Christine Skold - Vice President, IR Greg Sandfort - President and CEO Tony Crudele - EVP, Chief Financial Officer Steve Barbarick - EVP and Chief Merchandising and Marketing Officer Lee Downing - EVP, Operations

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Thank you, operator. Good afternoon and thank you for joining us for Tractor Supply Company’s quarterly earnings conference call.

Before we begin, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company.

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. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company 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.

Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. I’m now pleased to introduce Greg Sandfort, Tractor Supply Company’s President and Chief Executive Officer.

Greg, please go ahead.

Thank you, Christine and good afternoon everyone and thank you for joining us. On the call with me today are Tony Crudele, our EVP and Chief Financial Officer; Steve Barbarick, EVP and Chief Merchandising and Marketing Officer; and Lee Downing, our EVP of Store Operations and Real Estate.

We are really pleased with the overall performance of our business in third quarter. From a top line perspective we face our most difficult comparison of the year in this quarter.

If you recall, an extended spring-summer selling season combined with earlier cold weather made for a solid third quarter in each of the past two years. Our teams did an excellent job of positioning the business for both top and bottom line growth in the quarter with comparable sales increasing 2.9% and earnings per share increasing 16%.

Comp store sales growth was driven by strength in everyday in spring-summer seasonal category with consumable, usable and edible items such as pet food and supplies and livestock continuing to perform well in the quarter. Even though the spring-summer seasonal business started earlier this year, we did see a modest tailwind to categories in this business into the third quarter that resulted in solid sales of items such as trailers, fencing and outdoor recreation products.

We did not experience early demand for cold weather seasonal items as in the previous two years. This primarily impacted the sale of fuel and heating related products such as wood pellets, logs splitters, indoor fireplaces and wood burning stoves.

We understand that our customers purchase these items based primarily on need and as the winter season progresses we expect this business to improve. We obviously cannot predict weather but it is our job to be ready for our customers with the right assortments of cold weather seasonal products when the demand arises and we will be ready.

Last quarter we discussed a number of merchandise resets as part of our test and learn continuous improvement culture. We continue to use PoS and planogram data along with store, customer and vendor research to refine and improve our store assortments.

We are committed to ongoing merchandise improvements and with the exception of heavy winter related items, all of our major departments continue to contribute positive sales in the quarter. In September, we held annual Pet Appreciation Week or PAW event.

This is a week-along event in all of our stores and online. This centers around pet adoption and pet health.

We partner with local agencies and community groups to promote pet adoptions and this year's event resulted in nearly 2500 pet adoptions across our store base. Additionally, we continued to improve the event through extensive digital support including the third Annual Rescue Your Rescue contest to fund animal shelters.

Pet and animal related products are important and growing portion of our business and the PAW event is just another way we drive sales, support and awareness at the local level. And this year's event was another success and continues to position Tractor Supply as a leading authority in pet food and pet care.

Also this month we launched Flocktoberfest, a new event in stores and also online. This is a month long celebration featuring our feathered friends in our poultry and wild bird categories.

In conjunction with the event, we launched a new line of premium wild bird seed labeled totaled care as a sub-brand under our exclusive brand of Royal Wing brand bird products. As always here at TSC, we continue to test and learn from our customers utilizing new product introductions and extensions.

This program is just another example of this successful strategy in motion. In the quarter we also began a test of our customer loyalty program, Neighbors Club, in approximately 140 stores.

We ask our customers to provide their contact information at checkout and opt in to receive special promotions and updates on merchandise and in-store related events. As with everything we do, we will be measured and disciplined in our testing and eventual rollout of this program.

We have a strong and loyal customer base at Tractor Supply and we are excited to learn more about their preferences and shopping needs through our Neighbors Club program. Initial feedback and enrollment rates from the customers we have seen thus far are promising.

As I mentioned last quarter, we launched a new and completely redesigned Web site. The new Web site is a more responsive design that delivers the same shopping experience across all mobile devices.

The site improves search and checkout capability and provides better product descriptions, customer reviews and social media tie-ins. We continue to increase the merchandise offerings on our site and now have over 125 vendors in our drop ship program.

During the third quarter we opened our first two mixing centers in Texas. These are smaller cross-stocking style distribution facilities that handle many of our palletized products such as riding lawn movers and faster turning queue items such as feed, animal bedding and grass seeds.

With our vendors delivering products directly to these mixing centers, we are shortening the supply chain replenishment time and distance to stores and lowering our in-store inventory levels while improving in-stock levels. Thus far we are pleased with the initial results.

Construction of our new distribution center in Casa Grande, Arizona is complete and finished on time and under budget. The facility began receiving inventory in early October and is on schedule to began shipping to stores in December.

Over time, this distribution center will have the capacity to service upwards of 250 stores in the southwest region. And lastly, we opened 30 new stores in the quarter and remain on track to open approximately 114 new Tractor Supply stores in 2015.

Our western expansion continues to be a key initiative and our stores that have opened in that region over the past few years continue to comp favorably against our chain average. In closing, I want to say thank you to all of our dedicated team members in our stores, the merchandising innovation center, our distribution facilities and our store support center.

I realize that I comment on this a lot but it really is our people that set us apart and they drive the success, innovation and unique culture we have here at Tractor Supply. I will now turn the call over to Tony for a more detailed commentary on our third quarter financials.

Great. Thanks, Greg and good afternoon everyone.

For the quarter ended September 26, 2015 on a year-over-year basis, net sales increased 8.5% to $1.48 billion, net income grew 14% to $87.3 million and EPS increased 16.4% to $0.64 per diluted share. Comp store sales increased 2.9% in the third quarter compared to increase of 5.6% in last year's third quarter.

