in the Northeast and Midwest. Weather has always been a factor in our business, and that is why we recommend assessing our performance on a first half and second half basis. Now before I turn the call over to Tony for a more detailed review of our Q1 results and our outlook for the remainder of the year, I want to acknowledge a recent milestone. We opened our store in Bullhead City, Arizona late in the quarter. This was our 1,300th store. As we expand our Western footprint, Bullhead City represented our 12th store in Arizona and our 57th Tractor Supply store in the Western region. We are proud of this accomplishment and our growth over the years, and I would like to personally thank each of our team members out there who passionately serve our customers and who drive our sales results. I will now turn the call over to Tony to review our financial performance for the quarter.

Thanks, Greg, and good afternoon, everyone. For the quarter ended March 29, 2014, on a year-over-year basis, net sales increased 9% to $1.18 billion and net income grew 10.9% to $48.8 million or $0.35 per diluted share. Overall, we are pleased with our bottom line performance for the quarter. While Q1 sales were negatively impacted by the late start to the spring selling season, we drove strong gross margins that provided us the ability to meet our internal plan. Comp store sales increased 2.2% in the first quarter, compared to an increase of 0.5% in last year's first quarter. Although it looked like we were up against an easy comparison, let me remind you that comps in the first quarter of 2012 and 2011 were 11.5% and 10.7%, respectively, and benefited from an early start to the spring selling season in both years. This year, the winter selling season was very strong in January and February, as the cold weather drove solid sales performance and assisted us in the clearance of winter product. This contributed to mid-single digit comp gain through February. However, the snow and ice storms were very disruptive to the supply chain. As we headed into March, similar to last year, colder-than-average temperatures led to the late start in the spring selling season and resulted in softer sales than originally anticipated. Temperatures in the Northern markets were 5 degrees colder than last year on average and almost 9 degrees colder than historical averages. Although the second quarter has gotten off to a colder-than-anticipated start, we have seen our consumers respond as the weather has warmed to more typical spring conditions, and we are optimistic that this will result in a strong spring selling season. As we have often stated, we believe it is more appropriate to assess our performance by the halfs rather than the quarters. Comp transaction count increased for the 24th consecutive quarter, gaining 4.4% on top of a 2.2% increase last year. We continue to drive increased foot traffic by meeting the everyday needs of our customers. C.U.E. items performed well in several categories, such as feed and pet, as well as seasonal C.U.E. items including heating fuel, antifreeze and additives. Average comp ticket decreased by 2.1% versus last year's 1.7% decline. The decrease resulted primarily from deflation and a reduction in big-ticket sales related to softness in our storage category. Although we had a solid start to the riding lawnmower season and strong comps in the big-ticket winter items such as log splitters and heaters, it was not enough to offset the softness in the storage category. We estimate that overall, big-ticket sales reduced the average ticket comp by approximately 50 basis points and overall comps by 14 basis points. On a regional basis, comp sales were positive across all regions except the Northeast, which was the most impacted by the delayed spring. There were several factors that influenced sales in the quarter. We estimate that deflation negatively impacted comp sales by 80 basis points, which was at the higher end of our forecasted range. The deflation was driven principally by the feed categories. This compares to 140 basis points of inflation in Q1 last year, a swing of 220 basis points. Although deflation has a negative impact on top line sales, it has a favorable impact on margin rate, as I will discuss in a moment. Although the harsh winter had a favorable impact on sales and margin in the early part of the quarter, we were limited in inventory availability in some key replenishable categories, and we consciously did not replenish certain winter categories, such as heating and snow blowers, as we believe that the markdown exposure was greater than the sales benefit. However, we were nimble enough to restage many of our spring purchases as we experienced the delayed spring. We had 125 days of store closures due to the harsh winter storms, and we also had a significant increase in the number of store days with reduced hours. We experienced logistics and transportation disruptions related to the winter storms, including 12 closed days at our distribution center. As I mentioned previously, we were cycling strong sales last year in our storage category as a result of anticipated government regulation related to the Sandy Hook tragedy. We were negatively impacted by a later Easter, not only from the signaling of the spring season, but specifically as the Friday and Saturday of Easter weekend fell in our fiscal first quarter last year. Overall, the team did a great job delivering strong results despite these obstacles. Turning now to margin, which increased approximately 110 basis points to 33.5%. Our initial direct margin continues to improve