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Edited Transcript of TSCO earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Tractor Supply Co Earnings Call

Brentwood Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Tractor Supply Co earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine E. Skold

Tractor Supply Company - VP of IR & Corporate Communications

* Gregory A. Sandfort

Tractor Supply Company - CEO and Director

* Kurt D. Barton

Tractor Supply Company - CFO, SVP and Treasurer

* Steve K. Barbarick

Tractor Supply Company - President and Chief Merchandising Officer

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Conference Call Participants

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* Adam Harry Sindler

Deutsche Bank AG, Research Division - Research Associate

* Alan Michael Rifkin

BTIG, LLC, Research Division - MD for Research and Strategy Group

* Benjamin Shelton Bienvenu

Stephens Inc., Research Division - Research Analyst

* Brian William Nagel

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Charles Edward Cerankosky

Northcoast Research Partners, LLC - Principal, MD and Equity Research Analyst

* Christopher Michael Horvers

JP Morgan Chase & Co, Research Division - Senior Analyst

* Dana Lauren Telsey

Telsey Advisory Group LLC - CEO and Chief Research Officer

* Daniel Ray Wewer

Raymond James & Associates, Inc., Research Division - Research Analyst

* Denise Sara Chai

BofA Merrill Lynch, Research Division - MD

* Dennis Mitchell Van Zelfden

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Joseph Isaac Feldman

Telsey Advisory Group LLC - Senior MD, Assistant Director of Research and Senior Research Analyst

* Matthew J. McClintock

Barclays PLC, Research Division - Senior Analyst

* Michael Lasser

UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines

* Peter Jacob Keith

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Peter Sloan Benedict

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Scot Ciccarelli

RBC Capital Markets, LLC, Research Division - Analyst

* Scott Andrew Mushkin

Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst

* Seth Basham

Wedbush Securities Inc., Research Division - VP of Equity Research

* Seth Ian Sigman

Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss first quarter 2017 results. (Operator Instructions) Please be advised that reproduction of this call, in whole or 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, Ms. Christine Skold of Tractor Supply Company. Christine, please go ahead.

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Christine E. Skold, Tractor Supply Company - VP of IR & Corporate Communications [2]

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Thank you, Camille. And 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.

And lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call.

I'm now pleased to introduce Greg Sandfort, Tractor Supply Company's Chief Executive Officer. Greg, please go ahead.

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [3]

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Good afternoon, everyone, and thank you for joining us. On the call with me today are Steve Barbarick, our President, Chief Merchandising and Marketing Officer; and Kurt Barton, our Chief Financial Officer.

As was previously disclosed in our business update on April 11, a challenging weather played a significant role in our first quarter results. With a very mild January and February and cooler spring temperatures throughout most of March, accompanied by March winter storms, the demand for both winter and spring seasonal products was clearly diminished for the quarter. In the markets where weather and sales were more favorable, we pulled forward several spring seasonal receipts. And where weather was less favorable, we acted aggressively, addressing excessive winter product, which by quarter-end, resulted in a clean transition to spring.

In April, the weather has turned more springlike and our consumers are responding positively to our assortments, and sales have improved. We know from our many years of experience, the spring sales can shift between the first and second quarters, and that is why we have consistently stated that our financial performance can be best accurately assessed by the halves and not by the individual quarters business.

Looking ahead, we understand that the retail landscape is changing rapidly and our customers' expectations are evolving as well. Having the right products and stock at the right time and having those products competitively priced and readily available, whether in-store or online, is what our customers expect. The shopping experience across all Tractor Supply shopping channels must be seamless, effortless and consistent. And by adding a level of exceptional customer service, we can meet their needs better than any of our competition.

With this evolving landscape in mind, we are making strategic investments throughout the organization to meet the ever-evolving expectations of our customers and further enhance our personal relationship with them. Here are a few of the strategic initiatives that we will believe will enable us to address the current challenges we face within our business and will be instrumental in driving comparable store sales in the future. The first is our customer loyalty program, Neighbor's Club. This was rolled out to all stores as of early April and has 1.5 million members to date. This program is growing rapidly and has exceeded our original expectations. We are very excited about this program and believe it will become a valuable tool to strengthen that relationship with our customers. Now we've got a complete picture of the customer shopping history, and that will allow Tractor Supply to gain deeper insights into our customers' buying habits and prove -- provide us with the ability for more targeted messaging to them.

As we leverage our Digital Communications, we will better inform our customers regarding new products or upcoming events that are of interest to them. While we are still gathering data for the entire chain of stores, initial results from the pilot stores have shown that our Neighbor's Club members shop our stores twice as often as Neighbor's Club nonmembers, and their average spend is notably higher than non-Neighbor's Club members.

The second initiative. We're very excited about and have seen good initial customer response for is our Buy Online Pickup in Store program. This program is currently rolling out to the entire chain and will be complete by mid-May. We know our customers value a number of things: like quality products, product availability, a quick and easy shopping experience, and most of all, great customer service. The Buy Online Pickup in Store program allows our customers great flexibility and added convenience as they shop with Tractor Supply. They can place an order online, be assured the product is there at the store and pick up that order the same day. And while they are there in our store, receive seasoned advise on other products and services that we offer. They no longer have to wait for a package to arrive at their home and they don't have the hassle of shipping something back should they need to return it. Our stores are there close to where they live and will gladly take the return.

Since the rollout, a significant amount of our e-commerce business growth can be attributed to Buy Online Pickup in Store, and we are finding that these transactions carry a higher average order value, and many customers are adding purchases to their cart when picking up their online orders in our stores.

And finally, with our supply chain. Our largest initiative this year is the construction of our new distribution center in the state of New York, which is expected to be completed by the middle of 2018 and shipping products by the end of 2018. This new distribution center will add the necessary capacity for further store expansion in the Northeast Corridor and will also support our expanding digital fulfillment strategy and move us closer to our goal of reaching 90% of the U.S. population within 2 shipping days.

So in summary, we know our business performance has been a bit choppy over the past year and we know that the retail environment is rapidly evolving. We have a plan, and we are executing to that plan to realize our long-term target of high single-digit annual sales growth. Some of the tailwinds to the business over the past several years, such as the C.U.E. expansion, some of the big-ticket sales, some of the benefit of the oil and gas markets and the impacts of inflation, have either slowed or become headwinds today. We know it's our responsibility to address those shifts and find ways to move the business forward. We have a strong and proven business model that serves a unique customer with specific needs. With our size, scale, store count and growing digital capabilities, we believe there is no other farm store retailer that can serve this customer the way we can.

We are confident we are investing in the areas that will drive sustainable long-term growth, but we cannot guarantee that this growth will always be on a smooth and linear path. We will, however, continue to be as transparent as possible about our business and will keep you updated on our initiatives and their progress.

As always, I want to thank all of our dedicated Tractor Supply team members who give great customer service every day to all of our customers and they're the frontline of our business. A big thank you to everyone for all you do in our stores, Merchandise Innovation Center, distribution facilities and our Store Support Center. I still believe you are the best team in retail.