Similar to last year, good ground moisture and mild temperatures helped to extend the spring and summer selling season into the July and August timeframe. Key core categories performed very well such as the animal and pet categories and key seasonal categories such as fencing, trailer and outdoor recreation.

As we moved through September, we did not experience the cold weather trends in the north that drove early fall and winter sales last year. Additionally, since we were coming off our second consecutive cold winter season, we believe customers did not have the same sense of urgency for pre-seasonal winter purchases as they did the year before.

As a result, cold weather categories such as heating and power equipment did not perform to our expectations and negatively impacted comp sales. Sales were solid across all regions except for the northeast and upper Midwest as they did not benefit from the colder weather as I just mentioned.

Our new stores in the western region continue to product above chain average comp sales as they gain market awareness and share. Comp transaction count increased for the 38th consecutive quarter gaining 3.8% on top of a 3.3% increase last year.

Comparable transactions were driven by continued strength of our queue items and the strong performance of the spring-summer seasonal categories. Average comp ticket decreased by 90 basis points compared to last year's 220 basis point increase.

Big ticket was the principal driver of the average ticket decrease. Comparable sales of big ticket items were down low single digits year-over-year as soft sales of winter seasonal items such as heating stoves and log splitters were only partially offset by the strength in sales of trailers and utility vehicles.

We estimate that deflation was approximately 25 basis points which also contributed to the decrease in the average ticket. The deflation was driven principally by livestock feed and lubricants.

Now turning to gross margin, which increased approximately 60 basis points to 34.7% compared to last year's decrease of 30 basis points. While we had an easier comparison versus last year's third quarter gross margin decrease, our direct product margin was bolstered by strong price and markdown management.

Price management tools continued to help us optimize our retail pricing while negotiating lower cost in some of the deflationary categories. Freight was favorable by six basis points which related to lower diesel prices.

The favorable fuel price more than offset the stem mile increase from our western store expansion. The variance was not as favorable as Q2 as we had a merchandise mix shift to more freight intensive product in the third quarter.

The mix of merchandise did not have a significant impact on gross margin as the favorable gross margin impact from softer big ticket sales was offset by strong sales in animal feed and pet food which are below chain average margin categories. We estimate the deflation only had a slight favorable impact on gross margin as deflation continues to moderate in the feed category.

Import purchases in the quarter increased 16.6% and represented 11.2% of the sales mix. Also the exclusive brand sales increased to 8.2% compared to last year's Q3 and was approximately 31% of sales.

For the quarter SG&A including depreciation and amortization was 25.3% of sales, an increase of 10 basis points over prior year's quarter. We are very pleased with our payroll management in Q3 as the team reacted well and allocated payroll with the sales trend.

We did incur startup expenses for our southwest distribution center and the two mixing centers. We estimate six to seven basis points of SG&A expense related to the startup cost.

The expansion of Hagerstown DC in Q1 added incremental expenses to SG&A but we realized the cost benefit of lower stem miles in gross margin. We also experienced slightly higher rental leverage from the new stores as they ramped to maturity.

This was driven primarily by the western store openings, which as we have discussed, generally opened with higher rent to sales ratio. With the opening of over 40 western stores in the past year, this continues to impact SG&A.

Incentive compensation had minimal year-over-year impact on SG&A leverage. The year-over-year percent increase in SG&A was approximately 9% in the third quarter which was lower than our year-over-year increase in Q1 and Q2.

As a reminder, the third quarter last year was impacted by expenses related to the move to our new store support center. So this along with onetime expense savings this year, made for a favorable comparison in Q3.

Our run rate in Q4 is expected to be more consistent with the first half of the year. Turning to the balance sheet.

At the end of Q3 we had cash balance of $51.4 million and $190 million outstanding debt compared to a cash balance of $47.5 million and $150 million in outstanding debt at the end of last year's third quarter. During the third quarter, under our stock repurchase program we acquired approximately 1.4 million shares for $119.4 million.

Average inventory levels per store increased 1.6% compared to a 3.7% increase in last year's third quarter and annualized year-to-date to inventory turns decreased one basis points compared to last year as a result of the softer pre-season sales of cold weather items. We exited the spring-summer season with the normal seasonal markdown cadence.

We continue to make investments in key inventory categories and we have brought several fall winter categories in early and are prepared for the season. Capital expenditures for the quarter were $66.5 million compared to $43..3 million last year.

We opened 30 stores and closed two Del stores and one Tractor Supply store in the third quarter compared to 30 new stores opened in the third quarter of 2014. The CapEx increase relates to the construction expenditures of our southwest distribution center which were higher than the expenditures on our support center which was completed last year at this time.

So looking ahead. Based upon third quarter results and as noted in today's press release, we have tightened the ranges of our financial expectations for the full year 2015.

We expect full year sales to range from $6.28 billion to $6.33 billion. Full year comp sales are forecasted to increase between 4% and 4.5%.

We are forecasting a 20 to 25 basis point improvement to our EBIT margin compared to 2014. We anticipate net income to range from approximately $413 million to $420 million or $3.02 to $3.08 per diluted share.

Our capital expenditure forecast for full year 2015 remains $220 million to $230 million. We expect to finish the year with approximately 114 new stores.

Additionally, we anticipate the full year tax rate will be approximately 37%. We will continue to make purchases under the share repurchase program and currently project full year diluted shares outstanding to be approximately 136.5 million to 137 million.

Principally as a result of the share repurchases made year-to-date under our program, we expect that we will have an outstanding balance on our revolving credit facility of approximately $100 million to $150 million at year end. Our sales outlook is cautious based on the fact that weather and oil prices can impact sales this time of year.

Last year we had a colder than average November and a warmer than average December. This year we expect that to flip and anticipate the impact will be neutral.

