Tractor Supply Company (TSCO) Q3 2026 Earnings Call Transcript

Operator: Participants limit themselves to 1 question. Our question-and-answer session did not open until the start of this call. 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, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn? Please go ahead.

Mary Winn Pilkington: Thank you, Tamiya. Good morning, everyone. We appreciate your time and participation in today's call. On the call today participating in our prepared remarks are Hal Lawton, our Chief Executive Officer and Kurt D. Barton, our Chief Financial Officer. We will also have Seth Estep, EVP and chief merchant, John Ortiz, EVP and Chief Stores Officer and Craig Ledbetter, our SVP and Chief Supply Chain Officer, join the call for the question-and-answer portion. Following our prepared remarks, we will open the floor for questions. Now let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 2 thousand. 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, it 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 in this call. As we move into the Q&A session, please limit yourself to 1 to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation. We will also be available after the call for any further discussions. Now it is my pleasure to turn the call over to Hal.

Harry A. Lawton: Thank you, Mary Winn, and good morning, everyone. We appreciate you joining us today. The third quarter marked a step forward for Tractor Supply. We are encouraged by the improving sales momentum and broader strength across our business. While there is more work ahead, we believe our actions are gaining traction. I want to thank our more than 54 thousand team members for their hard work and commitment to our customers and communities. Their dedication to delivering legendary service remains at the heart of our business. It is also a pleasure to welcome Fahim Sadike to the team as our Chief Technology and Digital Officer. Fahim brings a tremendous amount of technical experience and retail knowledge to Tractor Supply. We look forward to his contributions to the business. Our team is acting with urgency to improve comparable sales strengthen profitability, sharpen our strategic priorities, and make deliberate choices about where we invest our capital and resources. Our objectives are clear: reaccelerate comparable store sales growth, restore operating margins to levels we believe this business can achieve, and unlock the full potential of Tractor Supply to deliver attractive long term shareholder returns. Let me start with a few highlights from the quarter. Net sales increased 5.1% to $3.91 billion driven by new store openings, VIP Petcare, and comp sales growth. Comps increased 0.4% on top of 3.9% growth in the third quarter a year ago, reflecting a 0.7% increase in average ticket and a 0.3% decline in transactions. Transactions were cycling 2.7% growth last year resulting in 1 of our strongest 2 year stacks of the past 5 years. Diluted EPS was $0.43 Of note, sales trends and transactions strengthened as the quarter progressed. Monthly comps improved from a decline of less than 1% in July, to modest growth in August to solid growth in September. That stronger finish included positive performance across a broader set of merchandising divisions and regions. Our consumable, usable, and edible categories continued to outperform the chain, with strong momentum in September. We saw strength in wildlife supplies, equine and livestock, truck tool and hardware, and seasonal products. Digital also grew at a double digit rate. These gains were partially offset by softness in big ticket and companion animal, although companion animal trends improved sequentially by quarter this year. Turning to our market and customers. The story remains largely with what we shared in the second quarter. Several broader trends continue to pressure the categories we serve. Elevated interest rates and reduced housing mobility are weighing on property improvements and larger projects. Peter ownership headwinds, particularly new pet acquisition, continue to affect demand in certain categories. Across the farm economy, increases in commodity prices and operating costs are influencing purchasing decisions. Customers continue to spend but remain cautious. In our most recent consumer work, more than 60% said they felt less comfortable making non essential purchases than 6 months ago. Inflation. Higher fuel costs, and broader uncertainty continue to weigh on how household budgets and discretionary spending. Despite these pressures, our core customers remain engaged. Higher spending customers again led quarterly performance, delivering above comp chain growth for the fourth consecutive quarter. And Neighbor's Club members represented nearly 82% of third quarter sales, with member comps increasing and retention improving modestly. We are also encouraged by spending trends among younger customers and the performance of our rural stores. Our younger demographic led comparable sales growth across age groups in the third quarter with strength among Gen Z and Millennials. And across our store base, rural locations returned to more positive comp growth and again outperformed the other pop population density groups. The momentum we experienced in Q3 has continued into October. We believe we gained market share across most metrics and categories, with improvement through the quarter. The actions we are taking are contributing to that progress. We are not waiting for the operating environment to improve, and we are building on these actions to drive further sales growth. And let me highlight 3 areas where we are seeing a meaningful customer response. First, our investments in value. As previously shared, we expect to realize $100 million in tariff refunds this year. And we are investing about 40% of that benefit in customer value, with the remainder helping to offset higher freight cost. A significant portion of our price investment has been on everyday essentials that matter most to our customers, and we have been focused on approximately 50 everyday Essentials SKUs that matter most to our customers. And we have seen strong unit growth on these items, reinforcing that our investments are delivering value to customers and strengthening our competitive position. Looking ahead, we remain committed to value and price leadership. While we need to recover some of the higher costs we are experiencing, we plan to continue to invest to keep prices low on products our customers purchase regularly. As always, our goal is to strengthen customer loyalty, drive traffic, and support long term growth. Second, on pet. Pet continues to improve. Companion animal performance remains below our expectations, but the sequential improvement is encouraging. Pet comps improved from approximately -4% in Q1, to -3% in Q2 to -2% in Q3. And including new stores, Oliver and our VIP Petcare acquisition, our total pet business grew 5% in the quarter. Our work around assortment, value, exclusive brands, services, and digital is beginning to resonate We are seeing outsized strength in 4Health, as well as triple digit growth in our subscription business. Also, based on Freshpet's performance, we are increasing our year end rollout target from more than 700 stores to approximately 1 thousand stores. We have also successfully integrated Oliver as the prescription platform for VIP Petcare post that acquisition. Together these initiatives collectively are strengthening our pet business. The third area I would like to highlight is digital. Digital continues to be a meaningful source of growth and customer engagement. Customers have always valued the convenience of Tractor Supply. And increasingly they are defining that convenience as shopping with us online and taking advantage of our nationwide store network for pickup and delivery. Digital sales increased approximately 16% in the quarter, with growth in both traffic and conversion. And we continue to expand delivery and final mile capabilities. Making it easier for customers to shop whenever and however they choose. We see opportunities to improve convenience, increase purchase frequency, and capture a greater share of customer spending. As we move into Q4, we expect continued momentum in sales trends while recognizing that consumers remain cautious. Our team is focused on executing our initiatives and building on the progress we made. Beyond near term performance, I want to discuss the strategic reassessment we outlined on our second quarter earnings call. As a reminder, we are taking a comprehensive look at our operating model, strategic priorities, and capital allocation. While the work continues, I want to share several perspectives and decisions that are already emerging and that we have made. While our end markets consumer environment and cost structures have changed materially since we introduced our last long term strategy in December 2024. The investments we have made over the past several years have strengthened our business and positioned us for the next phase of growth. We are building on that foundation to sharpen our priorities and continue to make deliberate choices about how we operate, invest, and generate stronger returns. As previously shared, we remain committed to generating operating margin leverage as comparable store sales move above approximately 2%. An important factor in this model is depreciation. Following several years of elevated capital investment, we expect depreciation growth to moderate to the mid single digit or lower in 2027. Additionally, we are not comfortable operating Tractor Supply at an operating margin below 9%. We believe this business can and should perform at a higher level. And we have work to do to get there. In the near term, our focus is on protecting operating margins in a challenging cost environment while positioning the business to generate stronger leverage as comparable sales improve. To that end, we are taking actions on both gross margin and SG&A as we look towards 2027 and 2028. Like much of the retail industry, we are going to need to offset the reinvested tariff refunds and anticipate continued inflationary pressures, particularly with higher diesel and commodity cost. We are working closely with vendors on a broad range of efforts to improve product cost and offset inflation. As an example, renegotiated vendor support agreements are expected to generate more than $50 million in annualized benefits next year. We are also taking actions across pricing, assortment and supply chain while maintaining compelling customer value and strengthening gross margin dollars. Additionally, we expect to realize last mile savings from our new distribution center in Nampa, Idaho next year. On the SG&A side, we are targeting more than $75 million in additional annual reductions over 2027 and 2028. These savings are incremental to the operating margin leverage we expect as comps move above 2%. This commitment reflects actions already underway including the completed Petsense closures, adjustments we have made to our benefits programs, and a comprehensive rollout of our store productivity program that has been in pilot for several months. We are also pursuing opportunities to reduce cost across our business, including supply chain operations, corporate efficiency and the use of technology and process improvements to simplify work. Stronger comps, actions to offset cost pressures, moderating depreciation and incremental productivity savings provide a path to restoring operating margins above 9% over time. Shifting to an update on our capital allocation priorities. Over the past few years, we made significant capital investments to support our sales growth following COVID, and the launch of our Life Out Here 2030 initiatives. We expanded and modernized our supply chain network. Grew our Fusion footprint to more than 60% of our stores, and built hundreds of new stores. With much of that investment behind us, we expect capital expenditures to moderate significantly and move below 4% of sales in 2027 and beyond, providing greater flexibility in deploying cash generated by the business. At the heart of our business is a strong culture grounded in our mission and values. Our team members bring that culture to life every day through legendary service and a genuine understanding of our customers and the Out Here lifestyle. We recognize that our recent performance has not met our expectations. But we have confidence in our business, our team members and the opportunities ahead. We are taking decisive action intended to improve performance strengthen our earnings power, and unlock the full potential of Tractor Supply. We expect to provide additional detail on our 27 priorities guidance and also our updated long term financial framework as this work is completed. With that, I will turn the call over to Kurt to discuss the quarter, our outlook, and the financial implications of the actions underway.

