Good afternoon, ladies and gentlemen and welcome to Tractor Supply Company’s Conference Call to discuss Third Quarter 2016 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. We ask that all participants limit themselves to one question with one follow up. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today’s call, Ms. Christine Skold of Tractor Supply Company. Christine, please go ahead.

Thank you, Camille. Good afternoon and thank you for joining us for Tractor Supply Company’s quarterly earnings conference call. Before we begin, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed and investors should not assume that statements will remain operative at a later time. Lastly, Tractor Supply Company undertakes no obligation to update any information discussed in this call. As a reminder, the focus of this call is to discuss third quarter earnings results and we do not have any additional updates on the Petsense acquisition at this time. We ask that your questions during the call and during follow up telephone calls focus on Tractor Supply Company’s results. I’m now pleased to introduce Greg Sandfort, Tractor Supply Company’s Chief Executive Officer. Greg, please go ahead.

Good afternoon, everyone. Thank you for joining us. On the call with me today are Tony Crudele, our EVP and Chief Financial Officer; Steve Barbarick, our President and Chief Merchandising and Marketing Officer; and Kurt Barton, our Senior VP and Controller. As we previously discussed in our business update earlier in September, there were several headwinds affecting our business during the third quarter. We have dedicated a considerable amount of time and effort gathering and analyzing data during the quarter to understand more fully the impact these headwinds have had on our performance, and we do not believe the current sales trends are the result of significant shifts in the competitive landscape, our market share growth or our long-term operating fundamentals. In fact, our core everyday business in categories such as livestock and pet remained strong throughout the third quarter and our business outside of the energy and agricultural markets in regions like the Southwest and West performed very well for the quarter. We did however experience softer demand in the energy and agricultural markets and we saw a slow start to the early pre-season sales of cold weather and heating related products that impacted the Northern region. We have managed successfully through challenging sales environments before. The recession of 2008, 2009, and during those most difficult sales periods, our teams remained focused on managing the factors they could control, such as inventory, gross margin, and other expenses. We made the necessary adjustments then by taking a long-term, balanced approach as we cycled through those periods, and we will do the same for now until these short-term headwinds subside. At Tractor Supply, we are committed to introduce new products and updating the merchandising categories to keep our stores fresh and with the current sales environment we are specifically targeting those…

Great. Thanks, Greg. And good afternoon, everyone. For the quarter ended September 24, 2016 on a year-over-year basis, net sales increased 4.5% to $1.54 billion. Net income grew 2.4% to $89.4 million, and EPS increased 4.7% to $0.67 per diluted share. Comp store sales decreased 0.6% in the third quarter compared to an increase of 2.9% in last year’s third quarter. There are a number of economic headwinds impacting consumer spending throughout many of our markets. However, as noted in our business update on September 7, the energy producing and agricultural markets were the most impacted. To give you a sense of the magnitude of the macro impact of the energy and farm economies, we estimate that approximately 25% of our stores have a direct correlation to these economies. This does not include any of the stores that may be tangentially affected by the economies. The strongest regional performance was in the Southeast and West regions where there is less exposure to the energy and agricultural markets. The West region base had a solid mid single-digit comp, and the Southeast was well above chain average. We continue to experience strong demand from many of our basic everyday items, such as livestock and pet category, which generated mid single digit comparable chain wide sales. While the quarter did not shape up the way we expected, we continue to be well positioned for the long term. The solid comp sales in the non-impacted regions support our position that the business will continue to drive profitable growth. As Greg said, we have been through periods like this before, and we have the leaders and the strategy to continue delivering value to customers, stakeholders and shareholders. Comp transaction count increased for the 34 consecutive quarter, gaining 0.5% on top of a 3.8% increase last…

Thank you. [Operator Instructions] And once again, I remind you to please limit yourself to one question and one follow-up. And we will take our first question from Matt McClintock from Barclays.

Hi, yes. Good afternoon, everyone. I was wondering if you could maybe update us on the competitive dynamics that you are seeing in some of those challenged energy markets and rural markets, are you seeing anything different there? And then, longer term, if weakness persists, I mean, could we actually argue an acceleration in market share consolidation for those markets? Thanks.

Matt, hi. This is Greg Sanford. We are not seeing anything of any substance from a competitive standpoint in even those markets that you mentioned that are challenged right now. The farm store market still has growth and some of the competition are opening some stores. But we are outpacing their growth at a very, very high rate. So, to think there is a competitive threat, I would say no, from another farm store competitor. And that’s what – we watch that very closely and monitor, but I would say, no, there is not.

