Tractor Supply Co 2026 Q3 Earnings Call

Thank you, Tamia. 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 Chief Financial Officer. We will also have Seth Estep, EVP and Chief Merchant, John Ordus, EVP and Chief Stores Officer, and Craig Ledbetter, our SVP and Chief Supply Chain Officer, join the call for the question and answer portion. Following our prepared remarks, we will open the floor for questions. Now let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risk 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. Now it is my pleasure to turn the call over to Hal.

Thank you, Mary Winn, and good morning, everyone. We appreciate you joining us today. The third quarter marked a step forward for Tractor Supply. We are encouraged by the improving sales momentum and broader strength across our business. While there is more work ahead, we believe our actions are gaining traction. I want to thank our more than 54,000 team members for their hard work and commitment to our customers and communities. Their dedication to delivering legendary service remains at the heart of our business. It is also a pleasure to welcome Fahim Siddiqui to the team as our Chief Technology and Digital Officer. Fahim brings a tremendous amount of technical experience and retail knowledge to Tractor Supply. We look forward to his contributions to the business.

Our team is acting with urgency to improve comparable sales, strengthen profitability, sharpen our strategic priorities, and make deliberate choices about where we invest our capital and resources. Our objectives are clear. Reaccelerate comparable store sales growth, restore operating margins to levels we believe this business can achieve, and unlock the full potential of Tractor Supply to deliver attractive long-term shareholder returns. Let me start with a few highlights from the quarter. Net sales increased 5.1% to $3.91 billion, driven by new store openings, VIP Petcare, and comp sales growth. Comps increased 0.4% on top of 3.9% growth in the third quarter a year ago, reflecting a 0.7% increase in average ticket and a 0.3% decline in transactions. Transactions were cycling 2.7% growth last year, resulting in one of our strongest two-year stacks of the past five years. Diluted EPS was $0.43. Of note, sales trends and transactions strengthened as the quarter progressed.

Monthly comps improved from a decline of less than 1% in July to modest growth in August to solid growth in September. That stronger finish included positive performance across a broader set of merchandising divisions and regions. Our CUE categories continued to outperform the chain, with strong momentum in September. We saw strength in wildlife supplies, equine and livestock, truck, tool, and hardware, and seasonal products. Digital also grew at a double-digit rate. These gains were partially offset by softness in big ticket and companion animal, although companion animal trends improved sequentially by quarter this year. Turning to our market and customers, the story remains largely consistent with what we shared in the second quarter. Several broader trends continue to pressure the categories we serve.

Elevated interest rates and reduced housing mobility are weighing on property improvements and larger projects. Pet ownership headwinds, particularly new pet acquisition, continue to affect demand in certain categories. Across the farm economy, increases in commodity prices and operating costs are influencing purchasing decisions. Customers continue to spend but remain cautious. In our most recent consumer work, more than 60% said they felt less comfortable making non-essential purchases than six months ago. Inflation, higher fuel costs, and broader uncertainty continued to weigh on household budgets and discretionary spending. Despite these pressures, our core customers remain engaged. Higher spending customers again led quarterly performance, delivering above-comp chain growth for the fourth consecutive quarter. Neighbor's Club members represented nearly 82% of third quarter sales, with member comps increasing and retention improving modestly. We are also encouraged by spending trends among younger customers and the performance of our rural stores.

Our younger demographic led comparable sales growth across age groups in the third quarter, with strength among Gen Z and millennials. Across our store base, rural locations returned to more positive comp growth and again outperformed the other population density groups. The momentum we experienced in Q3 has continued into October. We believe we gained market share across most metrics and categories with improvement through the quarter. The actions we're taking are contributing to that progress. We're not waiting for the operating environment to improve, and we're building on these actions to drive further sales growth. Let me highlight three areas where we're seeing a meaningful customer response. First, our investments in value.

As was previously shared, we expect to realize approximately $100 million in tariff refunds this year, and we're investing about 40% of that benefit in customer value, with the remainder helping to offset higher freight costs. A significant portion of our price investment has been on everyday essentials that matter most to our customers, and we've been focused on approximately 50 everyday essential SKUs that matter most to our customers. We've seen strong unit growth on these items, reinforcing that our investments are delivering value to customers and strengthening our competitive position. Looking ahead, we remain committed to value and price leadership. While we need to recover some of the higher costs we're experiencing, we plan to continue to invest and to keep prices low on products our customers purchase regularly. As always, our goal is to strengthen customer loyalty, drive traffic, and support long-term growth. Second on pet. Pet continues to improve.

Companion animal performance remains below our expectations, but the sequential improvement is encouraging. Pet comps improved from approximately negative 4% in Q1 to negative 3% in Q2 to negative 2% in Q3. Including new stores, Allivet, and our VIP Petcare acquisition, our total pet business grew 5% in the quarter. Our workaround assortment, value, exclusive brands, services, and digital is beginning to resonate. We're seeing outsized strength in 4health, as well as triple-digit growth in our subscription business. Also, based on Freshpet's performance, we're increasing our year-end rollout target from more than 700 stores to approximately 1,000 stores. We've also successfully integrated Allivet as the prescription platform for VIP Petcare post that acquisition. Together, these initiatives collectively are strengthening our pet business. The third area I would like to highlight is digital.

Digital continues to be a meaningful source of growth and customer engagement. Customers have always valued the convenience of Tractor Supply, and increasingly, they're defining that convenience as shopping with us online and taking advantage of our nationwide store network for pickup and delivery. Digital sales increased approximately 16% in the quarter, with growth in both traffic and conversion, and we continue to expand delivery and final mile capabilities, making it easier for customers to shop whenever and however they choose. We see opportunities to improve convenience, increase purchase frequency, and capture a greater share of customer spending. As we move into Q4, we expect continued momentum in sales trends while recognizing that consumers remain cautious. Our team is focused on executing our initiatives and building on the progress we made. Beyond near-term performance, I want to discuss the strategic reassessment we outlined on our second quarter earnings call.

As a reminder, we are taking a comprehensive look at our operating model, strategic priorities, and capital allocation. While the work continues, I want to share several perspectives and decisions that are already emerging and that we have made. While our end markets, consumer environment, and cost structures have changed materially since we introduced our last long-term strategy in December 2024, the investments we have made over the past several years have strengthened our business and positioned us for the next phase of growth. We are building on that foundation to sharpen our priorities and continue to make deliberate choices about how we operate, invest, and generate stronger returns. As previously shared, we remain committed to generating operating margin leverage as comparable store sales move above approximately 2%. an important factor in this model is depreciation.

Following several years of elevated capital investment, we expect depreciation growth to moderate to the mid-single digit or lower in 2027. Additionally, we are not comfortable operating Tractor Supply at an operating margin below 9%. We believe this business can and should perform at a higher level, and we have work to do to get there. In the near term, our focus is on protecting operating margins in a challenging cost environment while positioning the business to generate stronger leverage as comparable sales improve. To that end, we are taking actions on both gross margin and SG&A as we look towards 2027 and 2028. Like much of the retail industry, we are going to need to offset the reinvested tariff refunds and anticipate continued inflationary pressures, particularly with higher diesel and commodity costs.