Good morning, ladies and gentlemen, and welcome to the Tractor Supply Company's conference call to discuss third quarter 2018 results. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. We ask that all participants limit themselves to one question and one related follow-up. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. As a reminder, this call is being recorded. I'd now like to introduce your host for today's call, Mary Winn Pilkington, Vice President of Investor Relations and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.
Thank you, David. Good morning, everyone. On the call today are Greg Sandfort, our CEO, Steve Barbarick, President and Chief Operating Officer, and Kurt Barton, our CFO. Before we begin, we are delighted to share with you that we're planning on hosting our 2019 Investment Community Day in Nashville on May the 14th and 15th. We'll be sending out more details soon, please be on the lookout for that. Let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control.
Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statement are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. After our prepared remarks, we'll open the call up for your questions. Please limit your questions to one and one related follow-up question if necessary. I appreciate your cooperation.
We will be available for the call for follow-up. It's my pleasure to turn the call over to Greg.
Thank you, Mary Winn. Good morning to everyone joining us on the call today. To begin this morning, I want to thank all of the Tractor Supply and Petsense team members for their tremendous efforts during the recent hurricane season as they went the country mile for many of our customers. Our thoughts and prayers continue to be with all of our team members and the communities who have been directly impacted by the recent hurricanes. Now for the business results. We are delighted with our strong third quarter performance, driven by overall robust sales growth. Once again, our results were driven by broad-based strength across all geographic regions, as well as increases in both comparable average ticket and traffic, all merchandising divisions achieved positive comp sales in the quarter.
Our third quarter results represent the fifth consecutive quarter of comp store sales above 3% as we cycled our most difficult quarterly comparison of a year ago. During the quarter, the Tractor Supply team executed well across many of our areas: store operations, merchandising, supply chain, and planning and placement. While the overall retail economy is doing well, our teams did a great job of developing plans that resonated with our customers, that were seasonally relevant and continued to drive transactions and our average ticket. We continued to be in stock for our customers with our everyday basic assortments that we know our customers depend on from Tractor Supply that help them live their out here lifestyle. As I shared with you last quarter, I believe the macro backdrop for our consumer is relatively healthy given the recent trends in unemployment and consumer confidence.
For Tractor Supply, the macro headwinds we've experienced over the last several years have abated, and the team is now in a position to capitalize on the current consumer trends. We've continued to see some benefit from energy-related markets along with inflationary trends, both of which are positively contributing to our top-line performance. Given our performance through the third quarter, we are raising our full-year outlook given the ongoing strength in our business. We believe our merchandising, marketing efforts, along with our One Tractor strategy initiatives, have well-positioned us for years to come. Let us touch on a few highlights for the third quarter as compared to third quarter last year. Net sales increased 9.3% to $1.8 billion for the quarter as we stayed the course on our strategy to open new stores at both Tractor Supply and Petsense.
Comparable store sales increased 5.1% in the third quarter, with comp average ticket increasing 3.6% and transactions growing at +1.4% in the quarter. This quarter marks 41 out of 42 quarters that our customer traffic count has been positive. Consistent with the second quarter of this year, the average ticket increase continued to be among the best we have had in the last six years. Diluted EPS was $0.95, an increase of nearly 32%. Year to date, we have returned $398 million to shareholders through the combination of share repurchases and cash dividends. Based on our performance year to date, we are raising our full year earnings per share guidance to a range of $4.23-$4.27, up from our previous guidance of $4.10-$4.20. Now let's take a look at several of the operational highlights for the quarter.
We opened 23 new Tractor Supply stores and 7 Petsense locations. Our overall customer satisfaction scores continued to be at record levels. Based on our recently completed team member engagement survey, our scores continue to be very, very strong. We continue to see growth in our Neighbor's Club loyalty program, now with over 9.7 million members, as we are well on track to exceed our goal of 10 million Neighbor's Club members by the end of this year. This quarter marks our 25th consecutive quarter of strong, double-digit sales growth in our e-commerce business. During the third quarter, we continued to experience exceptional growth with buy online, pickup in store, again exceeding our expectations. This tool encourages customers to come into the store to pick up online orders, and this is resulting in 20% of our customers making an incremental purchase.
Between the combination of buy online pick up in store and direct delivery to the stores, more than 70% of our e-commerce orders continued to be fulfilled at a store level, illustrating the importance of our store assets and their key role in the fulfillment of our e-commerce business. Importantly, this is a very cost-effective way to serve our customers with greater speed, convenience, and efficiency. We believe that with our capabilities of buy online, pickup in store, mobile point of sale, Neighbor's Club, and Stockyard in-store kiosk, we are uniquely positioned to serve this customer base better than anyone in this fragmented market. We see significant opportunities to broaden our consumer reach and increase our market share as our store base and digital capabilities expand over time.