as a result of our initiatives around price management, markdown management and strategic sourcing. Import purchases in the quarter increased 9.5% and represented 11.3% of the sales mix. Also, exclusive brand sales increased over 13.5% compared to last year's Q1 and were almost 33% of sales. Deflation was the most significant factor impacting margin. As we focus on maintaining margin dollars per unit, this typically will result in an improvement in gross margin rate in deflationary periods. This provided us the ability to drive a healthy increase in gross profit even though comparable sales were not as strong as previous quarters. The favorable colder weather in January and February provided strong sell-through of our seasonal winter products, resulting in fewer markdowns. These improvements in margin rate offset an unfavorable mix variance of approximately 12 basis points, resulting from increased sales in the heating and rider categories, which have lower-than-chain average margin, and an increase in freight as a percent of sales of approximately 17 basis points related to the mix of merchandise and increase in stem miles for our Western expansion. For the quarter, SG&A including depreciation and amortization was 26.8% of sales, compared to 26.1% in the prior year's quarter. The deleverage in SG&A was caused by several factors, which include higher cold weather-related costs, including electric, gas, snow removal and building repair, increased distribution cost related to the disruption in the supply chain caused by the weather and the added capacity of the new Southeast distribution center, increased cost of our relocated data center, and as Greg mentioned, we continue to invest in our multichannel platform and tools. Also, it should be noted that last year in the first quarter, SG&A leverage benefited from cycling against a much larger incentive compensation expense in 2012, which made the year-over-year increase in SG&A last year much more favorable when compared to this year's increase in SG&A. Our effective income tax rate increased 37.6% in Q1, compared to 35% last year. Last year's first quarter benefited from the 2012 WOTC tax credit being reinstated. WOTC has not been reinstated this year. Additionally, we had a reversal of tax reserve pursuant to FIN 48 in last year's first quarter that had a favorable impact on the tax rate. Turning to the balance sheet. Although we had sizable purchases under our share repurchase program at the end of Q1, we had a cash balance of $48 million and borrowings of $80 million, compared to a cash balance of $57 million and $105 million of debt last year. During the first quarter, under our stock repurchase program, we acquired approximately 1.26 million shares for $84.5 million. Our share repurchase matrix drove aggressive share repurchases, and we were able to acquire the larger quantity than we anticipated. We estimate that the share repurchase program for the quarter did not have a material impact on EPS. Average inventory levels per store decreased 0.6% compared to last year as a result of deflation, the strong sell-through of our seasonal merchandise and the restaging of spring receipts to later in the season. The extended winter allowed us to effectively clear through cold winter merchandise, and we ended the season in great shape. Capital expenditures for the quarter were $41.9 million, as compared to $49.3 million last year. And we opened 32 stores in the first quarter, compared to 22 stores in the first quarter of 2013. The decrease in capital expenditures related to cycling expenditures for the construction of our Southeast distribution center last year. Turning our attention to the full year outlook. With respect to our financial expectations for the full year 2014, as noted in today's press release, we have reiterated our previous guidance. As a reminder, we still expect full year sales to range from $5.62 billion to $5.7 billion. We have forecasted comp sales to increase between 2.5% and 4%. We are targeting improvement of 20 to 30 basis points in EBIT margin compared to 2013, coming principally from gross margin as a result of several of our key merchandise initiatives and deflation. We expect SG&A percent to be generally flat. We anticipate net income to range from approximately $360 million to $370 million or $2.54 to $2.62 per diluted share. And we expect to open 102 to 106 new stores, with approximately 50% to 55% of these to open in the first half of the year. We still expect capital expenditures in 2014 to range between $240 million to $250 million. We will continue to make purchases under the share repurchase program. Given the amount of shares acquired in the first quarter, for modeling purposes, we have adjusted our estimate of diluted shares outstanding to be 141 million for the full year. We continue to estimate deflation for the full year to range between flat to 1%. As grain prices have started to rebound, it is likely -- it is less likely that deflation will be at the higher end of the range. Also to reiterate, in terms of cadence, we expect gross margin percent improvement to be greater in the first half of the year, as we will benefit the most from the deflation impact. We believe that the third and fourth quarters will have the toughest comparisons as we cycle the very strong gross margin improvement and very favorable clearance conditions in the prior year. We expect the fourth quarter to possibly decline in gross margin rate based on our current projections. That concludes our prepared remarks. Operator, we will now turn the call over for questions.

