All right, we're going to get started. Good morning, everybody. Thanks for coming. My name is Seth Sigman. I am the U.S. hardline, broadline Food Retail Analyst here at Barclays. My pleasure to have the management team of Tractor Supply with us today. Hal Lawton, President and CEO, Kurt Barton, EVP, CFO, and Treasurer. We also have Mary Winn Pilkington, SVP, IR, and Public Relations in the audience somewhere. There she is, perfect. Interesting time for Tractor Supply. A lot we want to cover today. I guess first for you, Hal, to kick it off high-level , Tractor Supply has discussed a number of external drivers influencing the business over the last few quarters.
We'll also talk a lot about the company's specific opportunities, but if we could just level set here, maybe frame down the top-down view of the business right now. What are some of the key factors, key end-market dynamics that you're seeing? What are you most and least optimistic about as we sort of look out?
Yeah. Good morning, everyone, and thanks for joining us today, and thanks, Seth, for the question and thanks for having us here. As Seth mentioned, we start at the high level. Tractor Supply participates in a large market. We estimate our market to be $225 billion in size. We're the largest player in our market at around 7%-8% market share. If you just kind of look at it over multi-decades, it's a very attractive market, so it's fragmented, significant opportunity for scale and aggregation, profitable from a Tractor perspective there, and it's one where we think from a competitive perspective, we're uniquely positioned to continue to grow and expand and take share. That said, over the last, call it six months to a year, our market has been stressed. That's kind of implied in Seth's question, and we've been talking a good bit about that.
We do see kind of some light at the end of the rainbow here, and we're excited about as we start to lap some of these pressures, kind of getting back on top of them. I'll talk about those pressures and what we've been seeing for the last 6- 12 months. Our end market, $225 billion, as I said, our total addressable market. There's kind of three major end markets that I'd like to talk about today that are kind of stressed. About 40% of our TAM, our total addressable market, is kind of our core farm and ranch segment. So think about these as kind of your core hobby farmer, your core backyard enthusiast folks that are raising animals, raising pets, three to five acres of land in this kind of core farm and ranch segment.
With fuel prices being where they are, with the ag economy being where it is, that part of our set market has been stressed for really the better part of six to nine months, started in Q4 of last year. If you look at Placer.ai data, YipitData, look at that whole competitive set, it has really been a flat to negative market for the last nine months, and that is about 40% of our market segment. The second set of our market segment is pet. We are a large player in pet, around the fifth largest player in the pet industry. That industry, kind of well-documented for the last couple of years, has struggled on the dog population side. You have seen pullback in consumables as a consequence of that.
You have also had not a lot of new dogs entering the market, so you have had a pullback on hard lines and other early dog kind of categories. As a consequence, that category, collectively inclusive of service, has been flat to modestly positive. Then if you look at our third end market, about 20%, that is kind of home maintenance, home improvement, property repair. That one, as you all have been following, really from the home improvement sector side, has been kind of a flat market now for four or five years. We are seeing that kind of moderated as well. So when you take farm and ranch, kind of flat to negative one-ish, you take pet, kind of flat to maybe positive one-ish, and you take home improvement, kind of flat-ish as well.
Those are kind of 80% of our $225 billion total addressable market, all kind of stressed. Now, as we look ahead, we see ourselves starting to lap on top of the farm and ranch pressure beginning in Q4. There are a lot of pundits around pet, but there does seem to be some stabilization occurring in that business. So we feel good about our end markets kind of evolving over the next 6- 12 months. Of course, we are taking a number of actions to respond in the moment, as well as to set ourselves up more strategically as we enter 2027 as well, which we can talk about, Seth.
Yeah, perfect. We will unpack some of that. I guess the other big change this year, maybe for you, Kurt, tariff refunds. Pretty big deal across retail. You haven't actually disclosed the number necessarily, but I guess, how are you thinking about reinvesting those dollars? Some of that started to flow in Q2, I believe, also expected to hit in Q3. I guess, how do you think about deploying those dollars?
