Q3 2023 Tractor Supply Co Earnings Call

Good morning, ladies and gentlemen, and welcome to tractor supply company's conference call to discuss third quarter 2023 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.

Please note that the queue for our question and answer session did not open until the start of this call. Please.

Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of tractor supply company and as a reminder, this call is being recorded.

I would now like to introduce your host for today's call Mrs. Mary Winn Pilkington Senior Vice President of Investor and public relations for tractor supply company.

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Thank you.

Operator, and good morning, everyone. Thanks for taking the time to join us today.

The call today for our prepared remarks, or Hal Lawton, our CEO and Kurt Barton, our CFO, Seth <unk>, our EVP and Chief merchandising officer will join us for the Q&A session. Please note that we have made a supplemental slide presentation available on our website to accompany today's earnings release now let.

Let me reference the Safe Harbor provisions under the private Securities Litigation Reform Act of $19 95. 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.

Operator: Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss third quarter 2023 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.

Operator: 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.

Early 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.

<unk> undertakes no obligation to update any information discussed in this call.

Given the number of people who want to participate we respectfully ask that you. Please limit yourself to one question. If you have additional questions. Please feel free to get back in the queue. I. Appreciate your cooperation we will be available after the call for follow up.

Operator: 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.

Now it is my pleasure to turn the call over to Hal.

Operator: I would now like to introduce your host for today's call.

Thank you Mary Winn and thank you to everyone for taking the time to join US This morning.

Mary Pilkington: Mrs. Mary Wynn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Wynn, please go ahead. Thank you, operator. Good morning, everyone.

I would like to express my sincere, thanks, and appreciation to my fellow 50000 tractor supply and <unk> team members as always they lived our mission and values delivered legendary service to our customers did a great job being nimble in the quarter.

Mary Pilkington: Thanks for taking the time to join us today on the call today for our prepared remarks or how Lawton, our CEO, and Card Barton, our CFO, Seth Eastep, our EVP and Chief Merchandising Officer will join us for the Q&A session. Please note that we have made a supplemental slide presentation available on our website to company today's earnings release.

To deliver against our strategic initiatives.

At tractor supply the underlying health of our business remain strong.

We continued to achieve substantial market share gains our customer trends and customer engagement are robust.

Our life out here strategic initiatives remain on track.

Mary Pilkington: Now, let me refer to say parable provisions under the Private Security's litigation reform act of 1995. This call may contain certain board 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 board looking statements are reasonable, it can give no assurance that such expectations are needed. Or any of its board looking statements will prove to be correct, and the actual results may differ materially from expectations.

Entering the third quarter, we had a sharp focus on the impact of the evolving macro environment and the impact of that environment on our customers retail spending patterns.

Mary Pilkington: Important risk factors that could cause actual results to differ materially from those reflected in the board 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.

Despite this view our quarter was more challenging than we initially expected.

The primary drivers of our underperformance were less than ideal weather conditions as well as our customers continuing to be discerning with their spending.

On the weather impact for the quarter as we shared in our July earnings call. We anticipated that our compares would ease through the quarter as we were lapping one of the worst droughts in a decade.

We were not assuming a significant benefit from the weather, but rather that it would not continue to be a drag on our performance.

In fact, it was a drag we estimate that the unfavorable weather conditions in the third quarter contributed more than one point of comp to our sales shortfall compared to our expectations.

Mary Pilkington: The information contained in this call is accurate only as off-the-date discussed. Investors should not assume that statements will remain opposite at a later time. Tractor supply undertakes no obligation to update any information discussed in this call.

While we never like to call out the adverse impacts of the weather on our business. There is no doubt that the challenging conditions continued to weigh on our sales this year as it relates to weather.

Mary Pilkington: Given the number of people who want to participate, we respectfully ask that you please limit yourself to one question. If you have additional questions, please feel free to get back in the queue. I appreciate your cooperation. We will be available after the call for follow-up.

In Q3, we had extreme heat and drought in Texoma and to a lesser degree the Midwest and also we had excessive rainfall and the absence of cool weather in other areas like the northeast.

Harry Lawton: Now it is my pleasure to turn the call over to Hal. Thanks, Mary-Win, and thank you to everyone for taking the time to join us this morning. To start, I would like to express my sincere thanks and appreciation to my fellow 50,000 Tractor Supply and Tetsense team members. As always, they lived our mission and values, delivered legendary service to our customers, did a great job being nimble in the quarter, and continued to deliver against our strategic initiatives.

As an example, texoma, which makes up a little over 15% of our sales.

We saw extreme temperatures and dryness there for most of the quarter in fact in Austin, Texas. As an example, there were 44 consecutive days of temperatures over 100 degrees in the third quarter.

For perspective, this was twice as many as Q3 of last year.

Additionally, last year in the third quarter, we benefited from both the emergency response from Hurricane Ian and a shift of cooler fall temperatures in the last few weeks of the quarter and some of our markets.

Harry Lawton: At Tractor Supply, the underlying health of our business remains strong. We continue to achieve substantial market share gains. Our customer trends and customer engagement are robust and our life out here strategic initiatives remain on track entering the third quarter. We had a sharp focus on the impact of the evolving macro environment and the impact of that environment on our customers retail spending patterns. Despite this view, our quarter was more challenging than we initially expected.

This year, we did not have these events working in our favor in the quarter. The emergency response from Hurricane to Dahlia was much smaller than the prior year and a wave of summer like temperatures continued into September and back even now into late October.

Turning to the macro environment as.

As we shared last quarter, we believe that due to the cumulative effect of many factors our customers are showing signs of strength.

Harry Lawton: The primary drivers of our underperformance were less than ideal weather conditions as well as our customers continuing to be discerning with their spending. On the weather impact of the quarter, as we shared in our July earnings call, we anticipated that our compares would ease through the quarter as we were laughing one of the worst droughts in a decade. We were not assuming a significant benefit from the weather, but rather that it would not continue to be a drag on our performance.

Examples of these factors, including inflation higher.

Higher credit card balances and the resumption of school loan payments.

Additionally, consumers continue to shift their spending from goods to services reverting back to pre pandemic levels in.

In the context of this shift we believe that they remain more committed to the out here lifestyle and that our business is stickier than more discretionary components of retail.

Harry Lawton: In fact, it was a drag. We estimate that the unfavorable weather conditions in the third quarter contributed more than one point of comp to our sales shortfall compared to our expectations. While we never like to call out the adverse impacts of the weather on our business, there is no doubt that the challenging conditions continued to weigh on our sales this year as it relates to weather. In Q3, we had extreme heat and drought in Texahoma and to a lesser degree the Midwest and also we had excessive rainfall and the absence of cool weather in other areas like the Northeast.

But nonetheless to some degree we've been affected by this shift.

Now turning to the numbers for the third quarter. The team delivered net sales growth of four 3% with a modest comparable sales decrease of 4%.

Diluted earnings per share for the quarter were $2 33.

An increase of 11% over the prior year.

Now, let's shift to some highlights for the quarter comp.

Comp transactions were flat to the prior year offset by an average ticket decline of <unk>, 3% the.

The average ticket performance was driven by a decline in units per transaction with average unit retail remaining relatively strong.

Harry Lawton: As an example, Texahoma, which makes up a little over 15% of our sales, we saw extreme temperatures and dryness there for most of the quarter. In fact, in Austin, Texas, as an example, there were 44 consecutive days of temperatures over 100 degrees in the third quarter. And for perspective, this was twice as many as Q3 of last year. Additionally, last year in the third quarter, we benefited from both the emergency response from Hurricane Ian and a shift of cooler fall temperatures in the last few weeks of the quarter in some of our markets.

July was our best performing period of the quarter with positive comps both August and September comps negative given the seasonal trends I mentioned earlier.

Importantly, our active customer accounts are stable and growing low single digits.

Also importantly, our reactivated as well as new customer accounts are also both positive and growing.

E Commerce achieved sales growth in the high single digits with strong conversion performance.

Harry Lawton: This year, we did not have these events working in our favor. In the quarter, the emergency response from Hurricane Adelia was much smaller than the prior year and a wave of summer-like temperatures continued into September and back even now into late October. Turning to the macro environment, as we shared last quarter, we believe that due to the cumulative effect of many factors, our customers are showing signs of strain. Examples of these factors include inflation, higher credit card balances, and the resumption of school loan payments.

Our buy online deliver from store program was up over 80%.

And on a rolling 12 month basis, very notably our digital sales have now surpassed $1 billion.

Our consumable usable and edible products represented a meaningful portion of our business in the quarter.

These businesses continue to outperform our overall sales comp results.

With continued strength in categories like dry dog food cat food poultry feed lubricant and shavings just to name a few.

Harry Lawton: Additionally, consumers continue to shift their spending from goods to services, reverting back to pre-pandemic levels. In the context of this shift, though, we believe that they remain more committed to the out-here lifestyle and that our business is stickier than more discretionary components of retail. But, nonetheless, to some degree, we've been affected by this shift. Now, turning to the numbers for the third quarter, the team delivered net sales growth of 4.3% with the modest, comparable sales decreased of 0.4%. 2%. The loot earnings per share for the quarter were $2.33, an increase of 11% over the prior year.

<unk> continues to be one of our structural advantages and these categories and products represent the strength of our core business and they are what drive footsteps into our stores.

The gains in these categories were offset by declines in our late spring summer seasonal product and big ticket categories as well as softness in demand for this fall winter product categories that usually begin to see some growth at the end of the quarter due to the unseasonably warm weather.

Big ticket performance remained under pressure down in the mid single digits, which was a slight improvement from the first half of the year.

By step back overall, though we continue to gain share across categories online and in store and continue as I said earlier to see strong customer trends.

Harry Lawton: Now let's shift to some highlights for the quarter. Comp transactions were flat to the prior year, off set by an average ticket decline of 0.3%. The average ticket performance was driven by decline in units for transaction with average unit retail remaining relatively strong.

On the customer front, our neighbor's club membership base represented more than 77% of our sales for the quarter. We're seeing continued favorable trends from our loyalty members retention rates have never been higher and our neighbor's club members continue comping at a faster rate than our overall sales performance.