[Operator Instructions] And we will take our first question from John Lawrence with Stephens.

Yes, Greg, would you comment a little bit, first of all, some of the changes that you've made as you went through the period and restaged some of those inventories. Can you give us any sense of, now that you've got another month under your belt, how has that restaging process for certain categories look going forward?

John, I'll start, and I think I'll ask Steve to probably follow up with this one. When you start seeing the temperatures, which we focused on quite a bit, continue to stay cool, there are certain products that just aren't going to sell. And it's our belief that you don't need to push those products into the stores prematurely because they just start to age on the shelf. So I mentioned live goods, especially. You don't want to be bringing live goods in where there's risk of cold weather and frost. But things like some of the deeper depths and outdoor power equipment, other garden-related-type products and things of that nature are the things that we just had to restage. And the way we can operate with our logistics backhouse now and how that works is we can push the inventory much easier now to those regions where the business is opening up, for example, the Deep South and the West. And that's what we did. We just reallocated and pushed the inventories there, and we've kind of held off on some of those other inventories until the weather starts to warm. We're starting to see that now here in the upper part of the Southeast, and we'll follow that same cadence as we go into the rest of spring. Steve, do you want to comment?

The only thing I would add to that, John, is that a lot of the outside product that we have, especially for the North, we delayed some of those purchases. Those stores have product now. They're locked and loaded and ready to go. And again, it's the value of being somewhat of a nimble company and being able to react to what we're seeing out there in terms of weather conditions.

Great, and just to follow up. Tony, you put some of the comp sort of headwinds in some buckets. You mentioned 80 basis points for deflation. A little bit on the big ticket. Could you break that down maybe to include the closures in the calendar on that sort of decline?

Yes, John, I didn't give specifics on those because it's very hard to sort of pull those out. Obviously, we have a lot of different factors to consider, such as what is the pent-up demand if a store is closed on the next day and how much of a supply chain disruption would have impacted those stores in being closed. So it's definitely a much smaller amount relative to those 2 that we stated specific numbers for.

And we'll take our next question from Michael Lasser with UBS.

So the weather was clearly disruptive in the first quarter. And it sounds like it's still been a bit of a drag in the second quarter to date. So what's giving you the confidence that the business will turn and -- such that you're maintaining your full year guidance and not making any adjustments to that at this point?

Michael, it's Greg. Here's why we're confident. We've seen, as we say in here at the office, we've seen this movie before. We've been here before, seen how the seasons can develop like this, with a much cooler early spring, and business kind of pushes and shifts backward. Now the obvious question probably will be, well, will you be able to capture that business as it is coming later. And our belief is that we will. We have seen this in years past historically, and so we're not concerned at this point that the opportunity for forward sales is -- it's still there. So we feel pretty good about that.

And is there a point at which you get into the season where sales are deferred totally until the following year? And what's the risk associated with that to your comp?

There are always those points in time, but it's too early in the season to make that call. What we are confident with is what we're seeing right now in the markets where the weather has improved, where the weather is starting to break. There's another thing I should mention, too, is that the levels of moisture that are out in the market today, there's only a couple of places in the country, the severe Western part of Texas and some of the California area is where there's some drought. Other than that, the weather maps that we look at and we track, that moisture level is going to occur. It's there in some places already. And when the snowmelt occurs, that's going also be a nice plus for us, and that's going to continue this shift to that business a little bit longer. So I'd say that I'm not concerned. I mean, last year, the spring weather extended. I think we're going to see the same thing this year.

Okay. My follow-up question is on the deflation. Do you see any evidence when prices do come down that the consumers stock up, such that you could be seeing artificial benefit to your traffic associated with the deflation?

Yes, I would say that no, that would not the case. We sell -- our products -- customers are buying needed products. If you have animals, you have to feed them, you have to care for them. And Michael, the only time that I could say you may see someone do a little bit of front-loading, or we call it pantry filling, is when we may get very aggressive on price in a certain promotional window. And as you well know, we run only about 15, 16 rotations of promotion a year. So that is -- it's just not our -- it's just not our model.

No, one thing I would add to that, because I think there is value in this, is that there are some discretionary categories like bird feeding, that when the prices do come down, you get a lot more people that are interested in it. And if you look at our comp transaction growth, we continue to see a lot more footsteps in the door. And I think that there's value over that because we have seen it over time. It's not like this has been a short window of deflation.

Our next question comes from Peter Benedict with Robert W. Baird. Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division: First question is on the seasonal products, I think, Greg, you mentioned that the riders were actually off to a decent start. So trying to square that with the late spring, I know you talked about the ground moisture. Was there regional strength in the riders or what do you think is going on there?

You're absolutely correct, Peter. There is very strong regional strength in that category. And I think Steve and the team did a great job this year with the lineup of products. I think, in the store side, Lee would echo that comment. And that gives us some confidence, knowing that the moisture levels are what they are as we move further North, that you're going to need to have probably either that machine or you're going to be buying parts, some replacement parts for a machine you have. So we think the category is going to perform fine for the year. We will not, today, tell you that we think it's going to be anything more than it probably was maybe a year ago. It's too early, again, to make that call. But we're encouraged with the early business that we're seeing in the markets where we have the weather. Peter S. Benedict - Robert W. Baird & Co. Incorporated, Research Division: That's helpful. And then your new store productivity, it continues to be very strong and consistent despite some of the weather challenges, et cetera. But can you just talk about what you're seeing in the new markets now as you're opening and how kind of how you see the openings coming going forward?

Peter, this is Lee. The range of stores that we have, and we continue to have a mix across the country. So to distinguish between the West and the East is probably not really worthy of the time, but I will say that we continue to perform above our pro forma across the entire network, and we're very happy with those results. So I feel like that seasonally, a new store is not necessarily quite as impacted as some others just because of the new customer base that starts to come in. So we typically plan for that when we see -- when we put our new stores out there.

Our next question comes from Chris Horvers with JPMorgan. Christopher Horvers - JP Morgan Chase & Co, Research Division: So I was just -- not to beat up the weather too much, but I was curious if you could talk about generically over the quarter how the feed and the food categories performed.

