Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss fourth quarter and fiscal year 2025 results. [Operator Instructions] 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. Your host for today's call is Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Now first up is a year-end video. [Presentation]

I would now like to pass the call to our host, Mary Winn Pilkington. Mary Winn, please go ahead.

Thank you, Elissa. Good morning, everyone. We appreciate your time and participation in today's call. On the call today, participating in prepared remarks are Hal Lawton, our Chief Executive Officer; and Kurt Barton, our CFO. We will also have Seth Estep, Rob Miles, John Ordus and Colin Yankee, joined the call for the question-and-answer portion. . Following our prepared remarks, we'll open the floor for questions. Please note that a supplemental slide presentation has been made available on our website to accompany today's earnings release. Now 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 in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. As we move into the Q&A session, please limit yourself to 1 question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation. We will also be available after the call for further discussions. Thank you for your time and attention this morning. Now it's my pleasure to turn the call over to Hal.

Thank you, Mary Winn, and good morning, everyone. Before we begin, I want to recognize our team members, first responders and local communities impacted by winter storm Fern. Our teams moved quickly to support our neighbors during challenging times and continue to do so, and it reinforces our role as a dependable supplier when our customers need us most. Turning to the business. The opening video highlights the progress our team made in 2025 and does a nice job of setting the context for the discussion that will follow in this earnings call. As with any year, 2025 was not without its challenges, and I want to thank our more than 52,000 Tractor Supply team members for staying focused on our purpose, operating with discipline and making the adjustments necessary in a dynamic environment while continuing to evolve the business. That work positions us to build on our strategic advantages and remain a consistent share gainer in an attractive market. Before getting into the details, I want to acknowledge that our fourth quarter results came in below our expectations. Results reflected a shift in consumer spending with essential categories remaining resilient while discretionary demand moderated and emergency response was absent versus last year. There were 3 primary drivers of our performance that I'd like to drill down on. First, as we cycled the benefit from last year's Hurricane Helane and Milton storm recovery, it became clear that it contributed more meaningfully to our results in 2024 than we had originally estimated. In contrast, 2025 was a historically quiet storm season with no hurricanes making landfall in the Continental U.S. for the first time in a decade. We now estimate this dynamic represented roughly 100 basis points headwind to comps, most pronounced in the South Atlantic. The second main driver was…

Thank you, Hal, and hello to everyone on the call. I'd like to start by walking us through the cadence of the quarter. Looking at comp sales, October started soft as we lapped the hurricane response, followed by a rebound in November as they got colder and the Hurricane lap dissipated. We entered the final 5 weeks of the year with relatively flat quarter-to-date comps. December, inclusive of Black Friday produced modest gains. All accounts, broader retail sales growth, especially general merchandise stepped down in December. Average ticket increased 0.3%, driven by approximately 2 points of retail inflation, offset by softness in big ticket categories and a decline in units per transaction. The retail inflation was primarily the result of a higher commodity cost environment and selective price adjustments as higher product costs flowed through our supply chain. The decline in [ UPT ] reflects the softness in certain discretionary seasonal and holiday categories. Turning to margins. Fourth quarter gross margin declined approximately 10 basis points year-over-year as ongoing cost management was offset by incremental tariffs, elevated promotional activity and higher delivery related transportation costs. The largest variance versus our expectation was the promotional environment, particularly around Black Friday and Cyber Week as customers were more deliberate in how they allocated their spending. Our view is that these promotions were transitory and specific to the operating environment in Q4. Stepping back for the full year, gross margin expanded 16 basis points, underscoring the underlying strength of our margin structure despite the more challenging dynamics. SG&A, including depreciation and amortization, increased approximately 70 basis points to 27.5% of sales, driven primarily by planned investments and fixed cost deleverage at the lower level of comp sales growth. These pressures were partially offset by continued productivity and cost control. Our expense management was…

