Tractor Supply Co /De/ Q3 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Third Quarter 2024 Results. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mrs. Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, operator. Good morning, everyone. Thanks for taking the time to join us today. On the call today are Hal Lawton, our CEO; Kurt Barton, our CFO. After our prepared remarks, we'll open the call up for your questions. Seth Estep, our EVP and Chief Merchandising Officer, will join us for the question-and-answer session. Please note that we have made a supplemental slide presentation available on our website to accompany today's earnings release. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, you can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and 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. Tractor Supply undertakes no obligation to update any information discussed on this call. Given the number of people who want to participate, we respectfully ask you to please limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-ups. Thank you for your time and attention this morning. Now it's my pleasure to turn it over to Hal.

Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. My sincere thanks and appreciation go out to my fellow 50,000 Tractor Supply team members. I know we all have been watching the devastation over the last few weeks that has been wreaked by Hurricane Helene and Milton with great concern and heartbreak. Hurricane Helene struck particularly close to home for me, given my roots in East Tennessee. Tractor Supply has taken a multitude of actions, big and small to take care of our team members, customers, and communities during this difficult time. I'd like to give a special thank you to all our team members who rallied to help the communities impacted by this storm season. We will continue to be there for our team members and customers from our communities in the days and months ahead for the recovery process. I would also like to thank our many vendor partners who are stepping up in the recovery effort. As it relates to a sales benefit from our response, we had no material benefit in Q3, but have seen an impact in Q4 and additionally have been somewhat encouraged by the recent change of seasons. This morning, we shared some exciting news that we've entered into a definitive agreement to acquire Allivet, a leading online pet pharmacy. This is a company we know very well as they have been excellent partners to us in fulfilling our pet subscription business for the last couple of years. This is a great opportunity for us to bring another benefit to our 37 million Neighbor's Club members. Allivet offers a convenient and cost-effective way to get medications and specialty items for their pets and livestock. The addition of Allivet allows us to expand our total addressable market by about $15 billion. Allivet is a best-in-class platform with an excellent management team and a strong financial profile. This is a great example of a strategic tuck-in acquisition. We anticipate that Allivet will be accretive to earnings in 2025, and we look forward to welcoming the Allivet team to Tractor Supply. We are planning to host an Investment Community Day in New York City on the afternoon of Thursday, December 5th. At that time, we look forward to providing more details on our Life Out Here strategy for the second half of the decade, including our plans to leverage Allivet online and in stores. So now let's shift to the quarter. For the third quarter, the macro retail environment was in line with our expectations and our customers remained resilient. While the overall economy remained strong as evidenced by a 3% Q2 GDP, overall retail sales continued to moderately underperform. The primary driver of this underperformance is the continued shift of consumer spending to services. As a consequence, we estimate that retail sales growth was nearly flat in our third quarter. It is our estimate that the Farm & Ranch channel was modestly negative in the quarter and that we continue to be a share gainer. I would describe the sentiment of our customer as relatively stable as supported by the recent jobs report and the current unemployment rate of 4.1%. Consistent with prior quarters, our consumers continue to be judicious with their spending focused on innovation, newness, and needs-based products. Year-to-date through the third quarter, the macro retail environment is running in line with the subdued expectations that we had as we entered the year. Also, as expected, our team has managed our business exceptionally well. Correspondingly, our sales and profitability continue to be in the range of our beginning guidance and have allowed us to consistently raise the lower end of our outlook. Let's turn to some highlights of our performance for the quarter. We grew net sales by 1.6% with comparable-store sales down a slight 0.2%. Diluted EPS was $2.24. Our comparable-store sales performance was driven by transaction growth of 0.3%, offset by average ticket decline of 0.5%. Emergency response, as mentioned earlier, had no material impact on Q3 comp sales. As we shared on our last call, we anticipated that the quarter would be in line with our full-year guidance. As we move through the quarter, many of the same trends from the first half of the year continued to play out. Notably, our customer engagement remains strong. The investments we've made in our Neighbor's Club, our world-class loyalty program are a competitive advantage for us as we continue to see solid growth in customer counts and retention. Our Neighbor's Club comp sales continue to outpace our overall sales growth. At the same time, we reached an all-time high on our sales penetration and a record membership of more than 37 million members. Our Neighbor's Club retention rate remains remarkably consistent as our best customers continue to shop with us more frequently and remain extremely loyal. Our Hometown Heroes program has gained traction with our customers as our store team members have rallied around this unique benefit as an opportunity to engage with veterans and first responders in their local communities. Additionally, our new customer data platform has gone live for all stores and digital platforms, which will allow for greater data integrity, a 360-degree view of our customer, and deeper personalization. Overall, our Neighbor's Club offerings continue to drive meaningful wins with our members. At Tractor Supply, we continue to invest in customer service as we believe it