And with that, I'll turn the call over to Kurt Barton, who will take you through the first quarter results in more detail.

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [4]

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Thanks, Greg, and good afternoon, everyone. For the quarter ended April 1, 2017, on a consolidated year-over-year basis, net sales were $1.56 billion, resulting in net income of $60.3 million and earnings per share of $0.46 per diluted share. Comparable store sales decreased 2.2% versus a reported increase of 4.9% last year. As a reminder, our Q1 2017 comparable store results reflect the calendar shift associated with the 53rd week in 2016.

Adjusting for the week shift, last year's comparable store sales increase would have been 2.6%. As we indicated in our last earnings call, we anticipated Q1 to be a challenging sales quarter. If you recall, the first quarter last year benefited from very cold weather in January, which drove the sale of winter-related items. Q1 of last year also benefited from both warm March temperatures and an early Easter, which drove sales of early spring merchandise.

Unfortunately, we experienced the complete opposite situation in first quarter 2017. In this year's first quarter, January and February weather was very warm, and we then had cooler temperatures and snow in March. January and February's warmer-than-normal conditions this year impacted demand for winter seasonal products. Additionally, the March winter storms, which primarily hit the Midwest and Northeast, but also reached down into parts of the southern regions, quickly silenced any early demand for spring seasonal products. The impact on comp sales from softness and seasonal products was relatively equal between winter and spring seasonal goods.

The sales were weakest in the northern regions of the country where the impact of weather was most pronounced, both in winter and spring seasonal products. The southern regions were less impacted by the weather conditions but were cycling a tough compare from last year's strong performance. The difference in comp sales performance between the northern and southern regions, excluding the western region, was approximately 600 basis points. The western region, which experienced less weather volatility, had a solid mid-single-digit comp sales growth. We continue to see strength in the western region as we expand our store base and gain market awareness and share.

We continued to experience increased demand for many of our basic everyday items, such as our livestock and pet category, which generated low single-digit comparable chain-wide sales. Excluding the impact of certain weather-influenced categories, such as bird feeding, animal health and fencing, we continue to be pleased with the overall performance of this category.

While there is a seasonal component to the livestock and pet category, we were pleased with the continued increase in comp units and sales dollars in the pet food and animal feed categories. And we see no evidence that we are losing market share in this core area of the business.

Comp transaction count decreased 1.4% compared to reported 4.2% increase last year, or 2.6% in the prior year adjusted for the week shift. The growth in many of our C.U.E. items, such as pet and animal food, was more than offset by the lack of demand in winter seasonal products, such as heating units and insulated outerwear and spring seasonal products such as lawn and garden, animal health and ag chemicals. The average ticket decreased by approximately 90 basis points. Big-ticket sales decline and deflation were the 2 primary drivers of this quarter's average ticket decrease. Comparable sales of big-ticket items were down high single digits year-over-year.

The comparable sales decline of big-ticket items was primarily driven by a slower start to spring seasonal products, such as riding lawn mowers, 3-point equipment and trailers, as well as continued softness in the safe business.

Deflation was slightly higher than we anticipated at approximately 50 basis points, driven principally by heating fuel, birdfeed, livestock feed and lubricant categories. As Greg stated, the weather shifted to more typical spring conditions in early April, and as a result, we have seen consumer demand increase. Also as a reminder, Petsense store sales are not reflected in same-store sales, as those will fall into the store base beginning with the fourth quarter of 2017.

Now turning to gross margin, which decreased 60 basis points to 33.1% compared to a 30 basis point increase in the prior year. In certain cold-weather seasonal products, where there was limited demand, we increased markdowns to ensure that we ended the season in a clean inventory position. Additionally, we were slightly more promotional in our efforts to drive sales by creating value for our customer. Freight negatively impacted gross margin, principally due to a greater mix of freight-intensive categories, growth in our e-commerce business, and to a lesser extent, higher average fuel cost. The mix of merchandise had a slightly negative impact on gross margin. This was driven by the strength of sales in C.U.E. products, specifically animal and pet food, which are below chain average margin categories.

Petsense provided a benefit to gross margin as they produced a higher rate than Tractor Supply stores. Also, it should be noted that last year in the first quarter, margin benefited approximately 15 basis points from vendor support programs associated with the initial stocking of our new Arizona DC. For the quarter, SG&A, including depreciation and amortization, deleveraged by 70 basis points to 27% of sales, compared to 26.3% of sales in the prior year's quarter. The primary driver of the deleverage was the decline in comparable store sales.

A few other factors impacting SG&A ratio were: Petsense, which operates at a higher SG&A rate; and a greater investment in store payroll hours as part of our focus on enhancing the customer experience.

And then as a partial offset to the deleverage, we estimate that incentive compensation provided approximately 35 basis points of year-over-year leverage.

Our effective income tax rate for the quarter was 35.6% compared to 36.8% last year. The reduction in the rate is principally due to the favorable impact of the adoption of the new accounting rules related to the recognition of incremental tax benefit on stock option exercises. The impact is typically strongest in the first quarter due to the timing of equity vesting and the smaller income base in Q1. And thus, we do not expect similar benefit in future quarters. We continue to estimate our full year effective tax rate to be in the range of 36.2% to 36.4%.

Turning to the balance sheet. At the end of the first quarter, we had a cash balance of $73 million and $611 million outstanding debt compared to a cash balance of $75 million and $250 million outstanding debt last year.

During the first quarter, under our stock repurchase program, we acquired 1.6 million shares for $115 million. The consolidated average inventory per store decline of 3.4% reflects the impact of Petsense stores on the chain average. Exclusive of Petsense, average inventory levels per store increased 4.2%, principally due to the timing of our spring seasonal build, and to some extent, the timing of seasonal sales.

With respect to our outlook, we are not updating our guidance at this time. As we have said for many years, we know that weather can impact the timing of sales this time of year, and we believe it's best to evaluate our performance based on the halves, rather than the quarters. While our Q1 performance was disappointing, there is still a lot of business ahead of us in the spring-summer seasons. Therefore, we believe it is prudent to revisit our guidance at the end of the second quarter.

That concludes our prepared remarks. Operator, we will now turn the call over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Peter Benedict from Robert Baird.

