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Executives

Jim Wright – Chairman and CEO

Tony Crudele – EVP, CFO, Treasurer

Greg Sandfort – President and Chief Merchandising Officer

Analysts

Alan Rifkin – Barclays Capital

Vincent Sinisi – Bank of America

Peter Benedict – Robert W. Baird

Dan Wewer – Raymond James

John Lawrence – Morgan Keegan

Peter Keith – Piper Jaffray

Mark Miller – William Blair

Adam Sindler – Deutsche Bank

[Kate Lent] – Wells Fargo Securities

David Magee – SunTrust Robinson Humphrey

Simeon Gutman – Credit Suisse

Matthew Fassler – Goldman Sachs

Chris Horvers – JPMorgan

[Bernard Shelton] – KeyBanc Capital Markets

Tractor Supply Company (TSCO) Q3 2011 Earnings Call October 19, 2011 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss third quarter 2011 results.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the call, please press star 0 on your touchtone phone.

Please be advised that reproduction of this call in whole or in part is not permitted without prior written authorization of Tractor Supply Company. And as a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Jennifer Milan of FTI Consulting. Please go ahead, Jennifer.

Jennifer Milan

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Before we begin, let me take a moment to reference the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

This conference 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 that 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'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 the statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call.

Now I'm pleased to introduced Jim Wright, Chairman and Chief Executive Officer. Jim, please go ahead.

Jim Wright

Thank you, Jennifer. Good afternoon, everyone. I'm here today with Tony Crudele, our Chief Financial Officer, and Greg Sanfort, our President and Chief Merchandising Officer.

We are delighted with our third quarter and year-to-date performance, with each quarter we've built on the momentum and continued to demonstrate that the structural changes we made to our business are contributing to our ability to grow and improve Tractor Supply Company.

In the third quarter we experienced another period of broad-based strength and double-digit increases in both sales and profitability on top of record results recorded a year ago. We also improved gross margin and leveraged SG&A costs.

Now, to provide more detail on our performance during the quarter, we continued to drive top-line growth through unique merchandise mix, which enables us to serve our customers' everyday needs at a compelling value. As expected our consumable, usable and edible, or [Q] categories remained key sales and traffic drivers.

At the same time, we experienced increased demand for emergency response items such as generators and pumps related to Hurricane [Irene]. Although emergency response items are typically lower margin, they do drive footsteps to our stores, allowing us to strengthen relationships with existing customers and introduce new customers to our brand. As drought conditions persisted in the southwest markets, we were nimble in refining our merchandise mix to support the changing needs of the customers in that region.

While growing the top line, we remained focused on executing our four strategic margin initiatives. This enabled us to manage merchandise margins despite some external headwinds. While we experienced significant commodity inflation, we were able to provide compelling value on our [Q] items that are core to the rural lifestyle. Once again we demonstrated our capacity to maintain margin dollars per unit while gaining market share during inflationary cycles. We continue to invest in the business to support our stores, which has allowed us to better serve our customers.

Our inventory management execution is simply the best that it's ever been, with a high in-stock levels and strong seasonal execution continuing to create a compelling shopping experience for our customers. In addition, we've opened our new distribution center in Franklin, Kentucky as planned. This is a new distribution center to facilitate our store growth in the northeast and the mid-south. We are pleased with the smooth opening of the facility as well as our successful implementation of the warehouse management system. We've already begun taking receipts at this new facility and expect to begin shipping product in December.

Overall, the third quarter results further validate that we continue to gain traction from our strategic initiatives which collectively have strengthened the structural foundation of our business and our brand. Tractor Supply Company is operating as a better, stronger and more sophisticated retailer than ever before. We have the right plans, we have the right team in place, and we're executing well across the business. We are sustainably gaining share in the market, and look forward to a strong close to 2011.

I'd now like to turn the call over to Tony to review our financial results and discuss our outlook.

Tony Crudele

Thanks, Jim; and good afternoon, everyone. We had another very strong performance in our third quarter. Our sales strength remains broad-based, and we continue to increase our market share in many key merchandise categories. Although comp sales benefited in part from Hurricane Irene and from inflation, the overall underlying fundamental strength of our business is demonstrated by the significant increase in unit sales and transactions.

For the quarter ended September 24, 2011, on a year-over-year basis, net sales increased 17.9% to $977.8 million, and net income grew by 43.1% to $42.7 million or $0.58 per diluted share.

Comp store sales increased 11.5% compared to last year's increase of 5%. We continue to drive same-store sales increase on top of a strong prior-year performance. Non-comp sales were $53 million or approximately $5.5 million of sales.

Comp transaction count increased for the 14th consecutive quarter by 5.9%, which was on top of a 6.3% transaction increase last year. We continue to drive footsteps into the store with our [Q] items, serving our customers' basic and functional needs. We also continue to gain customers through effective and targeted marketing.

Additionally, we believe that we experienced an increase in customer acquisition as an indirect result of Hurricane preparedness and emergency response sales related to Hurricane Irene. We estimate that approximately 90 basis points of the comp store sales increase resulted from emergency response sales.

The trend in average comp ticket continued to be positive at 5.3% versus last year's 1.3% decrease. We saw an increase in big ticket purchases consistent with the overall company comp increase. We estimate that this increase in big ticket purchases drove 120 basis points of the overall comp sales increase, with approximately half attributed to hurricane-related big ticket sales.

The increase in average ticket was broadly distributed throughout our merchandise categories and was driven by inflation as well as by mix. We continue to experience broad-based sales strength with respect to both merchandise categories and geographic regions. The strong sales occurred across the entire country as each of our eight geographic regions experienced a high single-digit increase in comp sales, or better.

Sales were the strongest in the mid-Atlantic region, which benefited from an extended spring, and also hurricane-related sales. While the southwest suffered from an extended drought and was the weakest region, we are still pleased with the positive performance as we did an excellent job shifting the assortment to meet our customers' drought-related needs. Broad-based nature of the sales increase is also reinforced by the consistency of sales throughout the quarter as we experienced a double-digit comp increase in each of the months.

The best-performing comp categories were our [Q] products, principally animal and pet-related merchandise, and additionally, emergency response and heating categories. Over the quarter, inflation exceeded our forecast as we estimated that it contributed approximately 465 basis points to the top line sales. Inflation was most evident in the livestock feed, agricultural fencing and lubricant categories as we saw cost increases in grain, steel and oil.

