Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company's Conference Call to discuss Fourth Quarter 2017 Results. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. We do ask that all participants limit themselves to one question. 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, Mrs. Mary Winn Pilkington, Vice President of Investor Relations and Public Relations for Tractor Supply Company. Mary Winn, Please go ahead.

Thank you, Noah. Good afternoon everyone. On the call today are Greg Sandfort, our CEO; Steve Barbarick, our President and Chief Merchandising Officer; and Kurt Barton, our CFO. Before we begin, let me reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. 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, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and the company's filings with the Securities and Exchange Commission. We will also reference certain financial measures not derived in accordance with GAAP. Please see this afternoon's release, which can be found on our website at ir.tractorsupply.com newsroom. While we believe this information improves comparability to other periods, this information is not a substitute for the GAAP measures and may not be comparable to similarly titled measures about our company. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. After our prepared remarks, we will open the call up for your questions. as Noah said, please limit your questions to one and one related follow-up question if necessary. We will keep the call to an hour today. I appreciate your cooperation. Kurt and I will be available after the call for follow-ups. Now, it is my pleasure to turn the call over to Greg.

Thank you, Mary Winn. Good afternoon everyone. I'll start today's call by providing a review of the operational and financial highlights for the fourth quarter and fiscal 2017, then review our strategic priorities going forward. Kurt will provide additional detail regarding our financial results and review our guidance for fiscal 2018. Following that, we will open the call for questions. We are pleased with our fourth quarter results and the continued progress of our ONETractor strategic initiatives to drive long-term sales growth, a more personalized customer experience, increased market share in all channels, and improved profitability over time. Our fourth quarter comparable store sales increased 4%, was driven by broad-based strength across all of our geographic regions and merchandise categories as well as increases in both comparable store transactions and average ticket. We know our customers look to Tractor Supply for their everyday basic needs and living their lifestyle. We believe the continued convergence of our physical and digital storefronts and updates to our in-store and online shopping experience are resonating with our customers. I want to thank our Tractor Supply team members across the country for a strong quarter and a solid year. Throughout the year, the team reacted to changing market conditions to optimize our performance, while we continued to invest in key initiatives that will drive longer term growth. The balance between daily execution and investing for the future is critical to the long-term success of any retailer, and our team did an excellent job of this in 2017. Now, let me touch on a few financial highlights for the fourth quarter and full year. Comparable store sales increased a strong 4% in the quarter and 2.7% for the year, with both transaction count on average ticket increasing in the quarter and full year. Net sales reached…

Thank you, Greg and good afternoon everyone. While Greg has taken you through the highlights of 2017, let me provide you with some additional financial details and review our initial outlook for 2018. As a reminder, beginning with the fourth quarter of 2017, Petsense sales are now included in our comparable store sales performance. For the fourth quarter of 2017, we had strong comp store sales growth of 4%, with comp transaction count increasing 2.7% versus an increase of 4% in last year's fourth quarter. Comps were positive across all geographic regions and all major product categories. All months had positive comp sales performance, with November being the strongest month of the quarter. Sales were positively impacted as cold temperatures arrived across our markets and our customers responded favorably to our assortment. Petsense comp store sales were essentially in line with the chain average. Comp sales average ticket increased 1.3% compared to prior year's reported 90 basis point decrease. The increase was primarily driven by the mix of goods. For the first time in 17 quarters, deflation was essentially neutral and was not a meaningful drag on comps. For the fourth quarter, gross margin increased 50 basis points to 34.2%. The increase in gross margin was primarily attributable to less promotional activity and improved sell-through rates on seasonal products during the quarter. Partially offsetting these items was an increase in transportation cost, driven by higher carrier rates, and diesel fuel cost, coupled with a higher mix of freight-intensive products. Including depreciation and amortization, SG&A as a percentage of sales increased by 120 basis points to 24.8% from 23.6% in the prior year's quarter. The increase was primarily attributable to deleverage of occupancy and other fixed cost resulting from the 53rd week of sales in the fourth quarter of 2016 that…

Thank you, Kurt. As we mark our 80th anniversary as a company, we are proud of our history and strong heritage of embracing change and leveraging technology to capture growth opportunities. I want to thank the more than 26,000 members of the Tractor Supply family who bring our mission and values to life everyday as they serve our customers. Our passion and commitment to provide legendary service and great products at everyday low prices will continue to be the foundation of our growth. With that, Mary Winn, we would now like to open the lines for questions.