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Peter Sloan Benedict, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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I guess, I'll use my one on some of the online stuff. Thanks for some of the color on BOPIS. Can you -- any more metrics around kind of the -- how online sales -- I know it's a small number for you guys, but how it's been growing, what percentage of the business it is? And then what else are you working on beyond Buy Online Pickup in Store, those types of things, in order to better position the company for omni-channel selling in the years ahead?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [3]

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Yes, Peter. This is Steve Barbarick. And I would tell you, we made a lot of advancements over the last couple of years and we continue to make traction as we go forward. To give you some bullets into the quarter and what we saw, our web business, we're up about 26%. And what's also very exciting is that if you look at the number of hits, we've got the store locator, we had nearly 5 million hits to store locator for the quarter, which is up about 40%. So we know our customers are going online, they're not just looking at content or looking to buy, but also to look where our stores are located. A couple other tidbits here that I would share with you. Mobile traffic was over 60% and up to last year. And we continue to see drop-ship as a reliable source for us. If you combine what we've done now direct-to-customer as well as what we're seeing with Buy Online Pickup in Store, the early results, I will tell you, as we move into the back half of this year, I suspect for the full year, we'll be between probably 1% and 2% of sales. So we're seeing nice growth there. Then if you look at some of what we're doing in terms of capabilities to, as Greg said, evolve to our customers' needs, we talk a lot internally and I think we introduced this to you all at the investor meeting, this concept of One Tractor. And it's really making sure we're taking care of the customer, anytime, anywhere and any way. And we're working on things like enhanced search, enhanced check out. We've got a comprehensive pricing tool that's going on out there for us, we can look at what the competitors are doing. Even going as far as taking a look at what we're doing inside the stores to better take care of our customers when it comes to Buy Online Pickup in Store. So there's a lot of things and a lot of capabilities that we have that we're working on. And that also includes what we call the [stockyard], which is a special order system in a number of our stores right now. So I guess, what I would tell you is that we're not sitting back. We are moving forward and we've got a plan to do just that. I know that was a long answer, but I wanted to make sure that it was as comprehensive as I could be.

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Operator [4]

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Our next question comes from Matt McClintock with Barclays.

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Matthew J. McClintock, Barclays PLC, Research Division - Senior Analyst [5]

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I guess, I'll focus a little bit on the weather and ask the question -- a 2-part question. The first one is the West Coast mid single-digit comp, pretty outstanding. I know that, that region has been outcomp-ing the rest of the store base for a while now. Can you just kind of remind us the spread between how the west had been performing versus the rest of the chain? And then as the weather did improve, did all product categories improve in line with how you would expect? Meaning do you see any area, Steve, specifically of weakness or from a merchandising perspective that maybe you could do better in?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [6]

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This is Greg. I'll start off and I think, Kurt and Steve may join. First of all, the Western region, as you know, we had a little bit of a slow start there in one state. But once the consumer recognized and understood who we were, we started seeing business accelerate. We don't typically comment on the basis points difference between the West, East, North and South, so I'll kind of putt on that one. What I can tell you is that the West is doing quite well. I think there's been a real challenge in the retail environment, in general, but our Western stores are performing very, very well. Now there's more new stores in the West, though, and I need to make sure that you understand that caveat. I think they're less weather dependent as well, so that gives us a little bit of a benefit. And there are some things that we're learning about the West, not only through the digital capabilities that we're also rolling out there, but how this consumer, their consumption, it's a larger equine community, and I think, for us, it's a little bit like the deep South, in Texas. We've got a consumer base out there that needs us, wants us to be there, and they're engaging with us at a very high level. So you'll see us continue to expand in the West. Eventually, maybe talking about more distribution capability towards maybe the Seattle area at some point.

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [7]

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Yes, and I would just add, Matt, that talking about the seasonal shift here. Greg talked earlier and so did Kurt about the softness we saw in January and February and that really impacted a lot of our cold-weather businesses. It was exciting and we thought we'd get an early spring, and so we were quite nimble. We bought some -- brought some receipts in early and thought that we can capitalize on an early spring season, similar to last year, but then the weather turned on us. Once we got into April, you would get basically what you would expect. We saw the OPE line start to ramp up. A lot of our spring seasonal businesses take off as well, including grass seed. Now we do have 1 less day in the second quarter, and that already took place in April. But if you look across the board, it's pretty much shaping up like you would expect for a spring season.

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Operator [8]

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Our next question comes from Dan Wewer with Raymond James.

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Daniel Ray Wewer, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Steve, also kind of a follow-up on that question with 2 parts. When you talk about April looking like a typical spring season, does that also imply it's back in that range of plus 2% to plus 3% that you were guiding for fiscal year '17? Or is just an improvement for the minus 2% that we had in the first quarter? And then the other question I want to see if you can ask -- answer is, on the original gross margin guidance of 25 to 40 basis points for this year, I know that pricing optimization was part of the margin driver that you were expecting. Do you think it's still a good environment to be pushing higher pricing in some markets given the tepid demand?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [10]

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Dan, this will be a 2-part answer because I'll take a piece and Steve will take a piece. On April trend moving forward, the only thing I can tell you is, well, you said, it's not me, yes, we're in the range of where we've been -- where we forecasted for the year. And it's what the initial response, but it's early, we're only 2.5 weeks in. But as we said before, when you see weather shift, it can have a dramatic impact on some of these categories in our business. Steve, want to talk about gross margin?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [11]

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Yes. I would just say that -- Dan, that we're -- we always talk about rate and share, and there's a balance between the 2. We're certainly not going to do anything that would put us in a position to be uncompetitive. So when you use a pricing tool when you've got upwards of 15,000 SKUs in the store, not all of them have the same level of elasticity. So we're going through -- we're going to be very careful, very surgical in the way we use the tool. I would tell you, at this point, the total has not cost us any share. If anything, it's benefited us both ways because we've come down on some prices and up on others, and we'll be very methodical in the use of that.

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Operator [12]

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Our next question comes from Chuck Cerankosky with Northcoast Research.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - Principal, MD and Equity Research Analyst [13]

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I was wondering if you could talk a little bit about Petsense in terms of is it meeting expectations? Can you carve out what its sales might be approximately for the quarter? And then where in New York will that new distribution center be and when might it open?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [14]

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Okay. Well, that was about 5 questions in 1 there, Chuck, so I'll start off with Petsense. Very pleased with how the Petsense business is performing. As I said, 2017 is the year of kind of the shakedown to understand the business more fully and to look at the expansion opportunities. So we still think this is a company that has tremendous store count, as well as online and Buy Online Pickup in Store capabilities, which we'll talk more about as we get further into the year. But Petsense is a winner, we're very excited about it. And it's teaching us a few things about pet special that we can use also in Tractor. What else? DC. DC is going to be -- I think we've already made that announcement, have we, official. It's in Herkimer, New York. It's at Frankfurt, Herkimer, it's in that area. It's in that area, it's kind of a small town in the northern part of New York, but northwestern New York. But the location was chosen because of its importance to helping us broaden our expansion capabilities as we add more stores in the North. As you may know, and you -- we talked about this a few calls back, that we needed more capacity in the Northeast. The Hagerstown facilities, and there are 2 of them, are somewhat running at maximum. That facility will be fully functional at the end of '18, so don't expect us to -- we'll start adding some stores in '18 there, but '18 into '19 will be the final build out as we move forward on for store base there.

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Charles Edward Cerankosky, Northcoast Research Partners, LLC - Principal, MD and Equity Research Analyst [15]

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Any numbers you could give us on what Petsense contributed to sales in the first quarter?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [16]

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We don't really break it out separately. And also, Chuck, we don't do that for competitive reasons. So as it grows to be a larger percentage, we'll talk more about that, and maybe later in the year, first of next.

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Operator [17]

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Our next question comes from Peter Keith with Piper Jaffray.

