Tractor Supply Company (TSCO) Earnings Call Transcript & Summary

Well, thanks for joining us, everybody. I'll start off the conference. Thinking of most of you in the room or for those that haven't met, I am Daniel Imbro on the hardlines and automotive analyst here at Stephens. Really pleased to be joined this morning by Tractor Supply Company. To start off our conference this year. From the company, obviously, we have Kurt Barton, who most of you know, Rob Mills; and then obviously, the IR team, Mary Winn Pilkington and Joseph Underwood. Thank you guys for joining us. Well, Kurt, obviously, and this format here, typically a fireside, I'll kick off the Q&A and kind of lead the discussion, but please get my attention, if you want to ask questions. We welcome audience participation.

But Kurt, I'll start off a little higher level. Tractor has a unique go-to-market. We spent some time talking about it this morning. I think most are familiar, but can you give the room maybe an overview of who your customer base is and how that's different from a lot of other parts of retail and then may be how that customer is doing today with the broader marker given all the uncertainties, we're hearing out there?

Sure. First, let me just say good morning to everybody. Glad to spend time with you welcome to Nashville. I say that being it's Tractor Supply's hometown. So Rob and I, Mary Winn and Joseph glad to be with you feel like we're hosting in a way too with Stephens. So Daniel to your point and for those that are modestly familiar with us, but even those perhaps that aren't as familiar to Tractor Supply, maybe the best way to start answering that question is to talk a little bit about when you say our go-to-market strategy as to where are we located? Because that's a key part of it, and then that brings to light the customer. So for Tractor Supply, we talk about being rural America, the rural out here customer. Think about it as this. We're very strategic in that if you take some of your major cities could be Nashville, Charlotte, Houston, if you take the center point of that, and you go anywhere, depending on the size, Houston, obviously bigger, but 30 to 45 miles out and just create that radius and that belt line around that, Tractor Supply begins to put stores into the market out there. That's really around the suburban -- the outskirts of suburbia or ex urban, then you could go another 15 or 20 miles out from there. And sometimes if you plotted our stores, you might see another beltline of another group of stores. And then, of course, we get other towns that are a bit more rural. But the important thing is that we're not an urban or even a near suburban retailer, principally because of the customer that we serve, and that leads me to what is that typical customer. And it's a customer that owns land, a very high percentage of our customers own their property. It's 5-plus acres typically. These are owned outright or they have a mortgage. And in these times, a fixed-rate mortgage that you obtained over the last few years is a pretty healthy customer from that standpoint. But it's a customer that has a passion towards living and being outdoors, having animals. 85% of our customers say they own at least an animal. That's often a companion animal, but it could be livestock, horse, chickens, goats et cetera, and most of them own multiple animal/pets. So land is important, maintaining the land, having animals. It's a customer that is passionate about that hobby. But it's a customer that, for the most part, isn't one that makes their living and earns their living off the land. They have jobs that could be anywhere from a tradesman, production warehouse worker, a professional that's working in the city and commuting. And today, as we saw in the last few years, many of them moving further out outside of even suburbia into our markets. But that's the core customer who is very passionate about their animals, their land and we say often that Tractor Supply is a bit like a grocery store for the animals and even the land because it's a part of your property that just like your own home, if you don't maintain it, it begins to decline. So there's needs just even for that as well. So we focus our strategy on that customer, which connects with the fact that a vast majority, a high percentage of what Tractor Supply offers and sells is needs-based, versus highly discretionary. It's what they come and need every day, and we get good repeat transactions from our core customers. I think the other part was, how are they? We look at our customer today, healthy. Healthy customer, and it's a customer base, as I mentioned, that is passionate about this lifestyle. Even in some of the tougher economic times, if you go back to the financial crisis, '07, '08, '09, where there was high unemployment, and there was a lot at risk. Our customers did not give up their passion towards their land or their animals. Even the most expensive animal that a customer owned being a horse is one that they're passionate about. We often describe our customers and teas that they may love their animals in particular horses more than they made their own kids. And so we found that it's a rather healthy customer, but a very frugal and prudent customer, and that's helped us during all different economic times. They are a DIY and a resilient customer that lives off their land, looks for Tractor Supply as a source, whether that's gardening, in other words to just be like homesteading, but they're pretty disciplined. And as we've mentioned, they're -- in times like we're seeing right now, where household incomes are a bit under pressure, they're very prudent on what they'll spend. And that impacts some of the small percentage of just discretionary products that customers are purchasing from retailers, including Tractor Supply.

