TSCO - NASDAQ

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss third quarter 2025 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow. At that time, we ask that all participants limit themselves to one question and return to the queue for additional questions. Please note that the queue for 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.

Thank you, Alyssa. 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 Barton, our CFO. We will also have Seth Estep, Rob Mills, John Ordus, and Colin Yankee join the call for the question and answer portion. Following our prepared remarks, we will open the floor for questions. Please note that a supplemental slide presentation has been made 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, 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 one question 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. Thank you for your time and attention this morning, and now it's my pleasure to turn the call over to Hal Lawton.

Thank you, Mary Winn, and good morning, everyone, and thank you for joining us today. Before getting into our results, I want to thank our more than 52,000 Tractor Supply team members. Their commitment, hard work, and passion for life out here continue to set us apart by delivering legendary service. They build the trust and loyalty that define our brand, and their dedication to our lifestyle remains the foundation of our leadership in rural retail. The Tractor Supply Team delivered a strong third quarter in line with our expectations, driven by ongoing share gains in our consumable, usable, and edible businesses. Agile execution through an extended summer season and healthy transaction growth that was supported by our consistent focus on value and service. Our view is that our third quarter results largely mirrored the broader US consumer environment, augmented by some share gain. We saw a strong start to the quarter with spending trends moderating into September. This pattern aligned with what we observed across the retail landscape and, in our case, was amplified by two key dynamics. First, the tailwind of an extended spring and July. And second, the headwinds of unseasonably warm weather in September and the absence of emergency response. So let's start with a few top-line sales highlights from the quarter. First off, we grew net sales 7.2% to a third-quarter record of $3.72 billion. Comparable store sales increased 3.9%, driven by a balance of transaction growth of 2.7% and average ticket growth of 1.2%. And importantly, we had positive comps in all three months. Positive comps in 11 weeks, a flat comp in one, and negative comps in only one week. We are particularly pleased to extend our track record of comp transaction growth, a hallmark of Tractor Supply and a strong signal of the health and engagement of our customer base. Our customers remain loyal and connected to their lifestyle, continuing to shop with us across categories and channels. And so let's turn to some customer engagement metrics, which remain a clear strength in the quarter. First, customer satisfaction remains strong, with scores continuing their positive trajectory, marking a record 17 quarters of consecutive improvement. Additionally, we achieved record Q3 highs across some key customer metrics, including total customer count, Neighbors Club membership, reactivated customers, and retention rates. Neighbors Club continues to be a powerful differentiator and represents over 80% of our sales. We saw gains in member retention and spend per member, and our Hometown Heroes program continues to attract new customers. We're also making progress on how we serve customers using data. With the implementation of our new customer data platform last year, our team is now able to better personalize offers and messaging, helping us deliver more relevant and engaging experiences across channels. Now let's shift to category performance in the third quarter. In line with recent quarters, the consumer remained discerning in their spending with categories that offer newness, strong value, and needs-based continuing to outperform. Our comp sales growth was driven by strong seasonal performance in spring and summer products, along with continued momentum in our core year-round Q categories. As we move from the second quarter into the third, seasonal categories strengthened meaningfully after a more modest first half. We benefited from the bathtub effect of the extended summer season. We believe this was about a 50 to 60 basis point contribution to the third quarter that would have historically been in the first half. As it relates to seasonal, the team did a great job capitalizing on the elongated summer season. Whether through strategically positioned inventory, enhanced financing offers, or targeted labor investments across the company. Our merchants to our store teams, to our supply chain, the organization leaned in to capture every single sales opportunity at a great example of that execution was in our tractors and riders category, which delivered another strong quarter. Our industry-leading lineup of zero-turn mowers, combined with disciplined inventory management and effective merchandising, continue to resonate with customers and drove share gains in this category. In the quarter, additionally, other categories in seasonal that saw standout results were lawn and garden sprayers and chemicals and power equipment, parts, and accessories. In our hallmark area of Q, we saw stronger than average growth in livestock, equine, poultry, feed and supplies, and wildlife supplies. In wildlife supplies, we continue to expand our position as a destination for outdoor enthusiasts across gun safes, deer, corn feeders, hunting blinds, attractants, trail cameras, and more. Our customers are responding to the depth of the inventory and the newness that we're bringing into the category, including the launch of the Field and Stream brand. We now have nearly 50 SKUs in this brand available in-store and online, with a robust pipeline in development. This launch strengthens our position as the destination for the out-here lifestyle. In discretionary and weather-dependent categories, particularly those in the fall season, such as recreational vehicles, grilling safes, and generators, sales continue to lag, reflecting both the cautious big-ticket consumer and the absence of storm-related activity this year. As it relates to big-ticket, overall, the strength in tractors and riders offset the softness I just mentioned in discretionary and emergency response categories, resulting in essentially a flat comp performance for the quarter. Finally, in companion animal trends remained stable, but below company averages. The consumables business remains flattish, with seasonal strength in animal health, and we have seen some sequential improvement in pet supplies and equipment as well. We also continue to execute well across our strategic initiatives and operational priorities. Digital sales grew at a low double-digit rate, representing a notable sequential improvement from the second quarter. Nearly 80% of online orders were fulfilled by our stores, highlighting the strength of our local network and store base. Same-day delivery and delivery from store outperformed, reinforcing the convenience and reliability of our model and the value of the final mile capabilities that we're building out. Peasants by Tractor Supply marked its 20th anniversary, and congratulations to that team. It highlights the differentiated pet specialty model out in rural America. Our distribution centers delivered another strong quarter of productivity gains, supported by disciplined execution and efficient inventory flow across the network. This execution helped ensure we remained in stock on the product. Our customers count on, particularly with the extended seasonal demand. Turning to pet pharmacy, we continue to see steady growth in orders and customer adoption. Each week we're seeing an increase in Neighbors Club subscriptions of prescription and over-the-counter products, leveraging our Alivet acquisition, our customers continue to engage with our suite of pet services, which also includes pet washes and vet clinics. On the real estate front, we remain disciplined and confident in our growth strategy. We opened 29 new Tractor Supply stores in the quarter, bringing our year-to-date total to 68. New store productivity continues to perform very well. Our pipeline of 2026 and into 2027 remains robust, with a significant runway for low-risk value, creating organic growth ahead. We also continue to invest in our existing store fleet. We now have 55% of our chain in the Project Fusion layout, and nearly 700 garden centers. These are capital investments that provide a multi-year runway for growth and extend the terminal value of our stores. They help us be more relevant to both our core customers and our new customers, allowing us to garner a greater share of their spending and be the dependable supplier for their lifestyle. Finally, we're making solid progress on advancing our life out here. Strategic initiatives with a focus on direct sales and final mile. These initiatives strengthen our foundation for long-term growth and relevancy to our customers. To summarize, the third quarter demonstrated the strength and consistency of our model. Healthy customer engagement, strong execution, and continued progress on our life out here. Strategy. As we look ahead, we believe it is appropriate and timely to narrow our fiscal 2025 guidance. This guidance reflects our year-to-date performance and outlook for the remainder of the year. We remain excited about our strategy and our ability to deliver long-term value for our shareholders. And with that, I'll turn the call over to Kurt to provide more detail on our performance and outlook.

