Christine E. Skold - Tractor Supply Co. Gregory A. Sandfort - Tractor Supply Co. Kurt D. Barton - Tractor Supply Co. Steve K. Barbarick - Tractor Supply Co..

David G. Magee - SunTrust Robinson Humphrey, Inc. Simeon Ari Gutman - Morgan Stanley & Co. LLC Atul Maheswari - UBS Securities LLC Adam H. Sindler - Deutsche Bank Securities, Inc. Seth I. Sigman - Credit Suisse Securities (USA) LLC Steven Forbes - Guggenheim Securities LLC Christopher Horvers - JPMorgan Securities LLC Seth M.

Basham - Wedbush Securities, Inc. Scott A. Mushkin - Wolfe Research LLC Dan R. Wewer - Raymond James & Associates, Inc. Bradley B. Thomas - KeyBanc Capital Markets, Inc. Chuck Cerankosky - Northcoast Research Partners LLC Benjamin Bienvenu - Stephens, Inc. Peter Jacob Keith - Piper Jaffray & Co. Justin E. Kleber - Robert W. Baird & Co., Inc.

Joseph Feldman - Telsey Advisory Group Robert Iannarone - RBC Capital Markets LLC Brian Nagel - Oppenheimer & Co., Inc. John R. Lawrence - Coker & Palmer, Inc. Stephen Tanal - Goldman Sachs & Co. LLC.

MANAGEMENT DISCUSSION.

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss Third Quarter 2017 Results. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. We do ask that all participants limit themselves to one question.

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, Ms. Christine Skold of Tractor Supply Company. Christine, please go ahead..

Thank you, Shayla. Good afternoon, and thank you for joining us for Tractor Supply Company's quarterly earnings conference call. Before we begin, let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

This call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company.

Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company filings with the Securities & 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. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. I'm now pleased to introduce Greg Sandfort, Tractor Supply Company's Chief Executive Officer. Greg, please go ahead..

Thank you, Christine. Good afternoon, everyone. And thank you for joining us on the call. Today with me are Steve Barbarick, our President and Chief Merchandising and Marketing Officer; and Kurt Barton, our Chief Financial Officer. We are very pleased with the overall performance of our business in the third quarter.

Sales were strong throughout the quarter, and broad-based across all of our major product categories and geographic regions. Moderate temperatures and higher moisture levels throughout the summer months led to an extended spring and summer selling season, and our team did an exceptional job of positioning our inventories to capture those sales.

We experienced strong demand for C.U.E., seasonal products and big-ticket products, and with our supply chain capabilities, we were able to flow inventory back into our stores to address the increased customer demand for product. While deflation did moderate somewhat in the quarter, it has continued to be a headwind in several key categories.

And in many of the energy markets we serve, we have seen our business improve, but by no means have all of these markets fully returned to prior sales levels. For the third quarter, comparable store sales increased 6.6%, with store transaction counts up 5%, and average ticket up 1.5%.

Our online traffic was strong with unique visits up 20% and 66% of all visits to our tractorsupply.com site continue to come through a mobile device. We did experience a marginal sales lift from the hurricanes late in the quarter, and we estimate this added about 120 basis points to comparable store sales.

But more importantly, we are extremely proud of the way our team members and our vendor community worked together to provide needed emergency response products to the hurricane impacted communities.

Team members in our stores, distribution centers, and store support center worked tirelessly to help our local communities in their greatest time of need. We believe it is this type of neighborly helping hand that makes Tractor Supply a special company, and strengthens our customer's affinity to the Tractor Supply brand.

Our customers have trust that Tractor Supply will provide their everyday basic products for living the rural lifestyle, and we continue to invest in our capabilities to better meet their evolving needs.

Our stores, our people and our systems are all critical components that enable us to serve our customers, and we continue to be committed to our goal of digitizing our business by closely linking the physical and digital storefronts into one seamless shopping environment for them. We call this our ONETractor initiative.

Our Buy Online Pick Up in Store and Drop Ship programs continue to build momentum and resonate with customers with roughly 75% of online orders being picked up in our stores in the third quarter. Additionally, the average order size for a Buy Online Pick Up in Store order remains significantly higher than the company average.

And our customer data indicates that Buy Online Pick Up in Store is particularly popular for larger projects and difficult to transport items, such as fencing products that require a larger number of components to complete the job.

Buy Online Pick Up in Store allows our customers the option to research and select the products they need, that know that their order will be ready for pick up at a store close by, and thus saving them time. Also, our Neighbor's Club customer regards program continues to be very popular.

Enrollment in the program has exceeded our expectations, and we finished the quarter with over 5 million members.

Our Neighbor's Club members are some of our best and most engaged customers, and while we are still in the early stages of rolling out the benefits of this program, we will leverage this customer data over time to strengthen our relationships and refine our personalized communications with this customer.

Now, there's two other technology initiatives that we continue to test, and we believe could be meaningful longer term. They are mobile POS and stockyard. Mobile POS is an in-store initiative that allows our associates to find information, locate product, and check inventory in surrounding stores, and then process the sale through a mobile device.

Our team members have embraced the technology and by using mobile POS are making the shopping trip easier for our customers. Stockyard, another store-level initiative that merges our online and in-store capabilities, allows our store team members and customers to tap into a much wider assortment of products, utilizing our vendor's inventories.

This extends our digital footprint and gives our team members and customers access to merchandise not normally carried in our stores. This is particularly helpful when a customer is looking for a unique or a hard-to-find item that may be make or model specific.

The team member and the customer can research the sought-after item on the kiosk, quickly address an immediate need, saving them both time. Now, a little over a year ago, we acquired Petsense, and we remain pleased with the opportunities for this business.

While immaterial to our overall results, Petsense stores generated positive comps and double-digit total revenue growth for the quarter. We have spent the past year gaining a better understanding of the business, and are working to improve the model while integrating back-of-house functions where possible.