Thank you, Kurt. As we begin 2026, we're staying focused on what is resonating most with customers across retail, value and essentials. Needs-based products are a core strength for Tractor Supply. We are effectively the grocery store for our customers' animals and pets with the scale, frequency and relevance that come with that role. That allows us to lead on value, invest with confidence and remain the dependable supplier our customers rely on every day. While much of the country is still in winter mode, spring will be here before long, particularly for Southern markets. As that transition unfolds, we're committed to being a dependable supplier for our customers' spring needs while also bringing meaningful innovation and newness across the store to keep Tractor Supply relevant and differentiated. This year, Chick Days will be bigger than ever with more stores participating and more selling weeks. Chick Days is retail theater like no other. It continues to be a powerful traffic driver with existing customers and a gateway for new customers, particularly [ backyard home centers ] and hobby farmers. This year, we're leaning into chick health and wellness, expanding breed assortments and deepening education support for both new and experienced poultry customers. We're also extending Chick Days online to 365 days a year, and expanding our exclusive ImPECKables brand with more functional treats and toys. Taken together, these efforts reinforce Tractor Supply as the destination for poultry while driving differentiation, value and engagement across channels. As we prepare for the spring selling season, we're leaning into targeted newness in the categories where customers are actively investing. That includes refreshed assortments in lawn and garden on our exclusive Groundwork brand, including expanded outdoor living and grilling accessories and also a stronger, more curated [ riders presentation ] in our flagship stores…

Thank you, Hal. Before we move to Q&A, one note for planning purposes. Due to a scheduling conflict, we will release our first quarter 2026 earnings on Tuesday, April 21. For the balance of the year, we anticipate returning to our normal reporting cadence. We just wanted everybody to be able to get that on their calendars now. With that, I'll turn it over to Elissa to begin our Q&A session.

Thank you, Mary Winn. [Operator Instructions] Our first question comes from the line of Steven Zaccone with Citigroup.

I wanted to start on gross margin. So it sounds like for '26, you're still expecting expansion, is going to be second half weighted. Should we anticipate gross margin decline in the first half? And then specifically on promotions, what gives you confidence that the promotions will be confined to the fourth quarter and that persist to the 26?

Steve, it's Kurt. Yes, thank you for the question. To your point on gross margin, gave guidance on, our expectation is that we can continue to expand gross margin. The fundamentals of our gross margin initiatives are still very solid. There is a stronger opportunity for expansion in the back half of the year, but we are not anticipating gross margin retraction in the first half of the year. The puts and takes that we described on fourth quarter, as I mentioned, very transitory. Our gross margin initiatives, our cost management is still producing a strong opportunity for gross margin expansion, albeit modest particularly in the first half of the year.

The next question comes from the line of Jonathan Matuszewski with Jefferies.

It sounds like 1Q started against tough comparisons, but you saw some outsized demand due to winter storm Fern recognizing that March is a large chunk of the quarter, with each quarter anticipated to be between 1% and 3%, is that to suggest the quarter-to-date trend is in that range? Or could you just clarify maybe how the first couple of weeks in the quarter in aggregate are trending?

I think you've encapsulated it pretty well. As you mentioned, the first few weeks, we were lapping winter weather from last year in storms and it was warm in the first 3 weeks of this year. And so we had offsetting comps there. And then, of course, with Winter Storm Fern, we had the flip where we were having strength due to storm preparations and storm recovery on top of some warmer weather last year. Case in point on the volatility that often happens in the beginning of the year, this week, as an example, last year was the warmest in 35 years, and then week this year is the coldest in 35 years. So you get these extremes in the first part of the year. But net-net, to your point, we are tracking at above our plan for the quarter-to-date. But as you said, there's still a lot of sales left to go. The month of January is like 30-ish percent of our sales. The month of March is 40-ish [indiscernible]. We certainly need the weather to turn in the south in late February to deliver on our plan for March. But in addition to spring coming on, which we know happens every year, just in a little bit different time, we're optimistic about the potential for tax refunds this year and I think that could be very similar to say 2018, and that would be the majority of that benefit would also be in the first quarter. So there are a number of things as we look out at the balance of the 7 weeks to go in the quarter that give us optimism but feeling good about the quarter so far, yes.