Additionally, with the relatively low heating oil prices, there could be less consumer demand for wood burning stoves and some of heating and fuel categories. We have seen in the early part of the fourth quarter as the weather turns cold, that consumer response to our winter seasonal assortment.

As in the past, our merchant team has been nimble and adjusting to weather shifts and we are confident that our team has put together a great plan to drive winter seasonal merchandise when the cold weather arrives. In the fourth quarter we expect deflation to continue to moderate and we will continue to use our price management tools to drive both sales and margin while remaining focused on our goal of growing market share.

We expect EBIT margin in the fourth quarter to be slightly down with a modest increase in gross margin to be offset by SG&A deleverage. Our gross margin initiatives continue to drive improvement in merchandising margin and lower diesel prices should benefit freight transportation.

As I mentioned earlier regarding SG&A, the third quarter this year benefitted from the comparison to last year's lease write-offs and accelerated depreciation relative to our store support center move. We expect SG&A run rate in the fourth quarter to be more consistent with the first half of the year and estimate SG&A increase in the range of 10% in the fourth quarter.

The key elements driving the incremental increase in our SG&A run rate results principally from the start of operations of our new southwest distribution center which we estimate to be 1.5 to 2 cent EPS drag, and rent deleveraging resulting from the increased mix of the new western stores. Although I will provide full guidance at our year-end conference call, I wanted to provide you with some considerations for your modeling of 2016.

Fiscal year 2016 will be the year that we add a 53rd week to our retail fiscal year. Based on past trends, we estimate that this will provide and EPS benefit of approximately $0.02 to $0.03.

This will be the first year of operations of the southwest distribution center. This will increase SG&A on a year-over-year basis while improving gross margin through reduced transportation expense.

We expect a net EPS decrease of approximately $0.04. We will continue to transition the Del stores to Tractor Supply stores.

We expect the majority of the Del stores to close in the fourth quarter and anticipate it will negatively impact EPS by approximately $0.02. As we have stated in our long-term capital plan, we look to manage the annual capital expenditures in the $200 million to $250 million range in order to be ratable in our allocation of capital and leverage depreciation expense over the next several years.

In 2016 we will not have a significant cash investment of a distribution center and we will look to continue investing in our stores and key initiatives to benefit long-term growth. Our goal continues to be to execute these initiatives while managing the financial impact to deliver our annual EPS target of mid-teens growth.

To conclude, we are pleased with our results and execution in the third quarter, we believe that we took advantage of the extended spring-summer selling season and are well-positioned to deliver another solid growth year. That concludes our prepared remarks.

Operator, we will now turn the call over for questions.

A couple of questions. First, just on the third quarter, the September with the cold weather products.

Tony, you said it weighed on comps, can you qualify maybe to what degree that shift kind of weighed on the second quarter, or on the third quarter? And was September comps positive or was it such that it actually dragged those negative?

Pete, as far as the comps go, we did have a positive comp in September and really we saw the drag just impact the last few weeks of the month. So as much as we don’t really give monthly comp, I don’t want to go into the specific details as to what the impact was but it did have an impact on the quarter relative to what our expectations were.

Okay. No, that's fair enough.

And just looking at the new store productivity, I know that the way we calculate it isn't always perfect but it had been running mid to high 70s. It was in the low 70s in the quarter.

I don't know if that had something to do with some of the closings or the timing of the openings. Was there anything interesting within the productivity of new stores that you saw during the third quarter?

No, there is nothing unusual and any differences really would relate to timing of the store openings.

Okay. My last question is just around the D&A profile.

You're going to open up the DC. You've been running like $30 million of D&A per quarter here through the first three quarters of '15.

How does that step up in the fourth quarter, how materially? And then as we think to next year, just a thought on D&A growth year-over-year.

You may have mentioned that in your outlook, if you did I apologize.

No. We didn’t specifically focus on D&A.

But I would not expect that the run rate in the fourth quarter to step up significantly and it would be more impactful next year as the DC comes on line and we have a full year of depreciation relative to the DC.

Good quarter. Was there much or have you seen much of an impact today on sales in the oil patch areas at this point?

Yes, David, this is Steve Barbarick. And first of all, I think on the last call we mentioned that the oil drilling areas represent about 10% of our total store count.

And a large majority of those stores are down in Texas, so I will use the example here. We have got control stores down there and we have got the what we consider to be the oil and gas stores.

The oil and gas stores are running positive comps and they have positive traffic. However, with that said, they are running less than company in chain average.

Where we are seeing the impact is on some of the categories that are more bigger ticket. So truck boxes and in fuel tanks and some compressors.

We are making that up, however, in a lot of the basic needs that our customers have down there in terms of consumable businesses. So generally speaking, we are seeing little bit of an impact but generally it's not been material enough to impact the overall company's comps.

Would you say it's been sort of running stable at that level or has there been any change in the past couple of months?

I mean it's been pretty stable. It's trended down a little bit.

It's not significant. It's nothing that would be worth noting.

Okay. Thank you.

And then my second question has to do with just further opportunity with regard to higher ASP items to bring into the mix. As you look to next year do you see more additions, more upside in that area?

Actually, this is an area that we see an opportunity with. And we have talked a lot on the merchant team about the fact that our customers are looking for value.

But value can be on the higher end of the ticket as well. And we have seen some nice movement in recreational vehicles, we have brought in some higher end trailers.

We are also looking at a number of commercial products as we move forward. For example, some heavier duty cattle handling cattle handling equipment up in the northwest.

Looking at, I guess at higher end trailers, premium rubber footwear, price points that may range up to the $200 price point. We are also expanding some recreational vehicles and we have got a unit right now that we are testing that’s up to $9000.

So generally speaking, we are seeing an opportunity with our customers to actually take them upscale by offering new products is differentiated.

I thank you, and great results. I want to dig in a little bit, Tony, on the gross margin dynamic.