Yes. And maybe to follow up on the last piece, the discretionary or the variances we've seen. It's been a volatile year. I guess when we look backwards with hindsight last 11 months, what are the biggest variances about how you thought about the business, how it would look in 2023 and how it has looked in 2023 as we walk through as biggest buckets. Should you look at the results?

Yes. When we entered 2023, there were a number of uncertainties, number of variables, inflation, interest rates, consumer sentiment, all those. When looking back as of 9 months into the year, the biggest difference is as to what we planned for and expect and how we saw 2023 could play out is really only in 2 categories, and they're in this order of magnitude as to the 9-month year-to-date performance on comps versus our expectations. First would really be the performance of our seasonal categories that are heavily impacted by weather. And I'll just pause there to give a few examples of that. When just go back to the way I described our customer and what they come to Tractor Supply for it is a very weather-dependent part of our business where if you're living and working and hobbing in life out here outdoors, weather is going to play a part of that. In the fall and winter months, Q4, Q1, it's heavily dependent upon how cold it is. If it's a -- if it's a mild warm season, a lot of the heating fuels and horse blankets, portable heating units, insulated outerwear, all that a customer needs to be able to continue to keep their animals safe, keep themselves [ healthy ] there, there's not as much demand for that. In a spring and summer season, we say we make a living out of and being the solution for our customers who have a passion towards in the springtime. Planting, fertilizing and making things grow. And then we serve and help them find ways to mow it down and cut it down and keep it maintained. And so it's a great cycle to be able to have. When it's extremely hot and you are in historic extreme heat, drought, et cetera, there's nowhere near as much ability to plant and grow and then, therefore, not as much need to cut and maintain as well. And so it shifts a bit of the demand. And this has been, by far, in my 24 years, the only year I can see where it looks like it's framed up to be 4 consecutive quarters of challenging seasonal category. So weather and seasonality would been the biggest difference between our expectations. And then the -- really the second piece of that is the consumer being a bit more judicious and prudent with their spend, the amount of shift from goods to services throughout the year, somewhat in line with our expectations, but what the household budgets have been under pressure and that's done across retail and big ticket type and other discretionary purchases, perhaps a bit more challenging than our original expectations. But other than that, the core consumables, the pet food, animal feed, all growing in units and we're very much in line with what we set out to accomplish, which was to gain market share in the core consumables and to maintain the traffic and activity from all of the new customers that we acquired during 2020 through 2022.

And Rob, I can't let you stay out of this discussion too long over here. Well, when we think about your seat in the Chief Strategy and kind of maintaining the multiyear strategy and digital offering, I guess, how do you balance the strategic multiyear plans you guys have and the things you guys are working on Life Out Here with that near-term volatility? I guess, how do you think about the puts and takes of what to keep investing in, what you have, if anything, pulled back on and make those investments?

Yes, that's great. First thing, good morning, everyone, Rob Mills. Just as a quick 10 second introduction, I have the responsibility for all the tech, the digital part of the business as well as the corporate strategy and M&A. Most recently, I've been focused on the Orscheln acquisition over the last couple of years. A part of the bigger strategy have been with Tractor almost 10 years now. With that being said, when you take a step back, we have a multiyear strategy focus here at Tractor. We don't look just at the current year or the year that's coming. But we lay out what is our overall objective and strategic initiatives that fall into that. And you've heard quite a bit about the Life Out Here strategy, and it's a solid platform that really put our customer at the heart as well as our team member and everything that we do. And then we look at not just how we operate the business from day to day, but how do we introduce new strategic growth drivers. And one of those strategic growth drivers is around our digital business. Currently, we're about 7% to 8% total penetration of our total sales from an online perspective with Omni. Omni is about 80% picked up or fulfilled through our stores. So that's the core part of our strategy. Everything is about how do we build an ecosystem around the store and really allow the customer to shop on their terms, how they want, when they want, where they want and to provide them flexibility. And what digital does as well as our strategic initiatives allows us to look at not just at today's kind of macro and micro conditions or what's going on with the customer base, but also allow us to pivot to talk to that customer differently, leveraging our Neighbor's Club data, making it more personalized, using that data to ensure that we're offering the right customer service, the right value back to the customer and more importantly, the convenience. So we have a strategic planning process that the leadership team comes together on a regular basis, not just focusing on the strategies that we have today and where are we executing well and what do we need to do to pivot based upon kind of the larger indicators, but also thinking about what's the next 3 to 5 years and where is our big growth opportunities as a company that we want to continue to build upon. So we look at today's numbers, we look at today's customer feelings, emotions, consumer shopping behaviors as well as kind of the macro and micro trends and then we pivot where it makes sense.