Thank you, Hal, and good morning to everyone on the call. As Hal highlighted, our third-quarter top-line performance aligned with our expectation each period of the quarter delivered positive results supported by consistent transaction growth throughout sustained growth in transactions remains a hallmark of Tractor Supply and a key indicator of the health of our business model. In addition, all geographic regions across the chain delivered positive, comparable sales for the quarter. These results underscore the broad-based nature of our performance and the consistency we're seeing in the business. This was especially evident in the performance of our Q categories, which outperformed the chain average and had mid-single-digit comparable sales growth every month of the quarter. While the early part of the quarter benefited from the extended spring selling season, the later portion was pressured by lingering summer heat and dry conditions. With no meaningful shift to fall weather. As far as emergency response sales, while we did not receive a significant year-over-year sales lift from emergency response last year, we did have a hurricane event in 2024 that provided some benefit to sales. This year, we had no emergency weather-related activity, which represented a modest headwind to our third-quarter comparisons. Let me add a few additional comments on our comp sales to complement Hal's remarks. The transition from price deflation to modest inflation year over year was consistent with our expectations for the quarter. Average ticket increased 1.2% driven principally by higher average unit retail. This was primarily the result of a higher but stable commodity cost environment and to a lesser extent, selective price adjustments as higher product costs flowed through our supply chain. Moving down our income statement. Our gross margin increased 15 basis points to 37.4%, in line with our expectations. This performance reflects the continued discipline of our merchant team in managing product costs and consistent execution of our everyday low price strategy. These benefits more than offset the anticipated pressure from tariff costs and higher transportation costs as we lapped last year's benefit from the opening of a new distribution center along with the modest cost increase to support our strategic investment and final mile delivery. We remain very pleased with our ability to expand gross margin in this environment which speaks to the strength of our cost management initiatives. Selling, general and administrative expenses, including depreciation and amortization, were $1,050,000,000 up 8.4% from last year. As a percent of net sales, SG and A deleveraged 29 basis points to 28.1%. This outcome was in line with our expectations and reflects a few puts and takes. There were primarily three drivers of the deleverage: First, the planned strategic investments in our business to launch initiatives such as direct sales. Second, higher incentive compensation from stronger performance primarily at the store level and the lap from last year's lower accruals. And then third, a lower benefit year over year from our sale leaseback strategy. These factors were partially offset by ongoing productivity initiatives and leverage in fixed costs from the stronger sales performance. Importantly, within gross margin and SG and A, we view our investment spending as critical to supporting our strategic priorities and long-term growth. While continuing to balance expense discipline with the opportunities ahead. Our effective tax rate decreased to 21% from 22.3% in the third quarter last year. Largely due to the timing of planned tax strategies for the purchase of federal tax credits, which we expect to normalize over the full year. On a year-to-date basis, our effective tax rate is 22.3%, just 10 basis points higher than last year's rate. Diluted earnings per share was $0.49 up from $0.45 in the prior year. Our inventory position remains in excellent shape. Our average store inventory is up a modest 3.4%, reflecting healthy sell-through and strong inventory management by the team. Year to date, we've returned more than $600,000,000 of capital to our shareholders through dividends, and share repurchases. As we look ahead, we're focused on finishing the year with the same discipline and agility that have guided our results year to date. The fourth quarter carries typical seasonal variability but we're confident in our ability to respond quickly to changing conditions and deliver within our outlook range. For the fourth quarter, we anticipate comparable store sales growth in the range of 1% to 5%, reflecting a wider set of possible outcomes given the current consumer environment. And keep in mind, winter weather is often the primary driver of our fourth-quarter business. More so than the holidays and the related gift buying. As a result of this outlook, we are narrowing our fiscal twenty twenty five guidance range. We now expect net sales growth of 4.6% to 5.6%. Comparable store sales growth of 1.4% to 2.4% operating margin between 9.59.7% and diluted EPS in the range of $2.06 to $2.13 Shifting further out, While we are not giving formal guidance for 2026 and with a caveat that we are still in the planning process and the macro environment can change rapidly, I thought it would be helpful to make a few comments about how we are thinking about next year. As we look to 2026, we expect to open 100 new stores compared to 90 this year, This increase reflects our continued confidence in the strength of our new store economics and the long-term growth potential of our model. We anticipate a consistent pace of openings throughout the year. For 2026, we are optimistic about maintaining the step up in comps that we are forecasting for the second half of this year. We expect transactions to remain a strength. With average ticket staying positive and the early benefits of our strategic investments contributing to that momentum. This level of comp sales growth should also support progress in our operating margin rate. To that end, we would anticipate fiscal twenty twenty six to be a more normalized year as it relates to our investment levels and the corresponding pressure on operating margin. This normalization provides the foundation for improved profitability. Based on our model, we see an inflection point in operating margin expected around the low 2% comp sales range. With margin rate expanding proportionally as comp sales growth increases beyond that level. Stepping back, with our peak capital investment cycle, as a percent of sales, now behind us, we believe 2026 will reflect continued P and L normalization. This progress positions us to deliver solid sales growth with margin improvement opportunity in line with our comp sales performance. We look forward to sharing our official guidance for 2026 during our Q4 call in January. In closing, we remain focused on disciplined execution and the factors within our control. Our Life Out Pier strategy continued to position Tractor Supply well to navigate the current environment maintain our industry leadership position and deliver sustainable value over time. Now I'll turn the call over to Hal to wrap up.