The up 60 basis points year-on-year is a little bit better than Q2 at the same time looks like you got less benefit from freight. So are you seeing some accelerating benefits around your product margin from the clearance optimization effort?

Yes, Peter, as we try to sort of break out the components, it is obviously difficult because many things overlap. But we firmly believe that probably the most significant driver outside of the fuel, the favorability of the fuel, really was in the price management and really sort of the vendor negotiation and working with the vendors and coming up with some great programs.

So that along with the price management tools and getting better at optimizing the prices, I think really was the key component in that large increase in the gross margin percent.

Is there anything within Q3 with regard to seasonality and maybe the summer to fall transition that gives you more opportunity in Q3 with regard to price management relative to other quarters or can it be pretty consistent through the year?

Yes. Peter, this is Steve.

I would tell you, it can be consistent. I mean there were times of the year where spring seasonal were transitional and fall winter were transitioning.

There are always pivotal months. This past quarter we talked a little bit about clearance optimization and while it only makes up a small part of the total pricing management tools that we have, we were able to leverage that tool.

We had about 60% of our clearance merchandize on that tool and early learnings suggested that we take markdowns earlier and we take them a little deeper while we have got them in the home before we have to liquidate them in the back of the store. So the team did an excellent job executing to that and we think that tool is going to give us momentum as we refine it and we get better with it.

One more on macro. I hate to waste one of my questions on it but the age old question of farm income.

I know we talk about it probably once every four or six quarters but you probably have better granularity on it by regions. So curious, any impact that you are seeing from it?

As you get bigger maybe you have more impact with a wider reach of customers. Curious if there is any correlation to that or still irrelevant to your business.

Yes. Simeon, I hate that you waste your question on that one as well.

Yes, we do not see any correlation with the farm income and as we look at the performance across the country and in the particular areas where the farming is stronger, again, we can't draw a correlation.

Fair enough. And then another question on I guess stem miles or gross margin.

It's a little early I think to talk about next year, you gave us a couple of clues. You mentioned the headwind this year, stem miles.

Does the headwind stay the same next year or does it moderate with the new DC opening?

Yes, good question. When we look at it and model it out, our goal is to obviously support the operations at DC by reducing transportation cost.

And as we move into next year and as I mentioned that we do anticipate having a drag next year, a net drag between the transportation improvements and the operations of DC. One of the keys is to reduce the stem miles and that is very dependent on our vendor base and making sure that they have key shipping points out west.

And so we do anticipate and we modeled accordingly to show some reduction in the stem miles but we still have some more work to do as we continue to improve the shipping points from the vendor base.

I guess just to clarify that point, I know we didn’t put a number on what stem miles are holding back gross margin, but is that basis point amount, could that end up -- is it less of a drag by virtue of comparison or could it be the same number next year as this year?

No, I think definitely the stem miles will decrease substantially, so we will have a positive impact relative to the gross margin. Just not to the extent that it will offset the full four wall operations of the distribution center.

Just digging into the ticket component of comps this quarter. When you look at big ticket, it slowed, it seems primarily related to weather and maybe the comparison.

Anything else to read into that or should we expect that to pick back up as the weather turns?

Seth, this is Steve. It was little bit of a mixed bag because we saw some improvements in things like recreational vehicles and trailers.

But the drag was in categories such as, and Tony had mentioned, stoves and log splitters and generators. Those typically tend to be a little bit more weather driven and being a needs based retailer you kind of see that.

So I would tend to skew toward that and not a shift in customer spending behavior.

Okay. And then a separate question on the loyalty program that you guys are testing.

I realize it's early but maybe to that last point, given the need based aspect of the business, can you discuss where you see some of the incremental opportunities from that program and maybe the cost associated with rolling that out?

Well, it is early, let me just say that first. And to give you a sense for how early it is, we just starting piling it, I guess, 21 days ago.

It's in about 10% of our stores and it's in different regions so we can track it. Right now this is, I think Greg said, we are pleased with the initial response from our customers.

What the data is giving us is the ability to track their purchases going forward as well as an email address so we can be more efficient in the way we communicate with them and personalize that communication. We are still working through the next steps in how we are going to manage this.

I can tell you that today working with our marketing department, not everything we do is highly efficient. And we are going to be able to tailor some of those dollars and move them into our loyalty program.

And at the end of the day, I think what we are going to do is we should see an improvement of loyalty with these customers which should follow sales and it should offset the cost that we would put into the program.

I have two things. One is, you have done a great job over time of broadening out the assortment even as you said getting into RVs up to $9000.

Could you just talk a little bit about how your assortment looks versus a typical general store in the markets that you operate? What might be missing from your mix that others might have?

Trying to figure out what new categories maybe could be relevant.

You know Hiram I would tell you that we have got a differentiated assortment and it's what has made our organization very successful. We always talk about that in retail plagiarism is free and highly efficient, so we are shopping our farm store competitors, we are shopping big boxes and automotive centers.

And we look it for those categories that we think are relevant to our customers lifestyles. Those folks that live out here as we call it.

So again, there is a variety of things that we are testing and trying and I don’t think there is any one or two specific things that I could mention on the call right now that we are probably not attempting somehow in our stores now or in the future.

But if you look -- let's say we take a look back at your assortment three years from now or five years from now, do you think we are seeing the tip of the iceberg in your store or are we still seeing the vast majority of the iceberg?

Hiram, I have been with the organization for 18 years and I am as bullish today as I was 17 or 18 years ago when I got here working in merchandizing.

Well said. Let me just follow up on the second question around how you want to use your Internet business.

Can you tell us whether or not you are looking to use it primarily for informational purposes for new products or for existing products? And if it is for existing products, do you have categories that are in the store today that you think that you can almost migrate online?

