拖拉機供應公司 (TSCO) 2026 年第三季法說會：銷售動能改善，利潤率舉措擴大

重點摘要

• 拖拉機供應公司 (Tractor Supply Company) 報告 2026 財年第三季淨銷售額為 39.1 億美元，年增 5.1%，主要受新門市、VIP Petcare 及 0.4% 的同店銷售成長所支撐。
• 同店銷售反映平均客單價成長 0.7%，但交易量下降 0.3%。管理層表示，銷售額在該季度內逐步加強，從 7 月下降不到 1% 轉為 9 月的穩健成長。
• 毛利率下滑約 90 個基點至 36.4%，主要歸因於燃料與物流承運成本上升，以及對客戶價值的投資。營業利益率約為 7.9%。
• 數位銷售額成長約 16%。包含新門市、Allivet 與 VIP Petcare 在內的寵物總銷售額成長 5%，不過伴侶動物（寵物）同店銷售額仍下滑約 2%。
• 拖拉機供應公司重申其 2026 財年指引。管理層對第四季的基準預估假設同店銷售將實現正成長，且毛利率年減約 10 至 30 個基點。
• 該公司的目標是在 2027 年與 2028 年期間，每年進一步減少超過 7,500 萬美元的銷管費用 (SG&A)。管理層表示，隨著時間推移，目標是將營業利益率恢復至 9% 以上。

關鍵財務數據

銷管費用包含約 15 個基點與愛達荷州南帕 (Nampa) 新物流中心相關的營運初期成本。固定成本去槓桿效應已被費用效率提升、績效獎金減少以及售後回租計畫下費用開發門市的效益所部分抵銷。

業務與營運表現

消耗品、實用品與食品類別表現繼續優於整體業務，並在該季加速成長。拖拉機供應公司報告野生動物用品、馬匹與牲畜用品、貨車工具與五金以及季節性產品表現強勁。高單價產品與伴侶動物用品則保持相對疲軟。

在流量與轉換率提升的支撐下，數位銷售額成長約 16%。管理層還指出，持續擴展外送與最後一哩路能力是重要的成長驅動力。

伴侶動物同店銷售改善，從第一季的約 -4% 逐季回升至第二季的 -3% 與第三季的 -2%。包括新門市、Allivet 及 VIP Petcare 在內，寵物總銷售額成長 5%。訂閱制銷售額實現三位數成長，而計劃推行的 Freshpet 冷藏寵物食品鋪貨門市目標從 700 多家提升至年底的約 1,000 家。

Neighbor’s Club 會員貢獻了本季近 82% 的銷售額，會員同店銷售額增加且留存率略有改善。按年齡層劃分，Z 世代與千禧世代客戶引領了同店銷售成長，而鄉村門市恢復更積極的成長，表現優於其他人口密度區域的門市。

該公司對約 50 種必需 SKU 進行降價投資。管理層表示，這些產品帶動了強勁的銷量、交易量及整體購物籃金額成長。第三季零售價格通膨低於 50 個基點，而單筆交易銷量上升是客單價成長的主要貢獻因素。

管理層財務預測

拖拉機供應公司重申其 2026 全財年指引。管理層預期第四季同店銷售將呈正成長，但強調該季度高度受天氣影響，且非必需品與大件高單價商品的需求仍具不確定性。

該公司第四季的基準預估顯示，毛利率將年減約 10 至 30 個基點，較第三季下滑 90 個基點有所改善。南帕 (Nampa) 物流中心預計將在第四季貢獻約 15 至 20 個基點的毛利率效益，不過營運初期成本將繼續影響銷管費用。

針對 2026 財年，管理層目前預期：

• 淨資本支出為 6.75 億至 7 億美元，趨向此前預期範圍的低端。
• 股票回購為 4.25 億至 4.5 億美元，趨向此前預期範圍的高端。
• 淨資本支出預測中包含 3.25 億至 3.5 億美元的售後回租收益。

展望 2027 年，該公司預計折舊成長將放緩至中個位數或更低，資本支出降至銷售額的 4% 以下。新開門市預計將放緩至約 85 至 90 家，管理層將此描述為資本配置決定，而非改變其 3,200 家門市的長期長期發展潛力。

重新談判的供應商支持協議預計明年將提供超過 5,000 萬美元的年化效益，相當於約 30 個基點。南帕物流中心預計在 2027 年將增加約 10 個基點的效益。

管理層的目標是在 2027 年與 2028 年期間，每年額外減少超過 7,500 萬美元的銷管費用。這些節省費用是在公司所聲稱的約 2% 同店銷售成長之營業利益率拐點基礎上的額外收益。管理層表示，其目標是隨著時間推移將營業利益率恢復至 9% 以上。

風險與關注焦點

燃料價格、承運費率與大宗商品成本上漲仍是顯著的利潤率壓力來源。管理層還預期部分成本逆風將持續至 2027 年，且必須吸收與 2026 年確認的約 1 億美元關稅退款相比的基期年減壓力。

高利率與住房流動性下降繼續施壓於房屋改進與較大型計畫。新寵物飼養量減少對寵物類別的部分領域構成壓力，而大宗商品價格與營運成本則影響農場客戶的購買決策。

消費者謹慎態度依然高企。在該公司的消費者調查中，超過 60% 的受訪者表示，相較於六個月前，他們對非必要消費感到不太踏實。通膨、燃料成本及更廣泛的不確定性繼續抑制非必需品支出。

第四季表現也高度取決於天氣，特別是冬季與季節性商品的預期需求。

分析師問答亮點

管理層表示 9 月的銷售動能延續至 10 月。在第四季的前 3.5 週內，同店銷售與交易量均呈正成長。公司將天氣影響定性為大致中性，並將改善主要歸因於市佔率提升與內部策略舉措。

在利潤率方面，管理層表示，在尚未計入 7,500 萬美元銷管費用削減計畫的額外效益前，拖拉機供應公司仍致力於在同店銷售成長率約為 2% 時維持營業利益率。定價舉措、供應商談判與供應鏈效率旨在抵銷運費、燃料及大宗商品通膨。

管理層澄清，第三季的價值投資著重於日常定價而非增加促銷活動。預計第四季零售價格通膨將回升至 2026 財年上半年記錄的約 1% 水準。

寵物策略仍以門市商品選擇、數位便利性與服務為核心。Freshpet、訂閱制銷售、最後一哩路配送、Pet Wash、Allivet 與 VIP Petcare 是公司整合型寵物產品與服務的主要組成部分。

門市生產力舉措包括減少勞動密集型任務、改善卡車裝卸流程、簡化標示、減少庫存經手次數，並利用科技排出門市整頓與補貨的優先順序。管理層表示，即使同店銷售低於 2%，第三季門市工資仍發揮了營運槓桿效益。

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管理層陳述

Operator

Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss third quarter 2026 results. [Operator Instructions] 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, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company.