And then if I could ask a follow-up, you reiterated the 2,500 store goal longer term. And if I recall, I believe there might have even been longer term some upside there previously in the past. As I think about that goal, does that imply a recovery in those energy markets to maybe the highs or any recovery at all in those markets? How do we – how should we think about that?

Well, first of all, the modeling that we use would not today say don’t go into those markets because right now they are under some pressure. It would actually tell us that there is a placeholder there for a store based upon all the factors that go into that model, and there is a number of those. And so it would tell us that that’s an ideal location. The one thing I can tell you is that in some of those markets where we’re seeing some challenges today, we are being very diligent when those stores come up for presentation, a real estate strategy. We need to look at them very closely to make sure that they are stores that we believe now today we should be looking toward opening. Now, there is a number of stores already in the pipeline for 2017, and those stores we are going to stay with and run with. We’re talking about stores now that truly are affecting '18 and probably into '19.

Thank you very much.

Our next question comes from Peter Benedict with Robert W. Baird.

Hi, guys. Just a question on the Neighbors Club and the decision to kind of roll that out for next year. I mean, what kind of impacts are you seeing from it? Can you give us a little bit more color on what has encouraged you and given you the confidence to push this out by the middle of next year?

Yes. Peter, this is Steve Barbarick. We started the program back, it was about a year ago in October, and we've been very methodical in watching it. The one thing that's really exciting is the enrollment continues to exceed our expectations. To look at the fact that - I'll give you some numbers here, 80% of the e-mails that we're getting through the program are new to our database and about 50% of the folks that are signing up are also new to our database. So we're getting a real good insight into these individuals. And tracking over the course of the last year, what we're finding is the people that are signing up, and this is of no surprise, tend to be the closest ones to the brand and they do want to hear from us. They tend to shop us more often and they are twice as likely to take advantage of our marketing promotions. So as we move forward with this program, we think that this is a real opportunity to talk more to them. They are typically our best customers and they really want to hear from us. So we think this has a lot of upside in the future.

And related to that, Steve, the response to the marketing changes you guys made in the fourth quarter, just curious, I mean, what's the plan for the fourth quarter, which of those events or radio or what was the most impactful in your view and how do you guys plan to kind of evolve the marketing in 4Q and then into '17 based on that?

You know, lot of what we're doing is not just new, but it's also enhancements of what we're currently doing. So for example, we're using the digital space today more effectively than we've had in the past. And so you'll see us continue to move down that path as we evolve. We still know that a lot of our customers like the traditional marketing that we do. But we will continue to evolve based on what we see it to be most efficient and that's where right now we're kind of moving toward.

Okay. Great. Thank you.

Next, we have Seth Sigman from Credit Suisse.

Thanks. Good afternoon, guys. I wanted to just follow up on a comment about September improving. I think the comment was that September was positive. Can you elaborate on that? And I know you said there was an easy comp, but did you see any sort of narrowing of the gap between some of those troubled markets versus the healthier markets? Thanks.

Sure, Seth. This is Tony. As I mentioned on the remarks, it was an easier comparison, but as we looked at the individual markets, we did see that those markets were still the ones that had the similar trends that we had in the July and August time frame. The one thing in September that did impact September was obviously not getting any type of cold snaps and some of the pre-season heating sales were still down. But again, going up against the easier compare of last year made September a positive comp.

Okay. And so just to clarify, when you talk about the 25% of the store base, that's either in energy markets or agricultural markets, you are not referring to those stores necessarily getting better in September?

Yes. When we look at those stores, those are clearly – I want to say its all ships rise with the current tide. So as we moved into September, obviously, we had stronger comps, but the difference or the delta between sort of a normalized comp and those stores remains similar as it was in July and August.

Okay. Got it. And then, on the expense side, obviously very well managed this quarter despite the tough environment. How are you thinking about the ability to leverage comps here? I mean, you gave some color on the fourth quarter, but just in general as we look out over the next 12 months, to the extent that comps are maybe below that 3% to 5% long-term target, maybe what are some of the opportunities that the team is focused on to maybe take some expenses out?