Harry Lawton: July was our best performing period of the quarter with positive cost, both August and September cost negative given the seasonal trend I mentioned earlier. Importantly, our active customer counts are stable and growing, low single digits. Also importantly, our reactivated as well as new customer counts are also both positive and growing. E-commerce achieved sales growth in the high single digits with strong conversion performance. Our by online deliver from store program was up over 80%.

And importantly, our high value customers again reached another record count in the quarter.

And just over a year since launching neighbor's club at pets in penetration of sales to our <unk> members now stands at over 65%.

And we continue to benefit from the cross shopping between the two brands as we grow our share of wallet with these customers and focus on pass out here in our collaboration between the two brands.

A couple of trends that I mentioned last quarter did continue into this quarter and those are one customers are continuing to increase in their usage of credit.

Harry Lawton: And on a rolling 12 month basis very notably, our digital sales have now surpassed $1 billion. Our consumable usable and edible products represented a meaningful portion of our business in the quarter. And these businesses continue to outperform our overall sales comfort results with continued strength in categories like dry dog food, cat food, poultry feed, lubricants and shavings just to name a few. Two continues to be one of our structural advantages and these categories and products represent the strength of our core business and they are what drive footsteps into our store.

And to shoppers continue to seek out value, particularly in lower income customer cohorts.

Importantly, our overall customer satisfaction scores hit another new all time high as we continue to invest in our team and they continue to do a fantastic job, providing best in class customer service, a hallmark of tractor supply.

Through the third quarter, our customer satisfaction scores have increased and we experienced an improvement every week year over year since 2021.

Harry Lawton: The gains in these categories were offset by declines in our late spring summer seasonal product and big ticket categories as well as softness in demand for those fall winter product categories that usually begin to see some growth at the end of the quarter due to the unseasonally warm weather. Big ticket performance remained under pressure down in the mid single digits, which was a slight improvement from the first half of the year.

We've made significant progress in our life out here strategy. We now have just over 35% of our chain or 780 stores that are in the project fusion layout and our Garden Center transformation is now active in over 420 locations.

We continue to be very pleased with the strategic benefits and the financial returns of these store level investments.

Our <unk> farm and home in the acquisition remains on track with nearly 50 stores converted to the tractor supply brand and during the quarter. We completed the sale of the <unk> store support center and the distribution center as planned.

Harry Lawton: By step back overall though, we continue to gain share across categories online and in store and continue as I said earlier to see strong customer trends on the customer front. Our neighbors club membership base represented more than 77% of our sales for the quarter. We're seeing continued favorable trends from our loyalty members retention rates have never been higher. And our neighbors club members continue coughing at a faster rate than our overall sales performance.

Year to date, we've opened 51, new tractor supply stores and 10 <unk> locations. Our team has done an excellent job executing our real estate projects this year and getting us back to a normalized cadence of new store openings in spite of a tough backdrop in the broader construction market.

Harry Lawton: And importantly our high value customers again reached another record count in the quarter. In just over a year since launching neighbors club at Pedsent, penetration of sales to our members now stands at over 65%. And we continue to benefit from the cross shopping between the two brands as we grow our share of wallet with these customers and focus on pass out here in our collaboration between the two brands.

During the quarter the real estate team also successfully executed our first sale leaseback transaction with the sale of 10 stores. In addition, the team has about 35 fee development site in the works.

Anticipate our real estate strategy will continue to be a source of increasing strength protract supply over the next few years.

Given our performance through the third quarter and our outlook for the fourth quarter, we are updating our sales and earnings guidance for 2023.

Harry Lawton: A couple of trends that I mentioned last quarter did continue into this quarter and those are one customers are continually increasing their usage of credit and two shoppers continue to seek out value, particularly in lower income customer cohorts. Groups. Importantly, our overall customer satisfaction scores hit another new all time high as we continue to invest in our team and they continue to do a fantastic job providing best in class customer service, a hallmark of Tractor Supply. Through the third quarter, our customer satisfaction scores have increased and experienced an improvement every week, year over year since 2021.

And Curt will share some more details on our outlook later in the call.

Before I hand, it over to Curt if I just step back for a moment. If you told me in January of 2020 that we would nearly double our topline sales and earnings.

And deliver strong cash return to shareholders, while increasing our capital investment in growth initiatives and investing in team member wages and investing in brand building.

And doing all of this through a global pandemic major disruptions in global supply chain wrapped.

Rapidly changing consumer shifts also rapidly escalating costs, including the highest consumer inflation 40 years, it would have been hard to imagine.

Harry Lawton: We've made significant progress in our life out here strategy. We now have just over 35% of our chain or 780 stores that are in the project fusion layout, and our garden center transformation is now active in over 420 locations. We continue to be very pleased with the strategic benefits and the financial returns of these store level investments. Our Orchland Farm and Home into Acquisition remains on track with nearly 50 stores converted to the Tractor Supply brand.

But that's exactly what this team has delivered.

Over the last four years, we've added $7 billion in incremental sales.

We've grown our market share significantly and we've increased our earnings by 115% and returned over $3 $2 billion of cash to shareholders.

Our resilient needs based business model has a proven history of growing through various economic conditions, our customers and team members are dedicated to the out here lifestyle and they prioritize it as it is their authentic lifestyle.

Harry Lawton: And during the quarter, we completed the sale of the Orchland Store Support Center and the Distribution Center as planned. Year to date, we've opened 51 new Tractor Supply stores and 10 tent tent locations. Our team has done an excellent job executing our real estate projects this year and getting us back to a normalized cadence of new store opening in spite of a top backdrop in the broader construction market. During the quarter, the real estate team also successfully executed our first sale lease back transaction with the sale of 10 stores. In addition, the team has about 35 fee development sites in the works.

Our customers Overindexes homeowners landowners pet owners and animal owners, we believe that the softness we're seeing is unique to transitory conditions and weather and consumer spending patterns.

We continue to have a long term structural macro trends that are favorable and sustainable and as the market leader, we have substantial competitive advantages.

And with that I'll now turn the call over to Kirk. Thank you Hal and Hello to everyone on the call.

There are three key observations about our business that build on house comments that I'd like to share a before diving into the quarterly results.

Harry Lawton: I anticipate our real estate strategy will continue to be a source of increasing strength for track supply over the next few years.

Looking at the impact of weather there are some years weather works to our favor and others, where it clearly works against US. We've certainly tried to be transparent over the years as to the impact from the volatility related to weather both in favorable and unfavorable events.

Harry Lawton: Given our performance through the third quarter and our outlook for the fourth quarter, we're updating our sales and earnings guidance for 2023 and Kurt will share some more details on our outlook later in the call.

Harry Lawton: Before I hand it over to Kurt, if I just step back for a moment, if you told me in January of 2020 that we would nearly double our top line sales and earnings and deliver strong cash return to shareholders, while increasing our capital investment and growth initiative. And investing in team member wages and investing in brand building and doing all this through a global pandemic, major disruptions and global supply chains, rapidly changing consumerships, also rapidly escalating costs, including the highest consumer inflation in 40 years.

No doubt 2023 will be a year where <unk>.

Weather goes down as unfavorable for our business from a warm January.

Late start to the spring that never materialized over most of our markets to a hot and dry summer across major markets like Texoma in the Midwest, our seasonal businesses have been under pressure all year.

Our execution continues to be strong our lifestyle initiatives are performing well and are positively impacting our results Neighbor's club project fusion and garden centers pet and digital initiatives are all driving topline growth.

Harry Lawton: It would have been hard to imagine, but that's exactly what this team is delivered. Over the last four years, we've added $7 billion in incremental sales. We've grown our market share significantly and we've increased our earnings by 115% and returned over $3.2 billion of cash to shareholders. Our resilient needs-based business model has a proven history of growing through various economic conditions. Our customers and team members are dedicated to be out here lifestyle and they prioritize it as it is their authentic lifestyle. Our customers over inductance homeowners, landowners, pet owners and animal owners. We believe that the softness we're seeing is unique to transitory conditions in weather and consumer spending patterns.

Third we view the softness in our customers retail spending to be unique to the macro challenges in the current environment.

Our customer engagement is strong and our initiatives are driving positive results.

We remain committed to investing for long term growth, but we will be agile as we navigate the current environment. We are committed to continuing our track record of long term value creation for our shareholders.

Now turning to our third quarter results.

While our sales trends were below our expectations the team manage the environment well controlling what we can control. We also remain steadfast in our commitment to being the dependable supplier for life out here.

Harry Lawton: Charter. We continue to have a long-term structural macro trim that are favorable and sustainable. And in the market leader, we have substantial competitive advantages.

Our third quarter top line results were driven by strong and consistent <unk> growth offset by below trend seasonal performance on a weak summer demand and the lack of early fall seasonal sales and discretionary big ticket sales remained under pressure.

Kurt Barton: And with that, I'll now turn the call over to Kurt. Thank you, Hal. And hello to everyone on the call.

Kurt Barton: There are three key observations about our business that build on house comments that I'd like to share before diving into the quarterly results. First, looking at the impact of weather. There are some years weather works to our favor and others where it clearly works against us. We've certainly tried to be transparent over the years as to the impact from the volatility related to weather, both in favorable and unfavorable events. No doubt 2023 will be a year where weather goes down as unfavorable for our business.

Our comparable store sales growth was solid in regions, such as the South east and the far West the performance of these geo regions was offset by pressure in Texoma, and the Midwest, where heat and drought trends added incremental pressure on consumer demand.

Kurt Barton: From a warm January, a late start to the spring that never materialized over most of our markets to a hot and dry summer across major markets like Texas Homa and the Midwest. Our seasonal businesses have an under pressure all year.

As well as the warm start to the fall in the northern markets.

Comparable transactions were flat for the quarter with growth in our core year round categories being offset by reduced demand for our seasonal categories. We had a modest decline in the average comp ticket or average unit retail was up 3% to 4% the benefit of the growth in our average unit retail was offset by the softness in big ticket.