Now turning to gross margin which increased by 25 basis points to 33.5% of sales. Direct product margin percent improved as we continued to make progress on our four strategic gross margin initiatives. We achieved this increase while overcoming headwinds from freight and the negative mix impact. Additionally, the merchandising team did an excellent job managing gross margin during a highly inflationary period in many of the core products.

Let me remind you that during inflationary times we experience pressure on margin rate and focus on driving margin dollars per unit. As you can see from our results, we are very successful in managing gross margin dollars during the third quarter.

Freight expense increased by 48 basis points over last year. This increase was driven by higher fuel costs, costs associated with increased import activity of seasonal goods, and emergency response in this quarter.

As an example, as part of our strategic sourcing initiative, import purchases in the quarter represented a little over 13% of our purchases, which is greater than 74% year-over-year increase.

Overall, we are pleased with our gross margin performance while we continued to provide great values to our consumer.

For the quarter, SG&A including depreciation and amortization, was 26.5% of sales, which was approximately 100 basis points of improvement from the prior year's quarter. This improvement resulted principally from our sales growth. We leveraged our key store expenses, payroll and occupancy. We are pleased to have a leveraged occupancy for the seventh consecutive quarter while growing the store base by 8%. Favorable leverage from store expenses was slightly offset by increased incentive compensation expense as our results were significantly above last year's performance and exceeded our original current-year plan.

The company's tax rate was 36.7% compared to 37% in Q3 last year. The tax rate was reduced by higher federal tax credits compared to the prior year. We continue to anticipate that our full-year tax rate will be 36.7%.

Turning to the balance sheet, at quarter-end, we had $118 million in cash and investments compared to $187 million last year. We are tracking well towards our cash management targets and anticipate year-end cash balances to be in our target range of $100 million to $150 million. The year-over-year reduction in the cash balance at the end of the third quarter resulted from our seasonal purchases and stock repurchases during the year as we returned value to our shareholders.

During the third quarter, under our stock repurchase program, we acquired approximately 805,000 shares for $49.2 million. We believe that the volatility in the marketplace provided an opportunity to repurchase shares below our calculated intrinsic value, and we were pleased with how our approach worked under our 10b5-1 plan. We estimate that there was minimal impact on EPS from the share repurchases in the quarter.

Inventory levels per store at quarter-end increased approximately 1.6%. We are pleased with our inventory position as we ended the fall/winter selling season, especially in light of the inflation that we experienced, which is embedded in the inventory valuation. Year-to-date annualized inventory turns were 3.13 times, a 15-basis-point improvement over the same period last year.

Capital expenditures for the quarter were $33.2 million compared to $30.2 million in last year's third quarter. This increase in capital spending related to approximately $10.9 million for the construction of our new distribution center in Franklin, Kentucky compared to $8.2 million expended in the prior year for conveyor systems and equipment for two distribution centers. We opened 12 stores, closed one store, and relocated another in the third quarter, versus nine openings in the prior-year's third quarter.

Turning to our outlook for the full year. As a result of our strong performance in the third quarter, we are increasing our financial expectations for the full year 2011. We expect net income to be in the range of $2.85 to $2.89 per diluted share compared to our previous guidance of $2.75 to $2.82 per diluted share.

We expect full-year sales to range between $4.15 billion and $4.17 billion compared to our previous expectations of $4.1 billion to $4.14 billion. Correspondingly, same-store sales for the full year expected to increase 6.5% to 7% compared to our prior expectation for an increase of 5% to 6%.

I'd like to quickly discuss a few of the underlying assumptions for the remainder of the including -- included in our full-year guidance. Let me remind you that we are cycling against a 13.1% comp in the fourth quarter last year, and this is a 14-week quarter as part of our 53-week year.

We estimate that the benefit of additional week to earnings will approximately be $0.05 to $0.06 per share. Obviously, the additional week in 2011 will not recur in 2012, which should be considered in the year-over-year earnings growth when modeling fiscal year 2012.

We believe that the consumer will remain value-oriented and that [Q] categories will continue to be the sales drivers. We also recognize that consumer sentiment regarding the economy continues to be negative. October sales to date have been very solid and are incorporated in our forecast.

The early cool weather in the north has had a positive impact on sales as we transitioned to the fall winter selling season. However, we expect weather trends to be slightly negative for the fourth quarter overall as November and December are projected to be slightly warmer than last year.

We expect that gross margin will continue to benefit from our strategic initiatives. However, freight costs continue to run above our original plan levels. We do not expect that this variance will begin -- we expect that this variance will begin to moderate as we start to cycle fuel increases in Q4 last year. Even with freight and mix as headwinds, we believe that we can drive gross margin improvement in the fourth quarter of approximately 10 to 20 basis points.

We anticipate that we'll continue to have inflation in the fourth quarter. Our full-year inflation assumption is 2% to 3%. Although Q3 came in above our forecast, we will begin to cycle against less deflationary period in the fourth quarter, and we anticipate that inflation for the quarter will be in this range. This inflation assumption is considered in our comp guidance.

With respect to store growth and CapEx, we now expect that the full-year expenditures will be approximately $165 million. We anticipate that we will exceed the high end of our original $160 million estimate for store growth and capital expenditures as a result of the acquisition of two of our lease stores originated in Q3 and a minimum of four additional purchases based on current commitments or intent to purchase.

Year-to-date, we have acquired five stores for $14 million. We will continue to opportunistically purchase lease stores where we are presented with the right of first refusal when the economics are accretive to the income statement and it improves our long-term return on invested capital.

To conclude, we are very pleased with our performance in the third quarter and are proud that our strategic initiatives are driving top and bottom line increases. We are well-positioned for another record year in both sales and earnings.

Now I'd like to turn the call back to Jim.

Jim Wright

Great. Thanks, Tony.

As you heard us say before, we place a great deal of rigor around our long-term planning process. The performance and the growth that we are delivering are reflective of this methodical approach, consistent execution and ability to capture value from our strategic initiatives. We believe that we're only beginning to see the benefits of our actions, that the structural improvements that we made to the business will continue.