Sure. We've been very aggressive in looking at the expenses for the back half, as we saw sales soften through Q2 and Q3. As we look out, we believe that we can continue to manage those discretionary expenses, such as travel, training, looking at some of the stores, really working with vendor to try to reduce our costs relative to maintenance, supplies, and fixtures and things like that. So obviously, we'll continue to do that. The one thing that's very important to us though is, we look at the long-term and so we do not want to do anything that would jeopardize the business. So we'll continue to make sure that we fund our stores, fund payroll. We want to make sure that we maintain market share and we want to convert those customers and maintain those customers as they come into our store. The one thing that we do mention when we look out over the next 12 months is the incentive compensation piece. Though, obviously it's much reduced this year and we'll be comping up against that as we put in a more normalized incentive compensation, it will make it very difficult to get SG&A leverage.

Okay. Understood. Thanks very much.

Our next question is from Christopher Horvers with JPMorgan.

Thanks. Good evening. So to follow up on that, I mean, I know, you haven't given full guidance for 2017, you have a long-term earnings algorithm out there of 3% to 5% comps and mid-teens earnings growth. And given the state of the world it feels like that's not going to be achievable next year. So any initial thoughts about how you're thinking about the sales outlook for next year and the overall earnings growth would be really helpful?

Sure. As we look out, we're still very confident in the long-term store target of the 2500. And we tend - we still want to look out and we believe that we are capable of driving that 3% to 5% comp on a long-term basis. Obviously, as we look at the headwinds that have been presented to us this year, as well as we cannot determine at what point in time they will subside. We will take a harder look at the short term and adjust our comps accordingly. At this point in time though, we're not prepared to give full guidance on 2017. But obviously given the current sales environment, we would agree with the consensus that it would be difficult to hit the longer term target of 3% to 5%.

Understood. And just related to that, so then is the message here guys, look we've got $0.05, $0.06 for the 53rd week. You've got $0.07 to $0.08 from the incentive comp normalizing. So if consensus is like 360, is it essentially the message just to take those one-time items and reduce our numbers by that amount to bring it down to that 345 to 350-ish level?

Well, obviously, we want you to consider those factors in the model. We are a grower, we're going to continue to grow the store base next year. We anticipate to be above the 100 store range next year. And we - the merchandising team is aggressive as far as putting in programs and looking at new products and trying to drive the comps. So obviously, we're really working hard to have a very strong 2017 campaign. Having said that, we just understand that those headwinds of the 53rd week and the incentive compensation will have an impact on earnings. But again, our mind set here is we want to be double-digit earnings growth, and we’re going to do whatever we can to make sure that happens.

Understood. And then, just as a follow up, how much of your mix would you say is heating related in the fourth quarter? And then, you know, bigger picture, how much is cold weather related sales as a percentage of mix in fourth quarter as well? Thank you.

Yes. Christopher, this is Steve Barbarick. And we typically don’t get too detailed into the numbers. The big picture, we know that animal products is about 40% to 45% of our business, and seasonally it changes. So, again, we’re not going to get that granular here.

Our next question comes from Michael Lasser with UBS.

Good evening. Thanks a lot for taking my question. It’s on the 25% of the business that’s been underperforming. Did it seem to catch you off-guard that the ag markets are rolling over? So what are you looking for to give you an indication that it’s going to get better? I guess, the point is how long is this going to be a drag on the overall business?

Well, obviously, Michael, it’s very difficult to project how long that would be. Now, what I would tell you, as far as order of magnitude, the oil markets have been a drag. Obviously, just in the recent weeks you start to see the oil prices coming back. They are having a few more rigs put back into place. Not that that’s going to turn of on a light switch, but obviously it’s more of a positive indication. Next, on the higher key would be really the impact of the cold weather products, and that would be probably the second biggest drag on the comps. And then really, thirdly, it’s the farm economy. And it’s really all three combined, which is having the impact. So as any one of those start to turn, you know, obviously, it would have a favorable impact on the business. So I wouldn’t necessarily say we need all three of them to turn around to start to see the comps really improve dramatically, and of those three factors, farm income probably is the least of the three.

Okay. That’s helpful, Tony. Two points to clarify. You mentioned double-digit earnings growth for next year, are you saying think about double-digit earnings growth and then subtract the incentive comp piece and the extra week piece or is that not the right way to think about it?

I would say that would be the correct way to look at it. I would say you want to adjust for those items and then this team here is - we are geared towards driving double-digit growth, but we need to adjust for those two factors.

And then will there be - how should we think about the sales contribution from Petsense in the fourth quarter?

We're not providing guidance at this time. What we believe is that any bottom line benefit that we would receive would offset the transaction and or integration cost in that quarter. So net-net, bottom line, there is not an impact.

Thank you.

Our question comes from Peter Keith with Piper Jaffray.