Perfect. I think you had a question?

On the discretionary side, real it's not a big portion of your mix, but we saw like [indiscernible] in there, the [indiscernible]. So I'm wondering what you guys are seeing in your apparel and footwear business? And -- any color there would be really helpful.

I'll go ahead. I'll repeat the question. Yes, recognizing that they're not, Mike. But the question was more about with discretionary business, what are we seeing in the apparel side of our business. We're seeing -- well, first, let me just say on apparel, Tractor Supply, if you've shopped our stores, you're going to know and recognize that it's -- there's not a lot of fashion in the apparel area. We try to stay like what is the best trend in the apparel area, but it's very much about a needs-based work whether it's your tradesmen or whether or not it's for you and your property, your land, your ranch, and so a lot of ours is durable, but yet you've got to replace it. So for instance, our main apparel brand names would be Carhartt, Wrangler, we've got Muck Boots and then our private label on Ridgecut as well. So most of ours is going to be based on what they need for work, et cetera. So there's a bit less even in our apparel area that's exposed to the discretionary spend. And apparel has been running pretty much in line with most of our categories outside of the core Q traffic driving, where it's a bit under pressured, but against most of discretionary retail against most of apparel -- while we don't get specific to our categories, we see a modest level of softness of demand. But apparel is not an outlier to the chain average as what we've seen in the other categories, whether it be truck tool and hardware like that because we've got a really good practical needs-based approach. Gloves, insulated socks, all -- that's what you're going to find in high vis for those that work in that industry. That's what you find in apparel and Tractor Supply.

And real quick, just to add on to that. One of the online strategy is the exited assortment. So where -- we'll have assortment -- core assortment in the store, both national brands, Carhartt, et cetera, as well as private label. We'll bring that full assortment online to ensure that we're offering flexibility to the customer that they could be picked up in the store or shipped within hours, within a day, same day delivery, et cetera. So do look at the assortment, not just focusing on the store, but how do we extend it, not just in apparel, but across all our core categories.

And maybe to follow up on the discretionary piece. You talked about the weather impact, Kurt. I guess one way to think about it, if we were to frame it up, thinking about last quarter, were there markets that had more normal weather? And if so, like how did those comps relative to your initial expectations? And how does that is that part of what gives you guys the confidence to say it is mostly weather right now versus what you expected?

Sure, yes. When we look across our geographies, and we're in now 49 states and have a pretty diverse geographic spread, there are markets that were pretty typical or less impacted by weather. The Southeast, even some of the South Central like around here and the Far West, in the Q3, not necessarily as impacted by the weather. Very consistent, we don't see from the most impacted to the least impacted a real disparity in performance. You look at some of the areas that I said that were less impacted by weather, and they are running generally in line with our expectations of positive low single-digit comps. And those that were under pressure are really kind of the opposite of negative low to negative mid-single digits. And really, the blend came out to that roughly flattish performance for the quarter. And so it also gives a little bit of visibility that we say it can be impacted by weather, but the resiliency and the amount of strength of the core consumable traffic driving, really, even in those particular cases, mitigates how big of a swing on the top side anywhere from discretionary or weather can impact because the business is so consistent in regards to its needs based.

Makes sense. And one of the big, Rob, digital initiatives last couple of years, the Neighbor's Club. If we think about it, 31 million, 32 million members now, whatever that number is, I guess, how do you measure incrementality? It's something I think investors wrestle with is the first 10, I'm guessing, are more higher spending than the last 10. But how do you guys think about what is truly being driven by Neighbor's Club? And what are the innovations you guys are rolling out to maybe push that sales number higher, given you've grown the member base so much?