is a differentiator for us. Our customers come to us for trusted advice. Our commitment to excellence and service and investments in training, tools, and technology are being recognized by our customers. Our scores continue to run at all-time highs with improvements year-over-year every month for 40 consecutive months. Turning to our category performance. Strong positive comps in big-ticket items continued for the third quarter, notably in Zero-turn and Front Engine Riding lawnmowers as well as recreational vehicles. This year, our team did a tremendous job bringing newness and innovation with attractive pricing to these categories, and our customers have responded positively to the new product lineup and our investment in inventory. As we experienced last quarter, we anticipated our consumable, usable, and edible products would run modestly below the chain average in the third quarter as deflation weighed on our average unit retail. The needs-based, demand-driven nature of our product categories continues to drive unit velocity in this segment of our business. Specifically in Pet Food, industry data suggests the category was slightly positive in Q3, consistent with trends through the first part of the year as the category disinflates and pet ownership trends remain soft. Our business in this category, while moderating from historical trends, continues to be a share winner in both households and dollars, although this is a small number math at this point. A couple of data points on share: Tractor Supply was two times the category growth rate in Q3 and nearly six times that of the grocery channel. Again, pointing back that this is small number math relative to the previously higher-growth rates that this category has seen in the last few years. In the quarter, in the Pet business, we invested in in-stock inventory rates, maintained our emphasis on EDLP, leveraged our customer service to drive basket building, and focused our marketing on the newness and innovation we've added to our lineup. In our most recent all-store meeting, we invested in training for our nearly 45,000 store team members on selling techniques for pet food and driving treat attachments. We also had a very successful Pet Appreciation Days where we marketed newly introduced brands like ACANA and Real Mesa and our exclusive brands such as Retriever, 4health, and MuttNation by Miranda Lambert. In Equine, livestock, and poultry feed, we continue to gain market share. While average unit retails are down mid-to-high single-digits in these categories, we had unit or pound growth across all species. And as large animal counts continue to be pressured, we are certainly a shared winner with our strong unit performance. Much like the first half of the year, categories that performed below our comp sales growth were in our discretionary businesses such as clothing, footwear, and outdoor living as well as in hardlines products such as ag fencing and pet kennels. Additionally, seasonal businesses such as heating, heating fuel, and insulated outerwear were negative. Our customer continues to respond to newness and innovation. A great example is the strong start to our Halloween Decor, which included a differentiated and expanded assortment such as the six-foot rooster skeleton that went viral. Another great example is in wildlife supplies, where we're a destination for deer corn and have expanded this year into trail cameras and feeders. Our digital sales continue to outperform with double-digit growth. The team has made substantial improvements in search and checkout. We continue to accelerate our digital sales with platforms that set the standard for our customers and rival best-in-class retail experiences. We opened 16 new Tractor Supply stores in the quarter, bringing our year-to-date total to 54. Our new store productivity continues to perform very well. Our pipeline for 2025 and into 2026 remains very robust with significant runway for low-risk, value-creating organic growth ahead of us. As we exited the third quarter, we've achieved some significant milestones in our Life Out Here strategy. We now have 45% of our chain in our Project Fusion layout and more than 550 garden centers. These are capital investments that provide a multi-year runway for growth and extend the terminal value of our stores. They help us to be more relevant to both our core and new customers, allowing us to garner a greater share of their spending and be the dependable supplier for their lifestyle. I commend the team on these investments and results given the scope and scale of these initiatives. It is hard to identify another retailer that has made this substantial investment in their store base in such a short period of time. We've also made major investments in our supply chain. Over the last four years, the team has added 2 million square feet to our DC capacity with the seamless opening of two new distribution centers. These new DCs have allowed us to service our existing store base while providing flexibility for future volume and new store growth. The addition of 10 mixing centers, bringing our total to 16, has improved our service levels to our stores. A new import distribution center has also allowed for greater flexibility to flow our seasonal goods. As a result, we have had a 20% structural improvement in our STEM models and corresponding cost savings. Our DC productivity has also reached strong levels. In conclusion, the team is performing admirably short-term and long-term. True to Tractor Supply style, we are efficiently managing the elements within our control and advancing our Life Out Here strategy. As we enter the fourth quarter, we are raising the low end of our guidance for the fiscal 2024 sales and earnings to reflect our performance year-to-date and our outlook for the fourth quarter of the year. The fourth quarter has started out well as we benefited from emergency response sales for Hurricane Helene and Milton, both of which were fourth quarter events for us. This sales benefit is reflected in our guidance for the year. As we plan for the fourth quarter, we continue to anticipate that our customers remain prudent with their spending as is typical in an election year. We are capitalizing on our strengths and enhancing our competitive edge in the market with the support of our team members, their strong connections with our customers, and our successful strategic initiatives; we continue to outpace our competitors. Now, I'll turn the call over to Kurt to provide more color on our performance and outlook.