Kurt D. Barton: Thank you, Hal, and good morning, everyone. I will first build on Hal's comments by focusing on the financial performance in the quarter. Then how we are managing the current cost environment and wrap it up with our outlook. Let me first add a few observations on the underlying sales trends. Transactions accelerated through the quarter and were generally positive outside of July. Units per transaction posted positive growth in every month and reached their strongest level of the year at quarter end. Our consumable, usable, and edible categories also accelerated month over month. Taken together, these are indications of improvement in our core business. Our focus is on sustaining that improvement and translating it into more consistent comparable sales growth and stronger profitability. Moving down the income statement. Gross profit increased 2.6% to $1.42 billion Gross margin was approximately 36.4% down about 90 basis points from the prior year. There were several puts and takes within gross margin. The largest pressures were higher transportation costs, both in rising fuel costs and carrier rates, as well as the investments we have made to strengthen our price value position. These were partially offset by tariff related benefits. Transportation pressures intensified from the second quarter, and were greater than we anticipated entering the third quarter. The higher transportation costs more than offset some of the productivity gains we continue to achieve across the supply chain. We are pleased with the early operational performance of our new DC in Nampa, Idaho, and we expect the benefits from that capacity and productivity to begin contributing more meaningfully as we move forward. The approximately $100 million full year tariff refund benefit included recognition in gross margin of about $70 million in Q2, $15 million in Q3, with the remaining $15 million expected in Q4. As we discussed on our last call, we planned to reinvest those dollars somewhat ratably throughout the second third, and fourth quarters as we provide value to our customers and help offset higher freight costs. As Hal described in his remarks, we are also taking actions across pricing, product costs, supply chain operations to address these pressures and support gross margin improvement over time. Turning to SG&A. SG&A was approximately $1.12 billion or 28.6% of sales. Compared with 28.1% in the prior year. The increase of 43 basis points primarily reflects fixed cost deleverage. Given the level of comparable store sales. It also includes 15 basis points of start up costs associated with our new distribution center. These pressures were partially offset by expense productivity, lower incentive compensation, and benefits from our fee development stores as part of our sale leaseback program. Importantly, we are beginning to see tangible progress from the actions we discussed last quarter across the organization teams are taking a more rigorous approach to spending, labor productivity, and resource allocation. That work is ongoing, and we believe there is additional opportunity ahead. Operating income for the quarter was $307.7 million representing an operating margin of approximately 7.9%. Our effective tax rate was 22.1% compared to 21.0% in the prior year. Primarily reflecting the lapping of purchased tax credits in the prior year as part of our tax planning initiatives. Turning quickly to the balance sheet. Average store inventory increased 4.8% compared to the prior year. The primary drivers were 3.5 points of inflation, inclusive of higher transportation costs and approximately a point of growth from the load in of inventory at our new distribution center. We continue to believe our inventory is in good shape and appropriate at this time. Turning now to the fourth quarter and our outlook for the balance of the year. As we enter the fourth quarter, we are reaffirming our 2026 guidance. The sales improvement we saw as we exited the third quarter is a positive sign. And our current planning assumptions contemplate positive comparable sales during the fourth quarter. At the same time, our outlook remains measured and we have considered a variety of scenarios. The fourth quarter is our most weather sensitive quarter. And there remains uncertainty around the consumer particularly for discretionary and large ticket purchases. That said, we are encouraged by the opportunities our seasonal and holiday offerings present. On gross margin, we expect a more stable year over year comparison in the fourth quarter than we experienced in the third quarter. As we discussed on our last call, the prior year comparison becomes less challenging and supply chain efficiencies from our new distribution center are expected to begin contributing to gross margin. Start up costs will continue to affect SG&A in the fourth quarter as this facility ramps. A more favorable comparison does not mean the underlying cost pressures have gone away. Higher transportation costs and inflation in certain commodities remain headwinds. We are responding through product cost management, selective pricing actions, supply chain productivity, and expense control while protecting our competitive value position. Our full year adjusted operating margin outlook reflects our year to date performance, the more manageable fourth quarter gross margin comparison based on the rate of decline moderating, and the expense actions underway. Let me spend a moment on operating margin because we know this remains an important question for investors. A year ago, we discussed an operating margin inflection point around the 2% comparable sales range. Our 2027 planning is focused on the actions required to support that performance while absorbing the current cost pressures such as higher fuel, freight, commodity costs. At the same time, there are several structural factors working in our favor. We have and expect to continue realizing productivity improvements across our distribution network. Additionally, we are actively engaged improve the economics of our vendor relationships to further reflect the investments we have made in our customer reach and capabilities. These benefits should help support our growth priorities and offset a portion of the cost of maintaining our value proposition. We are also taking actions across SG&A. The repositioning of Petsense will remove losses from the business. Depreciation growth should moderate as our capital spending normalizes. We have made meaningful progress on a comprehensive store productivity program and we are taking an even more disciplined approach to where we allocate both capital and operating expenses. Our objective remains straightforward, strengthen comparable sales performance and convert that improvement into stronger earnings growth and returns. Shifting to capital allocation. For 2026, we expect capital expenditures to trend towards the lower end of our range and share repurchases towards the higher end. We now expect net capital expenditures in the range of $675 million to $700 million and share repurchases of $425 million to $450 million. The net capital expenditures forecast includes expected sale leaseback proceeds in the range of $325 million to $350 million. It is important to note that approximately 2/3 of these proceeds represent a recovery of capital expenditures for the construction of new stores. While the remainder relates to existing store sale leaseback proceeds. As Hal discussed, we are continuing the work we began last quarter to sharpen our strategic priorities and capital allocation. Our focus is in increasingly on improving the productivity of our existing assets and investing in capabilities that support future growth. We continue to see attractive economics from new stores. That has not changed. As discussed last quarter, we expect to moderate new store openings in 2027 to approximately 85 to 90 stores. This is a capital allocation decision, not a change in our view of the long term new store opportunity of 3.2 thousand sites. 've also decided to move toward a more flexible seasonal garden center format that requires less capital while capturing the most productive selling periods. In addition, we intend to expand the outdoor recreation and wildlife supplies program to a meaningful number of our stores by the end of next year. Building on the strong customer response. More broadly, we are increasing our emphasis on digital delivery, final mile, pet and existing store productivity, areas where we see opportunities to strengthen our customer proposition, grow sales, and improve returns. We remain committed to an investment grade balance sheet and our long standing lease adjusted leverage framework of approximately 2.0x to 2.5x debt to EBITDAR. Our capital return priorities include a growing dividend along with consistent share repurchases. As capital requirements moderate and productivity improves, we expect greater flexibility to return capital to shareholders while continuing to invest in the business. Stepping back, Tractor Supply remains a differentiated business with significant competitive advantages. A loyal and engaged customer base, a productive store network, a low cost supply chain, and substantial opportunities to grow share of wallet. With that, I will turn the call back to Hal for a few closing comments.