Chris, this is Steve Barbarick. You heard from Tony and Greg that January and February actually started off pretty strong. And a lot of that we gave back in March. So if you look at the C.U.E. categories, and Tony made reference to this in his opening comments, they continue to perform very well. We continue to believe we're picking up market share in a number of those categories. We continue to broaden our assortments, make sure we're priced right, and we are a dependable suppliers. So we feel very good about where we're positioned there.

And Chris, this is Tony, clearly, when you look at the numbers, the dropoff that we saw in March was related to the seasonal categories. And so as Steve alluded to, the C.U.E. items really were very strong throughout the entire quarter. Christopher Horvers - JP Morgan Chase & Co, Research Division: Understood. And then as you think about the deflation, maybe you can talk about how quickly that price tends to get passed or the inflation that you're starting to see in March, how quickly that gets passed through, how quickly maybe it turns? And is there actually a chance that perhaps as you get to 4Q, you could see some inflation reemerge in your ticket?

Yes, as we've talked in the past, the inflation, deflation is most impactful on some of our higher-turning categories. Depending on how the product or the prices increase throughout the year, there is the potential that we could have some slight inflation in the fourth quarter. But currently, as we see it -- and again, our forecasting is based on this point in time, looking at today's prices compared to what we're cycling for the rest of the year, and that's how we'll generate our forecast. But right now, we see the prices increasing. It hasn't had that dramatic of an increase. We're still anticipating on a full year basis that we will be somewhere between the flat and 1% in deflation. Christopher Horvers - JP Morgan Chase & Co, Research Division: Okay, perfect. And one -- just one last one. Could you actually maybe quantify the closures year-to-year or how you saw spring play out in the non-weather-affected markets in March, that would be great.

Well, I would say that you've got -- it's a very small percentage of stores that were closed for any significant period of time. But the disruption of -- just for example, if you open a store at 8 in the morning, which is our typical opening time, and then the weather hits and the store has to close by 10 or 11 and we lose the sales for the remainder of that day and maybe possibly the next day, those are the kind of impacts that in the Upper Midwest and the Northeast we faced considerably in the month of March. Not so much -- we had some of it in February, but a lot of it in March with those storms coming through. And then on top of that, Chris, if you can imagine, the manufacturing base also experiencing issues, where they couldn't even -- could not ship the product from their locations either to our DCs or to our stores to replenish. So we had a bit of a moving target through that 6-week period there, dealing with a lot of that shift. But it was primarily the, we call them, regions, I think, 2, 4, and 5. It's, say, the part of Michigan across Pennsylvania up into the Northeast, which really -- and the latter part of the spring season is where we see a lot of our outdoor power equipment businesses and things of that nature and we will still see that business. So the disruption was short term. We've lived through it. We've worked our way through it. We're comfortable with our forward assortments. And I think we've got that opportunity to capture the sales yet.

Chris, it's Tony. Real quick, we estimate there was about 25 closed store days last year in the first quarter. So obviously, a significant larger number. And the one takeaway that I would have on the January, February timeframe is that the business could have been even stronger than it was if it wasn't for some of the store closures and the disruption in the supply chain. So we're really pleased with the way the business has performed in January and February. And again, with a cold March, we would expect sales to be a little bit softer.

Our next question comes from Chuck Cerankosky with Northcoast Research.

If you could talk a little bit about the great start to the store openings. You had a pretty good run rate with 32 openings in the first quarter. What does that tell us about their ability to contribute to earnings as the year progresses. Do they ramp up that much faster?

Chuck, this is Tony. We definitely like to get off to a quick start. There are some significant benefits, but obviously, a full year of productivity with a new store will benefit the full year. Since we opened so many stores on a year-over-year basis, I don't think it will have a dramatic impact. But clearly, in our model, where service is a key driver and it continues to drive additional footsteps as we become more aware in a particular community, it clearly will help drive some incremental sales for the full year.

All right. And then returning to the near term, if -- could you tell us, Tony, what the delta in comps was between March and what you're seeing so far in April, without giving us the actual comp numbers for those periods?

Well, as we had alluded to in the prepared remarks, when we see the weather break, the customer clearly responds. And so as we have had warmer -- the warmer trends in some of the areas of the country, the consumer has responded actually very well. And that's what's giving us the indications that the weather pattern this year is relatively consistent with what we experienced last year. And as we went through last year, we saw the real expedition of sales in the May timeframe. So we feel that we're tracking very close to our expectations, given the weather pattern that we've experienced though March and into April. And I would tell you that it is trending positive relative to our March sales pattern.

Our next question comes from Scot Ciccarelli with RBC Capital Markets.

As you move into some of these new markets -- I guess this is a follow-up kind of similar to, I believe it was Peter's question -- as you move kind of West, what kind of return -- how does the return profile of some of these stores change? And specifically regarding kind of labor and occupancy, does that actually ease or is it dependent on what kind of market you're heading into or is California actually more expensive? Can you just give us some general clarification on that?