Utilizing the Tractor Supply test-to-learn methodology, one area of focus has been on the development of exclusive brands. Through this effort, we are launching an exclusive brand of premium dog and cat food in Petsense stores this month, and it's labeled True Source.

Petsense will also launch an e-commerce site late in the fourth quarter for purchasing online, and Buy Online and Pick Up in Store will be available sometime in spring of 2018.

We continue to believe that the rural pet market is an under-served market with fragmented competition and significant growth opportunities, and we are prudently investing in people, processes and technology to develop and grow this business for the longer term. So, let me summarize.

We are delighted with our overall third quarter results, and our teams did a terrific job capitalizing on the extended summer selling season. We know our customers look to us for their everyday basic needs and we are making timely investments in our business to better serve them.

With a loyal and growing customer base and continued convergence of our physical and digital storefronts, we believe we are well-positioned to drive sustainable long-term growth and shareholder value. I want to thank all of our Tractor Supply and Petsense team members around the country for all that you do.

You are the driving force – those who serve our customers and execute our business plan every day. Now I'll turn the call over to Kurt to review our third quarter financial results..

first, we expect to continue to invest payroll in our stores, distribution centers, and customer solution center to drive strong customer-service levels. This investment reflects incremental hours and, to a lesser extent, higher average wage rates compared to prior year.

We're also cycling favorable medical and worker's compensation-related costs in the prior year. Depreciation expense is expected to grow 11% to 12% over the prior year, resulting from our key strategic investments in technology and supply chain enhancements.

Additionally, we are cycling the prior year 53rd week, which benefited last year's fourth quarter expense leverage. We will of course provide our initial outlook for 2018 on our year-end conference call, but in keeping with our past practices, let me provide you with some considerations for your modeling into next year.

We expect to finish the construction of our New York distribution center in Q3 2018 and begin servicing stores in late fourth quarter.

We are forecasting that related pre-opening expenses and incremental operating expenses for this distribution center to increase SG&A on a year-over-year basis, impacting earnings per share by approximately $0.03 to $0.04, with most of the impact in the second half of the year.

Also, should we achieve our targeted results in 2018, higher incentive compensation could raise SG&A and impact earnings by $0.06 to $0.08. We expect some moderate impact from higher-wage inflation at both the stores and distribution centers due to pressures from both state regulations, as well as competition.

Additionally, we anticipate continued headwind from freight expense due to growth in C.U.E. and other more freight-intensive products, higher average transportation costs and growth in our online business. Over the past two years, we have invested in several key initiatives to position the company for long-term growth.

We have managed the business and related investment spending to absorb these costs in our financial model while delivering solid bottom-line growth. Therefore, as we continue to invest in long term growth of the company, our goal is to execute these incremental investments while managing the financial impact to enable us to deliver earnings growth.

That concludes our prepared remarks. Operator, we will now turn the call over for questions..

As a reminder, we ask that you please limit yourself to one question. Our first question comes from David Magee with SunTrust. Your line is open..

Yes, hi. Thank you, and a nice quarter, guys..

Thank you..

Thanks, David..

Can you talk a little bit more about just the transportation issue, and maybe a bit more color about what type of items cost you more? I know you're investing a lot in improving the sort of the flow through of that, but is that something that is likely to peak next year, do you think, and starts to decline thereafter?.

Yeah, David, this is Kurt, and good question. On the transportation side what we're seeing are a number of factors. The growth in C.U.E. continues to have pressure on the transportation freight expense as those items, bulkier, heavier commodity items have a higher freight rate to them.

Additionally, we certainly were able to capitalize on opportunities to sell certain items that are bulkier and big product that have a larger freight charge to them. That was part of the third quarter. That is a little bit more specific to third and perhaps fourth quarter.

I will tell you that what we're seeing in addition to that is on the oil pricing and the cost of fuel, we saw an increase in the third quarter, and in the fourth quarter we expect to have higher average fuel costs.

And then lastly, both domestically and internationally we are seeing increases in transportation costs, and those items we expect to carry into next year..

Okay. Thank you for that, and I guess – and secondly, if you could give a little color about what you're seeing with regard to your competition online and any price movement online that might be surprising either way to you..

Yeah, this is Steve. We're keeping a close eye on it. What I can tell you is that no different than we do in our stores, we've got different categories of merchandise, whether it be items we're very competitive on, items that are more convenience and some that are balanced.

And I've seen a lot of reports out there kind of trying to project where Tractor is relative to their pricing competitiveness online. What I can tell you is is that the vast majority of our business is done in stores. And the store brands that we carry, we feel really good about where we're at online.

We do have about an additional 70,000 items that are online that we don't have in the stores, and we're constantly going through and checking those items, but those items don't have a significant impact on our revenue. So, again, I would tell you we feel pretty good about where we're at.

We feel good on the consumable side of our business and a lot of the big ticket, especially the products that we carry in our stores..

We will take our next question from Simeon Gutman with Morgan Stanley. Your line is open..

Thanks. Good afternoon, guys..

Good afternoon, Simeon.

How are you?.

Good. How are you doing? Just a follow up for Kurt. I don't think you mentioned it explicitly in, I guess, the preview guidance for 2018. I think you mentioned that SG&A will be up and you mentioned a couple of the headwinds to gross margins.

And I didn't know if there's offsets to it or if what you're implying is that overall margin could be under pressure? And then at what sort of comp rate is it normalized? I think the 3%, 3.5% or so camp rate, is that how you're thinking about comp growth relative to the other plans you laid out?.

Sure, Simeon. And I mentioned this briefly on the last call, too. When we look ahead to 2018, first I'd say with fourth quarter still ahead of us, and right now we're heavily into building the budget and the forecast for 2018, I can't necessarily get into too much detail.