Yes. So we clearly look at comp base of new members that are being added to the Neighbor's Club program, but also with the tiering of how do you move a customer from one tier to a higher tier. And this is where the power of the data that we have. As you mentioned, we're 32 million plus strong. We have a lot of data that we're able to mine. And the purpose is to drive a level of personalization and see how that customer is shopping both online as well as in-store. And then really be specific about the products that we're either offering up their e-mail, through mobile, SMS or even from an in-store experience, how do you drive more of a personalization. You've all heard quite a bit about AI, GenAI, definitely the buzz out there from a technology perspective. And what I would say is, over the years, Tractor has been investing, leveraging this data and the technology behind it to drive more predictive and more what I would say, real personalization. But ultimately, our goal is to take the customer and allow them the flexibility and the information that they could buy additional products or services. through an online channel or within the store, and it's about leveraging that data. The last callout that I'll make is right at the start of the pandemic, we introduced a mobile app. That mobile app is now about 6 million strong downloads. We have a high stickiness rate. And the mobile app is really built around 2 components. One is to drive a level of personalization with the Neighbor's Club customer to influence their next shopping behavior, their next add-on to the basket. All of the above as well as to drive a level of personalization related to their pet or large animals or their property. So it's about taking the data and driving a true personalized experience.

You mentioned retention. I guess I'm curious how the different cohorts of new customers been retained early on, very high retention rates, but through COVID and you gained tens of millions of new customers quickly, have those customers matured at the same rate as the previous customers? And how is that maturity curve of looking?

Yes. I mean, overall, we have shared that through COVID, we've attracted not just through Neighbor's Club, but through our brand -- through brand awareness. And going back to Kurt's point about being a needs-based retailer, a higher customer base, especially within the Neighbor's Club program. The retention rate has been extremely strong. And it's about really 3 things around how we're driving a superior customer service experience while you're in the store or online. How do you ensure that we offer the convenience to the customer, to get their product. We have the product available. . And then lastly, it's about how do we ensure that we're listening the customer and responding around the value that they're looking for. So we've seen really strong retention rates as well as we do believe with the current customer base, there's an opportunity to continue to grow just their comp transactions as well as their average basket size.

And when you do your survey work for your customers, you talk to your customers, is there any consistent feedback you get of things Tractor doesn't offer, either product or type of transaction that you guys could provide for your customers looking forward? Or what's the feedback customers give that you guys could approve?

Yes. The 2 areas, we get very, very high remarks on our customer service. And if you walk into a Tractor Supply store or online, it's about having product and expertise around living the life out here lifestyle. Which at times could be fairly technical and complex, just either what you care or feed for your animals or your property and maintaining of your property. But with that, how do we ensure through the last mile delivery that were efficient, that we could get the product to the customer when they need it with the flexibility. So we're investing in delivery programs, both through third parties as well as our own team member delivery, which has been extremely successful. As well as even within that delivery program, how do you offer more bulk, bulk type of delivery for that customer that needs pallets of feed or food and they need it at a certain day or the flexibility that somebody on their ranch or on their property can actually receive the goods. So an area that we're really going deep into is on the whole last mile and delivery service both in-store as well as online.

Helpful. And Kurt, maybe going back to the near-term trends that you talked about last call. Obviously, a big ticket has been a consistent weak spot for the last 1.5 years or so. I guess if we go into '24 will be 18 months, how long do these cycles have you seen them typically last year time at Tractor? How long should a big ticket down cycle last? And how does the private label credit card or some of your other offerings? Can you weigh into that to help offset that at all?