Hey, thanks for taking the question, guys. Just to circle back on the oil markets, and maybe a little bit on the ag economies too with the economic issues. When you look at the oil markets it's 25% of the base, is that only South Central Texas or could you maybe frame that up for us geographically and then similarly on the - where the ag economies are the worst?

This is Tony. I'll give you just a little bit more color as best as I can. In the prepared remarks we talked about 25% of the store base and that would include all energy, which would be oil, it could also be coal in the Appalachian area and obviously the farming tends to be mostly in the Midwest and the Great Plains. So - but what we're saying is – and this is such a broad area of the country. All the stores are getting thrown in there. So it appears to be a much larger piece of business. But when we run our models, we see that the co-relation specifically to all three of those being any of the oil, energy, coal or farm, the co-relation, the direct correlation is only for about 25% of the store base. So those are the ones that are being directly impacted. So, as much as we have a lot of stores in Texas, there is only X amount that are energy impacted. So the first thing is I would not extrapolate it to every store in every state, what we're saying is about 25% of the stores are co-relate directly and have a more significant impact than the rest of the chain.

Okay. Thank you. That's helpful. And wanted to pivot over to gross margin, curious on the sharper pricing, it sounds like you're having some success there. Is that something that with ongoing sluggishness you would anticipate continuing and is there a possibility to get some vendor support to perhaps mitigate the gross margin impact?

Yes. This is Steve Barbarick. We have been working with our supplier community. But we use a price optimization tool in systems here and it's been very effective for us. And we continue to drive share in a lot of the key categories that are more price sensitive, like feed and in some cases pet food. I don't want to get too deep into the vendor support, but we do work with our vendors to make sure that when we do promote and we do EDLP pricing that we're competitive and that we are continuing to gain share.

Okay. And maybe just a follow-up on that for Tony, is there some risk of gross margin pressure continuing in a sluggish sales environment or just too tough to tell at this point looking out to next year?

Obviously, it's too early to tell for next year. As we've done our sensitivities for Q4, we believe that if there is margin pressure with some of the pricing programs we would expect to pick it up on the top line and vice versa, if we aren't overly aggressive on price we'll pick it up on the margin side relative to the models that we ran for the quarter.

Okay. Thanks a lot, guys. I appreciate it.

Thank you.

Our next question comes from Steven Forbes with Guggenheim Securities.

Good afternoon.

Hi, Steven.

To start with the top line performance and trends within the different sales categories thus far, so far this year, I know you mentioned live stock and pet rose mid single digits during the quarter, I think that's been relatively consistent. But can you provide some color around the other categories, maybe just touching on the categories you lay out within the SEC filings and how they've trended throughout the year just to give us a better perspective as we look out, kind of over the next 6 to 12 months here as relates to the compares by category?

Steven, this is Steve. And I'll try to stay at a fairly high level here, because we can break this thing down in a lot of little pieces and parts. But we talked about the impact that the energy markets have had on ticket. And I would go back and say that categories such as welders, some compressors, those type of businesses have been a bit of a challenge for us. And you can see that in those individual markets where we are impacted most by energy, things like certain apparel, whether it's some steel footwear – toe footwear or fire retardant apparel, you can actually look into those specific regions and you can pretty much, you know, kind of, estimate what categories are going to be the most impacted there. In terms of the seasonal businesses, we talked about having a fairly soft spring, but then it drug into the fall and that benefited us. But we certainly didn't capture any of the pre-heating sales that we had traditionally gotten. So again, if you look at seasonal, it's kind of a tale of two stories. We prefer to have spring in spring and winter in winter, but that just hasn't necessarily been the case yet. So we're having to move some of our inventories around to better position ourselves to optimize where we think we can. And then the last thing I would tell you is in the truck, tool and hardware business, it's a little similar to what I talked about earlier with some of the big ticket. Truck boxes, fuel handling, those kind of categories have been really soft for us, and again, we believe a lot of that is more energy related. So does that help clarify some?

Yes, I guess. And then I guess as a follow-up, maybe if we can expand on it regarding the trends in those more discretionary categories, right, the non-maintenance side and not livestock and pet. I mean, I guess just trying to understand the color around of behavioral trends, right, as you think about the consumer shopping the store. I'm not sure if you have visibility via talking to store managers or so forth. Is it – are the consumers coming into the box, right, because you're clearly driving traffic, the 34th consecutive quarter and are they shopping the rest of the store and just not making – exploring the side of the store, exploring the merchandising displays and just not making the purchase or are you seeing the consumers come into the store and really just go right for that back section livestock and pet and not even exploring everything you are doing on the merchandising side? And then how does that relate, right to the initiatives you have in place and you are working on, as it relates to space allocation merchandising and promotional activity, right, as you look to curtail those trends?