But I'd tell you that when we look at 2018 on the gross margin side, we do see the expectation that freight headwinds to continue into 2018. As we said before, 2018 will continue to be a year we invest in our long-term growth initiatives.

So for the items that I mentioned earlier in my prepared remarks, I believe there's SG&A headwinds, as I mentioned. And I would say at this point, we would expect to see operating margin for next year have somewhat of a slight decline. A little bit early to say. We'll have more information as we end Q4.

At this point, looking out, I can probably just tell you that we're somewhat realistic and cautious on operating margin and would expect to see some slight decline..

Okay. Thanks for the color. And good luck in Q4..

Thank you..

We will take our next question from Michael Lasser with UBS. Your line is open..

Good evening. This is Atul Maheswari on for Michael Lasser. Thanks a lot for taking our questions. See, your guidance implies that the fourth quarter comp would be in the 1% range at the midpoint.

I know you're lapping significantly comparisons in the fourth quarter, so what gives you confidence that this guidance will be achievable? Do you need favorable weather to comp at that level, or do you believe your initiatives will help you meet this guidance, even if the weather is not very cooperative? Thank you..

Yeah, it's a good question. On the fourth quarter, I'd say the couple of assumptions are that we do see strength in the core of the business. And that's a key part of our assumption. The fourth quarter is a quarter where weather can heavily impact the performance of it.

So, the assumed guidance range assumes somewhat of a normal fourth quarter, and expecting continued strength in our C.U.E. product. Any favorable weather or change in weather that's unfavorable could heavily impact the performance of the top-line sales..

Okay. Thank you.

And as my follow-up, can you quantify as to how much the milder summer helped your comp in the third quarter? And also if there were any geographies of noticeable strength? Can you quantify how much those regions comped above the company average?.

Yeah, this is Kurt, and the best I can tell you is that, as we mentioned, the strongest month of the quarter was July, and that's where we saw the extended summer-selling season. And I don't have specifics on exactly the impact to the overall top line.

I would tell you that it was beneficial to July and it was not a strong significant impact to the overall comps. It was probably somewhere around 100 basis points to something less than that..

We will take our next question from Adam Sindler with Deutsche Bank. Your line is open..

Ah, yes, hi. Good afternoon, everyone. Congrats on the quarter, as well..

Thank you..

Thank you, Adam..

Thank you. Of course. So, the first question I wanted to ask was on mobile and the strength you're seeing there. And then, potentially, sort of tying that into Neighbor's Club. One sort of segment that's always eluded you has been the aware non-shopper and the non-aware non-shopper.

And I remember, maybe, several quarters ago, you gave an example of someone looking to buy a trailer. They'd never shopped there. They came in and bought one.

As you're looking at the mobile orders, and as you're looking at your Neighbor's Club enrollment, what type of overlap is there between those two? And, I guess, sort of the question is are you seeing that some of these mobile customers are new customers, and then they're signing up for Neighbor's Club, I guess is one.

And then secondly, sort of similar to the last question, could you sort of maybe discuss how much confidence you've gotten from running longer hours, now that you are doing that?.

Okay, yes, sure. Let me start. This is Steve. The first question you ask about mobile, Neighbor's Club and tying the two together, here's what I can tell you. Our customers have always used mobile and we are getting more traction from mobile. As Greg said, we've got about 20% of the growth of our web is from unique customers.

So, what we're seeing is more customers come into the fold that are relatively new to our site, and probably new to our brand. A lot of that has to do with a lot of the SEM marketing that we're doing out there, what we're going in social media space.

And I do believe that's actually bringing more folks into the fold, or at least introducing them into the brand. Now, in terms of whether or not they're new to Neighbor's Club, that's a little harder for us to understand, because the Neighbor's Club program is new.

And now that we're able to have as many as 5 million members, we're able to now go back through and check with those members to see if they're using mobile, desktop, or how they're coming to us, whether that be in-store or not. So, we'll probably know more once we start cycling more of this. At this point, Adam, that's the best I can give you..

Adam, this is Greg to talk to you about the longer hours of operation. When we made a slight change back in the latter part of first, second quarter to stay open until 9:00, that was due to customer request. They were coming to us in droves saying, hey, listen, I need to be able to get to your store after 8:00 and pick things up.

It's still light outside. I've still got work to do. Why are you guys closing at 8:00? And we had, I can't tell you, how many customers coming to us through email and through social media saying, why are you closing so early? Many of our competition stay open until 9:00, some stay open even until 10:00. So, we made the adjustment based upon that.

My belief is is that we may have seen a slight uptick, but generally speaking, it was business that probably would have come to us the following day or morning. I think we just made it more convenient for our customers to stay open an extra hour.

And it cost us a little bit in labor, but it was the right thing to do from a customer-service standpoint..

We will take our next question from Seth Sigman with Credit Suisse. Your line is open..

Thanks a lot and congrats on the great quarter. First question, just on the C.U.E. categories. It sounds like C.U.E. continues to outperform.

Is there a way to break that down further and to see if there are particular categories within that, that are leading the growth?.

Seth, this is Steve. What I can tell you is we talk a lot about C.U.E. being across the four walls. But if I were to give you any indication on the product categories that did perform, we continue to see growth in those categories that continue to fuel our business.

We did a reset in the livestock feed category in Q3, and we believe that that added some value. We localized a number of assortments, brought in some new SKUs and we continue to see growth in organic livestock feed. In addition to that, we did a reset in our pet food segment.

And I know there's a lot of concern, a lot of buzz out there around pet food and the internet, but we're still continuing to see growth, not just in top line, but in units as well. And so that continues to do well for us. And so – and even in the lubricant category.

So, without getting too specific, generally speaking, we continue to see growth, and we believe that's continuing to bring footsteps through the front doors..