As we look to the upcoming fall/winter holiday selling season, we remain confident that we have the right plans in place. Our heating department looks just terrific. We've recently introduced Redstone, our private label brand in the heating category. We are pleased with the look and the feel of this brand. As you know, our private brand strategy is key -- is a key initiative from a top-line margin and loyalty perspective, and we're excited about the opportunities for Redstone as well as our other private brands.

As we look ahead, we believe that consumers in general remain cautious and we expect they'll continue to make needs basis, value-driven purchases. We expect the holiday season to trend as it has for the last few years, with customers looking to buy functional everyday items. With that in mind, we continue to develop and merchandise functional products at the best value possible.

Now let me briefly review some of the additional merchandise and the marketing initiatives. We've enhanced in-store presentation and product displays, and we've improved product content. We continue to test and learn from a price optimization strategy and leverage the point of sale information. We're also using marketing more effectively and efficiently to drive the business forward. Through our CRM program and direct mail programs, we are capturing data that allows us to better understand our customers and their household needs. We are very pleased that both are providing increased ROI on marketing and advertising spend. We understand our niche very well and we are learning more about our customers each day. As a result, we continue to refine our marketing efforts.

Overall, we believe that we have considerable runway ahead of us as we continue to implement and gain traction on each of our strategic initiatives. We are gaining share in the market, increasing sales and profits, and expanding our footprint in key regions. The team is fully aligned, collaborative and passionate about what we all do. As a result, our execution has never been better and is dramatically superior to what it was only a few years ago. Our balance sheet is strong. We look forward to completing another record year for Tractor Supply Company and building on the momentum in 2012 and the years ahead.

Operator, that concludes our prepared remarks and would now like to open the call for questions.

Q&A Session

Operator

Thank you. Ladies and gentlemen, at this time, if you have a question, you'll need to press star 1. If your question has already been answered, you may remove yourself from the queue by pressing star 2. Also if you're using a speakerphone, please pick up the handset before pressing the buttons. One moment please for the first question.

And our first question comes from Alan Rifkin from Barclays.

Alan Rifkin – Barclays Capital

Thank you very much. Can you folks hear me?

Jim Wright

Yeah.

Alan Rifkin – Barclays Capital

Hey, congratulations on a nice quarter.

Jim Wright

Thank you.

Alan Rifkin – Barclays Capital

A couple of questions if I may. Jim, you said that ticket rose 120 basis points, 60 basis points driven by the hurricane. I was wondering if you could please elaborate on the other 60 basis points of core comp increase that was driven by big ticket. What specifically you saw there and what sustainability do you believe is behind that number.

Greg Sandfort

Hey, Alan, it's Greg. Let me take the first one.

No question that in the quarter, with the weather impacts of Hurricane Irene, we saw some big ticket improvement in generators, chainsaws, things that are larger ticket. But we also saw, probably for the first time, the return of some of the other categories that we've been -- we have not seen for the last couple of years. Our truck box and fuel-handling equipment categories, the heating category got off to a very good start early in the year which we did not have a year ago.

And I would tell you that some of our other categories where we talked about big ticket, $350 and higher, have been, how would I say this, a quick start for the fall season, and we're pleased with it. But it wasn't just the hurricane. It has been, and we've been seeing some movement in big ticket, but very delighted that we're starting to see this consumer coming back. Maybe we're getting toward a replacement cycle, I'm not sure. But clearly, some of the big ticket products are starting to sell again.

Alan Rifkin – Barclays Capital

Greg, so despite your belief that the consumer remains cautious, I mean do you think that there is a sustainability on this part of the equation, since you said that these are trends that you haven't seen for a couple of years?

Greg Sandfort

It's hard to say. One quarter would not give me the confidence that it's a trend just yet. I think we'll answer that question as we get to fourth quarter.

Alan Rifkin – Barclays Capital

Okay. And one more question if I may, and then I'll turn it over. With respect to the opening of the Franklin DC, were there any costs associated with that opening in the quarter that were expensed that negative impacted your SG&A line?

Tony Crudele

Alan, this is Tony. There was some expenses related, but it was not significant, and I would say the impact would be limited and it wouldn't be something that you would exclude it from your model.

Alan Rifkin – Barclays Capital

Okay. Thank you both very much.

Jim Wright

Thank you.

Greg Sandfort

Thank you.

Operator

And our next question comes from Vincent Sinisi with Bank of America.

Vincent Sinisi – Bank of America

Thanks very much for taking my question, and congratulations on another very nice quarter.

Jim Wright

Thank you.

Vincent Sinisi – Bank of America

No problem. I wanted to ask you guys, Jim, not too long ago you had come out and officially gave a new EBIT margin target, I believe it was over the next three to four years of 8.5% now. Just wondering if any of your underlying assumptions have changed since you last had given an EBIT target in terms of the percentage contribution from each of the components. I know that traditionally you guys have expected gross margin about 20 to 30 basis points a year. If you can elaborate if anything fundamentally has changed, that'd be appreciated.

Jim Wright

Sure, Vinnie. At this point in time, we would stick with 8.5% as our goal. Historically we've talked about it would be driven principally by gross margin rate. As we cycle through the inflation, and you've heard us talk many times about our capacity to maintain margin dollars per unit, I think we may see the EBIT driven equally now via margin dollar gain as well as a continuous gain in margin dollar rate, unless we begin to see a reversal of the inflation we're experiencing as we speak.

Vincent Sinisi – Bank of America

Okay, that's helpful. And one follow-up if I can, as you continue to refine your marketing efforts, can you give any perspective in terms of what's giving you kind of the best bang for your buck? Do you think that your strategies that are in place right now will remain, whichever, contemplate moving back into a TV type of advertising? Do you have a sense for what's drawing the most new versus existing customers?

Jim Wright

Sure. We're delighted with our ability to look into our customer profile and move them upwards in each of the seven segments we have and then begin to move them across segment towards, in each case, towards your higher-value consumer of the shops with increased frequency in shops across the broader market basket.

With regard to television, our recent research has indicated that there is a significant number of consumers that we call aware non-shoppers. They are aware of Tractor Supply, they may drive by our store, but their point of view is "probably not as store for me." We've had some focus groups with those customers, taking them through -- showing them an ad [sap] which is essentially a magazine ad, that describes in greater detail what our stores are all about. And we've noticed a pretty significant opinion change in those customers' desire to perhaps give us a try.