Thanks, Kurt. As we look at the remainder of the year, and into 2026, we're focused on finishing strong. And building momentum on our investments in the next phase of our Life Out Here strategy. For the balance of the year, our priority remains on being a dependable supplier delivering compelling value and providing more meaningful in-store and online experiences. Let me share some of the key in-store and merchandising activities that we have planned. We remain excited about the continued momentum of our Hometown Heroes program, which is part of our Neighbor's Club benefits for military service members veterans and first responders. This year, in the weeks leading up to Veterans Day, we'll be executing our Hometown Heroes Days. A highlight of the event is our self-proclaimed National Hometown Heroes Day on Saturday, November 1. This day comes to life in our stores as a unique opportunity to connect with our communities in very special ways from touch a truck events to Americana themed crafts for kids, to thank you notes to our hometown heroes, and an honor wall. These types of events create a lot of energy and excitement in our stores. And if you get a chance, it's a great day to be in them. The winter and holiday season always creates a sense of fun and excitement across our as our teams showcase the best of Tractor Supply for our customers and communities. Customers truly rely on us for their winter essentials like wood pellets, propane heaters, fireplaces, insulated jackets, gloves, boots, more. In the fourth quarter, we're leaning into that responsibility with depth of inventory, the right price and fresh and trusted brands that reinforce our relevance. While holiday gets the spotlight, it's winter readiness that drives the heart of our business and where we consistently show up for our customers when they need us most. And once again, our now famous six-foot holiday rooster is capturing customer tension and social buzz a great example of the fun and discovery and retail theater that define the Tractor Supply experience in the holiday season. Additionally, in recreational products, exclusive mini bikes and gun safes position us as a destination for unique gifts at a great price. And this year's Tool Shop event brings outstanding value to our customers with leading brands and exclusive TSC offerings in power tools, accessories, and storage. This event highlights us as a gifting destination for the homesteader lifestyle. Our holiday sets always bring energy and excitement to our stores, But as I said, what truly drives our business in the fourth quarter is the weather. And when winter weather arrives, our customers know they can depend on Tractor Supply. In addition to strong merchandising and store execution in the fourth quarter, our teams remain focused on setting up the Life Out Here 2,030 initiatives for success as we head into 2026. From localization and direct sales to Pet and Animal Rx, to Final Mile exclusive and private brands and retail media the team is fully engaged. Executing detailed roadmaps that will drive growth, and long-term value creation. To close, we operate in a large attractive market that rewards consistency, connection and authenticity to a lifestyle. Our investments in our new store base in our existing stores, in our technology, in our supply chain, and in our talent are strengthening our competitive advantage, and enabling us to consistently gain share. Combined with strong new store returns, ongoing rural migration, and disciplined expense management, we believe we are well positioned to deliver long-term value for our shareholders. With that, let's open up the call for questions. Thank you.