Okay. And, I guess, a related question on the pet category.

Is there a way to give us a sense of how Petsense is comping on its own versus pet comps within the Tractor stores? And then, just bigger picture on Petsense, now, a year in, any more color on what you're learning there, and how you're thinking about growth for the Petsense concept? Thank you..

Well, we won't get too specific on comps, but I can tell you that it's running very much similar to how we're doing in Tractor Supply. So they're both running very positive.

Second, as far as the overall growth and where this is headed, we've still got some integration things that we're doing, later this year, and the first part of next, and we're going to still say that there's many more hundreds of stores that we can open in Petsense, for Petsense in the rural environment.

But we've got to get some other things in the works. We've got to get the website up. We've got to have some other structural things going on at Petsense to bring it kind of into the fold of how we operate at Tractor, and then I think you'll see us start to accelerate. So this year was a year of learning.

What do we have? What does it look like? 2018 is the year of moving it forward, and I think beyond 2018 is the acceleration point..

Our next question comes from Steve Forbes with Guggenheim Securities. Your line is open..

Good evening..

How are you?.

Good evening, Steven..

So I wanted to focus on I guess in-store merchandising and maybe opportunities right as we think out here. So question for both Greg and Steve, if you can.

So can you discuss the cadence of the 4Q seasonal resets by region, and the flexibility around the timing of the roll-out? And then as we think about as we head into 2018 and continuing kind of comp growth, where do you see the greatest opportunity within the box, right, as it relates to future category resets and new product introduction, right? What gets you excited about what you're putting forth to the consumer?.

Okay. Steven, this is Steve. Let me go ahead and start. What I can tell you is is that we talked about the extended selling season for the spring/summer goods, and part of that, I think, we actually drove. And I say that because we've left more stores on year-round for a lot of the spring/summer goods in the Southern part of the U.S.

Not only has it helped us operationally, but it's also gives us an opportunity to take advantage of a longer season. So that's some of the work we've done, and I think we're going to benefit from some of that not just in Q3, but maybe even a little bit in early Q4. In terms of the north, the set dates were very similar to what we did a year ago.

I do think that every year our planning team, as they mature, continues to do a better job in assorting those stores from a timely standpoint, and also with the assortments that make the most sense for us. So I believe that we're really well positioned as we go into the back half of this year.

Now in terms of what gets me excited about the inside of the box. I would tell you that there's a number of things. First off, in Q3, we had a strong performance within the four walls of the business. And while I know we talk a lot about the C.U.E.

business and how that's performing, and we should, because it's doing well, there are other things outside of just C.U.E. that we're working on as well. In terms of things like big ticket, we've done some resets relative to log splitters and generators. We're even looking at our safe assortment, making modifications to that.

On decor and spring goods – or, I'm sorry – fall and holiday goods, we're building off the momentum of what we had in spring, which was very strong for us. And I think we're going to have a really solid season in the back half of this year. As a matter of fact, the early signs right now are strong.

And we're also launching a Trisha Yearwood decor collection, which we're kind of excited about, and we think it's going to really respond well with our customer base. We tested it in the spring. And then I would also lastly suggest to you that C.U.E. is still a focus for us.

And we launched our version of 4health called UNTAMED, which is a high-protein diet, and it's already exceeded our original forecast. And I think our customers are responding favorably there. There's more opportunities within pet, we believe, as we continue to learn from Petsense and apply some of those learnings to our box as well and vice versa.

And then in feed, I still believe that there's long-term growth for us as we continue to work our way into markets and consolidate what's taking place out there in that business. So across the board, and across the spectrum, I think there's opportunities, and I'm still pretty bullish on where they are..

Thank you, Steve..

Thank you..

We will take our next question from Christopher Horvers with JPMorgan. Your line is open..

Thanks. Good evening, guys..

Good evening..

You have a lot of visibility on some signals in your business. You have the pellet sales, you have layaway of pellets, and I think log splitters and so forth sales in the north.

So last year, I remember you talked about the warm prior-year winter and the hot summer really didn't have – wasn't pulling the customer into the store for layaway of pellets and the early heating season was weak, as well.

So, curious, what are you seeing in terms of those categories where you get an early read on how the heating business is setting up for the fourth quarter?.

Yeah, Chris, this is Steve. What I can tell you is – as Kurt mentioned earlier, that the early part of October started off a little warm and customers a lot of times buy on need. And when you come off of different seasons, there's usually early demand or not, based on what they remember from the prior year.

We did have a cold December, but that was about it last year. And even when you worked in there, for the first part of this year, it was fairly mild compared to the year before. So our pellet – just to give you a sense for it – it picked up as it got colder, but, again, it's geographic. And a lot of our pellet business is done in the very Northeast.

So, if you look at where it got cold, we saw demand for the cold-weather products. But as you moved further East to the Northeast, where it wasn't quite as cold yet, I still think that there's some pent-up demand that will come out once the colder weather hits. Log splitters, that's a little similar.

We did do a reset, updated our log splitters, so we're seeing a little better performance than we saw a year ago. But that's what I can give you..

Understood. And you called out specifically, I think, $0.10 to $0.12 of earnings headwinds from the margins and from the SG&A side next year. You came in – this quarter you came in and beat the Street by $0.04.

So, is the right way to think about it that maybe the Street consensus is sort of $0.10 to $0.12 too high next year? Or do we sort of offset that with a $0.04 and be more of a $0.06 to $0.08 kind of reduction in the consensus is the right ZIP code as you think about it for 2018?.

Yeah, Chris, this is Kurt. I'd tell you, as I was preparing items to mention for 2018, I specifically brought up things that I believe may not be in the models or may not be factored in.