Steven, this is Greg. Let me -I'll make it very simple for you. There is evidence not only in the consumer surveys that we've completed, but in our current sales trends that the customers have become more conservative in their purchasing behaviors. It doesn't mean they are not still buying, but they're buying more conservative, which means they are buying absolutely what they need at the time that they need it. They are still shopping the store as evidenced by the transaction increases that we're seeing. They are still supporting the pet, the animal and some land maintenance and in other categories across the store. So we're not seeing them just cherry pick. They are actually shopping across the store, but they've pulled back considerably on big ticket spends for now. We think there is a number of factors involved there, not just the energy markets and some of the things happening in the ag economy. But we’re going to get to listen again this evening a debate about who is going to be the next President of the United States, and those things have some effect on our customer, no question. We have heard from them in these surveys that they feel their budgets are a bit tighter right now. And as we’ve been monitoring sales trends and looking at this by region, the customer demand for those things that are needed to support the lifestyle continue to exist, they continue to come in and purchase in our stores. So we have got to keep bringing new products. We’ve got to keep updating the merchandise assortment, keeping those stores fresh and I can tell you the consumer count is still there, but they are being very conservative and very thoughtful in their spends.

Thank you.

Our next question comes from Simeon Gutman with Morgan Stanley.

Thanks. Good afternoon. So I want to ask about farm income, because a couple years ago it actually started to nosedive, and we know from history there was no impact to the business. And actually the deceleration was sharper two or three years ago than any time in 2016. So I’m trying to figure out what’s happening now, why it wasn’t evident before, if something else was sort of hiding the impact, because I think what we’re all trying to get at is it’s hard to quantify, we don’t know when it’s going to end. But because you weren’t getting hit by it before, how do we understand the downside? And I’m sure you are trying to figure out the same thing, how are you thinking about it?

Simeon, this is Greg. This - when we studied that in years past and up till even this point in time, this is the first time in a number of years that back to back to back years the farm community has suffered losses in the crops that they’ve tried to bring in and sell. There is also a factor in cattle, which most people don’t think about, but in the state of Texas and in the few states north of that it’s a big impact as well, cattle prices, a dollar less per pound. I mean, we hear these things from our customers, and I would tell you that I think it’s more severe now than it was in the past. I’ll also tell you that in the model of our business, this is the first time that we’ve seen energy come into the same kind of a play on top of these other aspects. So multiple things working at the same time, it’s not – the farm piece we just mentioned this time and said it's more of a factor or at least it's a bit of an overhang because it's the first time in a number of years we can actually say in those communities we're seeing a softness, we didn't see that before. But it's other factors on top of those factors we believe that have caused the drag.

So just to following – I guess clarifying that, not my follow-up yet, but would you say, I guess, there's been a lag or you are saying there's somewhat of a coincidence now just because it's just amplifying some of the other pressures?

I think you just answered your own question.

Okay. And then my second question, you know, it sounds like you're stepping up the marketing to help drive the sales. What about any I guess temptation to promote during this environment, Greg, is there any or Steve, I mean, or doesn’t make sense - does not make sense for your business?

Simeon, here's how it works, when there's no demand for certain categories of products, there is not a price that you can sell that product to the consumer for. And I'm talking about things like heating, I'm talking about things like possibly large farm equipment or larger pieces of equipment, big ticket items and so on. You have to have the consumer demand. Now we're going to need to be a little patient here and understand that we can maneuver and control inventories in some of those categories where the demand's not great right now, but we want to make sure and Steve would tell you this, that we have the ability to react if the category starts to accelerate. We believe there will still be a heating business this year, but we think it's going to come later. We do believe there will be some outerwear business and some call it seasonal type businesses this year. But until we see some weather improvement, meaning cooler weather, that's not going to transpire. So instead, inventories have been shifted a bit and where we put our – and placed our bets is on the things within queue and the categories that are retailing right now and doing well. But we have every ability to react when things would move in the right direction and we believe it will come. We don't know the timing of it, but we do believe some of these seasonal trends will shift.

Okay. Thanks, Greg.

Our next question comes from Ben Bienvenu with Stephens, Inc.

Yes. Thanks, good afternoon. Tony, I think in the past you had quantified the differential between your energy exposed markets and the rest of the chain to be around 400 to 500 basis points. Is that still the case today in light of sort of the broadening of the store base that's seen weakness and the broadening of the SKU set that's seen weakness?