Harry A. Lawton: Thank you, Kurt. Before we open the call for questions, let me leave you with a few final thoughts. We made progress on sales in the third quarter. And we are encouraged by the customer response to the actions we are taking. At the same time, recognize there is more work to do. Our priority is now to build on that momentum in the fourth quarter and drive more consistent performance across the business. We also know that cost pressures remain and some of those pressures will carry into 2027. And we are not waiting for the environment to improve. We are taking actions now to simplify how we operate, improve productivity, and get more out of the investments we have already made. As we look ahead, our priorities are clear. We need to drive stronger, comparable sales, manage cost with discipline, and focus our capital on the opportunities that generate the best returns. These actions will strengthen the fundamentals of our business and position Tractor Supply for sustainable earnings growth and long term value creation. As we move into the fourth quarter, our focus remains on being the dependable supplier our customers count on. Whether it is preparing for winter, caring for their animals, or maintaining their homes and properties, we have an important and critical role to play in their lives. I remain confident in our business, our strategy, and our team's ability to execute. We have a strong foundation meaningful opportunities ahead of us, and a clear focus on the work required to deliver better results. I hope today's discussion gives you a better understanding of the progress we are making the challenges we are addressing, and the work underway to strengthen Tractor Supply for the long term. I want to thank our team members for their commitment to our customers and communities. That connection remains at the heart of Tractor Supply. And it is a strength we will continue to build on. With that, let's open the call for questions.