The next question is from the line of Bobby Griffin with Raymond James.

I just want to maybe talk about the discretionary weakness you referenced. I'm just curious, like, can you unpack that a little more? Do you think there's been a step function change where your customer, the more rule-based customers started to feel maybe some of the pressure other areas in this country felt across retailer? Or Is It really just weather-driven? Is anything there to help us understand that and what the maybe drivers will be for that to get better in '26 and beyond.

Bobby, when we reflect back on the discretionary for Q4 and a bit of the step down that we saw there, we do think that was specific to Q4 using the word transitory, I guess. And kind of hit on a few things there. First, a lot of it was emergency response as we called out which is being specific to that quarter. The second one was really around kind of these like seasonal holiday categories that we really only participate in Q4 in. And so things like toys, holiday decor. Some of the -- even like in like dog snacks and dog treats, you see like a lift in those last 2 weeks kind of that are discretionary in their orientation. We just didn't see that. But as we head into 2026, we feel very good about our business. Just based on Jonathan's question, just gave a little bit of a summary of how things are playing to date in the quarter. We feel very good about our big ticket plan for the spring. We've had 2 successful seasons in riders, even with kind of broader big ticket pressure in the market. So I feel very good about our setup as we head into the first half of this year and do think most of the step down we saw in Q4 was kind of onetime kind of transitory type things that happened in the month of December. And I think you'll hear that a bit more across retail as it comes out. I mean, by all accounts, December stepped down versus the year-to-date and quarter-to-date if you look at almost any external data, as it relates to retail sales. And in particular, you see that in general merchant and big ticket as well. You see -- you saw kind of low price point gifting, things like beauty, and others have a good December. But I think most -- across most categories that were big ticket, you saw a pullback in December .

The next question is from the line of Kate McShane with Goldman Sachs.

Kurt, we wondered if you could walk us through the cadence of how you see tariff costs rolling in here maybe in the first half and how you're managing pricing as a result.

Yes, Kate, I'll share a little bit of what our assumptions are in 2026. And in summary, I'd say there's not that much variation to what we saw in the second half of 2025 as we've said before, we feel like we're basically halfway through the process of cycling through tariffs, tariffs have had at its base rate anywhere from 20 or 30 basis points of pressure. We've been able to offset that through great cost management initiatives. In some cases, there are some -- there's price increases selectively like I mentioned in there. And we would anticipate that the impact in the second and the first half to be very similar. It's one of the key drivers of the average ticket increase. As we mentioned, there's some level of inflation in AUR. The biggest portion of that would be related to cycling the tariffs in the first half of the year. So not that much different. We step back, we look at -- at the tariff piece of the business, the team managed it really well, been able to maintain our margins related to that, and we anticipate similar in the first half.

The next question is from the line of Michael Lasser with UBS.

You have expressed a lot of optimism that the model can eventually return to the algorithm. So under what conditions, economic or otherwise are necessary in order to restore the comp growth back to 3% to 5%, what's a reasonable time frame for that? And is the challenge today versus 10 years ago, that tractor has just achieved so much productivity gains during the last decade through all the initiatives deployed such that it's just going to be more difficult to generate the type of growth that the market had been accustomed to in the past because of the base being so much bigger in the market share being so much larger today?

Michael, thanks for your question. Good to speak with you this morning. We remain very committed to our long-term algorithm on our comp sales. We feel like we're on track and a path to return to those comp sales. And we think we've got the full suite of activities necessary to deliver that, including big investments we made in our core flywheel everything ranging from our DC capacity to all the investments we made in our stores and our remodel programs. Our new stores continue to provide excellent maturity curves, and we've got a number of our strategic initiatives as well. So we feel like the toolkit that Tractor Supply has had for the last 20, 30 years is a tried and true tool kit. We continue to add to it like we always have and feel very confident in our long-term algorithm. We think we're on the path back to that.

The next question is from the line of Robert Ohmes with Bank of America.

