TSCO - NASDAQ

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Third Quarter 2024 Results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, 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's been wrecked by Hurricane Helene and Milton with great concern and heartbreak. Hurricane Helene struck particularly close to the heart 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, 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've 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 customer 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 spend 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 consumer continues 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 to continue to run 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 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 is it 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

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 C.U.E. 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 C.U.E. categories. As Hal mentioned, we are pleased with our unit movement in C.U.E. 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 DC 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 less 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'll 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, even Ember patio heaters, and Blackstone Grills. In our CUE business, we're expanding our cat food assortment, testing new items such as freeze-dried sacks, 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 Porter Cable and it introduced new tailgating truck boxes just in time for the outdoor season. Our garden centers will be transformed to a winter wonderland with live Christmas trees, set is reeves and tractor eyes 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. And so to this year, 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 the 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 get in 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 today 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.

[Operator Instructions] Our first question comes from the line of

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. 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,

Appreciate your time, Hal.

Thanks,

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. So I just want to talk about the weather and the storms. So 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 on the -- 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.

Oh. Hi, Chris, it's Kurt. In regards to I was taking notes on what I think there's about three points in there. There is the question on the storms. There's a question in regards to the margin on DC headwinds and or DC benefit and when does that turn in the emerging response. So let me just try to hit those things. In regards to the weather, I'll just mention Q3 first as I had mentioned some of that in prepared remarks. Leading up till about mid-September, just as an example, the business was running at a slight positive comp sales trend. And in the back two weeks, while we did see benefit like in emergency response from generators and others at the front-end of Hurricane Helene because that's one of those storms that really straddles both quarters. It was offset or more than offset by -- in that particular storm across most of the South and Southeast, just blanketed with storms. And so that dampened a bit of the overall traffic in the last week or two of September. As I mentioned, I see that more as a positive because that just defers some of the demand on the business. So both Helene and Milton have had net for the full year in Q4, a benefit to us. We'll have -- we have so many of the important weeks ahead of us. I won't quantify exactly what we expect from these storms, but generally, hurricanes have a modest level of benefit on each hurricane, and we anticipate that for Q4. Emergency response has a mixture of product, some of the bigger ticket generators lower, but has a mix of higher margins. So we do not anticipate the storm's emergency response really having an impact on margin in the fourth quarter. And yes, the distribution center been a headwind to SG&A in 2024 does start to cycle out as you get about 9 months to 12 months out. It really takes about that much time to be able to even out the inventory and be able to have the other distribution centers have a productivity offset to it. So we'll share more information on 2025 in regards to that in 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 out year in terms of store count, margin, puts and takes, et cetera. 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 algo 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 months 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 go capture that value sooner. And we're kind of moving in that direction. We talked earlier about our consistent remodel approach somewhere between 175 and 220 stores a year. If you think about that it kind of the average of that at 200 with 2,300 stores roughly right now. That means about every 10 years, we're remodeling a store, which is I think, a nice healthy run rate for a retailer. And 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 and the two major factors impacting our doing so is 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 we'll continue to lap that over the next 6 months to 9 months and then start to really be through that cycle. And if we all look at the low price for corn was really middle of this year and we would -- but we also had the big dip down that we took last year starting in October. And then on goods to services, the consumer continues to have to shift a number of a good bit of their spend into services right now. If you look at whether it's rent, insurance costs, those sorts of things, I mean, services continues to outpace the spend on goods, somewhere in the range of 6 to 7 points versus, say, 1 to 2 points on goods. And you can see that kind of correspondingly into retail sales. And as I talked about in the call, we think retail sales were slightly positive in the 1%-ish, 1.5% range for Q3, our fiscal Q3 and our sales were right in line, if not slightly above that at the 1.6% range. So 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, thanks. Great to talk to you again and look forward to seeing you in December. So my question is, looking at 4Q when you look at the range of outcomes on sales and gross profit dollars and gross margins, it's pretty wide. So wondering if you could address that. And then also looking to -- so and commenting on more specifically puts and takes on 4Q on gross margins and SG&A. But then wanted to address more specifically the longer-term algo and when you think you can return to that? And I assume you'll address that at the Analyst Day, but any preliminary comments would be great.