Okay. Now, we will take our first question.

Thank you. [Operator Instructions] And we'll take our next question from Steve Forbes with Guggenheim Securities.

Good afternoon. Maybe if you could start, I think I heard you right, but can you provide some additional context around the implied margin guidance for next year at the midpoint, right? As we digested last quarter, right, the margin headwinds you laid out, I believe you mentioned 20 basis points of incremental pressure as you balance the benefit of tax reform. Is that, right? And then can you just help us understand where those dollars are being spent as you try to accelerate some of the opportunities you see?

Sure Steve and this is Kurt. I'll first just confirm what you said. Yes, we indicated that about 20 basis points is investment from tax reform that's impacting the operating margin. But if I step back to the Q3 call, we indicated as to what we saw in regards to our investments and cost pressures, we anticipated operating margin decline in 2018. If you try to bridge that to the guidance that we have, we've -- we'd have about 50% of that operating margin implied deleveraged in 2018 specific to investments in the business. And I would tell you that with investments from the business that we have related to tax reform, as we see that opportunity to invest those resources into labor wages at the stores and distribution centers, as well as ONETractor initiatives, the additional implied into our guidance has more visibility to areas like transportation cost that I would say that even in the last few months, it's been widely publicized, indicated about the transportation industry that we're seeing greater headwinds into that area. So, the difference in our outlook today as to what was indicated at Q3, principally due to the investments that we're making in the business and stronger cost pressures specific to the transportation industry.

Thank you for that. And then maybe just a quick follow up on supply chain, right. So maybe just a higher level, help us conceptualize how you view the capabilities in the network post New York. You mentioned a few other additions that are hitting this year. But do you envision having to add direct fulfillment points to the network or additional capabilities? I mean, where do you see the evolution of the network kind of going over the next couple of years here?

Yes, Steve, this is Steve Barbarick. I would tell you, at this point, once we get that New York distribution center up, we've already got an expansion going on at Waverly, so I feel really good about that. We do have some mixing centers that we believe can continue to add value as we're bringing speed in both products to there. We're using 3PL in trying to get a better sense for that. But all of this will be baked into our CapEx guidance as we move forward. So as we move forward, you'll see that in the numbers.

Thank you.

And we'll take our next question from Peter Benedict with Baird.

Hey guys. Thanks for taking the question. First question, just around -- you mentioned kind of store-level initiatives. I may have heard talk about the PoS, maybe talk a little bit more about what that -- the cost pressures, I guess, around rolling out the PoS? And then, are there other store initiatives? I'm thinking lay out changes, things like that, merchandising, that you're testing, Steve, that you think could have an impact, if not this year, maybe in 2019?

Yes. And Peter, this is Kurt. I'll start with the first question on your question related to point-of-sale. And we're indicating that -- we're making investments in our point-of-sale system. That will be capital that we're investing this year. So, it has some impact in depreciation in 2017. It's not a significant part of that depreciation as we roll that capital out throughout the year, but that's where most of the cost. No other real operating cost impacts specific to a new investment of point-of-sale.

And Peter I would -- I think the question -- the way I'll respond is less about the expense side, more about the sales and opportunity side. So, we have really laid out reset program that we're working toward for the spring and into the summer of this next year that I'm very excited about. You'll see a lot of newness within the center courts and up and down the aisles. The only other one that I would mention, and I think we've hinted to this in the past is that we do have a couple of concept stores that we're working on right now. They're up and running. The layouts are a little bit different. They're still within the same size box, similar prototype. So, if we find that they're working well, then what we'll be able to do is retrofit them back into the existing stores should we opt to. It also gives us an opportunity to put this new format into existing stores as we move forward. Essentially, that layout is -- we reduced the number of SKUs that we felt we could accommodate through our fulfillment channels in e-commerce. And then giving more space to categories that we believe we have an opportunity to continue to grow share in, so the bigger bulkier products within the inside of the store. We've got a number of pallet drops that we've opened up for our operations team to better manage the labor model. And I would say, the early read on those two stores has been very positive from both the field as well as from our customers. So, I would anticipate, in the future, you'll see more of that concept in a lot of the new stores. And then we'll be looking at retrofitting some existing stores to see what the customer's feedback is on that.

