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Executives

Jim Wright – Chairman & Chief Executive Officer

Greg Sandfort – President & Chief Operating Officer

Tony Crudele – Executive Vice President, Chief Financial Officer & Treasurer

Jennifer Milan – FTI Consulting

Analysts

Alan Rifkin – Barclays

Peter Benedict – Robert Baird

Scott Ciccarelli – RBC Capital Markets

Ed Ration – Nomura

Vincent Sinisi – Bank of America Merrill Lynch

Dan Wewer – Raymond James

John Lawrence – Stephens

Matt Fassler – Goldman Sachs

Adam Sindler – Deutsche Bank

Mark Miller – William Blair

Brad Thomas – KeyBanc Capital Markets

Simeon Gutman – Credit Suisse

Matt Nemer – Wells Fargo Securities

Joe Feldman – Telsey Advisory Group

Chris Horvers – JP Morgan

Tractor Supply Company (TSCO) Q3 2012 Earnings Call October 24, 2012 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Tractor Supply Company’s conference call to discuss Q3 2012 results. (Operator instructions.) 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, Jen.

Jennifer Marin

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 assurances 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.

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 introduce you to Jim Wright, Chairman and Chief Executive Officer. Jim, please go ahead.

Jim Wright

Thank you, Jen. Good afternoon, everyone, and thank you for joining us on today’s call. I’m here today with Greg Sandfort, our President and COO; and Tony Crudele, our CFO. We are pleased with Q3 and year-to-date performance. Each quarter we continue to build on our momentum, further demonstrating that the structural changes we have made in our business are contributing to our ability to profitably grow Tractor Supply.

Before I turn the call over to Greg I’d like to comment on our planned leadership transition. It was recently announced I’ll be assuming the role of Executive Chairman at the end of the year, at which point Greg will take on the role of Chief Executive Officer in addition to his current role as President. The Board and management have been preparing for Greg’s transition to CEO for some time. With the talented team we have in place the Board and I believe this is the ideal time to complete this transition. Having worked closely with Greg for the last five years, I know that we share a deep understanding and belief in the core cultural foundation of Tractor Supply and that we are aligned on Tractor Supply’s business strategies and priorities.

Over the past several years we’ve built a differentiated and stable business. We have a unique niche and a deeply experienced, energized and focused management team in place. Due largely to Greg’s leadership, we are improving our ability to react to and to capitalize on shifts that we see in our business from time to time. Over the last twelve years it’s been an honor to serve Tractor Supply’s 17,000 plus team members and loyal shareholders through these chapters of successful growth.

Tractor Supply is strongly positioned competitively, operationally and financially, and I believe it’ll be a seamless transition. I have the utmost confidence in the team’s ability to continue executing Tractor Supply’s key strategic initiatives and to continue the company’s record of success. I’ve been privileged to work for an exceptional team and look forward to continuing to work with that team in my new role as Executive Chairman throughout the upcoming year.

And with that I’ll turn the call over to Greg.

Greg Sandfort

Thank you, Jim, and good afternoon, everyone. We are very pleased with our Q3 results which again underscore the strength of our core business. Our team at Tractor Supply continues to perform exceptionally well, particularly given what remains a challenging retail environment. The progress we continue to make in the areas of new merchandise offerings, management of inventory, and our expanded regionalization of assortments have enhanced our overall operational performance.

Now, let me provide a little more detail on our Q3 results. As mentioned on our last call, with over 64% of the country in drought conditions as we entered Q3, weather was not ideal for a strong selling season. Additionally, the lack of cold weather in the north in September contributed to less-than-ideal weather conditions for sales of cold weather products in that quarter. That being said, we are delighted with the team’s ability to successfully manage through these variables and deliver positive comparable sales.

Our core businesses has solid increases again in Q3, and within our seasonal categories several big ticket products, such as heating and outdoor product equipment were negatively impacted. However, with our ability to recognize and react quickly to sales trends, we turned our focus to other categories that could provide a sales lift. And now, as cooler weather has come at the outset of Q4 we are experiencing stronger sales trends in fall in cold weather-related products. Most importantly, we completed Q3 ending well positioned with the desired inventory levels to support sales in the all-important holiday season.

We have often stated in the past that we believe it is most appropriate to look at Tractor Supply’s performance by the halves rather than the quarters. Our ability to deliver solid results in Q3 on top of a very strong comparison from last year positions us well for Q4. In terms of specific sales drivers, our CUE categories – Consumable, Usable, Edible – remains strong and were key components to driving both traffic and sales, contributing to our eighteenth consecutive quarter of comp transaction count increase. We’ve also experienced solid performance from our exclusive or private brands with mix at roughly 25% of sales, up 1 percentage point from last year’s Q3. This slight increase was expected given our focus on growing our penetration of exclusive brands within our stores.

Our Forage business continues to build momentum and we continue to expand our program. We are on track to end the year with Forage in over 600 stores compared to just 300 stores at the end of 2011. EquiStages, our exclusive brand of equine feed that was introduced about seven months ago, also continues to perform well within our mix of equine feed products.

Our new store performance also contributed to our solid Q3 results. This year we opened 17 new stores in Q3 as compared to 12 new stores in Q3 2011. We’ve remained very comfortable with our annual square footage growth rate of approximately 8% as we expand our footprint into new regions.

So in closing, let me say that we continue to be delighted with our ability to manage our business and drive improved profitability during Q3 despite the challenging weather and retail environment. The progress we have made on many of our key strategic initiatives continues to provide operational benefits, and we are planning, preparing, executing, and reacting better than ever before. We continue to improve our understanding of our customers’ changing needs and we regularly refine our assortments to provide compelling values every day, focusing on the right products in the right regions at the right time.

Our business model today is well-balanced and will continue to provide sales momentum for Tractor Supply in the coming quarters. I would now like to turn the call over to Tony to review our financial results for the quarter and discuss our outlook. I will return afterwards to share several closing comments.

Tony Crudele

Thanks, Greg, and good afternoon everyone. We had another very solid performance in Q3 to complete an extremely successful first nine months of 2012. For the quarter ended September 29, 2012, on a year-over-year basis, net sales increased 9.0% to $1.07 billion and net income grew by 17.1% to $50 million or $0.69 per diluted share. Comp store sales increased 2.9% for Q3 compared to last year’s reported increase of 11.5%. Adjusting for the one-week shift as a result of the 53rd week in F2011, we were actually cycling a comp store sales increase of 11.9% resulting in a strong two-year stacked double-digit comp.

Non-comp sales were $64.1 million or 6% of sales. As Greg stated, comp transaction count increased for the 18th consecutive quarter, gaining 2.6%; and we are very pleased with the core business as CUE products continue to help drive footsteps, resulting in sustained transaction count increases. The average comp ticket was up 21 basis points compared to Q3 last year.