Yes. Hi, Karen. On the long-term algo, 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 algo. We don't see any internal issues in terms of returning to our long-term algo. Our market continues to be incredibly favorable in terms of just the overall optics of our market, the strength of our markets, attractiveness of our markets. Our position and competitive differentiation in the market is as strong as it's ever been. We think the combination of those two absolutely in normal operating kind of circumstances lead to our long-term algo. We're very confident in our ability to return to that long-term algo and the two main things that we're watching in the context of returning to that are, as I mentioned earlier, the goods to services split on overall consumer expenditures. And then two, how inflation, deflation plays out and then that plays into our average ticket. As we've talked about in the past, our recipe is really a 50% growth based on average ticket, 50% growth based on comp transactions. The goods to services shift is much more about a transactions type of headwind. And then the inflation, deflation, obviously being an average ticket headwind. We do see that both the pressure, 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. And we will share more of that, a little bit of that in our Investor Day. And then certainly, you'll hear our perspective on that in our Q4 earnings call. As it relates to the range of outcomes in sales in Q4, I'll address that and then Kurt can speak to some of the gross margin ins and outs. But on the range of sales, I'd start with in the month of October has played out much like what we expected with the one addition being the hurricanes that Kurt talked about previously, all right. Those will provide a modest benefit to Q4. As Kurt shared in the past, we've seen maybe 20, 30 basis points of benefit for a hurricane of those sizes. And I think something to that effect is what's in our guidance in Q4. The other major things that are going to play into Q4. One is going to be weather and it needs to get cold for our business to really perform well in Q4. We saw a lot of heating pellets. We saw a lot of heating fireplaces. We saw a lot of insulated outerwear and a lot of other products in our business that are cold-weather related. We've had about a week, week-and-a-half of cold-weather this quarter so far. When that hit, it was very good. It's now probably -- if everybody can think about where they're sitting right now, it's very warm right now. And so by consequence, people aren't buying heating and insulated out of ware. So we've had a bit of a mix in October, and that's typically what you can expect in October. As you look forward into the last two months, it really comes down to the continuation of cold weather, do we get it in November? Do we get it in December? Last year, we got cold weather in neither month. The second comes down to holiday shopping. We've got five less days this year. Historically, customers have been able to compress for the most part, but the question will be just how does the calendar play-out this year? And does that occur? Also with Christmas being on a Wednesday, you've got a unique setup where online is able to play much more strongly in on that final Super Weekend than it has in the past. And then, of course, you've got the federal election and we do expect that consumer spending leading up to the federal election will be dampened both just with distraction as well as a little bit of just wait-and-see mode. And so then you've got to see how does that pick back up. But at the end of the day, as I said on my prepared remarks, while the holiday sales are important of our business, the make or break for our business is the -- is how we support our customers with what their needs are, particularly during the cooler weather season. So that's what's most indicated -- will be 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. And I'd start by saying the all year, the business has been remarkably consistent. And so I'll refer to Q4 versus some of the highlights of Q3. We had 56 basis-points of benefit in Q3 as it was really the last quarter before we start to lap the significant benefit we started to see last year in fourth quarter on both transportation and our cost-saving and our cost-cutting initiatives. And so we'll have only a modest level of benefit remaining on transportation and cost in fourth quarter, that will for the most part likely be offset by product mix. So gross margin is relatively, give or take a bit more flattish year-over-year in Q4. And then on the SG&A side, the -- a lot of the puts and takes are similar other than in Q3, we were cycling 35 basis points 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 as we anticipate positive comp sales for the fourth quarter. So you really see yourself moving in that in about a 50, 60, 65 basis points of pressure from SG&A in the fourth quarter as it's a -- it does not have as much of the one times as, say, Q3 does. 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 just bring women's wranglers to your stores.

We'll make a note of that.

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 how one of the key debates is can Tractor Supply get back to the historic levels of 1% to 2% growth in traffic. It seems like what you're suggesting is the ability to get back to that level of traffic growth on a consistent basis is going to be macro dependent where it will be influenced by the shift from services to goods. Yet, Tractor being a more needs-based retailer that has more consistent trends in areas like consumables CUE have 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, more robust retail environment to drive that traffic growth? And as you see a little bit less gross margin expansion because of some of the drivers from this year stayed, 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 -- maybe I'll just step back, if I look at our growth over the last five years post-COVID, which I think is the second-highest in all of retail -- major retailers out there, the key to that has been strength in both average ticket and comp transactions. So it's not -- comp transaction growth has not only been a highlight of Tractor Supply for the last 30 years, 20 years, but also in the last five. And I would say of most retailers out there, we're one of the few that have been -- that have strong positive like double-digit positive comp transaction growth over a multi-five-year period. So I'd put our transaction growth over the last five years up against anyone. Second of all, I think if you look at retail right now, overall transaction growth in retail is either flat to negative in general right now. And so when you look at our modestly positive comp transactions, you combine that with overall transactions given our new-store growth and our comp transactions, I would argue we are in the top-quartile right now of retail in terms of overall transactions. So I look at --- I'm very pleased with how we've grown our transaction last five years, how we've held those transactions and even in the context of this environment that we're in, how we're modestly positive comping transactions and then with our new stores having strong couple of points of transaction growth. Then as I look forward, I think it really does all come down to the goods-to-services shift and then our customers having a little bit more money to spend on items in our stores. And that's going to make its way into that extra half of transaction a year to them and it's also going to make its way a little bit into the units per transaction. But I think what we're seeing on our comp transactions being muted a bit is very comparable to what's happening in all the rest of retail. And I certainly believe as retail moderates back to its normal levels, rising tides will lift all boats. And those of us that continue to have positive comp transactions will continue to see stronger positive comp transactions as that occurs. Anyway, I'll just -- I'll leave it at that. Thanks, Michael.