Our One Tractor strategy remains focused on the same four objectives: driving profitable growth, building customer-centric engagement, offering the most relevant products and services, and enhancing our core and foundational infrastructure capabilities. We are building solid momentum behind our One Tractor strategy to serve our customers anytime, anywhere, and any way they choose. I believe our One Tractor strategy positions us well to meet the unique preferences our customers have for demand-driven, immediate-need products in an easy and seamless shopping experience. We also believe that the continued convergence of our physical and digital storefronts and the updates to our in-store and online shopping experience are attractive, defensible, and are resonating with our customers. We believe these will drive our performance in the coming years.
For 2018, we are on track to open 80 new Tractor stores and 20 new Petsense store locations. Before I turn the call over to Steve, there's one topic we continue to monitor very closely, and that is the tariffs on products from China and their impact on our business. Please keep in mind, we have a large segment of our business, such as our consumable, usable, and edible products that would be impacted very little to none at all. Depending on the product category, the team is working through our plans to mitigate the potential impact of tariffs. We will continue to watch this topic closely as there are many moving parts, and it is a fluid process. I'll turn the call over to Steve.
Thanks, Greg, and good morning, everyone. We had a strong quarter of results that exceeded our expectations. Our comp sales were broad-based, and all four walls of the box performed well for the quarter. Our comp sales growth was driven by both average ticket as well as continued increases in customer traffic. The team did a great job developing and delivering on our merchandising plans and marketing events during the quarter. That, coupled with strong execution by our store teams and across the supply chain network, we successfully cycled the most challenging comparison of the year with a 2-year stack of 12%. Many of the performance factors that we experienced in the second quarter continued to benefit us in the third quarter. Our strong average ticket growth of 3.6% was driven by strength in our items per transaction, product mix, inflation, and to a lesser extent, growth in big-ticket categories.
The store operations and merchandising teams put forth a coordinated effort to grow our average ticket, and we saw that pay off in the quarter. In addition, commodity inflation across categories such as livestock feed, pet food, steel, and oil-based products contributed approximately 90 basis points to our average ticket performance. Lastly, our average ticket improvement experienced some benefit from big-ticket sales. We did experience strength in big-ticket sales across several product lines, which included a go-along replenishment strategy around outdoor power equipment. Our supply chain remained nimble throughout the quarter, and we took advantage of the favorable weather trends. We continue to be pleased with our traffic trends, with growth of 1.4% on top of last year's growth of 5%. Please keep in mind that last year we benefited from 2 major hurricanes. During the quarter, we had strong sales dollars and unit growth of CUE products.
Our mission is to be a dependable supplier of basic maintenance products so that our customers can rely on us on a regular basis. Within the CUE products, strength was broad-based across several key product lines such as pet food and supplies, small animal products, livestock feed, forage, and bird feeding, just to name a few. Our pet food business continues to drive solid comp sales. Our exclusive brand of 4health pet food is a differentiator with our customers who value premium quality at a great price. The 4health brand continues to gain share and has become a meaningful part of our overall pet food portfolio. Lastly, traffic benefited from an extended selling season in our spring and summer categories during the quarter. Let me turn to the progress we're making on building out our capabilities in support of our customer.
We are pleased with the traction we are gaining and our customers' response to these initiatives. Specific examples include capabilities such as expanding the functionality of our website, increasing the store count of our Stockyard kiosk and mobile solutions for our team members, growing our Neighbor's Club engagement, enhancing our private label credit card offering, and investing in our supply chain. As part of our One Tractor strategy, we continue to enhance the functionality of our website and mobile platform with features to support our seamless shopping experience. For example, we continue to introduce more payment options online. The functionality we added in July to our website to allow our customers the ability to register for and make tax-exempt purchases has exceeded our expectations. In addition, online applications for our private label credit card are up strong double digits, accounting for just under half of our total credit applications.
This card is also being used by our customers on our website as our private label credit card tender online more than doubled in the third quarter. The ongoing expansion of our Stockyard kiosk in select stores will allow us to provide even more customers with a long tail of product assortment. We now have more than 100,000 SKUs on our website, compared to the 15 to 20,000 in our stores. At the store level, the Stockyard kiosks are a proven tool for driving incremental sales. By the end of the year, we anticipate a third of the chain will have the Stockyard kiosks. The mobile point-of-sale capability will be in approximately 20% to 25% of our chain. We know that when we equip our team members with mobility tools, we see better levels of suggested selling, along with higher customer satisfaction scores.
Our Neighbor's Club membership continues to be very strong. We are on track to exceed our goal of 10 million members by the end of the year. This program has quickly become a transformational and growing asset to drive brand loyalty. With a one-year retention rate at nearly 90%, our customer feedback continues to be overwhelmingly positive, and key engagement metrics for the third quarter improved sequentially. Our sales per customer are up in the year post-enrollment, with Neighbor's Club members shopping between three and four times our average customer. As mentioned last quarter, we are continuing to identify customer insights based on the rich data that we are getting from our loyalty program. The data allows us to target specific customers based on their frequency and category-specific needs. This personalized approach will allow us to drive engagement and share wallet over time.