And declines in seasonal categories, which run at a higher average ticket.

Kurt Barton: Second, our execution continues to be strong. Our life out here's initiatives are performing well and are positively impacting our results. Neighbors Club, Project Fusion and Garden Centers, pet and digital initiatives are all driving top-line growth. Third, we view the softest in our customers retail spending to be unique to the macro challenges in the current environment. Our customer engagement is strong and our initiatives are driving positive results. We remain committed to investing for long-term growth, but we will be agile as we navigate the current environment. We are committed to continuing our track record of long-term value creation for our shareholders.

Additionally, but to a lesser extent, we continue to experienced softer sales in discretionary and impulse add on items, putting pressure on the average units per transactions.

Moving down our income statement, our gross profit increased seven 3% to $1 25 billion.

Gross margin increased 101 basis points to 36, 7% from 35, 6% in the prior year's third quarter gross margin was a highlight for the quarter as we continued to maintain strong product margin from our ongoing execution of everyday low price strategy at.

At a time when the overall promotional environment across retail has picked up modestly are large and robust membership of neighbor's club offers us a great way to provide value our loyalty program allows us together with our vendors to strategically target value propositions for our customers.

Kurt Barton: Now, turning to our third quarter results. While our sales trends were below our expectations, the team managed the environment well, controlling what we can control. We also remain steadfast in our commitment to being the dependable supplier for life out here. Our third quarter top-line results were driven by strong and consistent Q growth, offset by below-trend seasonal performance on a week-summer demand and a lack of early fall seasonal sales. And discretionary and big ticket sales remained under pressure.

The gross margin rate increase was primarily attributable to lower transportation costs, driven by improvements in the global supply chain and efficiencies from our new distribution center in Ohio product mix pressured gross margin given the strength in Q. This was somewhat offset by the margin improvement from lower big ticket sales, which carry.

Kurt Barton: Our comparable store sales growth was solid in regions such as the southeast and the far west. The performance of these geo regions was offset by pressure in Texas Homa and the Midwest were heat and drought trends added incremental pressure on consumer demand as well as the warm start to the fall in the northern markets. Comparable transactions were flat for the quarter with growth in our core year-round categories being offset by reduced demand for our seasonal categories.

A lower gross margin rate.

As a percent of net sales, our selling general administrative expenses, including depreciation and amortization increased 38 basis points to 26, 7% the.

The increase in SG&A as a percent of net sales was primarily attributable to our planned growth investments, which included higher depreciation and amortization and the onboarding of our new DC.

Along with some lost fixed cost leverage due to the decline in comparable store sales.

Kurt Barton: We had a modest decline in the average comp ticket. Our average unit retail was up 3-4 percent. The benefit of the growth in our average unit retail was offset by the softness in big ticket and declines in seasonal categories which run at a higher average ticket. Additionally, but to a lesser extent, we continued to experience softer sales and discretionary and impulse added items, putting pressure on the average unit's per-trend theft.

Additionally, consistent with last quarter higher medical claims also contributed to the increase in SG&A, we have made adjustments to our benefits program and we'll continue to do so we don't anticipate this to be a headwind in 2024.

During the quarter, we completed the planned sale leaseback of 10 tractor supply store locations benefiting SG&A by approximately 70 basis points net of transaction and repair costs.

Kurt Barton: Actions. Moving down our income statement, our gross profit increased 7.3% to 1.25 billion dollars. Gross margin increased 101 basis points to 36.7% from 35.6% in the prior year's third quarter. Gross margin was a highlight for the quarter as we continue to maintain strong product margin from our ongoing execution of everyday low price strategy. At a time when the overall promotional environment across retail has picked up modestly, our large and robust membership of neighbors club offers us a great way to provide value.

Additionally, the increase in SG&A was partially offset by a onetime benefit to depreciation expense of approximately 35 basis points or $11 million pretax.

This benefit is attributed to a change in the useful lives of assets for certain remodeled stores due to a reassessment of lease terms to better represent the economic profile of these investments.

As I reflect on the SG&A performance overall I would be remiss, if I didn't mention that our operations team did a great job scaling our core variable cost to our sales performance.

Our distribution center teams achieve some of the best cut time still rates and overall productivity measures in years and our store teams did a great job balancing store payroll to scaled back while also maintaining the right level of customer support and driving our best in class customer satisfaction scores.

Kurt Barton: Our loyalty program allows us, together with our vendors, to strategically target value propositions for our customers. The gross margin rate increase was primarily attributable to lower transportation costs driven by improvements in the global supply chain and efficiencies from our new distribution center in Ohio. Product mixed pressure gross margins given the strength and cue. This was somewhat offset by the margin improvement from lower big ticket sales which carried a lower gross margin rate.

Overall, the team had strong execution and scaled our core variable cost well in this environment.

As an example to further illustrate nearly 85% of our core SG&A dollar growth year over year represents investments in our strategic growth initiatives.

Kurt Barton: As a percent of that sales are selling general administrative expenses including depreciation and amortization increased 38 basis points to 26.7%. The increase in SGNA at the percent that sales was primarily attributable to our planned growth investments, which included higher depreciation and amortization and the onboarding of our new DC. Along with some lost fixed cost leverage due to the decline in comparable store sales. Additionally, consistent with last quarter, higher medical claims also contributed to the increase in SGNA.

My appreciation goes out to the team for controlling what we can control.

For the quarter operating profit margin was 10% a 62 basis point improvement from the prior year.

Turning now to our balance sheet merchandise inventories were $2 8 billion at the end of the third quarter flat to the prior year on a per store basis, we are managing it closely and continue to be very pleased with the quality and position of our inventory our in stock rates are the best they've been in over two years. In addition, our.

Kurt Barton: We have made adjustments to our benefits program and will continue to do so. We don't anticipate this to be a headwind in 2024. During the quarter, we completed the planned sale leaseback of 10 tractor supply store locations, benefiting SGNA by approximately 70 basis points, net of transaction and repair costs. Additionally, the increase in SGNA was parked off-step by a one-time benefit to depreciation expense of approximately 35 basis points or $11 million pretext.

Towards shrink improved year over year.

With strong annualized cash flows we continue to maintain a healthy balance sheet with a leverage ratio of around two times. Our long term debt has no nearing maturity and is fixed at very attractive rates.

Now, let me turn to our updated fiscal 2023 financial outlook.

For the year, we now anticipate net sales in the range of 14, five to $14 6 billion and.

Comp store sales, even with last year.

Our full year operating margin rate is expected to be in the range of 10, 1% to 10, 2% with net income of one one to 111 billion.

Kurt Barton: This benefit is attributed to a change in the useful lives of assets for certain remodeled stores due to a reassessment of lease terms to better represent the economic profile of these investments. At the reflect on the SGNA performance overall, I would be remiss if I didn't mention that our operations team did a great job scaling our core variable cost to our sales performance. Our distribution center teams achieved some of the best cut times, fill rates and overall productivity measures in years, and our store teams did a great job balancing store payroll to scale back while also maintaining the right level of customer support and driving our best in class customer satisfaction scores.

Diluted EPS is forecast to be $10 to $10 <unk>.

This includes a net after tax benefit of about <unk> <unk> in Q4 for our remaining sale leaseback transactions this year.

We continue to forecast anticipated capital expenditures for the year in the range of $800 million to $850 million or about $725 million to $775 million net of our capital needs for the fixed fee real estate strategy that we shared last quarter.

This higher level reflects the move to owned development for select new store growth that will be funded through the sale of existing stores. It's important to note that the proceeds from the sale of our own stores are expected to offset the incremental capital outlay under the development program the.

Kurt Barton: Overall, the team had strong execution and scaled our core variable cost well in this environment. And as an example, to further illustrate, nearly 85% of our core SGNA dollar growth year-over-year represents investments in our strategic growth initiative.

The combined transactions are expected to be relatively neutral to our cash position.

Kurt Barton: Joseph. My appreciation goes out to the team for controlling what we can control. For the quarter, operating profit margin was 10%, a 62 basis point improvement from the prior year. Turning now to our balance sheet, merchandise inventories were $2.8 billion at the end of the third quarter, flat to the prior year on a per store basis. We are managing it closely and continue to be very pleased with the quality and position of our inventory.

Implied in our outlook is.

As for fourth quarter comp store sales to be down low to mid single digits.

As Hal mentioned, we anticipate continued discerning consumer spending and unfavorable compares relating to weather as we experienced the ongoing El Nino pattern combined with the cycling of last year's monumental winter storm, which drove 200 basis points of favorable impact on comps we.

Kurt Barton: Our in-stock rates are the best they've been in over two years. In addition, our inventory shrink improved year over year. With strong annualized cash flows, we continue to maintain a healthy balance sheet with a leverage ratio of around two times. Our long-term debt has no nearing maturities and is fixed at very attractive rates.

<unk> continued strength in our core year round categories, yet the softness in demand for seasonal and discretionary will continue to limit the top side on our performance. As a reminder, we are also lapping the 50 <unk> week, which included an extra week of sales in the prior year contributing approximately $225 million of topline sales.

Kurt Barton: Now, let me turn to our updated fiscal 2023 financial outlook. For the year, we now anticipate net sales in the range of $14.5 to $14.6 billion and cost our sales even with last year. Our full year operating margin rate is expected to be in the range of 10.1 to 10.2% with net income of $1.1 to $1.11 billion.

<unk> 16 of diluted earnings per share.

As for our retail price increases our plans reflect a continued moderation of inflation.

While still positive we believe it will be modest.

Our guidance reflects ongoing gross margin expansion year over year, we anticipate continued benefit from transportation and our new distribution center, along with some pressure from an unfavorable product mix in the fourth quarter. We expect continued SG&A deleverage given our investments and the expected comparable store sales declines.

Kurt Barton: Deluted EPS is forecast to be $10 to $10 and 10 cents. This includes a net after-tax benefit of about $0.8 in Q4 for our remaining sale lease-back transactions this year. We continue to forecast anticipated capital expenditures for the year in the range of $800 to $850 million or about $725 to $775 million net of our capital needs for the fixed fee real estate strategy that we shared last quarter. This higher level reflects the move to own development for select new store growth that will be funded through the sale of existing stores.