Yes, Ben, you're correct, it has - the difference has continued. It's been very consistent over the last three quarters. But where we're disappointed is that, as we had mentioned on a previous conference call, we were hoping that that differential would moderate as we came into the back half of the year and we have not seen that happen. So there still is a relatively large delta and again, until the economies really start to turn a little bit, we expect that we'll have similar delta throughout the end of the year.

Okay. That's helpful. And then, when you look at the ag exposed markets, is it a similar magnitude of differential or is it less or more? Any quantification you could provide there would be helpful.

Sure. The differential is a little bit less and it's very, very less number of stores as well.

Okay, great. Thanks. Best of luck.

Our next question comes from Alan Rifkin with BTIG.

Thank you much. Thank you. Just to follow up on a couple of earlier questions. So you've cited agricultural impacts, as well as energy as two of the three reasons. So can you just try to help us delineate the impact between just those two variables on the business?

I'm sorry, which two, the ag…

Agriculture and energy. Now I understand the impact from both of them, but are you able to segregate the effect of agriculture alone on the business versus energy alone?

Well, at times it's very difficult to segregate the two because you may have some that cross both. But I would try to give you a generalization of the magnitude is probably at least three to one when it comes to the impact of oil on the comps versus farm on the comps.

Okay. Thank you. And my follow-up, you are now talking about 113 stores for this year, whereas last quarter you were talking about 115 to 120. When you take that together with your earlier statement, Tony, that next year you are going to open up “above 100 store range”. Should we think of your square footage in 2017 really being closer to 6% rather than the 7%, 7.5% versus what some people thought, and why the slippage of anywhere from 2 to 7 stores for this year? Thank you.

We're currently assessing the store target for next year. I would tell you that we have the majority of stores already in place and signed. As we move towards that north of 100 to 120 range, I would tell you that we would be very discriminate in the softer sales environment and making sure that we make the right choices on those stores as we of move forward. But we'll give you more guidance on the next conference call in January as to the 2017 store plan.

Are you at liberty to say how many of the stores for 2017 are already signed?

I would say – well, we don't usually give out that number. But I would say that number is defined, this is Greg. And I want you to think about something that most people don't realize, Alan. Back in '08 and '09, we were growing our store base at 10%. We saw a similar type of headwind occur and we said, you know what, we're going to slow down to about 7% to 8% and hold there for a while until the economies at that time would improve. We're seeing a little bit of the same kind of drag, a little different variables this time than last. So Tony's comment earlier about you know, we may not be at the 115, 120, that's always been a target, by the way. In real estate, you can in a moment's notice lose two or three stores because deals can't be completed or there is a problem with the contractor or what have you. So for 2016, that's more of the instance. We wanted to get more stores opened, we just could not. But we'll talk more about that in specific as we get through the fourth quarter and we give our guidance for next year.

Okay. Thank you very much. I appreciate it.

You're welcome.

Our next question comes from Scott Mushkin with Wolfe Research.

Hey, thanks, guys. Thanks for taking my questions. So just want to clarify a couple things. The stores that are not in the 25% that are feeling the wins of oil and agriculture, are they comping 3% to 5% in your – just to be very specific?

When it comes to those stores comping 3% to 5%, as we mentioned the Southeast and the West. The Southeast more on the lower end, the West is actually exceeding the upper end. Now, again, I'd point out that the West has a less mature store base, given the stores that we opened over the last couple years. So we would expect them to comp a little bit stronger, but they have had very strong sales in those areas. Again, those stores that are highly correlated, obviously, the gap with a normalized comp is much greater, and then there is a swath of stores that range in between those numbers.

Perfect. Then, one other clarification. I know you guys talked about September, two weeks into October, is the momentum continuing?

Well, what we see in October are similar trends as in September, and as we moved into this quarter, we did anticipate that October will be the toughest compare. And obviously the quarter is going to really be driven by November and December and the type of weather that he we have in those two months.

Perfect. Now, to my real question, so much more of a kind of a secular question. So, obviously, you guys have some cyclical issues now. But if you kind of take a longer view, comps have been kind of slowing for a while, return on invested capital turned down about 18 months. How do you kind of view this? And then, of course, you went out and made an acquisition, an adjacent acquisition. How do you view more the - what looks to be more of a secular slowing of the business versus what’s going on cyclically? And thank you for taking my questions.