As a result of that learning, we are currently testing regional television in three markets, and then obviously using the adjacent markets and the rest of the company as a control group, and we'll be testing that TV advertising through the end of this year. And its purpose is to -- is deliberately to target this aware non-shopping consumer. They will never be our highest annual value as our best customers, but they do own pets, they do take care of their yards, and for them, we may be the most convenient outlet for those products. So we are actually back on television after a three-year hiatus, but we are doing it very selectively against the highly targeted audience, and we're measuring the response.

Vincent Sinisi – Bank of America

Okay. Thanks very much, Jim, and best of luck to you all in the fourth quarter.

Jim Wright

Thank you.

Operator

And next question will come from Peter Benedict with Robert W. Baird.

Peter Benedict – Robert W. Baird

Hey, guys. A couple of questions. First, Tony, maybe how material was that incentive comp hit in the third quarter? Can you give us maybe a basis-point impact or dollar impact? That's the first question.

And then the second question, the new store plan for the year, is that still the high end of 80 to 85? And related to that, as we think out towards next year, just some early thinking about CapEx. I know some of the DC stuff falls off, so I wanted to just get your thoughts on that.

Tony Crudele

Right. Yeah, Peter, as far as the capital goes, we are targeted still at the 85-store range for this current year. As we move into next year, we're going to focus a little bit more on the sales percentage increase. As we open some of these smaller -- the small market stores, we may have a little bit more unit growth, but we are still targeting about the 8% sales growth. So that should put us in somewhere between the 90 to 95-store range for 2012.

And on the first question --

Jim Wright

Incentive comp.

Tony Crudele

The incentive comp, the range was around 30 basis points, you know, give or take a few. A lot of it really had to do with the strong sales performance and was related to the store monthly sales bonus. So, a strong performance by the stores and the incentive compensation followed.

We believe that as we move through this year, we have been able to look in incentive compensation relative to the performance. And as you move into the fourth quarter, I think we're well-positioned, given our performance year-to-date, based on our original forecast or original budgeting and performance compared to last year, and the booking of the incentive comps.

Peter Benedict – Robert W. Baird

Thanks, that's helpful. And then maybe a follow up for Jim or Greg, just any early learnings you guys are seeing from the price optimization rollout that I guess started in June? I know it's early, but just any initial thoughts on how that's starting to work out, and kind of the pace of getting that rolled out to all the categories that you have that planned for?

Greg Sandfort

Hey, Peter, it's Greg, I'll answer that one. First of all, all the buyers in the company are on the plan now with at least one or more categories. About 27% of all the company's categories and volume of those categories is now being managed on the Revionics system. So we're starting to get a decent read now. We're managing categories basically two ways: the gross margin to market share and then really maybe even a third way, combined of -- is a mix of both.

I would tell you that we are learning a lot about our pricing rules and our correct pricing relationships between categories. That's probably more of a more important learning that we've had. Yeah, you change your price here in the category, what is the effect in some other products over here out of the sale ship and so on.

And then I'd say last, and we're not ready to give any hard numbers to this just yet, but we are seeing an uptick in our gross margin performance due to this more up than down, I will say that.

Peter Benedict – Robert W. Baird

All right. Terrific. Thanks very much, guys.

Greg Sandfort

Thank you.

Operator

And next question comes from Dan Wewer with Raymond James.

Dan Wewer – Raymond James

Thanks. Jim, a question about the smaller 12,000 square-foot stores, as I recall, there are about 23 of those now opened. When you go through periods such as the third quarter with very robust comp store sales growth, are those smaller stores able to achieve the same type of gains as the company average?

Jim Wright

Sure. Yeah, good question, Dan. But when you think about the, I guess, the type of metric -- important metric is inventory turns, days average inventory on hand, and that would be a number that's very comparable to the full-size markets.

Dan Wewer – Raymond James

Okay. And then a second question, I wanted to clarify your comments about during periods of especially high inflation, that you're focusing on gross margin dollars, not gross margin rate. And I understand that. But on the other hand, your margin rate did increase. So, just wanted to confirm, are you able to pass through all 4 percentage points of inflation through, or did the company have to eat some of that increase?

Jim Wright

Well, we -- two things, two countervailing things. One, there's mix of product, and our mix this quarter was actually margin-negative. The four initiatives we discussed many times were -- all gained traction and they were margin-positive. And then we had significant commodity inflation. And that relates specifically to my comment that, as we manage high-velocity commodities the cost increases fairly quickly, while we delay that when we can, we then look at the marketplace and use our pricing power at the pace that allows us to maintain or gain market share. That decision may compress margin rate, which it did in those categories during those quarter, but does allow us to maintain margin dollars per unit, or per bag if we're talking about feed. So, those were the dynamics of margin this last -- in this last quarter, Dan.

Dan Wewer – Raymond James

Then just as a last question I had for, just for Greg, I believe you're now in the third year of the introduction of Nutrena and Purina. You've talked in the past about the benefits in terms of driving more traffic to the stores and helping ticket size. But now that we are in the third year of those initiatives, do those benefits begun to run out?

Greg Sandfort

Dan, it's Greg. We're really in still year two, haven't eclipsed year three year. And what we're still seeing, because we track this through our CRM database, which is 40-ish percent of the consumers that are out there shopping with us, that we still see new customers coming in because of those two brands, and we also see customers who were buying in other parts of the store but not buying feed now starting to buy feed from us. So we're still very delighted with what this is still bringing to us.

I must comment, remember, that branded feed is the top [slice] of the feed business. It's not the major driver. You've got a lot of commodity businesses under that and our own private brands, but it's an important piece because it completes the picture of the whole feed story for the consumer who is particularly interested in buying that branded feed.

Dan Wewer – Raymond James

Great. Thank you.

Operator

And moving on to John Lawrence with Morgan Keegan.

John Lawrence – Morgan Keegan

Yeah, thanks. Good afternoon, guys.

Jim Wright

Hi, John.

Greg Sandfort

Hi, John.

John Lawrence – Morgan Keegan

Greg, would you follow up a little bit and just talk a little bit about the private label portfolio. Going into fourth quarter, it looks to me like in the store pretty good SKU additions in C.E,. Schmidt, obviously Jim mentioned Redstone. Just give us a little sense of, are we seeing more SKU expansion going into the fourth? And then I'll have a follow-up.