Thank you, Hal, and good morning to everyone on the call. As Hal mentioned, our third-quarter top-line results were consistent with our expectations and in line with the results in the first half of the year. We saw continued strength in big ticket sales, while our discretionary categories remained pressured. Our seasonal category performance, exclusive of big ticket, was in line with chain average at a modest decline to prior year. Similar to the first half of the year, we saw strong performance in seasonal categories such as live goods, mulches and soils, grilling, and wildlife supplies. This was offset by softness in ag fencing, heating, outdoor living, and lawn and garden tools. As we expected, our consumable, usable, and edible performance was slightly below the chain average given the retail price deflation and moderating pet category trends the industry is experiencing. Retail price deflation, which was approximately 1%, was in line with our expectations. The vast majority of this deflation came from our consumable, usable, and edible categories. As Hal mentioned, we are pleased with our unit movement in consumable, usable, and edible as we successfully managed through the impact of deflation this quarter and are now starting to lap the beginning of this deflationary cycle from last year. Our comp sales growth was relatively consistent across all regions of the chain within a range of down 2% to up modestly. The strongest regional performance was in Texhoma due to inventory investments made in big ticket, easier compares, and better overall weather compared to last year. This strength was offset by pressure in the Far West, Midwest, and Commonwealth as the summer heat lingered and a lack of the change of season to fall in these areas. As to the cadence of the quarter, all months were also in a relatively tight band of essentially plus or minus 1%. Weather was generally a net neutral factor in the third-quarter comparable sales results. Extreme heat persisted throughout the quarter in certain regions with no shift to cooler weather in the northern regions. Hurricane Helene and other storms in the last two weeks of the quarter did not produce net incremental sales to Q3 as any pre-hurricane demand was more than offset by softer volume in the South as a result of heavy rains and continued intense heat in the Far West and Midwest regions. We do believe this created a timing shift that has benefited early Q4 sales. Moving down to our income statement. Our gross margin increased 56 basis points compared to last year. We continue to be very pleased with these results, which were driven primarily by ongoing lower transportation costs along with disciplined product cost management and the continued execution of an Everyday Low Price strategy. These improvements were partially offset by the mix impact from strong growth in big ticket categories, which have below-chain average margins. As a percent of net sales, SG&A expenses increased 119 basis points to 27.8%. This increase was primarily attributable to our planned growth investments, which included the onboarding of a new distribution center and higher depreciation and amortization, as well as modest deleverage of our fixed costs given the decline in comparable-store sales. The new distribution center was approximately a 25 basis point headwind on SG&A for the quarter. We were also lapping a one-time depreciation expense benefit in the prior year of approximately 35 basis points or $11 million. These factors were partially offset by strong productivity and cost control and to a lesser extent, a slight benefit from our ongoing sale-leaseback transactions. For the quarter, operating profit margin was 9.4%. Diluted EPS was $2.24 compared to $2.33 last year, which included a $0.08 benefit from the depreciation change I mentioned earlier. Turning now to our balance sheet. Merchandise inventories were $3.1 billion at the end of the third quarter, representing an increase of 4.3% in average inventory per store. Last quarter, we shared that we had strategically invested in inventory as we look to improve our in-stock position in queue and support the strength in our big-ticket sales. We effectively controlled our inventory as we reduced our average inventory growth per store by more than 50% sequentially from the second quarter. Our inventory levels and in-stock rates are in excellent shape as we enter the fourth quarter. With strong annualized cash flows, we continue to maintain a healthy balance sheet with a leverage ratio of around 2 times. Our announced acquisition of Allivet fits perfectly with our tuck-in M&A strategy and is highly complementary to our business. Given that we have significant financial flexibility, this acquisition will be financed by our balance sheet. Year-to-date, we have returned more than $760 million of capital to our shareholders through share repurchases and dividends. Looking ahead, we are updating our fiscal 2024 guidance to raise the lower end of the range on both the top line and earnings. We now anticipate net sales to be in the range of $14.85 billion to $15 billion. We expect comparable-store sales to be between flat to up 1%. We are forecasting an operating margin rate of 9.8% to 10.1%. Our net income is expected to be between $1.09 billion to $1.12 billion, and we anticipate diluted earnings per share of $10.10 to $10.40 compared to our prior guidance of $10 to $10.40. As I see it today, our outlook for the remainder of the year is appropriately described as right down the middle of the fairway. At this time, we believe that our EPS will more likely be at the midpoint of the range, allowing for a breadth of possibilities that remains quite varied for Q4. As Hal mentioned, the fourth quarter is off to a solid start with the most significant sales weeks of the quarter still ahead of us. We continue to see the quarter having a wider range of potential outcomes on comp sales given the easier compares while acknowledging that we could see more volatility in consumer spending. On the high end of our outlook range, in addition to the easing compares, factors we considered include a more normalized start to winter, lapping net deflation, which began in the fourth quarter of 2023, and the emergency response activity from the recent hurricanes. On the low end of the range, dynamics we contemplated include moderation in big-ticket trends, potential consumer uncertainty due to the federal election, and a shorter holiday selling season with five fewer selling days between Thanksgiving and Christmas. Our outlook on gross margin, SG&A, and operating margin remain consistent with past commentary. In the fourth quarter, we will be lapping our most difficult gross margin comparison with 129 basis points of expansion in the prior year, where we began to see the benefits from lower transportation costs and our product cost management initiative. As to SG&A, we anticipate better performance than in the third quarter given our comp sales outlook. We continue to forecast the return of capital to our shareholders in the range of $1 billion, reflecting the strength of our cash flow and the confidence we have in the long term. In conclusion, we are confident in our ability to deliver on our financial outlook for the year. At Tractor Supply, our philosophy is to stay on offense and remain proactive. We're enthusiastic about the progress of our Life Out Here strategy, maintaining our industry leadership and expanding our legacy of generating long-term value for our shareholders. Now, I will turn the call back over to Hal to wrap up.