Yeah. A couple of things on the backdrop. One, it's understandable that tariff refunds is a broad transitory issue for all of retail. You're hearing more about that through all the earnings calls, et cetera. Tractor Supply is much smaller in regards to our direct import exposure. When tariffs began to be, those costs began to become part of the cost structure in 2025, we've said we are about 10% or 12% of our sales is tariff related. I think with those two backdrop items, the way we're managing and the way we view tariff refunds for 2026 is that this is broad. It's somewhat unique to 2026. Every year it seems like of late there's new uniqueness, and tariff refunds are a bit unique.
As we said on our second quarter earnings call, we viewed in this environment, at this time, the best strategic move is to reinvest our tariff refunds to drive and create value for our customer. We did that and are doing that in two ways. First, and the most significant reinvestment of the tariff refunds are to offset historical record high fuel costs, diesel costs even today hitting some of the historical highs. The combination of fuel costs being higher and then the overall transportation business, principally domestic, but both domestic and import are certainly showing with new regulations, et cetera, there's inflation in transportation costs. The biggest inflation environment right now for our consumer is the overall supply chain costs driving inflation.
We're utilizing that to offset that, rather than try in an environment that the consumers are a bit stressed to be able to try to push through cost increases or price increases, we're reinvesting it to be able to offset that. To a lesser extent, secondly, we think it's a great opportunity, and we've invested on a few key core traffic-driving items where our tariff refunds may be coming in specific to certain merchandise categories. We're reinvesting that in the topmost visible traffic-driving consumable items that bring the customer into Tractor Supply. It's a great opportunity for us to be. We use this as our Unbeatable Price on those to make sure the visibility is that Tractor Supply is driving value in an inflationary stressed environment. That's how we're reinvesting it.
I think the other thing that's important is we've said the timing of tariff is going to be a little bit choppy. A majority of it, we estimate, occurred in second quarter, but there's still some tariff refunds in the second half of the year. We saw an outsized benefit in Q2, but we're managing and reinvesting this for the full year. Ultimately, our guidance says, with high commodity cost inflation, transportation cost increases, those typically put a lot of pressure on gross margin. Our guide for the year puts gross margin not too far off of our original plan, albeit we get there differently. We'll be managing throughout the year, which we've said for the second half of the year, the gross margin performance will not be consistent with Q2, but kind of view it on a full-year basis.
Mm-hmm. Okay, that's helpful. A few things that I want to follow up on there. On the transportation cost side, you called out a 50- 75 basis point impact in the second quarter, which is a big number. Anything else you can tell us about what drove that increase and how you're planning for those costs through the rest of the year and anything that you could help us with into next year?
Transportation is a bit higher portion of our cost of goods sold than most retailers. Certainly, as you understand, we move a lot of heavy bagged commodity feed, big bulkier items, et cetera. Most of retail, general merchandise, transportation costs may be mid-single-digit percent of sales. In soft lines, it might be low single-digit . Well, we're more of a high single-digit . When fuel costs increase, as they have, like almost an entire dollar per gallon, and as we move more the needs-based item in an environment where consumers are focused more on the consumable, the needs, and less on the discretionary, the combination of those two does actually put an impact of 50- 75 basis points. Last thing I'd say on transportation, it's not unique. We've seen these cycles. It's almost every two years, three years, transportation may go through different cycles.
We are using this unique environment to offset it, but it is not unique to us that how we manage that going forward, whether that be through cost or productivity, cost reductions from our vendors, productivity improvement, all of that, it is very much in our playbook to find different ways to offset the transportation cost increases if these types of pressures were to persist beyond 2026.
Okay. You mentioned pricing earlier, maybe for you, Hal. Can you talk about the recent price investments that you have made? How comfortable are you with the price gaps today versus your farm and ranch competitors? Just any other context on pricing historically, like why the change now? Did you pull back on that price aggression historically? Why do you need to ramp that up now?
Yeah. Thanks, Seth. As Kurt mentioned, like a lot of retailers, we have been the benefactor of tariff refunds this year. We did not disclose it in our second quarter call, as you mentioned, Seth, mostly just from the sake that we were kind of first in line on earnings, and from a competitive perspective, did not want to share too much information. But the math on our tariff refunds was north of $100 million, but south of, say, $150 million, somewhere in that range, and obviously some of that will depend on the dollars that actually get refunded. So there is a range there. To Kurt's point, we invested about 2/3 of that back into covering freight and incremental fuel costs, and Kurt just went through the details of that. The second kind of the remaining third, we invested into price.