Greg Sandfort

You're right, John. You've been out in the stores. As I said in the call last quarter, we would start to see that influx in the third quarter and into fourth. There's been substantial SKU additions across the store. Heating is probably one of the more noticeable because it's new. JobSmart is still expanding. You saw C.E. Schmidt. There's other categories, rowing and such.

What I can tell you is that, you know, very pleased with what we're seeing initially on sales too. So, yes, we have done exactly what you said.

John Lawrence – Morgan Keegan

Even the pink overalls?

Greg Sandfort

Yeah, even the pink -- believe it or not, John, those sell.

John Lawrence – Morgan Keegan

I understand.

Greg Sandfort

There's a customer for it.

John Lawrence – Morgan Keegan

Secondly, could you talk just a little bit about -- following up on Dan's question regarding the smaller footprint. Anything there about as far as just the, I guess, the challenges of getting some of that -- the turns, Jim, as far as -- I know the breadth of some of that product is a little less than -- that's the idea of stocking that store. Could you just go one step further, and the ability to stock that store when -- high-turn categories?

Jim Wright

Sure. As we reduced the inventory, and I think you've heard us say in the past, that a full-sized store opens with about $670,000 of inventory cost. Small box will open at close to $500,000. We expect the full-size store to open at $3 million. We expect the smaller market store to open around $2 million. So it has a little more than two-thirds the inventory with an expectation of two-thirds of sales. And we do first work on narrowing breadth. For example, we have a category where we offer good, better, best. In the smaller market, we may offer only the good/better, or the better/best.

We, to the degree it's possible, do not reduce depth in any of the high-velocity categories. And bear in mind that we do replenish our stores at least weekly, including the small stores.

John Lawrence – Morgan Keegan

Right, thanks. And the last question, Greg, is, you mentioned some of the high-ticket items you're starting to see that customer come back. Does that bode well, obviously going into spring of next year, back to the more season, from your standpoint?

Greg Sandfort

John, if it continues, yes, it would bode well for us. But again, I said this is really the first quarter that we've seen this happen. I'd like to get another quarter under our belt to be able to speak to it and say, "Listen, it looks like they're back and they're starting to buy again." So it's still a little early.

John Lawrence – Morgan Keegan

Thanks, guys. Congratulations.

Greg Sandfort

Thank you.

Jim Wright

Thank you.

Operator

And next question comes from Peter Keith with Piper Jaffray.

Peter Keith – Piper Jaffray

Hey, good afternoon. Also pass down my congratulations on the good results.

Jim Wright

Thank you.

Peter Keith – Piper Jaffray

Tony, I had a question for you on some of the detail around gross margin. When you said that -- it sounds like freight expense, and there were some other things, was a 48-basis-point negative impact, did that also include the negative mix impact from the hurricane-related items?

Tony Crudele

The freight relates to -- the 48 basis points relate to freight. Obviously that would include movement of some of the big ticket items such as generators. In addition to that, we did have a negative mix impact, and that is not included in the 48 basis points.

Peter Keith – Piper Jaffray

Okay. Could you give us a ballpark of what that negative impact for mix was?

Tony Crudele

Yeah, it, again, it seems like I always default back to around a 30-basis-point range, but again, that mix variance or negative mix impact was in that range as well.

Peter Keith – Piper Jaffray

Okay, all right, that's helpful. Thank you. And I appreciate some of the feedback you've already provided on the price optimization initiatives. I was just curious here, as we've seen the last couple of months with consumer sentiment dropping off, does that change your outlook on how you may be able to drive gross margin expansion? Obviously maybe in some categories it's a little more difficult to adjust price as consumers are getting a little more challenged from a spending front.

Greg Sandfort

Peter, this is Greg. It does -- it's taken in consideration, as we make adjustment and we watch and monitor it very, very closely, I would tell you that thus far we haven't made any moves where we've seen a dramatic drop-off from the consumer. We're very cautious, it's a slow ratcheted up process or ratcheted back process, depending upon the category and how we profiled it. As I said earlier, is it a gross margin category, is it a sales-driving category, market share category, is it blend of both?

So it's a little early. But we'll, I think we'll see a bit more as we go through the fourth quarter.

Peter Keith – Piper Jaffray

Okay. That's great. Good luck going forward here, for the rest of the year.

Greg Sandfort

Thank you.

Operator

Once again, if you would like to ask a question, please press star 1. Again, that is star 1 for questions.

The next question comes from Mark Miller with William Blair.

Mark Miller – William Blair

Hi, good afternoon. My question is about the relationship between direct import purchases which I think you said are up 74%, and private label sales. I'm assuming that virtually all of these are private label items. Can you help us understand the relationship here in both the timing and the magnitude of these two dimensions, so, imports versus private label movement with the customer?

Greg Sandfort

Yeah, Mark, first of all, there is a difference. We do import from some of our what I would call indirect relationships with vendors. You know, heating category as an example. We have some things we develop on our own, that’s direct to factor, that's private label, that's us. And then there's other products we bring in, in heating category that are brought through the channel of our logistics but is -- it's not a direct import per se. We didn't develop it. We didn't product-develop it. So, there's a combination of things going on there.

As far as the relationships, we had, as I've been saying the last couple of quarters, we were going to see a major push in the overall private brand expansion into the third, fourth quarter, particularly in the hard line side of the business, some in the soft line side, and you're seeing that, if you’ve been in our stores, you'll see that right now. That's been in the works and being executed against for many, many months.

I would tell you, from a mix standpoint, whether that's going to all fall out, we're going to need to go through the fourth quarter before we can say how successful we were. But initial results are very promising. I like what I'm seeing with the sets, the quality of the product that's in the stores, and initial customer response, so.

Mark Miller – William Blair

Great. And then can you just remind us how this plays out through the P&L? So, you get a higher markup on the direct import. Does that go through the P&L when it's sold, or do you have average markup on the inventory that even before you sell it could help the margins?

And then also curious if there's an impact on the accounts payable. It typically has gone up with inventory, but this quarter was flat, a little bit down. Thanks.

Greg Sandfort

First of all, it goes to the P&L when it's sold. And then secondly, as far as the terms, as far as the balance of how much of the inventory is sitting out there, from a term standpoint, it's going to come down a little bit because of the fact that we're doing our own importing, you know, and we're putting some of our cash out in front. But it's not significant at this point. And the differential between the margin that you gain and what you give up on the discount side is always, for us, it's on the positive side. It's many basis points of improvement.