Hiram, it's Greg. The strategy behind our omnichannel business is very simple.

It's called the three Cs and it first starts with content. And content means giving the customer the information they need to make a decision to either buy online, buy in our store, research products that they think they have either an interest in or a need to have to satisfy something that they are either doing, building a project or something that they need to replace on their property.

The second piece of it is community. And what we are finding is, through our experience right now out there in some of the social sites and our activity there, our consumers like to converse with us and with one another.

So all that’s doing is bringing them closer to us as a consumer base making us more of the desired, I think, retailer for them to exchange hopefully commerce with. And that is then the third C, commerce.

And we are not -- we didn’t set our site up nor did we ever think that it was going to be a large percentage of our sales. Our stores are located out where the customer lives.

We are more convenient, if they break something let's say on a particular piece of tillage equipment or they blow a gasket on a small engine, they are not going to dial into the Web site and expect to get that delivery and wait for two or three days. They are going to expect to go to the store, find the part, replacement part, repair what they are doing and get back to the task.

So the commerce side for us as we build out this entire omnichannel piece is to have immediate product available to them because we live close to them. So the strategy is, the first two Cs to be the first C.

And we are never going to say that it's going to be a large percentage of our business but we are convinced and through the Neighbors program we are going to be able to track much closer those customers who are engaging with us through the web and then tying that back to a four wall store sales number.

Well, that world is evolving and it sounds like you have been pretty consistent in your approach so I appreciate the update.

Tony, you outlined a number of put and takes that are going to impact the business next year. It wasn’t clear in totality, should we expect mid-teens earnings growth next year?

Yes. Absolutely our target is to always grow the company EPS in the mid-teens.

So that is our goal and we will manage accordingly.

And is that going to be inclusive of the extra week or will the extra week be on top of that?

You know since there is generally a range, and I know most people are going to probably be doing 15% and 17%, but I like to say mid-teens. So this is somewhere between 13% and 17%.

So generally with or without that additional week since it is only a few cents, we anticipate that we will fall within that range. [indiscernible] growth.

Okay. My second question is, how are you thinking about the inflation, deflation environment as we move into the next year.

Good question. When we look to next year, I anticipate right now at this point in time, slight deflation in the, say, first half of the year and then as we move to the back half we expect it to be flat or actually some small level of inflation.

Are their things that could drive either upside or downside to that and maybe you think that would change the algorithm where deflation [leads] [ph] a little bit better on the margin side so gross profit dollar comp remains sustained?

No. As we look at it, in the past it's always been the impact on feed and on petroleum products.

And those are really the two large drivers. The steel element has been less impactful.

And we believe that we have cycled through the majority of some of the declines in feed. So I think that would be the biggest driver so we expect it to definitely moderate next year and stabilize some.

And as we have shown in the past, be it moderate inflation or moderate deflation we have been able to manage the business so that we can get to the right bottom line.

So a couple of quick questions here. My first one I think is a follow up to a prior question but just to dial deeper into Texas.

I know you have talked about this in prior quarters too but the numbers you read out here, they just make it sound that the Texas market is performing okay. Maybe a little worse than the company average [indiscernible], but if you look at the stores there, is there any more troubling signs below those big aggregate numbers meaning that are you seeing a wider dispersion of performance in the stores or are sales trends generally more erratic than the chain?

No, Brian. As a matter of fact the only thing I would say is that the Texas market in total was right about company average.

The oil drilling stores were the ones that were below company average. So Texas as a whole is still healthy.

Okay. And then, I mean not to belay this but the oil drilling store you mentioned, is there something you have seen there, are you seeing more erratic trends and you would expect to make a loss in kind of the aggregate common?

No. I mean, it's not that volatile.

I will tell you that when we saw a nice ramp up in compressors and some welders and big ticket merchandize, some of that has come down. But if you look at the total nucleus of the store, okay, in those area those stores are still comping positive and foot traffic is still positive even with the compression on some of the big ticket that we saw there.

So I don’t see anything that leads me to believe that Texas, the market itself or the state should be a concern for us.

That’s helpful. Then the second question, more of a maintenance question, but with regard to the Del stores, how many stores there are left to be closed and when should we expect to see those closed?

Generally, what we are trying to do, Brian, is time the closings relative to the lease expirations and do it as close as possible. But at the same time, we want to be able to open new stores and make sure that we transition staff appropriately.

So as we see it, we believe the majority of the stores will close in the fourth quarter next year and we anticipate that being somewhere in the 16 to 17 store range in the fourth quarter.

Couple of follow up questions. So on the supply chain investment you spent about $16 million in CapEx in supply chain year-to-date.

Curious, all-in, how much the DC will cost you on the CapEx side and or the mixing center is a big capital investment as well?

Sure. The number that you are seeing includes obviously investment through all of the distribution centers.

As we complete the southwest distribution center, we anticipate that that’s going to be in the $70 million range. And then the mixing centers, they will vary depending whether it's lease or acquisition but we anticipate putting somewhere in the $6 million range for each one of the mixing centers.

So it's not a significant large capital investment.

So as you think about the 200 to 250, the long-term capital guide, what could be some other, I guess chunky items that could fill in for that $70 million range. In other words, why wouldn’t CapEx be a little bit lower next year than this year given you have will have that DC?

Well, a part of the issue is that we started the distribution project last year so some of the CapEx is split between the two years. So when you are looking at a delta -- but what we look at as far as continued investments in the business is, one, we always want to continue to invest in our store infrastructure and make sure that there are kept as current and up-to-date as possible.

But we have other programs. One program in particular next year that we think has a significant return on investment is our LED lighting change out.

And not only does it meet our stewardship program but we are really excited about the cost savings as well. So that will be a capital investment but we believe that payback will help throughout next year as well as in future years.