The benefit to average ticket from inflation was offset by a decrease in big ticket purchases and other mix impacts. Big ticket sales were hindered in the early part of the quarter by limited riding lawn mower sales as we experienced drought conditions throughout a large portion of the country. There was also limited cold weather in the last few weeks of the quarter which limited sales of big ticket winter goods, particularly cold weather heating products. Additionally, emergency response sales were less than in the prior year as we cycled Hurricane Irene. Hurricane Irene had a more beneficial impact on sales last year as it affected a significant portion of the East Coast whereas this year’s Hurricane Isaac was more isolated in its impact.

Other key notes on the quarter: the quarter exemplifies the strength of the CUE products which posted a very high single-digit growth in both comp sales and units. The strength of these products was consistent throughout the regions. We did an excellent job of managing the variable weather conditions throughout the country including those regions that suffered through prolonged drought.

On a regional basis, sales were strongest in the Southwest as we cycled last year’s drought conditions in Texas. We also generated incremental sales in the Louisiana area as a result of Hurricane Isaac. The Southeast also performed very well as we had more moisture in that region and in the prior year that helped to extend the spring seasonal business.

Comp sales trends were consistent in the first two months of the quarter; as expected, September’s positive comp was the weakest of the three months as we cycled the sales lift from Hurricane Irene last year. Additionally we experienced warmer than normal temperatures in the Northeast and we did not benefit from any of the cold snaps which typically signal the start of the fall/winter season and entice shoppers to start making cold weather purchases. As the weather cooled in early October we experienced a notable improvement in some of the key seasonal categories.

The impact of inflation was approximately 185 basis points for Q3 which was within our projected range of 100 basis points to 200 basis points. Inflation was most evident in livestock feed, lubricant, grass seed and fertilizer categories. Last year, inflation in Q3 was more impactful on comp sales at approximately 465 basis points.

Turning now to gross margin, which as a percent of sales was essentially flat compared to last year’s 33.5%. Direct product margin benefited from product mix as we sold less lower-margin big ticket merchandise than last year. As I noted earlier, as a result of the drought conditions we sold less power equipment such as riding mowers in the early part of the quarter. Also as I mentioned, lower-margin cold weather heating products have shifted into October which benefited margin in Q3. We also continue to benefit from our price optimization, imports and exclusive brands, and markdown initiatives.

Unfavorable gross margin impacts were offset partially by the impact of some of our CUE products such as seed and pet that have margin rates slightly below chain average. We estimate this at approximately 15 basis points. Freight increased approximately 10 basis points and also partially offset the product margin benefit we experienced in the quarter. This increase in freight resulted principally as a result of the costs related to increased import activity of seasonal goods and the negative impact on freight related to mix shift to freight-intensive CUE products.

Contrary to our historical trend, the year-over-year reduction in emergency response sales actually had a negative impact on gross margin as a result of the merchandise mix. Lower-margin generator sales that we experienced in the early part of the quarter related to storms in the Northeast were comparable to the generator sales from last year’s Hurricane Irene. However, this year’s decrease in sales of the other ancillary high-margin emergency response categories, such as tarps and batteries, resulted in a negative impact on gross margin in the current quarter.

Import purchases in the quarter accounted for 13.0% of total purchases, which represents a 6.9% increase over last year. So overall we are pleased with our gross margin performance, and our gross margin initiatives provide us the ability to maintain gross margin rates in spite of product mix and freight headwinds while continuing to provide great value to our customers.

For the quarter, SG&A including depreciation and amortization was 26.2% of sales, reflecting a 32 basis point improvement from the prior year’s quarter. We are very pleased with our ability to leverage SG&A in light of our modest comp store growth with leveraging stemming from lower incentive compensation recorded in the quarter compared to the prior year. We experienced strong payroll control as we continue to better allocate payroll to sales trends and medical expense trends were also favorable in the quarter. These benefits were partially offset by de-leveraging from our distribution costs as we will not begin to cycle last year’s opening of our Franklin, Kentucky DC until Q4.

Our effective income tax rate decreased to 35.5% in Q3 compared to 36.7% last year. The decrease was principally due to the favorable impact of our provision to return reconciliation and the reversal of tax reserve pursuant to FIN 48. This was partially offset by lower federal tax credits, primarily WATSY, and higher credits that expired at the end of 2011.

Turning to the balance sheet, at quarter end we had $78.6 million in cash compared to $118.5 million at the end of the same period last year. During Q3 under our stock repurchase program we acquired approximately 681,000 shares for $61.3 million. We estimate that the share repurchase program had an insignificant impact on EPS for the quarter.

Average inventory levels per store at quarter end were approximately 2.1% higher than last year. Year-to-date annualized inventory turns were 3.18x or 5 basis points better than last year. We are very pleased with our ending inventory composition and our overall inventory productivity, especially given the embedded inflation and having one more distribution center than at this time last year. We are comfortable with our quarter-end inventory level of seasonal merchandise as we exit the summer selling season.

Capital expenditures for the quarter were $45.6 million as compared to $33.2 million last year. We opened 17 stores in Q3 compared to 12 stores in Q3 of 2011. We closed one store in the quarter in both this year and last year. The increase in spend relates to the purchase of the future site for our store support center and cost related to the construction of our new Macon, Georgia distribution center, which is the relocation of our Southeastern DC in Braselton, Georgia.

Turning to our outlook: as a result of our stronger-than-expected earnings performance in Q3 we are increasing our net income expectations for the full year 2012. We now expect net income to be in the range of $3.63 to $3.69 per diluted share as compared to our previous guidance of $3.58 to $3.66 per diluted share. We now expect full-year sales to range between $4.61 billion and $4.65 billion compared to our previous expectations of $4.58 billion to $4.65 billion. Correspondingly, same store sales for the year are expected to be 4% to 5% compared to our prior expectations for an increase of 3.5% to 5%.

I’d like to quickly discuss a few of the specific drivers and underlying assumptions for the last quarter embedded in our full-year guidance. Our guidance is based on the assumption that the retail environment will be stable. We expect our customers will remain price-conscious and value-oriented and continue to shop our stores for basic and everyday needs as they did in the first nine months of 2012. On a full-year basis, we expect to far exceed our annual EBIT margin improvement target of 20 basis points for the third consecutive year.

With respect to Q4, we are again targeting 20 basis points of year-over-year EBIT margin improvement, principally through our key gross margin initiatives. We do expect the freight and mix headwinds will continue into Q4 consistent with Q3 as fuel costs have edged back up and are now slightly higher than last year at this time, and we continue to drive CUE items that are slightly below chain average margin and freight-intensive. As a reminder, we are cycling against a $2.7 million reserve for welding gas that negatively impacted Q4 last year.