Items that have changed in 2017 that we believe will carry into 2018, such as transportation costs, such as some of the labor headwinds, and gave you some color on the distribution center. So, I would tell you that bringing those up, it's because I anticipate those may not be factored into 2018's guidance..

But do we have to mitigate any of that by the fact that you just beat the Street nicely on a $0.04 beat.

Do we offset it with that? Or do we just think about it from a gross $0.10 to $0.12 perspective?.

Well, Chris, I think the one thing I'd tell you is that we don't give guidance on the quarter. And so the beat to the Street versus our internal expectations may be different. And I would tell you that the one thing in the quarter that was the primary item not expected was the $0.02 beat related to the hurricane..

We will take our next question from Seth Basham with Wedbush Securities. Your line is open..

Thanks a lot, and good afternoon..

Good afternoon..

Can you quantify big ticket comps with and without the benefit from emergency relief products like generators?.

Sure, Seth. I'd tell you that, as I mentioned, the big ticket sales were boosted by generator sales and other big ticket items from the hurricanes and were above chain average. When you exclude the impact of the hurricanes, big ticket had positive comps, but was slightly below the chain average..

We will take our next question from Scott Mushkin with Wolfe Research. Your line is open..

Hey, guys. Thanks for taking my question. So I wanted to poke a little bit about the company priorities. You talked a little bit about your investments in omni channel.

And as we think forward, obviously you're going to build about 100 stores this year, as we think forward and you guys think about how you want to invest your capital, how do you think of stores versus e-commerce? And then I just had a quick follow-up on some of the conversations about 2018. Thanks..

Yeah, Scott, this is Kurt. It's a good question and we look at both of those capital allocation investment items. New stores certainly are a key to Tractor Supply's overall growth strategy. They provide a good return on the investment.

But today, what you're hearing and where we're focused on is not only growing the stores for continued top-line growth, but we're also focused on the things that we need to do and are part of our strategy for long-term growth. And so at this point, the 100 stores as part of our long-term growth strategy, we continue to evaluate that annually.

And we do look at the e-commerce side of it. When I say e-commerce, I believe Steve and I would agree on this in that we refer to it more as the digital. Because it's an omni-channel investment. And so many of the sales can begin online.

As Greg mentioned, the number of new or unique visitors to the website, how many are starting through a mobile device. So when we speak about e-commerce online investment, it's about the overall growth for Tractor Supply, both online and in the stores.

So to get to the answer to your question, I would say that we're focused on challenging both store growth and the other digital investments, and we continue to analyze that. That could lead us to a number of store growth that is below 100 if we believe we need to manage both the capital and the SG&A burden of our investments.

And we balance both of those out for the long term..

So it is conceivable that as we get to 2018 and 2019 that we tack a little bit more towards omni-channel and digital in your thinking. And then with that thinking, this is my follow-up, could we start to maybe characterize 2018 as an investment year? Is that how you guys would maybe think about it as we go this direction? And then I'll yield.

Thanks very much..

Yeah, it's a good question. I would say we've been on an increasing capital growth rate for omni-channel digital investment. We'll be near $65 million to $70 million investment this year. That number will grow next year. It may begin to stabilize on the investment specific to IT and digital at about $70 million or $80 million.

But as a percentage, yeah, that's a bigger percentage. And it is a good analysis to say we'll evaluate both store capital investment along with the IT investment, and the IT investment may continue to bring a bigger percentage. And we have looked at 2017 and 2018 as investment years.

So I would say it is a good way to describe 2018 continuing to have investment for the long term, and we're excited about the momentum we're seeing and some of those initiatives taking hold as part of the top-line sales growth..

We will take our next question from Dan Wewer with Raymond James. Your line is open..

Thank you. I have a short-term and a long-term question. First, the short-term question. Greg, on the benefit to sales from the hurricanes, will there be a continuing benefit as insurance checks and FEMA checks are distributed in the Houston and Florida area? And then the long-term question goes back to the idea about the investments in 2017 and 2018.

And this is very different than the outlook presented at the Analyst Meeting back in February.

I was just curious, at what point did the strategy change? Did you see these investment opportunities appear that would lead to operating margin rate dropping so much compared to the original plan of a 15 basis point to 25 basis point increase?.

I'll take the first part of the question, and maybe Kurt and I will double up on the second. We're going to see very little push in the business due to what happened around the Houston area. It's very isolated. It was flooding.

You won't see a tremendous amount of benefit from our side, at least the Tractor – like maybe the home centers will see for rebuilding and reconstruction. Maybe some fencing replacement, but I don't think it's going to be major. There's actually more impact, Dan, when you look at what happened with Irma as she came through Florida.

The power outages and things of that nature actually drove more of the business than did Harvey. To say that we have changed our thinking or changed the model of where we're going on long term, it would not be absolutely what's going on here. What we've been talking about is investment in bringing the digital and the physical places together.

We've been doing this now for the last four years. We are seeing some pressures through some things in transportation. We're seeing that we're going to have to step up and move a little faster maybe in some of our omni-channel efforts. But this is nothing different than what we were talking about in the investor meetings.

There is a little bit of movement. And one analyst mentioned earlier about do you think possibly that you may look at investing more on the digital side and a little less on the physical side as you balance this out over the next year or two. And I think that's probable, to be very honest. But we want to stay out in front of this, not be behind it.

We believe now we've got the platforms in place. We've got some things to do in CRM and Neighbor's Club yet to really develop that and mature it. We've got some more things to do in mobile within our stores, putting some more technology in the stores. We've got a few things to do yet, just inside itself and how that both these component works.

We've got a very, very strong and very healthy mix of business coming through the web, but translates at the store level. Very unusual when you think about it, versus much of the other retailers that you may throw us in the same basket with. So it's a little bit of some shifting around, Dan, but really no difference in strategy.

We're still funding and pushing the same priorities that we talked about..