Yes. Daniel, it's a fair question on big ticket. The -- I think the answer, though, has been there's not 1 typical cycle. We've seen some down cycles 2008, 2009, even '16, '17, and there's not necessarily any standard type pattern to that. Each cycle has some of the different drivers of it. For instance, in '08 and '09, you were coming off of pretty consistent like mid-single-digit comps. And the U.S. consumer had high unemployment. It was a shock to the system, and the consumer sentiment hit some pretty strong lows and big ticket was under pressure and it lasted maybe 12 to 15 months. You look at this period of time, what's really different about it is you look at the periods of 2020 and 2021, maybe the early part of 2022. Coming off of pretty consistent trends as well, except the stimulus and everything boosted the economy, the stay at home, we're coming off of, in total, and big ticket was running higher than the averages at this time, but a 3-year 45% comp, and so I think the scenario is -- and it's always been the question of you just ran 3 years -- 3-year stack 45% comp sales growth. And big ticket was a part of it, and it was running in line or a bit better than even the 45%. Can you keep that? Can you continue to maintain? Or would there be a reversion back. And what we're basically seeing is a consistent, maintained growth pattern of the core of the business. The big ticket was fueled as we expected, as we signaled because we said there would be some reversion on that. You had fueling of some onetime purchases through stimulus. You had new customers moving into the market, maybe buying their first zero-turn riding lawn mower and that. So you pretty much had like a bit of a hub. And so we're now seeing a bit of reversion back to the historical norms on a per store basis on big ticket. And so it's really about coming off of some of the highs on big ticket and being a bit more normal. And we may have 1 or 2 more quarters of that. We said in Q3, while big ticket was negative, it was better than Q1 and Q2's performance on big ticket as we're beginning to cycle that. So the only thing else to consider with big ticket is, it's not just about discretionary. Big ticket was under pressure this year because some of the seasonal parts of our business are big ticket related. In Q1, having one of the most mildest January, February, limits the demand for heating units for snow blowers, log splitters. In the summertime, the drought limits the demand for riding lawn mowers, zero turns, those types of big ticket items. So there is some discretion there, but even some of the seasonality puts pressure on big ticket. So we're not surprised at big ticket considering what we're coming off of and the pressures on the seasonal part of the business.

Perfect.

Do you just have a sense for how much your costs may be made in [indiscernible] home sales slowing down as much I'm sure it's like people get a new home out there [indiscernible] wondering if you guys do any kind of analysis to the estimate what that headwind might be, what we might see going forward?

Yes. So the question was what -- how much correlation, how much do we believe a slowdown in home sales may be impacting the business this year? And I certainly acknowledge the question. The indication right now is that home sales in general, not only is it going -- in units going to be below the highs of 2021 and 2022, but really at this point looks to be forecasted to be a 13-year low. You have to go back to the financial crisis to see these numbers again. So we understand the question on that. For the years as we look at the business and what drives the demand for our business, home sales correlation units, there's not a real strong correlation that we can see and it's understandable that we don't sell the -- when we sell fencing, our fencing is T-post, barbed wire, gates, et cetera. We aren't selling lumber and drywall and a lot of the appliances that go into that, that's not a business for Tractor Supply. But what we do sell are some of the things I mentioned like a riding lawn mower, a push mower, some of the fencing if you've got multiple acres, some of our fencing. So I think there's certainly a -- whether it's a positive or an unfavorable halo. There may be a bit of a halo that we watch and are aware of. But as much as sometimes we get grouped in with other retailers, home sale units is not a much of a strong correlation for us as much as some of the other things that we talk about being -- those that enter into the rural markets, enter into our lifestyle of pets, owning chickens. Pet ownership was a bigger impact for us on the upside than home unit purchases over the last few years. And same thing with the explosion of backyard chickens.

I know it's a control like weather and the macro, but if you had there a room for a certain macro environment -- what's your kind of environment that really [Indiscernible]?

Sure, sure. I'll start with -- okay, the question was in 2024, if you had to think macro and what would be the route for ideal scenario in there. And the topic of weather comes up often, so I'll just hit that first. After 2023, as I mentioned on the Q3 earnings call, one would think, one would hope it can't be worse than 2023. So I would put in there that you would have cold and heavy precipitation in the Q1 and Q4 time frames. And in spring, you would have a nice early start to spring with mild weather and a moderate level, a good level of precipitation. That would, certainly, from that standpoint, that's ideal. What we would typically plan for is not ideal, but a bit more of the reversion to the norm and the mean on weather. In regards to the other parts of the macro, you -- the consumer certainly feeling confident that we have either seen the worst behind us that there's more optimism. Inflation in the past few years has not been healthy for the consumer. We've been able to manage through it. We -- at this point, we expect and we're pretty much targeting like most would be that between inflation and deflation next year, maybe it's more of a neutral-ish. But we always say in deflation, there's favorable aspects to our business, gross margin expansion, other drivers of traffic for our product help. But we -- if we were framing up a deal, a good, modest small amount of inflation would be your ideal situation. And those really are the -- are going to be the main factors that move our business outside of the consumer already having their need for their lifestyle hobby. As we start to frame up and plan out, and we're in the middle of it now 2024. Besides the core part of our business, the strategy that we believe has got a meaningful tailwind to drive what we can control the comps, and additionally, is planned for what's likely to be the scenario with the consumer, the inflation, more normalized weather. That's a bit of how we'll think about and be framing up our planning for 2024.