That's fair. That's helpful. I guess my follow-up, looking in terms of the online business, I may have missed it, but did you guys give the percentage of sales that were online for the year? And then as you look out over 2018 and 2019, maybe talk about how you view your pricing online, what type of tools you may have to help optimize that as we go forward? Thank you.

Sure. So, in Q4, that's usually a heavier time of the year for us on the e-com side and our percent of sales was probably between 2.5% and 3%. That's what it was. For the full year, it was between 1.5% and 2%. So, as we look forward, we continue to see that as a growth mechanism for us. And it's in two ways. It's Buy Online Pickup in Store as well as some of the ship to home product. The vast majority of what we do today is picked up in store, so whether it be shipped to store or picked up in store, our customers still like to come and engage with us in the four walls, but a few would like the convenience of having it shipped to them. As you look forward, we've done a really nice job, the team has, going out and doing price surveys, looking at where a lot of the major brands are positioned. And I feel that we're very competitive today. And as we move forward with ONETractor, one of the capabilities we're adding is a more robust price intelligence tool. And we believe that will give us greater value in the future as well. So, a number of things that play here, but all very positive as we move forward with our ONETractor strategy.

Okay, great. Thanks guys.

We'll take our next question from Seth Sigman with Credit Suisse.

Hey guys, thanks for taking the questions. A couple of follow-up questions here. I guess, just first on the investments and the margin outlook. I'm just wondering, have you guys built in any positive offsets within the guidance? And then, in general, if you think about the potential for sales to maybe come in better, would that flow through or would you offset that with more spending, just given the demands and the higher investment requirements that you're basically talking about? Thanks.

Yes, this is Kurt. You know what, when we built our outlook for 2018, we took a pretty rigorous look at all of the cost and all the spend. And I would tell you that in an investment like this, we certainly have an opportunity and there are some benefits that we've got that are offsets to these investments that are baked into that outlook. As we're growing the topline and with comp positives in there, there are areas in the overhead store support center cost, the store and distribution center occupancy cost, some of the investments we've made in there as well as leverage, we're seeing the benefits. So, we take it -- we're taking a pretty rigorous look at and we are managing tightly, and there are definitely some benefits that play into the outlook to help offset some of those investments. And then the second question--

Okay. The second part of that was just to the extent that sales do come in better, I realize some of the investments are within your control, some are not. But would better sales flow through? Or do you think that you would accelerate spending further just given the investment requirements in the business?

Yes. Seth, I would say that we've got a pretty good aggressive investment plan, I think, as you've seen. And so as those investments start to take hold, and as we believe they will begin to drive the sales, our plan, our strategy is we'll invest to what our capacity and capability is. And I think we've got a realistic capacity in there. And so you'd see some benefits dropping to the bottom line.

Okay. Thanks very much.

We'll take our next question from Elizabeth Suzuki with Bank of America Merrill Lynch.

Hey guys. Thanks for taking the question.

Hey Liz.

Hey. On your planned store opening pace, slowing a little bit from about 6.6% in 2017 to about 5% in 2018. First question is, are there still a few stores left to close? And then second is why slow the pace of store growth if you're going to have some extra cash post tax reform? I mean, obviously, you're making some investments in ONETractor that are going to be pretty significant. But is there also maybe a strain on management resources in terms of finding the right people to run new stores?