I was hoping you guys could actually talk a little more about the direct sales model and the profitability now, and it looks like you're going to keep ramping it up. Is there a how do we think about how many stores, how many sales specialists, what the -- how big it needs to be to really become profitable?

Yes. Thanks for the question. First, I'll just tell you, I'm very pleased with our performance so far. We saw volume average sales per rep, transaction value, average transaction volume, all increased in the month and in the quarter. In December, we finished with sales of over $2 million. We're seeing a month-to-month-to-month ramp as similar to new store maturation curve. Our growth is structural. Our direct [ sales app ] is core growth engine for us. Our people and our process investments are delivering returns, and we're seeing strong momentum exiting Q4 into 2026. 75% of our specialists are external and they're bringing this book of business with them and they are strong at selling. They all live the lifestyle, and they all have an average of 11 years of experience in the farm and ranch industry. And in the month of December, we had our first $1 million specialist. So I was able to go travel with that person. I could tell you just like phone calls throughout the day, the relationship he had with his clients, [ everybody call them ] all the stuff they need. You can just see that relationship building and building and building there. As we look into 2026, we'll continue to invest in technology and training. We'll double our specialist count, as Hal mentioned. We have found that smaller training classes have been better than the bigger classes, and we're able to do more one-on-one training. And we're targeting around $50 million in sales in 2026. I also mentioned that we ended the year with just under 50 sales specialists. We've hired 9 at the end of December going into January, and we'll continue to build as this year goes on throughout the year.

The next question is from the line of Peter Benedict with Baird.

I wanted to follow up on an earlier question. Just on the inflation with, I guess, 200 basis points, a lot of that [ you're seeing ] with tariffs. I'm just curious if you could talk about the commodity side of that and what you're seeing and what your outlook for 2026 includes from a commodity standpoint. And then my other question is just around the garden centers, you're about 32% penetrated. What's the outlook there? Any plans to go faster or slower? Just kind of an update on that initiative?

Peter, Seth will take the first question on inflation and then I'll take the question on garden centers.

Yes. Peter, it's Seth. Thanks, Hal. As we look ahead to this year -- as we're looking at comp sales, some of what we put in the guide is we do anticipate a little bit of inflation, that kind of potentially at 1% to 2% range from an AUR perspective to really help drive that from a comp perspective with some modest obviously, transaction gains with that. . And that's kind of a blend, right, with commodities trading kind of within a range in which we manage kind of every day. It's corns within that low to mid-4s, which we feel very comfortable with, with that outlook right now. And as we look ahead, as we strategically manage our kind of pricing, we'll continue to monitor how much is being driven by traffic, how much is being driven by AUR, and we'll continue to flex up and down accordingly. But yes, some modest continued inflation as we look ahead and the guide to deliver on that [ comp sales ] goal this year. .

And then circling back on Garden Centers. I'll start off by just saying we remain very pleased and committed to our being in the business of live goods and kind of the outdoor garden business. As expected over the last 5 years, the way we go after that has -- continues to evolve. So we have -- and we talked about this a little bit before, but we have kind of our now really large live goods, garden centers. We've got kind of a medium in size, we have a smaller size. And then we also have another solution set where we do pop-up tents out in our stores. And so gotten really good in our real estate model over the last few years of deciding which one of those solution sets is best for each store and then we deploy it as such. And as I mentioned, in my opening remarks, we'll have well over 1,000 stores this year that we -- between garden Center Stores and pop-up garden centers, and we feel really good about it. And Live Goods is one of our best-performing categories last year as a business.

Our next question is from the line of Oliver Wintermantel with Evercore ISI.

How should we think about the lap of sales leaseback benefits? And as we move through 2026, should we expect any incremental contributions next year? Or does the comparison become neutral?