Mark Miller – William Blair

Great. Thanks. Great work.

Jim Wright

Thank you.

Operator

And the next question comes from Adam Sindler with Deutsche Bank.

Adam Sindler – Deutsche Bank

Yes, good afternoon, gentlemen. Great quarter. My congratulations as well.

Jim Wright

Thank you.

Adam Sindler – Deutsche Bank

Greg, the first question, for you, on the big ticket, I guess while still this is the first quarter where you're really kind of excited about it, we have seen in some other quarters, I guess the second quarter of 2010 when you responded with a good opening price point assortment of outdoor power equipment, in the fourth quarter last year with weather we saw some decent sales, maybe not as strong as this, but at least a little bit better than expected. Is this still from the opening price point side of the business, or are we starting to see a return to some of the fuller price points, big ticket items?

Greg Sandfort

It is a blend. At this point in time it's a blend. It's not just the opening price tier. But again, it's early.

Adam Sindler – Deutsche Bank

Yeah.

Greg Sandfort

I would tell you that -- I believe there's probably some pent-up demand. For example, a customer that last year was stranded because they didn't buy a snow blower, they're not going to let that happen again to themselves. They're going to go out early this year and buy that snow blower. So we see some of that as some of the early sales coming through. That's just one item. But it's really a blend. It's not just the opening price point that we created about a year-and-a-half, two years ago.

Adam Sindler – Deutsche Bank

Okay. And then just on the gross margin drivers, could you remind us maybe, sort of go over where we are on each of those sort of implementation and then sort of realization of the benefits?

Greg Sandfort

Well, let me give you at least where I think we are as far as innings, since we're in the World Series of baseball right now. The strat sourcing side, I'd say we're probably in the third inning. We are just not getting some momentum with product development and our overall coordination of that with strategic sourcing. We're finding some new countries to source product, not just China. The third inning.

Private label expansion, maybe more, you know, maybe in middle of the fourth inning, because of what we've done this past fall, but a lot of improvement yet to be made there as far as other categories and expansion within an established category.

On the price [stop], we talked about that earlier, that we've got all the buyers now into that process. About 30%, 27% exact numbers of the products are out there already in the process. We expect to have better than a third by the end of the year. So we're going to make some more movement there.

And then the last piece, the seasonal conversion, critically important now as we go through the fourth quarter and making the turn into spring, we came out of this past spring summer fairly clean, pleased with the inventories, as a matter of fact, probably could have pushed in fall earlier because we had such clean sell-throughs.

So, in that seasonal conversion, we're probably more toward the sixth inning, I would say. Still more room to improve the processes, but we're getting fairly good at the inventory management now and that seasonal conversion piece.

Adam Sindler – Deutsche Bank

Actually just one real quickly to wrap up, so, the guidance, full-year comp guidance implies about 1-1/2 to 3 for the fourth quarter. Looking at the commentary that inflation is about 2% to 3%, are we basically assuming that the entirety of the comp in the fourth quarter comes from the inflation benefit with potentially even a little bit of decline in comp transactions just based on the strength of the winter in 4Q10 -- I'm sorry, 4Q11 -- 10?

Jim Wright

Yeah, this is Jim. As we think about the fourth quarter, a couple of things to keep in mind. As we look at the second half in total, we have increased our second-half forecast obviously, which goes to Q4. As you know, we're cycling a 13.1 comp. We also had a record the day after Thanksgiving event a year ago. In addition, we expect [December] to be a little warmer than last year and we all continue to be concerned about consumer sentiment as we look into the -- out into the fourth quarter. December this year is a six-week month, but it's so -- it's quite aways away from us right now and difficult for us to look forward with that level of certainty.

So as we think about our EPS range for the full year, and obviously you've all deciphered what that means for Q4, particularly relative to comps, as Tony said, we've started out very strong in October, and if that trend continues, we certainly have the opportunity to exceed the high end of the range that we've granted, and that would come because of comp levels above what you calculated and suggested.

Adam Sindler – Deutsche Bank

Perfect. Thank you, appreciate it.

Greg Sandfort

Thank you.

Operator

The next question comes from Matt Nemer with Wells Fargo Securities.

[Kate Lent] – Wells Fargo Securities

Hi, this is actually [Kate Lent] in for Matt Nemer. Congrats again on a great quarter.

I wonder, first, follow-up on the smaller format stores, I was wondering if you could talk about the rent expense compared to your larger stores, and also any early thoughts on the potential market opportunity.

Jim Wright

The rent on a per-square-foot basis is attractive. I guess it would be a tad lower than what we're paying in the full-size markets. The numbers that -- returns on sales, internal rate of return, all are virtually the same as the company we've built today.

And with regard to the number of stores, we continue to do our research, validate our learning, and our expectation is sometime in the first half of next year we should be able to, with some certainty, predict what our first estimate with that could be.

[Kate Lent] – Wells Fargo Securities

Okay, great. And secondly, we've noticed that you've been looking to add some personnel in your e-commerce and multichannel departments. And I'm wondering if you could share an update on any initiatives that you have to improve your e-commerce offering and better utilize the website to drive traffic to the stores, or your search engine optimization to capture new customers.

Greg Sandfort

[Kate], this is Greg; I'll speak to that. We have a number of things that we're doing with our web presence. The first is to improve the what I would call navigation and conversion. And then from there, we're talking about a new platform, and I can go on and on. The facts of this, we are now committed to saying, listen, we have to get in this space in the right way with the right people behind it and to give our customer basically the option, you know, we've got to get the conversion there. We have to be able to give them the convenience to shop, when, how, where they want. We know that, as an example, that more and more of our customers are coming to our site. We're seeing this track on mobile, which is amazing for us. I don’t know if it's ever going to be as large as other companies, but we're seeing movement.

So, yeah, we are behind this. We've got a lot of initiatives. Yes, we are out recruiting and putting together what we will believe be an 18. We have a great team of people together today. We're just very thinly staffed. And we've come to the realization through some work with an outside consulting group that, to do this the way we want and to have a world-class site and business for the consumer and for the company in the next, say, 18 months to three years, we have to make some investment, and we're doing that.