Sure, Scot. This is Tony. As we talked about in the past, our model, when we approve a store, were driven based off of a 10-year discounted forecast -- discounted model. And we set a hurdle rate. So when we look at a particular store, as much as you like to have that higher-volume store, the key is going to be the bottom line results and how much cash it throws off over that period of time. So as we move out in California, generally, you're going to have much stronger sales base. And obviously, the rents are going to be much, much higher. What we see, and the only difference between a store in the Southeast and a store in California or the Southwest, is the various ramps. So as we have a significant ramp in a store with, say, $100,000 of rent, you can really start to drop that to -- the profit, to the bottom line. In California, again, you start with a higher base, and if you have that acceleration, again, you can really start to leverage those fixed expenses. So the model will work very consistently throughout. Payroll is a little bit higher out West, as well as the supply chain. And obviously, we'll start to cure that as we develop a Southwest distribution center over the next 1.5 years. So when we look at it across the board, again, it really is centered on making sure that we meet their hurdle rate when we approve a store. After that point in time, on an aggregate basis, the stores will perform fairly consistently.

Tony, because you don't have as much store density out there, does the maturity curve look much different than what you would see on the, let's call it, the East Coast?

No, it actually -- right now, just based on the stores that we've had out there -- and we've had California stores actually since 2004. I would tell you that they perform consistently with those on the East Coast.

Our next question comes from Alan Rifkin with Barclays.

Greg, you mentioned that due to the weather, you made some shifts in the marketing expenditures, pushing some programs from 1Q to 2Q. If you hit your revenue goals in Q2, whatever that may be, what is the anticipated effect on the marketing spend in Q2?

Well, as a percent of sales, it will probably come down, I think, now that we've seen what's happening. But remember, we made a conscious decision to make that shift due to the movement of Easter. And we also anticipated that we could have a bit of an extended spring, which is exactly what we are now seeing. So as a percent of sales, it will probably be a little less than what we initially planned. But for the half, it will be relatively the same, probably be on plan.

Okay. And then just a follow-up, if I may, with respect to the DC. So if you do the math, the store closures represent a pretty small fraction of the total store days in the quarter, maybe 0.1%. I was wondering, the 12 days that the DC was closed, what was the -- how many stores did that affect? And as a follow-up to that, for how long do you anticipate deleverage coming from the new Southeast DC?

Okay, let's take it in 2 steps. The DC closures, you have to put it in perspective to -- into 2 buckets here. One is closure of the DC due to weather and our inability to operate because the team members can't get there, and secondly, the inability of the manufacturers to move product by truck, which typically how it comes to us to the DC. So we've got 2 variables working here. It's hard to say how many absolute stores. I can tell you that probably 3 of our regions were most affected, some in the Southwest, some in the Northeast. Primarily, though, the 2 areas, it's kind of where that swath of weather kept coming through. It would come from the Southwest and sweep up through the Northeast, hit a little bit in the Midwest. So it really hit 3 of our buildings. So if I look at that, they've got to serve somewhere probably around 450 stores, in that range. Now it didn't affect every store every day, depending upon the days that these storms came through and the disruptions. But it was quite disruptive, I will say that. As far as the deleveraging on that Southeast DC, we're going to cycle through that here as we get through the summer period, to get through the June, July, when we opened that building a year ago. So that's -- they're going to be behind this year shortly.

Our next question comes from Denise Chai with Bank of America Merrill Lynch.

I just want to follow up on what you were saying about restaging your spring seasonal products. Was this actually disruptive to your store operations? What kind of lead time do you need to give your vendors? And can you give us a sense of those one-off weather-related costs in terms of utilities and snow removal in SG&A?

Denise, I'll take it first. This is Lee. As far as store operations goes, when you start restaging product, it really doesn't hurt a whole lot, because in the Northeast or in the Northern areas where there's still snow on the ground, a lot of that product is outside. So I mean, it actually helps us to restage, so we don't have to try to do work in the snow. So I think it's really actually helpful when we restage the product. So it probably makes us much more productive in stores. I'll let Steve answer the rest of that.

Yes, in terms of working with our supplier community, we have weekly calls with our key suppliers when we go into spring. They see this, not only with Tractor Supply, but with a lot of their other customers. Because of our purchasing power, we're typically prioritized, and we haven't seen any real hiccups or supply chain issues relative to those goods that we've delayed.

Okay. And is there anything you can say about the additional costs from snow removal and utilities?

I would tell you that it actually was a significant increase over last year. And it really -- when you look at the various numbers, the occupancy -- increase in occupancy, because of those line items, was the most significant one as far as the deleveraging that we experienced in the first quarter.

Okay. Just one follow-up here. What categories do you think that you're taking market share in?

Yes, we typically talk about the C.U.E. business in general. And we've always talked a little bit about the fact that when it comes to livestock feed and some of the other categories, we go into a community, and there is a lot of people who carry what we have, but we offer a different experience. We put it all under one roof. We're open typically more hours and more days, and our customers tend to gravitate to us that way. So we think there's a variety of categories where we continue to win, and we will continue to make sure that our assortments are right, that we're priced right and that we're a dependable supplier.