Being a relationship-based retail company, we continue to test the impact of personalized communications through our digital channels. For example, we just concluded a digital campaign test directed at dog-owning customers with multiple email messages. The messages were personalized across different customer profiles. Initial results have been positive, delivering an increased engagement with these dog owners and providing great insights on customer response. This test will also allow us to continue to build out and refine our model to improve customer engagement across a variety of customer segments. In addition to our Neighbor's Club program, our enhanced private label credit card offerings have resonated with our customers. While still very early, we have seen the use of private branded credit card increase across the board as a result of more compelling financing offers.
Lastly, we anticipate that this will become a key tool to deepen our relationship with our customers, drive loyalty, and increase our share of wallet. During the quarter, we opened a new mixing center in Georgia. This is our fourth mixing center, helping us provide just-in-time replenishment of fast-turning CUE and high CUE products to our stores.
We believe this model has further expansion potential, allowing us to better serve our stores and alleviate some capacity constraints across our distribution centers. Our distribution center in Frankfort, New York is on track to begin receiving late in the fourth quarter and begin shipping to our stores in the first quarter of 2019. The Frankfort facility will support replenishment to our stores and increase our fulfillment speed for direct-to-customer orders. As we wrap up the year, the winter season and changing temperatures are rapidly approaching. We are ready for our customers with a strong assortment of apparel, heating, and seasonal items, offering innovative products and great value that help our customers live life on their terms. In addition, we have sourced a solid lineup of excellent values and special buys for our customers during our Black Friday and holiday events, both online and in store.
I believe we're on a great track for a strong finish to the year. At this point, I'd like to turn the call over to Kurt.
Thank you, Steve, and good morning, everyone. For the third quarter of 2018, we had strong comp store sales growth of 5.1%. All three months of the quarter were positive. Petsense stores continue to have positive comp store sales increases in line with our expectations. For the third quarter, gross profit increased 8.8% to $653.1 million. Gross margin had a slight decrease of 16 basis points to 34.7%. The team was very effective with their efforts to mitigate the impact of overall freight cost increases through our price management initiatives. The pressure we have experienced on our freight expense is not unique to Tractor Supply, given the industry trends of higher carrier rates and increased diesel fuel prices. Average fuel prices have been running up 20% or more year-over-year. All in, the team did a great job navigating the current environment.
Including depreciation and amortization, SG&A, as a percentage of net sales, increased by 31 basis points to 26.6%. Higher incentive compensation from the strong year-over-year growth in comparable store sales, along with planned investments in infrastructure, labor wages, and technology, were the primary contributors to the SG&A increase. Partially offsetting these increases were leverage in occupancy and other costs from the increase in comparable store sales. Normalizing for incentive compensation year-over-year, we continue to have good underlying SG&A performance. Our effective tax rate decreased to 21.5% in the third quarter. The decrease was driven primarily by the U.S. Tax Cuts and Jobs Act that was signed into law in December 2017. To a lesser extent, an incremental tax benefit associated with higher stock option exercises year-over-year also decreased our effective tax rate. Now to our balance sheet and cash flow.
We have a strong balance sheet. We continue our track record of generating strong cash flows from operations. At quarter end, our merchandising inventories were $1.7 billion, an increase of about 4% on a per store basis from the 2017 third quarter. The increase is principally due to inflation, as well as growth in fast turning everyday merchandise to support the positive trends in the business. Our financed inventory improved more than 100 basis points over the prior year, with accounts payable leverage at about 39.4% for the quarter. We believe our inventory is in great shape. We are very comfortable with its quality. As we enter the fourth quarter, we're well positioned to take advantage of the change of the seasons. We remain committed to returning cash to our shareholders through our share repurchases and dividends while maintaining a disciplined approach to capital allocation.
We are managing to a leverage ratio of approximately two times adjusted debt to EBITDA. Over the last several years, we have taken advantage of the low interest rate environment to have a majority of our debt at fixed rates. About 70% of our long-term debt is fixed with a weighted average interest rate of about 2.7%. In addition, we're very comfortable with our debt maturation ladder. Year to date, through the third quarter, we repurchased about 4.3 million shares of our common stock for $289.2 million and paid quarterly cash dividends totaling $109.2 million. Since the inception of our share repurchase program in 2007, we have repurchased over $2.4 billion of our common stock. Our remaining share repurchase authorization was approximately $580 million as of the quarter end. Let's turn now to our guidance. Given our strong performance year to date, we are raising our financial outlook for 2018.
For the year, we now anticipate net sales in the range of $7.84 billion-$7.87 billion, an increase of 8%-8.5% over fiscal 2017. Comparable store sales in the range of 4%-4.5%, net income in the range of $522 million-$528 million, and earnings per diluted share of $4.23-$4.27, compared to our previous guidance of $4.10-$4.20 per diluted share. We now forecast capital spending in the range of $260 million-$280 million for the year. Our effective tax rate is anticipated to be in the range of approximately 22.3%-22.5%. As we shared with you earlier in the year, for the fourth quarter, we expect gross margin rate to be down to a greater degree than we have experienced year to date and expect SG&A deleverage to be at a modestly lower level.