As we shared last quarter for modeling purposes, but <unk> stores will go into our comp calculation in 2024 based on when the store is converted to our point of sale system. Most stores converted to our point of sale during Q2 and Q3 of this year.

As is customary we will provide our guidance for 2024 at our fourth quarter earnings call. We're still finalizing our outlook for sales as there are number of puts and takes to be considered.

Let's start with the fact that we're a needs based demand driven business with a long history of positive comps.

Kurt Barton: It's important to note that the proceeds from the sale of our own stores are expected to offset the incremental capital outlay under the development program. The combined transactions are expected to be relatively neutral to our cash position. Employed in our outlook is for fourth quarter-comp store sales to be down low to mid-single digits. As Hal mentioned, we anticipate continued discerning, consumer spending, and unfavorable compares relating to weather. As we experience the ongoing El Niño pattern combined with the cycling of last year's monumental winter storm which drove 200 basis points of favorable impact on cops. We anticipate continued strength in our core year-round categories, yet the softness and demand for seasonal and discretionary will continue to limit the top side on our performance.

Additionally, as we see 2024 today, we expect we will have less benefit from inflation, but.

We're 18 months into cycling big ticket softness and the weather hopefully cannot be worst than it was this year, but we do anticipate that the operating environment will continue to be challenging with a higher than normal degree of uncertainty and ongoing pressure on consumer confidence and household budgets.

As we've shared over the last couple of years, we've always planned at 2023 would be our peak capital investment level with that as a backdrop, we plan to prudently invest in our strategic priorities in 2024 with next year's net capital spending in the six hundreds which will relieve some depreciation expense we remain.

Excited about the progress on our life out here strategy and are very pleased with our initiatives.

Kurt Barton: As a reminder, we are also lapping the 53rd week which included an extra week of sales in the prior year, contributing approximately $225 million to top line sales and $0.16 of deluded earnings per share. As for retail price increases, our plans reflect a continued moderation of inflation. While still positive, we believe it will be modest. Our guidance reflects ongoing gross margin expansion year-over-year. We anticipate continued benefit from transportation and our new distribution center along with some pressure from an unfavorable product mix.

Our 10th distribution Center will open during the second quarter of 2024, much like our distribution center opening this year. This new DC benefits gross margin, but will pressure SG&A as the facility ramps up the gross margin benefits typically lag the opening by about one quarter.

Similar to 2023, we anticipate executing approximately 15 existing store sale leaseback transaction in 2024 to fund the owned development New store program and we anticipate the opening of 80, new tractor supply stores and 10 to 15 <unk> locations.

Kurt Barton: In the fourth quarter, we expect continued SGNA D leverage given our investments and the expected comparable store sales decline. As we shared last quarter, for modeling purposes, the Oarsland stores will go into our comp calculation in 2024 based on when the store is converted to our point of sale system. Most stores converted to our point of sale during Q2 and Q3 of this year.

Over our history, we have continually adapted to the operating environment around us the need space demand driven characteristics of our product offerings support our ability continues to be a winner in retail we will remain agile and play offense, we will leverage our core competencies that have served us well all while strengthening.

Our capabilities and investing in our life out here growth strategy.

Now I will turn the call over to Hal to wrap this up thanks.

Thanks Kurt.

Kurt Barton: Let's start with the fact that we're a needs-based, demand-driven business with a long history of positive comps. Additionally, as we see 2024 today, we expect we'll have less benefit from inflation. But we're 18 months into cycling big ticket softness. And the weather hopefully cannot be worse than it was this year. But we do anticipate that the operating environment will continue to be challenging with a higher than normal degree of uncertainty and ongoing pressure on consumer confidence and household budgets.

As the calendar shifts to the fall and winter season, our stores and online are ready for the change of typical tractor supply faster.

Our merchandising team has been working closely with our vendors on plans for the holiday season, with an emphasis on new products and innovation and very notably with a focus on value.

As the largest player in our sector. It is our obligation to be the advocate for value for our customers and we are working hard to rollback cost absorbed over the past two years, we will continue to be the destination for value and quality across our merchandising lineup.

Kurt Barton: As we've shared over the last couple of years, we've always planned that 2023 would be our peak capital investment level. With that as a backdrop, we plan to prudently invest in our strategic priorities in 2024 with next year's net capital spending in the 600s, which will relieve some depreciation expense. We remain excited about the progress on our life out here strategy and are very pleased with our initiatives.

In key categories like heating and insulated apparel, our merchants have brought newness with compelling value, including exciting programs, such as Colombia performance hunting gear and our line of Grand Teton pellet stoves.

In our key categories, we have the right selection at the right price with a focus on value and are committed to being in stock as we continue to support our customers' lifestyles.

For example, you will see wood pallet stack outs and the majority of our stores in preparation for the winter season.

Kurt Barton: Our 10th distribution center will open during the second quarter of 2024. Much like our distribution center opening this year, this new DC benefits gross margin, but will pressure SGNA at the facility ramps up. The gross margin benefits typically lagged the opening by about one quarter.

And right now are 400, plus garden centers are showcasing pumpkins, mums and fall harvest decor and this year, we expanded our Halloween and harvest the core program with a great lineup to capitalize on our customers' love for decorating their homes with on trend seasonal indoor and outdoor decor, including a skeleton cow.

Kurt Barton: Similar to 2023, we anticipate executing approximately 15 existing store, sale lease back transaction in 2024 to fund the own development new store program. And we anticipate the opening of 18 new tractor spot stores and 10 to 15 pet sense locations.

That was a tick tock viral sensation.

Additionally, and particularly in light of the continued warmer weather, we continue to be the destination for our customers' sporting goods outdoor recreation and outdoor wildlife interest with products like our exclusive Royal wing Birdseed Canning gun safe exclusive County line log splitters and the Blackstone griddle.

Kurt Barton: Over our history, we have continually adapted to the operating environment around us. The needs base, demand driven characteristics of our product offerings, support our ability, continue to be a winner in retail. We will remain agile and play offense. We will leverage our core competencies that have served us well, all while strengthening our capabilities and investing in our life out of here growth strategy.

<unk>.

Earlier this week, we announced the addition of yeti products to our lineup and our fusion stores were especially excited to collaborate with a well regarded brand like yeti. It brings a long standing reputation for quality and durability and aligns with our customers' interest in camping fishing hunting and all outdoor activities.

Harry Lawton: Now I will turn the call over to how to wrap us up. Thanks, Kurt. As the calendars shift to the fall and winter season, our stores and online are ready for the change in typical tractor supply fashion. Our merchandise team has been working close with our vendors on plans for the holiday season with an emphasis on new products and innovation and very notably with a focus on value. As the largest player in our sector, it is our obligation to be the advocates for value for our customers.

Our stores in garden centres, where soon be filled with Christmas trees reason points added in addition to <unk> our customers can look forward, a unique and different decor items, including our popular six foot chicken lawn decorations and farm themed holiday gingerbread kit.

When it comes to guests, we have compelling values and buys and every selection of our store from tools and grills to even fund rural unique items like a 12 volt zero turn bright on toy lawnmower.

Harry Lawton: And we are working hard to roll back the cost absorbed over the past two years. We will continue to be the destination for value and quality across our merchandise lineup. In key categories like heating and insulated apparel, our merchants have brought newness with compelling values, including exciting programs such as Columbia Performance Hunting Gear. And our line of grand tea time pellets. Stokes. In our two categories, we have the right selection at the right price with a focus on value and are committed to being in stock as we continue to support our customer's lifestyle.

From a calendar perspective, it's a good setup this year with 31 days between Thanksgiving and Christmas and Christmas Falls on a Monday, So we anticipate a strong full weekend a sale prior to Christmas.

We have a strong holiday season playbook with an exciting day after Thanksgiving day plan as well with compelling offers programs throughout the season.

As we plan for the season, though we acknowledge there is a broader range of estimates for holiday consumer spending than we've seen over the last couple of years.

Harry Lawton: For example, you will see with palette stackouts in the majority of our stores in preparation for the winter season. And right now, our 400 plus garden centers are showcasing pumpkins, mums, and fall harvest decor. And this year we expanded our Halloween and harvest decor programs with a great lineup to capitalize on our customers' love for decorating their homes with on-trend seasonal indoor and outdoor decor, including a skeleton cow that was a tick-tock viral sensation.

As we entered the fourth quarter, we are on track to achieve several milestones in our life out of your strategy.

Notably, we anticipate ending the year with 40% of our store base in the project fusion format and nearly 500 garden centers, both significant milestones to initiatives that we began less than three years ago.

Our real estate pipeline is robust with plans for 80, new tractor supply stores also in 2024.

Harry Lawton: Additionally, and particularly in light of the continued warmer weather, we continue to be the destination for our customers sporting goods, outdoor recreation, and outdoor wildlife interest with products like our exclusive whirlwind birdsy, Canon Gunsafe, exclusive county line long splitters, and the blackstone griddle. Earlier this week, we announced the addition of Yeti products to our lineup in our fusion stores. We're especially excited to collaborate with a well-regarded brand like Yeti that brings a longstanding reputation for quality and durability and aligns with our customers' interest in camping, fishing, hunting, and all outdoor activities.

We're piloting artificial intelligence in many functions in the business, including marketing supply chain and technology development.

In one particular application that I am very excited about is our generative AI knowledge tool that we call <unk>.

Using a proprietary AI engine that we built we are able to deliver knowledge directly to our team members through the headsets that each were to augment their individual experience and let me give you. An example of this.

One of the questions recently asked by a team member is when do you switch from crumble feed to pellet for baby chicks.

Harry Lawton: Our stores and garden centers were soon be filled with Christmas trees, reeds, and point setters. In addition to live goods, our customers can look forward to unique and different decor items, including our popular six-foot chicken lawn decorations and farm themed, holiday gingerbread kits. When it comes to gifts, we have compelling values and buys in every selection of our store, from tools and grills to even fun, rural unique items like a 12-boat zero-turn right on toy lawn mower.