Thank you, Kurt. I continue to believe that the structural backdrop remains very attractive for Tractor Supply. We participate in a large, attractive, fragmented, and growing market. We're a consistent share gainer and have numerous tailwinds, including our Life Out Here strategic initiatives, our market being a beneficiary of continued net rural migration, and high-return new-store growth opportunities. Short-term and long-term, Tractor Supply is extremely well-positioned as the leader in Life Out Here. As we look to close the always-important fourth quarter, we have exciting plans in place to drive sales. We're in the midst of launching our first Hometown Heroes Days. Veterans and first responders over-index in our communities and Tractor Supply is uniquely positioned to celebrate those who keep us safe and make Life Out Here possible. The event starts on Saturday with a chain-wide event with our stores hosting their community to interact with fire trucks, K-9 units, and ambulances, as well as food trucks and local farmer markets. Over the two weeks, we will be offering special promotions to our hometown heroes, including 10% off on First Responders Day and Veterans Day. Hometown Heroes Days is the perfect way to drive excitement for this program and for Neighbor's Club more broadly. This is a unique event, which will further support and strengthen this important customer segment's shopping affinity with Tractor Supply and is a great way for us to give back to them. We have an exceptional lineup of innovative and new products as well as enticing values and fresh offerings for the fourth quarter. In big-ticket, highlights include Massimo golf carts, Liberty Safes, Tractor Cam cameras, Ember patio heaters, and Blackstone Grills. In our consumable, usable, and edible business, we're expanding our cat food assortment, testing new items such as freeze-dried snacks, adding exclusive SKUs and Nutrena Triumph Equine Feed, and launching exclusive brand extensions such as 4health Shreds. In tools, we're offering notable deals across our tool shop event on brands such as DeWalt and Porter Cable and also introducing new tailgating truck boxes just in time for the outdoor season. Our garden centers will be transformed into a winter wonderland with live Christmas trees, wreaths, and Tractor Supply seasonal decor. And while the holiday merchandising is fun and brings great retail theater to our stores, what is most important in the fourth quarter to driving our business is the weather. As always, we'll be offering our customers all the things they need to weather the winter, including log splitters, snow throwers, chainsaws, and more. And if and when winter comes, our customers know they can count on us for these critical supplies to get through the winter, as well as products like propane and alternative heating sources. With strong inventory levels, we're committed to being the dependable supplier for Life Out Here. Our stores are well-stocked with the key products our customers depend on for their home and maintenance needs in the winter months. I hope you get a chance to visit our stores this season to see firsthand the great merchandising initiatives we have in place. As I mentioned earlier, please mark your calendar for our Investment Community Day to be held on the afternoon of Thursday, December 5th. The team is excited to share our growth strategy for the back half of the decade. We're confident in our ability to navigate the challenges and seize the significant opportunities we see ahead. And with that, let's open the call for questions.