Mary Winn, please go ahead.

Mary Pilkington

Thank you, Tamia. Good morning, everyone. We appreciate your time and participation in today's call. On the call today, participating in our prepared remarks are Hal Lawton, our Chief Executive Officer; and Kurt Barton, our Chief Financial Officer. We will also have Seth Estep, EVP and Chief Merchant; John Ordus, EVP and Chief Stores Officer; and Craig Ledbetter, our SVP and Chief Supply Chain Officer, join the call for the question-and-answer portion. Following our prepared remarks, we'll open the floor for questions.

Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant 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 from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call.

As we move into the Q&A session, please limit yourself to one question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation. We will also be available after the call for any further discussions.

Now it's my pleasure to turn the call over to Hal.

Harry Lawton

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

Our team is acting with urgency to improve comparable sales, strengthen profitability, sharpen our strategic priorities and make deliberate choices about where we invest our capital and resources. Our objectives are clear: reaccelerate comparable store sales growth restore operating margins to levels we believe this business can achieve and unlock the full potential of Tractor Supply to deliver attractive long-term shareholder returns.

Let me start with a few highlights from the quarter. Net sales increased 5.1% to $3.91 billion, driven by new store openings, VIP Petcare and comp sales growth. Comps increased 0.4% on top of 3.9% growth in the third quarter a year ago, reflecting a 0.7% increase in average ticket and a 0.3% decline in transactions. Transactions were cycling 2.7% growth last year, resulting in one of our strongest 2-year stacks of the past 5 years. Diluted EPS was $0.43. Of note, sales trends and transactions strengthened as the quarter progressed. Monthly comps improved from a decline of less than 1% in July to modest growth in August to solid growth in September. That stronger finished included positive performance across a broad set of merchandising divisions and regions.

Our consumable, usable and edible categories continue to outperform the chain with strong momentum in September. We saw strength in wildlife supplies, equine and live stock, truck tool and hardware and seasonal products. Digital also grew at a double-digit rate. These gains were partially offset by softness in big ticket and companion animal although companion animal trends improved sequentially by quarter this year.

Turning to our market and customers. The story remains largely consistent with what we shared in the second quarter. Several broader trends continue to pressure the categories we serve. Elevated interest rates and reduced housing mobility are weighing on property improvements and larger projects. Pet ownership headwinds, particularly new pet acquisition, continue to affect demand in certain categories. Across the farm economy, increases in commodity prices and operating costs are influencing purchasing decisions. Customers continue to spend, but remain cautious. In our most recent consumer work, more than 60% said they felt less comfortable making nonessential purchases than 6 months ago. Inflation, higher fuel cost and broader uncertainty continue to weigh on household budgets and discretionary spending.

Despite these pressures, our core customers remain engaged. Higher spending customers, again led quarterly performance, delivering above comp chain growth for the fourth consecutive quarter, and Neighbor's Club members represented nearly 82% of third quarter sales, with member comps increasing and retention improving modestly. We're also encouraged by spending trends among younger customers and the performance of our rural stores. Our younger demographic led comparable sales growth across age groups in the third quarter with strength among Gen Z and millennials. And across our store base, rural locations returned to more positive comp growth and again outperformed the other population density groups. The momentum we experienced in Q3 has continued in October. We believe we gained market share across most metrics and categories with improvement through the quarter. The actions we're taking are contributing to that progress. We're not waiting for the operating environment to improve, and we're building on these actions to drive further sales growth.

And let me highlight 3 areas where we're seeing a meaningful customer response. First, our investments in value. As we've previously shared, we expect to realize approximately $100 million in tariff refunds this year. And we're investing about 40% of that benefit in customer value with the remainder helping to offset higher freight costs. A significant portion of our price investment has been on everyday essentials that matter most to our customers. And we've been focused on approximately 50 everyday essential SKUs that matter most to our customers. And we've seen strong unit growth on these items, reinforcing that our investments are delivering value to customers and strengthening our competitive position. Looking ahead, we remain committed to value and price leadership.

While we need to recover some of the higher costs we're experiencing, we plan to continue to invest to keep prices low on products our customers purchase regularly. As always, our goal is to strengthen customer loyalty, drive traffic and support long-term growth. Second, on Pet. Pet continues to improve. Companion animal performance remains below our expectations, but the sequential improvement is encouraging. Pet comps improved from approximately negative 4% in Q1 to negative 3% in Q2 to negative 2% in Q3 and including new stores, Allivet and our VIP Petcare acquisition, our total pet business grew 5% in the quarter. Our work around assortment, value, exclusive brands, services and digital is beginning to resonate. We're seeing outsized strength in for health as well as triple-digit growth in our subscription business.

Also, based on Freshpet's performance, we're increasing our year-end rollout target for more than 700 stores to approximately 1,000 stores. We've also successfully integrated Allivet as the prescription platform for VIP Petcare post that acquisition. And together, these initiatives collectively are strengthening our Pet business. The third area I would like to highlight is digital. Digital continues to be a meaningful source of growth and customer engagement. Customers have always valued the convenience of Tractor Supply. And increasingly, they're defining that convenience as shopping with us online and taking advantage of our nationwide store network for pickup and delivery. Digital sales increased approximately 16% in the quarter, with growth in both traffic and conversion. And we continue to expand delivery and final mile capabilities, making it easier for customers to shop whenever and however they choose. We see opportunities to improve convenience, increase purchase frequency and capture a greater share of customer spending.