[Kate Lent] – Wells Fargo Securities

Okay, great. We look forward to it. Thanks so much.

Greg Sandfort

You're welcome.

Operator

And next question comes from David Magee with SunTrust Robinson Humphrey.

David Magee – SunTrust Robinson Humphrey

Yeah, hey, guys. Great quarter.

Jim Wright

Thank you.

David Magee – SunTrust Robinson Humphrey

Two questions if I could. One, assuming the large ticket remains more vibrant here over the balance of the year, do you anticipate it staying in the same sort of price points and the brands next summer, next spring and summer?

Greg Sandfort

Well, I would say yes. I mean it's working for us now, Dave. I don’t think that we can take the attitude that we can take permission from a consumer just yet to say, let's start moving the price points up. I think we've hit the sweet spot right now where they're comfortable. And we know this customer fairly well through all the CRM data that we collect on them.

The example that I give sometimes is the compressor store where we had a (inaudible) compressor. We went back and re-engineered it, brought it under $1,000, and today it's now our number one compressor and continues to outsell anything and everything else in the compressor category. And probably for the near future, we'll continue to do so.

So, it's not so much about, you know, because things are just starting to open up, where we start to move price points up. We have a good selection of good, better, best in most of these categories already. What we did is just moved our inventory levels to where the consumer was at. And in some categories, yes, we did probably enhance the opening price more moderate. But we'll wait to see, the consumer is going to tell us.

David Magee – SunTrust Robinson Humphrey

Right. Thank you. And just secondly, I came in late, so I apologize if you've already given color, but I'm curious about the hay products and how that's working in your stores right now.

Greg Sandfort

The hay program, I can comment to that briefly. We actually have an excellent young man who is our buyer for the hay category. He's out canvassing the markets. We've got 100-plus stores in the business today. It's part of the whole forage reset that we put in the stores about four, five months ago.

The hay program also consists of trailered hay, you know, out behind the store. So it's a multi-tiered program. We're really probably just getting our feet positioned right now into that business. I will tell you, we're very pleased, our customer is very pleased that we're carrying the product. And this will be something there will be a rollout probably over the next three to four years, because, as you can imagine, you have to have space. Space is the key here.

David Magee – SunTrust Robinson Humphrey

Right.

Greg Sandfort

But glad you saw that and commented, and we're very pleased with it and excited that we can now offer to our customers.

David Magee – SunTrust Robinson Humphrey

Very good. Thank you.

Greg Sandfort

Thank you.

Operator

And next is Simeon Gutman with Credit Suisse.

Simeon Gutman – Credit Suisse

Good afternoon. Congratulations. Tony, not sure if last quarter you tried to quantify how much the weather may have held back your comps. I don’t know if you have an idea this time how much some pent-up demand helped.

And a follow-on regarding inflation. Can you give a little more granularity on it with regard to next quarter's expectations? Because it seems like the step-up you saw this quarter is more or less enough just to get you there alone. So, what's being cycled and what's staying on in terms of the inflation picture?

Tony Crudele

Sure. Let me handle the inflation. As we look forward again, our best estimate, we're looking at our current selling prices relative to the cost, the key driver and the quickest turn will be in the grain categories. In particular, we use corn as a guide. And we have seen a relative precipitous drop in corn recently. And as we track that go forward, I would expect that slight decrease there would be very beneficial. That would be the difference as far as looking at the third quarter versus the fourth quarter.

Relative to weather patterns for the quarter, we did not quantify Q2. We did believe that we had a significant impact in Q2 from April. And as you sort of string together our comments, you can assess that we've had five very strong months since a very weak weather-driven April.

As we look at Q3, year over year, generally weather is not overly impactful to Q3. Where it can be impactful is on hurricane-related preparedness. And again, we gave you a number, total impact overall to comp sales of about 90 basis points. And then, of that, the big tickets impacted about 60 basis points, or the generator piece impacted about 60 basis points on the big ticket sales.

Simeon Gutman – Credit Suisse

Okay. And for Greg, mentioned that the heating piece has started off well. Is there any difference in timing of placement of that product, whether markets or difference in selection also that's helping drive that?

Greg Sandfort

I can tell you that we were not earlier necessarily, but in a much deeper stock position in the north. That was one of the strategic things last year that we kind of trickled the product in too much. This year we made a big impact up north. And we now are completely set across the company. So I would say we did a better job in execution this year, far better than we did in years past.

Simeon Gutman – Credit Suisse

Okay. And then one last one for Tony, I guess, on gross margin. Looking out towards 2012, it looks like this year you're held back by freight which could go up, could go down, some mix, and then a little bit of inflation pass-through. Just by cycling those, does it -- should it -- does it make sense that we should see maybe an above-average amount of gross margin expansion just because some of the underlying initiatives seem to be progressing well but maybe hit a little bit by some of these headwinds. So, is it reasonable to assume slightly more than we saw this year just by cycling some of those items?

Tony Crudele

I think intuitively you could come to that conclusion. We would have -- we're going to be working through the numbers obviously as we move into the budget cycle for 2012 and really examine of the other influences.

We do expect that inflation will moderate next year, and we would -- are very hopeful that diesel prices will be much more comparable year-over-year. Based on those two factors, you could conclude that we could have -- we could be in a position for a little bit more stronger margin improvement, probably more so as we move through the sort of this second half of the year.

Simeon Gutman – Credit Suisse

Okay. Thanks a lot.

Operator

Moving on to Matthew Fassler with Goldman Sachs.

Matthew Fassler – Goldman Sachs

Thanks a lot. Good afternoon and congratulations on your performance.

On the four strategic drivers of gross margin, I think you gave us a baseball analogy for three of the four, price optimization, maybe it's a bit redundant, I would imagine it's in early innings state. But what I'd also like you to do is, if you could dimensionalize or kind of rank them in their potential contribution to gross margin rate over time. That'd be very helpful for us.

Greg Sandfort

All right, Matt, this is Greg. I would tell you that over time -- I'm going to start this way. I'm going to say, as of today, and will go on for the next couple of years, price optimization will take us a good five years. So that's a five year trek. I would say, sooner than that, you're going to see the private label and strategic sourcing pieces kicking in. We've been working on that longer. We're now starting to see some benefit this year. So those two components will be adding more value to the gross margin line sooner than price op will because it's going to take long for price op. And seasonal conversion, I mention that earlier, we're in good shape there, sixth, seventh inning. We're more doing refinement now than anything else.