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Peter Jacob Keith, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [18]

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Greg, I was wondering if you could comment, in the press release and in your prepared remarks, you referenced multiple times there, the retail landscape that's changing rapidly. Could you provide maybe a little bit more perspective on that with specifics? And I assume that maybe related to e-comm, but maybe you could enhance the detail?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [19]

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Okay, a couple of things that I would say to that. Peter, one is that we noticed in our own business about 4 years ago, 4.5 years ago, the amount of consumers that were coming to us through mobile devices. And we kept scratching our head going, "Why is mobile so important?" Well, as we talked about it as a group and we went out with visiting stores, it's very simple. The landscape changed because that's the way our customer in the rural community can communicate with us, and that's how they really find product online. You see, there's not a lot of broadband in a lot of these markets where we have stores. So cell towers are easy, and for them to use mobile was important. So we quickly started to mobile-lize everything that we do.

The second thing we were learning is Buy Online Pickup in Store, it made a lot of sense to us as step 1 versus direct fulfillment, which we're already doing through drop-ship and such through our Franklin facility and with a lot of the vendor base that we have out there. But we said our customers buy projects generally and they come in, they want to know that the product's there before they make the trip. Remember, they're traveling an average of 10 to 15 miles to get to our stores usually. So when we turned it on, we thought let's just watch and see. And exactly what we thought was going to happen has happened. And that was last fall. Well, I'm proud to say, we've got it rolled to the entire chain in less than an 8-month period and it is driving our online business. It's also bringing customers into our 4-wall and as I said in my comments, these customers are adding other things to the ticket, so the ticket is starting to grow when it comes to Buy Online Pickup in Store.

And then eventually, we'll start to look at how we fulfill directly to consumers as Steve and the team build up the network with the distribution centers, and we can start shipping direct and not having to try to fulfill out of one center. Now the other thing that's changing in retail is you have to be available to the customer 24/7. It doesn't matter what time you open and close the physical store, the store is open 24/7, and we realized that about 4 years ago, maybe even longer. And we've been working, and that's why we did the replatforming. And I'm very excited about now our capabilities, and Rob's team has really brought us in very, very quickly and up to speed. And we're moving much, much faster than those in our segment. And having the capabilities of Buy Online Pickup in Store, direct fulfillment from a distribution centers and drop-ship, being able to have mobile POS in our stores we're testing right now and rolling out to more stores. What we like about that is it gives us the ability to ring a sale, to correct inventory, to answer a phone call, to do whatever, with 1 device throughout the entire store. It can even be a line buster if we get a line of people that can go in and use that device to basically ring the customers up.

So that's a wonderful tool and the stores that are using it today are loving it. And we -- well, I think we've just about got a tool to the point we're going to take it and roll it to the chain. And the last thing is the comment that Steve made about [stockyard]. And that's really the special order concept. It's really a kiosk, it sits back at the customer service desk. It's a large screen that's there for the customer. And what we're finding, customers are going there to place special orders, maybe large quantities of product that we already carry but don't have enough in the store or a unique product that they can't find, but they can go on the screen with help from one of our team members. And we don't lose a sale. I'll given an example. If we ran an ad on Thursday and -- or Wednesday it breaks, on Thursday, we sell out of an item. In the past, we'd have to tell a customer, we can give you a rain check. We don't have to do that any longer. Now, we can say, "Listen, let's go to the kiosk, we'll go ahead and lock it in and that will be coming to you through the next truck or we'll drop-ship it to your premises. So all of these things are working in conjunction. And as Steve said before, it's 1 tractor. It's -- so we have realized that. We have been moving very quickly over the last several years. We've probably just been more public with it over maybe the last 6 to 8 months. But we are clearly moving ahead of those in our segment and excited about what we see in front of us.

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Operator [20]

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Our next question comes from Seth Sigman with Crédit Suisse.

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Seth Ian Sigman, Crédit Suisse AG, Research Division - United States Hardline Retail Equity Research Analyst [21]

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My question is around the promotional activity you discussed. Can you just elaborate on that and whether you think it was effective? And then the second part of the question sort of ties in just around deflation, which has been a drag. Is that purely just flowing through the impact from lower input costs? Or is there any evidence that maybe it's getting a little bit more competitive in some of the consumable categories?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [22]

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Seth, this is Steve Barbarick. And one of the things we've talked a lot about is I mentioned it earlier about our ability to be nimble and whether it be using our inventory or using things like promotion to take care of our business and making sure that we continue to keep share up. In the first quarter, we did a few things. We did a coupon online to see what kind of impact that might have and we tested that across the network. And the response was very favorable with our customers. We also did a few other little events that we thought might have an impact. I would tell you that it wasn't material in terms of overall sales to the business, it did have a little bit of margin erosion. But we've always talked a little bit about the fact that we've got to make sure that we're using all the arrows in our quiver. This would be one of the arrows that we used in Q1. I don't anticipate further promotion needing to be used throughout the remainder of the year based on last year's promotion. But we want to make sure that we've reserved the right to use it if we need to. So that's what I would tell you about promotion. In terms of deflation, and Kurt and I may tag team this one, typically the way we view that is input cost, first, and then what our retail selling price is, second. So what you hear when we talk about deflation isn't us just unselling at lower retails, it has to do first and foremost with that impact of commodities.

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [23]

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Yes. No, I would just say I agree. Steve, hit that important point, Seth, in that, it's the input cost that are a key part to that. So our deflation calculation is not quoting situations where there may be retail declines without a cost change.

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Operator [24]

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Our next question comes from Simeon Gutman from Morgan Stanley.

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Dana Lauren Telsey, Telsey Advisory Group LLC - CEO and Chief Research Officer [25]

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So I too have one question, but I'll make a part A and a part B. The part A, Greg, I'd love to hear your thoughts on the private transaction in the pet space last week. If -- how you think about it. If you're expecting to see a more rational competitor. I'm not talking about the physical one, the digital one. And then my second question, and Greg, you mentioned that there's a lot of -- there's been a lot of choppiness in the last year on comps, and the first quarter being no exception. We're kind of hearing from other retailers, we're start -- hearing weather was a problem and then we're starting to see guidance that looks more normal for the second quarter. I guess, so given that the choppiness, though, you've seen, I guess, how do you get confidence in, let's say, what a normalized run rate looks like, a 2, a 3 or 4. And correct me if I'm wrong, doesn't your comparison in the next -- in this quarter, year-end, doesn't it get tougher as the quarter goes on?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [26]

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All right. Let me first comment about -- and maybe not comment about the PetSmart (inaudible) scenario. All I can tell you there is that we keep our eyes and ears open to what's going on, both online and in bricks and mortar. We think we have a powerful combination with Petsense and Tractor right now, and there's a lot of growth for us in Petsense to take that business digital and explode it. And in the local markets, where I can push some store delivery, it's going to be a huge advantage for us as we go forward. So as far as the private transaction there, that's probably the only way that it could have happened, to be honest, because as a public company, I don't think that many people could have absorbed the hit in earnings. Moving on from that to the choppiness and then why do I feel we've got a more normal-looking set up for second quarter and maybe beyond and yes, there's some challenges. Simeon, when you see the business respond as we had hoped in the early part of April, that we didn't see happen in the first quarter, it gives us great confidence. We've been in this business, all of us, Steve has been here 19 years, I've been here 10, Kurt has been here 15-plus, and the rest of the team. We're not rookies to this. We've seen this before. I can remember a year when the weather didn't break until Memorial Day weekend, and we blew the numbers away for the entire year. It was just -- we were off to the races and never looked back. So I think we're a little less concerned now that we've seen the business open up. And it's more in line with what we had expected. But as I said before, this is not a linear path. We could see some coolness and softness, but we really feel good about what we're seeing right now. And our inventory levels have really come down quickly because of the amount of sales that we've generated in the first 2.5 weeks.