Our next question comes from Seth Basham with Wedbush Securities.

First question is on gross margins. You talked about deflation being the largest driver of gross margin improvement year-over-year. Can you help rank order the other drivers you mentioned, which 1 or 2 were most important?

Sure. This is Tony. When we look at it -- and again, when we analyze gross margin and the improvements, there is a lot of overlap. So if I were to break it down, we -- because of the -- deflation was obviously the largest. Then when we look at imports, I would probably categorize as next. Depending on how you break out the price optimization piece, because again, there is a portion in which we manage deflation through the price optimization. I would probably say that falls in -- as your second category and -- or second or third category. And then the way we manage the clearance throughout the quarter. And again, some of that is the improved management and the tools that we're using, as well as the weather giving us the ability to be able to clear with less markdowns. So it's difficult to rank them, and I think that once you get past the deflation, those categories for the most part are all in about the same ballpark.

Got it. That's helpful. As we think about the go forward through the balance of the year, is it appropriate to think about the same type of magnitude of benefit to gross margins from those drivers outside of deflation?

Generally, when it comes to our initiatives around price optimization, strategic sourcing, they have been fairly consistent. My one hesitation on that question is around the markdowns, because obviously, a lot of it has to do with how much inventory we're buying, how the season ends and then obviously, then the tools that we have around that to try to maximize the clearance. So I would look at a couple of those as being very consistent. But when it comes to the markdown management, that is going to vary from quarter to quarter.

Great. And one last follow-up. Could you quantify for us the Easter shift? How much benefit is expected to shift from Q1 to Q2 because of the timing of Easter?

Yes, when it comes to that, we had obviously 2 days last year, and it obviously was the sort of the buildup to Easter. We are closed on Easter Sunday. So we actually lose that comp day, which does match up between the quarters. So there is no change in comp days through the quarter. So you're really looking at just a fairly limited impact when it comes to that subsequent Monday because there is a pent-up demand, since we're closed on Sunday, and those 2 days before. So net-net, between the 2 quarters, you're probably looking at around low double digit, you know, maybe 10 basis points.

Our next question comes from Matthew Fassler with Goldman Sachs.

Two questions for you. First of all, as you think about the shift in your business associated with the weather, the delayed spring, and you think about how that plays out respectively for traffic, ticket and gross margin, versus what an ordinary spring would look like, how would you think about those moving pieces?

Matt, this is Greg. I believe that when you have the temperatures to sell spring/summer product, the traffic count typically from -- and what we've seen historically is there. It can be fairly violent, meaning that it can come quick, fast and furious, in a matter of 10 days to 2 weeks to maybe stretching to 3 weeks, depending upon how late that temperature impact occurs. We're expecting some of that, honestly, in the Northeast, where there's still snow on the ground. And it's going to be probably mid- to late-May scenario, but the big impact of what I look at when I look at ticket and looking at is traffic, traffic count. And the fact that our footsteps were up in that first quarter, and we continue to see strength in that footstep. When this weather does open up, and it will, we do not anticipate that, that's going to slow at all. As a matter of fact, it should accelerate.

And in terms of the average transaction size associated with that traffic, given the mix that you anticipate to see and also what that mix would mean for gross margin, obviously, the mix benefited grosses a bit in Q1, does it go the other way in Q2 or not necessarily?

It could move back a little bit with the sale of a lot of big-ticket product. That is true. We know that. We manage to that. But I would tell you that the average ticket will also move up. So we'll start to see a little bit more leverage and SG&A cost. So it's kind of there's good guys and bad guys in that mix. But we anticipate that. We plan for that now, and we've recalibrated for that. So I feel, I'm fairly confident that it could be a little later, but it will still come.

And then the quick follow-up. You had discussed at various times some discreet investment spending for 2014. I think you'd quantified that. Is there any way to quantify the degree to which that impacted Q1 and whether the cadence of the impact is on plan with your original thought process?

Matt, Tony. Our capital spending is very consistent with what we had anticipated going in. And we continue to make investments in several different areas, in particular e-commerce. And then as we move forward through the second half of the year, we'll be making investments in our clearance optimization, as well as in demand planning. So those are 3 of the big ones, as well as, I guess, a fourth would be the CRM that Greg talked about as well in his prepared remarks. So when we look at the first quarter, one of the variables that occurred is, if you remember, back at the end of 2012, we had taken a charge relative to our e-commerce platform. And so as we cycled through into Q1 this year, and we had made some investments last year in our new platform, we started to see that come through to Q1, obviously, in the form of depreciation, whereas we had very minimal last year. So from an impact on the quarter, there was definitely $1 million to $1.5 million of what I would term additional investment that was charged in this quarter versus what we saw last year in the first quarter.

Our next question comes from Aram Rubinson with Wolfe Research.