First off, Tractor Supply always stands for low price on consumable goods, everyday low price. We benchmark ourselves against our competition on our top 100 KVI SKUs, our top 1,000 KVI SKUs, and then of course, across the entirety of the store. We typically are somewhere between 1 and 3 percentage points lower than our competition on those sorts of basket of goods. As we all know right now, there is significant pressure on the consumer. So the way you see retailers responding is leaning into their consumable and transaction-driving businesses. Those of us that are fortunate enough to have consumable and transaction-driving businesses, not all of us do. We are fortunate that 40%-45% of our business is consumables, and we are leaning into the price points on those to drive those transactions and drive that traffic.
Right now, there's not a lot of real growth occurring in retail. Most of the growth is just nominal growth based on average ticket. There's tremendous fight in retail for transactions right now. That's why we lean into it, call it $35 million, $40 million of our tariff dollars are going into this price investment. As Kurt mentioned, it's a smallish subset of SKUs, call it 50-ish SKUs. But they are the most widely prevalent SKUs in our baskets, in our customers' transactions. They're the ones that our customers note when they're pricing out their projects. We've seen almost a 200 basis point price increase in customer price perception since we launched our Unbeatable Price campaign. Our customers are noticing, we're seeing the transactions, we're seeing the response to the price investments, and we're very pleased.
To give you an example of the types of SKUs these are on, things like shavings. If you have a horse, chickens, any sort of animal outdoors and also sometimes indoors with cats, shavings are a huge portion of your purchases in almost 15% of our baskets. We've made price investments on those, but also some of the key consumables by category, whether it's chicken feed, dog food, equine feed, things like sweet feed, which is a universal product, or even on the liquid side, things like lubricants, which are a huge transaction driver this time of year, or even things like deer corn this time of year as well. But really leaning into those consumables, making those price investments, and we're very pleased with the response we're seeing from our customers.
Given that unique benefit of having the tariff refunds this year to fund some of that, how do you think about the sustainability of these price investments into next year?
Yeah. Great question, Seth. First off, I'd say, if I step back really in retail for the last six or seven years, we've been playing these annual challenges, right? I think when we started this year, it was a very different setup than what we're experiencing now eight months into the year. I'm pleased with how we're responding to the moment. I also reflect back over the last six or seven years, and each of the years have had a challenge, and I'm pleased at how we responded to those as well. Certainly, we know there's a challenge ahead of us in 2027. First thing, we're working really closely with our vendors right now on our support funds and our relationships with them to be able to offset that going into next year. We just had our vendor partnership meeting last week.
We've got a new set of vendor support funds we're in the process of negotiating. We've made great progress on that. That in and of itself should help us offset the price investment we're making. Then we're really just talking about the freight offset. I feel more comfortable navigating the freight offset. It's something we've done historically very well. If freight stays elevated at this level for a year plus in time, I think the entire market will have to reconcile with that.
Yeah. Wrapping that all together, maybe for you, Kurt, what's the right way to think about the starting point for gross margin as you look into next year? Because obviously there's a few crosscurrents here. You have tariff refunds rolling off, you have the price position that's going to remain elevated. You do have those vendor offsets, but you also have cost pressures that persist. If we wrap that all together, what's the starting point?
Yeah, a couple key framework points to make. One, we continue to target and have been consistent with as we grow to maintain or even slightly improve our gross margin rate year-over-year. That's been our target, and we've been relatively consistent with that. This particular year, as I mentioned, even with a lot of these cost pressures, we'll be generally in line with that flat, maybe slightly down over year for the year on gross margin. From an annual perspective, I think 2026 is a decent jumping point to look at that. There's a lot still to know, and certainly we'll be giving more guidance on 2027 in three to six months. When you think about it, I wouldn't look at Q4 or Q3 as the primary jumping point, but really look at 2026.
To my point earlier, the choppiness of tariff refunds, how we're managing that. Hal mentioned that we had our vendor partnership conference just last week. With the expectation that this isn't going to be a light switch that jumps on or off in regards to the end of 2026, either cost pressures dissipating or persisting. We really view that we've got to manage through this, so we're already making plans on how we manage with the different levers that we have on how we can maintain our gross margin. The way we look at right now, 2026 for the full year is a relatively good basis from that point. I think that's the position we'll work from as to how do we take that and be able to manage the balance of both comp sales, ticket, and transactions, but also our margin rate for 2027.