We will now begin the question and answer session. The first question is from the line of Steven Forbes with Guggenheim. Please go ahead.

Good morning, everyone. Hal, curious if you can give us an update specifically around the direct sales rep build-out and maybe how many you plan to have in place by year-end. What will the final mileage coverage be? Percentage of the store base and then lastly, just like how should we be thinking about the benefit of the incremental sales potentially offsetting the initial startup costs, right, associated with the initiative next year. It sort of sounds like you're implying that there's a potential sort of net benefit to margin next year as this program ramps and you start getting the benefit of sales flow through.

Good morning, Steven. And thanks for joining us on the call and thanks for the question about direct sales. I will give a couple of high-level comments and then turn it over to John to provide further detail. But at the highest level, what I'd say is we remain incredibly bullish and confident in our direct sales initiative. It's off to an excellent start. Right on top of the expectations that we set at the beginning of the year in terms of rollout. Sales rep ramping, the sales attributed to that ramping, etcetera. As we've been clear, this year, there was some expense investment that we've made in that business, to get it launched and ramped, that's embedded in the guidance, that we've been giving throughout the year. As it relates to next year, we are looking for the initiative to self-fund itself. So there would be no further incremental investment, into the initiative as it's ramping now and starting to self-fund. I'll turn it over to John to give some of the highlights on the number of reps we've hired recently and over the last nine months and, how they're doing on sales and what our outlook for next year is.

Yeah. Thanks. Hey, Steven. Good morning. Our direct sales business continues to scale rapidly with reps covering we're over 300 stores now. I think it's 312 as of today. Our big barn customers are comping at nearly 50% our direct sales specialists working directly with them, and we're selling over $2,000 a week now in sales. So it could and continue to ramp pretty fast. We're taking that legendary service that our stores do a great job in, and we're taking it out to the Big Barn customer. I'll give you just a quick example of a recent customer. So a customer in the Florida market was buying feed somewhere else after three visits, and it normally takes about three to four visits for us to complete that sale. That customer decided to move to us. They're buying eighty bags of feed, now two skids of feed. Buying them every other week, and we're able to create that relationship and an ongoing relationship. And then we'll continue to build on that basket as we go. Our team builds these relationships with our customers, and our specialists have over ten years, on average ten years of experience in this industry, and a 100% of them live the lifestyle. So we're very pleased with the people we've hired. We're very pleased with where we're at. We've done four cohorts now, four training classes. The first, obviously, class April, and that's starting to ramp up faster. And we're seeing that ramp as each week as that class ramps up. To answer your question on specials, we're at 48 specialists right now. Continue to look at markets this for the remainder of this year where we'll have modest growth with another eight to 10 reps. And as we get to next year, we'll continue to follow the final mile team. As they grow out there, we'll let them get established and then we'll come in a little bit behind them, and then we'll start doing direct sales in those same markets. Average ticket continues to be strong, about seven times the company average, and we're very pleased with what we're seeing in the departments that are doing that are driving the sales are the departments that we thought they would. Feed, fencing, and equine feed being the big one.

Thank you. Thank you.

The next question is from the line of Michael Lasser with UBS. Please go ahead.

Good morning. Thank you so much for taking my question. The question is on any changes you're seeing around the consumer behavior lives in the life out here environment. Especially because the perception is that trends have slowed quarter to date and folks are wondering, is that due to just the weather or is there something more that's going on? And then as part of it, you were helpful in giving some color on the contribution from your initiatives $200,000 in incremental sales per week, If you could build on that and give us a sense for how you think about that contribution as you move into next year across all of the initiatives that you have in place? Thank you very much.