Although we recorded a one-time charge to SG&A last year of $3.2 million for the write off of certain ecommerce assets, it’ll still be very difficult to leverage SG&A in Q4 based on our forecasted sales range as we are cycling the additional week from last year’s 53-week calendar. Therefore we believe that gross margin improvement will be the majority of the operating margin leverage in Q4. Overall, we expect inflation impact of 1% to 2% in Q4 and we maintain our inflation forecast of 2% to 3% for the full year.

For the full year we are now forecasting that our effective tax rate will be approximately 36.7%, an increase from 36.5% in 2011 and slightly lower than our previous guidance of 37.0%. The increase from last year results principally from a reduction in expected federal tax credits and reduced ISO disqualifications relative to a higher taxable income base in the current year. The slight improvement in the full-year tax rate results from the favorable adjustments I noted earlier that were recorded in Q3.

We have essentially made no changes in our expected store growth rate or plans for capital spend. We expect to open 93 stores which corresponds to our previously communicated range of 90 stores to 95 stores for 2012. We project capital expenditures in 2012 will be at the high end of our previous range of $160 million to $170 million. In addition to our planned expenditures of $11 million for the initial phase of construction for our Macon, Georgia DC relocation and an incremental $6 million as part of our ecommerce re-platforming, we will incur approximately $11 million on the land acquisition, initial permitting and grading expenses for our new store support center.

We will continue to make purchases under our share repurchase program as part of our long-term objective of reducing cost of capital and maintaining a targeted year-end cash balance of $100 million to $150 million. We currently project the full-year fully diluted shares outstanding calculation exclusive of any additional share repurchases throughout the remainder of the year would approximate 73 million shares.

To conclude, we are very pleased with our performance in Q3 and the first nine months of 2012 overall, having delivered solid results on top of very strong comparisons. We are proud that our initiatives are driving both top and bottom line increases and are very excited about the programs we have in place for the holiday selling season and believe Tractor Supply is well positioned for another record year in both sales and earnings. And with that I’d like to turn the call back over to Greg.

Greg Sandfort

Thank you, Tony. Regarding the current retail environment, consumers continue to act conservatively and are expecting to find compelling values in our stores during the holidays. Purchases are being driven by necessity and are taking place much closer to the need. We remain committed to our strategy of testing and improving our assortments.

We are building a strong stable of exclusive brands across multiple categories to provide our customers with a value driven alternative to branded products without sacrificing quality. This has been a highly successful strategy for us and we believe this will continue to strengthen customer satisfaction and longer-term loyalty to Tractor Supply. Looking at the remainder of 2012 and the holiday selling season. We believe we have the right plans in place for the holiday selling season and we are pleased with our overall inventory position supporting our key categories and initiatives.

Before I turn the call over for questions I would like to take a moment on behalf of the Board and the entire Tractor Supply team to thank Jim Wright for his leadership over the past twelve years. His strategic vision, dedication to our mission and values, and unwavering commitment for collaboration among all have been instrumental to Tractor Supply’s success and our ability to implement our corporate strategy.

As Jim noted earlier, he and I are completely aligned on Tractor Supply’s business strategies and priorities for the future. I look forward to continuing to work with Jim as our Executive Chairman, our Board of Directors and our strong management team. As a team, we will continue to focus on our core strategies to capitalize on the opportunities we see for our business to maintain Tractor Supply’s forward momentum.

And with that, operator, I’d like to open the call for questions

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) And the first question will come from Alan Rifkin with Barclays.

Alan Rifkin – Barclays

Okay, thank you very much. Jim, we wish you a very happy and healthy retirement as well. With weather, between drought and the lack of cold weather really wreaking havoc on the business, are you at liberty to maybe tell us what the comp was in markets that had no weather impact in the quarter? That’s my first question.

Tony Crudele

Generally we don’t get into that detail as far as the regional comps. We would tell you that obviously comps range positive for almost every region and for the most part were below double digits. So you had a span within the single digits for the general categories throughout the nation.

Alan Rifkin – Barclays

Okay. Secondly, with your import purchases continuing to grow at a double-digit rate, can you maybe just tell us where you think you are in that program and what at this point do you think can be the ultimate benefit to the EBIT margin line of that initiative? And then I just have one last follow-up.

Greg Sandfort

Alan, this is Greg. As far as our development within imports and what we see, we’re still… I would say, if you put it in the baseball terminology that we like to use, we’re probably in the third or fourth inning; quite a bit of room yet for us as we move through this cycle of not just conversion of product but building products that meet the specifications that our customers demand. And that’s probably more important than anything else, is giving them a much better value quality product at a reasonable price point.

As far as what it’s going to do for overall EBIT margins, we usually don’t talk in specifics. The one thing I will tell you is that on a direct import basis it’s usually somewhere between 600 basis points to 800 basis points of improved margin over say a comparable national brand.

Alan Rifkin – Barclays

Okay. And one last one if I may: any significant change at all to your holiday setup this year versus last year? Will you be bringing in the products earlier versus last year or how should we look at that?

Greg Sandfort

It’s a great question and I will tell you that from the correction of error process that we have behind each season, last year we noted that our customers were asking us for the décor and the toy segment of holiday product. They wanted it earlier in the stores. They were willing to buy earlier, so we did make that change this year and move that up three weeks.

We also have I would say an improved in-store environment. We learned from a year ago that the North and the South have to be set a little differently, and what I mean by that is in the North where we’ve got a lot of cold weather business we will move into the center court a lot of the insulated products and ancillary products – the heating and such; and we’ll use the left-hand side of the store for the rest of seasonal and Christmas and holiday. In the South it’s just the opposite – the center court you’ll see is set up with all the seasonal and Christmas and then cold weather’s moved to the opposite side of the floor.

And some of those changes last year were really tests to learn this year. We’re convinced that’s going to make a big difference in the ease of shopping and the availability of product for our customers – so just a couple of things that we have done differently.

Alan Rifkin – Barclays

Okay, thank you very much.

Operator

The next question comes from Peter Benedict with Robert Baird.

Peter Benedict – Robert Baird

Hi guys, thanks, and congratulations again to Jim. Just can you remind us how last year’s Q4 trended by month? What were the toughest comparisons as you went through the quarter last year?

Tony Crudele

Sure Peter, this is Tony. We generally had a very strong quarter throughout but we did start off the quarter last year with some dry cool weather, which drove October to be the strongest comp within those three months of that quarter.

Peter Benedict – Robert Baird

Okay, when you said, Tony or Greg – I don’t know who said it – but that October has so far gotten off to a trend that’s better than what you were seeing before, is that better than September or better than what you did for Q3?