This is mainly a function of the comparisons for the quarter, as we are cycling a 50 basis point improvement in gross margin rate and a 120 basis point deleverage in SG&A. We remain committed to a disciplined capital allocation strategy with our first priority being reinvestments back into the business to support the long-term growth through the opening of new stores and our One Tractor initiatives. We remain on track to open about 80 new Tractor Supply stores, 20 new Petsense stores, and the substantial completion of our new distribution center in Frankfort, New York. We also are committed to creating lasting value for our shareholders through anticipated quarterly dividends and continued share repurchases.
Over the last three years, we have made investments in our One Tractor strategy, complemented with investments across our supply chain that have been required to maintain our leading position in the farm and ranch sector and capitalize on the digitalization of retail. At the same time, we have increased labor hours and wage rates at both stores and distribution centers. For 2018, we have been disciplined to invest in the key strategic initiatives that we believe will drive our long-term performance. In the current operating environment, there are many variables that are impacting our business that are fluid and constantly changing. Based on what we know today, we continue to anticipate that our investments have plateaued and believe that 2018 is positioned to be the trough in our operating margin rate. We will provide more details on our 2019 outlook when we have our year-end earnings conference call.
I'd like to turn the call back over to Greg.
Thank you, Kurt. I'll reiterate again, we believe we really had a strong third quarter. We're on track for a very solid year-end. We have a unique and differentiated model that positions us well for the future. I again want to thank the more than 29,000 team members across the company that allowed us to deliver a great quarter, and I appreciate their hard work, and I know that they're providing legendary customer service every day to our out there and out here lifestyle customers. With that, Mary Winn, we would like to open the lines for questions.
Great. Thank you. David, we'll move to our first question.
Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you're using a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. To allow everyone an opportunity to ask a question, we ask that you please limit yourselves to one question and one related follow-up. Once again, press star one to ask a question, and we'll take our first question from Matt Fassler with Goldman Sachs.
Thank you so much. Good morning, everybody.
Good morning, Matt.
Morning.
My primary question relates to the sizing of incentive compensation. How significant of a driver of the bump this was in Q3? If you could just remind us what role that plays in the Q4 expense outlook year-on-year.
Sure, Matt, this is Kurt. In regards to incentive compensation, the important thing is that for the third quarter in particular, it's really about a comparison to prior year. The comparison is meaningful. The past two years' performance was below plan, driving below normal incentive compensation expense. The current year, as you know, and the quarter performance was strong and more normalized. We're excited about the strong performance that does drive incentive compensation, and the incentive compensation was a significant part of the SG&A deleverage. That incentive compensation for the third quarter itself was approximately 40 basis point year-over-year comparison. With that, you can see we had strong SG&A deleverage in the third quarter ex incentive compensation.
For the fourth quarter, the only variable difference is, as we called out last year in the fourth quarter, with the performance, we had a strong SG&A performance there. The compares are not as significant in Q4 as it is in Q3.
I guess the follow-up would be, since you said that the delta is frankly more about what happened last year than what happened this year. As we think about next year, really, would you say that your incentive comp levels in Q3 were sort of in line with what they would be in an average year, or were they slightly elevated given the outstanding operating performance?
Matt, we had good, solid performance. We're excited about the ability to incentivize our team members with that performance. It's normalized to slightly higher than normalized performance in Q3.
Thank you for the clarity. I appreciate it.
Next we'll go to Simeon Gutman with Morgan Stanley.
Thanks. Good morning. Good quarter, guys. I had a question.
Thanks.
Sort of following up on 2019, I respect it doesn't sound like we're going to get a lot, but sort of pick your brain on one idea of it. If comps next year continue their strength, let's say they're 4% or better, do you spend into that? Or do you allow your margin to float up a little more or quicker than you planned within the context of the nine% to 9.4% that you outlined at last year's meeting?
Yes, Simeon, this is Kurt. Won't go into 2019 specifics beyond what we've given to you. What our strategy is we're going to continue the plan of executing on One Tractor, investing in our stores, and we're going to put a plan together that is consistent. If we drive comp sales higher than our stated near-term targets of 3% plus, then that drops to additional leverage and operating margin.
Okay. My follow-up is on inflation and tariffs, which Greg mentioned. You've had a little bit of inflation the last couple of quarters, albeit it was following some deflation. Is there any hint about the elasticity, specifically looking at unit demand, is there any change that you can either get a glimpse of either what more inflation does or maybe what some of the tariff could do to elasticity?
Simeon, this is Steve. What I can tell you is that we're very well positioned here, I believe, on a couple of things. First and foremost, Greg mentioned that if you look at the overall model itself, our CUE business over time has really benefited us. I would also say, and more specific to your question, we tend to be a needs-based retailer. You've heard us talk in the past about our pricing tools that we've invested in, and those pricing tools will help us as we move forward, test elasticity across the country in the zones that we manage. I think we're well positioned there.
Thanks.
Next, we'll go to Steven Forbes with Guggenheim Securities.
Good morning.
Good morning.