Operator: Thank you. Will now begin the question and answer session. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by 2. Again, to ask a question, please press star 1. The first question comes from Peter Benedict with Baird.

Peter Benedict: Hi. Good morning, guys. Thanks for taking the question. Kurt, I think I will ask 1 about gross margin. You said that the fourth quarter you are expecting more stable than 3Q. Is that just down less than the 90 basis points? Or do you think it is going to be close to flat on a year over year basis? And as we kind of move into next year, appreciate some of those. The comments you guys have given, around the things you are doing. But I. I am kinda curious on how we should be thinking about gross margin next year We do have to lap some of these tariff refunds. How do we think about kind of the first half of next year? Just any color you could provide in terms of gross margin for next year in total. I know you talked about $50 million savings, but would be really helpful just to flush that out a bit further. Thanks so much.

Kurt D. Barton: Yeah. Sure. Hey, Peter. Good morning. Good morning to everybody as well. I will do 2 things. I think to address your questions, I will bridge third quarter to fourth quarter. And then your second part of your question's a bit about know, addressing gross margin and some of the key pressures and offsets going into 2027. Very specifically, we do expect our performance and gross margin year over year in Q4 to be better than it was in Q3. While modestly down, and I would say modestly 10 to 30 basis points down would be our base case assumption. What really plays into that from the key drivers freight pressures, expect to continue to persist. And the pressure on gross margin similar to Q3. There are easier compares in the third. The fourth quarter than there was in Q3. If you look back, Q3 had 1 of the strongest gross margin performance of last year. And then we had higher promotions, a number of pressures in Q4 last year, so we are lapping some easier compares. As we have mentioned, we have put in some pricing actions and so are there. There are negotiations. there is partnerships with our vendors and some pricing actions that are already mitigating some of the pressure in Q4. The last thing in Q4 is we begin to see benefits coming out of the new 15 to 20 basis points of benefit from the Nampa DC beginning in Q4. As far as next year, we understand that we have got cost pressures that we have seen in Q3 and Q4. We are lapping about $100 million of tariff refunds. Hal made mention to the support and the negotiations with their vendors to be able to help offset that. $50 million-plus that Hal mentioned, can drive about 30 basis points of benefit next year. We have about 10 basis points of benefit coming from a new distribution center. So when you think about lapping even the tariff refund benefit that we had this year, you are really closing the gap to about 20 basis points. And we have said we are. We have got cost negotiations. Price, selective pricing actions in place, and we believe that gap is pretty manageable. And we have talked about our SG&A cost benefits. And this may be an environment that on overall operating margin, our SG&A cost benefits are also helping solve the overall operating margin benefit. And, you know, with that, I think we have I think we have covered the primary drivers for both fourth quarter the fiscal year, and I appreciate the question.

Harry A. Lawton: Thank you.

Operator: Thank you. The next question comes from Christopher Horvers with JPMorgan.

Christopher Horvers: Thanks, and thank you for taking my question. You mentioned a number of times the momentum in the business that you saw build in September. And has continued in October. Can you provide more clarity on where you are quarter to date? And then in the pretty weather sensitive business, do you to what extent do you think the weather has been, you know, maybe a helper in September and October in related to the momentum, did inflation accelerate over the quarter And is that part of the momentum that you are seeing versus on the unit side? And where do you think momentum, where inflation lands in the fourth quarter of this year? Thanks so much.