Are you seeing any inflation or disinflation in the core categories [indiscernible].

Question was, are we seeing any disinflation or deflation in the core categories today. And we're certainly seeing we're certainly seeing disinflation. As for the best example, we said, and it's played out very much like we expected. Our year-over-year inflation on a retail price side was high single digits in Q1. It moved to mid-single digits in Q2 to low single digits year-over-year in Q3, and we'll be in the lower end of a low single digit and even potentially getting to more flattish on a year-over-year retail price inflation by the end of this year, and that leads you into 2024. Have we seen some deflation, we have in some commodities, corn, in particular, as an example, hit a high in the back half of 2021 and it started -- has come down over periods of time since then, but yet corn is still above its pre-pandemic levels. And in many of the commodities, I think there's a strong argument to say you're seeing a bit of the bottom of the trough on that because as it plays out in the cost of goods sold, there's the commodity, but then there is all the other input costs. And about every other input cost besides the commodity is still at elevated levels. Wages occupancy costs, transportation costs have come down meaningfully in import a sizable amount in domestic, still above pre-pandemic levels. And I think the argument still plays out that transportation costs not likely to be reverting back to pre-pandemic levels. There's increased regulations, the higher driver wage costs, et cetera, that keep those. So there's a reason to say we've seen some of the deflation, disinflation in some of the commodities over the last 12 to 18 months. And there could be some movement in there. But throughout this period of time where there's been inflation in pet and other areas, we've also seen that being offset by some levels of the commodity prices coming off their highs of '21 and 2022.

Perfect. Well, maybe if I want to think about taking a step back in '24 and just think about the long-term guide. All the different sales drivers you guys have, the 4 to 5 comp. If we build up to it, can you maybe just help investors frame up how much of that is coming from these remodels? How much of that is from the digital strategies that Rob's ever seeing, how much of it's new stores, kind of help us build to what a normal year would look like? And then we can obviously make our assumptions about all of the everything else.

Yes. The expectation on our long-term guidance and what we believe we can drive in our target to achieve a 4% to 5% comp over the long term. And we've said doesn't mean it's going to be a straight line upward on there. It could have some years of higher lower, et cetera, and so forth, and we're experiencing some of that in 2023. But the core drivers of our -- from our strategy of what we can control, the Fusion remodels interior and the side lot garden centers, the growth that Rob talked about on the digital side of the business, e-commerce expected on its path to double-digit penetration in sales. We expect -- and if we continue even in this year to see it well outpace our performance of the chain average. Third, our Neighbor's Club. As we've gone pre-pandemic 14 million members, 32 million members plus today, representing 77% of our sales. We believe there's still opportunity to grow that number. But more importantly, secondly, our Neighbor's Club, grow the share of wallet on the 32 million members that are with us today. We know from our surveys with them. We see it from the other third-party data. They're shopping at us as well as competitors that -- in products that we share and how we get them shop across all 4 corners of the store is key. And then lastly, our growth in our new stores. New stores continue to add in its maturation process of 3 to 5 years to a mature level. It drives comp sales over that period of time. And we're growing from 70 stores this year, a target of 80 next year and then after that 90 stores a year. And so that continues to add to the comp. That is the biggest chunk of the 4% to 5%. We generally say Tractor Supply historically has run at or slightly above the GDP growth for goods in the U.S. And so if that's 2 percentage points in your growth, those initiatives, we believe can be driving a greater portion in a decent chunk of the 4% to 5% comp. And we still feel very strong about that. We're seeing all those lifts this year, helping offset some of the pressure points. So we'll continue to invest in those categories to continue to expand in all of those areas.