Ali, and Kurt can jump in here if we need to get anything to the. Some of the core details of it. I would just say, in general, the sale leaseback is going to be flat year-over-year from an operating income benefit. What I'd love to do is just step and just talk about how successful our real estate model that we introduced 2 summers ago is going. We are now doing own development on 50% of our new stores that is providing 2 sets of benefits. One, the dollars that we would normally pay a developer, we're now able to reinvest that back in the store. That's saving us somewhere in the high single digit, call it, 10-ish percent in total cost to build. And then we're also essentially procuring a lot of the materials that go into building our stores, and we're getting high single digit, call it, 10-ish percent savings there as well. So we are getting significant savings from the cost of building a new store that continues to allow us to deliver high IRRs. And now when we're in the market starting to sell some of those owned stores, we're seeing really strong cap rates on those as well. So the strategy has paid off in spades and more. We're very pleased with the results and the returns it's getting and the capital impact, the operating income impact, et cetera. I just can't say enough about the work that team is doing and the impact it's having on the company.

The next question is from the line of Michael Baker with D.A. Davidson & Company.

Can you talk about the timing of when you start to leverage some of the investments that you've made over the last few years. For instance, you're saying that delivery will still be a drag this year. At some point, I think the final mile investments you're making start to leverage themselves. Similarly with the [ Big Barn ] initiative, just wondering when we see a, I guess, would be a lower comp breakeven point from leveraging the past investments?

Michael, and thanks for the question this morning. I'll just start off by saying at a low 2% comp, I think that's a really good inflection point for retail. So that's why we're emphasizing it and putting it out there so folks kind of have that in their model. So I feel really good about that. And I think that stands tall in retail in terms of the right comp percent to be inflecting on your operating margin. . Specific to the initiatives, on Final Mile, there are -- there is no kind of incremental operating expense being attributed into that this year. That -- while we're expanding it to twice the number of stores this year and getting to 50% store coverage, it's basically last year's benefits are paying for the rollout for this year. Incremental to that, there is significant cost savings that, that initiative will capture this year related to freight. Specific on freight that we use for Roadie and also -- which is our gig provider as well as freight that we use to ship goods from our DCs that will now ship through our stores and then out to the customer for the Final Mile. And those are $10-ish million a year in savings that help improve our gross margin, but then also fund that initiative. So that initiative in many ways is kind of self-funding itself as it goes. On the same front, direct sales is doing the same thing. As we talked about last year, we invested around 10 basis points of margin rate between those 2 initiatives. They are not further dilutive this year. on final -- direct sales, it's the same way. As Jon mentioned, we're going to double the class from this year, last year 50 to next year 100. The class of last year of 50 is basically paying for the investment of the next 50 this coming year. And so there's not incremental dilution on either one of those from a rate perspective, and that's what allows us to achieve that breakeven just above the 2% comp run rate.

The next question is from the line of Chris Horvers with JPMorgan.

So I wanted to take the other half of that question. So as you've scaled out the [ self-help ] benefits from prescriptions and Final mile And direct sales, how do those build? Like when do you think that will become sort of a greater portion of the comp such that the overall trends become a lot less macro sensitive. Is there an inflection as this year progresses? And how does that look then in '27? And any quantification around that would be really helpful.

Yes. Thanks for the question, Chris. And what I'd say is if you take -- well, first off, I'd start by saying we expect those initiatives to provide material benefit this year in our comp. And they did have some nominal benefit in our comp last year. Last year at the beginning of the year, we kind of said, "Hey, look, don't -- we're going to get these things ramped up. We're making some investments in them. You'll be able to -- we'll be able to see some of the sales, but we're not going to be sharing those a lot, just because we wanted to get ramped up and get in a good spot. This year, we feel like those are off and running. As Jon said, we have 50 sales reps last year. We had the first 1 to hit $1 million. We did $2 million in the month of December. We eclipsed that rate in the month of January. So we're seeing the right pace and cadence there. You guys can do the math on that. If you think about the number of reps and the pace we're running at, you can see the dollars that we would roughly be targeting this year, and that starts to have a material 40-ish basis point impact on comp. And the same thing starts to happen in Pet and Rx as we start to scale that up as well, and we start to see the strong growth rates we see in there, and then that starts to add to it as well. And so feeling really good about these initiatives. And Final Mile, as we talked about, is really it has 3 purposes. It's driving cost down on our delivery. It's enabling the direct sales as well. But really, it's also providing a means for us to be able to fulfill future demand as delivery becomes more and more a way of life for everyone. So feeling great about all 3 initiatives. They're all on track and doing really well.