Harry A. Lawton: Yeah. Hey, Christopher. Thanks for the question and thanks for joining us on the call today. As mentioned on the call and your reiteration, the momentum that we saw sequentially improve through the third quarter leading to solid positive comps in September. Has continued into October. So kind of our run rate for October is very much in line with what our exit and run rate was in September. If I were to point to a few things on Q3, 1, really across almost any measurement of share, our share performance improved in Q3. As it relates to the market, you know, I would say the market's that we participated in were flat to perhaps modestly lesser. More headwinds in the quarter. We had kinda lesser help. I do not think weather was a positive factor for us. And also, you know, all The US retail sales data sets you look at, whether it is Census Bureau, NRF, etcetera, all slowed through the quarter counter to our performance. So think all that is indicative of the share gains that we took. If you look at, say, year to date versus Q3 or first half versus Q3, the entire shift in our comp performance was in comp So, you know, it speaks to the. Our ability in Q3 to get more foot steps in the store and convert those footsteps into sales. And we are continuing to see that into Q4 here. We are running positive comp transactions and positive comps in the first 3.5 weeks here of Q4. And so we are continuing to see sequential improvement in comp transactions. As it relates to weather here for Q4, I think it is been kinda neutral ish so far. I mean, that hurricane came through was really much to nothing. Actually left a little rain that impacted the first week, and then it is been, you know, nice you know, modestly cool these last couple weeks, but, really, flat kind of from a temperatures perspective versus last year. So I would say our performance again, in October is really, been more around share gains and the work that we are doing versus any tailwinds that we are getting from the market. Anyway, thanks so much, Christopher, for the question.

Operator: Thank you. Next question comes from Steven Zaccone with Citi. You may proceed.

Steven Zaccone: Hey. Good morning. Thanks so much for taking my question. I want to build on Christopher's question. I guess I was curious for your assessment of how much of some of the initiatives you have in place are getting you back to this sort of you know, solidly positive comp. And then what is missing to kind of feel a bit better growth in the business You know, is it the macro sort of needs to get better from a consumer uncertainty perspective on the discretionary side? As you look to 2027, you take sort of a preliminary view. Can some of these initiatives you have in place, you know, continue the business and sort of a solid positive comp? And any sort of quantification would be helpful.

Harry A. Lawton: Yeah. Thanks, Steven, for the question. And back to a little bit of the commentary in the call-- Question with Christopher. We would assert that the vast majority of the improvement that we saw in the quarter was due to the work and initiatives that the team has been pushing on. And I highlighted some of those in the calls related to our digital business performance, where customers are really embracing the improved customer experiences that we are providing from an online perspective, as well as the continued rollout of our final mile delivery program. And the combination of those 2 drove us 16% to 17% growth in our digital business for the quarter. Similarly, our delivery program continues to exceed all expectations and all plans that we have had. We talked about how we are gonna be leaning into that more next year. We are seeing significant growth and reception from our customers on that. As I mentioned on pet, we continue to see sequential improvement in that business. Very much you can look at the actions that we are taking as the underlying drivers of those. And, again, I think that is in the context of share gain in that area. And then just overall in our CUE business, in our essential business, you know, that is what we are the destination for. We are the grocery store for our pets our customers' pets, animals, and we absolutely gained share on that in those categories in Q3 and will continue to. And a little bit on the margins, just wanted to take a moment to talk about that. And Seth can provide some more detail in a future question if it comes up. But as it relates to Q4, we understand what we got to do on margins and pricing and gross margin in Q4 and into next year. And, hopefully, you are taking away from today's call that we understand that mission and we are taking actions on that mission. We are taking actions as it relates to SG&A. We are also taking real actions that relates to cost of goods, and We are taking actions as it relates to pricing. While we are committed to being, price competitively and leading in the market, we also know that this is an environment where pricing is likely going to be moving up over the next few months. We have already started that journey. We are seeing the market act very rationally as we do that. And we expect that will continue over the next few months. And will be a contributing factor to the improving margin rates that we are highlighting today. Thank you.

Operator: The next question comes from Michael Lasser with UBS. You may proceed.

Michael Lasser: Good morning. Thank you so much for taking my question. How much of the increase promotional and discounting posture do you think had an impact on your sales performance in the third quarter? And as you mentioned, it is a very challenging environment for the consumer. So to the extent that you maintain this position of being a bit more aggressive with your top 50 items, into next year. And the composition of your sales gravitates towards these more items that are on promotion, do you think you could keep your operating margin flat if you did comp 2% next year knowing all these puts and takes that you have in place today? Thank you so much.

Harry A. Lawton: Hey, Michael. Thanks so much for the question. Appreciate you joining the call today. A few things I would assert. 1, I would not say that we were more promotional in Q3. We leaned into everyday value in Q3, but we certainly were not more promotional in Q3. The second thing I would say is that we price and move our margins across our full portfolio. So Seth and the team are doing an excellent job of knowing that we have got to improve our margins, which means cost management with our vendors as well as pricing actions. And we will do that in a way that keeps us favorably positioned in the market. As I mentioned, we are already seeing movement in the market over the last 3 or 4 weeks, and the market is acting very rationally as we as we make that movement. And we intend to continue to stay competitively positioned as we move into next year on these set of essential SKUs. Other thing I would just say specifically to next year, yes, we are committed at a 2% comp to having operating margin break even. That is our pivot point. $75 million that we have talked about today, that is incremental SG&A actions that we will be taking that will fall over the next 2 years from an annualized perspective those are incremental to that 2% operating margin inflection point. We will provide further clarity in our next call on what the resulting range for operating margin is for next year because, obviously, that is dependent upon what the comp sales outlook we have. But to be very clear, we are committed to holding our operating margins at a 2% comp next year. and that is prior to the $75 million incremental SG&A. Thank you.

Operator: The next question comes from Simeon Gutman with Morgan Stanley. You may proceed.