I wanted to start with Neighbor's Club. I think you mentioned for the second quarter in a row here, the shopping trends, three to four times more than the average customer. Any insight into the spending habits, average basket size, category penetration, really just any additional color you could provide on the Neighbor's Club member?
Yes, Steve, this is Steve Barbarick. Glad to do it. Just to start with, Greg mentioned that we've got about 10 million members or will have by the end of the year, and these are some of our most important members. We can tell not only because of how often they're shopping in terms of frequency, but also what they spend. They tend to spend about 10% more on any given visit than a regular customer would. Because they shop more often, our ability to communicate and personalize those communications to them based on what they're actually buying, that allows us to upsell, cross-sell, and even convert them into our exclusive brands, is really of great value to us. We're still pulling apart a lot of the data. It's incredibly rich right now, and now it's about the quality and how we're using it.
Just maybe a follow-up on the other strategic initiatives you talked about, Stockyard and mobile kiosk. I think you mentioned about a third of the chain will have the Stockyard and 20%-25% will have mobile point of POS. What's the plan today as you think about the rest of the chain for both those initiatives?
Yeah. Well, first off, we're seeing some great signs from both. It's been a methodical rollout. As you know, we talk about being a test and learn company. We learned a lot as we've implemented both of these two devices into our stores. As we move forward, we believe that we'll continue to populate our store count with both devices themselves. We've laid out the plan. You will see us rapidly expand both the kiosks as well as mobile point of sale as we get into 2019.
Thanks, Steve. Take care.
Thank you.
As a quick reminder, we ask that you please limit yourselves to one question and one related follow-up. Next, we will go to Christopher Horvers with JPMorgan.
Thanks. Good morning, everybody.
Good morning.
Can you talk a little bit about sort of the hurricane comparison year-over-year, how you think about sort of how much of that headwind was on a net basis, considering what rolled through this year, obviously less geographic exposure. Then also on the seasonal side, you had the extended seasonal period last year that seemed to replay this year, and seems like you were really ready for that on the OPE side. Can you talk about how perhaps the seasonal benefit was compared to last year as well?
Sure, Chris, this is Kurt. I'll start with the first question on hurricane. I'll pass the second part of that over to Steve. The hurricanes, as you recall, and was stated earlier, that we had Hurricane Florence this year, cycling up against two hurricanes last year. Hurricane Florence had a modest benefit to the top line, drove approximately about 40 basis points of benefit on the top line. That's cycling those two hurricanes last year that we called out at about 120 basis points. While we were able to capture sales and Florence was part of our benefit on the top line this year, when we look at all the comparers in Q3, the actual emergency response was about a 80 basis points drag in comparison to Q3 of last year.
I'll take the second question here on the extended selling season.
I don't know how much of it was the season and how much of it was some of the work that we did that actually extended that season itself. I will tell you, our supply chain team looked at what we did last year. As we become more national in scale, we're seeing a little more benefit maybe from the southern stores and the length of season that they've had. When you look at the total comp of the 5.1 that we ran for the quarter, it wasn't a material impact, just because it's a smaller portion of our total business as we move into the quarter. We certainly were able to comp that extended selling season from a year ago.
Understood. Then as a related follow-up, as you look at the fourth quarter, it didn't raise the comp outlook. It looks like an implied about a two-handle comp. Your comparisons get a lot easier. You don't have the hurricane comparison, the seasonal comparison.
Clearly it's been cold in October here. Can you talk about your thoughts around the fourth quarter, and perhaps not taking it up and how you're feeling about the season so far?
Sure, Chris, this is Kurt. Here's how I look at it. First, you can see from our raised guidance that there is strong momentum in the business. We are going up against a solid 4%+ comp last year in fourth quarter. With that said, there's a lot of meaningful portion of the quarter still ahead of us, and we're going up against December, which had a real strong benefit from the cold snap. As a reminder, December is a real strong portion of the quarter. To give clarification, the start of the quarter has been considered and factored into our guidance.
Understood. Thanks very much.
Okay. Next we'll go to Michael Lasser with UBS.
Good morning. Thanks a lot for taking my question. Greg, you spoke about your thoughts on the tariff in general terms, can you quantify the percentage of your sales that you import from China?
Michael, we can quantify what we bring in on a direct basis. We've always said for a long time, about 10% of our overall mix of products comes from outside the country. A high percentage of that mix comes from China. The part that is difficult to quantify, and we're now starting to see the impacts of it, is the indirect things, the componentry parts that are going into U.S.-made products or U.S.-assembled products. The team has done a great job of quantifying and putting together a plan not only to deal with what we've got coming on a direct basis, but what we're seeing as, I'll call it artificial inflation, okay, on the products that are being tariffed, that are componentry driven, that are driving costs up in some other categories. Yes, we understand it. We've got our hands around it.
We've got a great plan behind it, and we'll execute to that.
Is it your expectation that you'll be able to pass along most of the pressure that you're going to see both directly and indirectly through price increases? Kurt, when you talk about this year being a trough in the operating margin, does that assume that the 25% tariff does not go through? Would that cause incremental pressure on your operating margin next year? Thank you.