As we move into Q4, we expect continued momentum in sales trends while recognizing that consumers remain cautious. Our team is focused on executing our initiatives and building on the progress we made. Beyond near-term performance, I want to discuss the strategic reassessment we outlined on our second quarter earnings call. As a reminder, we're taking a comprehensive look at our operating model, strategic priorities and capital allocation. While the work continues, I want to share several perspectives and decisions that are already emerging and that we've made. While our end markets, consumer environment and cost structures have changed materially since we introduced our last long-term strategy in December 24, the investments we've made over the past several years have strengthened our business and positioned us for the next phase of growth. And we're building on that foundation to sharpen our priorities and continue to make deliberate choices about how we operate, invest and generate stronger returns.

As previously shared, we remain committed to generating operating margin leverage as comparable store sales move above approximately 2%. An important factor in this model is depreciation. Following several years of elevated capital investment, we expect depreciation growth to moderate to the mid-single digit or lower in 2027. Additionally, we're not comfortable operating Tractor Supply at an operating margin below 9%. And we believe this business can and should perform at a higher level, and we have work to do to get there. In the near term, our focus is on protecting operating margins in a challenging cost environment while positioning the business to generate stronger leverage as comparable sales improve.

To that end, we are taking actions on both gross margin and SG&A as we look towards '27 and '28. Like much of the retail industry, we are going to need to offset the reinvested tariff refunds and anticipate continued inflationary pressures, particularly with higher diesel and commodity costs. We are working closely with vendors on a broad range of efforts to improve product costs and offset inflation. As an example, renegotiated vendor support agreements are expected to generate more than $50 million in annualized benefits next year. We're also taking actions across pricing, assortment and supply chain while maintaining compelling customer value and strengthening gross margin dollars. Additionally, we expect to realize stem mile savings from our new distribution center in Nampa, Idaho next year.

On the SG&A side, we're targeting more than $75 million in additional annual reductions over '27 and '28. These savings are incremental to the operating margin leverage we expect as comps move above 2%. This commitment reflects actions already underway, including the completed Petsense closures, adjustments we made to our benefits programs and a comprehensive rollout of our store productivity program that has been in pilot for several months. We're also pursuing opportunities to reduce costs across our business, including supply chain operations, corporate efficiency and the use of technology and process improvements to simplify work. Stronger comps actions to offset cost pressures, moderating depreciation and incremental productivity savings provide a path to restoring operating margins above 9% over time.

Shifting to an update on our capital allocation priorities. Over the past few years, we made significant capital investments to support our sales growth following COVID and the launch of our Life Out Here 2030 initiative. We expanded and modernized our supply chain network, grew our fusion footprint to more than 60% of our stores and built hundreds of new stores. With much of that investment behind us, we expect capital expenditures to moderate significantly and move below 4% of sales in 2027 and beyond, providing greater flexibility in deploying cash generated by the business. At the heart of our business is a strong culture grounded in our mission and values. Our team members bring that culture to life every day through legendary service and a genuine understanding of our customers in the Life Out Here lifestyle.

We recognize that our recent performance has not met our expectations, but we have confidence in our business, our team members and the opportunities ahead. We're taking decisive action intended to improve performance, strengthen our earnings power and unlock the full potential of Tractor Supply. We expect to provide additional detail on our 2027 priorities guidance and also our updated long-term financial framework as this work is completed.

With that, I'll turn the call over to Kurt to discuss the quarter, our outlook and the financial implications of the actions underway.

Kurt Barton

Thank you, Hal, and good morning, everyone. I'll first build on Hal's comments by focusing on the financial performance in the quarter, then how we are managing the current cost environment and wrap it up with our outlook.

Let me first add a few observations on the underlying clients. Transactions accelerated through the quarter and were generally positive outside of July. Units per transaction posted positive growth in every month and reached their strongest level of the year at quarter end. Our consumable, usable and edible categories also accelerated month-over-month. Taken together, these are indications of improvement in our core business. Our focus is on sustaining that improvement and translating it into more consistent comparable sales growth and stronger profitability.

Moving down the income statement. Gross profit increased 2.6% to $1.42 billion. Gross margin was approximately 36.4%, down about 90 basis points from the prior year. There were several puts and takes within gross margin. The largest pressures were higher transportation costs, both in rising fuel costs and carrier rates as well as the investments we've made to strengthen our price value position. These were parts offset by tariff-related benefits. Transportation pressures intensified from the second quarter and were greater than we anticipated entering the third quarter. The higher transportation costs more than offset some of the productivity gains we continue to achieve across the supply chain. We are pleased with the early operational performance of our new DC in Nampa, Idaho, and we expect the benefits from that capacity and productivity to begin contributing more meaningfully as we move forward.

The approximately $100 million full year tariff refund benefit included recognition in gross margin of about $70 million in Q2, $15 million in Q3 with the remaining $15 million expected in Q4. As we discussed on our last call, we planned to reinvest those dollars somewhat ratably throughout the second, third and fourth quarters as we provide value to our customers and help offset higher freight costs. As Hal described in his remarks, we are also taking actions across pricing, product cost and supply chain operations to address these pressures and support gross margin improvement over time.

Turning to SG&A. SG&A was approximately $1.12 billion or 28.6% of sales compared with 28.1% in the prior year. The increase of 43 basis points primarily reflects fixed cost deleverage, given the level of comparable store sales. It also includes 15 basis points of start-up costs associated with our new distribution center. These pressures were partially offset by expense productivity, lower incentive compensation and benefits from our fee development stores as part of our sale leaseback program. Importantly, we are beginning to see tangible progress from the actions we discussed last quarter across the organization. Teams are taking a more rigorous approach to spending, labor productivity and resource allocation. That work is ongoing, and we believe there is additional opportunity ahead.