Yeah, and Dan, this is Kurt. The only thing I'll add to that is our long-term strategy or targets have not changed, and we're not saying that they have changed. At the Investment Community Day, we emphasized the long-term growth plan, particularly, as you mentioned, operating margin growth, 15, 20 basis point improvement.

We said and knew that 2017 would not be in line with those long-term growth strategies, and we said the long-term growth is three to five years.

And as 2017 has played out, additional pressures and costs on transportation, payroll investments, has perhaps changed a little bit of the level of performance that we foresee for 2018, but we still see realistic long-term targets for Tractor Supply to be able to drive the top line, as well as the operating margin growth rate in the long term..

Yeah, Dan, the combination of everything is we're still looking to 3% to 5% is the comp rate from a long-term standpoint. And temporarily we may not be there, but we believe that is absolutely achievable. And operating margin of around 10% is the goal. I know we haven't been there in the last couple of years.

We've had some investment that we've had to make, and some other changes within some structures, but we see in front of us over the next couple of years the opportunity to get back to those levels..

We will take our next question from Brad Thomas with KeyBanc Capital Markets. Your line is open..

Yes, thank you. And let me add my congratulations on the strong sales here as well. To follow up on a couple of the earlier questions, I guess just a clarification on CapEx.

Any color about bringing that guidance down by about $20 million? And any additional color you could provide on new-store productivity, both in some of your denser markets as well as some of the newer markets out West? Thank you..

Sure, Brad. This is Kurt. First, on CapEx, the guidance coming down is really two things. Most significant is going to be timing shift of the New York distribution center, and just the timing of key initial costs that go into it are shifting out of 2017 and into 2018. The only other real key change is more of a mix of the type of stores.

So we either have a low-capital intensive prototype lease store or a retrofit with more capital, and the mix of stores in the back half Q3, Q4, has impacted the expectation on capital spending that has caused us to drop that $20 million. New store productivity, we're – as I mentioned on the call, we are pleased with new store productivity.

The trends continue to show improvement over the 2016 year. And the results that we're seeing in the last couple of quarters, I think you'd see is pretty consistent to years like 2014 and 2015. The selection of stores and our ability to enter the markets quickly we've been pretty excited about.

One thing on new-store productivity as you're calculating it, just as a reminder, with the integration of Petsense, with the smaller size, different model, the new store productivity, Petsense brings – has about a 600 basis point impact, bringing the number down.

So if you exclude that out of your calculation, I think you'll be more in line with what we look at as the comparable Tractor Supply new store productivity..

We will take our next question come from Chuck Cerankosky with Northcoast Research. Your line is open..

Good evening, everyone. Great quarter..

Thanks, Chuck..

When you're looking at the third quarter, what kind of merchandising programs apart from the normal seasonal stuff worked? I noticed you had Chick Days reemerge in a number of stores, and how are you looking at that for the fourth quarter, especially if you want to get past what might be a warm start or maybe another warm winter?.

Yeah, this is Steve. We did, I would say, maximize the opportunity in our center court space. We did have a fall Chick Days, as you mentioned, and we thought that that went very successfully. We heard a lot from our stores and our customers how much they enjoyed that. And we saw some sales from it.

At the same time, there were a couple of other events that we did, no different than what we've done in the past, but I think we had a lot more newness, and we really hit, I think, a better sweet spot with our customer with the product selection. So the center courts certainly helped us.

In addition to that, some of the resets that I mentioned earlier, I think, paid off for us both in pet food and in feed, and a couple other categories as well. And we had a little bit of a carry through in some of our live goods as well, Chuck.

As you look to desensitize your business in Q4, which is always a challenge, because we want to grow that seasonal business, because our customers need it when the weather does hit, some of the offsets to that are in our core basics.

And I think that's one of the reasons we put so much effort into some of the resets into some of the non-seasonal businesses, such as the consumables. And so with the launch of several product lines in pet as well as in feed, we think that that will continue to drive traffic should the weather not necessarily come.

In the center court, I mentioned earlier that we are really going to feed off the momentum of the decor selection and a lot of the holiday sets. And the early read on that is very positive, along with the new collection that we'll be launching from Trisha Yearwood. So I think that there's a lot of things outside of weather that we've done.

Now, will they offset that completely if it stays warm the entire back half? I can't necessarily say that, but I can tell you I think we've put our best foot forward..

All right..

We will take our next question from Ben Bienvenu with Stephens. Your line is open..

Hi, thanks. Good evening. I wanted to ask – the 1.5% increase in the comp transaction value is notable. It's a nice uplift and certainly an uptick relative to what you've seen in the last five quarters or so.

Kurt, of the 120 basis point benefit to comps that you called out from the hurricane, how much of that benefited ticket versus transaction count? And then if you could also eliminate the margin impact, the gross margin impact from the hurricane, that'd be helpful..

Yeah, Ben, this is Kurt. On the ticket side, I'd say we said about 1.5% comp ticket increase for the third quarter, and roughly about a third of that was related to the big ticket and the hurricanes. The rest of it was principally more broad, just overall product mix.

So from the ticket side, I'd say that's really about 50 basis points, and you can basically deduct that as part of the 120 basis point overall. And then on the gross margin side, when it comes to rate, we basically saw that the hurricanes drove top line, did not really have a significant impact on the rate.

We had generators at a lower average rate price, but you had other higher-ticket items on the truck tool or hardware side. And then you did have some higher transportation costs to get the product to the consumer, and get it there quickly. There certainly were some higher transportation costs.

You probably also read and heard that generally, starting in about late August, September, the demand for transportation through those hurricanes put a significant demand on the transportation system, and costs went up. So we look at it on the gross margin side as about a net neutral on rate..

That's great clarity, thanks..

We will take our next question from Peter Keith with Piper Jaffray. Your line is open..