When asked the hate U R. App responded typically chicken switch from probable to pellet feed when they reach about 15 to 18 weeks of eight depending on breeding and development.

To date the results have been excellent. Our team members are really embracing and excited about the technology and it's been a great value add feature for our leading customer service.

We have a long track record of growth and high expectations of our performance.

Harry Lawton: From a calendar perspective, it's a good setup this year, with 31 days between Thanksgiving and Christmas, and Christmas falls on a Monday, so we anticipate a strong full weekend of sales prior to Christmas. We have a strong holiday season playbook with an exciting day after Thanksgiving Day Plan as well, with compelling offers programmed throughout the season.

We view our current trends to these expectations as transitory and specific to the economic environment. This.

This team is dialed in and understands the challenges.

As we are entering one of the busiest periods in retail my thanks, and sincere appreciation goes out to my fellow 50000 tractor supply team members for their dedication to our mission and values.

Harry Lawton: As we plan for the season, though, we acknowledge there's a broader range of estimates for holiday consumer spending than we've seen over the last couple of years. As we enter the fourth quarter, we're on track to achieve several milestones in our life out here strategy. Notably, we anticipate in any year with 40% of our store base in the Project Fusion format and nearly 500 garden centers, both significant milestones to initiatives that we began less than three years ago.

And with that operator, we would now like to open the lines for questions.

We will now begin the question and answer session.

We would like to ask a question. Please press star followed by one on your telephone keypad.

If for any reason you would like to remove that question. Please press star followed by Tim.

Again to ask a question press star one.

Harry Lawton: Our real estate pipeline is robust, with plans for 80 new tractor supply stores also in 2024. We're piloting artificial intelligence in many functions in the business, including marketing, supply chain, and technology development. And one particular application that I'm very excited about is our Generative AI Knowledge Tool that we call Hague Raw. Using a proprietary AI engine that we built, we're able to deliver knowledge directly to our team members through the headsets that each wear to augment their individual experience.

We ask that all participants limit to one question and one follow up after which you may rejoin the queue.

As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.

Our first question comes from the line of Scot Ciccarelli with Qos.

Your line is now open.

Good morning, guys. Thanks for the question Scot Ciccarelli.

Given the decline in same SKU inflation and growing concerns you may see a deflationary environment in pet food and feed can you help us understand at least generally how youre thinking about the impact of inflation or deflation for 24, especially in your key categories.

Harry Lawton: And let me give you the example, of this. One of the questions recently asked by a team member is, when do you switch from crumble feed to pellet for baby chicks? When asked, the hey, you are app responded, typically chicken switch from crumble to pellet feed when they reach about 15 to 18 weeks of age, depending on breed and development. To date, the results have been excellent. Our team members are really embracing and excited about the technology and it's been a great value ad feature for our leading customer service.

Hey, Scott this is Kurt and good morning.

First let me just start by saying, we still see an environment, where there is.

Net inflation year over year, while modest.

Inflation is clearly slowing but not turning to deflation at this point and specific to some of the categories.

We are seeing those areas this year, where there is year over year deflation.

Harry Lawton: We have a long track record of growth and high expectations of performance. We view our current trend to these expectations as transitory and specific to the economic environment. This team is dialed in and understands the challenges.

Particularly like areas like bird feed livestock feed corn base, yes, there is some level of deflation, but there's areas like you mentioned, where we're still seeing some level of inflation still in the system such as pet food.

Harry Lawton: As we're entering one of the busiest periods in retail, my thanks and the sheer appreciation goes out to my fellow 50,000 Tractor Supply team members for their dedication to our mission and values.

And then there is most of our areas and our product categories, what I describe as they've hit a plateau, it's stable and were running pretty consistent and as you as that moves to the pipeline very much consistent with.

Operator: And with that operator, we would now like to open the lines for questions. We will now begin the question and answer session. If you would like to ask a question, please press star, followed by one on your telephone keypad. If for any reason, you would like to remove that question, please press star, followed by two. Again, to ask a question, press star one. We ask that all participants limit to one question and one follow up after which you may rejoin the queue. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question.

Our outlook for this year and beyond was that we'd start to moderate down to a low single digit level of inflation in 2023.

Too early to really say for 2024, but.

The general call would be that things begin to stabilize inflation deflation is not as much of a factor in the average ticket that it's been over the past few years and it's more stabilized in neutral ish and we're certainly focused on it this team as his works.

Consistently and in environments of change and inflation deflation have a history of performing very well know that we're monitoring it I'll be able to share more information on that in the fourth quarter call. When we give our outlook for 2024.

Scott Ciccarelli: Our first question comes from the line of Scott Cicarelli with Truist. Your line is now open. Good morning, guys. Thanks for the question, Scott Cicarelli. Given the decline in same-squeue inflation and growing concerns, we may see a deflationary environment and pet food and feed, can you help us understand, at least generally, how you're thinking about the impact of inflation or deflation for 24, especially in your queue categories? Hey Scott, this is Kurt and good morning.

That's really helpful. And then just for clarification, if we were to get seen skewed deflation should we expect it to result in gross margin expansion I think that used to be a general rule of thumb for you guys. As we go back to the pre pandemic Dave. Thanks.

Yes in general our history has been that in a deflationary environment, we're able to leverage our scale manage our retail pricing generally produces a benefit on the rate just like inflation did over the last few years put a bit of pressure on that rate and we manage both both environments very well.

Scott Ciccarelli: First, let me just start by saying we still see an environment where there's some net inflation year-over-year while modest. Inflations clearly slowing but not turning to deflation at this point. And specific to some of the categories, we are seeing there's areas this year where there's year-over-year deflation, particularly areas like bird feed, livestock feed, corn-based. Yeah, there's some level of deflation. But there's areas like you mentioned where we're still seeing some level of inflation still in the system, such as pet food.

<unk> and.

Historically, it's been as you described it.

Very helpful.

Thanks.

Thank you.

The next question comes from the line of Steven Forbes with Guggenheim Partners. Your line is now open.

Good morning, Kurt.

Maybe maybe it is a focus on capital spending plan for next year. I think you guys mentioned sort of in the $600 million range, but was curious Curt if you can maybe help us explain.

Scott Ciccarelli: And then there's most of our areas in our product categories, what I describe as they've hit a plateau. It's stable and we're running pretty consistent. And as you, as that moves to the pipeline, very much consistent with our outlook for this year beyond was that we start to moderate down to a low single-digit level of inflation in 2023. Too early to really stay for 2024, but the general call would be that things begin to stabilize, inflation deflation is not as much of a factor in the average ticket that it's been over the past few years. And it's more stabilized and neutralish. And we're certainly focused on it. This team is, as works consistently in an environment of changing inflation deflation, have a history performing very well. Know that we're monitoring it.

Year over year change and if theres any part of the strategic investment plan that youre pulling back on for any particular reason.

Yeah, Hey, Steven.

The biggest change very much consistent with what we expected when we said peak years of 2022 and 2023 are those big investments in the distribution centers. We will open that second new distribution Center next year in 2024, but a majority of that capital is in 2023, so the on the <unk>.

Net capital spend that we're forecasting in the $725 to 775, if you back off of that into the six hundreds. The biggest majority of that is supply chain. There's other efficiencies in there such as we continue on our investments in the stores such as fusion and garden centers.

Kurt Barton: I'll be able to share more information on that in the fourth quarter call when we give our outlook for 2024. That's really helpful. And then just for clarification, if we were to get seam skewed deflation, should we expect it to result in gross margin expansion? I think that used to be a general rule of thumb for you guys as we go back to pre-pandemic days. Thanks. Yes, in general, our history has been that in a deflationary environment, we're able to leverage our scale, manage our retail pricing, generally produces a benefit on the rate. Just like inflation did over the last few years, put a bit of a pressure on that rate. And we manage both both environments very well. And historically, it's been as you described it. Very helpful. Thanks.

To reengineer and find efficiencies in our investments are really excited about the two newest formats that.

Kurt Barton: Thank you.

That we are rolling out in the stores that we've been able to reengineer and drive cost out of our Garden Center and that's giving us.

Even lower cost of that and then maybe the third thing would be the investments. We made in 2023 on integration and remodeling the stores will be rolling off of that I think those three things are the biggest difference, but no shift in our strategic investments.

Thank you.

Thank you.

The next question comes from the line of Peter Benedict with Baird. Your line is now open.

Steven Forbes: The next question comes from the line of Steven Forbes with Guggenheim Partners. Your line is now open.

Oh, Hey, guys. Thanks, Jud provisions leveraging off of Steve's question, there the prudent investments.

Kurt Barton: Good morning, how are you, Seth? Maybe just a focus on capital spending plans for next year. I think you guys mentioned sort of in the $600 million range, what was curious, Kurt, if you can maybe help us explain the year over your change. And if there's any part of the strategic investment plan that you're pulling back on for any particular reason. Yeah, hey, Steven. The biggest change very much consists of what we expect and we said peak years of 2022 and 2023 are those big investments in the distribution centers.

Approach on the Capex side can you walk that over to the SG&A side of.

The P&L and talk about.

What kind of mean you've spoken to.

85% of the growth in SG&A coming from some of these investments how does that kind of maybe that growth cadence inflect next year, and then secondly, your ability to kind of manage the <unk>.

Core bucket I guess, the non investment related bucket in the event that your comps remain challenged let's say through 'twenty four it let's just call it flat for argument's sake. Thank you.

Kurt Barton: We will open that second new distribution center next year in 2024, but a majority of that capital is in 2023. So the on the net capital spend that we're forecasting in the 725 to 775. If you back off of that into the 600s, the biggest majority of that is supply chain. There's other efficiencies in there such as we continue on our investment in the stores such as fusion and garden centers to reengineer and find efficiencies in our investments.

Yes, Peter on SG&A as I mentioned in my prepared remarks, I felt one of the highlights was how the team managed pivoting off of a number of years and quarters with strong top line sales to scale to the appropriate level of volume for Q3 and it just shows our ability.