Operating income for the quarter was $307.7 million, representing an operating margin of approximately 7.9%. Our effective tax rate was 22.1% compared to 21.0% in the prior year, primarily reflecting the lapping of purchased tax credits in the prior year as part of our tax planning initiatives. Turning quickly to the balance sheet. Average store inventory increased 4.8% compared to the prior year. The primary drivers were 3.5 points of inflation, inclusive of higher transportation costs and approximately 1 point of growth from the load-in of inventory at our new distribution center. We continue to believe our inventory is in good shape and appropriate at this time.

Turning now to the fourth quarter and our outlook for the balance of the year. As we enter the fourth quarter, we are reaffirming our 2026 guidance. The sales improvement we saw as we exited the third quarter is a positive sign, and our current planning assumptions contemplate positive comparable sales during the fourth quarter. At the same time, our outlook remains measured, and we have considered a variety of scenarios. The fourth quarter is our most weather-sensitive quarter. and there remains uncertainty around the consumer, particularly for discretionary and large ticket purchases. That said, we are encouraged by the opportunities our seasonal and holiday offerings present.

On gross margin, we expect a more stable year-over-year comparison in the fourth quarter than we experienced in the third quarter. As we discussed on our last call, the prior year comparison becomes less challenging and supply chain efficiencies from our new distribution center are expected to begin contributing to gross margin. Start-up costs will continue to affect SG&A in the fourth quarter as this facility ramps. A more favorable comparison does not mean the underlying cost pressures have gone away. Higher transportation costs and inflation in certain commodities remain headwinds. We are responding through product cost management selective pricing actions, supply chain productivity and expense control while protecting our competitive value position. Our full year adjusted operating margin outlook reflects our year-to-date performance, the more manageable fourth quarter gross margin comparison based on the rate of decline moderating and the expense actions underway.

Let me spend a moment on operating margin because we know this remains an important question for investors. A year ago, we discussed an operating margin inflection point around the 2% comparable sales range. Our 2027 planning is focused on the actions required to support that performance while absorbing the current cost pressures such as higher fuel, freight and commodity costs. At the same time, there are several structural factors working in our favor. We have and expect to continue realizing productivity improvements across our distribution network. Additionally, we are actively engaged to improve the economics of our vendor relationships to further reflect the investments we have made in our customer reach and capabilities. These benefits should help support our growth priorities and offset a portion of the cost of maintaining our value proposition.

We're also taking actions across SG&A. The repositioning of Petsense will remove losses from the business. Depreciation growth should moderate as our capital spending normalizes. We have made meaningful progress on a comprehensive store productivity program. And we are taking an even more disciplined approach to where we allocate both capital and operating expenses. Our objective remains straightforward, strengthen comparable sales performance and convert that improvement into stronger earnings growth and returns.

Shifting to capital allocation. For 2026, we expect capital expenditures to trend towards the lower end of our range and share repurchases towards the higher end. We now expect net capital expenditures in the range of $675 million to $700 million and share repurchases of $425 million to $450 million. The net capital expenditures forecast includes expected sale-leaseback proceeds in the range of $325 million to $350 million. It is important to note that approximately 2/3 of these proceeds represent a recovery of capital expenditures for the construction of new stores, while the remainder relates to existing store sale leaseback proceeds.

As Hal discussed, we are continuing the work we began last quarter to sharpen our strategic priorities and capital allocation. Our focus is increasingly on improving the productivity of our existing assets and investing in capabilities that support future growth. We continue to see attractive economics from new stores. That has not changed. As discussed last quarter, we expect to moderate new store openings in 2027 to approximately 85 to 90 stores. This is a capital allocation decision, not a change in our view of the long-term new store opportunity of 3,200 sites. We've also decided to move toward a more flexible seasonal garden center format that requires less capital while capturing the most productive selling periods. In addition, we intend to expand the outdoor recreation and Wildlife supplies program to a meaningful number of our stores by the end of next year, building on the strong customer response.

More broadly, we are increasing our emphasis on digital, delivery and final mile, pet and existing store productivity, areas where we see opportunities to strengthen our customer proposition, grow sales and improve returns. We remain committed to an investment-grade balance sheet and our long-standing lease-adjusted leverage framework of approximately 2.0 to 2.5x debt to EBITDA. Our capital return priorities include a growing dividend, along with consistent share repurchases. As capital requirements moderate and productivity improves, we expect greater flexibility to return capital to shareholders while continuing to invest in the business. Stepping back, Tractor Supply remains a differentiated business with significant competitive advantages, a loyal and engaged customer base, a productive store network a low-cost supply chain and substantial opportunities to grow share of wallet.

With that, I'll turn the call back to Hal for a few closing comments.

Harry Lawton

Thank you, Kurt. Before we open the call for questions, let me leave you with a few final thoughts. We made progress on sales in the third quarter, and we're encouraged by the customer response to the actions we're taking.

At the same time, we recognize there is more work to do. Our priority is now to build on that momentum in the fourth quarter and drive more consistent performance across the business. We also know that cost pressures remain. And some of those pressures will carry into 2027, and we're not waiting for the environment to improve. We're taking actions now to simplify how we operate, improve productivity and get more out of the investments we've already made. As we look ahead, our priorities are clear. We need to drive stronger comparable sales, manage cost of discipline, and focus our capital on the opportunities that generate the best returns. These actions will strengthen the fundamentals of our business and position Tractor Supply for sustainable earnings growth and long-term value creation.

As we move into the fourth quarter, our focus remains on being the dependable supplier our customers count on, whether it's preparing for winter, caring for their animals or maintaining their homes and properties, we have an important and critical role to play in their lives. I remain confident in our business and our strategy and our team's ability to execute. We have a strong foundation, meaningful opportunities ahead of us and a clear focus on the work required to deliver better results. I hope today's discussion gives you a better understanding of the progress we're making, the challenges we're addressing and the work underway to strengthen Tractor Supply for the long term. I want to thank our team members for their commitment to our customers and communities. That connection remains at the heart of Tractor Supply and is the strength we will continue to build on.

With that, let's open the call for questions.

Operator

[Operator Instructions] The first question comes from Peter Benedict with Baird.