Tony Crudele

Well specifically we’re targeting the winter season program. Generally what we’ve seen in the past is in the last couple weeks of September we will get cold snaps that will start to drive those sales; and as I had mentioned earlier we did not see that type of cold weather. So that did present a drag as we experienced the sales in September. As we moved into October and we had a nice cold snap during I want to say the first through the second week we saw a noticeable improvement in the sales of those winter categories. So it was really specific to the winter categories – there had been a drag in September and we clearly saw them starting to turn around in an accelerated manner in October.

Peter Benedict – Robert Baird

Okay, that’s helpful. And then when you think about the feed, can you talk about feed costs and pricing overall? I know your inflation outlook for Q4 is kind of similar to what you’ve been seeing, but with the drought and everything, some [of our checks] have indicated that there could be some renewed upward pressure on pricing within the feed category. Can you tell us what you’re seeing there?

Greg Sandfort

Yeah, Peter, it’s Greg. Feed prices and pet food prices have somewhat stabilized for the short term here. There’s a little movement in the futures market as we look at corn but it really hasn’t worked its way back yet to our costs as an immediate change. So we’re looking at things being fairly stable through Q4 and you know, again – I don’t have the crystal ball to tell you what it’s going to look like beyond that point but pricing is fairly stable right now.

Peter Benedict – Robert Baird

Okay, that’s great. And then Greg, just a follow-up on that: can you talk about the supply chain opportunities? You mentioned some pressure from moving these bulky feed products around. Can you talk about the [cross-docking tests] you’ve got underway and kind of how you see that as you look out maybe the next year or two? Is there an opportunity on supply chain for that to turn from a headwind to a tailwind?

Greg Sandfort

Well, on the comment of the cross docks we have one in operation today and we are pleased with how it is performing. And it is giving us the confidence that it appears that this may be the solution for us as we deal with this high bulk/high velocity but low value product, because as we all know the fewer times you handle it the more profitable that product is. As far as in the future, we still have some more measurements to take on that so it’ll be the early part of next year before I would tell you we are convinced that it’s going to work properly; and at that point we’ll be probably in a position to talk on the conference calls about the plans to take that forward.

Peter Benedict – Robert Baird

Okay, fair enough. Thanks very much.

Operator

The next question will come from Scott Ciccarelli from RBC Capital Markets.

Scott Ciccarelli – RBC Capital Markets

Hey guys, Scott Ciccarelli. Two questions: first of all, there’s been a lot of questions recently just regarding the general health of the consumer out there and I’m just curious if you’ve noticed any changes in consumer behavior in terms of either how people are shopping or what they’re shopping for, etc.

Greg Sandfort

Scott, it’s Greg Sandfort. I would tell you it’s very consistent with what we’ve seen for the last several years, particularly through the first three quarters of this year: buying closer to need, being very value-conscious, and still repairing versus buying new. There’s still a big emphasis on trying to extend the life of big ticket.

Scott Ciccarelli – RBC Capital Markets

Alright, so no real change from what we’ve seen earlier.

Greg Sandfort

No real change.

Scott Ciccarelli – RBC Capital Markets

Okay. And then the second portion was obviously we’ve had these drought conditions, it’s been a challenging environment, but do you feel like you faced a bigger challenge in Q2 or Q3 from the drought conditions?

Greg Sandfort

Well to be honest with you probably more Q2 than Q3 only because that’s the quarter where you have a lot of outdoor power products and such that we would sell, and when there’s a drought typically that business especially tends to get a little bit tougher because there’s no grass to cut and so on and so forth. But we managed through that and we found other things to sell, and what it does is it helps us understand that we’re not reliant – we’re not reliant on the category. We can sell other things and this is where the [forged] piece kicked in and the feed piece kicked in, and some other categories that helped us offset. So I would say it’s between Q2 and Q3 with probably the most impact on drought but I’d probably look more at Q2 due to the fact that we need the moisture to drive the growth of grass and other things in that OPE category.

Scott Ciccarelli – RBC Capital Markets

Thanks, guys.

Operator

And we’ll move next to Aram Rubinson with Nomura.

Ed Ration – Nomura

Yes hi, it’s Ed Ration for Aram – how are you? I had one quick question on purchases. We kind of backed into your purchases being up about 13.5% this year versus the same quarter last year, and I was just curious if there’s anything behind the scenes that would change with respect to the timing of receipts or anything like that? On a comp store basis that’s up 4.3% which seems like a reasonable level but just wondering if there’s any extra color there. Thanks.

Greg Sandfort

Well, it’s several things I guess we could talk to. One is you have another DC in the mix so you’re moving inventory to that DC. You’ve got the earlier delivery of décor, toys, and some of the seasonal products which also would have pushed receipts a little higher. And as we said earlier in the call and in our comments the CUE business continues to drive positive units and positive costs. So those three are probably the primary areas.

Ed Ration – Nomura

Okay, great. And then looking historically at the seasonality of the business and we’ve taken to heart your point that you should look at the halves, but in the past it looked like about a 50/50 split between the first and the second half. Is there anything you’re seeing that would cause this year to move dramatically different from that? Maybe I shouldn’t say “dramatically” – is there anything moving it differently?

Tony Crudele

Ed, this is Tony. Just looking at the first half we really had a tremendous lift in Q1, and that clearly is rare relative to past historical trends. Now we do understand that there was some shift between the two quarters – Q1 and Q2 – but we do feel that the first half was an extremely strong performance. So that may be outside of the norm.

Additionally, you have to remember that last year was the 53-week year, so last year was (inaudible) by that additional week that continued that trend of having the back half a little bit stronger. So I think coming into this year you would expect the back half to be a little bit less. And as a reminder, last year we represented that we believed the last week represented about a $0.09 addition to EPS.

Ed Ration – Nomura

Okay, thank you.

Operator

And we’ll go to the next question from Vincent Sinisi with Bank of America.

Vincent Sinisi – Bank of America Merrill Lynch

Thank you for taking my question, and Jim, congratulations to you and best of luck to you and Greg as you move into next year. I wanted to ask on your SG&A you had some nice leverage on your comp number, especially up against a pretty difficult compare. Was there anything to call out specifically there? I know you mentioned some other personnel costs, incentive comp – anything though that’s worth calling out for this quarter?

Todd Crudele

There’s nothing that’s significant. We’re definitely very pleased with our payroll control and we continue to leverage that, and as well as medical expense has been very favorable. And that has been a little choppy throughout the year, however we have put programs in place over the last year and a half that we have seen overall trend to sort of maintain below our normal SG&A growth. But other than that, really the driver behind it is the incentive comp and that is the reason why we were able to leverage in this quarter.