So it's probably ranked that way, strat sourcing, private label expansion, I would say, price op, and then seasonal conversion at the end.

Matthew Fassler – Goldman Sachs

Got it. And then just by way of follow-up on the drivers of same-store sales for the fourth quarter, you just got a question on inflation. If we think about traffic, the pickup -- the pickup in traffic your business last year from Q3 to Q4 was largely ticket, and the traffic certainly accelerated. Would there be any reason for the two-year traffic stack to decelerate from Q3 to Q4? Was the weather that impactful in driving transactions a year ago?

Tony Crudele

Matt, this is Tony. It's not necessarily weather-driven in the fourth quarter, although it was a fairly cold above-average December and there were a few storms. So that does factor into it.

From a transaction standpoint, we would anticipate that we would continue to drive transactions, where we feel the wildcard is with the consumer and to what extent will he be driving the average ticket up. We anticipate that there will be some inflation, obviously, but that could be offset by potentially a lower ticket.

So there may be some slight compression in the transaction year-over-year, but we still believe that that will be the driver of the business. And as we stack really almost a three-year comparison, that we can continue to drive the transactions in Q4.

Matthew Fassler – Goldman Sachs

And then one final follow-up to that, if you take your comments from earlier about the pickup in big ticket x inflation and x the impact of the hurricane, and it sounds like it came from a couple of different -- a couple of different categories, not necessarily related. If you think back your all's experiences in the business over time, the areas where you saw this pickup typically accelerated with cyclical improvement or would you say it's actually just a bit more random than that at this stage?

Jim Wright

I'd say much more random.

Matthew Fassler – Goldman Sachs

Got it. Okay, that's fair. Thank you so much.

Jim Wright

Thank you.

Operator

And the next question comes from Chris Horvers with JPMorgan.

Chris Horvers – JPMorgan

Thanks. Good evening. First, on the sales side, can you talk about the cadence of sales last year in the fourth quarter? Did the acceleration (inaudible) around the timing of your Black Friday promotions and then build into yearend, or was it pretty spread evenly?

Tony Crudele

I would agree that we saw a nice acceleration with November and December, but it was really focused sort of post Black Friday. So, day after Thanksgiving onward was a very strong period for us, although generally the entire quarter was very firm.

What you really have to do is look back and do a two-year comparison because the prior-year comparison in November was very, very warm November. And that was one of the reasons why last year was such a significant comp increase in November.

But as far as when we look at sort of the pure transactional drivers in the business, it really was driven by day after Thanksgiving and continued improved sales in the month of December.

Chris Horvers – JPMorgan

Yup. Understood. And then on the gross margin, it would seem like, I don’t know the math, direct margins, product margins were up 100 or so basis points in the third quarter. And as you think about the fact that the gas prices are receding and perhaps inflation receding and helping mix a little bit, why would gross margins only be up 10 to 20 basis points in the fourth quarter?

Tony Crudele

Again it's really the mix, is one of the bigger drivers. And obviously the more freight-intensive goods that we have as far as the movement of good, those freight costs obviously will drive that number as well. But it's really, you know, our concern is the mix, and obviously last quarter we said we were sort of in the sort of 30-basis-point range as far as the negative mix impact. So that's one of the concerns that we've had.

Additionally, as we manage the inflation, it obviously can be a positive, as Jim talked about, we've really focused on margin dollars versus the rate. But as the inflation moves through the cost and the cost moves through that cycle, you can start to experience some margin compression.

So there's a few other components that would offset what we'd normally anticipate being able to get some tailwind or some benefit from some other factors relative to margin.

Chris Horvers – JPMorgan

Fair enough. And one final one, just as we think about I guess the sourcing side, sourcing was up, what, 70%, 74% year-over-year, up to about 13%. S, is it -- that margin benefit, is it just fair enough to say, hey, I take that delta, which is 6%, and then multiple by like a 600 to 800-basis-point lift, or is -- in terms of the margin benefit? Or is direct sourcing less than the private label?

Tony Crudele

Generally the direct sourcing will have more of a benefit than the private label because the private label may be driving an opening price point. But what we look at, clearly the simple math would be there's a gross margin benefit and you would multiply that by the percentage increase.

I just want to make sure that you have your numbers correct. On a year-over-year basis, we've driven imports from about 7.5% to close to 9%, so, as a percent of the business. And that did represent about a 40% increase in total purchases. So, the numbers are fairly large but the percentage currently is relatively low. But as we continue to grow that over the next several years, you can obviously take the margin improvement by the percentage increase. But I think the numbers that you had just thrown out there, I just want to make sure you're grounded with those numbers, because as much as we feel it's a significant increase, it's not as impactful right now to the P&L.

Chris Horvers – JPMorgan

Yup. No, thanks for clarification. Take care.

Operator

And our final question comes from Brad Thomas with KeyBanc Capital Markets.

[Bernard Shelton] – KeyBanc Capital Markets

Hi. This is [Bernard Shelton] in for Brad. I'm wondering if you could talk about the competitive environment and what are you seeing, any changes from home improvement or pet specialty retailers?

Jim Wright

Nothing that's -- other than the fact there were some store closures going on out there, and actually some of those are in markets which are small for them that we participate in. We've not seen a great deal of change with regard to category development, price reactions, any significant change in marketing that's impacting our business.

[Bernard Shelton] – KeyBanc Capital Markets

Thanks.

Jim Wright

You're welcome.

Well, inclosing, first of all, I'd like to thank the 16,000 team members who serve our customers everyday and make this kind of quarter possible.

The consistency of our stellar performance indicates that we have a lot to be proud of here at Tractor Supply. Throughout the years we've been very deliberate with our strategic planning, steadfast in our executions. They were a much stronger and larger retailer with the right plan systems and people in place. This indeed has led to the structural shifts in our business and our brand, we are, we believe, are very well-positioned for near and long term. But as you heard us say before, while we might be proud, we are absolutely not satisfied, and we are dedicated to continue both improve and grow our business.

We appreciate you taking this journey with us and look forward to speaking with you at the end of Q4. Thank you.

Operator

And that does conclude today's conference. Thank you for your participation today.

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