Liz hi, this is Greg. No, there's no limit on how many stores actually we could open from the standpoint of management in the ranks ready. The reason we slowed to 80, if you want to call it that, I say there's a redirection of our capital investments. We've had some tremendous success with some of these ONETractor initiatives. It's a bit of a reallocation of capital in the short term to accelerate those and continue to keep the store opening schedule robust. We don't have any one that's chasing us for these sites. And we're going through with some new data that's demonstrating again to us that there are at least 25,000, as a number, of Tractor sites out there. Now we know that Tractor stores are a great value to the consumer, and they also help us from a standpoint of profitability as a company. But we really are just reallocating some of those dollars to accelerate some of the things in ONETractor that right now are showing us great promise.

All right, great. Thanks very much.

We'll take our next question from Christopher Horvers with JPMorgan.

Thanks. Good evening guys.

Good evening.

So my first question is can you talk about the performance of the oil and gas markets? They were a drag as oil prices dropped, and then they're a bit more and more neutral, I think, over the past couple of quarters. How has the performance of those stores changed in the fourth quarter relative to, say, the second and the third?

Yes, Chris, this is Kurt. I would tell you that as we've seen it and said that the Texas, Oklahoma oil market and other energy areas have those headwinds have subsided. And the last couple of quarters, prior to Q4, they -- we said that we saw those areas falling in within chain average. And I would tell you, we're pleased in the fourth quarter in those particular areas to see some good strong performance in their -- in line with chain average. And so as you're seeing indicators of that area, I would say that we're pleased to see that no longer really being a headwind for us.

Understood. And then also there's a bit of an earlier Easter this year, I think it's April 1st, so it flows right, I guess, at the start of your second quarter. Historically, has an earlier Eastern helps you? And is it sort of -- is it 50 basis points, is it 25, is it 75? Any quantification will be very helpful. Thanks very much.

Sure, it's a good question. I would say that it's not about an early Easter helping or hurting. I think it's a good point to bring up in that the timing of Easter between the halves where it plays into. So, this year, we've got Easter on the Sunday right after the end of Q1. So, the holiday weekend, that Friday and Saturday will be in Q1 and so that can shift a little bit between Q1 and Q2. When weather breaks in March has probably more to do about the impact than that weekend. But I would say that as you look at that, we anticipate that, that weekend falling into Q1 can have some impact, but not a material.

Okay. Thanks very much. Have a great quarter.

Thank you.

We'll take our next question from Mike Lasser with UBS.

Good evening. Thanks a lot for taking my question. My question is on the outlook for comp over the next few quarters. So, it sounds like inflation has become some of an issue, the oil and gas markets have stabilized. You're providing an optimistic outlook for the next couple of quarters where you said that you expect your comps to be above 3% or near that range, and yet your -- in the second half of the year and middle of the year, comparisons become harder. But you're also talking about sub 2% comp when all of these factors should going to be a benefit and you'll experience a return on the investments that you've been making. So, why would you only be expecting less than a 2% comp in that sort of scenario?

Sure Michael, this is Kurt. In regards to our outlook, as we looked at the year and I'd say the most significant factor in there is the strength of the second half of 2017 and the comparisons over there. We had in Q3 two strong hurricanes that will be cycling as well as a good strong performance in fourth quarter with weather and other positive factors. So, we've got that compare to go up against. When we look at the year, we're taking a good realistic approach as to what we can actually drive in regards to traffic and sales and aren't making too many wide assumptions about what might happen in the second half there. We're going to drive our strategies that we believe will benefit both the first half and the second half. And our guidance is more about our ability to have good significant -- good consistent traffic, and it's more about the comparison in the second half of the year.

And my follow question is on the performance of the new stores in the fourth quarter, if we back out the contributions from the extra week, it looks like the new store productivity was in the high 50% range. Is that right? And is that what you expect new store productivity to be moving forward?

I would -- Mike, I would just say that, that percentages would not be consistent with new store productivity as it's calculated. And I understand the 53rd week makes this fourth quarter probably the hardest one to calculate for new store productivity. Here's what I'll tell you, is that we continue to be pleased with new store productivity. Fourth quarter had a good strong new store productivity and the -- consistent with the last few quarters in 2017, our new store productivity is consistent with 2015 in those years where we saw strength in new store productivity. We're pleased -- we look at our new stores and compare against -- measure against performance to the pro forma and the IR hurdle, and the 2017's have outperformed both of those. So, we're pleased with new store productivity.