I would look at it more from the full year of 2026 than say, third or fourth quarter.
Yeah. Okay. That makes sense. I guess a related follow-up on pricing is inflation. We have seen a pickup in some of the commodities recently. Inflation, I think in the first half of the year is around 1%. How are you thinking about it from here?
I will take that. We said on our last earnings call that while at the beginning of the year, we could see inflation having anywhere from a 1-2-point benefit to ticket, that with a lot of the pricing adjustments we have made and how we are managing that, we saw that being more towards the lower end of that. So more like a 1% benefit. It has really been trending that it is likely to fall into that category. Now, we do recognize to the points we have made on transportation inflation, commodity, corn in particular, has certainly had a jump in its pricing of late. It is still relatively early, but if the current prices above 500 were to persist, we will work to manage as best we can to not have to raise prices, but eventually, you have to look at the market.
You look at how we have to adjust for that. I would say, still see us at the low end of that range, but a persisted inflation level could push that modestly up for the year. Then we will certainly see what position we are in for 2027.
Okay, great. For Hal, I want to switch to the pet category specifically. Obviously, you face some challenges, as you noted earlier. There is a lot of work happening in the store. Maybe just update us on the trends that you are seeing, the progress through some of the initiatives.
Yeah, thanks, Seth. One thing I did want to just mention, as we think about 2027, we, in Q3 of last year, in that earnings call, we talked about the fact that we were building our business model, looking forward to anchor operating margin rate breakeven at around a 2% comp. We still feel very strongly about that 2% comp kind of operating margin breakeven, and that is even in the context of looking forward to 2027, Seth.
Okay.
As you were asking, as we think about the step off into 2027, we still very much are anchoring and feel good about that 2% comp kind of breakeven. Obviously, we got to manage through margin rate and expense, and there is some nuances there, but feel very good about that. As it relates to the pet category, to Seth's point, we have been taking some significant steps to re-accelerate our business in pet. If I step back, the pet category is one that historically has been a real compounder from a category perspective. You had AUR growth almost every single year for the last 30 years. You have had unit growth almost every single year for the last 30 years. Plus, it has been a very good category to participate in.
That said, the category has been stressed, as I mentioned earlier, the last couple of years, dominantly because folks have not been introducing new dogs into the population. So you have had an aging dog set, a declining total dog population count. That puts pressure on the consumable side. So you are seeing consumables negative. You are seeing hard lines very negative, but then you are seeing the services side, +5%, +10%. So we are trying to react to that market. We have taken the following set of steps.
First off, we have made some significant adjustments to our square footage and space allocation in the stores. We do this routinely every six months to a year. We did a kind of a larger swing this summer than our normal. But we did things like add eight feet of space to cat, really pushing in more treats, more accessories, more wet food.
That is where you're seeing significant growth in the market. Cats growing in the 5%, 10%, 15% range, whereas you've got dog negative. That space came out of dog hard lines, which you're seeing significant negative. We also allocated more space to big bag sizes inside of our core dog food. We're very much a wholesale kind of model, a warehouse kind of model on dog food. When you had inflation occurring over the last several years, we saw pack sizes decrease. That's not our model. We want larger pack sizes, so we changed a lot of 40 lbs- 50 lbs, and we're seeing the benefit of that as well. Also on dog treats and snacks, we also made some significant changes there as well. So really changing the square footage in our store to reflect kind of current sales trends.
The second thing we did was we added a whole bunch of new innovation into our business. So we added a lot of air-dried and freeze-dried snacks, more proteins, leaning much more into supplements and health and wellness. Even on the dog food side, we did a lot more localization of our assortments. So a lot more innovation into the business. The third thing is really around digital. We know that we have to grow our subscription business online. We've made substantial changes to our experience over the last six months. We'll do over $200 million this year in subscription. The vast majority of that is in the pet category. It's growing triple digits for us, so we feel very good about the improvements we've made in subscription, and we'll continue to lean into that. The last thing is fresh.