So those are the type of initiatives that we are going to be continuing to drive so that we can continue to capture savings and be able to utilize those savings to continue to grow the company in a very efficient and productive way.

And then on the west coast DC. How many stores are serviced out of that DC roughly at the end of this year and is there a -- what's the sort of store level that you start to get better leverage on, like you mentioned, the four wall ramped and operating cost of the distribution center.

Sur. You know we anticipate by the end of the year we are going to be around 100 stores that will be services by that distribution center.

And generally we map this center out to be able to handle about 250 to 300 stores. So it will have some significant additional capacity.

As we move forward, again as I mentioned earlier, a lot of it has to do with vendor shipping points and we will continue to coordinate with our vendors and as our vendor base grows, hopefully they will grow with us as well and have shipping points out west. As well as it will help it will help our capacity when we have imports coming in from the west and that will reduce some of the stem miles.

So one of the keys is that as we progress more towards about the 150 store range, we will start to see some benefits and hopefully we will have more of a net impact, net neutral impact when it comes to the P&L.

So it seems like based on the timing of the weighting of the West Coast opens, that starts to be something really later, later in 2016 where you could see some leverage or at least flattening out.

Yes. Now clearly as we move through the year, we will start to gather more of the benefits through the distribution center.

And so, yes, as you model, when you look at the drag that we identified in the, I guess about the $0.04 range, I would say in the first year it's going to be slightly weighted more to the first half but it's not going to be something that's so front weighted that there won't be any impact in Q4.

You called out a bunch of different pressures in the SG&A line and considering all that, I actually thought that it looked very well controlled. I was wondering what might have went in your favor this quarter.

Can you comment on that?

Sure. When we look at the -- the biggest number what I had identified which was related to the store support center that happened last year.

And I think as we accumulated the adjustments relative to lease write-offs and accelerated depreciation, it totaled in about to $3 million range. So that clearly was the largest one.

As we look to the back half of the year coming into it, we had some expense savings initiatives out there and we felt that we did a great job in particular in the third quarter itself. But some of those are really just one time savings that relate just to the third quarter.

Again, we are focused on the fourth quarter but as we have forecasted out, we believe that we won't have that benefit of the store support center expenses last year in Q3. So we expect to inch back up into the 10% range versus the 9% that we are at in Q3.

Got it. And can you just remind us what some of those savings initiatives were?

Relative to -- they really just relate more to some of the discretionary expenses that we have in the quarter. And even it could be just basic ones relative to how we had managed the store payroll, as we mentioned, in Q2.

We went in a little bit heavier with some of our payroll initiatives but as we came into Q3, the team did a tremendous job in managing that. Now as we move into Q4, it's a big selling period for us and we expect to continue to driver our sales with proper adequate staffing to do that.

Got it. Okay.

And just lastly, can you just remind us what kind of a comp you need to leverage rent and occupancy within SG&A?

It will vary quarter-over-quarter and one of the biggest impacts is the incentive compensation. So I will always qualify with that.

But when it comes to leveraging, we have really been more in the 3.5% to 4% range when it comes to leveraging SG&A. And again my other standard qualification is that a lot of the things that we do as far as improving the business and the initiatives that we have, that expanse runs through our SG&A where some of it will benefit our gross margin initiative.

So things like demand planning, obviously the mixing centers expenses in SG&A, the distribution centers in SG&A, but we will get the benefit on the gross margin line. So that’s why I believe that it makes it a little bit more difficult to be able to leverage SG&A and that’s why you see the number running into 3.5% to 4% comp range.

My first question is on new store productivity, just want to follow up there. You noted, Tony, that there is nothing with timing this quarter.

Is the decline that we saw in new store productivity year-over-year related to the productivity out of some of the western stores?

Well, when I look at it I really think it would just the timing of the store openings. Our stores that are opening this year are exceeding our pro forma very consistent with past performance.

So it's really a non-issue. Some of it from a sales productivity standpoint really can be the mix of the stores that we are opening and that would be the only other impact other than the timing.

Got it. Okay.

That's helpful. And then secondly, just in terms of the merchandising trends.

You talked about pet food and animal feed being a pretty strong category. Can you comment on how you fared with the Purina feed line expansion?

Yes, absolutely. Seth, this is Steve.

That launch was really part and parcel of something much bigger and that’s our key strategy. And we added the product in our stores, it was really around more premium for horse, cattle and show feeds.

It allowed us to hit higher price points. There was a question earlier about higher price points and how our customers are reacting.

You know it's still a relatively small portion of our total business, the expanded line that we put in, but I can tell you it's been incremental and we have seen nice growth in our feed business. And I believe the addition of these SKUs has lend credibility to the entire line.

So we are pleased with it.

Just going back to the weather issue towards the end of the quarter. Could you talk about the delta between, say the Northeast and upper Midwest and the other regions?

Relative to the weather itself or the performance?

Comps in those regions once you started to anniversary the strong demand for fall and winter products that happened last year.

Sure. Clearly, up north during that period of time where you are expecting a little bit cooler weather, the comps in the upper Midwest and the northeast ran slightly down.

And when I say slightly I mean very low single digits during that time period. But other than that the rest of the chain performed very well.

So it clearly wasn’t a weather issue when it came to the softness of sales.

Okay. Got it.

Thanks. And are you able to break out how much big ticket was a drag on overall ticket?

Well, we had quantified that at being about 90 basis points that it impacted average tickets. When it came to the transactions, for us big ticket is relatively small transaction impact and the impact generally is going to be on the average ticket itself.

So I would just use the 90 basis points that we talked about on average ticket.

Okay. Got it.

And just last one. Since you've relaunched your Web site, could you give us an update in terms of what sort of growth you're seeing online, average order size?