分析師問答

Peter Benedict

Kurt, I think I'll just ask one about gross margin. You said that the fourth quarter, you're expecting more stable than 3Q. Is that just down less than the 90 basis points? Or do you think it's going to be close to flat on a year-over-year basis. And as we kind of move into next year, I appreciate some of those -- the comments you guys have given around the things you're doing. But I'm kind of curious on how we should be thinking about gross margin next year. We do have to lap some of these tariff refunds. How do we think about kind of the first half of next year? Just any color you could provide in terms of gross margin for next year in total. I know you talked about the $50 million savings, but it would be really helpful just to flesh that out a bit further.

Kurt Barton

Yes, sure. Peter, good morning. Well, I'll do 2 things. I think to address your questions, I'll bridge third quarter to fourth quarter. And then your second part of your question is a bit about addressing gross margin and some of the key pressures and offsets going into 2027.

Very specifically, we do expect our performance and gross margin year-over-year in Q4 to be better than it was in Q3. While modestly down, and I'd say modestly 10 or 30 basis points down would be our base case assumption. What really plays into that from the key drivers, freight pressures, we expect to continue to persist and the pressure on gross margin similar to Q3. There are easier compares in the third -- the fourth quarter than there was in Q3. If you look back, Q3 had one of the strongest gross margin performance last year. And then we had higher promotions, a number of pressures in Q4 last year. So we're lapping some easier compares.

As we've mentioned, we have put in some pricing actions. And so there are negotiations, there's partnerships with our vendors and some pricing actions that are already mitigating some of the pressure in Q4. The last thing in Q4 is we begin to see benefits coming out of the new Nampa DC, and we're roughly expecting about 15 to 20 basis points of benefit from the Nampa DC beginning in Q4. As far as next year, we understand that we've got cost pressures that we've seen in Q3 and Q4, we're lapping about $100 million of tariff refunds. How made mention to the support and the negotiations with our vendors to be able to help offset that. the $50 million-plus that Hal mentioned, can drive about 30 basis points of benefit next year. We have about 10 basis points of benefit coming from a new distribution center.

So when you think about lapping even the tariff refund benefit that we had this year, you're really closing the gap to about 20 basis points. And we've said we've got cost negotiations, price -- selective pricing actions in place, and we believe that gap is pretty manageable. And we've talked about our SG&A cost benefits. And this may be an environment that an overall operating margin, our SG&A cost benefits are also helping solve the overall operating margin benefit. And with that, I think we've covered the primary drivers for both fourth quarter and the fiscal year, and I appreciate the question.

Operator

Our next question comes from Chris Horvers with JPMorgan.

Christopher Horvers

You mentioned a number of times the momentum in the business that you saw build in September and has continued in October. Can you provide more clarity on where you are quarter-to-date? And then pretty weather-sensitive business. Do you -- to what extent do you think the weather has been maybe a helper in September and October and related to the momentum did inflation accelerate over the quarter? And is that part of the momentum that you're seeing versus on the unit side? And where do you think momentum where inflation lands in the fourth quarter of this year?

Harry Lawton

Yes, Chris, thanks for the question, and thanks for joining us on the call today. As mentioned on the call in your reiteration, the momentum that we saw sequentially improved through the third quarter, leading to solid positive comps in September has continued into October. So kind of our run rate for October is very much in line with what our exit and run rate was in September.

If I were to point to a few things on Q3, one, really across almost any measurement of share, our share performance improved in Q3. As it relates to the market, I would say the markets that we participated in were flat to perhaps modestly lesser -- more headwinds in the quarter. We had kind of lesser help. I don't think weather was a positive factor for us. And also, all the U.S. retail sales data sets you look at, whether it's Census Bureau, NRF, et cetera, all slowed through the quarter counter to our performance. So I think all that's indicative of the share gains that we took. If you look at, say, year-to-date versus Q3 or first half versus Q3, the entire shift in our comp performance was in comp transactions. So it speaks to our ability in Q3 to get more footsteps in the store and convert those footsteps into sales.

And we're continuing to see that into Q4 here. We are running positive comp transactions and positive comps in the first 3.5 weeks here of Q4. And so we are continuing to see sequential improvement in comp transactions. As it relates to weather here for Q4, I think it's been kind of neutralish so far. I mean, that hurricane came through was really much to nothing. Actually left a little rain that impacted the first week, and then it's been nice -- modestly cool these last couple of weeks, but really flat kind of from a temperature perspective versus last year. So I would say our performance again in October has really been more around share gains and the work that we're doing versus any tailwinds that we're getting from the market. Anyway, thanks so much, Chris, for the question.

Operator

Our next question comes from Steven Zaccone with Citi.

Steven Zaccone

I want to follow up on Chris' question. I guess I was curious for your assessment of how much of some of the initiatives you have in place are getting you back to this sort of solidly positive comp? And then what's missing to kind of see a little bit better growth in the business? Is it the macro sort of needs to get better from a consumer uncertainty perspective on the discretionary side. As you look to '27, you take sort of a preliminary view and some of these initiatives you have in place continue the business in sort of a solid and positive comp? And any sort of quantification would be helpful.

Harry Lawton

Yes. Thanks, Steven, for the question. And back to a little bit of the commentary in the question with Chris, we would assert that the vast majority of the improvement that we saw in the quarter was due to the work and the initiatives that the team has been pushing on. And I highlighted some of those in the calls related to our digital business performance where customers are really embracing the improved customer experiences that were from an online perspective as well as the continued rollout of our final mile delivery program. And the combination of those 2 drove 16%, 17% growth in our digital business for the quarter.

Similarly, delivery continues to exceed all expectations and all plans that we've had. We talked about how we're going to be leaning into that more next year. We're seeing significant growth and reception from our customers on that. As I mentioned on Pet, we continue to see sequential improvement in that business. Very much you can look at the actions that we're taking as the underlying drivers of those. And again, I think that's in the context of share gain in that area. And then just overall in our Q business, in our essential business, that is what we are the destination for. We are the grocery store for our pets -- our customers' pets and animals. And we absolutely gained share on that in those categories in Q3, and we'll continue to.