Simeon Gutman: Hal. Hey, Kurt. Thanks for taking my question. I wanted to ask about this 9% margin. You said, I do not know if I have used the word right, but you are not, like, satisfied if they go below that number, which I think is understandable. So investors have been beginning to condition by retailers to focus on operating income dollar growth. Rather than a margin target. So you are drawing a line at 9%. And by the way, I do not think it is unreasonable Is there a risk that you end up sacrificing investments that can drive dollar growth fast but without the-- like, with diluting the margin rate? But so how do you balance the objectives, and then how do you. Why do you think you could do both?

Harry A. Lawton: Yeah. Thanks, Simeon, for the question. I think this is the tried and tested, you know, back and forth on retail, right, operating margin dollars versus operating margin rate. What I would say is, you know, at the highest level, we are always around driving operating margin dollars. that is what you take to the bank, and that is what drives the overall business. That said, I would say there is obviously optics and perspectives that you have on the fundamentals of the business. And we are not comfortable running the business below a 9% operating margin. And we know we need to move back above that as quickly as possible. And we are confident that we can grow operating margin dollars continue to grow share and improve our comps, as well as drive our operating margin rate back towards that goal. And as I said again, next year, we are building an operating model and a business plan that allows us at a 2% comp to inflect on operating margins and the $75 million of SG&A work that we are doing that will layer in over the next 2 years, and provide more details on how that layers in over the next 2 years in our upcoming call. But a good portion of it will be in the first year just to set expectations And that will be incremental to that 2% comp inflection point. Thank you.

Operator: The following comes from Charles Cerankosky with Northcoast Research. You may proceed.

Charles Cerankosky: Good morning, everyone. Could you maybe restate your pet strategy now that you have got far fewer Petsense stores, more ecommerce, and Allivet in with VIP Petcare, but maybe give us the update with all that combined, please.

Jonathan Seth Estep: Yeah. Hey, Chuck. This is Seth. Thanks for the question. Yeah. When we go back and we look at our pet strategy, it is really around 3 core pillars. And it starts with our store and our store assortments. With that, over the course of this last year, the team has done a very nice job resetting every single consumable category in pet multiple times, driving a level of localization, driving, key brands that we have, driving for health and our exclusive brands that we mentioned in prepared remarks that are continuing to considerably outperform, the broader brands within our store. And, also, just looking at total space allocation when you look at our store assortment from that perspective. We discussed how we have launched Freshpet in stores, and we have raised our target on this year from 700 stores to 1 thousand. And we. We are very encouraged by the momentum we see there. We are around 40% of those buying in that fresh category continue to be new or reactivated to pet at Tractor Supply. The second piece I would tell you is around digital. We mentioned that subscription grew at triple digits. We are very pleased with that. We are also very pleased with how we are able to leverage our final mile delivery program. And how we are leaning into our digital experience to make sure we win those consumers and be the most convenient shopping destination for life out here in rural America relative to pet, and also the extended categories in areas like poultry, equine livestock, etcetera. And then the final piece I would just say is our ecosystem we are building in services. Very pleased with not only our pet wash program, which we have mentioned before, that is driving just great customer engagement through both our Neighbor's Club and that being in stores. Also, the integration of Allivet and VIP Petcare, where we have completed that integration now where Allivet is the fulfillment arm for VIP pet care. On track there, and we are. And we are very encouraged by the momentum we are seeing at that point. So it is really around the combination of our store base, our assortment, leaning into what is growing, leaning into digital, and making sure we have the right experience across all channels, and finally, building what we believe to be the most unique pet ecosystem in our markets.

Harry A. Lawton: Thank you.

Operator: The next question comes from Chuck Grom with Gordon Haskett Research Advisors. You may proceed.

Chuck Grom: Good morning. Thanks very much. On the 50 SKUs, you reduced price Kurt, can you talk about the unit velocity you saw? And I guess my question is, would it make sense to accelerate that effort going forward? And then just simple 1, can you just quantify inflation here in Q3 and your expectations for 4Q? Thank you.

Kurt D. Barton: Chuck, here's what I will do with that. I will take the second question first and then let Seth talk about the unit velocity and the volume of the positives we are seeing on our 50 essential SKUs. To your question on the inflation, and I will just start with what we said going into the year that we could see a retail price inflation somewhere between 1% and 2%. We saw relatively close to 1% in the first half of the year. In the Q3, it is actually below that number, and that has more to do with the investments we have made in pricing on these key essential SKUs and the fact that the Q consumables makes up some of the highest in a quarter like Q3. So retail price inflation was just under 50 basis points in there. The ticket was really mostly fueled by growth in units per transaction. And we do expect that the level of inflation to moderate more up to the level we saw in the first half of the year as part of Q4. And then Seth can. I will turn it over to Seth to talk about the, you know, the essential SKUs.

Jonathan Seth Estep: Thanks, Kurt. Thanks, Chuck. Yeah. I would just say, yeah, when you look at 50 essential SKUs that we have really invested in over the course of Q2 forward, we are gonna continue to lean into that. We have seen really strong UPT and transaction growth there as well as we are seeing that drive the broader basket within Tractor Supply when you look holistically at the basket. it is not just those items are coming in and kind of cherry picking us for. it is actually driving trips, it is driving UPT, and it is driving basket. So you are going to see us continue to lean into that. When you looked at q 3 as well, we also saw our price perception among our customer increase almost 200 basis points on our customer experience survey. So it is showing that the consumers are noticing those price value perceptions. They are coming in. They are buying the full store, and you will see us continue to lean in there, and we will we will be targeted to making sure we are managing margins appropriately there by also, like, making that we are managing market share and driving growth. Thank you.