How much gets picked up in store and what categories you're really seeing the most traction?

Denise, this is Greg. I won't give you which categories are doing best or worst, I think it follows suit to what you heard for the rest of the company sales.

We suffered a little bit in heating and other places like that. What we are finding is because this side is more easier to navigate with, the customers are starting to add multiple things to baskets.

Our actual traffic is up, our conversion is about flat to where it was but that’s anytime you go through a change like that in the Web site or some things you have to do within Google's search engine to gain that some of that back. But we are very optimistic that the changes we have made as we go through the holiday season are going to benefit us in a big way.

So you talked a little bit about the mixing centers in Texas. You've also talked about 20 to 30 centers that you think you could build longer term.

Do you have any sense of the velocity of that build out or is it just too early at this point?

Yes, I would tell you that, Ben, that it's a model we need to make sure that it's going to prove itself out. We, as you know, had about a two year, 18 month to two year test of this in the back of one of our other distribution centers where we had space.

We have now rolled two physical facilities into play. So far I would say we are pleased but some of the challenges, they are going to be different in different markets.

So right now we placed these two in Texas and these are high velocity feed food markets. As we will use these in other parts of the country and the key behind this is to bring inventory more direct to the store, faster replenishment, pull that inventory out of the back of the store so they don’t have to hold two and three weeks worth of supply.

That makes it so much easier for a store to operate. But so far so good but it's going to be little different by region and all I can tell you is we may not 30 or 25, we may find it 15 to 18 is enough.

But it really is -- supply chain build out is something we are still working through and we will give you more information on that as time progresses.

Okay. Fair enough.

Thanks. And then maybe switching gears back to the southwest distribution center.

As that center comes online, obviously you've talked about the reduction in stem miles, but to what extent do you expect it to positively benefit store productivity from a sales perspective? And can you point to instances in the past where you've built new DCs and how that may have impacted sales at surrounding stores that were serviced?

Well, the last several DCs we have built, one was a replacement DC from a Georgia DC to another, the other was one located in the Midwest here early, I will call it beginning of the south which is up in Franklin, Kentucky. And that was just based upon volume of stores that were opening in the region.

So here would be some of the benefits in this Arizona facility. Stores in the West Coast no longer have to have merchandize moving from Waverley, Nebraska and Waco, Texas.

The transit time is long. So we should be able to turn that transit time and make it much shorter to replenish those stores if we see a run on the certain category of business.

Secondly, we will hold a little different mix of product in that distribution center than you would have say in the eastern part of the United States because the climate and temperatures are different out there. So some of the unique mix of products that we would not typically store in the other DCs we will put into this distribution center in hopes of having more of the manufacturers that build that specific product sitting in the West Coast for either manufacturing or their own distribution facility so we can move it to our DC and then back to our stores, not moving it from the east all the way across to our DC and then from there to the stores.

So it's really about replenishment capability and turnaround time.

I just wanted to follow on that mixing center question. I'm curious how that plays into how you guys think about inventory turns longer and then how that flows through to possible improvement in the gross margin.

Do you guys have maybe a goal of where you'd like those trends to go, because you've made some pretty impressive strides over the last handful of years there?

Jamie, good question. Here is a couple of things to think about.

One is, mixing centers are closer distance to the store base than the large DC. So the whole philosophy behind that was to be able to turn merchandise faster back to the stores, replenish and keep the weeks of inventory out of the backrooms because our stores don’t have large backrooms.

We like to bring inventory in so much just in time and push it to the floor. So the modeling we have done on all this would tell you that number one, it makes the store to easy to operate and number two, we should see some gain in turn.

But the facts are that we have only got two up and running. It's not significant enough to probably impact the overall company turn at this point but longer term it should.

Okay. And then do you guys have any comments on the HomeTown Pet, read through on how those consumers are maybe converting to regular Tractor Supply consumers or adopting some of the brands a little bit more broadly?

I don't know if there's any anecdotal evidence that that's happening yet.

Well, this is Lee. We are just about a cycle a year, so we continue to still learn because we are just now going to see some comparisons come up so we are excited about that.

As far as brand conversion, what we are seeing is the customers are somewhat different, they are a little bit smaller dogs and smaller animals than they are in Tractor Supply that maybe outside dogs. So I think we see a little bit difference there.

We are seeing the customers are eager to adopt our exclusive brands, so I think that’s a great learning that we can deliver good value on both sets of the equation there. And I think overall, it's been a -- we feel very confident that we are getting some learnings for Tractor Supply as we move forward.

So I think we are very positive about it.

Greg, at the investor meeting back in February, you had discussed the opportunity to open stores in markets that are a bit larger than you have historically. You gave some examples in the Houston area, stores that were a bit closer to, say, a Home Depot and Lowe's.

Can you discuss how the stores with that change in the real estate strategy are performing?

Dan, not really a change in real estate strategy, more of a learning from our real estate portfolio. And what we have seen that it continues to work for us.

Today our base store is a little different than it was maybe ten years ago when we are purely, for the most part, a rural lifestyle store sitting a good 15-20 miles outside of most city limits. Today with some of the urban crawl and some of the other locations that our real estate model has told us can work for us, we do sit a little closer to some of the Home Depot's and Lowe's.

We are not as far out as we once were. About 67% to 68%, I think the number of our stores, sit within a proximity of a Home Depot and a Lowe's.

So we complement one another in those markets, to be very honest. I think you may have had one of the store walks with the team and you notice that we both have hardware but it's very different assortments.

We both have tools, but we are heavily into welding and in to power equipment that’s used in air tools whereas they are into more hand tools and electric type products. So the store base will continue to evolve, Dan, as the model tells us where we can place those stores.

But it hasn’t changed really that much it's just evolving.

Okay. And then just one quick follow up.