And when we look at SG&A exclusive of the incentive compensation it had been running relatively flat on a year-over-year basis when you look at each quarter because each quarter does behave somewhat differently. So on a per-store basis it is generally flat, and what we’ve seen is that it will grow – again, exclusive of incentive comp – around the 9% to 10% range on a year-over-year basis. So the wildcard is the incentive comp, and what really drives it is the sales level.

So as we look at last year, since a good portion of our incentive compensation is based on sales for our team members out in the stores you can imagine last year with an 11.5% comp that drove some significant incentive compensation. So there is some variability when it comes to sales level and the amount of incentive comp.

Vincent Sinisi – Bank of America Merrill Lynch

Okay, that’s helpful. And just as a follow-up, are there any updates regarding your CRM efforts? I know that you guys are working on a “Future of Loyalty” type of program. Can we expect anything with that before we get into really the holiday season? I know that you guys said you’re bringing some of the inventory in for the holiday specifically in earlier – any updates there?

Greg Sandfort

Vincent, it’s Greg. No additional comments as far as a program being launched this fall. We continue to do a lot of due diligence on what’s the right program for Tractor Supply, and I would say that it’s our intent that sometime in 2013 it’s very possible we could be testing something out there to gain a read but nothing yet for the remainder of this fall. We’ve got many initiatives in place that I think will carry us through Q4 adequately.

Vincent Sinisi – Bank of America Merrill Lynch

Great, thanks very much.

Operator

And the next question comes from Dan Wewer from Raymond James.

Dan Wewer – Raymond James

Thanks. Well Jim, don’t you think you’re entirely too young to retire?

Jim Wright

I do; my wife does not.

Dan Wewer – Raymond James

Call us in six months and let us know how it’s going.

Jim Wright

Will do.

Dan Wewer – Raymond James

I had a question on gross margin rate. You noted that the growing sales contribution from CUE items negatively impacted margin by 15 bps. Was the benefit from the declining sales contribution from OPE about the same – also 15 bps – so they washed each other out?

Greg Sandfort

Yeah, the amount – there were a few other factors, and I lumped all the big ticket together so there were some other considerations such as generators and all. But it was in that range of 15 bps to 20 bps.

Dan Wewer – Raymond James

I think there may be some that are surprised that a 10 basis point increase in freight expense would be enough to offset all of the tow-ins that you have on improving gross margin rate. Do you think we’ve achieved so much gross margin improvement the last three years that the rate of future gains may begin to slow?

Greg Sandfort

Well currently when we look at the potential of the gross margin initiatives we still think we have a nice runway ahead of us and we can continue to drive that. Obviously we’ve taken into consideration the potential headwinds from the mix as well as from some of the freight intensitiveness of some of the products, and weigh that against a potential. But we think that we can continue to drive the sales. As we look at the potential benefits of the four key margin initiatives we feel that we’ve made substantial progress during this quarter, and again it gets masked somewhat because of the headwinds that we faced from the freight and the CUE items.

Dan Wewer – Raymond James

And one other question that I have: there’s a thesis that the housing markets are beginning to stabilize or in fact improve. It’s our view that there’s a portion of your business that’s also sensitive to housing activity. Can you just update us on how much of your business you think is tied to the housing and what kinds of sensitivity may we see in terms of future sales growth if housing does in fact stage a comeback?

Jim Wright

Yeah, this is Jim. As we look back to what we experienced starting in ’08, the most direct correlation we have is riding lawn mowers and other OPE equipment – obviously most of it falls into big ticket. And it’s not just new housing starts; it’s also housing mobility. And while we’re hearing that new houses are up a little bit, home sales are up a little bit, mobility has not kicked in to a degree that it’s going to make a difference in our business.

Should it return back to a more normal level of housing starts we would expect that we would benefit from the increased sales of new mover activity. I’m not sure we’ve ever broken out… Tony?

Tony Crudele

Yeah, when it comes to the categories that we perceive to be housing-related it represents about 6% to 7% of the business.

Dan Wewer – Raymond James

Oh that’s helpful, okay. Okay, great. Thank you.

Operator

And our next question comes from John Lawrence with Stephens.

John Lawrence – Stephens

Good afternoon, guys. Congratulations, Jim, and thanks for all your help over the years. Greg, would you come in just a little bit, if you look at sort of going into Q4 and particularly private label such as Schmidt and RedStone, as you look at this holiday set compared to last year would there be a lot more? I know you’re always adding products but compared to what we saw in the first nine months, would there be an additional sort of ramp in extending those lines and those private label categories?

Greg Sandfort

John, you will see an expansion first of all in RedStone because we’ve taken a little over 100 stores and put a much larger heating set into those stores. This is something we tested a year ago called a Hearth Shop and it did quite well in the stores it was tested. So that’s one expansion. You’ll also see across the whole category in heating RedStone being a primary brand and that’s a very consistent message for the customer.

You’ll also see in C.E. Schmidt some additional depth in the insulating categories and in what I would call the everyday use categories, whether it be in denim jeans or flannel shirts, things of that nature. This is kind of work wear-related. So yes, we are building out the brand even further and there’s been some new footwear that’s been placed into the assortments as well. So we are building those two brans, yes.

John Lawrence – Stephens

Great, thanks. And secondly, as you’ve continued to build out the price op sort of modules, any real differences across categories that you could tell us about as time has marched on in that test; and any differences among the processes among categories?

Greg Sandfort

Well, there’s no question that hard lines act a little differently than soft lines, and feed acts a little bit differently than let’s say our lubricants. But let me kind of reiterate that this is a process that’s iterative, so you know it’s going to change. You may work through a category today and come back again and visit it a year from now because of the dynamics in the market – whether it be cost inputs that you changed or consumer preference has shifted. It’s going to affect the elasticity and the way that we may price.

The other thing that you’ve got to consider is the competitive nature in some of these categories, and as I have said before there’s three buckets we work in: there’s the bucket for trying to find margin rate, there’s the bucket for trying to drive market share, and then there’s a bucket that has a blend. So in general what I think I can tell you is that we’re very cautious with this test and control methodology here at Tractor Supply. We don’t just turn the switch and let the system run. There’s always a test and control group that we work with to ensure that we’re going to get the kind of result we expected before we roll this to the chain.

Secondly, there’s going to be differences between the regions – no question. You can imagine the Northeast right now acting a little bit different than the South because we haven’t had some of the weather situations in the North just yet. So more specific to that, John, I can bury you with detail but I don’t think it’ll add any value.

John Lawrence – Stephens

Great, congratulations and thanks for your help.

Operator

We’ll go next to Matt Fassler from Goldman Sachs.

Matt Fassler – Goldman Sachs

Thanks a lot and Jim, all the best to you as you move on; and Greg, I look forward to continuing to work with you. Two questions really focused on gross margin: Tony, you cited the impact of the CUE products and their impact on mix as one of the factors keeping gross margin levels among many others I guess. Is that mix shift element and the consumables business and its strength any different than it’s been in prior quarters or should we just view this as a continuation of that long run trend?