Somebody broached the topic of outdoor space earlier, so I wanted to just dig into that again, which I do often. But by my calculations, your sales per square foot in the outdoor area are about 15% of the sales per square foot of your inside area. Home Depot and Lowe's, by my calculations, do like 40% to 50% outdoor to indoor. I'm just wondering where that fits on your priority list and if you can help us just dimensionalize the opportunity there, and if you have enclosed any of those areas to kind of get more business out of them, what kind of results you see from those types of stores.

Yes, absolutely. This is Steve again. We do see opportunity with the outside of our stores, and we continue to test and try new things. Last year, we got more into live goods, bag mulches and soils that are outside. We've got a number of stores right now that we're testing an ability where customers can go directly into the yard without going through the door first. And we'll see how that pans out for us as we get through the spring season here, because it's a relatively new change that we made. We have also got forage product, which we didn't have a few years ago, that's outside. And we have got some other new things that we're testing out there as well in terms of product. So we recognize that this could be a potential opportunity for us. We've just got to figure out how we get customers in there, comfortable in that area, open those doors. And while we don't have an awning today, we believe there's more potential as well. We will continue to test and try, I can promise you that.

And then if it's okay, on the segmentation, it was mentioned at the top of the call as well. I know you've kind of been prioritizing that recently and probably are learning something from it every week. Can you kind of just help us figure out what types of surprises you're learning as you segment your customers, what you are seeing and maybe what actions you've been taking and what results or response you see from kind of that CRM implementation?

Yes, this is Steve again. There's always a lot of learning with the evolution of a retail store and chain. And I would tell you that over time, and I've been with the organization -- this is my 17th year. We've seen a change and a modification in our customers and their behavior. We talked a little bit about our lifestyle customer. They tend to live closer to our stores. They tend to buy more convenience-type products. There's a reason we've had multiple quarters of comp transaction growth, and we believe a lot of that is bringing in new customers because of the products that we're carrying in our stores and how we're marketing them. So we've talked about gardening products. We've talked a little bit about pet products. And there's other categories that are at our store that are more broad-based, and we're getting the word out on those categories, bringing in new products and expanding our lines, without necessarily disenfranchising our core customer, because I think you can do both at the same time. Recently, Greg mentioned that we did a test on one of the segments that we have. It was a personalized test with touch points in digital, e-mail, along with direct mail. And of the groups that we talked to within the segment, we saw positive ROI with each one in their shopping behavior back to us. And that gives us confidence, that as we move forward with an affinity program in '15, that it's going to work and pay dividends for us in the future. We've also made a strategic hire, a Director of Customer Marketing, a position we didn't have before. And we believe that, that will add tremendous value for us in the future as well.

Our next question comes from Peter Keith with Piper Jaffray.

This is Jon Berg on for Peter tonight. We're just curious in looking at how a tough winter may or may not drive stronger lawn and garden sales. And I know it's probably difficult at this point to tell whether or not it's improving demand in the Northern parts of the country, but maybe in a state like Georgia, that saw greater snow and ice this year, have you seen a stronger-than-expected pickup in sales in that category?

Jon, I would tell you -- this is Greg. I would say to you that again, we don't talk in specific state, but I can say that in the Deep South and in the South, where temps have warmed and they were much cooler earlier and kind of somewhat suppressed customer demand, the business is opening up. And we're very encouraged with what we're seeing. As Steve said earlier, the number of new programs that are out there in the stores that are really temperature sensitive. And I think anyone that's in some of these businesses will tell you the same. So comfortable, confident that we've got a good trend going there, and we believe that trend will just continue to move north as temperatures warm.

Okay. As my follow-up, Tony, is there any way you could provide any color or quantification maybe around what markdowns did for your gross margin in the quarter?

We don't provide that information, again, because as we work through technically what is clearance and what the impact is on sort of price optimization or what the impact price optimization had on the clearance -- some of the mix changes, I don't think it would benefit to try to quantify specifically. Net-net, you're going to be somewhere in the -- again, just the low double-digit territory.

Our next question comes from Adam Sindler with Deutsche Bank.

I was hoping you could just walk us through sort of what the trends were like last year in the second quarter? I believe that, as you said, April did start a little bit weak again. And then sort of how it ramped. And then maybe if there is any sort of just geographic differences this year versus last year. And then on the cost side, just remind us what you guys are expecting for the DC -- the headquarters relocation and some of the other projects you have planned for the back half of the year.

All right, Adam, this is Tony. Just to give you the background, when we went into Q2 last year, obviously, April was the softest month and the significant spike occurred in May. And then a strong June, but not in the same ballpark as the strength of May, but still a very strong performance in June. As we move into this quarter, as we've said before, it appears as if we're running the same pattern. And so that's what we're looking at and anticipating as we move into Q2. The one big advantage we had last year, and again, we're very hopeful that trend will continue, is it was not only a delayed spring but an extended spring and it even moved into Q3. And we had a very strong July and August. So that will be a key. And again, one of the main drivers is the moisture that's in the ground. Obviously, rainfall that occurs through the second quarter will be beneficial as well to drive that spring into Q3.