And a little bit on the margins, I just wanted to take a moment to talk about that. And Seth can provide some more detail on a future question, if it comes up. But as it relates to Q4, we understand what we've got to do on margins and pricing and gross margin in Q4 and into next year. And hopefully, you're taking away from today's call that we understand that mission, and we are taking actions on that mission. We're taking actions that relates to SG&A. We're also taking real actions that relates to cost of goods and we are taking actions on it relates to pricing. While we're committed to being priced competitively and leading in the market, we also know that this is an environment where pricing is likely going to be moving up over the next few months.

We've already started that journey. We're seeing the market act very rationally as we do that, and we expect that will continue over the next few months and will be a contributing factor to the improving margin rates that we're highlighting today.

Operator

The next question comes from Michael Lasser with UBS.

Michael Lasser

How much of the increased promotional and discounting posture, do you think had an impact on your sales performance in the third quarter? And as you mentioned, it is a very challenging environment for the consumer. So to the extent that you maintain this position of being a bit more aggressive with your top 50 items into next year and the composition of your sales gravitates towards these more items that are on promotion. Do you think you could keep your operating margin flat if you did comp 2% next year, knowing all these puts and takes that you have in place today?

Harry Lawton

Michael, thanks so much for the question. I appreciate you joining the call today. A few things I would assert. One, I wouldn't say that we were more promotional in Q3. We lean into everyday value in Q3, but we certainly were not more promotional in Q3.

The second thing I would say is that we price and move our margins with -- across our full portfolio. So Seth and the team are doing an excellent job of knowing that we've got to improve our margins which means cost management with our vendors as well as pricing actions. And we will do that in a way that keeps us favorably positioned in the market. As I mentioned, we're already seeing movement in the market over the last 3 or 4 weeks, and the market is acting very rationally as we make that movement, and we intend to continue to stay competitively positioned as we move into next year on these set of essential SKUs.

The other thing I would just say specifically to next year, yes, we are committed at a 2% comp to having operating margin kind of breakeven. That is our pivot point. And the $75 million that we talked about today that's incremental SG&A actions that we'll be taking that will fall over the next 2 years from an annualized perspective, those are incremental to that 2% operating margin inflection point. We will provide further clarity in our next call on what the resulting range for operating margin is for next year because obviously, that's dependent upon what the comp sales outlook we have are. But to be very clear, we are committed to holding our operating margins at 2% comp next year prior to the $75 million incremental SG&A.

Operator

The next question comes from Simeon Gutman with Morgan Stanley.

Simeon Gutman

I wanted to ask about this 9% margin. You said -- I don't know if I've used the word right, but you're not like satisfied if they go below that number, which I think is understandable. So investors have been beginning to condition by retailers to focus on operating income dollar growth rather than a margin target. So you're drawing a line at 9%. And by the way, I don't think it's unreasonable. Is there a risk that you end up sacrificing investments that can drive dollar growth faster, but without the -- like what diluting the margin rate. But so how do you balance the objectives? And then how do you -- why do you think you could do both?

Harry Lawton

Yes. Thanks, Simeon, for the question. I think this is the tide tested back and forth on retail, right, operating margin dollars versus operating margin rate. What I'd say is, at the highest level, we're always around driving operating margin dollars, that's what you take to the bank, and that's what drives the overall business.

That said, I would say there's obviously optics and perspectives that you have on the fundamentals of the business. And we're not comfortable running the business below a 9% operating margin, and we know we need to move back above that as quickly as possible. And we're confident that we can operating margin dollars, continue to grow share and improve our comps as well as drive our operating margin rate back towards that goal. And as I said again, next year, we are building an operating model and a business plan that allows us at a 2% comp to inflect on operating margins and the $75 million of SG&A work that we're doing that will layer in over the next 2 years, and we'll provide more details on how that layers in over the next 2 years in our upcoming call, but a good portion of it will be in the first year just to set expectations, and that will be incremental to that 2% comp inflection point.

Operator

The following comes from Chuck Cerankosky with Northcoast Research.

Charles Cerankosky

Could you maybe restate your pet strategy now that you've got far fewer Petsense stores, more e-commerce and elevates in with Pet VIP, but maybe give us the update with all that combined, please.

Seth Estep

Yes. Chuck, this is Seth. Thanks for the question. Yes, when we go back and we look at our pet strategy, it's really around 3 core pillars. And it starts with our store and our store assortments. With that, over the course of this last year, the team has done a very nice job resetting every single consumable category in pet multiple times, driving a level of localization, driving key brands that we have, driving for health in our exclusive brands that we mentioned in prepared remarks that are continuingly to considerably outperform like kind of the broader brands within our store.

And also just looking at total space allocation when you look at our store assortment from that perspective. We discussed how we've launched Freshpet in stores, and we've raised our target on this year from 700 stores to 1,000. And we're very encouraged by the momentum we see there where around 40% of those buying in that Fresh category continue to be new or reactivated to pet at Tractor Supply. The second piece I'd tell you is around digital. We mentioned that subscription grew at triple digits. We're very pleased with that. We're also very pleased with how we're able to leverage our final mile delivery program, and how we're leaning into our digital experience to make sure we win those consumers and be the most convenient shopping destination for Life Out Here in rural America relative to pet and also the extended categories in areas like poultry, equine, livestock, et cetera.

And then the final piece I would just say is our ecosystem we're building in services. Very pleased with not only our Pet Wash program, which we've mentioned before, that is driving just great customer engagement through both our Neighbor's Club and that being in stores, but also the integration of Allivet VIP Petcare where we have completed that integration now where Allivet is the fulfillment arm for VIP Petcare, we're on track there, and we are very encouraged by the momentum we're seeing at that point. So it's really around the combination of our store base, our assortment, leaning into what's growing leaning into digital and making sure we have the right experience across all channels; and finally, building what we believe to be the most unique pet ecosystem in our markets.

Operator

The next question comes from Chuck Grom with Gordon Haskett Research Advisors.