Tony Crudele

Matt, I would look at it as a continuation. We’ve experienced this headwind as we’ve accelerated our business in those lines and we would expect… Again, each quarter varies slightly but as we continue to drive that business we’ll continue to have that very similar headwind.

Matt Fassler – Goldman Sachs

If I were to take a step back and look at the past four quarters from a gross margin perspective three of them have been essentially flat, and there’ve been I guess some kind of freakish events or weather circumstances that have contributed to that. If you thought about the next four quarters in aggregate, the initiatives that you have – taking weather out of the picture and knowing what your drivers are – would you think that the gross margin would probably have a better year-on-year trajectory or is this the kind of 20 basis point, 25 basis point run rate on an annualized basis that you would anticipate?

Tony Crudele

Matt, generally we always default back to our sort of standard pro forma which is we’re looking to grow the base of 8% and drive EBIT margin of 20 basis points. So that’s really our goal. We understand that the years in which sales are very strong we’re going to get some leverage on SG&A but for the most part we expect to drive a 20 basis point improvement in EBIT margin with the majority of that coming from the gross margin initiatives.

Matt Fassler – Goldman Sachs

Got it. And then just one final follow-up: once you start to leverage the Kentucky DC how much of a weight does that take off margins as you think about whatever pressure it’s driven year-to-date?

Greg Sandfort

Well Matt, the impact on margins is going to be in the [stem aisle] savings because of where that DC is located and its capabilities. So it’s going to fall on that side of the house. The building is still not at full capacity yet and that’s a good thing because we built it large enough and it’s got enough stores being pushed through it, so there’ll be some advantages yet but it’ll be more I think on when we look at the distribution/transportation side.

Matt Fassler – Goldman Sachs

Got it. Thank you guys.

Operator

We’ll move next to Adam Sindler with Deutsche Bank.

Adam Sindler – Deutsche Bank

Yes, good evening guys. So I guess no one has said congratulations to Steve [Barber] yet tonight so I’ll do that right now. [laughter]

Greg Sandfort

Steve’s actually travelling.

Adam Sindler – Deutsche Bank

There you go, okay. So just to go back to the gross margin question for a minute, and relative to I guess Scott’s question about the impact of drought on Q2 and Q3 – would you say that the change in gross margin trajectory between Q2 and Q3 was due to the fact that one, you have more consumables business in this quarter and then secondly the favorable impact of the higher-margin drought was not as beneficial this quarter as last quarter? It just seems that the impact of CUE is not too dissimilar and yet the margins slowed pretty significantly sequentially.

Tony Crudele

We definitely have an increase in the mix of the freight intensive CUE items in Q3 so that really was one of the biggest drivers. Also the pull forward in Q1 as we moved some of the big ticket riding lawn mowers into Q1 helped Q2 when it came to its margin. So yeah, there’s always going to be some plusses and minuses as we go through each quarter and but those two explanations probably drive the majority of the difference in performance between Q2 and Q3.

Adam Sindler – Deutsche Bank

Okay. And then as you look back over the last nine months, would it be safe to say, I mean from my perspective you guys only really had one month of favorable weather – that being March; and then the other months were actually pretty unfavorable?

Greg Sandfort

Well they were challenging, I’ll say that. This has not been a typical year but regardless of weather we still have to find a way to do business, right? And we do – we find a way to sell the products that our consumers continue to want. So yeah, it’s been a tough year from a weather standpoint.

Adam Sindler – Deutsche Bank

Okay, and then just lastly could we just go back over… I know there were a couple puts and takes in the gross margin of Q4 last year. You had the welding gas charge and then also some early discounting on winter merchandise. Can you remind us what the basis points impact was of the discounting?

Tony Crudele

That I don’t have handy. I want to say that it’s going to be probably less than 20 basis points when it comes to management and we did have a significant freight expense increase last year that I think was… If I can recollect it was close to 40 basis points. So we would not expect that type of a headwind from freight as the freight expense and diesel is similar to last year. So net-net between the two there was clearly an offset last year. We would expect that there would be some headwind from the freight as we’d talked about earlier as well as the mix, but I don’t think it’ll be quite as dramatic as the freight impact from last year.

Adam Sindler – Deutsche Bank

Okay, very good. Thanks guys.

Operator

We’ll move next to Mark Miller with William Blair.

Mark Miller – William Blair

Hi, good afternoon. The benefits you had in lower incentive comp, Tony, I think you were suggesting that maybe that was the majority of the expense leverage you got. So is that in the $4 million favorable range year-to-year, about $0.04 to EPS?

Tony Crudele

It was a little bit less than that. It was probably more in the $0.02 to $0.03 range.

Mark Miller – William Blair

Okay. And then how about the other one-time items you called out – lower medical costs? Were those considered in your prior EPS outlook and also the tax rate? So in other words, as you raise the EPS outlook how much of that is coming from any of these items?

Tony Crudele

When we look at the quarter the payroll management and the medical expense they were not as significant; and when we look at the entire year a little bit of a driver from the payroll performance throughout the entire year, probably not as significant in Q3. The main driver of the SG&A improvement, and I say “main driver” but I would say significantly the entire portion of the SG&A leverage came from the incentive compensation.

So as we look at the forecast we really felt very good about the sales level that we had anticipated because we understood that we were going up against an extremely strong comp in Q3 last year. So we felt very good about that as well as margin. In fact, as we went though it we were ahead in probably each category – slightly above performance in sales, slightly above performance in margins, slightly above performance on the SG&A. So it was a combination of several factors that drove us to raise our full-year expectations.

Mark Miller – William Blair

And the tax rate as well or had you contemplated that?

Tony Crudele

The tax rate was a benefit that was above our expectations, that was approximately $0.01. And but we did exceed our internal expectations by, at a minimum and excluding the tax impact, by the increase in our guidance.

Mark Miller – William Blair

Okay, great. And then I was hoping to get some perspective around the increase in the import orders. So I think if my numbers are right in Q2 those were up 16% and in Q3 up 7%, and I imagine that could be impacted by the timing of when you want to inventory certain items. But was there any timing there that impacted that or I guess can you broadly comment on sell through of import items versus your plan? And are there any items that are just not moving as quickly as you had maybe thought perhaps due to weather?

Greg Sandfort

Well, that’s a good question. I would tell you a couple things on imports. Depending upon the category the lead times are what you have to consider here but thus far in the fall season we’re very pleased with what we’re seeing as far as sales in the direct import products. Now remember, I mentioned earlier that we deliver a lot of these products in early- to mid-Q3, many of these pushing into Q4 for the all-important holiday season and gift giving.