To be agile in that in that case to your point on the 85% was growth.

Some of the things that really played out to help drive the core SG&A to a really low growth levels.

First area supply chain and I mentioned this in the previous last couple of quarters, we had built the supply chain almost through muscle three pls other areas that distribution centers, we're running at Max capacity or above that level.

Kurt Barton: Really excited about the two newest formats that we are rolling out in the stores that we've been able to reengineer and drive cost out of a garden center. And that's giving us even lower cost that. And then maybe the third thing would be the investments we made in 2023 on integration and remodeling the Orson stores will be rolling off of that. I think those three things are the biggest difference, but no shift in our strategic investments.

Kurt Barton: Thank you.

Inefficient.

We've been able to shed off some of the three PL higher cost.

The team is running at the some of the highest level of productivity. So our one of our biggest areas of leverage in a.

Flat to slight negative comp sales environment was our distribution supply chain as they actually leveraged as a percentage of sales because of productivity.

Peter Benedict: The next question comes from the line of Peter Benedict with Baird. Your line is now open. Hi, guys. Thanks. The leveraging off Steve's question there, you know, the prudent investment approach on the cat backside can be walked that over to the SGNA side of the PNL and talk about what it kind of means you've spoken to 85% of the growth in SGNA coming from some of these investments. How does that kind of.

John and team focusing on scaling down task or non customer service work to modestly drive hours down that also reflects some of the SG&A benefits in general.

In an environment that there was a softer demand at tractor supply as we look ahead to even future quarters and next year.

We will make we will plan and scale, our core levels of investments and our operating expenses in line with our sales growth.

Peter Benedict: Maybe that growth cadence inflect next year. And then secondly, your ability to kind of manage the core bucket. I guess an on investment related bucket in the event that, you know, your cons remain challenged. Let's say 324. Let's just call it flat for our gun to take. Thanks.

And then from there. This team will continue to do Clawback inflationary pressures even in operating expenses that have embedded over the last few years and this is a team that's been built with lean management continuous improvement in our DNA and we have profit improvement goals.

Kurt Barton: Peter, I mentioned my prepared remarks. I felt one of the highlights was how the team managed pivoting off of a number of years and quarters with strong top line sales to scale to the appropriate level of volume for Q3, and it just shows our ability to be agile in that case. To your point on the 85% was growth. Some of the things that really played out to help drive the core SGNA to a really low growth level, first area supply chain.

And those are all things as we plan ahead to 2024 that gives us confidence in our ability to manage and still hold to our long term algorithm and targets on operating margin.

Thank you very much.

Thank you.

The next question comes from the line of Michael Baker with D. A Davidson your line is now open.

Kurt Barton: And I mentioned this in the previous last couple of quarters. We had built the supply chain almost through muscle, three PLs, other areas that distribution centers were running at max capacity or above that level of amount inefficient. We've been able to shed off some of the three PLs, higher costs. The team is running at some of the highest level productivity. So one of our biggest areas of leverage in a flat to slight negative comp sales environment was our distribution supply chain as they actually leveraged as a percentage fails because of productivity.

Excuse me. Thanks, two part question I guess I wanted to ask about your discretionary and seasonal business you talked about your discretionary business being 15% of sales.

But why wouldn't you consider the seasonal business to be discretionary as well as that seems to be able to ebb and flow based on the seasons and I guess the second part of that as you said the fall slash early winter businesses start off slow are those lost sales or just delayed if it does eventually get cold, which presumably it will.

How do you think those sales pick back up.

Hey, Michael Good morning, Thanks for the question I appreciate your participation in the call.

Kurt Barton: John and team focusing on scaling down task or non-customer service work to modestly drive hours down. That also reflects the SGNA benefits. In general, in an environment that there is softer demand at tractor supply, as we look ahead to even future quarters and next year, we'll plan and scale our core level of investments and our operating expenses in line with our sales growth. And then from there, this team will continue to do clawback inflationary pressures, even in operating expenses that have embedded over the last few years.

As it relates to discretionary just one would acknowledge.

15 ish percent of our business kind of big ticket discretionary.

Mid single digit negative comps a slight improvement from sequentially from what we saw in the first half of the year kind of in line with what we expected.

The myth throughout the entirety of this year for US has been our seasonal businesses are.

<unk> business continues to perform very strong.

With comps well above our reported total company comp performance with significant share gains happening in our <unk> business.

On our Q2 call our Q1 and Q2 calls when we talked about seasonal we acknowledged that there could be an element of the consumer spending discretionary piece it kind of seeps into that seasonal business.

Kurt Barton: And this is a team that's been built with lean management, continuous improvement in our DNA, and we have profit improvement goals. And those are all things as we plan ahead to 2024 that gives us confidence and our ability to manage and still hold to our long-term algorithm and targets on operating margin. Thank you very much.

Kurt Barton: Thank you.

I would characterize the fall and winter business, though.

More demand driven needs based and even spring because in the winter or the businesses that are really strong for us in large and robust are things like wood pellets and propane in fact three of our top 10 skus during the winter season or those are two wood pellet skus in the propane skew those are demand driven need.

Michael Baker: The next question comes from the line of Michael Baker with D.A. Davidson. Your part question, I want to ask about your discretionary and seasonal business.

Base when it's cold people are burning the pellets in there would serve or they're using propane or heating their homes or supplemental heating and when it's not hold theyre not in this time last year as actually as we entered Q3 the last week of Q2 and as we entered Q3.

Harry Lawton: You talk about your discretionary business being 15% of sales, but why wouldn't you consider the seasonal business to be discretionary as well as that it seems to be able to ebb and flow based on the seasons? And I guess the second part of that is you said the fall slash early winter businesses start off slow. Are those law sales are just delayed? Like if it does eventually get cold, which presumably will, how do you think those sales pick back?

It was we had cooler weather and then that continued throughout the balance of Q3, we didnt have that at all this year and then even as we're heading into Q4 here, it's going to be 80 degrees. This weekend in Boston, you just don't need wood pellets and you don't need propane during that time and so.

You can see it very clearly in our business on the flip side, we are seeing strength in outdoor projects outdoor wildlife those sorts of categories, whether its grilling whether it's.

Harry Lawton: up. Yeah, Michael, good morning. Thanks for the question. Appreciate your participation in the call. You know, as it relates to discretionary, just one would acknowledge 15th percent of our business, kind of big ticket discretionary, mid-single digit negative comp, a slight improvement from sequentially from what we saw in the first half of the year, kind of in line with what we expected. The myth throughout the entire year this year for us has been our seasonal businesses.

Dear corn and the deer hunting season.

You can certainly seen in the lawn and garden category, even in riding lawn mowers.

Those businesses. This time of year, though are just not large enough to offset even with nice growth in those categories. They're just not large enough to offset those sorts of pieces there.

Or demand driven we also do sell a lot of insulated outerwear type categories, whether it's codes.

Lease lined pants and those sorts of things gloves boots, I think as it gets cold I would expect those to not be lost sales, but there is an element of what wood pellets and propane at once you don't have that cold weather.

Harry Lawton: Our Q business continues to form very strong, you know, with COPS well above our reported total company COPS performance, with significant share gains happening in our Q business. You know, on our Q2 call or Q1AQ2 call, we talked about seasonal. We acknowledge that there could be, you know, an element of the consumer spending discretionary piece to kind of seeps into that seasonal business. You know, I would characterize the fall and winter business though more demand-driven needs based than even spring, because in the winter our businesses that are really strong for us in large and robust are things like wood pellets and propane.

You do lose it I think we are being.

Prudent.

Our implied guidance for the fourth quarter last year, we didn't have.

It was not it was.

A warmish November so there, but we know theres, an el Nino that's in forecast right now and so we just thought it'd be prudent to not assume that wed have any upside as we lap that in November as we talked about in our prepared remarks, and then of course, we're hurdling. We're comping on top of a robust storm from last year that as we noted in our Q.

Harry Lawton: In fact, three of our top 10 skews during the winter season are those are two wood pellets skews in the propane skew. Those are demand-driven needs based. When it's cold, people, you know, are burning the pellets in their wood stoves, or they're using propane for heating of their homes, or supplemental heating, and when it's not cold, they're not. And this time last year, as actually as we entered Q3, the last week of Q2, and as we entered Q3, you know, it was, we had cooler weather, and then that continued throughout the balance of Q3.

Our earnings call last year contributed two points of comp for the quarter.

Excuse me. Thanks, that's helpful. So it sounds like those seasonal categories are non discretionary, but only if the weather cooperates. So is that a fair way to put it yes, I think thats a fair way to.

Absolutely fair way to say it.

Excellent I appreciate the time thank you.

Thank you.

Our next question comes from the line of Michael Lasser with UBS. Your line is now open.

Harry Lawton: We didn't, you know, have that at all this year. And then even as we're heading into Q4 here, it's going to be 80 degrees this weekend in Boston. You're just don't need wood pellets and you don't need propane during that time. And so you can see it very clearly in our business. On the flip side, we are seeing strength in outdoor projects, outdoor wildlife, those sorts of categories, whether it's grilling, whether it's deer corn and the deer hunting season.

Okay.

Good morning. Thank you so much for taking my question one of the debates on the tractor supply story over the long term.

Is the company has.

Gross margin right now Thats, the 150 basis points, that's higher than it was prior to the pandemic and what gives you confidence on the long term outlook, especially as this has become a more profitable business.

Harry Lawton: You can certainly see it in the lawn and garden categories, even in riding lawnmowers. Those businesses this time of year, though, are just not large enough to offset. Even with nice growth in those categories, they're just not large enough to offset those sorts of pieces that are demand driven. We also do sell a lot of insulated outdoor wear type categories, whether it's coats and a lot, you know, fleeced flying pants and those sorts of things, gloves, boots.

What's a realistic expectation that you can hold on to this increased profitability and then I have one quick follow up.

Yes, Michael this is Kurt.

Gross.

<unk> has certainly been not only a a high point for this quarter this year, but to your point, what we've been able to accomplish leveraging our scale and size in the last years has been.