Adam, this is Greg. On some of the initiatives and some of the capital outlays, Tony mentioned about demand planning for the latter part of this year. I mentioned earlier in my comments about some of the work we did in CRM early in the quarter. And now we'll be working towards '15 for some of that implementation. The headquarters building, our Store Support Center, will be completed and will begin occupancy with our first move, sometime probably in July or early August, hopefully, to have everyone under one roof by the end of the year. But again, that all depends upon how smooth the first move takes place. But right now, I think everything that we're working through and working on from a spend standpoint is coming -- falling within the plan. We've got some things we're doing in the distribution network as well. So I think we're in good shape.

Our next question comes from Eric Bosshard with Cleveland Research.

Two questions. You talked about the loyalty card and you talked about online. Just curious if you could frame what success looks like in terms of those initiatives, in terms of the payback that we might see in results?

Eric, you said loyalty and -- we missed the...

Loyalty. Loyalty and online.

Okay, online, okay. Steve, do you want to talk about...

Yes, I'll talk to the loyalty program. We call it an affinity program here. Again, this is about capturing data from our customer, bringing them to an opt-in position with us and then communicating with them over the course of time, the way they want to be communicated to, that's relevant to their lifestyle and their needs. We haven't put a dollar amount to it at this juncture. We're still in the process of the RFP and trying to understand all the dynamics of that. But at the end of the day, we want to get to know our customer better, and whether that be the content that they want to see online, how they want to be talked to and what kind of -- what they're looking for from Tractor Supply Company. We believe we've got a customer base out there that wants to be more engaged with us, and this will open the opportunity for us to do so.

Eric, this is Tony. Just to tag on to what Steve said. We have been very deliberate in our approach to the loyalty program. And it all centers around designing something that the customer wants and isn't necessarily something that would degregate [ph] margin. So when we look at that and design that, we want to be very careful, because we understand that we're a destination store. And it's not as critical to try to entice people to come into our -- into the store. So the design is going to be very critical for it to be successful, so that we can capture information about our customer and be able to correspond with them.

Eric, this is Greg. I'll talk about the online for a moment. We mentioned in our prepared remarks about drop shipment, and what we saw was the consumer still having a need for certain fall/winter products that we were already starting to exit in the 4-wall store, but they took full advantage of because they were available through the drop ship program with certain vendors online. That was a bit of a surprise but a great learning for us. It helps us extend some of the seasons with no risk. The mobile business, we don't have -- we have a mobile site that is capable now. But we're seeing people come through the mobile, some type of mobile platform, into our website and exchange, not only information with us, looking to exchange commerce. So we've got some interesting things happening. It's still very early for us. There's still lots of learning. But we're excited about what we're seeing.

And our last question will be from Gary Balter from Crédit Suisse. Gary Balter - Crédit Suisse AG, Research Division: One question is just a follow-up. On the gross margin, obviously, you talked about spring seasonal getting delayed. If we think about the gross margin on the different merchandise, is that a higher-margin category, putting aside the deflation impact, et cetera, than C.U.E., some of the things that you did sell through in Q1?

Yes, Gary, Tony. The spring assortment and seasonal categories will generally be a higher margin and will be beneficial. My only caveat would be strong riding lawnmower season, which tends to be well below chain average. But we obviously love to get that customer in because then we turn them into hopefully a customer for life, and we can service their repairs and their other needs relative to that. So we anticipate right now a reasonable season that generally will correspond from a margin standpoint to the prior year. Gary Balter - Crédit Suisse AG, Research Division: And then just to follow up, Greg, maybe I go back too far with this company, but in the past, years ago, you used to talk about resetting the right side of the store and then the left side of the store. And obviously, it's been extremely successful. If you look at the inside of the store, are there areas that you still feel are underperforming, that are a focus of resetting or remerchandising?

Yes, this is Steve, I will tell you that this is a culture of being relentlessly dissatisfied. I can tell you, we're probably not happy with the majority of the inside of our store, and we think we've got upside just about everywhere. So the merchant team, working with our space planning team, is looking at every square inch, every peg, every 4-way and every shelf to optimize the opportunity. So I would tell you, yes, we're still working on it.

That conclude today's question-and-answer session. Mr. Guiler, at this time, I will turn the conference back to you for any additional or closing remarks.

Okay, thank you, everyone. In closing, I'd like to thank all of you who are invested in Tractor Supply and all of our team members out there living the lifestyle, serving our customers and driving our company's performance. We believe 24 consecutive quarters of comp transaction count growth, and 18 consecutive quarters of positive comparable store sales is evidence that customers are increasingly looking to Tractor Supply as a one-stop shop for rural lifestyle needs, and we continue to strive to be the most dependable supplier of those needs. Thank you for spending time with us today, and we look forward to sharing our second quarter results with you during our next call in late July.

That concludes today's presentation. Thank you for your participation.