Charles Grom

On the 50 SKUs, you reduced price, Kurt, can you talk about the unit velocity you saw? And I guess, the question is would you -- would it make sense to accelerate that effort going forward? And then just simple one, can you just quantify inflation here in 3Q and your expectations for 4Q?

Kurt Barton

Chuck, here's what I'll do with that. I'll take the second question first and then let Seth talk about unit velocity and the volume of the positives we're seeing on our 50 essential SKUs.

To your question on the inflation, and I'll just start with what we said going into the year that we could see a retail price inflation somewhere between 1% and 2%. We saw relatively close to 1% in the first half of the year. In the Q3, it was actually below that number, and that has more to do with the investments we've made in pricing on these key essential SKUs, and the fact that the consumables makes up some of the highest penetration in a quarter like Q3. So retail price inflation was just under like 50 basis points. In there, the ticket was really mostly fueled by growth in units per transactions. And we do expect that the level of inflation to moderate more up to the level we saw in the first half of the year as part of Q4.

And then Seth can -- I'll turn it over to Seth to talk about the essential SKUs.

Seth Estep

Thanks, Kurt. Thanks, Chuck. Yes, I would just say, when you look at the 50 essential SKUs that we've really invested in over the course of the from kind of Q2 forward, we're going to continue to lean into that. We've seen really strong UPT and transaction growth there as well as we're seeing that drive the broader basket within Tractor Supply when you look holistically at the basket. It's not just those items that are coming in and kind of cherry picking is for. It's actually driving trips. It's driving UPT and it's driving full basket. So you're going to see us to continue to lean into that.

When you looked at Q3 as well, we also saw our price perception among our customer increase almost 200 full basis points on our customer experience survey. So it's showing that the consumers are noticing those price value perceptions. They're coming in, they're buying the full store, and you'll see us continue to lean in there. And we'll be targeted to making sure we're managing margins appropriately there, but also making sure that we are managing market share and driving growth.

Operator

The next question comes from Scot Ciccarelli with Truist.

Scot Ciccarelli

Scot Ciccarelli. So 2 SG&A questions. First, I think your sale-leaseback program is expected to be $75 million to $100 million higher than it was last year. I know there's a cash component or proceeds component and then a onetime gain that you recognize. So is it fair to assume your SG&A benefit this year will be $75 million to $100 million higher than it was last year? And then secondly, what broad categories do you expect to be the biggest drivers of your expected SG&A reductions over the next 2 years?

Kurt Barton

Scot, I'll go ahead and take that and start with the question on the sale-leaseback program. The growth in the overall sale leaseback program is very much in line with what we signaled and we said is that a couple of years ago, as we began to build these owned fixed fee developed stores where we invest the capital. It will take some time as you group those and you sell those off. So all of the growth that you're seeing year-over-year on the cash proceeds is in new stores, which is why I emphasized the significant portion of that is related to new stores.

And then to your question about the gain, the gains are relatively consistent. We were slightly up in Q3, were expected to be a few million dollars lower in Q4. And for the year, because of some efficiencies in the construction of new stores, we're actually seeing slightly higher year-over-year, but it's all related to the benefits of leveraging the size, scale of owning the construction. So you're getting some gains on new stores as we flip those. That will be more of the story going forward. Higher amounts of proceeds in cash is coming from new stores, less on existing in regards to that.

As far as the $75 million in cost savings, as Hal mentioned, we've got a number of things that we've taken actions on, and then there's other areas in productivity across the chain that both principally in stores and in distribution centers. And there's a meaningful portion of this is opportunities to be more efficient through technology, automation or just using some of the upstream work in the supply chain to make some of the efforts more efficient at the store level. And maybe John can just mention quickly like some of the benefits they're already seeing as Hal said, they're in pilot.

John Ordus

Yes. Thanks, Kurt. I would just tell you, first of all, we look at productivity all the time. We have a team in the store operations group that does a great job looking at this. They've been in the stores. They know the stores, they're former store managers and they know how to continue to bring productivity down. And it shows just even in Q3, we had -- we levered labor and we also had top box in both overall satisfaction scores, both year-over-year and quarter-over-quarter.

We continue to look at productivity in 3 different ways. One is how we improve customer service, that belly-to-belly selling full contact retail that we're known for and that we're always going to give the technology and how we help the team with technology to drive sales, but also on productivity and improve in our processes, both upstream and downstream. So I'd tell you just from the testing we've done so far this year, there's a lot of no-regret decisions in here. When I look at the areas that we -- where there is waste and task, and we can help our team members be even better working with Craig on things like when we get trucks how the trucks should be loaded, what comes out first, working with Seth on things like signage. And how many signs, what the signs, digital mapping of stores and how do we put them up or even just areas like recovery and inventory touches, we measure how many times we touch a piece of inventory, where it's at and then also using technology in order to where to recover, which aisle should recover and then how we fill things in the C part of the business in both pet and feed.

So we'll continue to drive this as meaningful over the next few years on this, and we're going to continue to move on the labor model, planograms assembling a lot more, including on the field activity support teams where we've able to help them. And we now have a field to support team member in every single store that also helps drive that task down.

Operator

The following comes from Christopher Nardone with Bank of America.

Christopher Nardone

So sorry to ask another pricing question, but I think the prior message was our investments in these unbeatable prices expected to be more of a temporary phenomenon. And now it seems like the tone is changing a bit that you want to keep prices on key SKUs lower for longer. Is this the right message? Are we interpreting this correctly? And then just going back to the inflation comments loud and clear in the back half, but is there a possibility that inflation can rise above 1% heading into 2027? And think historically, we've seen this 2- to 3-quarter lag track and commodity prices, but want to see if this time is different given the promotional strategy.

Harry Lawton

Yes. Chris, thanks so much for the question and for being on the call today. I'd start with first like Tractor Supply, we are the destination for consumables for our customers. We are the grocery store for our customers, pets and animals. And we're committed, and we always have been, to being everyday low price on those items.