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, curious if you could expand on how the 37 million Neighbor's Club members informed the decision to acquire Allivet. Any -- I guess, how many Neighbor's Club use an online solution for the 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 the acquisition of Allivet. I think it's a great example of kind 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 both their nationwide prescription licensing capabilities, their distribution centers and their ability to get product shipped out in 24 hours, their ability to get prescriptions approved and partner with the veterinarians, their excellent website, their strong management team and importantly also excellent financial condition. So we feel all-around. It's a great business, one that we're excited and thrilled to welcome into the Tracker Supply family and we look forward to bringing that feature of a low cost affordable, wide array of prescriptions for pets and animals to our customers. As you said, we have 37 million-plus members of our Neighbor's Club program. It's a highly engaged membership program, one that we continue to add value in and our customers continue to further and further become loyal around. And we think the combination of Allivet with our Neighbor's Club is going to just be a great mix and we look forward to over the next few years, getting the deal done, approved, closed, and then starting to bring that to our Neighbor's Club members in the ways that we've brought the additional features and benefits that we have to them. Very excited about it and more to come at 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 there that are maybe structurally higher today than where you originally framed it?

No, really, there's not anything significant in our algorithm to attend 1 to a 10.6% and recognizing that we're going to continue to invest for the long term. The last two years, the comp sales puts pressure on our ability to leverage the SG&A and it's really been the difference. The team has just done a phenomenal job though, finding ways to offset that. And there are a number of cases on productivity in both our stores and our logistics distribution team that have just done a phenomenal job finding new opportunities for productivity. So the team has done well to be able to maintain that 10-plus operating margin in the last couple of years. So the algorithm is still intact. And Hal has mentioned all the different reasons of our expectations of being able to get back to the long-term algo and that just gives a better opportunity to avoid the pressures of SG&A. So I feel very confident with the long-term algo still 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 the use of private credit has been playing a role. And how do you guys think about like 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 definitely are very pleased with the performance there as Q3 really was much in line with the strength of the performance as we exited Q2 and we really were able to maintain that. You know, the third quarter, it was our third consecutive quarter of big ticket growth and as you mentioned in some of the categories that we've had, whether it be like

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. So Hal, you had 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 perhaps 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, AI, really across the business both in our own analytics frameworks, also in leveraging our -- software providers capabilities, whether that's in things like Reflexis on inventory management or whether that's with our new CDP in terms of customer insights and personalization. And then I'm really proud that we're also building solutions internally to drive, as I've shared earlier, kind of better customer service in our stores. And whether that's through things like tractor vision, where we're upgrading our camera software and hardware technologies to be able to leverage our cameras to drive improved customer service through a variety of use cases, whether that's at the register on the apron in our garden centers or whether that's through our Hey GURA tool that we have that all of our team members are able to use to ask to get further knowledge inside of our stores when they're dealing with customers or when they just want to educate themselves. But we have a broad variety of things that we're using all really to drive improved customer service productivity with our team. Also in our distribution centers, we're doing that. We're using vision technology to be able to look at the packing of trucks, to look at left-offs of trucks to watch, to use it to manage the yard. So whether it's operationally in our DCs, whether it's for customer service in our stores or whether it's in our merchants or marketing use it for behind-the-scenes analytics and personalization. We're leveraging data science and machine learning and AI across the board. Thanks, Peter, for the question.

Thank you.

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 '25? 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 ran in-line with our plan and expectations. We have seen a bit of a additional step-down, modest on some of the commodities. I expect Q4 to have a similar but slightly less deflationary impact than Q3. But it really looks like today, if you're trying to peg when is there a point neutrality that that's been punted out anywhere from three to six months and you will have a much better view in January on what the expectation is on 2025. All indication is we are shifting out of a deflationary environment towards an inflationary one. The timing of when that conversion flips, we first thought it would be late 2024, early 2025, that could be Q1, Q2 of next year. And then in regards to your second question, remind me again that point?

Yes, just farm income broadly has been under pressure because of commodity deflation and just trying to figure out, have you guys been able to quantify the impact on your bills? Thanks.

Yes. For years, we've looked at the farm income level in strong years and soft years. And it can have either an indirect slight halo or overhang on there and we really don't see much of a correlation to that. And as you know, I'll just point out our majority of our customers are not professional farmers. It's not their number-one source of income. And they if anything, we look sometimes at the overall market area and if there's an indirect benefit to that market area and how the non-farmers may spend. At this point, we're not really seeing anything that points to that in 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 and please reach-out if you need any further information. We look-forward to the event and thank you for your interest in Tractor Supply.