Our first question comes from Zach Fadem with Wells Fargo. Your line is now open. Please go ahead.

Hi, good morning. So now that about 25% of your stores have lawn and garden centers and roughly half of your stores are converted to Fusion, I'm curious if that historical mid-single-digit lift for the combination is still holding in this environment, which if it is, it would mean about 150 basis points to the comp, if that's right. And then how should we think about the outlook for lawn and garden Fusion and any other store initiatives that you have planned for '25?

Hi, Zach, it's Hal Lawton, and good morning, and thanks for joining us on the call. Yes, it’s a great milestone for us that we've reached with over 1,000 stores now in our Fusion format and over 500 stores in our Garden Center format. You think back to where we were in October of 2020 when we had zero of each. So we have come a long way in a short amount of time. As we look forward, we feel good about both the pace that we're doing on our remodel program, which is between 175 and 225 stores a year. We've been consistently running at that pace the last couple of years. Of course, all new stores are built with the Fusion concept. Then between half and three-quarters of the stores, just depending on a variety of factors, are receiving the Garden Center, a bit more on the new stores because we have a little more control over the setup, but the same on existing store remodels as well. And yes, we are continuing to be very pleased with the performance of Fusion. Those stores do continue to outpace the broader chain. Additionally, they continue to have higher customer scores on key areas of things like store environment, cleanliness, and being uncluttered. Those stores also tend to have a higher female as well as a younger shopper base. So all the quantitative and qualitative metrics that we've shared historically on Fusion continue to occur, and we continue to be very pleased with the Garden Center business. While it's been a couple of years now of tougher spring/summer weather, we continue to have strong performance in live goods, as we talked about, as well as all the other ancillary products that go around it. This year, we'll be using, as I talked about in our prepared remarks, the Fusion setup even to bring a heightened and well-done fall execution as well as Winter Wonderland execution. So all in all, very good progress. To wrap it up, I mentioned earlier that the Farm and Ranch channel being negative in kind of low to mid-single digits, around a minus 2%, minus 3%, maybe minus 4%. If you look at our overall growth of 1.6%, it points to many of our competitive advantages and strategic initiatives that we've been investing in as the reasons for our share gain. One of the important ones is Fusion, which is doing well and is a major contributor to our share gain. We're excited to continue the initiatives as we turn to the back half of the decade.

Appreciate your time, Hal.

Thank you. Our next question is from the line of Chris Horvers with JPMorgan. Your line is now open. Please go ahead.

Thanks, and good morning. I just want to talk about the weather and the storms. Can you talk about what the storms have done for your business so far and sort of what's embedded into the balance of the quarter? It seems like you're targeting about a roughly 2% comp in the fourth quarter. And then just on the margin front, you start to lap the transportation cost tailwinds as you talked about. Does the emergency response create some headwinds in gross margin that we should think about in the fourth quarter, and does that DC headwind go away in SG&A? Thank you.

Hi, Chris, it's Kurt. In regards to your question, I think there are about three points. There is the question on the storms, a question about margin on distribution center headwinds, and the impact of the emergency response. In regards to the weather, I'll just mention Q3 first, as I had mentioned some of that in prepared remarks. Leading up until about mid-September, the business was running at a slight positive comp sales trend. In the last two weeks, while we did see benefits like in emergency response from generators and others at the front-end of Hurricane Helene, that was offset by softer volume in the South as a result of heavy rains and continued intense heat in the Far West and Midwest regions. So, we do believe this created a timing shift that has benefited early Q4 sales. The extreme heat persisted throughout the quarter in certain regions with no shift to cooler weather in the northern regions. Moving down to our income statement, our gross margin increased 56 basis points compared to last year. In terms of the new DC headwind, that does start to cycle out as you get about 9 to 12 months out. It really takes about that much time to be able to even out the inventory and have the other DCs offset productivity. We will share more information on 2025 during our January call.

Thank you. The next question is from the line of Chuck Grom with Gordon Haskett Research Advisors. Your line is now open. Please go ahead.