Got it. And then, Rob, maybe one on your side. You said you're overseeing Orscheln and the integration. How has that gone? And should that be a further comp driver as those stores come up the maturity curve look more like Tractor stores?

Yes. So overall, the Orscheln acquisition, we announced October -- we announced the closing October of last year. Over the past year, we have spent the most of the effort in converting the store, remodeling the store, bringing the team members up to our standards, as well as introducing the community to Tractor Supply as well as just the customer base. Overall, we're very pleased with what we've seen. From a team member feedback, they're extremely excited about the future. When you hear the feedback from the customer around the dependability, the products that we offer feeds directly into their lifestyle, going back to the market share, we were able to enter the Midwest market that really accommodates very well our product as well as a customer base that was extremely welcoming to the Tractor Supply brand. And by the end of this year, first week of January, all stores will been remodeled, converted and fully re-grand opened as a Tractor Supply. So we do see it as a driver of next year. Now it's about operational execution and really building that muscle into the Tractor Supply kind of flywheel that we have about how we operate our stores.

And then, Kurt, related on the merchandising side, you guys recently rolled out YETI. I guess that's an exciting may brand introduction. But is that material when you think about introducing new national brands historically, has that been a big comp driver? And then how do you weigh the long-term private label versus national brand mix in Tractor?

Yes. Not one really not one particular national brand is the silver bullet or the key, but having a great presence of national brands that shows the relevance and the importance of that brand and Tractor Supply being a destination for key brands is all part of it. And making sure that you've got a good, better and best across the business. And so over the last few years, if you've shopped our stores, you see newer national brands that we've added to our strong list of national brands. Some of the names I've already mentioned, but what we have now today, like in the apparel side of the business, where we've now brought in Columbia. Columbia performance fishing, Columbia performance, hunting type apparel. In the power tools with Makita, Bosch and Dremel. What we're adding there is we continue to show our presence in power tools for a tradesmen as well. All of that plays into it. And then of course, we've got a really strong presence in feed and food on the Purina checkerboard brand, which is critical. That's complemented by the strong exclusive brands that we've got like 4health and DuMORs and Producer's Pride. All of those areas on apparel Ridgecut, which is very much a high-quality comparable to your Carhartt that we offer along with having Carhartt in our stores, those are all critical to it. And so for us, exclusive brands. There's not a goal as to how much our percentage. We're roughly a little over 30% exclusive brands. But making sure when there's a great national brand that shows the importance and it is to Tractor Supply and the customer but to have a complement and exclusive where there's not a critical aspect to have a national brand. In some areas, there's just -- it's not necessary, there isn't one. How do you have a really great exclusive brand to it. So we'll continue to find and bring in great national brands. We think YETI is a great partner for us. It's a product that our customer has an affinity towards and buys and we think it's been a really nice match. I'm looking forward to seeing the holiday sales in YETI. The next year spring/summer, we're adding YETI as we open up Fusion stores in the new Fusion model that has space for the YETI lineup. And so that's how we've added in even some national brands as we've completed a fusion remodel.

Maybe one on the margin. I'm sorry [indiscernible]

[indiscernible] go backwards, but a conversation around the 3-year 45% comps. And I think can you just talk about [indiscernible] rationalized that conversion [indiscernible] a lot of that call and that back pricing. Just sort of curious on how much price and maybe what would cause more price if that the promotion or the [indiscernible].