Operator: The next question comes from Scot Ciccarelli with Truist. You may proceed.

Scott Ciccarelli: Good morning, guys. Scot Ciccarelli. So 2 SG&A questions. First, I think your sale leaseback program is expected to be $75 million to $100 million higher than it was last year. I know there is a cash component or a proceeds component and then a 1-time gain that you recognize? So, is it fair to assume your SG&A benefit this year will be $75 million to $100 million higher than it was, last year? And then secondly, what broad categories do you expect to be the biggest drivers of your expected SG&A reductions over the next 2 years? Thanks.

Operator: Scot, I will go ahead and take that and start with the question on the sale leaseback program.

Kurt D. Barton: The growth in the overall sale leaseback program is very much in line with what we signaled and we said is that a couple years ago, as we began to build these owned fixed fee developed stores where we invest the capital, it will take some time as you group those and you sell those off. So all of the growth that you are seeing year over year on the cash proceeds is the new stores, is why I emphasized the significant portion of that is related to new stores, And then to your question about the gain, the gains are relatively consistent. We were slightly up in Q3. We are expected to be a few million dollars lower in Q4. For the year, because of some efficiencies in the construction of new stores, we are actually seeing slightly higher year over year, but it is all related to the benefits of leveraging the size, scale of owning the construction. You are getting some gains on new stores as we flip those. That will be more of the story going forward. Higher amounts of proceeds in cash is coming from new stores up less on existing in regards to that. As far as $75 million in cost savings, as Hal mentioned, we have got a number of things that we have taken actions on, and then there is other areas in productivity across the chain that both principally in stores and in distribution centers. And there is a meaningful portion of this is opportunities to be more efficient through technology, automation, or just using some of the upstream work in the supply chain to make some of the efforts more efficient at the store level. And maybe John can just mention quickly, like, some of the benefits they are already seeing.

John Ordus: As Hal said, they are in pilot. Yeah. Thanks, Kurt. I would just tell you, first of all, we look at all the time. We have a team in the store operations group that does a great job looking at this. They have been in the stores. They know the stores. They are they are former store managers. They know how to continue to bring productivity down. And it shows just even in Q3, had we levered labor and we also had top box in both overall satisfaction and Gurus scores. Both year over year and quarter over quarter. We continue to look at productivity in 3 different ways. 1 is how we improve customer service at belly to belly selling full contact retail that we are known for and that we are always gonna give. The technology and how we help the team with technology that drives sales, but also in productivity. And improving our processes both upstream and downstream. So I tell you just from the testing we have done so far this year, there is a lot of no regret decisions in here. When I look at the areas that we are where there is waste and task, and we can help our team members be even better, I am working with Craig on things like when we get trucks. How the trucks should be loaded, what comes out first. Working with Seth on things like signage. And how many signs, whether they are signs, digital mapping of stores, and how do we put them up. Or even just areas like recovery and inventory touches. We measure how many times we touch a piece of inventory, where it is at, and then also using technology in order to know where to recover, which aisle to recover, and then how we fill things in the queue. it is part of the business in both pet and feed. So we will continue to drive this it is meaningful over the next few years on this. We are gonna continue to move on the labor model, planograms, assembly, a lot more, including on the field activity support teams where we have been able to help them. And now we have a field activity support team member in every single store that also helps drive that task down.

Harry A. Lawton: Yeah.

Operator: The following comes from Christopher Nardone with Bank of America. You may proceed.

Analyst: Thanks, team. Good morning. Sorry to ask another pricing question, but I think the prior message was your investments in these unbeatable prices was expected to be more of a temporary phenomenon. And now it seems like the tone is changing a bit that you want to keep prices on key SKUs lower for longer. Is this the right message? Are we interpreting this correctly? Then just going back to the inflation comments loud and clear on the back half, but is there a possibility that inflation can rise above 1% heading into 2027? Think historically, we have seen this 2- to 3-quarter lag tracking commodity prices, but I want to see if this time is different given the promotional strategy. Thank you.

Harry A. Lawton: Yeah. Hey, Christopher. Thanks so much for the question and for being on the call today. I would start with first, you know, Tractor Supply, we are the destination for consumables for our customers. We are the grocery store for our customers' pets and we are committed and we always have been, to being every day low priced on those items. In Q2, what we did was some incremental investment in some of those core essentials given the current market conditions to stimulate some transactions and to drive some footsteps into our stores. That was effective. We now are maintaining that position, but in the context of the market with higher cost, we are seeing the market move some here in the at the end of the third quarter and beginning of the fourth quarter to reflect some of these higher costs. But we are committed to maintaining our best competitive. Our competitive position as the market does that, as we always are. So I do not know that I would I would. You should be taken away that it is like going to be extended for longer. it is kind of who we always have been, and we just leaned in a little incrementally for a couple of months to try to stimulate the market a little bit. As it relates to next year, we will provide further guidance on 2027, our next call and provide more details. But I would say we are encouraged by our Q4 performance today to see a very healthy blend of positive comp transactions, positive units per transaction, and also positive AUR. it is a very healthy profile as we are now kind of mostly through October. And our goal would be to continue that into 2027 with a healthy balance across all of those, drivers of sales. Thank you.

Operator: The next question comes from Seth Sigman with Barclays. You may proceed.