Hey, thanks, guys. Good quarter. You had been talking a bit, in the prepared remarks, about labor investment. Sounds like there's two dynamics with your adding hours, but there's also some wage pressure.

Could you give a little more detail on those? I guess the – maybe first off is the labor investment beginning to drive any sales benefit that you can see? And then the wage pressure sounds like a new comment. I don't recall hearing that.

Can you give a little more color on what you're seeing from a competitive standpoint, how long that pressure might last?.

Yeah, sure, Peter. Good questions. First, I'd tell you that, as Greg mentioned, with additional hours, where it's meeting the customer's needs, and as our customer comes into the store, and is looking for that expert advice and service, as well as the customer solution center, we've invested additional payroll hours.

We believe that's all part of the top-line growth. Our stores speak and talk often, as you've heard us talk about G.U.R.A. And we want to make sure that our G.U.R.A. and our customer service is at the top level currently today in the retail environment. So, that is having an impact.

We believe it's all part of our initiative and what's driving the top line. When it comes to the wage pressure, I would just say that what we've seen in pockets, certain states, as you're aware, have instituted some regulations that have had an impact to us.

And then in pockets both in the stores and distribution center side, where there's some competitive wage pressures, it is important for us to maintain – hire and maintain the best team members, and we've certainly made sure that that is top priority.

And that is putting some level – moderate level of impact in the third and fourth quarter, and we believe we'll see some of that in 2018. Not saying that this is a level of significant it could have a 10 or 20 basis point impact in 2018 on the wage side..

Okay. Thanks that's helpful. Good luck on the fourth quarter, guys..

Thank you..

We will take our next question from Peter Benedict with Robert W. Baird. Your line is open..

Yeah, good evening, guys. This is actually Justin Kleber on for Pete. Thanks for taking the question.

If I look at the comp acceleration rolled into 2Q and adjust out for the hurricanes life, I'm still trying to understand if the improvement that you've seen was primarily driven by seasonal and big ticket or did you actually see sales within that core livestock and pet category also accelerate relative to what you experienced in the first half?.

Yes, this is Steve, and what I would tell you is, is that it was fairly broad-based, as Greg mentioned in his comments. While the pet and animal side probably was consistent with what we've traditionally seen. The other three walls of the box performed at pretty good levels.

So, the traffic that was brought through, it seemed to translate within all four corners, and within most of the product mix. That's how I'd respond to that..

Okay. And then -.

Go ahead..

No, I'm sorry, Greg, go ahead..

Well, I was going to just follow up to say that our business was very strong well before the hurricanes ever came in. So, we were enjoying a very strong third quarter of sales.

The hurricanes added a little at the end, but you lose at the beginning, you kind of lose in the middle, and you maybe pick up a little along the way with – the hurricane effects are not something that you plan on year to year, but that did not drive the third quarter results. We had a very strong business well before the hurricanes ever came..

Okay. Yeah, it sounds like maybe the pet and livestock business also improved as well. And just my second question for either you, Greg, or Steve, just was hoping you could maybe discuss any broader thoughts or observations as it relates to pet food category. As to these channel exclusive brands we're seeing move into the FDN (01:03:55) channel.

Do you see any cannibalization to your business, as those brands become more broadly distributed? And maybe how does that influence just your thinking on private label with the core health brand? Thank you..

Great question. I mean, that seems to be a big topic, certainly in the pet circles right now, with everything that is taking place out there.

I will tell you that for the last, I don't know, five, six, seven years, we've worked really hard to develop our own exclusive brands, and also get behind those brands that have a little bit more channel exclusivity to them.

And while there may be a few folks go into mass and doing some things online, the strength of our business continues to be very strong in those brands that we identify with, that our customers identify with, that are much more channel specific.

Our private brands, if I were to give you a sense for the quarter, and even for the year, are outstripping on a comp basis what the national brands are doing within our box. Our team members have gotten behind those. We've added several subcategories of those in 4health as well.

We'll continue to do an extension of our assortment within the retriever line. And then, as I mentioned earlier, the UNTAMED launch, which is more of an LID-type (01:05:22) product, I think, is going to do incredibly well. And the early read on that is very strong. So, when we look long term at that business, we still see upside.

We're staying very close to what's happening in the marketplace, but we have accelerated our own efforts to continue to move faster into the exclusive brand side..

We will take our next question from Joe Feldman with Telsey Advisory Group. Your line is open..

Hi, guys. Good afternoon, or good evening, I should say. Thanks for taking the question. Two quick things.

One was when you guys look at the e-commerce sales that you're having, are you seeing it – like more penetration from existing customers? Are you actually seeing new customers come into the fold, or like is it – newer ZIP codes that you hadn't seen before? Anything you can share on that?.

Yeah, Joe, this is Steve. I would tell you that it's a broad base of our customers that are coming to us. Whether it be Buy Online Pick Up in Store, I can give you examples of new customers who have found us through the web. At the same time, as Greg mentioned earlier, the majority of our customers are coming into our stores to pick up the product.

Store locator is one of the key metrics for us, and we're finding that the store locator is up significantly in terms of percentage year-over-year, where customers are going online and then trying to find out where their nearest Tractor Supply Company store is.

And then relative to customers that would like to have products shipped to them, again, that's only about 25% of our total sales. And what we're finding is is that it's a broad range of categories and most of those products are within the ZIP Codes that we have stores. And I think it's more of a convenience for them..

Our next question comes Scot Ciccarelli with RBC Capital Markets. Your line is open..

Hey. Good evening, guys. And thanks for squeezing us in. This Rob Iannarone on for Scot Ciccarelli. So I wanted to follow up on some of the expense issues that you talked about earlier.

So, you outlined expense pressures for the DC next year and higher incentive compensation costs potentially, but you also did talk about higher wages and freight and transportation costs.