Hi, good morning. Thanks very much, guys. In the past on your third-quarter calls, you've provided some early framework for the upcoming year in terms of store count, margin, putting and taking, etc. Is there anything we should be mindful of as we build out our models for next year? And then along those lines, you have a long-term comp algorithm of 4% to 5%. I'm sure you don't want to underline getting to that next year, but can we think about the puts and takes over the next 12 to 18 months on the comp front? Thank you.

Hi, Chuck. Good morning. I think on the two things I'd say as it relates to looking out into next year and beyond. One, I think we've got a very clear recipe of how we're operating our business right now in terms of, this year we increased from 70 new stores to 80 new stores, and we've talked about how we're moving to 90 new stores next year. And that is the recipe that we're planning on. We have an exciting portfolio of high-return new-store opportunities out there. We've been challenged by many of our investors to capture that value sooner, and we're moving in that direction. We have a consistent remodel approach somewhere between 175 and 220 stores per year. As you think about that, at the average of that at around 200 with about 2,300 stores roughly right now means we're remodeling a store every 10 years, which I think is a nice healthy run rate for a retailer. Other than that, there's no real outliers on how we're thinking about the business as we turn into next year as it relates to our long-term comp algorithm. I'd point to the same commentary we had on the last call, which is we look to return to that as quickly as possible. The two major factors impacting that are inflation, deflation, and consumer spending nominally between services and goods. If you look at deflation, inflation, Kurt had some comments on that earlier, and we start to lap some of that around now and continue to lap that over the next six to nine months and then start to be through that cycle. And if we all look at the low price for corn, it was really the middle of this year. But we also had the big dip down that we took last year starting in October. The shift between goods and services is something we're also monitoring closely, but I believe as retail moderates back to its normal levels, rising tides will lift all boats. Those of us that continue to have positive comp transactions will continue to see stronger positive comp transactions as that occurs. That’s kind of how we see the macro-environment shaping up right now and what we see as we turn the corner to 2025. Thanks, Chuck.

Great. Thanks, Hal.

Thank you. The next question is from the line of Karen Short with Melius Research. Your line is now open. Please go ahead.

Hi, it's great to talk to you again and I'm looking forward to seeing you in December. My question is about the fourth quarter. The range of outcomes for sales, gross profit dollars, and gross margins seems quite broad, so I'm curious if you could elaborate on that. Additionally, could you comment on the factors affecting gross margins and SG&A in the fourth quarter? I would also like to discuss the longer-term strategy and when you anticipate returning to that. I assume this will be covered at the Analyst Day, but any initial comments would be appreciated.

Yes. Hi, Karen. On the long-term algorithm, maybe hit that one first. I very much, as I've said just a moment ago, look forward to getting back to our long-term algorithm. We don't see any internal issues in terms of returning to our long-term algorithm. Our market continues to be incredibly favorable in terms of just the overall optics of our market, the strength of our markets, and the attractiveness of our markets. Our position and competitive differentiation in the market are as strong as they've ever been. We think the combination of those two absolutely in normal operating circumstances leads to our long-term algorithm. We're very confident in our ability to return to that long-term algorithm. The two main things that we're watching in the context of returning to that are the goods-to-services split on overall consumer expenditures and how inflation, deflation plays out as that impacts our average ticket. As we've talked about in the past, our recipe is really 50% growth based on average ticket, and 50% growth based on comp transactions. The goods-to-services shift is much more about a transaction type of headwind and then inflation, deflation obviously being an average ticket headwind. We see that both the pressures, the headwinds on both of those dissipating into 2025. I think the question is to what degree and over what period of time through '25. We will share more of that, a little bit of that in our Investor Day. Certainly, you'll hear our perspective on that in our Q4 earnings call. As it relates to the wide range of sales outcomes in Q4, I'd start with in the month of October has played out much like what we expected, with the addition being the hurricanes that Kurt talked about previously. Those will provide a modest benefit to Q4. While the holiday sales are important for our business, the make or break is how we support our customers with what they need, particularly during the cooler weather season. So that's what's most indicative of our sales in Q4. And I'll turn it over to Kurt for some comments on margin.