That's not a category we've played in significantly in the past. We've introduced that category. It's about 8%, 9% of total pet dog food market now. We've got Freshpet now in, well, at the end of Q2, we were over 300 stores. We're on track for over 700 stores by the end of this year. Just met with Freshpet last week. They commented this is their largest rollout in a single year. Also, their smoothest rollout they've had, and we're exceeding the expectations we all had on sales, so feel very good about that. Looking to increase our store count this year, possible beyond the 700, and more to come on that. So making a lot of progress across a lot of elements. The last thing I'll leave with, as I mentioned on services, that's the really high-growth area.
We've made some substantial progress adjusting our portfolio in that area as well. Two years ago, we acquired an RX company called Allivet, a little over $100, $150 million dog prescription business and animal prescription business. Earlier this year, we bought VIP Petcare, which is a vet clinic business, mobile. They go out to about 1,700 of our stores already. Between the two of those, we now have an over $300 million pet services business. You'll hear more from us on how we're going to take those two businesses and combine them with the subscription plays we have and our in-store experience, and really drive that pet ecosystem, and that's a huge opportunity for us as we look ahead.
A lot of change. Sounds like a lot of progress rolling out these initiatives. Any early learnings, consumer response? Are you seeing a pickup in sales related to that—
Yeah.
—framework?
Great question. As we commented, we were a -4.2% comp on our pet business in Q1. If you were to add about 3.5 points of non-comp growth, you get closer to flat total growth for the business, which is in line with the market, as I mentioned earlier. If you look at Q2, we commented that we were a -2.9% comp. Again, you would add about 3.5 points of non-comp, and so our total pet business was growing at a 0.5%- 1%. So you had sequential improvement based on some of these actions we are taking. Then we commented in the call that our exit rate coming out of Q2 in June was better than the -2.9% for the quarter. So we are running more mid- to low- single - 2s now, as we got into Q3.
Feeling very good about the progress we are making. 2 points, 3 points of sequential improvement in four or five months' time. More to come.
Okay, great. I want to shift to final mile and delivery. Big focus. Maybe talk about the progress that you have seen there so far. How much of this is an enabler for the core business? How does this help drive B2B?
Yeah. We want to back up a little bit and explain our journey on delivery. In 2020, we rolled out delivery to all of our stores with a third-party gig provider named Roadie, and that has been a very successful partnership for us. For the last five or six years, all of our stores across the country have had delivery from the store, and it could be same day or two day or three day, depending on the service that you selected. We knew that was a nice first step, but insufficient for our final destination of where we need to be on delivery. What we have been rolling out over the last year and a half is our own final-mile delivery.
In essence, what we are doing is we are taking every three to four stores, we are creating a hub and spoke system, and serving four stores out of one store. Our customers then, when they select and order a product online, depending on the order size and quantity, it would go to either Roadie or go to our own team member. In these hubs, we have dedicated two drivers. We have one during the week, one carrying over the weekend and also as a backup driver. They have a truck and a trailer, and they are able to deliver directly to a customer's home all the items that they order online. We are typically, in those, doing larger order quantities. Think about Roadie doing, say, a $50- $100 order, and then think about our own team members doing somewhere between a $200- $1,000 order.
In the last four weeks, we have done over 15,000 of our own team member deliveries each of those weeks. We are scaling it very well with each of these hub stores doing somewhere around seven to eight deliveries a day. We are very pleased as this is scaling up and the performance of these hubs. On the customer satisfaction, our gig worker delivery is right in line with our overall store satisfaction. But when we have a team member deliver it is almost 10- 15 points. It is more than 10 points, almost 15 points higher customer satisfaction than a normal purchase. We feel really good about the customer satisfaction, really good about the velocity we are seeing, and then also the repeat orders and order volume size. We are seeing this really open our big barn customer, to your point, Seth.
The gig workers really work fine for that almost like DIY consumer that is purchasing in our stores. But our team member delivery, really, we are seeing is the big unlock for that big barn customer who has horses and stables, equine facilities. Time is money. It is less of a hobby and more of a business. They expect delivery, and they want a Tractor Supply red apron delivering it. We are seeing significant inroads with our big barn customers as we roll it out.
Okay, great. Kurt, for you, I wanted to talk about store growth. I think you lowered the store growth target for next year, 85- 90 stores, previously 100. Maybe just walk us through the rationale of that, and how do you think about the right growth rate of the business?