Hey, Michael, and thanks for joining the call today, and good morning to you. I'll start out first just on the state of our consumer. Our consumer remains strong, resilient. You know, we had exceptional customer metrics in Q3. Whether it relates to engagement and their shopping patterns or whether it relates to overall customer satisfaction. changed dramatically as we've moved into Q4, very much steady as she goes. I'll highlight a couple things on that. As we all know, the core component of that is our Q business. Our Q business trends, and that's the fundamental underpinning some foundation of our business. Certainly would acknowledge that the first couple of weeks here, three weeks or so of October have had unfavorable weather for us, but it's, the last few days started to get cool across the country, and we feel very good about the outlook for, for the balance of the quarter. That's reflected in our guidance of 1% to 5% comp. And as we talked about in our, prepared remarks as well, the biggest driver of variation in our sales in a Q4 is, is a winter storm. And if you go back over the last decade or so, it's about fifty fifty in those last two weeks, if you get a, polar vortex or a really, really significant cold snap. You know, you look at, like, 02/2018, I think, a great example for this quarter where started out warm in October, very similarly, our first couple weeks were tougher comps. There was a government shutdown going on, and and holiday sales that year were some of the weakest holiday sales, in the last decade, and we still put up a 5.7% comp for that year I mean, for that quarter. Because the last two weeks, we had incredibly strong winter business. And, you know, we think our guidance reflects if you go back over the last, decade plus, you know, we're right in that Our the guidance range we've given that midpoint of 3% comp is even if you exclude, like, 2021 where we had really high comps those two years, you exclude those, our center point's still right at about a 3% for comp for, for Q4. So, yeah, we feel really good about the guidance we've given in Q4. It is all about the cold weather and winter that starts to happen in December. We're really optimistic about our holiday. We've got a lot of things locked and loaded for that. Our hometown heroes event should give us the opportunity to get in the market very early in a very unique way for Tractor Supply. So just can't say enough, positive things about how we're thinking about the balance of Q4, and we feel as bullish on Q4 as we did three months ago, on our most previous earnings call. As it relates to to the comments John made on direct sales, Michael, I'd say a few things. First off, John mentioned we've got a little over 40 sales reps right now, 48 sales reps in place. I'd say, you know, 20 to 25 of them are really doing the bulk of the sales driving right now out of that first cohort, second cohort of classes. And driving that to $250,000 a week we're seeing right now. And we're ramping sequentially every single week. So we feel really good about, the continued benefit that that's gonna drive for us into next year, and we've always talked about 2026 would be when you'd start to see, the impact of the initiatives in our results. At our next earnings call, we certainly will be providing guidance for '26 and and more detail on how the initiatives layer into that guidance. But no doubt, direct sales, you know, will be a complement and a driver of our growth year. Thanks so much for the question, Michael.

Thank you very much.

The next question is from the line of Kate McShane with Goldman Sachs. Please go ahead. Please ensure your line is unmuted.

Sorry about that. We wanted to ask a few more questions around pricing and tariffs. The color you gave around ticket was helpful. How should we be thinking about ticket in Q4, especially when it comes to like for like price increases. And just when it comes to the change that we saw the narrowing in the top line of guidance today, how much of that is because of the change in terms of what you're expecting to flow through in terms of price?

Hey, Kate. This is Seth. Thanks for the question. For tariffs and kind of pricing and as we look ahead, would just take a step back first and just say, first and foremost, that you know, I've just really highlight to the team that we have the tools and the team in place and have done a really nice job up to this point. To navigate. And at this point, we're about halfway through the initial incremental tariff impact kinda year over year as it's kind of flown through to the p and l. We have taken some price where we have needed to here and there. Where we have, we have not seen a lot of elasticities yet. It has driven a little bit of AUR, but not a lot of elasticities. You know, we think about a look ahead, I would just say our top priority really is to continue to be that advocate of value for our customers. You know, our guidance implies that, we're gonna continue to navigate the costs that flow through to the P and L in Q4 as a result of these tariffs. Where we do take price, we're gonna continue to be surgical. We do have a portfolio approach. As you know, Q is such a big part of our business. 40% to 45%. You know, and you think about that and mostly domestic based on that. You know, it continues to be operating within kind of a a lot in line with, where we are kinda today and foresee that kinda going forward. So as we think about price, as we look ahead, again, we're gonna continue to navigate You know, our focus, again, is on value perception. It's on managing margins. And at the end of day, we're gonna continue to make sure that we are priced right to make sure that we continue to take market share.

Thank you. The next question is from Scott Ciccarelli with Truist. Please go ahead.

Good morning, guys. So Kurt provides some comments on '26 So when you guys look at next year and the OI margin expansion you referenced, is the potential on the 2% plus comp coming from SG and A leverage? Is it coming from growth? Is there a mix Can you just provide any more color or clarity around the thought process around that? Thank you.

Yes, Scott. What you heard from me in my remarks, I'd summarize by saying we expect and see momentum in our gross margin expansion. In 2026. The pressures on SG and A that you saw this year, we we had said we were going to make a very purposeful investment to launch final mile and direct sales and that was gonna put 15 to 20 basis points of pressure on operating margin in 2025. As you heard Hal mentioned just a second ago, the next cohorts in the 2026 launch we anticipate paying for itself, and there's no incremental pressure on SG and A. So between that and some of the transitory type items that were pressured this year, SG and A has less pressure in 2026 as we see it today and allowing us to be able to leverage at a lower, more normalized comp rate as I mentioned in that low 2% range. And just as an example for Q3 and even our expectation for Q4 of this year, with twenty basis points of pressure on initiatives, on year over year pressure from incentive comp just compares, and even some timing on the benefit or the pressure on sale leaseback you you look at the core of the business, and SG and A is in a really good shape. And it's really another great example of of how at this point, we can leverage on SG and A at a lower comp rate and be able to grow operating margin if we achieve that low to mid 2% range. And it's really about being able to move past the investments, and, and and I hope that helps in regards to seeing the potential for next year.

Thank you.

The next question is from the line of Steven

Hey, good morning. Thanks very much for taking my question. I wanted to ask on the same store sales growth. So to follow-up on Michael's question earlier, The fourth quarter, why does the low end of the guide include a one comp? You know, quarter was back to algo. So just help us understand why there's a wider range for the fourth quarter what gets you to the low end versus the high end? And then as we think about '26, thanks for the preliminary views, is there anything to be mindful of first half versus second half? Just since inflation was a factor in first half versus second half of this year?