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [27]

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Simeon, Kurt. A couple of things on that. So we continue to evaluate our long-term targets, and as just a reminder, our long-term targets that we've set is high single-digit total sales growth, which include some solid comp store sales in that picture. To Greg's point, 1 quarter of tough weather conditions or a couple of quarters there, we're not going to change our long-term targets. We still see the strength in the business and our growth -- sales growth driving initiative's ability to drive the high single-digit sales growth. One reminder is when it comes to Q2, I think as was mentioned, in Q2, we do have 1 less comp sales day that we know is part of the headwind that we're facing as part of Q2.

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Operator [28]

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Our next question is from Michael Lasser with UBS.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [29]

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Recognizing that you don't want to update your full year guidance until the second quarter, to get to the low end of your previous 2% to 3% comp guidance for the year, you will need to do at least 3% comp for the next few quarters. And over the last 4 years, you've averaged an annual comp of 3.4% and you've acknowledged that this number benefited from the expansion of C.U.E., big-ticket sales, growth of energy market and the impact of inflation. So aside from deflation getting less bad, what is going to get better in order for you to consistently put you in the comp range that's necessary in order to hit your standing guidance?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [30]

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Yes, Michael. First, as we said, given the seasonality of the business and the weather conditions in first quarter, we're not updating guidance at this time. Reminding that first quarter is the lowest volume sales in earnings quarter for that, that's the primary reason. It's about 15% of sales and earnings for the year. So at this point, with being so early in the year, and we recognize those factors that you brought up, at this point, it's just too early to give any guidance on the year.

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [31]

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Let me comment on what needs to get better, Michael, okay? First of all, it's top line sales, it's -- the categories that we didn't see response from in March this year that we saw in March last year, and we're seeing that. We also believe that the acceleration of our business in the digital space is feeding and fueling some of the things happening in the 4-wall store. We are talking with our consumer 24/7. They're interacting with us 24/7. As we learn, we reapply. Neighbor's Club has been a tremendous benefit from the standpoint of understanding this consumer better and being able to talk to them directly. And we're just getting, really, to start using some of that information. And then I will tell you, we said it earlier, BOPIS has really been a wonderful addition to the business. What I like about it is it gives us both sides, it gives us the online component, it gives us the 4-wall component. And all we see for that is just continued acceleration. So there's a number of things, even within some product categories, which Steve didn't mentioned, but he could, of things that we're starting to see work far better in some categories that maybe were a little more difficult the past 2 years, they're starting to open up again. And the energy markets down in Texas seem to have settled down now, and we're starting to see the movement back in those markets in sales. So there's a lot of positive things that we see going forward, and that's why, I guess, we said at this point, it's best to look to us at the halves, not the quarters.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [32]

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And Greg, if I can just add one quick one. Because of the addition of Petsense, we can't calculate your new store productivity. What was your new store productivity in the first quarter and how does that compare to what it was last year?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [33]

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Okay. Michael, I'll take that one. Yes, there's a couple of unique factors in the new store productivity calculation, I understand that, so I'll give you a little bit of data points on there. So it -- the unique items are the week shift and the impact it has on this year. So the week shift into a higher spring sales week, also along with Petsense, impacted the new store productivity when you're looking at it from the external data that you have. Internally, as we adjusted for those 2 items, the first quarter new store productivity was slightly below the prior quarter. But nothing significant in that decline. And I'll just tell you that the new store performance, it continues to be in line with our pro forma calculations and the -- those new stores continue to contribute at an elevated comp consistent as what we've seen in the prior year.

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Operator [34]

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Our next question comes from Steven Forbes with Guggenheim Securities.

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Michael Lasser, UBS Investment Bank, Research Division - MD and Equity Research Analyst of Consumer Hardlines [35]

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I wanted to focus on the GURA, right, the service initiative you have going on. Maybe if you just comment, Greg, on how that process is going. What metrics you're looking at to measure the impact on service levels and sales? And then how has the 1 quarter shortfall impacted your plans to invest in labor and service this year, if at all?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [36]

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Couple of things, Steve. Let's talk about GURA, G-U-R-A. And it's Greet Uncover Recommended and Ask. Our scores are climbing in that category. I would think that if (inaudible) was speaking, he would tell you that there's still more work to be done. But we are seeing a comparison year-over-year in a very positive direction. The second thing I would tell you is that we are protecting payroll in our stores. We all believe, as a management team, that you can't call out great service when you have no one in the store to wait on the customer and take care of their needs. And so we are going to take the route of making sure that payroll's protected, making sure our stores can service our customers, and that may -- that could be painful at times, but we know that, that is the longer-term goal is to keep that customer service level at an all-time high. And our [S&G] scores, which is the company we use to measure that, are very accurate today and are telling us that, that is paying off. So we believe it will pay off in sales, particularly as we get into the peak season here in the second quarter. And you know what, we'll be able to update you more in July, when we get through the second quarter.

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Operator [37]

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Our next question comes from Stephen Tanal with Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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I also wanted to ask a multipart question on the comp. I guess, part 1 would be sort of around the in-store initiatives and whether there's any initial uplift when Neighbor's Club comes and whether the incremental shelf space in pet is helping? And then part 2 would be sort of about how to think about the deferred sales that you have to have from 1Q, do you think that comes in ratably throughout the quarter? Or is that more sort of an "out of the gates" type of a dynamic?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [39]

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Let me start, Stephen. This is Steve with the in-store initiatives and some of the things that we're doing. We did reset about 1,000 stores in first quarter. In those stores that got the reset, we went up to 84-inch height. And really the strategic area of our business, and that is pet, and you heard Kurt and I believe Greg both talk about the growth of our pet business in Q1, I think we're going to get the benefit of that later in the year because that reset happened about midway towards the back half of Q1. So that's still in play, but we anticipate continued growth there. We tested it before we did it, so we had an ROI before we laid it out. The other thing I would tell you in-store is that we had our most successful Chick Days event ever, when you cross over the March, April time frame, it was fantastic. We saw great growth in a lot of the accessories within Chick Days, whether it be the coups, organic feed and treats. The garden event is doing exceptionally well right now. And so a lot of the efforts that we put into the initiatives in-store have really, from where I sit, had paid off. The seasonal business was a drag, and it's unfortunate because it doesn't necessarily reflect the hard work, nor the results that I would've expected.