Well, we'll start and let Steve and Kurt come in here. We baked into the plans the expectation that tariffs are going to move to 25%. I'll also tell you that you just can't artificially raise price. There will be some consumer, we think, push back potentially in some categories, so we're working diligently with our manufacturing base to look for cost reductions from them. We've also brought some, pushed some goods in forward to get ahead of some of that tariff impact. Then there will be a combination of some price increases in certain categories. It's just going to be unavoidable. We are going to do all we can to keep the impact to our customer at a minimum.
One other thing I would mention on that, Michael, this is Steve, is that unlike a lot of other retailers out there, we are well-positioned being a needs-based organization. When you need fencing to contain an animal, you're going to buy fencing. There's really not many other ways around it. When you look at our model, our box, and our product type, we are less discretionary than many others, and I think that really bodes well for us. The second factor is our purchasing power. We are well-positioned in our space to push back and to mitigate a lot of those costs coming through. The last thing I would tell you is not everyone uses the same pricing tools that we've got, and so we're able to really manage elasticity probably as well as anyone in our space.
Thank you.
Next, we'll go to Chuck Grom with Gordon Haskett.
Good morning, guys. How are you? It's Andrew Minora on for Chuck.
Morning.
Hey, Chuck.
I was wondering if first you could give us a little bit more detail on the cadence in the quarter. I know you said all three months were positive, but if you could give us any sense of how that trended throughout the quarter.
Sure. Chuck, this is Kurt. All three months were strong. The cadence was pretty tight. Where we saw any variation may have been in September, where there was the toughest compare. Very excited about how it started out and how we were able to compare that toughest month of September against the hurricanes.
Okay, great. Thanks. Just one quick follow-up. I know you guys talked about carrier rates in the quarter. Would you be able to quantify the increase year-over-year in the carrier rates? If you can, what's your expectation for these in the fourth quarter and then 2019? Is it to get worse, stay the same? Just any color around that would be helpful.
Sure, Chuck, this is Kurt. As been mentioned as part of an industry average and it's been well documented and we're seeing similar things. While the fuel prices are up year-over-year, similar like they were in second quarter, about 20%+ on fuel costs, the carrier rates have been averaging year-over-year, in the teens. We saw that in second quarter again in third quarter. We believe we'll see persistence on that into the fourth quarter. Just looking ahead, while we believe transportation cost pressures do continue. When you see where it began to really increase in the beginning of 2018, the compares get a little bit easier. We believe the year-over-year impact starts to moderate. The key is what we're doing to take action on that and the efforts that Tractor Supply has in regards to mitigating any cost increases on that.
We're doing a few things right now today and laying the foundation that we believe really help with the impact in 2019. We're managing with our vendors and our carriers the ordering time frames to avoid spot rates. That's been effective as we've seen our usage of spot go down compared to some of the peaks in the first half of the year. We're leveraging our strategic sourcing group to reduce stem miles. Part of our profit improvement initiative that we mentioned for this year to lay the foundation, we're addressing also the utilization of trucks to a greater level and working on our carrier rates. There's some great momentum on that. We believe that will help us going into 2019.
That's really helpful. Thanks a lot. Have a great day, guys.
Thank you.
Thanks.
Thank you.
Next we'll go to Elizabeth Suzuki with Bank of America Merrill Lynch.
Great. Thanks, guys. Is there any color you can give on the performance of Petsense stores year to date? I know you mentioned that comps were positive and that you added seven new stores in the quarter, Any other details you can provide about the performance of those stores?
Liz, this is Greg. Here's what I'll tell you about Petsense. We're pleased with their overall performance. It was very positive. We'll have 180 stores by year end. As you know, we're going through a lot of back house integration right now that won't be completed until about the mid of 2019, That's giving them the capability to manage and operate their business very similarly to the way we do here at Tractor Supply. As you probably recall, they were a private company that was run a little bit more entrepreneurial, We've kind of brought them into the way of thinking about how, if they're going to someday be a 500 to 800 to 1,000 store chain, they needed to have the capabilities of a Tractor Supply in the back house for them. We're very pleased with how that integration is going.
We're also testing several new store formats within Petsense, a new color palette, new decor, new layouts. So far, the few that we've got up, we're very pleased with those performances. We're also doing some other things within the mix of product. The differentiation of product's important. Just as Steve mentioned about what we've done within the categories of Tractor, we have the same opportunities in Petsense. We launched True Source about a year ago. True Source is becoming a major force inside the Petsense brand. What our belief is that this is still going to be a growth vehicle for us as a company in both that rural and ex-suburban community over the next five to seven years. Very pleased with the performance. More to be shared as we get a larger store base out there.
Great. Is the e-commerce division there growing at a similar pace to the Tractor Supply e-commerce?