The next question is from the line of Peter Keith with Piper Sandler.

Hal, I was hoping you could talk about the pet food category that was not called out as an area of outperformance within Q. I think there's been some concern out there with investors of maybe market share loss or maybe the category seeing deflation. What specifically did you guys see in Q4? And what are you expecting for pet food in '26.

Peter, this is Seth. Thanks for the question. relative to Pet, I would approach Pet and how we're thinking about it in kind of 3 different kind of frameworks, particularly as we look ahead for kind of 2026 and beyond. The first thing I would just say is Pet does not have to over deliver an outsized growth for us to achieve our overall comp targets. We're needs-based, multi-category retailer. We have a history of balancing our full portfolio to deliver our comp growth rates. And there's not -- we're really not relying on any single category kind of going forward. The second way I'd look at Pet is also from a share perspective. We're not seeing any indication that we're losing share in pet. We're holding our own, we might not be at the outsized pace that we were over the course of the last couple of years, but the data that we get is a very data-rich industry that we're holding our own. We're holding trips. Our customer remains very engaged in the category. For an example, last year, we saw over 2 million pets come through our pet washes. Our PetVet clinics grew in sales over 20% in those stores. So we're seeing really good engagement from our shoppers in the category itself. And then third, I would just say, hey, we're excited about what's ahead. I mean from the assortments, from the layouts, we're focusing on more localized assortments, making sure that we're allocating brand and space in our stores to the brands that fit kind of regional preferences in a given market. As Hal mentioned as well earlier, we're continuing to expand kind of fresh and frozen into that category. That is the fastest-growing category in the space, and we'll have a few hundred stores this year in that particular area as well. And we're constantly looking to revitalize our brands as well, like for Health, continuing to see that kind of customer engagement and interaction. And as the category returns to kind of historical growth, we feel like we're really well positioned to continue to maintain our share and being in a position to grow share long term here as well. So thanks for the question.

The next question is from the line of David Bellinger with Mizuho.

Maybe a bit bigger picture, but you mentioned some of these initiatives layering in for 2026, even maybe 40 basis points of comps from direct sales is very incremental. But if we back some of these things out, why is the core business of Tractor sort of underperforming now? We're talking about a wider range of outcomes. These outcomes basically widening out. And plus, can you square that away with some of this increased promo activity we heard about in Q4. Is that something contained to the period or something that we could see bleed into 2026 as well.

David, thanks so much for the question. We are very excited as we enter the year 2026. I think as always, as we commented, there's a wide range of outcomes, we think that are allowable for the year. And I think we're starting in the right prudent mentality. As it relates to promos, we really haven't seen that carry over into 2026. I admit there's been a lot of volatility in retail for these first 5 or 6 weeks. And so I think time will tell on that. But to date, we've not seen that carryover. We all -- I would say all already have most part, our spring plans already laid out, and we're planning for a more normalized environment on that as well. But certainly, we'll be prepared to respond if necessary. But I'd just start out by -- just close by just saying we're feeling very optimistic about 2026. We like the setup we have coming into 2026. The first 5 or 6 weeks have been a nice start to the year. We're optimistic about the potential for tax refunds. We're optimistic about the potential for a strong spring after 2 tough springs. We think we've got a lot of strategic initiatives underway. Our team is engaged. Supply chain has never been better. Stores have never been operating better. We think we've got a great setup as we head into 2026 here, and we're looking forward to getting into the year and coming back and reporting on some strong actuals for you.

Listen, we've hit the top of the hour, maybe even going a minute past. So we'll go ahead and call it now and wrap the call up. I do want to thank everybody for joining us. And as a reminder, we look forward to speaking with you again during our Q1 earnings on Tuesday, April 21. As always, please don't hesitate to reach out with any questions. Thank you for your time and attention today.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect your lines.