Good morning, Steven. As it relates to Q4, it's really just reflective of the range of outcomes that we see in the fourth quarter as we've mentioned previously, kind of dominantly based on weather. I think if you go back and look at our kind of ten year trend on the fourth quarter, that's it's kind of the range to that we've seen historically in the in this quarter. And and, anyway, so I'd just say that that's kind of reflective of of what we're seeing. The second thing I'd say as it, relates to next year there's really not a lot ins and outs on the sales side for next year. You know, a little bit of maybe of Q3 benefit that I referenced in my earning scripts that might flow into Q2. But other than that, I think the sales should be pretty straightforward probably got a little more AUR benefit in the first half of the year than the second half of the year. At least what we know now. Kurt mentioned, we've got a DC opening, next year. That's got a little bit of a start up cost that'll impact operating margin in the first half, but we get the the cost of goods benefit on that on the second half, from the new store from a new discount we get with our vendors for opening up a new DC. That should pretty much, wash itself out for next year just between the two halves a little bit. So, you know, I'd say nothing nothing too out of the ordinary next year. I think that's that's one of the big things to Kurt's prepared remarks we're trying to get across was it's a we expect it to be a very much more of a normalized year than we've had in the last five or six years. Whether that's across our p and l, whether that's across commodity deflation, inflation, etcetera.

Thank you.

The next question is from the line of

Hey, good morning. Kurt, on your 26 comments, maybe we could talk a bit more about the comp building blocks. Maybe we talked a little bit about direct sales. Maybe we could touch on Alivet. And curious how you think about other things like commodity inflation and tax refund stimulus? And adding this all up, is it fair to anticipate a return to comp algo in 2026?

The information that I've shared thus far is about the the the length of what, at this point, I think it's appropriate to share on thoughts for 2026. It's really been intended to say, the p and l is more normalizing And at a run rate relatively consistent with what you're seeing in the second half of this year, there's an opportunity for margin inflection. Certainly will be able to share some of the details on how we build up to our guidance range for comp sales in the back half of the year. Things that we've said thus far that I'll just reiterate that it's important to understand, we see AURs continuing to be in a positive scenario. The back half of this year, and going into 2026. Transactions continue to be a core foundation for comp sales growth, and we anticipate that for 2026. So in general, the consumer continues to engage in the lifestyle. We have a solid demand for our core business. We anticipate transactions and ticket to both contribute. Strategic initiatives which just launched this year including Ally Vet, We ant we're excited about the momentum. We anticipate that each of them will give some contribution. But I would just say at at this point early in each of those stages, those contributions are important to be able to show the acceleration, the momentum of the business, but won't be the the key drivers of the comp sales growth. And we'll give you more information on what our range is and what the key contributors are in our January call.

Thank you.

The next question is from the line of Chuck Grom with Gordon Haskett Research Advisors. Please go ahead.

Hey, good morning guys. Thanks very much. Maybe a question for Seth or John or maybe Given the increasing tariff drop, curious if you're making any changes to your seasonal assortment for the holidays, some other retailers have talked about swapping out certain products. And I guess if so, how that supplementing of assortments could impact sales or gross margins here in the fourth quarter? And then just one quick one follow-up for Kurt. I think historically, your leverage gets you about 15 bps above or below. Is that would that still be the case based on that low 2% potential comp next year? Thank you.

Hey, Chuck. This is Seth. I'll start, and then I'll kick it over to Kurt for your second question. Hey. Hey. For holiday, I would just say, you know, going back to post the April announcements of the tariffs, the team did a really great job. Analyzing all the programs that were set aside for the back half, looking at where we thought, you know, there could be elasticities or tariffs could come in. And went went right away to kind of adjusting potential buys and things of that nature. I would tell you that, like, there's not a significant meaningful amount of updates and shifts that occurred other than maybe going from direct importing some products to finding domestic supply and demand, looking for products that had other countries and origins of supply, I would just say that the team did a really nice job pivoting to those other countries of origins as well taking advantage of opportunistic buys so that we can make sure that we have a really compelling offer as it comes and we look ahead to holiday. So, you know, we're we're really confident when we look ahead and be able to manage not only tariffs, but also being able to offer, that kind of assortment that our customers expect for us around this time of year. I'll kick it over to Kurt and let him go to the second question.

Yeah. Chuck, the you're going back to my comments about the over moving beyond the peak investment cycle gives us the ability at lower comp rates more historical tractor supply norms to be able to have some level of inflection in operating margin. When we gave our long term guidance, we said, you know, we we generally look in this guidance range to be able to grow our operating margin five, 10, 15 basis points annually. And as we are able to achieve comp sales above that inflection point, I believe that scenario is very much in play for 2026.

Thank you. The next question is from the line of David Bellinger with Mizuho. Please go ahead.

Hey, good morning everyone. Thanks for the question. I want to ask you about the hunting supplies expansion. We've noticed rollout of ammo dens in the ammunition category as part of our checks. Can you help us size the revenue opportunity in the the potential comp uplift there? How many stores can this reach? And any early reads from your core customer? Thank you.