Seth Sigman: Hey, good morning, everyone. I guess it is a bigger picture question and somewhat of a follow-up. But I guess the message is that you are more aggressive on price than you have been in recent years. And at the same time, you are saying that you can deliver operating leverage. On a lower comp than in the past. And you gave us a lot of examples, which we appreciate. But I guess, what is fundamentally changing across the organization to support that? I guess, give investors confidence that this is achievable? Then I guess, somewhat related, as you think about next year, of moving pieces in 2026. But is the right way to look at this basically 2026 guidance. The adjusted EPS is the right base to grow off of in 2027 despite all the moving pieces? Thanks so much.

Kurt D. Barton: Yeah. Hey, Seth. I will take those. I will start right there with your last question. 2026 is the right basis to be jumping off of. We have said, particularly, like, with tariff refunds, we are going to manage throughout the year. That may create a little bit of choppiness in the gross margin and operating margin, but we are going to invest in this moment when it is the, the right thing to do to drive value for our customers. that is created the right overall basis to leap into 2027 and when. To your question about operating margin, I have already walked through gross margin, how we could see that play out. The biggest pressure on operating margin certainly has been the investments and how that plays out in depreciation growth and, the softer comps below 2%. So there is a lot of work that you hear that we have been doing, and we think about going forward to 2027 in the areas that we know and in our control. Depreciation, as Hal mentioned, moderating down to mid single digits or lower next year. that is coming off of 7% growth this year, and we believe we can have lower growth in depreciation and start to actually see leverage in that case. We have also seen operations of the core operations, and John just got done talking about how we even saw lower labor hours in Q3 than the year before. Store wages leveraging even at a comp sales below 2%. So we have got significant results already in store operations. I look at Q3's SG&A when you back out the 1-time startup costs on the new distribution center, it gives really good evidence that the model is playing out to be able to lever at that point. And then lastly, we know that there is cost pressures We know there is some things that are uncertainty. $75 million, 2-year cost saving targets gives us the opportunity to either overachieve on that offset unexpected costs, but the combination of all of those allows us to, you know, claw our way back to a stronger operating margin. And that is really the difference than the last couple of years. I hope that helps give the insights that we see and the confidence we have on the things that we can control that gives us that ability.

Operator: More question. Thank you. The last question comes from Steven Forbes with Guggenheim Securities.

Steven Forbes: You may proceed. Good morning, Hal Kurt. Hal, if we maybe just revisiting Tractor's price value proposition 1 last time here. I was curious if you could maybe expand on your initial thinking about how price zones will evolve and or work in an agentic world, inclusive of how Tractor prices products today online, right, nationally, regionally, locally, And if the team really has a good handle on the full scope of investment, required to fully optimize price perception, you know, across the full assortment, right, beyond the 50 SKUs? Is there a reason to think that there is additional investment required Or should we think about, you know, sort of the efforts being made during this deflationary period of time as sort of 1 and done.

Harry A. Lawton: Yeah. Thanks, Steven. To hit a few things on that to close out here. First off, we. Our customer. We have a strong price perception with our customers. And we have always had a strong price perception to customers. it is something we monitor monthly in our brand tracker and our and our customer trackers, all the information that we have there. And we have always had a strong price perception. Given the market dynamics in Q2, we leaned more heavily in that and we saw some improvement there. But it was an improvement related to already a good starting position, to be clear. This is not something that is something that we have done frequently in our history from time to time when we need to jump start some transactions. We did this in 2022. We did this back in 2009. We have done this in other parts of our of our company's history as well. But to be very clear, we stand for price with our customers, and as we look forward, we are confident that we can manage margin and our price perception as we always have. As I have mentioned, the market is acting very rashly right now The higher costs that we are seeing are everyone in retail is seeing these higher costs. Right? Everyone in retail has been paying higher freight bills at a higher rate for the last 6 months Those are all going on the balance sheet, and those are all going to have to roll into COGS and gross margin over time. We know that task. We are ahead of that task. We are making adjustments in our in our pricing structure and we are making adjustments with our vendors to offset that. As it relates to kind of the more broader comments, Steven, online in stores, we have a kind of a strong belief that online and stores pricing should mirror each other. And, you know, we have always acted and operated in that way. They are probably 80-ish percent of our SKUs are kind of nationally priced for the most part across our price zones. that is that is reflective of map pricing categories like pet or in power tools. And also just the ubiquity of pricing on a lot of the items that we carry nationwide. On the 20% that are tailored, those are the ones that our customers understand should be tailored because they are reflective of the cost locally to get that product to a store. You know, what. And dominantly, that is in areas like feed. The proximity of the feed mills, the cost of the freight to that to that location. And it is no different than like in my past life in home improvement. Concrete was priced very much the same way. it is based on the distance to travel as it is a heavy item. And we price based on cost, and we price on. Price based on competition in those. And I think even in a in a fully transparent world as we move forward, you know, that much of that will remain. But, again, I want to just finish where I started. We are pleased with our Q3 performance. We know we have got more work to do. Continue to have sales momentum as we move into Q4. We are conscious of the increasing costs that are coming at our business. And hopefully you took away today that we are taking action. We know the challenge. And we know the work we have got to get done, and we are not resting on our laurels, driving sales, taking SG&A actions, taking gross margin actions, doing that both near term and heading into 2027. We appreciate everybody's time on the call today, and we look forward to further updates in the next quarter. Tamiya, that will wrap our call now.

Operator: Thank you everyone for joining us. This concludes today's conference call. Thank you for your participation. You may now disconnect.