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [40]

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Yes, Stephen, Kurt, I'll address the second part of it. And it might be helpful as a data point to refer back to our pull-forward discussion from last year. At the end of Q1, we estimated that number at about $18 million. And then as we reported Q2, and saw the results in April, more information, we estimated about $25 million. To have it more of a comparable number for this year, with the week shift and moving a -- that week into Q1, but April shifting to Q2, our estimate is for this quarter, it was about a $15 million deferral into the second quarter. How that plays out on that second quarter, weather as well as Easter timing plays into it. So some of that they're in the first part of April, but the rest of it, really can play into just as the weather hits in various spots, particularly in the Midwest and Northeast. So I wouldn't say it's something that was immediate all in the first few weeks of April. It really plays more into the weather conditions in areas such as the North.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [41]

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Got it. And then just Neighbor's Club, is that -- is there are an early lift on that? Or is that really more about the long term in the data that you're collecting?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [42]

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Again, this is Steve. I would tell you that -- and I've said this previously that if we didn't think that there was a lift, we wouldn't have rolled it out completely. We haven't gone in the specifics around what that lift looks like. But we do believe there is a benefit less in the short run, although there's a benefit and certainly more in the long haul.

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Operator [43]

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Our next question comes from Scott Mushkin with Wolfe Research.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [44]

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Just had a short-term oriented question and then a longer one. First, and I think you said that April's off to a good start. If you took a step back and look at April and March combined, are you in positive territory or you're still negative? If you're going to kind of look at it that way and try to even out some Easter shift and the weather.

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [45]

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Yes, Scott. Good question. I can't speak too specific to those -- specifically those particular months. We would just say again that we saw the March potential dissipate with the cold weather. And then I just tell you, we've seen strong response from the consumer as the weather has turned more typical in April. At this point, it's the best I can give you. Too early in the quarter to try to give more specifics.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [46]

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Okay. Easter should have really helped you guys out quite a bit, isn't that correct?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [47]

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Well, keep in mind that Easter, we're closed on that day so we lose a day of sales. But certainly, last year, we had the benefit of the Friday and Saturday before the Easter, and we had that in April. So you do get those 2 days in April, and we have a strong ad at that time that coincides as well. So if there is a planned expected strong sales performance in that particular time around Easter.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [48]

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And were you on plan?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [49]

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Can't be that -- it's a good question, Scott. Can't be any more specific.

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Scott Andrew Mushkin, Wolfe Research, LLC - MD, and Senior Retail and Staples Analyst [50]

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Okay, so then I appreciate that. And then so looking at a longer-term question, I think it's something I've asked you guys before, but I wanted to kind of poke at it again. I mean, if I take a step back and just look at your same-store sales, yearly same-store sales, they really been kind of down and to the right since I think 2011, each year they're kind of peeling off just a little bit, and some years a little more, I guess, last year. What do you guys think is causing the kind of the slow decline? And obviously, this year is not off to such a good start. I mean, have you kind of pinpointed on what has made you drop from like, say, mid-5s to now like last year, 1.6. What are the causes there? And why do you think it will stop?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [51]

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This is Greg. I'll give a comment, I think Steve and Kurt also say. First of all, there were some tailwinds. No questions, there were a few tailwinds helping us. Inflation is a good thing. A few categories that had some tailwinds behind it, safes and a few other things of that nature, which those slowly kind of worked their way off, okay, out of the comparable sales numbers. I don't believe, because we track this very closely, it was competitive intrusion, and we don't believe that it is anything that we had done to not refresh the business or bring newness to the business. I do believe, however, that the entire four-wall retail businesses around the country, in many segments, have seen some decline and maybe we were part of some of that. But because I think the consumer has fallen in love with digital, which our consumer has as well. So we have seen some shifting, as Steve mentioned earlier, we could see as much as 2% of our business this year being done on the digital side. So there's been some shifting moving between four-wall and digital. But in general, I would tell you some of those tailwinds became headwinds, and we didn't anticipate honestly the difficult business in the Texas, Oklahoma and call it, the Dakota's regions, as it softened due to the pullback in the oil markets. That was very, very difficult to overcome. Scott, you got anything?

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Operator [52]

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(Operator Instructions) And we do have our next question from Ben Bienvenu from Stephens Inc.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - Research Analyst [53]

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I'm curious, I think you are talking in the past about labor optimization that you're going to put in place in late 2017. Is it your expectation that you'll -- you will roll that out in late 2017? And if so, do you expect to roll out via test or all at once? And what kind of impact might that have from a tail of the year?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [54]

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Ben, I think what we talk about is that we were going to look at labor management and payroll management as kind of the combined or task management as a combined system. And we talked about starting it -- hoping to start it in the fall of this year and running it into '18 as a completion. So we're still on task to do that. We have not chosen the final system yet, but we plan to do that by midyear.

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Benjamin Shelton Bienvenu, Stephens Inc., Research Division - Research Analyst [55]

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Okay, great. And then if I could, just one quick follow-up on the deflation, 50 basis points in the quarter. I think for the year, you had previously said you expected a range of 10 to 30 basis point of deflation? Is that still your expectation or given that higher level of deflation in 1Q, has that changed at all?

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [56]

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Yes. I would say that we are seeing a little bit more deflation than our original expectations. And we still believe that we're seeing signs that it would moderate in the back half of the year. So as we saw 50 basis points in Q1, I would say our expectation on deflation is more like a 20 to 30 basis point impact for the year, with that being closer to the high end of that range in Q2 and moderating in the back half.

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Operator [57]

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Next question comes from Chris Horvers with JPMorgan.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [58]

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I have 2 quick follow-ups. So the 2% to 3% comp in April, does that include what sounds like a small headwind from the overall Easter shift? And then can you talk about the performance of the mature store cohort relative to chain. And perhaps if you isolated it along weather impact and another nonweather-impacted markets like, say, same North versus South.

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [59]

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Okay, Chris, I'll address the first question there. Yes, Easter is a headwind in that 2% to 3%. For the quarter, that is about a 60 basis point headwind on Q2. And the lost comp sales day for the year is about 20 basis point impact for the year.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [60]

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And that 2% to 3%, that 60 basis points is like an annualized -- the 2% to 3% is sort of net of that 60, basically.

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [61]

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That's right. It's net -- it assumes and includes for the quarter a 60 basis point headwind on the quarter. And the second question, could you repeat the second question.

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Christopher Michael Horvers, JP Morgan Chase & Co, Research Division - Senior Analyst [62]

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So the question is can you talk about the performance of the mature -- your mature stores versus -- I know the West is seeing some lift out of a younger store, maybe South there. So how are the mature stores performing and obviously, you had some in weather-impacted markets and some in not, so maybe the stores in the South where there was a lot less weather impact in the overall trend, those mature stores.