Can you help us get a better sense for the magnitude of those incremental cost pressures?.

Yeah, Rob. This is Kurt. The best I can tell you at this point is we're going through our budgeting timeframe right now. The items that I mentioned, such as the new distribution center investment and the additional depreciation related to the investments, those are the more significant items.

And so I would tell you they're listed in order of magnitude being depreciation and a new distribution center, to a lesser extent payroll and wage pressures is probably the best I can tell you at this point. Still a lot to be calculated and forecasted for 2018. Incentive comp, as I mentioned, I gave you the magnitude of that.

It all depends on performance in 2018 and could have a magnitude of $0.06 to $0.08 next year..

Our next question comes from Brian Nagel with Oppenheimer. Your line is open..

Hi, good evening. Thanks for squeezing me in as well. Nice quarter. So, I apologize because I was on and off the call. But I just want to understand better, you did a 6.6% comp in Q3. That's a very nice number. If I'm hearing you correctly the hurricanes were not a big driver of that. So it was more reflective of the actual underlying business.

And then if you look at the guidance, what's implied in the fourth quarter does assume a deceleration in comps.

Is that a function of what we've seen so far, is the weather and extrapolating that, more difficult comparisons basically? So how should we think about the comps going from Q3 to Q4?.

Brian, this is Greg. That's us being our typical – let's say we're being conservative and knowing that what we've put out there we believe we can achieve. Given a little bit of weather favorability, those numbers could change. But we were being more conservative.

We did with the guidance change indicate between 1% and 2%, so it's not a low or high range. It's just somewhat of a conservative average is what we're targeting for the fourth quarter. We've got an immense December we're up against. And we took that into consideration with that forecast..

We will take our next question from John Lawrence with Coker & Palmer. Your line is open..

Thanks. Good afternoon, guys..

Afternoon, John..

Yeah, would you just comment a little bit, Steve, we've always talked about this new product development cycle.

Is there anything different that you're getting some of this product to market sooner, the process is faster, you've got better data on a regional basis, and I assume the success of that product just continues to sell through at a better rate than it was two years or three years ago?.

John, I love it when you ask the question because those are the kind of questions I'm prepared for. So thank you for the predictability. What I can tell you is new products are critically important to our engine, certainly our sales engine.

And we talk about filling often, early and cheaply, and I would tell you that the merchant team's gone out and there's a lot of tests that we're conducting right now. There is a lot of newness in the store and I think a lot of that has to do with a couple things. One, there's maturity in our sourcing side of our business.

We're starting to finally get our legs under us after a few years of new folks coming in, learning the processes, learning the culture, learning our partnerships that we have overseas and domestically.

In terms of the planning department, they've done a nice job as they've continued to mature in identifying local opportunities and assortment planning opportunities for the merchants and bringing them back. And I think that we're better assorted today than we have been in the past.

And we've also gone out and we've hired a number of new merchants on the buying team that have brought with us a wealth of experience from retailers that do things differently and maybe have an expertise in certain areas. So across the board, I feel pretty good about the movement and the traction that we're getting there.

I don't want to say that that's the season for Q3's strength of business. I think it was much more broad-based than that for a variety of things. But I am encouraged as we move forward into Q4 and into 2018 that we've got a good grounding for where we're going to be headed..

And we will take our final question from Stephen Tanal with Goldman Sachs. Your line is open..

Hey, good afternoon, guys. Thanks for the question. I'll try to make this quick. I just had, really, two parts both related to margin.

I think the first one, as I think about the 4Q gross margin decline, could you just walk us through like the biggest components of that? I think you mentioned freight being one of them, but I'm sort of curious, because as it looks like the compare is a bit easier, but if you'd just remind us what you're up against.

And secondly, you reiterated a 10% op margin target longer term in the context of IT maybe being a bit of a drag, online and C.U.E. maybe being a bit of a drag. Just trying to look and understand really the offsets there.

When you think out a few years, how do you get back there?.

Okay. Yeah, Stephen, in regards to Q4, we continue to see benefit and expect and anticipate from our gross margin initiatives pricing, strategic sourcing. We see some opportunity at the product margin rate in gross margin.

Our anticipation is that would be offset by the headwinds we've seen on the transportation side, so it's really simply when it comes to compare, we think we can drive some improvement in the direct product margin, but that is going to be offset by higher costs on the transportation side.

And then in regards to the long-term operating margin, I guess the best we could say is that we anticipate next year for the few items we mentioned and the investments in our long-term initiatives to have an increase in SG&A for those items. But most of those are either one time or they're temporary investments.

And what I would tell you is that we see from there we're able to build as we are able to impact the top line and be able to maintain and improve the level of expense leverage from there.

So looking out beyond 2018, it's too difficult to get specific, but there's a lot of what you see in the 2018 investments similar to 2017 that are very specific to the current or temporary investments in the business..

Got it. Thanks a lot, guys..

Thank you..

And that is all the time that we have for questions. I will now turn the call over to Greg Sandfort for additional or closing remarks..

All right. Before I wrap up the call, I'd like to inform all of you that Christine Skold, this is her last earnings call. She's decided to leave Tractor Supply Company after a lot of thought and reflection.

She shared this decision with her internal team a few weeks ago, and she felt it was time for her to find a new opportunity to further her professional growth. She will be actively engaged in the IR function through next Friday November 3. I'd like to thank Christine for her 15 years of dedicated service here at Tractor Supply.

Through her work in a variety of roles, she has made a significant contribution to Tractor Supply, and we wish her all the best for continued success in her professional and personal pursuits. In closing, thank you for your continued support of our company. And we're focused on the end game.

We want to be the store of choice for those who live life out there and we look forward to speaking to you again in January regarding our ONETractor initiatives and our fourth quarter financial results..

That concludes today's conference. Thank you for your participation. You may now disconnect..