Sure. So the question was on the 3-year stack historical comps. How much of that was price average ticket, inflation, et cetera, what's the risk of some of the give-back in some of that. I'd start by saying, historically, even pre-pandemic. If you look at the 20, 30-year history, we're pretty balanced in growth in comps coming from both traffic, new customers or additional traffic from existing customers and ticket. That played out very similar in the 45%, roughly anywhere from 20% to 25% of that 45% is ticket/traffic. We had significant growth in traffic, and we continue to maintain and even have a slight improvement in traffic. So key is that we're maintaining and holding these customers, those that have moved into our markets, they've own a home, a mortgage, they're staying and they're engaged in their lifestyle. On the ticket side of it, while most of our growth was really fueled by the traffic, ticket was fueled by a mixture of big ticket scaling a bit higher inflation in there over 3 years, high teens stacked inflation rates across the board and then more units per transaction. Some of that units per transaction over the few years has been some of the discretionary of the add-ons and the impulse. To your point, we've seen some modest give back. And I think that's a real testament to the resilience of the business is the modest part of it. I talked earlier about big ticket as we expected, as we've seen some level of disinflation or if we've seen the discrete UPT a little bit under pressure. You've seen ticket more pressured than transactions are this year. But again, I believe we've hit over the time, we've seen some of the deflation in the commodities that has really been absorbed over the last 18 months. There could be some future impact. We really believe it's more of a neutral-ish. There's a lot of structure in the cost of goods sold versus historical if commodity prices go up or down, so do the cost and the retail prices. So we've seen some reversion on the ticket but the -- we don't see -- and we're not planning that there's an extensive continued amount of that. And the key part of that is the transactions, the traffic, the units are pretty consistent there. And there's a little bit of noise expected that and the normalization of it. But we've got a lot of optimism towards being able to grow both ticket and transactions in the go-forward years.

Maybe one just on the operating margin side. Kurt, you talked a lot about the offsets in the business? And what -- I guess, 2 part are as thinking about SG&A growth, you guys have pulled forward a lot of investments. But what is the right SG&A growth for the business as we think about it? And you talked about if we get deleverage on a lower comp, there's normally a natural offset in gross, [ here's ] walk through those dynamics and what makes you more bullish on the gross margin outlook maybe in the near to intermediate term as we digest this kind of tougher period?

Yes, sure. On SG&A, I'd start by saying -- right now, if you look at the core SG&A, and I say that because we are very purposeful in a growth mode for these strategic initiatives. And I'm very purposeful on the earnings call to talk about the growth on strategic versus the core area. If you just bifurcated that, looked at the core, around a 2% growth rate on the core SG&A being the cost of -- the variable cost and the cost in our stores the labor in our stores, the labor in our distribution centers, the occupancy cost. If you saw roughly 2%, maybe even a 3%, that's pretty normal in that -- and what that means is costs are going to be growing at higher than that number. There's other variable costs that are in there. But we continue to drive as part of our strategy, efficiency and productivity in the business. We're coming off of for the company and overall nearly 80% growth rate in the last 3 years, that came through a lot of muscle and even some inefficiency. And as we begin to come off of those, we're being able to claw back whether it's cost or clawback or improve on some of the efficiencies. So we believe the core can grow modestly. Then what gives us the opportunity to be -- it may grow another 2 points from there just in the investments we're making in the business. And that's why we said under normal algorithm 4% to 5% comp growth SG&A can be relatively flattish as a percentage of sales and gross margin, we see expansion opportunities. The reason we say expansion opportunities -- some of our investments in the business, particularly supply chain, are going to burden our SG&A, all of our distribution costs are in SG&A. But drive down stem miles and drive efficiency and cost of goods sold. So where we invested in a new DC this year and next year, that pressured SG&A as an example, by 20 to 30 basis points and will for the next one, but driving that much or more benefit in gross margin. So we continue to see favorable outlook on transportation, controlling what we can control. We believe our micro initiatives are driving down stem miles and more efficiency in supply chain and the scale of this business as a $15 billion size business versus the pre-pandemic $8 billion to $9 billion. We are scaling our size, and we are creating the lowest cost to serve and being able to grow gross margin expansion. So in general, we still see upward opportunity. Even if there's pressure where you have less big ticket that means less pressure on mix. Where you see a downward turn in the economy, that means transportation, other costs tend to start coming down. And in a deflationary environment, if we saw something like that, we generally manage to -- just like an inflation environment, we try to manage to profit dollars and it puts pressure on the margin rate. Deflationary, we've typically improved our gross margin. So there's -- you can see a number of the list of things why what's in our control or visibility. We've got consistent trends on the cost structure but we've got the right initiatives helping us with some over the long-term gross margin expansion.

Perfect. Well, I hear the crowd in the hallway, which shows me I'm running up on time. Okay. But Kurt, Rob, thanks so much for the time today, and I appreciate all the color.

Thank you.