Thank you very much. Good luck with the year.

Thank you.

And we'll take our next question from Ben Bienvenu with Stephens Incorporated.

Good evening. And thanks for taking my questions.

Hey Ben.

I wanted to ask about operating margins in a little bit different way. So, you said you expected the midpoint operating margins for this next year to be 8.8%. Is it your expectation that this is for the low watermark in the multiyear trajectory for operating margins longer term and you still think a 10% operating margin goal long-term is a realistic goal?

Yes, Ben, this is Kurt. And so I would tell you that if I -- I'd step back, talk a little bit about the business and what we see long-term, I would say the business is strong, the investments are clearly paying off for a lot of the things that Greg mentioned earlier. The investments are having some pressure and had in 2017 and are having pressure as we anticipate in 2018. But we're committed to those investments being made to drive long-term topline, and then the overall bottom-line, we believe that we're going to grow with those investments, EPS at a low double-digit range. And as we manage those investments and our cost, we can grow operating margin. And so as you look at 2018, we will be focused heavily on the cost and management of investments. But we believe we have the opportunity in the long term to continue to grow operating margin.

Okay, great. Thanks for that. And then, I wanted to shift as it relates to some of your investments and distribution network changes. Can you talk a little bit about what you're seeing in terms of the impacts from the West Coast 3PL trans load center and what you think it could mean for your business as you put in place your East Coast import center in 2018?

Yes, this is Steve. What it's really helped us do is bring product in, house it and ship it out based on need. In the past, we were shipping container loads to our distribution centers, and it wasn't as effective as it needed to be because we're filling those containers and those DCs with more product than they actually needed. So, by having these transload centers, what we're able to do is take the over and aboves, pare them down and ship them to the stores that actually need the product. So, it should have a benefit in our seasonal inventories and make us more nimble as we move forward rather than having more clearance on the backside. The last thing I'd tell you is it also allows us to build pallets of product for our stores so that the operations of the business, when it gets to the store, can be more efficient. In the past, it would all come in and have to be sorted out. These transload centers now will allow us to go ahead and pull together a lot of the seasonal product and ship it in 1 pallet to the stores.

Great. Thanks for all that detail. And best of luck.

Thank you.

We'll take our next question from Alan Rifkin with BTIG.

Certainly appreciate it that as a result of the tax legislation, you are making some reinvestments, particularly in the form of higher wages. But yet, if we look at your forecasted operating margin for 2018 of 8.8% at the midpoint, that's lower than where you were even five or six years ago. Is there -- at what point in time do you believe that all of these reinvestments, not only in wages, but other areas, at what point in time do you think that that will result in incrementally higher operating margins? And then I have a follow-up, please.

Sure Alan. It's a good question. As we've said, in the last few years we've been making investments and you're seeing some of those investments and the impact on the operating margin. And our long-term goal is to grow operating margin annually. We believe that's achievable. And as I mentioned previously, our investments that we've been making, we believe we're making them in the right area, they're driving the long-term growth potential. Those sales growth opportunities -- typically in our plan that they would lag the initial investments. And those investments, over the last few years, are generally starting to plateau. So, when we look at that, we see that the investments and with the top line benefit our ability then to grow operating margin. So, we're very focused on 2018 right now. I would tell you that as we see the long-term, we're committed to our ability to grow the bottom-line profits. And we believe with those investments, the strength of the top line, you'll see operating margins improving.

Okay. Thank you. And a follow-up, if I may. If we look at CPI and PPI data and listen to what the Fed is forecasted to do in 2018, there's certainly greater signs of inflation. As part of your 2% to 3% comp guidance and regardless of what inflation or deflation may be at the product level, are you contemplating perhaps taking prices up to help offset some of these higher costs?

Yes, this is Steve. I would tell you, we're going to be opportunistic. I mean, we constantly do a scan of the marketplace and where we see potential and opportunity, we take advantage of that. So, that is certainly on the table, and we will adjust accordingly. But we also want to make sure that it's balanced with market share, like we've always told you all. And we're making sure that we're doing the right thing for the long term of the business. So, if that opportunity presents itself, I can pretty much guarantee, we will take advantage of it.