Yes, Karen, here's how we look at the gross margin and the SG&A in the fourth quarter. I'd start by saying the all year, the business has been remarkably consistent. I'll refer to Q4 versus some of the highlights of Q3. We had 56 basis points of benefit in Q3 as it was the last quarter before we lapped the significant benefit we started to see last year in fourth quarter on both transportation and our cost-saving initiatives. We'll have only a modest level of benefit remaining on transportation and cost in fourth quarter that will likely be offset by product mix. So gross margin is relatively flat year-over-year in Q4. On the SG&A side, the other puts and takes are similar other than in Q3, we were cycling a 35 basis point benefit of a one-time depreciation. In Q4, we'll still have roughly 20 basis points, 25 basis points of pressure on the new distribution center. We anticipate a little bit more leverage on the comp sales, so you see yourself moving in about a 50, 60, 65 basis points of pressure from SG&A in the fourth quarter due to fewer one-time benefits. So net, that does put operating margin in an unfavorable decline from year-over-year, but that's always been in our expectations for fourth quarter as we were lapping the strongest performance year-over-year.

Thank you. Hopefully, you'll bring women's wranglers to your stores.

Thank you. The next question is from the line of Michael Lasser with UBS. Your line is now open. Please go ahead.

Good morning. Thank you so much for taking my question. My question is about the debate on whether Tractor Supply can get back to the historic levels of 1% to 2% growth in traffic. It seems like you're suggesting that the ability to achieve consistent traffic growth is going to be macro-dependent, influenced by the shift from services to goods. Yet, Tractor being a more needs-based retailer that has consistent trends in areas like consumables has held up relatively well. So what specifically do you see as influencing the assortment or category performance that will improve in a more robust economic environment to drive that traffic growth? And as you see a little bit less gross margin expansion because of some drivers from this year staying, would you be willing to sacrifice some gross margin in order to drive the traffic growth? Thank you very much.

Hi, Michael, thanks for the question. First off, I'd step back; our growth over the last five years post-COVID is the second highest in all retail among major retailers. The key to that has been strength in both average ticket and comp transactions. Comp transaction growth has not only been a highlight of Tractor Supply for the last 30 years but also in the last five. I would argue we are one of the few that have shown strong positive double-digit comp transaction growth over a multi-five-year period. If you look at retail, overall transaction growth is flat to negative. When you look at our modestly positive comp transactions in conjunction with our new-store growth, I would argue we are in the top quartile of retail currently in terms of overall transactions. As I look forward, it really all comes down to the goods-to-services shift and how our customers have a little more money to spend on items in our stores. That's going to translate into that extra half of transaction a year to them and also make its way a little bit into units per transaction. However, our current positive comp transactions are very comparable to the rest of retail. I believe that as retail moderates back to its normal levels, rising tides will lift all boats, and those of us with positive traffic will see stronger results.

Thank you very much.

Thank you. The next question is from the line of Steven Forbes with Guggenheim Partners. Your line is now open. Please go ahead.

Good morning. This is Julio Marquez on for Steve. Hal, I'm curious if you could expand on how the 37 million Neighbor's Club members informed the decision to acquire Allivet. How many Neighbor's Club members use an online solution for their pet pharmacy needs? And any other color you can help contextualize the opportunity there would be great. Thank you.

Yes, thanks. We are really excited about acquiring Allivet. I think it's a great example of a tuck-in acquisition. They've been a partner to us for a few years now as our pet RX provider. What we've observed over those few years has been best-in-class in terms of their nationwide prescription licensing capabilities, distribution centers, and their ability to get product shipped out in 24 hours, along with their website and strong management team. Given their excellent financial condition, we feel it's a great business that we're thrilled to welcome into the Tractor Supply family. We look forward to bringing a low-cost, affordable, wide array of prescriptions for pets and animals to our customers. As you said, we have over 37 million members of our Neighbor's Club program, which is highly engaged. We continue to add value, and our customers continue to become more loyal to us. The combination of Allivet with our Neighbor's Club is going to be a great mix and we look forward to getting this deal done, approved, closed, and starting to bring that to our Neighbor's Club members in ways we’ve previously enhanced their experience. We're very excited about it, and more will come during our Investment Community Day on that topic on December 5th.

Great. And just a quick follow-up. Kurt, following two years of flattish comps, has there been any change to the building blocks behind that 10.10% to 10.6% long-term EBIT margin guidance? Realizing productivity plays a role, but are there any margin factors that are maybe structurally higher today than where you originally framed it?

No, really, there's not anything significant in our algorithm to attend 10.10% to 10.6%, recognizing that we'll continue to invest for the long term. The last two years' comp sales pressures have affected our ability to leverage SG&A, but the team has done a phenomenal job finding ways to offset that. There are numerous productivity cases within both our stores and our logistics distribution team. Our team has done well to maintain a 10% plus operating margin in the last couple of years. Our algorithm is still intact, and Hal has mentioned all our expectations of being able to get back to that long-term algorithm. This gives a better opportunity to avoid pressures of SG&A. I feel very confident with the long-term algorithm at this point.