Well, what I would tell you initially is that when you look back at the comps, we’ve had some very nice comps over the last 3 years and in an environment with mostly deflation. And obviously, as we get into some of these periods where we have a downturn in the economy, we’re going to be impacted. But we continue to believe that we’ll make the necessary adjustments with the merchandising, we'll continue to drive strong store performance. And as these economies turn, we're going to be very well positioned to continue towards our long-term goal of 3% to 5% comps.

All right. Thanks, guys.

You’re welcome.

[Operator Instructions] And our next question comes from Stephen Tanal with Goldman Sachs.

Okay. Good afternoon, guys. Thanks for taking the question. Obviously, a lot of ground covered. And I guess, just a question for Steve maybe, is there anything going on in merchandising, any initiative that you guys are thinking about or new product categories or specific products, if you will, anything that you’re excited about that we should be thinking about here, as we look out quarter or two quarters and maybe even into next year?

You know, there is a lot going on in the merchandising front. I would tell you that the team is all over certain trends right now. We continue to see in the pet and animal side people stepping up the premium, natural foods. We've just expanded a number of organic products in the stores. We still see our customers tend to self reliant. So the thing that we're doing with chicken supplies and beekeeping, we've got resets that are taking place throughout the store right now on both sides that we think we can capitalize on things like premium, rubber footwear and things in truck accessories. So there is a variety of things. We've always said that we're a test and learn company, and we've been testing and learning a lot, and we're rolling and expanding a lot of programs out. So from that perspective, there is still a lot in the hopper. Just most recently we expanded our animal test from 25 stores to 100 stores, thinking that this would be a good quarter to learn a little bit more in. In sporting goods, for example, we've got premium coolers and kayaks and other things going on. So if I were to walk a store with you and walk through the entire four walls, I would tell you there's something happening in about every area.

Okay. That's good to hear. And moving on to the loyalty card, I don't know - some companies from time to time actually quantified a lift that you get from sales. I don't know if there's anything like that that you see. Obviously over time there's more you can do with the data. But I'm curious to know if there has been a lift in sort of the test markets?

Stephen, this is Steve again. I would tell you that it's still early in the game for us. While we've got a handful of stores that have comped the first year, we're now just comping over last year's and we're going to be able to give you much better indication on the next call. But I will tell you we wouldn't be expanding it if we didn't feel like we were getting a benefit.

Got it. Okay. Thanks a lot, guys.

Our next question is from Dan Wewer with Raymond James.

Thanks. I believe in some prior calls you noted that e-commerce revenues were less than 1% of total, certainly recognize there are some of these products that are not friendly for online shopping. But nevertheless would you think that your penetration should be exceeding that level given the investments that have been made?

Yes. Dan, this is Steve again. I would tell you that we're seeing nice momentum in this space. We've added a number of new lines, online in content and we're seeing good growth there, as you know, that we've invested in the new platform. We've mobile optimized our website to ensure there is a consistent consumer experience across the device. And most recently the impact of Buy Online Pickup in Store is having a very positive impact on our business. I think that alone tied in with the initiatives we have, some around the fulfillment side, you'll see that percentage grow over time and once it becomes more material, we'll be able to share with you exactly where we're at. But I would tell you that there's a lot of work being done and we're very excited about what we're doing right now. And we're seeing the results of it.

Second question. I know that you are still targeting 3% to 5% secular same store sales growth. Can that be achieved if energy markets stabilize at current levels? Or do those markets need to rebound to where they were, say, 2 or 3 years ago to achieve that 3% to 5% company wide target?

Hey, Dan, this is Greg. Very difficult to predict as you can imagine, but those energy markets we're watching closely and I would say that we can't predict if they are going to be any worse or any better. But my prediction if I was going to give one on this is a slight up-tick in that business down there to stabilize would give our customers the confidence to go back and start spending again on some of those categories that we believe right now from the survey work we've done, and they're sitting back, holding their money. They are not releasing those funds right now because they are nervous. Once they can settle down I do think we'll start to see some movement back, yes.

And just one real quick question. A year ago we were discussing some of the weaker first year sales volumes in Arizona and in Utah. Now we're talking about the strength in the Western markets. Are we seeing those stores that opened up at slower revenues, are they achieving that faster same store sales growth now that they are in their second year?