Yeah. It simply is a capital allocation decision that we made very much in line with, we are focused on re-accelerating the business and driving investment in areas that could grow existing store sales. First, our new stores are performing as well as they ever have. They are coming out of the gates at higher revenue levels. They are maturing at faster paces, and they give us the best profitability. So we couldn't be more thrilled and confident in the investment in new stores. We have historically been opening around 80- 90 stores. In our 2024 strategic Investor Day, we announced that we saw an opportunity in our path to 3,200+ stores that we could do 100 new stores, and we feel very confident in that.
However, with the opportunity we have to make investments in services, final mile, pet, a number of things that we're doing in existing stores, including relocations and remodels, we're pivoting back to making those investments is really just a capital allocation and a complete confidence in the new stores. We think that for this environment, for all the reasons Hal was mentioning about the end markets, investing in the existing stores is the right pivot right now.
Okay, great. If we tie it all together here and think about the outlook, to your point, you did have this long-term algorithm that you provided in December of 2024. You withdrew that recently. As you think about 2027, on the top line at least, how do you think about your ability to get back to steady comp growth? Is it fair to think that 2027 should be better than 2026, but not necessarily at that prior 3%-5% comp outlook? We'll follow up on margins.
Yeah. Obviously, today we are not providing guidance on 2027. I would say, first off, we know what Tractor Supply's track record is and history of performance. When you look back over 30, 35+ years of this business, you are going to see a comp that runs routinely between 3% and 4%. You are going to see that that comp is historically almost 50% comp transaction growth, 50% average ticket growth. It is a business that has been a compounder for multi, multiple decades now. That is our standard, and that is the expectation that we deliver on that standard as we look into the future. Exactly where on that spectrum 2027 is, more to come. We are very focused on getting transactions positive back in the business, very focused on driving growth in the business and accelerating sales.
Feel good about the progress we made on that over the next three or four months. Look forward to sharing more in our Q3 earnings and then more details as we get into the back half of the year.
Okay, super helpful. From a margin perspective, I think you answered some of this earlier, but leverage point, think about 2% comp still as the right framework. Anything else to unpack some of the key variables that we should be thinking about on the margin side?
Yeah, Hal made a really key point. We still see the business being able to inflect at about a 2% comp sales range. The core business is efficient and performing as productive as ever. We have been very successful with driving task work back, like back room task work out of stores. We are actually performing today with less hours in our stores. Our units per hour, our productivity in the distribution centers are as strong as ever, and we have come off our key investment cycle. You are seeing this year even, like depreciation just outpacing in growth to the sales, but right around 6%. We see that as something that continues to come down a bit. So, those are all the reasons that we believe that even in 2027, we still see 2%.
And then particular with anything nuanced, we opened up a new distribution center just here recently, and that will have a little bit of a growth investment in SGA for the back half of this year and early part of next year. It gives us benefit on the supply chain side. At this point, that is probably the only big call-out that I would see. We are going to look at all of the major capital allocation and long-term target type points as we go into and bring guidance. But what we do not see is anything meaningfully changing in Tractor Supply's long-term outlook or targets. But we look forward to be able to share more about where the allocation is and where we are investing, and how we are going to re-accelerate the business.
Okay. This has been great. We have about one minute left. Hal, I will turn it to you. Any closing messages for the group here?
Yeah. Hopefully, what you heard in our Q2 earnings call is a Tractor Supply that is still looking forward, excited about the future. But also taking actions in the moment that are required. And hopefully also, what you heard was as we think about 2027, no sacred cows. We are challenging our strategic assumptions. We are responding to the moment. As an example, we wrote off 75 Petsense stores in the second quarter. We also talked about how we are going to pivoting from 100 new stores down to 85 or 90 new stores next year and put more of our emphasis on our existing store capital. Then, next year, as Kurt mentioned, we are very conscious of where we are running on comps, very conscious of our business model right now. We are not entering an investment cycle.
Next year, our total net capital spend will be likely our lowest in six or seven years. We will start getting below a 4% of sales on our capital run rate. That will allow us to have depreciation running at sales or less for the first time in quite some time. So just know that we are very focused on running a disciplined business, very focused on how we allocate our capital in the moment, responding to the crisis, but still making sure we are setting ourselves up well for the future. Thanks.
Great. Thank you both.
Appreciate that.