Hey, David. This is Seth. Hey. Thanks for the question. Hey. I would I would start with just saying that, you know, wildlife and recreation supplies have been a core kind of category growth strategy for us. If we go back even over the last five years, and we continue to be really, really pleased with the growth of the categories and those items as we're looking at those in the store. So when it goes directly to ammo, I would say ammo for us was just kind of a natural extension, to that kind of outdoor wildlife and recreation category. You know, we are the market leader in safes. We are growing significantly in, call it, feed and attractants. When you look at those categories, ammo is kinda like that next, iteration of q when you think about that wildlife category for us. Today, I would tell you we're in roughly about half of the chain we've ramped that recently where we started with a small pilot, and we're pleased with the initial results. We also have it online. And I'd say for a little bit for the foreseeable future, would be in about that kind of store count as we kinda go into 2026 and we continue to manage that out. So, again, ammo is kind that natural extension to it. I would just say more broadly, you're gonna continue to see us go deeper and deeper in the wildlife and outdoor recreation categories. Because not only has it been a key growth driver for us in the business for the last five years, but as we look ahead. And that's part of the things that you're seeing with us with the Field and Stream partnership that we're launching. We're having those new exclusives. Kinda coming out. And for us, we're looking at that as, like, what's that kind of next category of growth similar to what we've seen over poultry kind of over the course of over the last five years, ten years, etcetera. So thanks for the question. Thank you.

The next question is from the line of Chris Horvers with JPMorgan. Please go ahead.

Thanks. Good morning and thanks for taking my question. So a couple of follow-up on the top line You talked about 50 bps to bps of Spring seasonal demand, springsummer shifting into the third quarter. Also talked about some fall headwinds. So was that 50,000,000 to 60 sort of a smaller tailwind as you think about how it played out in September? And then as you think about the ticket component of comp following up on an earlier question, into the Seth, you mentioned you're about halfway through rolling out pricing. But also into the fourth quarter, your mix goes more highly towards imported goods. So would you think that ticket could perhaps be up 2.5% in the fourth quarter or maybe a little bit more given the mix shifts? Thanks so much.

Hey, Chris. It's Kurt. In regards to the the ticket question, we anticipate that our ticket will have a similar, maybe slightly higher impact on the fourth quarter. For some of the things that you mentioned. The the ticket had minimal impact this quarter on mix in well, including big ticket. So, ticket is is benefiting from the stable commodity market with some slight increase in the input cost, including tariffs. That may moderate up a bit in the fourth quarter. We've always said that in this quarter, there's volatility in regards to elasticity as well. So some of that in, includes for ticket, how much impact may be in the basket, etcetera. So we look at both transactions and ticket being a key contributor to the fourth quarter and maybe maybe more outsized on ticket in the fourth quarter than it was the third quarter. And transactions will move in regards to demand for the business And particularly, as Hal mentioned earlier, the demand related to cold winter weather, impact. So look at it look at it that way in regards to the the benefit. And then, remind me the first part of your question, Chris.

Was, yeah, Kurt. The, was whether you think that 50, 60 basis point lift from the shift from 2Q to 3Q on the seasonal business, do you think it was less of a tailwind considering what happened in September? Or is that sort of your view of the net impact of weather in this in the third quarter?

Yeah. You let me I'll just step back on the on the third quarter in general And we often say is is the quarter favorable or unfavorable weather related? And third quarter overall was favorable from a weather perspective. And there's been some puts and takes in there, but if it's, you know, relatively a a point of comp benefit from a good solid weather condition in the third quarter, that's a pretty good range to look at it. Within there, Hal mentioned that areas on a delayed start to the second quarter and then the bathtub effect, some of that is what fell into July that may often be know, part of the second quarter. But overall, particularly July and August, we're set up as a a favorable, solid third quarter. And then on the tail end of it, you had a, you know, a headwind on there. But we do overall look at the third quarter as a a solid, good, favorable weather con you know, condition type quarter. Thank you.

The next question is from the line of Robert Ohmes with Bank of America. Please go ahead. Robert, please ensure your line is unmuted.

Sorry about that. Sorry, just two quick questions. Maybe how can we get an update on retail media for Tractor Supply? And then another question for the team would just be, I think you guys on the the the release you put out mentioned softness in the select discretionary categories. A little color on that. Was it apparel? Sounds like it wasn't big ticket overall, but would love to get any color on that. Thank you.

Hey, Robert. Thanks so much for the question today. I'll take the second one, and then I'll toss it to Rob to share some details on direct sales. I'm sorry, on retail media. As it relates to the, softness in discretionary, really, not much difference in what we saw in Q3 than what we saw in Q1 and Q2. The seasonal big ticket certainly continues to resonate with customers when there's a need. They're purchasing We saw that in July and August with riding lawnmowers, as we called out. But on the flip side is if there's not a big driver of demand right now, we still see customers being a little bit cautious in their purchase as a big ticket. And and for us, those are things like, say, dog kennels and crates, It could be it's things like, that we've called out also, like trailers, and gun safes. Some of those, everyday bigger ticket businesses that we sell just a little bit of kind of, cautiousness from the consumer on that. It's been that way all year, and I think what we were trying to call out in Q3 is that the strength in riders offset the weakness there. Also, the weakness we mentioned in the last couple weeks of emergent response, you can imagine, we sold a lot of generators in weeks '3 as it relates to the trends we saw in the first half.