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [63]

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Sure. Yes, directionally, what we're seeing is that, as we've said, the less mature stores have a faster higher comp sales growth than the mature stores. And then -- so there is somewhat of a gap between the 5 years or less stores and the mature ones. And consistent lease, looking at Q1, the mature stores were less than the less mature stores, but they behaved similar geographically. So when it comes to mature stores in the West, the mature stores in the South, they outperformed the mature stores in the North. So there's that -- there's somewhat of a gap between those. But they behaved very similar. And for the quarter, the mature stores had the same typical headwinds as the less mature store due to weather.

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Operator [64]

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Our next question comes from Seth Basham with Wedbush Securities.

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Seth Basham, Wedbush Securities Inc., Research Division - VP of Equity Research [65]

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My question is around gross margins, just if you could provide a little bit more detail, maybe disaggregate the gross margin performance a bit more for this quarter between markdowns, promo and freight? And then provide some a little bit more color and expectations for which these buckets will improve the most for you to achieve your guidance for over 25 basis points of improvement in gross margin on the year?

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [66]

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Sure. For first quarter, the product rate being the clearance markdown as well as any promos, along with freight were the most impactful factors to margin. And then I would say after that, the headwind that we saw and knew we were cycling, but the next most impactful would have been cycling the benefit we got from the discounts for inventory related to new distribution center. The other headwinds that we described were of lesser impact. Specific to go forward, Q1 did have some unique items in there. So I'd first say that the things that were unique to the first quarter, such as cycling the vendor funding related to the inventory in the DC, the clearance on the winter seasonal goods, and even to some extent, the additional promotions that Steve talked to, were unique to first quarter. However, we do see some higher -- some greater headwinds than originally expected in freight. We have said that we saw or expected freight to be about a 10 basis point headwind in 2017. Based on what we're seeing today, that's more closer to a 20 basis point headwind. And then we do have a few other areas that mix -- particular that if we continue to grow strong in the C.U.E. items, mix will likely be a bit of a headwind for Q2 and potential other quarters go forward.

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Seth Basham, Wedbush Securities Inc., Research Division - VP of Equity Research [67]

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Got it. So just to understand, the 25 to 30 basis point gross margin improvement for the year, that guidance, is that still good? Do you think there might be a little bit of downside risk to that based on freight and mix?

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [68]

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Yes. And I would just say, again, we're not updating guidance, but I will say as I look to Q2, that it will be more challenges, more headwind to try to achieving that range for Q2 than our original expectations.

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Operator [69]

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Our next question comes from Brian Nagel with Oppenheimer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [70]

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So Greg, I wanted to go back to some -- the comments you made on your prepared comments, just with regard to the headwinds and tailwinds and specifically, with respect to the C.U.E. business. So overall, do you -- is C.U.E. still, as you think about that analysis, is C.U.E. still a tailwind of the business? And maybe explain why there? And then with regard to Q1, it seems -- the color you gave us, it seems that the C.U.E. sales holding it well. So I wanted to confirm that. Did the Q2 sales volume -- I guess the question I have there, did promotions at all help you drive better C.U.E. sales in Q1?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [71]

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Yes, Brian, let me answer it this way. C.U.E. business is -- the thing that you'll find in our store at any given time of the year that make sense for the customer that they buy in high-volume, high-quality. Hydraulic fluid, wood pellets, certain products in feed and food, so on and so forth. C.U.E. units continue to increase. So we feel good about our unit increase overall in the C.U.E. categories, which tells us we're still taking share. However, deflation continues to play a major role in some of those C.U.E. categories. So I've said this before, a bag of bird seed, that was at one time, we considered it a C.U.E. item in the first quarter, was selling for $19 to $22, and now selling for $16, let's say as an example, due to deflation. Those are tough comparisons to offset. I've got to see another 30-some-odd percent increase in units just to be able to offset last year's comparable volumes. So there is where some of that quirkiness comes into play. But we're very, very comfortable with C.U.E. We track it very closely. Steve and the team have a pulse on it, literally, daily and we continue to see share -- take share.

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Operator [72]

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

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Scot Ciccarelli, RBC Capital Markets, LLC, Research Division - Analyst [73]

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I apologize if this is asked before because I was disconnected earlier. But I guess, my question is how should we think about the balance sheet going forward? I know this was a tough quarter, but we had AP to inventory ratios fall pretty sharply. You guys are paying a dividend, you bought back a bunch of stocks, so debt level have risen quite a bit. So I guess the question is should we expect more debt to come on to the balance sheet during the balance of the year? Does that cause you potentially to pull back on your buyback program, because you don't want to add more debt? Or will the seasonal cash flow cadence that you're anticipating help you reduce those cash needs?

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [74]

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Sure. Scott, I'll first start with this quarter had some unique items. Steve mentioned the earlier spring seasonal buys. And so with our effort in January, February addressing what looked to potentially be an early start to spring, we pulled some receipts forward. So in regards to the balance sheet on the AP and inventory side, it's somewhat unique to the quarter in that the growth in the inventory is fresh spring-related items. We pulled it forward that played into the timing of our payments. And so you see that on the balance sheet. To a lesser extent, one other thing that we phased in Q1, this one we faced whenever we have a 53rd week shift, the end of the month -- the quarter ended a week later, that does impact the timing of a key payables point to our merchant and rent vendors. And so you see a little bit of that drag compared to the prior quarter as well. In regards to debt, I would just say that we look at Q1 and Q3 as those peak particular times, and you're seeing with the uniqueness a heightened level of debt, we expect in Q2 for that to go back to normal levels. We've said we're targeting and comfortable with the 2x debt leverage ratio. And other than a few particular peak times, we see ourselves at about $400 million in debt, $450 million in debt at the end of the year. And we don't expect at this point that to change any of our plan or cadence on capital allocation for dividend or share repurchase.

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Operator [75]

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Our next question comes from Alan Rifkin with BTIG.

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Alan Michael Rifkin, BTIG, LLC, Research Division - MD for Research and Strategy Group [76]

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With respect to the gross margin, Greg, you cited that e-commerce was a headwind on the gross margin. So assuming that e-comm continues to grow at a rate greater than your stores, what kind of level can we assume would be kind of a continuous gross margin headwind from the fact that you're growing e-comm at a greater rate? And then my second question is we appreciate the color provided with respect to the 600 basis point delta on a market basis as a result of the weather, I was curious if you can maybe segment that in different way and tell us how much in total did the oil patch states underperform the rest of the corporate average?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [77]

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Sure, Alan. I'll take those. First, in regards to the e-commerce and gross margin. We called out the growth in e-commerce and its impact on freight. So our -- with our e-commerce business growing, it does have a higher freight rate, and we've always had some level of burden, but e-commerce is -- as small as it is, has not had much of an impact. We are excited about the growth we have in e-commerce business, and we have seen a few basis points increase in the burden on the freight line within gross margin. So we called it out. I believe that we'll see that continue in the future quarters. And as our e-commerce business grows, it could have a basis or 2 impact throughout the year on the gross margin rate. And then -- yes, go ahead.

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Alan Michael Rifkin, BTIG, LLC, Research Division - MD for Research and Strategy Group [78]

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No, please, and then the delta on the oil patch?