Dan, this is Tony. When we look at the comps and sort of the store maturation cycle, we've always said that the newer stores are going to ramp at a higher pace than the chain. When in good times and the chain is moving out at your 3 to 5 comp, you know, we're going to be at a delta above that. We're seeing that the stores out West are running above that normalized delta. But given that, obviously, the rest of the chain is very flat, obviously that helps to increase the delta between the mature stores and the new stores out there. But what I would tell you is that, yes, some of the stores that came out slow are ramping at a much nicer pace. We're very pleased with those stores, and that's why when we look at the new store productivity and we spent a great deal of time looking at it, we look at it more on a rolling 12. We know that some of the stores last year that we talked about came out a little bit soft. So we know that we probably have this lower new store productivity over the course of the year. But when we look at it and look at it over a 12 – rolling 12, it's relatively consistent for the last four quarters. It has gone down slightly. Some of the West stores have come out slower. That's probably one of the bigger drivers and some of the West stores also had a little bit more square footage as we've had some additional square footage so that we could have more allocation for the feed products since they tend to be strong feed stores. So that distorts the calculation a little as well. But IRR hurdle has not changed. We're meeting pro forma. And so we feel very good about the new stores, especially as we see the stores out West ramp.

Our next question comes from Chuck Cerankosky from Northcoast Research.

Good evening, everyone. Just to let you know, the Cleveland Indians are up three nothing.

Oh, man.

Somebody mentioned earlier your taking – about taking your data warehouse, my words, in house and starting to manage that. How does that work as you start to roll out the loyalty card? And I assume they are connected?

Yes, they are connected. I mean, we brought the database in house, it was last month. And what we're going to be able to do now is mine it with our own folks rather than outsourcing it to a third-party. So all the enrollments, all the customer data we have will be here and we'll be able to manage it accordingly.

And was there any problem connecting shopper data to the individuals to specific market baskets while it was done outside of the company or is that all dependent on the loyalty program?

Well, no, I mean, what the loyalty program will do is give us access to every single one of the purchases they make as they go into our stores. But whether it was outsourced before or whether it’s in house we're not going to see any material difference in the data itself, it's just how we'll mine the data.

All right. Thank you. Good luck for the rest of the year.

Good luck to you, Chuck.

Our next question comes from Adam Sindler with Deutsche Bank.

Yes, hi. Good afternoon, guys. Quick question on Petsense and more just about the timing of the announcement. It seems or if I remember correctly that this sort of thought process was that you have a bunch of stores in front you to open, and that is the main focus, you know, probably no acquisitions during that time frame. Petsense is obviously very small, but again it does seem like a different customer based on what you’re saying about your learning’s from HomeTown Pet. So now in a difficult macro environment, you sort of have to try and manage two related, but different businesses. And related to questions about maybe where we are on the broader picture, what should we be thinking about the timing of this announcement, why now, I guess, is sort of the general question?

Adam, this is Greg. Two things to remember on Petsense, one is it is not going to be a distraction for TSC, and it will not really look to take any type of funding and resources from TSC. As a matter of fact, it’s a well run little company. It is small in base today, but has tremendous growth opportunity, and it will basically fund itself. So don’t worry about trying to run two businesses. They are not going to be integrated. It’s a separate business. It runs separately. It has its own president and its own staff of people, and there would be no integration, this was a strategic buy and not an integration buy, there is the difference.

Okay. Thank you. I appreciate it.

Our final question comes from Joseph Feldman with Telsey Advisory Group.

Hi. Good afternoon. This is Cristina Fernandez for Joe. We wanted to ask about the incentive compensation. You talked about $0.07 to $0.08 headwind being a normalized compensation for next year, but then at the same time EPS coming in below that mid teens range, so how do you reconcile the two?

Well, Cristina, this is Tony. What we’re saying is that our incentive compensation is based against our plan. So as we move into 2017 and we create a new plan, we have to allocate to the incentive compensation expense line relative to our projected 2017 plan. So as we go through this year with very limited incentive compensation in the expense structure, once we recalibrate next year and put a new plan together, we need to put an on plan incentive compensation. So we estimate that if we move back relative year-over-year that there would be an increase in the expense structure of $0.07 to $0.08 to the bottom line. So having said that, we're just saying, I'm just giving you notice that you need to adjust your models accordingly as a lot of people have been looking at this year's expense run rate and applying it to next year. So you just need to be able to add in some incentive compensation into your model next year if you have not already.

Thank you.

Thank you. That does conclude our question-and-answer session. I'd like to turn the call back over to Greg Sandfort for closing comments.

Well, thank you, everyone, and thank you for your continued support in Tractor Supply. We'll look forward to speaking with you again in January regarding our fourth quarter and full year 2016 performance.

Once again, that does conclude today's call. We appreciate your participation.