It is not. It is a very simple, straightforward format. We have not converted over to the Tractor platform just yet. That'll be in 2019. We're today using a third-party format through the distributor, one of our major distributors. That also will be an opportunity going forward. To be very honest, there hasn't been a tremendous amount of e-commerce business being generated from the Petsense locations. It's a very convenient one-stop shop. It's a high service location. The food side of it could accelerate once we get the new platform in place. I think it's more of a store where people like to visit. They come there with their pets. Grooming is a big component. Adoption and so on. It's a little bit different format than just selling product online. This is really more an experience store, just like Tractor.
Got it. Thanks very much.
Next we'll go to Scot Ciccarelli with RBC Capital Markets.
Good morning, guys.
Morning.
Hi. I was wondering if we might be able to dig in a little bit more on the increase in average ticket that you guys had. Specifically, can you quantify what the impact has been from your deferred financing program on average ticket?
Sure, Scot, this is Kurt. What I can tell you is that our big ticket was a contributor to the average ticket increase. We were very pleased with the performance on big ticket. Big ticket was slightly above chain average growth, and it drove about 40 basis points of the overall comp ticket growth. We do see a good correlation between the customer's acceptance and use of the new extended financing on big ticket items. Trying to be able to exactly connect on average ticket and big ticket to the new credit card is difficult, but we can say that we're pleased with the results and there's a strong correlation to a growth in big ticket as well as growth in the private label credit card program.
Okay. That's helpful. I guess kind of related to that, the first thing you cited in terms of average ticket was number of items in the basket. Just kind of generically, what are the top two or three items that you're doing to drive the items in the basket? Because obviously there's been a pretty big inflection in the average ticket performance in the last two quarters.
Scot, this is Steve. Here's what I would tell you. There's been a concerted effort here to work on average ticket. Our store teams have put together some contests, it's all about add-on selling. It's interesting, when you hire your customer, you're not hiring professional salespeople. You're hiring people just like yourself, quite frankly, that are customers. By giving them confidence that they can recommend products to customers, that goes a long way. So we're seeing, from a store operation side, some benefit in adding more to the basket. Another thing we implemented on the technology side, we haven't talked much about this, is multiples. We're now able to enforce multiple purchasing. During the quarter, in our Center Court events, we had a buy more and save event, it's where you come in and you buy three four or four four.
Now that we're able to enforce that, we're finding that people are taking full advantage of that opportunity. Between that and some other things that we're doing internally, we're really seeing the items per transaction move up.
Very helpful. Thanks, guys.
Thank you.
Next, we'll go to Zachary Fadem with Wells Fargo.
Hey, good morning. Appreciate all the-
Good morning.
incremental color on the Neighbor's Club, is there any way to isolate what the impact of the program has contributed to comps in the quarter and year? At this point, with nearly 10 million members, what % of your sales would you say are being derived from club members today versus the potential ahead?
Yeah. Well, this is Steve. We've done some work. First off, the whole collection of all the efforts we're putting forth, whether it be the investments we've made, the initiatives, some of the things I just talked to Scot about, they all add up to the 5.1% comp, we're not really breaking and isolating all those apart. I will tell you that we do see continued momentum in the Neighbor's Club program. It's still in the very early stages of what the opportunity is in front of us, to be quite frank with you. We haven't quantified the specifics relative to the actual incrementality of all the communication that we've been sending out. We are seeing more per visit with these customers. We are seeing more frequency from these customers, so we know that there's a benefit there.
The second portion of your question had to do with the % of sales. What I can tell you, that % is growing. We have not communicated what that looks like publicly at this point as it continues to scale. With 10 million members, you can imagine it's probably a pretty good percentage of our business. I suspect in the future, we'll have more dialogue around what that might look like.
Got it. Thanks. That's helpful. Just quickly on your online orders, any call-outs in terms of basket size or customer frequency compared to in-store orders?
Sure. This is Steve again. I will tell you our online orders are typically significantly higher than any given transaction that takes place in our store. Greg mentioned earlier that about 70%-75% of those orders are picked up in store and with about a 20% attachment rate. We see a real benefit of giving that customer an opportunity from a convenience standpoint to go online, buy, pick up in store, have ship to store or ship to a home. Just a couple other quick things I would note on that. We're really excited about the fact that our web visits are up about 30% year-over-year. Unique visits are up double digits. Our store locator, and this is the one that I always go back to and why it's so critically important to have the website that we have and the traffic.
Our store locator hits were up 50% year-over-year. What that tells me is there's a lot of customers who may have never gone to a Tractor Supply Company store before but may have done some research and said, "You know what? I'm going to check it out." They start with the website, and they migrate to the store. We're seeing a lot of momentum here.
Thanks, Steve. Appreciate it. Thanks, guys. Appreciate the time.
Thank you.
Next, we'll go to Peter Keith with Piper Jaffray.
Thanks. Good morning. Great quarter, guys.
Thank you, Peter.
Dig into the inflation trend a little bit. It's continued to accelerate here with Q3. Hearing in the channel that some of your large animal feed branded suppliers are now pushing through price increases. I guess, could you confirm that? How should we think about the inflation trends looking forward in terms of continued acceleration?