We estimate that the inventory per square foot finished the quarter up about 1.2%. Had the company not seen the softness in some of the winter product during the last couple of weeks in September, were you expecting your inventory per store to be essentially flat year-over-year?

Probably a little down, to be very honest because we came out of the spring season. Steve and his team did a great job managing through the inventories and we are actually chasing some product towards the latter part of second, early third quarter.

But what caused a little bit of movement upward was really all the forward movement of some heating products and things into the assortment and into the stores a little earlier. Yes.

That was the impact of it.

What I'd like to ask about is a little bit more related to precipitation, which often is affected by the temperature. But where it's been particularly dry, what are you seeing in terms of water handling equipment, things related to pumps and tankage, and how was that performing?

Yes, Chuck, I mean we have talked a lot about being a needs based retailer and when it comes either wet weather or dry weather, we see our business thrive in many of those cases we are a destination for those types of products. So if it's dry, people need to transfer water.

We sell water pumps. We have got a full line of different products to support their needs.

So we won't get into the specifics of it but I can tell you as a needs based retailer and the differentiated assortments that we have, we typically do pretty well and I would use the example of the West Coast for example. We have seen dry weather out there for quite a while but yet we continue to open stores and see, as Tony said, above average comps in a lot of those stores.

So, again, it works for our model.

Two things. First of all, the sales that were impacted by weather at the end of the quarter, do those get recaptured at full margin is the expectation in 4Q, and is this material in the whole scheme of things?

Eric, this is Steve. What I can tell you is, as when it got cold a few weeks and few days, we saw our cold weather business move.

What I can't tell you is how cold it's going to be in Q4 and what part of the country it's going to be really cold in. What I can say, and Tony said it earlier I think on his initial call, is that last year in November it was colder, December was a little warmer.

We think that’s going to flip. But I can't say whether or not all sales are going to be deferred.

Q4, we do much more cold weather products than we do in Q3. Q3 was a small portion of the total.

Okay. That's helpful.

And then secondly on gross margin, the upside in the quarter, the payback from some of the price and markdown optimization. Not asking if there's more quarters above 60 basis points of gross margin but are there more quarters of notable benefit from those efforts?

How should we think about that?

Yes. What I would tell you is that we have invested in a variety of systems and we do expect get some benefit from those systems but there is a number of variables that play in the margin as well.

We will continue to become more efficient as we use science rather than art and that’s how we are operating today. So I think we have got a good track record and a good run but I don’t know what percent you are going to see those improvements over time.

We are going to continue to operate as we have in the past. Tony, I don’t know if you have anything to add.

No, I would agree that the most important thing is a lot of it is year-over-year performance and markdowns and clearance through a particular cycle or season. That’s going to override the benefit of any of the price management tools that we put into place.

But the key is, as we continue to develop these tools and utilize and become more adapt, we clearly lay a basis of improvements so that we can continue to even in a tough quarter be able to drive more efficient and better sales and obviously drive the comps. So it's really a critical element of our continuous improvement program.

First, I guess I'd like to say I'm glad I was wrong on the quarter. Very solid, as always.

Everybody gets the tractor Adam.

Yes, I know. That's what you guys told me last time.

I have learned my lesson. So I want to focus my question on the continued strong traffic trends.

As you look at the results, I'm hoping maybe you could provide a little bit more color on the drivers here. I know you guys have been doing a lot with customer acquisition initiatives, maybe more share of wallet from existing customers, and then as you look at the new western stores, maybe how much is coming from there?

Yes. Adam, what I would tell you is is that a lot of it has to do with our strategy around queue.

We continue to gain momentum in a lot of those businesses and a needs-based retailer, when you sell a lot of consumables and you build loyalty, and we have got great team members in our stores, you get a lot of repeat customers coming back through. You know there is also the word of mouth marketing that we get the benefit of because we are in local communities.

And a lot of the folks that shop us tell their neighbors. And so I think it's 30 straight quarters of comp transaction growth and I think a lot of that stems from a lot of what we are doing inside the store but I would also tell you has a lot to do with the assortments that we put strategies around.

And as you think about maybe who you're taking share from, I know in the past you've discussed a number, or a number of how many of these smaller, really mom and pop operations you have. But then just sort of relative to Dan's question earlier, you find that you are maybe a little bit easier to evolve your real estate strategy into larger cities, maybe some more from some of the big box guys.

As you look at that really small mom and pop though, is that number still coming down quite a bit and how much do you think share do they really have of the market?

We don’t typically get into the share number game here. What we can say is we are a consolidator for the lifestyle and our goal as an organization is to bring the needs of our customer under one roof and allow them to come in and our hope is that they will shop, peg hooks, shelves, four ways, center courts and end caps.

And I think we have done a nice job with our assortments, tailoring them to that lifestyle and they continue to reward us with traffic.

I would also say, Adam, the emphasis Steve and the merchant team and the marketing team and the stores team have put in to this localization of products and really being understanding the market needs has played off and paid big dividends for us. Our stores may look the same as you walk through them but as you go down those aisles, as Steve was saying those end caps and that, you are going to notice very specific products geared toward those individual markets.

And in this business and those who we compete with in this business, they are good at that. And that’s something that we have gotten far better at for the last several years.

Okay. Well, thanks everybody for joining us today and we are looking ahead and we are pleased with our performance as I said for the first nine months of the year and we really do feel very positive about our position heading into fourth quarter.

Along with our continuous improvement efforts as Steve had mentioned, we have got things happening in merch and in marketing and we will continue to invest in our systems and infrastructure to support the long-term growth of Tractor Supply, driving return on capital and achieving our goal of mid-teens annual earnings growth. Thank you for your continued support of Tractor Supply and we look forward to speaking with you again in January regarding our fourth quarter and full year of 2015 results.