Harry Lawton: I think, you know, if it gets cold, I would expect those to not be law sales, but there is an element of like wood pellets and propane that once you don't have that cold weather, you know, you do lose it. I think we are being prudent in our implied guidance for the fourth quarter. Last year, you know, we didn't have, it was not, it was a warmish November, but we know there's an El Nino that's in forecast right now, and so we just thought it would be prudent to not assume that, you know, we'd have any upside as we laugh at in November, as we talked about in our prepared remarks.

A real testament to the team.

Give you a few examples of.

Why we believe this is a sustainable gross margin and most of it is around the structural nature of it.

You think ahead I'll first acknowledge as we continue to grow in Q and take market share it puts a little bit of pressure.

From product mix, and we've been cycling and absorbing those gross margin expansions with the higher pressure from.

Harry Lawton: And then of course, we're heartulating, we're hopping on top of a robot storm from last year that as we noted in our Q4 earnings call last year, contributed two points of comp to the quarter. Excuse me, thanks. That's helpful. So it sounds like those seasonal categories are nondiscretionary, but only if the weather cooperates. Is that a fair way to put it? Yeah, they get the fair way to, that's an absolutely fair way to say it. Excellent. Appreciate the time. Thank you.

Q mix in the past few years more than we would see going forward.

Supply chain benefits have really been one of the top two areas of gross margin expansion and we see.

<unk> seen and come off some of the highest supply chain cost we absorbed some of the inefficient inefficiencies in the robust fast growth period, so the supply chain costs declining transportation cost improvement and the reduced miles from new distribution centers.

Michael Lasser: The next question comes from the line of Michael Lasser with UBS. Your line is now open. Good morning. Thank you so much for taking my question. One of the debates on the Tractor Supply Story over the long term is the company has a growth margin right now that's 150 basis points that's higher than it was prior to the pandemic. So what do you do confidence on the long term outlook, especially as this has become a more profitable business. What's a realistic expectation that you can hold on to this increased profitability and then I have one quick follow up.

Our all structural and as you think about transportation costs, you would think about it as in this particular.

Time, we are still in an environment, where transportation costs, both domestic and imports are higher than the pre pandemic levels.

I'm, not saying that we expect to revert back to pre pandemic norms, but I think the important thing is is that we're not coming off of a new extreme low, but yet coming off of some of the highs.

And then the second most impactful piece of gross margin is the structural sustained difference of coming off promotional that were embedded into our our normal programs and really leveraging E. DLP and neighbor's club. So the biggest drivers are structural we expect to be able to change those.

Kurt Barton: Yeah, Michael, this has hurt. Gross margin has certainly been not only a high point for this quarter this year, but to your point, what we've been able to accomplish, leveraging our scale and size in the last years has been a real testament to the team. I'll give you a few examples of why we believe this is a sustainable gross margin and most of it is around the structural nature of it. As you think ahead, I'll first acknowledge, as we continue to grow in Q and take market share, it put the little bit of pressure from product mix and we've been cycling and absorbing those gross margin expansions with higher pressure from Q.

And the.

The benefits that are our fast team.

Has driven in our production not only in sales, but the funding from our vendors is structurally in there as well. So we can we anticipate to be able to have continued gross margin expansion.

And even next year as you think about seasonal may build of a bounce back and that has higher margins. So we have a lot of we have a lot of expectations on our ability to sustain and even expand gross margin for those reasons.

Got you.

Follow up question is you provided some initial observations on next year macro is going to be tough, we'll see what happens with the weather less completion benefit.

Kurt Barton: There's a few mix in the past few years more than we would see going forward supply chain benefits have really been one of the top two areas of gross margin expansion, and we've seen and come off some of the highest supply chain cost. We've absorbed some of the inefficiencies in the robust fast growth period, so the supply chain costs, declining transportation costs, improvement in the reduced miles from new distribution centers are all structural.

So in light of all of those comments, how low 10 year comp B and you still maintain flat overall EPS next year versus this year.

Yes.

I'll take that one.

I'd have to just go to this is still very early in our planning cycle.

This business has been resilient in regards to our ability to maintain our comp sales.

Kurt Barton: As you think about transportation costs, you think about it as in this particular time, we are still in an environment where transportation costs both domestic and import are higher than the pre-pandemic levels. I'm not saying that we expect to revert back to pre-pandemic norms, but I think the important thing is that we're not coming off of a new extreme low, but yet coming off of some of the highs. And then the second most impactful piece of gross margin is the structural sustained difference of coming off promotionals that were embedded into our normal programs and really leveraging EDLP and neighbors clubs.

So much of a of a needs based core business in there that.

We are planning for.

Some uncertainty there are some headwinds on the consumer, but we got strong strategic initiatives.

Lapping some difficult.

Challenges from the seasonal business.

And we can we can be nimble, but I'm, just not going to try to.

Predictors go down a path of like what level of comps or how low it could be because this business has a track record in 30 years, we've had one year of negative comps and it was ever so slightly and we are our confidence in our ability to produce strong sales performance.

Kurt Barton: So the biggest drivers are structural, we expect to be able to change those, and the benefit that our fast team has driven in our production not only in sales, but the funding from our vendors is structurally in there as well. So we anticipate to be able to have continued gross margin expansion, and even next year, as you think about, season will be it may be able to bounce back, and that has higher margins. So we have a lot of expectations on our ability to sustain and even expand gross margin for those reasons. Got you.

And then the only thing I would add is very much in.

Yeah, Hey, Michael the only thing I would add is Kurt and encourage prepared remarks talked about our commitment to our long term operating margin guidance inclusive of next year.

I also add we see a lot of opportunities for continued.

Operating expense control next year, namely as Curt mentioned freight in a number of other levers and I think we've demonstrated this year that we have a number of levers that we can pull to continue to support the undermining underlying profitability of the business and also can control what we can control and we certainly don't see an outlook.

Harry Lawton: My follow-up question is you provided to initial observations on next year, Mack was going to be tough. We'll see what happens with the weather, less inflation benefit. So, in light of all those comments, how low can your comp be and you still maintain flat overall EPS next year versus this year? Yeah, I'll take that one. I mean, I'd have to just go to this is still very early in our planning cycle.

Next year as you implied as potential for negative decline in EPS and if you look at the underlying strength of our business, whether it's in consumer our consumer shopper number of shoppers in our stores, our customer satisfaction, our market share gains all of those sorts of things.

Never been more confident in the underlying foundation of our business.

Thank you so much.

Thank you.

The next question comes from the line of Oliver Winter mantle with Evercore. Your line is now open.

Harry Lawton: This business has been resilient in regards to our ability to maintain our comp sales. It's so much of a needs-based core business in there that we are planning for some uncertainty. There are some headwinds on the consumer, but we've got strong strategic initiatives. We're lapping some difficult challenges from the seasonal business and we can be nimble, but I'm just not going to try to predict or go down a path of what level of comps or how low it could be because this business has a track record in 30 years.

Yes. Thanks.

<unk>.

For your guidance for the fourth quarter comp.

The low single digits to mid single digit decline curve.

How do you expect the transactions versus ticket are performing and that kind of environment.

In regards of last years Winter storm and is it mostly is it mostly on transactions that are going to decline in the fourth quarter.

Oliver Yes.

I'd frame it up and it's going to be a mix of both of those we had a slight average ticket decline in Q3 some of those pressures on average ticket.

Harry Lawton: We've had one year of negative comps and it was ever so slightly and we worked confidence in our ability to produce strong sales performance. And the neil ending I would add is- Very much. Yeah. Hey, Michael, the only thing I would add is you know, Curtman and Curt's prepared remarks talked about our commitment to our long-term operating margin guidance, inclusive next year. I'd also add we see a lot of opportunities for continued operating expense control next year, namely, as Curt mentioned, freight and a number of other levers.

We expect to persist into Q4, but transactions are what gets impacted and did.

Get impacted by the monumental winter storm last year with our expectations. As we mentioned this is not framing up to be.

Ideal fourth quarter, whether that demand would play out in transactions and in our inner valuation, it's going to be a mix of both transactions and ticket and implied in our guidance would be a negative.

Comp transaction for that reason.

Harry Lawton: And I think we've demonstrated this year that we have a number of levers that we can pull to continue to support the undermining underlying profitability of the business, and also control what we can control. And we certainly don't see an outlook next year as you implied as potential for negative decline in EPS. And if you look at the underlying strength of our business, whether it's in consumer, our consumer shopper number of shoppers in our stores, our customer satisfaction, our market share gains, all those sorts of things. We've never been more confident in the underlying foundation of our business.

Got it thanks very much good luck.

Thank you.

Next question comes from the line of Scott <unk> with archive capital. Your line is now open.

Okay.

Good morning. This is Ryan on for Scott. Thanks for taking my question. Our research would suggest that there is an opportunity to have stores get deliveries from the distribution centers more frequently.

You agree and if so what do you think the sales opportunity may be.

Good morning, and thank you for your question.

First off I'd say this is an area that we had been focused on for the last few years.

Michael Lasser: Thank you so much. Thank you.

Oliver Wintermantel: The next question comes from the line of all of our winter mantle with Evercore. Your line is now open? Yeah, thanks. I was for your guidance for the fourth quarter comp, the low single digits to a mid-send digit decline. Curt, how do you expect transactions versus ticket up performing in that kind of environment? In regards of last year, the winter storm, is it mostly in transactions that are going to decline in the fourth quarter?

We've gone from roughly five mixing centers to 15 mixing centers over the last three years that has given us the ability to have more replenishment going into the stores of full pallet quantities of our big moving Skus.

The second thing is the expansion of our D. C from eight to nine and then next year 10 also gives us the additional outbound capacity to.

Would you be able to deliver more frequently to our stores. We now have over I think it's five or 600 stores.

Oliver Wintermantel: Oliver, yeah. I'd frame it up as it's going to be a mix of both of those. We had a slight average ticket decline in Q3. Some of those pressures on average ticket will, we expect to persist into Q4. But transactions are what gets impacted and did get impacted by the monumental winter storm last year. With our expectations, as we mentioned, this is not framing up to be an ideal fourth quarter weather.