Alright. And good morning, Robert. This is Rob. Hope all is well. Hey. So first, from a retail media perspective, we're continuing to make really strong progress. You know, we entered this year with retail media with two primary objectives. One, to expand our partnerships and ultimately drive revenue. And we're on track for this year to deliver a triple retail media revenue growth year over year. So we're very pleased about that. We're doing that by expanding the partnership count over 80%. Our average partner revenue is up by nearly 50%, and we're introducing new products and capabilities to our partners such as know, branded pages, off-site products, and expanding our in-store, display meet retail media offerings. You know, we're really early still into retail media. I would call it kinda say the first inning, but we're really pleased with the progress the team's made. Have extreme focus. We have strong, we, have strong value proposition back to our partners. Really focusing on the footsteps in the rural market area, And in '26, where we're gonna double down, expanding our vision to more of the self-service capabilities, the model, related to more product placement, related to ads, as well as products in general. So with these expansion, the momentum that we're seeing in our partnership as well as just continuing to put the focus on our value proposition, we feel we're well positioned going into '26. We're we're very pleased to team's done a great job.

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

Hi, good morning guys. Thanks taking the question. I guess I'll ask on on AI, just maybe an update on what you guys are doing in that area. And what your kind of outlook is for how you're gonna layer it into Tractor Supply? Thank you.

Yeah. Hey, Peter. Thanks so much for the question on AI. We've got a lot of exciting things going on on that front, and I'm gonna break it into into three buckets. Enterprise level software. The second is custom built what now we call, off the shelf enterprise software. Second, call custom built enterprise software. And then the third, would talk about is around agents and automation. First off, on on the enterprise kind of purchased software, all of our vendors that we work closely with are now rolling in AI modules AI analysis, AI capabilities, you know, whether that's in ERP ERP systems, whether that's in replenishment systems, marketing, etcetera. So we are, fast adopters there where appropriate. Obviously, with, clarity of understanding of functionality and security. On the second one, as, in terms of custom build, we talked about that several times in the past. Those, software systems applications that we built out we continue to scale. We continue to refine. And they continue to and they become more and more key parts of just how we operate every single day. So whether that's Heygura, which is increasing in its use whether that's tractor vision, in terms of our customers, you know, calling out when customers need help in areas that our team members might have visibility to them, or whether that's in CorSo, which drives day to day operational So those are just three examples of custom built applications that are scaled out now and continue to ramp in their impact and use by our team members. On the third one around, kind of automation and agent build out. Over the last six months, we've done a, enterprise integration with OpenAI. We now have over 1,200, I think, 1,500 users that now have, OpenAI enterprise account. That's integrated with our Snowflake data lake. And what that allows us to do now is to start, really across the organization building agents to automate and make things, simpler and faster. An example of that, would be in, say, our fast team, where in the past, when a, FAST team member would finish a planogram reset, they would take a picture. They would send it to their district manager, district FAST supervisor. They would review it and provide manual feedback. We've now built up the capability where when that picture's taken, AI assesses the picture and gives immediate feedback to the team member, and our district FAST supervisor only has to get involved with escalation And so, you know, just makes everybody's job more efficient and allows us to execute faster and kudos to the team across, you know, really all dimensions of our organization for embracing it and driving that that productivity enhancements that it can provide.

Alyssa, we'll got time for maybe just one more quick question. So let's see if we can slip one more in.

Great. Thank you. Our final question will come from the line of Spencer Hanis with Wolfe Research. Please go ahead.

Good morning. Thanks for the question. I just wanted to ask on store growth. Stepping up for next year. Where do you see most of that growth being centered? Is it new or infill markets? Then how are you thinking about the cannibalization from that growth and then the returns on those? Those stores as well?

Yes, thanks for the question. Appreciate it. So on new store growth, first, I'd just say as we look backwards, last eighteen, twenty four months, there were some questions around our new store productivity being lower and we talked about was a lot of noise in there. And as we said then, ex the noise, we've been running pretty consistent. And we continue to be pretty consistent. The new store productivity numbers of late continue to show that our new store productivity is running strong and consistent. New stores are performing above pro forma. We are site selection and model is the best we've ever had. Our pipeline is strong. The real estate construction team are doing an excellent job continuing to build out these stores in the right locations. We know that cannibalization we can build out markets. We can grow the overall market and we're seeing cannibalization numbers come in even lower than what we predict them to be. So we we know that the growth's out there. We see growth across the entire United States. But a lot of our growth will continue to be in the West as we're opening a new DC out there. Idaho, we'll continue to grow stores up there as well. Well,

Alyssa, I know we've hit the top of the hour, so that will wrap our call. I'm around anytime anybody needs anything at all. So thank you all for joining our call today.