In Q2, what we did was some incremental investment in some of those core essentials, given the current market conditions, to stimulate some transactions and to drive some footsteps into our stores. That was effective. We now are maintaining that position. But in the context of the market with higher cost. And we are seeing the market move some here in the -- at the end of the third quarter and beginning of the fourth quarter to reflect some of these higher costs. But we are committed to maintaining our best competitive position as the market does that, as we always are. So I don't know that I would -- you should be taking away that it's like going to be extended for longer. It's kind of who we always have been. And we just leaned in a little incrementally for a couple, 3 months to try to stimulate the market a little bit.

As it relates to next year, we'll provide further guidance on 2027 and our next call and provide more details. But I'd say we are encouraged by our Q4 performance to date to see a very healthy blend of positive comp transactions, positive units per ticket, and also positive AUR. It's a very healthy profile as we're now kind of mostly through October. And our goal would be to continue that into 2027 with a healthy balance across all of those drivers of sales.

Operator

The next question comes from Seth Sigman with Barclays.

Seth Sigman

I guess it's a bigger picture question and somewhat of a follow-up. But I guess the message is that you're more aggressive on price than you've been in recent years. And at the same time, you're saying that you can deliver operating leverage on a lower comp than in the past? And you gave us a lot of examples, which we appreciate.

But I guess what's fundamentally changing across the organization to support that, I guess, to give investors confidence that this is achievable? And then I guess somewhat related, as you think about next year, a lot of moving pieces in '26. But is the right way to look at this, basically, '26 guidance, the adjusted EPS, that is the right base to grow all those in 2027 despite all the moving pieces?

Kurt Barton

Yes, Seth, I'll take those. I'll start right there with your last question. '26 is the right basis to be jumping off of. We said particularly like with tariff refunds, we are going to manage throughout the year. That may create a little bit of choppiness in the gross margin and operating margin, but we're going to invest in this moment when it's the right thing to do to drive value. That's created the right overall basis to leap into 2027.

And when -- to your question about operating margin, I already walked through gross margin, how we could see that play out. The biggest pressure on operating margin certainly has been the investments and how that plays out in depreciation growth and the softer or comps below 2%. And so there's a lot of work that you hear that we've been doing, and we think about going forward to 2027, in the areas that we know and in our control, depreciation, as Hal mentioned, moderating down to mid-single digits or lower next year. That's coming off of like a 7% growth this year, and we believe we can have lower growth in depreciation and start to actually see leverage in that case. We've also seen operations at the core operations, and John just got done talking about how we even saw lower labor hours in Q3 than the year before, store wages leveraging even at a comp sales below 2%. So we've got significant results already in the cooperations.

I look at Q3's SG&A when you back out the onetime on the new distribution center, it gives really good evidence that the model is playing out to be able to lever at that point. And then lastly, we know that there's cost pressures. We know there's some things that are uncertainty. The $75 million 2-year cost-saving targets gives us the opportunity to either overachieve on that, offset unexpected costs. But the combination of all of those allows us to claw our way back to a stronger operating margin. And that's really the difference in the last couple of years. And I hope that helps give the insights that we see and the confidence we have on the things that we can control that gives us that ability more question.

Operator

The last question comes from Steve Forbes with Guggenheim Securities.

Steven Forbes

Maybe just revisiting Tractor's price value proposition one last time here. I was curious if you can maybe expand on your initial thinking about how price zones will evolve and/or work in an agentic world, inclusive of how Tractor prices products today online, right, nationally, regionally, locally. And if the team really has a good handle on the full scope of investment required to fully optimize price perception across the full assortment, right, beyond the 50 SKUs. Like is there a reason to think that there is additional investment required? Or should we think about sort of the efforts being made during this deflationary period of time as sort of one and none?

Harry Lawton

Yes. Thanks, Steve. I'll try to hit a few things on that to close out here. First off, we -- our customer -- we have a strong price perception with our customers. And we've always had a strong price perception to customers. It's something we monitor monthly in our brand tracker and our customer trackers, all the information that we have there. And we've always had a strong price perception.

Given the market dynamics in Q2, we leaned more heavily in that, and we saw some improvement there. But it was an improvement related to already a good starting position to be clear. And this is not something that we -- this is something that we've done frequently in our history from time to time when we need to jump start some transactions. We did this in 2022, we did this back in 2009. We've done this in other parts of our company's history as well. But to be very clear, we stand for price with our customers. And as we look forward, we're confident that we can manage margin and our price perception as we always have. As I mentioned, the market is acting very rationally right now. The higher cost that we're seeing are everyone in retail is seeing these higher costs, right? Everyone in retail has been paying freight bills at a higher rate for the last 6 months. Those are all going on the balance sheet, and those are all going to have to roll into COGS and gross margin over time. We know that task. We're out ahead of that task. We're making adjustments in our pricing structure and we're making adjustments with our vendors to offset that.

As it relates to kind of the more broader comments, Steve, online and stores, we have a kind of a strong belief that online and store pricing should mirror each other. And we've always acted and operated in that way. probably 80-ish percent of our SKUs are kind of nationally priced for the most part across our price ones. That's reflective of map pricing categories like pet or in power tools, and also just the ubiquity of pricing on a lot of the items that we carry nationwide. On the 20% that are tailored, those are the ones that our customers understand should be tailored because they're reflective of the cost locally to get that product to a store. And dominantly that's in areas like feed, the proximity of the feed mills, the cost of the freight to that location. And it's no different than like in my past life. And home improvement concrete was priced very much the same way. It's based on the distance to travel as it's a heavy item.

And we price based on cost and we price based on competition in those. And I think even in a fully transparent world as we move forward, that much that will remain. But again, I want to just finish where I started. We're pleased with our Q3 performance. We know we've got more work to do. We continue to have sales momentum as we move into Q4. We're conscious of the cost -- increasing costs that are coming out of our business. And hopefully, you took away the trait that we are taking action. We know the challenge, and we know the work we've got to get done, and we're not resting on our laurels, driving sales taking SG&A actions, taking gross margin actions, doing that both near term and heading into 2027. We appreciate everyone's time on the call today, and we look forward to further updates in the next quarter.

Mary Pilkington

To me, that will wrap our call now. Thank you, everyone, for joining us.

Operator

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