But at this point I can’t tell you that there’s anything we’re displeased with. We understand the weather impact right now and we’re very patient with that because the weather will come and we’re not concerned. It will come, and we’re not at this point in time at any risk to say that we’ve got more inventory in the stores than we need at this point. We’re waiting for those allocations based upon sales. So as sales come we’ll allocate the product and push it out of distribution centers but the big shift I guess from Q3 to Q4 as far as sales is you have to come.

Tony Crudele

And I would tell you that we’re basically dealing with a little bigger base when we go into Q3 as we in the past have had relatively high imports as we go into Q4. So that is one of the reasons why you probably don’t see as significant of an increase year-over-year.

Mark Miller – William Blair

Okay, thanks so much.

Operator

And we’ll move next to Brad Thomas with KeyBanc Capital Markets.

Brad Thomas – KeyBanc Capital Markets

Thanks, good afternoon – let me add my best as well to you, Greg and Jim. I wanted to just ask about performance of new stores. It’s kind of an imperfect metric for us to grade from the outside but our calculations suggest a little bit of a slowdown in that metric for Q3. Anything in particular going on with timing or maybe the mix of stores in terms of the smaller format that might have affected that?

Greg Sandfort

Well, this is Greg. Let me just quickly say that the new store performance is on par with what we’ve seen through the first two quarters and actually in Q3 this year. So we’re not seeing any deceleration in the performance. And I think I mentioned this in the last call that we developed a new launch platform for the new stores with a marketing area that is really helping us accelerate the business and get those stores off to a much faster start. So we’re very pleased with those performances right now.

Brad Thomas – KeyBanc Capital Markets

Great. And then as we think about the contribution, the delta between your comp and your top line – would you expect that to start to shrink a little bit as you start to open stores that are in the smaller format over the next few years?

Jim Wright

Not really. The mix between the formats, it might be that 10% of the base might be in smaller markets but it shouldn’t be significant. And again, as Greg has mentioned the performance of the new stores has done very well and they, I want to say almost in every case exceed the target sales levels that we had laid out for each one of those stores.

Brad Thomas – KeyBanc Capital Markets

Perfect, I appreciate the clarification. Thanks so much.

Operator

The next question comes from Simeon Gutman with Credit Suisse.

Simeon Gutman – Credit Suisse

Thanks, and congratulations Jim and Greg. A quick question on CUE, on the CUE area – can you talk about how the product margin in that category has trended? Have there been any meaningful changes within it? And then besides private label is there anything you can do to enhance that margin over time, maybe as you get bigger with certain suppliers?

Greg Sandfort

The product margin in CUE has remained fairly stable. It moves with some of the commodity shifts that we’ll see but in general, we manage those shifts with inflation and deflation. As far as any advantage going forward based upon scale and size that we may be able to have some influence, there’s no question that we’re always working with our manufacturers and suppliers to talk about size and usage product, and in many cases we can gain some benefit. But it can be highly volatile when there’s inflation and deflation is all I can tell you but we have a very concise program on how we manage that. So we take every advantage, believe me, of using our size and scale to try to drive cost down.

Simeon Gutman – Credit Suisse

But I guess to your point before of it being I guess high touch but low value, is there a lot to really extract out of it? Is it an area that you’re really focused on or it might be a minor benefit if you see something over time?

Greg Sandfort

The place that we’re focusing on today is the actual movement of that product, and that’s why we talked about the cross-dock centers earlier. Your largest expense is really your freight, and so we are working diligently to find a better solution to bring to Tractor Supply in handling that piece of the business. And at the same time as we are gaining and growing market share, our costs should probably be a little more advantageous than say a much smaller retailer that’s purchasing quite a bit less.

Simeon Gutman – Credit Suisse

Okay. And then one follow-on I guess regarding CUE: you mentioned the forage program and my apologies if someone asked this – I admit I didn’t get every question. Can you just talk about some of the traditional CUE [pay versus some of the bagged]? I’m curious as to how each are performing. And then is it bringing new customers to the store or is it adding to the basket of existing?

Greg Sandfort

Well, there’s two parts of the forage program. There’s the outside piece that we’ve been talking a lot about recently and that’s the two-string, the three-string and the rolled hay bale. That’s one piece. There’s also an inside piece that is the packaged product that we sell that’s a compressed product that sells inside the store. The in-store piece, those carry a little higher margin than the outside store piece, and I would say to you that what it’s done is it’s helped us round out the tickets for the consumer.

In the past when we didn’t have these programs in place they may have come to us for their feed but they didn’t buy the other components; they’d have to still go to some other place, some other store. Today we have become that one-stop destination where they can fulfill all those needs and we are seeing the market basket growing. As the customer’s buying the feed product we’re seeing some of the other forage products accompanying that, and that was the whole goal behind that.

Simeon Gutman – Credit Suisse

Okay, thank you.

Operator

We’ll take the next question from Matt Nemer with Wells Fargo Securities.

Matt Nemer – Wells Fargo Securities

Good afternoon. I just had a quick question on the gross margin in Q4. Assuming that the 25 basis point headwind from mix and freight is fairly persistent, how would you rank the offsets to that that take gross margin up enough to drive EBIT margin expansion? For example, how much benefit do you think you’ll see from cycling the Franklin opening?

Tony Crudele

The Franklin opening would be down in SG&A because we do not allocate the distribution center operating costs to gross margin. And we would anticipate there’s a potential for possibly 5 basis points of improvement there, so it’s fairly limited when it comes to Q4 because as Greg had mentioned earlier, we really need to drive the productivity in that new facility.

And then of course we can get positive contribution from the mix depending on the big ticket sales, and generally what we would anticipate is some increase there. And then when it comes to the four key gross margin initiatives, we feel very good about how we’ve been driving that business. The markdown management was really one of the main drivers in this Q3 and we expect as we enter into Q4 that our inventory position is in very good shape, so we expect to be able to manage through that.

As far as optimization, it contributed very nicely in Q3 as well and we have a really nice import line which we have brought in relatively early this quarter and expect to have some benefit there as well. So it’s difficult to rate all three or four of those gross margin initiatives and combining with the mix impact I think we can really drive performance and exceed any of the margin headwinds that we would encounter.

Matt Nemer – Wells Fargo Securities

That’s helpful; that helps lay it out for us. And then secondly, given the drought that we’ve had – and you may have already hit on this – but what’s your outlook for inflation over the next couple of quarters into the beginning of 2013?

Tony Crudele

We haven’t looked out into Q1 yet – we like to reserve that as being a little bit closer. But this last quarter we were at 185 basis points and we expect to range between the 100 basis points and 200 basis points again this quarter.

Matt Nemer – Wells Fargo Securities

Okay, great. Thank you.