Would you be a price leader or would you wait to see what competitors do?

Yes. I would tell you that there are markets we've got where we will certainly be price leaders, and there are markets that we're at where we'll be watching the market very closely. We are a test and learn company, we've got a price optimization tool that allows us to look at elasticity, and we will do just that.

Okay. Thank you. best of luck in the New Year.

Thank you.

We'll take our next question from Scott Mushkin with Wolfe Research.

Hi guys. This is Paul Kearney calling on for Scott. Thanks for taking my question.

Hey Paul.

Curious if you can maybe provide any detail on what you've learned from your core customers through the loyalty program?

Sure, this is Steve. One of the things that we've certainly learned is that they have a keen interest in wanting to build a stronger relationship with us. The enrollment that we've had today has exceeded our expectation and continues to be do so. I would also tell you those folks that are core customers that are part of the program, there's a higher engagement in terms of click through rates, open rates, redemption of offers. And we recently did a study, and this is pretty interesting. These folks have a high -- have a much higher statistically significant difference and their likelihood to recommend us to others, to return and their overall satisfaction with Tractor Supply Company is higher. So, there's a lot here that we're learning, they're coming in more often and when they do, they spend more. So, as we move forward, our focus is on continued enrollment and in continued engagement through personalization to drive more loyalty. If there's one thing that, I guess, to me looking back is a surprise, I would tell you it's the amount of activity that our core customers are coming to us and how often they come to us to buy their needs and get what they need. So, it's a much higher frequency rate than we had originally anticipated. And so now we're able to segment those customers off and talk to them in a more personalized manner.

Great. Thank you. And just a quick follow-up. I guess, qualitatively, how does the management team kind of look at balancing between growth and improving ROIC, I guess, over the short-term and longer term? And how important is ROIC as you make these investments through the year? Thank you.

Paul, this is Kurt. We -- as Greg mentioned, we focus on both of those. We understand the importance of maintaining a good ROIC. The important thing for us as we look at it, maybe to share in regards to our perspective on it, is that we are making significant investments. These are key investments for the long term. And so during that time, as those investments may have -- take time to take hold on the topline, you're seeing some pressure on ROIC. But we do look at, with each investment, the return on investment and how we balance ROIC, it's part of our overall management. And I would tell you that we believe, with the investments we're making today, it not only drive the top line, but in the long term ROIC improvement.

All right. Thanks guys.

We'll take our next question from Matt McClintock with Barclays.

Hi guys. Good afternoon everyone and welcome Mary Winn. Just on wages, wanted to follow up on that. You guys seem to be ahead of the curve in addressing this topic last quarter, specifically. I just wanted to know, has there been any real change in how you think about wages relative to last quarter, now that tax reform has been passed? And kind of related to that, it will be nice to revisit since you're a high growth retailer, one of the few that are opening stores, how do you think about finding employees, not store managers, but employees, in what is increasingly a tight labor market? Thanks.

Hey Matt, this is Greg. Two things. One is changes from maybe a quarter to now. I think what we're seeing is we have a unique customer base. We have a unique team member that wants to work in Tractor Supply. Probably not the average person that would work in some of these other formats. They typically have a love for the lifestyle. They have a passion for living this lifestyle. So, we attract team members from those local communities because they enjoy the lifestyle, want to participate in it. And guess what? Working for Tractor Supply, they can get a discount on those things that they need. So, that's the first thing. We're not having a problem attracting those people. But some of the changes that we are seeing is there are some retail organizations that are making bold statements about we're going to have a minimum price guarantee to our team members of X, Y and Z. And here's how I look at that. And I've said this to our organization, I said we need to be priced very competitively, if not leading the market, in each of the markets where we have stores. We're in 49 states. Those 49 states are not equal. There's different challenges, there's different, I would call it, wage rates that need to be addressed. Some states are passing state laws that force some of that. Other states are not. So, we've taken a very proactive posture and said even in our 2018 planning, given some of the tax advantages that we have, we're going to stay not only very competitive on wages but, in many cases, we're going to be probably the person leading up in the wages because we need to make sure we've got the best people period.