I'll start. This is Steve. I don't know if we get into specifics about individual categories or vendors. I will tell you that Tractor Supply has significant purchasing power. Maybe what our competitors are saying is one thing, I'm not going to necessarily suggest that we follow those same trends. In terms of inflation in general, I would tell you that a lot of inflation rises and falls based on commodity prices, which are fairly easy to track. We track those on a regular basis and work with our suppliers based on the trends that we're seeing. I think it's a better gauge probably to look at the quantifiable data rather than the subjective.
Peter, this is Kurt. I'll follow up with that on your second part of that question. We've seen the inflation rise slightly. It was about a 75 basis point impact in Q2 to about a 90 basis point in Q3. We do expect inflation at this point to continue perhaps somewhere around those ranges into Q4. As Steve mentioned, principally in the commodities. Looking out, this is very fluid. It's hard to predict. You may start to see some inflation beyond just the commodities as the macro cost pressures start to put emphasis across other categories of it. We'll continue to balance keeping competitive pricing for our customers, as well as managing the margins for our investors. We've been dealing with inflation and deflation, and we'll continue to manage pricing and margins to be rather consistent.
Okay, that's helpful. I'll stick to Mary Winn's rule, and thank you very much.
We appreciate that.
Much appreciated, Peter.
Okay. Next we'll go to Peter Benedict with Baird.
Peter, are you there?
Can you hear me?
Yeah, go ahead.
Yeah. Now we can.
Oh, sorry about that. Just a question around labor management, and the opportunities you guys have to use systems or technology to be a bit more efficient, whether that be in the stores or in the distribution centers. That's my first question.
Peter, this is Kurt. We feel good about where we're positioned on labor. I mean, this is certainly a challenging one for the entire environment. Specific to Tractor Supply, we feel good. I'll mention a few things that we're doing with that. Like great retailers in a situation like this on labor, you focus on not only on managing your wages specific to the market, but you focus on productivity. We're driving change in our profit improvement initiatives to help offset wage pressures. You've heard us talk about investment in labor hours and wages in the past couple of years. Our focus going forward is laying the foundation for the productivity, that's a key part of our profit improvement initiative, focusing on that.
We'll be utilizing the labor scheduling and task management, as well as initiatives that were actually in certain test stores today, testing and adding science into taking work out of certain task functions so that our team members are more focused on serving customers. We believe the combination of those all participate in helping us being able to offset challenging labor pressures.
Okay. That's helpful. Maybe one for Steve. Just an update on the private brand efforts, where you see the most opportunity for new categories or products to get some private label or private brand exposure, and then also maybe line extensions. Just your latest thoughts around that, Steve. Thanks.
Yeah. Well, that's one of our key strategic go-gets on the merchandising front. I will tell you, the team's made some great progress. We've seen ourselves expand in a couple of different lines, including the 4health line. We've recently expanded the Retriever line to a Mossy Oak look, and we think that there's more upside across the entire four walls of the store, to be quite frank with you. I think the bigger challenge that we've got is not just expanding the brands and adding new ones, but marketing them. That's something the team's doing really a lot of right now behind the scenes. I would tell you, this is where the digitization of our business can really take hold.
Very cost effectively, we can build out small vignettes and videos, get them out to our consumer using the social media platforms that we have and the engagement with our customer. I would tell you, Peter, that we probably have more opportunity in marketing what we have than just expanding more of the brands out at this point.
Okay, great. That's helpful. Thanks, guys.
Thank you.
Thanks, Peter.
David, I think we've got time for one more call.
We have time for one more question. Next, we'll go to Brian Nagel with Oppenheimer.
Hi, good morning. Thanks for slipping me in there.
Morning, Brian.
Nice quarter.
Thank you.
Thank you.
Since we're at the end of the call, I'll keep it pretty quick. Just with regard to weather, Greg or Steve, you commented when talking about the Q3 period that you benefited from, I guess it was an elongated summer season. But how should we think about the trade-off between that benefit and then what was likely a slower start to the cool temperatures later in the quarter? At least it seems here, now things have gotten more seasonal, cooled down early in the fourth quarter. If we could just think about how that dynamic, how it impacted Q3 and how should we think about it in Q4.
Yeah. Brian, this is Steve. Here's what I would tell you. You're looking at the tail of both sides. When I say that, what I mean is that the spring-summer at the very end of the quarter makes up a very small percentage of the total. The cold winter at the very beginning of the fourth quarter makes up a very small percentage of the overall quarter in fourth quarter. If you really bookmark those two, you're not looking at a tremendous amount of material impact. That's how I would phrase that.
Okay. That's fair. I appreciate it. Again, thanks.
Yeah.
Had a nice quarter.
Thank you.
Thanks. Thanks, Brian.
That will wrap up our call. We really appreciate you joining us today. We look forward to having you join us on our next quarterly earnings call in January of 2019. As I mentioned at the start of the call, please mark your calendars for our Investment Community Day to be held May 14th and 15th in Nashville. We will be sending out more details in the coming weeks. Please feel free to reach out to me with any questions, and we thank you for your interest in Tractor Supply.
Thank you.
That does conclude today's conference. We thank you for your participation. You may now disconnect.