Thank you. The next question is from the line of Peter Benedict with Baird. Your line is now open. Please go ahead.

Hi, good morning, guys. Thanks for taking the question. Maybe one for Seth. Just around the big ticket strength, it certainly continues to be unique relative to most of retail. You talked about some innovation, I think some sharp pricing on these items. I'm just curious if you could expand on it. Any other factors helping here? I don't know if the use of private credit has been playing a role. And how do you guys think about replacement cycles for some of those bigger ticket categories? Is that potentially starting to tick in here? I'm just kind of curious if you expand on that a little bit. Thank you.

Yes. Hi, Peter. Thanks for the question. Just overall with big ticket, as we mentioned, we are very pleased with the performance there as Q3 really was much in line with the strength of our performance as we exited Q2, and we really maintained that. The third quarter was our third consecutive quarter of big ticket growth, and as you mentioned, it’s seen in categories such as Zero-turns, Front Engine Riders, Recreational Vehicles, and a couple of other categories. I would point to a couple of things that have really differentiated us a little bit from the market. I think our merchants have done a fantastic job with the product lineup, where we are offering quality, high-value products across multiple brands, bringing innovation. We are working on differentiation with exclusive features tailored to the needs of our customer, particularly those in large-animal or large-acre ownership. The next point I'd highlight is the strategic inventory investments that Kurt mentioned. Upon exiting Q2, we picked up on strength here and strategically placed inventory in these key categories to maintain that strength. Lastly, our private-label credit card momentum has been very strong as our supplier base partners continue to drive that. When you combine the product lineup, value quality proposition, and unique programs like the private-label credit cards and Neighbor's Club, it's a combination of these initiatives that is really contributing to our success. Our team is building for 2025 right now, and you can expect to see continued expansion in these areas, and we're really excited about the lineup as we move into next year.

Thank you. The next question is from the line of Peter Keith with Piper Sandler. Your line is now open. Please go ahead.

Hi, thanks. Good morning, everyone. Congrats on the continued market share gains. I wanted to ask about technology. Hal, you referenced some greater data integrity and personalization with Neighbor's Club. I was wondering how you're leveraging technology and AI to provide those solutions and anything that we might think about going into next year that could provide some type of sales benefit.

Yes, good morning, Peter, and thanks for the question. I'd say we are infusing machine learning, data science, and AI across the business both in our own analytics frameworks, as well as leveraging our software providers' capabilities. This includes inventory management through Reflexis and our new customer data platform for customer insights and personalization. Additionally, we are building solutions internally to drive better customer service in our stores, whether through upgrades to our camera software or hardware to drive improved customer service through various use cases. We're also using tools like Hey GURA, which our team members use to ask for insights while engaging customers or educating themselves. We're leveraging data science, machine learning, and AI throughout our operations in distribution centers, customer service in stores, and merchant and marketing analytics. Thanks for the question, Peter.

Operator, we'll have time for one more question.

Thank you, Mary Winn. Our final question comes from the line of Scot Ciccarelli with Truist. Your line is now open. Please go ahead.

Good morning, guys. Thanks for squeezing me in. First, a quick clarification. I think it might have been on Chuck's question. Are you expecting this year's same-SKU deflation to flip to same-SKU inflation in 2025? And then kind of related to that, are you able to quantify to any degree the pressure on your business from the decline in farm income that we've seen because of commodity deflation? Thanks.

Hi, Scott, this is Kurt. On deflation, for the first nine months of the year, it's generally run in line with our plan and expectations. We have seen a slight step down, modestly on some commodities. I expect Q4 to have a similar but slightly less deflationary impact than Q3. The timing of when that conversion flips has been pushed out from three to six months. You'll have a much better view of the expectations for 2025 in January. There are indications we're shifting out of a deflationary environment towards an inflationary one. In regards to your second question, we have looked at farm income levels in strong years and soft years, and we really don't see much correlation to that. The majority of our customers are not professional farmers; it's not their number-one source of income. If anything, we look at the overall market area, and if there's a benefit to that market area, how the non-farmers spend. At this point, we are not seeing anything that points to that affecting our business today.

All right. Well, that will get us to the top of the hour and wrap up our Q&A for today. As always, we're available for any follow-up calls. Please be on the lookout for the invitation to our Investment Community Day in December that Hal referenced earlier. Please reach out if you need any further information. We look forward to the event, and thank you for your interest in Tractor Supply.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.