If I could have a follow-up. Just on Buy Online Pickup in Store, the vast majority of your sales flow through that channel. I was just wondering you launched that capability impressively just a little bit more than a year ago, and now it's more than half of your sales. Did that mix shift towards Buy Online Pickup in Store cannibalize your existing e-commerce business or was it largely additive to your existing e-commerce business before?

Yes, this is Steve. No, it's been additive. As a matter of fact, we're seeing growth in both areas. So, comp store sales, so to speak, on the ship to side, continues to scale up.

Perfect. Thanks a lot. Best of luck.

Thank you.

We'll take our next question from Matthew Fassler with Goldman Sachs.

Thanks so much. Good afternoon guys. My first question relates to the investments that you've discussed. Is there a way to a portion how much of them relate to cyclical pressures, such as freight and shipping and labor as opposed to what you'd call strategic investments that don't relate at all to the cost backdrop?

Yes, Matt, this is Kurt. The easiest way I could tell you is about 50% of the additional cost increases that we pointed out, I would bucket as investments and the other 50% are really more the cost pressures. And the transportation piece of that is probably the biggest one of that, 50% of that's cost pressures and the majority, the rest is the investments.

And should we think about that 50% that relates to investments basically being aligning with the piece of the tax windfall that you're reinvesting, is that the way to think about that relationship?

Yes, about -- so about a little over a third is, as I mentioned, it's probably 20 basis points of the operating margin comes from our tax investments. So, it's not all 50% of it, but it's probably more than a third of that is from our conscious investment on the things we mentioned with the opportunity of the additional resources to invest in a key strategic part of our business such as our team members. We're investing in those areas. That's probably the right quantification of that.

Got you. And then separately, you mentioned in your remarks earlier that you're going to start to test subscription commerce. I'm wondering if the categories that would be most appropriate for subscriptions presumably largely in queue, align with the businesses where you currently have e-commerce penetration and what the shipping and logistic -- what the cost essentially -- logistics and shipping charges are cost -- associated with those categories will suggest for the return profile of that, if that were to take hold?

Well, it's a great question. And one of the things we've got to do is find out whether or not our customers even have an interest in subscription to Tractor Supply Company. So, this is going to be a slow roll. It's going to be a test and learn. We're going to start with a few categories, see what kind of interest there is. The great thing about the opportunity and the tool is we can geo-target. There's a variety of things that we can do here so it doesn't get out ahead of us. And so it's going to be managed. And as we continue to scale, if it works, we'll be able to communicate to you along the way what impact that it has.

And Steve, would you say that Neighbor's -- the Neighbor's program, the data that you've obtained from it has indicated that your customers are purchasing with you the kind of consistency that will suggest a subscription would be a good fit?

That's a really good question. I would tell you that I think there might be some interest. I think we owe it to our customers, quite frankly. When you look at retail today, you get involved with where the market is going to go. And I believe we owe it to our customers through our idea of anytime, anywhere and anyway that whole idea of being a convenience for them. But I think we need to do it based on scale, we need to do it based on our ability to make sure we execute and offer the right customer service along the way. And we need to do it in a way for our shareholders that we don't do it so that it's going to be overly costly. So, we will manage this appropriately. But we do believe we owe it to them to at least offer that capability.

Thank you.

Noah, I think we've hit the top of the hour, so I think we'll wrap up now. I'm going to turn it back over to Greg for a wrap up. I know we're leaving some people in the queue, so I apologize about that. My number is 615-440-4212, and I look forward to speaking to anyone that's interested in calling. So, please give me a call, and I'll turn it back to Greg.

Well, thank you, everyone, for being on the call today. I'm excited that we're going to be hosting our upcoming Annual Sales Meeting for over 3,000 of our Tractor Supply team members here in February. And during that same time, we're going to be hosting our Investment Community Day, that's scheduled for February 20 here in Nashville, where we plan to further discuss our strategic growth drivers for the long term with all of you. If you have any questions, as Mary said, please reach out to her. She'll be happy to help you if you have any further questions. And again, thank you for dialing in today.

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