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Kurt D. Barton, Tractor Supply Company - CFO, SVP and Treasurer [79]

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Sure. Sure. In regards to the oil patch, I'd first say that the Texas region, like much of the South, had less of an impact on weather. So we did not see as much volatility in sales in the Texas area, but specific to the oil patch, as Greg mentioned, we see it moderating. And in the quarter, we had close to 30 basis point headwind against the -- or 30 basis points headwind on the comps due to the oil patch stores.

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Operator [80]

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Next, we have Adam Sindler with Deutsche Bank.

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Adam Harry Sindler, Deutsche Bank AG, Research Division - Research Associate [81]

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I was hoping to ask about BOPIS a little bit and then specifically to give us some examples. What types of categories or products you're seeing strong there? How much is incremental to current traffic? And then similar to that, at the Analyst Day I remember you speaking a little bit about potentially thinking about subscription-based program for some of the renewable C.U.E.-based items. And what you're sort of thought process around that at the moment?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [82]

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Yes, Adam, this is Steve. I would tell you that when it comes to Buy Online Pickup in Store, what we're finding is that our customers have an interest across the four-walls. It's nothing in specific. In many cases, it's in multiples that they're buying, so it may be fencing outside, it could be product that is on promotion for example, where they're maybe trying to reserve something so they can get in and get the deal, but it's really across the entire spectrum of the four-walls. So it's nothing that I could point to and say that 80% of what we're seeing there is in one category or even one side of the store. The second question was regarding the subscription. We talked about One Tractor. And we talk about anytime, anywhere and any way our customers want to shop at Tractor. And one of the capabilities that we're working on right now is subscription. It's one of many. And we fully anticipate making good traction on that throughout this year. And you will see us, as we continue to talk with you all in these conference calls, we'll give you the traction that we're making, but it's definitely high on the list for us.

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Adam Harry Sindler, Deutsche Bank AG, Research Division - Research Associate [83]

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On the BOPIS answer just real quickly if I could. I'm unsure then if these are the things that are already in the store, and I imagine you generally have an already high capture rate of the customers in your area, how it's actually incremental? I mean, would these people not be coming into the store to begin with to buy these things?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [84]

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Sure. Well, I would tell you, it's two-pronged. Yes, in some cases. And I think if you would talk to most retailers, they would tell you that because I have certain retailers that I go to that I would've gone to anyways and I use Buy Online Pickup in Store. But I would also tell you there's been several examples where we've modified our marketing budget and our spend there. And we've gone from what has been traditional over to digital. And buying SEM search words, we have found that customers are going in, I'll use the example of the first Buy Online Pickup order that we had was actually a customer who was searching for trailers. And had never shopped at Tractor Supply before, searched the word, went onto our site, reviewed it, looked at the content, used Buy Online Pickup in Store and came in and bought 2 of them from us. So it's hard to pinpoint exactly who's using it. But I can tell you that we do believe it's a mix of both.

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Operator [85]

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Our next question comes from David Magee with SunTrust.

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Dennis Mitchell Van Zelfden, SunTrust Robinson Humphrey, Inc., Research Division - Associate [86]

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This is actually Mitch on for David. Just (inaudible) the weather impact in the first quarter, how do you feel about big-ticket demand in general?

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [87]

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What I would say in regards to big ticket is what we saw was the biggest headwind on the big-ticket sales was the spring seasonal product. And so I would say that big-ticket demand was flat to potentially slightly positive if you x out the headwind that we were up against last year in the March spring seasonal. So big ticket clearly became a stronger component of the average ticket in the month of March as we cycled the strong spring seasonal and did not achieve those spring seasonal sales in Q1.

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Operator [88]

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Our next question comes from Joe Feldman with Telsey Advisory Group.

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Joseph Isaac Feldman, Telsey Advisory Group LLC - Senior MD, Assistant Director of Research and Senior Research Analyst [89]

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Most of my questions were answered. I just want to follow one other thing. Are there any new products that you guys are having in-store or testing out, I recall a year ago, maybe that you tried some things with kayaks or something like outdoorsy, or are there things that are maybe tangential to the business that maybe a way to drive additional traffic?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [90]

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Yes. Joe, this is Steve. And I would tell you, we've been talking a lot about different digital things that we're doing and ways we're attracting new customers in our store, but there's also an opportunity with our existing customer base to sell them new and different things like you're mentioning. And so, for example, this year we've expanded beekeeping because we know our customers are self-reliant and that's a unique item that really is all about sustainability. That we've expanded our organic selection both in lawn and garden as well as in our livestock feed section and we're seeing incredibly nice comps there. A lot of the resets we've done in adding new brands, we're expanding 4health to the customers. Our outdoor sporting goods, for example, continues to grow. We've added to more stores at this point. We're up to between 200 and 300 stores. We've expanded Ammo, which is another key item for us that we think our customers are looking for. And I'll even go as far as to tell you that we're testing live crickets and worms in a lot of these sporting goods stores as well to see if there's an interest or demand from our customers. So there's a lot of things going on within the four-walls themselves that should continue to drive that momentum that we've talked about in the past.

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Operator [91]

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

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Denise Sara Chai, BofA Merrill Lynch, Research Division - MD [92]

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You mentioned before that you've got tools to look at competitor pricing now. So what are some of the key learning so far? And what opportunities do you see in pricing?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [93]

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Yes, Denise, this is Steve again. I would tell you that's one of the capabilities that we're at right now that we're working on when we talk about all the new things we're putting into in our capabilities for One Tractor. So while we have a tool out there today that is going out and web scraping for us, and it's been effective for us for the most part. We've had that for now, 2 years. I would tell you a more comprehensive tool that will give us more insight into more competitors and more SKUs will be much more beneficial as we move forward. And I'll be able to give you more on that, probably in the upcoming quarters.

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Denise Sara Chai, BofA Merrill Lynch, Research Division - MD [94]

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Okay. And then just back to big ticket for a moment, it sounds like you're -- aside from weather and timing impact on things. If you set it aside, it sounds like you're actually a little bit more positive towards big ticket. So in the past, when there has been a big-ticket cycle, how long did it last?

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Steve K. Barbarick, Tractor Supply Company - President and Chief Merchandising Officer [95]

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The last part of that question is tough, Denise, as it relates to weather. So I'll let Steve maybe think about that and see if he can go back in history. But I would tell you that generally, big ticket has -- is more significant in Q2 than it is in Q1 with the spring seasonal. And the only thing I didn't mention the last time was the headwind of safes. And so big-ticket spring seasonal was the biggest headwind. Outside of the weather, there was a little -- there would have been a little bit of a headwind still with the sluggishness of the safe sales.

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Operator [96]

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This concludes today's question-and-answer session. At this time, I'd like to turn the call back to our speakers for closing remarks.

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Gregory A. Sandfort, Tractor Supply Company - CEO and Director [97]

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Okay. Thank you, everyone, for your continued support and interest in Tractor Supply. We look forward to speaking with you again in July regarding our second quarter results.

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Operator [98]

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Once again, that does conclude today's call. We appreciate your participation.