Now that receive shipments twice a week from our distribution centers the remaining stores all receive shipments once a week. So it's not that we have stores receiving it less than that but.

Yes.

We're constantly looking at ways, we can drive in stock what I would leave you with is our in stock rate right. Now is the best it's been as Kurt said in his prepared remarks really since the pandemic began and we feel very good about our in stock rates right now.

Our team has done an excellent job I think managing inventory. If you look at our inventory growth is in control. If you look at our in stock rates they are excellent.

Oliver Wintermantel: That demand would play out in transactions. And in our evaluation, it's going to be a mix of both transactions and ticket. And implied in our guidance would be a negative comp transaction for that reason. Thanks very much, good luck. Thank you.

You look at our shrink numbers built.

Below last year in that last year was below two years ago. So I think on all sides of inventory quality quantity in stock rates. We felt we feel very good but continue to challenge yourself to increase frequency and get smarter and smarter and our tools like our new <unk> replenishment and allocation system.

Ryan: The next question comes from the line of Scott Muschkin with our five capital. Your line is now open.

To be able to keep improving our performance on inventory, but feel very good about it as I said our in stock rates are the best they've been really since the pandemic.

Kurt Barton: Good morning. This is Ryan on for Scott. Thanks for taking our question. Our research would suggest that there is an opportunity to have stores get delivered from the distribution centers more frequently. Do you agree? And so what do you think the sales opportunity may be? Thanks.

Thanks, so much.

Thank you.

The next question comes from the line of Chris <unk> with Jpmorgan.

Kurt Barton: Good morning, and thank you for your question. First off, I say this is an area that we have been focused on for the last few years. We've gone from roughly five mixing centers to 15 mixing centers over the last three years. That has given us the ability to have more replenishment going into the stores of full power quantities of our big moving skews. The second thing is the expansion of our DC from eight to nine and then next year, 10 also gives us additional additional outbound capacity to be able to deliver more frequently to our stores.

Your line is now open.

Thanks, very much comment following up on some of the.

The prior questions.

<unk>.

Assuming comps are down roughly 4% in the fourth quarter and you also said that your business has a long history of positive comps sort of alluding that 'twenty four would be positive. So I guess, what's unique to the fourth quarter I understand there is two points of.

Weather lap year over year, why went into business to be positive in that quarter.

Whether it's sort of the only variable that spend the unknown.

Kurt Barton: We now have over I think it's five or 600 stores now that receive shipments twice a week from our distribution centers. The remaining stores all receive shipments once a week. So you know, it's not that we have stores receiving it less than that. But yeah, we're constantly looking at ways we can drive in stocks. What I would leave you with is our in stock rate right now is the best it's been as Kurt said is prepared remarks really since the pandemic began.

Hey, good morning, Chris.

Thanks for your question participates in that.

And I would just reiterate what we said in our prepared remarks that we continue to see the consumer being discerning in their spend particularly in discretionary and I think we're all we've all seen the charts on.

<unk> spend and the shift from goods to services. We've all been looked at how good good spending is occurring and how that's shifting across the various retail sectors. The sector. We play in is the is the most sticky the least impacted by that you go look at electronics and appliances, you look at furniture, you looked at our home improvement you look at all the.

Kurt Barton: And we feel very good about our in stock rates right now and our team set an excellent job in managing inventory to look at our inventory growth. It's in control. If you look at our in stock rates, they're excellent. You look at our shrink numbers, you know, below last year and that last year was below two years ago. So I think on all sides of inventory quality, quantity in stock rates, we feel we feel very good.

The other category they are all performing well below kind of our normal our sector, but nonetheless, we are seeing some modest impact in the discerning spend we also said.

Weather is not off to a great start for us in Q4, there is a very strong el Nino pattern occurring that typically is a warmer.

Kurt Barton: But continue to challenge yourself to increase frequency and get smarter smarter in our tools like our new relax replenishment and allocation system to be able to keep improving our performance on inventory. But feel very good about it is a set our in stock rates are the best they've been released in the pandemic.

Winter season, it's 80 degrees this weekend in Boston and then as you said, we are lapping the strong storm from last year, which we.

According to <unk> two so we just think you put all that together and it's prudent to be it's appropriate to be prudent in our outlook for the fourth quarter and that kind of mid single digit low to mid single digit negative and.

Kurt Barton: Thank you so much.

Kurt Barton: Thank you.

Christopher Horvers: The next question comes from the line of Chris Horvers with JP Morgan. Your line is now open. Thanks very much. So comment following up on some of the question, the prior questions, you are assuming comes are down roughly 4% and the fourth quarter. And you also said that your business has a long history of positive comp sort of eluding that 24 would be positive. So I guess what's unique to the fourth quarter?

I don't think its indicative of anything structural in the business.

We see it as very transitory to the current moment.

And as I said in my prepared remarks, we've had we had active customer growth in Q3, we had new customer growth in Q3, we had reactivated customer growth in Q3, our customer satisfaction scores are at all time highs our market share gains are very strong right now across the board.

This past quarter. Our share is this share gains are as strong as they've been since the pandemic.

And again, our underlying business is very strong I'm confident that in the context of retail goods spending.

When even though the tide shifting out for all that we're going to be standing tall amongst them.

Christopher Horvers: I understand there's two points of, you know, whether or not be over a year, why wouldn't the business be positive in that quarter? Whether it's true, the only variable that's been the unknown. Hey, good morning, Chris. And thanks for your question, participation, the caught. You know, I would just reiterate what we said in our prepared remarks that we continue to see the consumer being discerning in their spin, particularly in discretionary. I mean, I think we're all seeing the charts on PCE spin and the shift from goods to services.

Got it and then my follow up is just on the consumer broadly.

Is a needs based business.

How has the consumer changed because I think if you look across retail right now.

Christopher Horvers: We've all been looked at how good spending is occurring and how that's shifting across the various retail sectors. The sector we play in is the most sticky, the least impacted by that. You go look at electronics and appliances, you look at furniture, you look at home improvement, you look at all the other categories. They're all performing well below kind of our normal architecture. But nonetheless, you know, we are seeing some modest impact on the discerning spin.

Some of the things that you are talking about in terms of units per transaction and the usage of credit as your view that there has been some some degree of deterioration in the consumer over the past.

Six months or so.

I would start by saying what is our value proposition and our value proposition is to be that dependable supplier for life out here and again I would reiterate we are seeing the customers in our stores. They are shopping us and at record levels that said when theyre shopping as they are spending.

Christopher Horvers: We also said, you know, whether it's not off to a great start for us in Q4. There's an out there. Very sure. That's a strong amino pattern occurring. That typically is a warmer winter season. It's 80 degrees this weekend in Boston. And then, as you said, we're laughing the strong storm from last year, which we, you know, recorded two points to. So we think you put all that together and it's prudent to be it's appropriate to be prudent in our outlook for the fourth quarter.

A little bit less items per basket right kind of to the tune of a low single digit headwind.

And theyre pulling back a little bit on discretionary those are consistent themes that we've had really for the last few quarters, we havent really seen any any acceleration in that it's really been more of a consistent theme.

Christopher Horvers: And in that kind of mid single digit low to mid single digit negative. And, you know, don't think it's indicative of anything structural in the business. You know, we see it is very transitory to the current moment. And, you know, as I said, in my prepared remarks, we've had, we had active customer growth in Q3. We had new customer growth in Q3. We had reactivated customer growth in Q3. Our customer satisfaction scores are at all time highs.

But again for us the seasonal weather and seasonal businesses had been a huge departure from what our outlook and expectations have been all year long.

But nonetheless, I think youre going to continue to see.

The near term consumers continued in the consumer spend continuing to shift to services from goods and kind of rebalancing and I think youre going to see discretionary retail businesses, taking continuing to take the brunt of that as we turned the quarter of this year into next year.

Christopher Horvers: Our market share gains are very strong right now across the board. You know, in past this past quarter, our shares this share gains are strong as they've been since the pandemic. And again, our underlying business is very strong. I'm confident that in the context of retail goods spending, you know, we're, when even though the tide shifting out for all that we're going to be standing tall amongst that. But my fault is just, you know, on the consumer broadly, it is a needs based business.

Got it thanks very much.

Yeah.

As we take the top of the hour.

So to hit the top of that our I think this wraps up our call.

Thank you for everyone for joining us and unfavorable for follow up and we'll look forward to speaking to you on our fourth quarter earnings call.

This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.

Christopher Horvers: How is the consumer changing? Because I think if you look across retail right now, you're not the only one who is seen weakness and it seems like it has deteriorated a bit. So, you know, are some of the things that you're talking about in terms of units per transaction and the usage of credit is your view that there has been some some degree of deterioration and the consumer over the past, you know, six months or so.

Christopher Horvers: You know, I start by saying what is our diet proposition and our diet proposition is to be that dependable supplier for life out here. And again, I'd reiterate we're seeing the customers in our stores. They are shopping us and at, you know, record levels that said when they're shopping us, they are spending, you know, a little bit less items per basket right kind of to the tune of a load single digit headwind.

Christopher Horvers: And they're pulling back a little bit on discretionary. Those are consistent themes that we've had really for the last few quarters. We haven't really seen any any acceleration in that. It's really been more of a consistent theme. But again, for us, the seasonal weather business, the seasonal businesses have been a huge departure from what our outlook and expectations have been all all year long. But nonetheless, you know, I think you're going to continue to see for the near term, consumers continue and the consumers spend continuing to shift to services from goods and kind of rebalancing. And I think you're going to see discretionary retail businesses taking continuing to take the brunt of that as we turn the quarter of this year and next year. Got it. Thanks very much.

Mary Pilkington: As we hit the top of the hour, Elizabeth, as we hit the top of the hour, I think this wraps up our call. So thank you for everyone for joining us, and I'm available for follow up, and we'll look forward to speaking to you on our fourth quarter, Ernie's call.

Operator: This concludes today's conference call. Thank you all for your participation.

Operator: You may now disconnect your line.