Operator

And our next question will come from Joe Feldman of Telsey Advisory Group.

Joe Feldman – Telsey Advisory Group

Yeah, hi, good afternoon guys. Thanks for taking my questions. Most of mine have been answered but I did want to ask you about as you think about Q4, and I know you sort of addressed it in different chunks of the call but I guess where do you guys worry about the potential pitfalls in the quarter or the potential upside in the quarter that could come out of this?

Jim Wright

Well, there’s a couple things we don’t worry about and one is CUE. CUE continues to drive, continues to perform and we believe that we have our hands around that business. I think the biggest issue we’re going to have for Q4, if there’s an issue at all is when the weather might come and help us in the seasonal products. It’s going to come – it’s just when. You know, is it middle of November? Like we had, for example, on Halloween a year ago in the Northeast we had a snowstorm. That was a wonderful thing that helped kick the business off but I can’t predict that this year.

So what I’ve done is I’ve kept my inventories very tight, very pointed, very focused. My vendor community is sitting out there with product waiting if I need it, and if I don’t need it then I don’t need it. But I think that’s probably the only thing that I… And it’s not really a concern because we manage our inventory so differently today than we did in the past. There’s an upside, and the upside is if the weather breaks and we get some opportunities we can push inventory into the stores very quickly; we’re very good at that. Our supply chain is a well-oiled machine at this point from that standpoint and we can take advantage of it and drive sales. So it’s a little bit of a waiting game.

Joe Feldman – Telsey Advisory Group

Got it, that’s helpful. Thank you. And then just one other question, and you sort of addressed it in the prepared remarks but I guess where weather was a little more seasonal were the trends dramatically different in sales or was it just moderately different in sales? Like I don’t know if you can size it at all for us.

Tony Crudele

It’s tough to come to some conclusions because of the different weather patterns. For example, as we cycled the drought in Texas from last year we had a significant comp – we were high single digits in that region. As we cycled against Hurricane Irene up in the Northeast we experienced the weakest comp. So the weather variables were so dramatic that it’s difficult to sort of isolate it and encapsulate it into sort of one generalization across the nation.

But we do feel very strongly that in particular as we enter Q4, that if the cold weather comes we’ll be very well positioned as well as last year was one of the warmest winters December through February that we had experienced in many, many years. So we’re optimistic that the cooler weather will take over. The forecasts show a relatively warm winter again but potentially cooler than last year.

Greg Sandfort

The other thing that we have an advantage in is with the composition of stores now across the country, this is how weather kind of dissipates. We may have ideal weather in one part of the country and less favorable in another, but the mix of all is what we’ve been able to really use as a strength of ours because of our ability to move within the supply chain and push products where they’re needed.

As an example take the drought a year ago – we took advantage of that. This year we had drought in many other parts of the country and we continued to shift; last year it was kind of consolidated as Tony said in Texas. So because of the dispersion of stores we have a little bit of an advantage and a little bit I guess of some, I would say a little bit of an offset to what might happen in one particular region or another.

Joe Feldman – Telsey Advisory Group

Got it, that’s helpful guys. Thanks and good luck with this quarter.

Operator

And we’ll move next to Chris Horvers with JP Morgan.

Chris Horvers – JP Morgan

Thanks, good evening. So I was just trying a little bit more on the monthly trends side, not to beat a dead horse but thinking about last year and you mentioned Irene – how do the comparisons play out in Q3 last year? On an adjusted basis you did a 7.1% in Q2 and then 11.9% and then we fell off and went back to a lower trend, so kind of when did we come over that hump? Did that show up in September because of Irene or how should we think about that?

Tony Crudele

Well, last year in Q3 September was the strongest comp although all three months were double digit comps last year, with September being the strongest. So as we entered this quarter we expected that September would be the weakest. We also mentioned last year on the conference call that Irene represented about a 1% impact overall to the comp for the quarter, so you can imagine that it had a fairly significant impact on the September numbers.

Chris Horvers – JP Morgan

That’s very helpful. And then as you think about how that math would play out, was September still positive? And then related to that, did the CUE category show any variability, any significant variability on the monthly basis as well?

Tony Crudele

CUE was very consistent throughout the quarter, and again as I had mentioned earlier it was really high single digits but in sales and units. So we’re very pleased with the performance, and again, it drives the footsteps and is one of the key reasons why we have 18 consecutive quarters of transaction growth. When you look at September it was a positive comp; and the other thing that I would like to reiterate is that last year we had some significant inflation as we moved into the back half of the year and in particular Q3 was impacted almost 500 basis points of inflation whereas this year it was down to 185 basis points.

So between the hurricane and the inflation, we understood coming into the quarter that they would be a very tough comparison; and that’s why we come away very pleased and it actually exceeded our internal expectations and gave us the opportunity to increase our outlook for the year.

Chris Horvers – JP Morgan

Thanks very much, and good luck, Jim and Greg.

Operator

And we have a follow-up from Peter Benedict.

Peter Benedict – Robert Baird

Hi guys, just one more – sorry the call dragged on here. Just, Tony, on the 20 basis points that you had [margin planned] for Q4 is that off of last year’s reported 9% or were you thinking about that off an adjusted 13-week number from last year? Thanks.

Tony Crudele

That is off of last year’s reported number, so that’s what we’re targeting. And our Merchandise Group was tasked and put a plan together that can get us there. And also we’re hopeful – as much as we think it will be a struggle to drive some SG&A benefit we’re hopeful that we can drive some SG&A leverage as we manage the expenses and some of the expense trends that we see as we enter the quarter. But we really do think that the majority of the EBIT margins improvement will come from gross margins.

Peter Benedict – Robert Baird

Okay, perfect. Thank you.

Operator

And there are no further questions. Please continue with any closing comments.

Jim Wright

Okay, thank you Operator. Thank you all very much for participating on today’s call. Let me just make a few comments here, that in the past few years Tractor Supply has operated more effectively than at any time in its history. This is best demonstrated by the fact that we’ve had 18 consecutive quarters of comp transaction count increases; 15 consecutive quarters of double-digit EPS growth; 12 consecutive quarters of comp sales increases; and 11 consecutive quarters of expense leverage.

We know and we understand our customer and our more than 17,000 knowledgeable and very motivate Tractor Supply team members work very hard every day to provide exceptional customer service. Surveys indicate that our customers appreciate the level and consistency of our service and we are honored that they continue to reward us with their increased loyalty. We continue to demonstrate our ability to manage the controllable and operate our business effectively despite the uncontrollable, whether it’s the economy, inflation, or weather.

We appreciate your continued interest and support of Tractor Supply and we look forward to speaking to you again after the holidays.

Operator

Ladies and gentlemen, that does conclude our conference call for today. You may all disconnect and thank you for participating.

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