Tractor Supply Company (TSCO)

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Tractor Supply Company (TSCO)

Q2 2009 Earnings Call

July 22, 2009 5:00 pm ET


Erica Pettit - Financial Dynamics

James F. Wright - Chairman of the Board & Chief Executive Officer

Anthony F. Crudele - Chief Financial Officer, Executive Vice President & Treasurer

Gregory A. Sandfort – President & Chief Merchandising Officer

Stanley L. Ruta - Chief Operating Officer & Executive Vice President


Peter Benedict – Robert W. Baird

John Lawrence – Morgan Keegan

Dan Wewer – Raymond James

Analyst for Alan Rifkin – Bank of America

Robert Higgenbotham – Goldman Sachs

Analyst for Mitch Kaiser – Piper Jaffray

David Magee – SunTrust Robinson Humphery

Jay McCanless – FTN Equity

Joan Storms – Wedbush Morgan

David Strasser – Janney Montgomery Scott

Andrew Wolf – BB&T Capital Markets

Jack Balos – Midwood Research



Welcome to Tractor Supply Company’s conference call to discuss second quarter results. (Operator Instructions) I would now like to introduce your host for today’s conference, Miss Erica Pettit of FD.

Erica Pettit

Thank you. Good afternoon everyone and thank you for joining us. Before we begin we would like to take a moment to reference the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. This conference call may contain forward-looking statements that are subject to significant risks and uncertainties including the future operating and financial performance of the company.

Although the company believes that the expectations reflected in its forward-looking statements are reasonable it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company’s filings with the Securities and Exchange Commission.

The information contained in this call is accurate only as of the date discussed. Investors should not assume that the statements will remain operative at a later time. Lastly Tractor Supply Company undertakes no obligation to update any information discussed in this call.

Now I am pleased to introduce Mr. Jim Wright, Chairman and CEO.

James Wright

Thank you. Good afternoon everyone. I am calling in from the road. Tony Crudele, our Chief Financial Officer; Greg Sandfort, our President and Chief Merchandising Officer and Stan Ruta, our Chief Operating Officer are together at our store support center.

During the second quarter, our largest in both sales and profits, we remained focused on our key priorities for the year which are to grow our business and to improve our business by continuing to differentiate our merchandise mix and execute our retail strategy. As a result of our collective efforts to win in the current environment and beyond we grew sales by 5% despite the challenging top line environment and improved gross margin by 150 basis points to 31.9% through a number of strategic initiatives that I will discuss in a moment.

We are pleased to deliver better than expected net income of $54.8 million or $1.50 per diluted share, a 30.4% increase. Let me briefly discuss some of the highlights that contributed to our performance. First, we continued to provide our customers with a compelling merchandise assortment that supports the basic and fundamental needs of the rural lifestyle. Our consumable, usable and edible or CUE category remained our strongest performers particularly animal and pet related products.

We have successfully increased our prominence in these less discretionary SKU’s in our advertising and in our new store presentations while ensuring we offer a compelling value in these categories to our customers. As we anticipated, demand for replacement parts has grown as consumers continued to place greater emphasis on repairing and maintaining their existing tools and equipment.

During the quarter we experienced particular strength in repair parts for outdoor power equipment, small farm tractors and farm implements. At the same time, we narrowed our assortment of certain big ticket items to reflect the anticipated weak trends in outdoor power equipment. We feel we are very well positioned to exit this season at very appropriate inventory levels in those categories.

We also expanded our lawn and garden offering by creating a destination department within the store. Throughout the first half our team studied and responded to the grow it yourself trend. Consistent with what we would anticipate from our self reliant customers, products related to planting gardens such as seeds, fertilizers and tillers had a very good sell through.

Additionally, our customers responded well to canning products. We look forward to applying our findings in the future as we enhance this category to fully capture initial opportunities.

Second, we effectively refocused our marketing program to align our spending and the offer with the current market conditions. In doing so this quarter we eliminated our television Ad spending and frankly have done so for the year. As you have heard us say before, we believe that while TV advertising has somewhat increased our [top] you might recall, we have never been able to correlate TV to sales or traffic. In a more normalized retail environment we will reevaluate televisions role in our marketing mix.

We also reinvested a portion of our TV ad budget into our direct marketing program that includes mailing and emailing circulars with partner offers to various customer groups which we have segmented by spending profiles. As we enhance our CRM capacities we are continuing to test and refine these offers through our promotions, drive traffic and profitable sales.

Third, we continue to deliver improved performance through our inventory management initiatives. We have had a lot of success this year with our 20/250 initiatives that focuses on the top twenty categories and the 250 most important SKU’s within those categories. We had very high in-stock level on these items while driving total per store inventory levels down on a year-over-year basis for the seventh consecutive quarter.

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