Tractor Supply: 3Q26 Immediate Call Postmortem

This company just can’t ever seem to connect its perpetual optimistic language with underlying numbers. Comps were down less than 1% in July, modest growth in August and better than that in September which has continued into October. And yet they only reaffirm full year comp sales guidance (didn’t even raise low end). Most companies do that to sandbag but after years of exaggeratory language on initiatives this management team just doesn’t have that credibility.

“Fourth quarter is most weather-sensitive quarter”. “Weather has been neutral so far in 4Q”. A warm winter (Super El Nino) isn’t going to be good, but hopefully they have room for that on the top line guide now (gross margin is a question because they expect it to sequentially improve to only 10-30 bps of pressure in 4Q). Doesn’t really matter though – all eyes on the new long term algo coming out with 4Q26 earnings. We gave our detailed thoughts on what that could look like in our report to subs on 8/24 (The Tractor Broke Down: Reduced Speed Ahead).

None of the data points Hal gave today change our views about the new algo in that August note. Incremental data points: Remain committed to operating leverage “as comps move above approximately 2%”. Depreciation important factor – expect that to moderate to MSD or lower in 2027. Not comfortable operating Tractor Supply at an operating margin below 9% (the fact they even felt compelled to say this is strange). Taking actions on both gross margin and SG&A. Renegotiated vendor support should generate $50 mm in annualized benefits next year. Should realize stem mile savings from new DC next year. Targeting more than $75 mm in additional annual SG&A reductions over 2027 and 2028. Expect capex to moderate significantly to below 4% of sales in 2027 and beyond.

“Our focus is increasingly on improving the productivity of our existing assets”. Just had to clip a part of our August report below.

Continue to see attractive economics from new stores. Should open 85-90 stores in 2027 (unchanged from 2Q26 comments). No change in long term new store opportunity of 3,200 sites (people have questioned that target forever and doubt they will believe Kurt today).

“We would assess the vast majority of improvement was due to the initiatives the team has been working on” – of course they would say that. Three areas seeing response: 1) investments in value (while appropriate for sure, not something investors want to hear when you miss gross margin Hal), 2) pet comps sequentially improving. Total pet business grew 5% during quarter. Triple digit growth subscription business (yeah from a low base). 3) digital sales up 16% with growth in traffic and conversion. Expanding final mile – you know what, digital growth really isn’t that impressive when you consider how much benefit they should be getting from final mile. “Delivery continues to exceed all expectations” – kinda proves my point.

Benedict went straight at them on gross margin with first question. This is the big concern given they are making price investments. 4Q26 should get better because compare against higher promos last year (lets see how that plays out with potentially the warmest winter in a decade). Also have put in “pricing actions” to deal with inflation (at the same time they are becoming more “value”). Should see 15-20 bps benefit from new DC. Tariff refunds helped by $100 mm this year but next year they should get $50 mm from vendors (30 bps), 10 bps from new DC, and 20 bps to “close the gap” from “price negotiations” (didn’t they already do that with vendors) and “selective price actions” (while focusing more on value). SG&A cost benefits should also help to solve for overall operating margin.

I dunno but it just sounded like Hal was yelling on this call. He is a fast speaker, but this just seemed like he was speaking faster than normal too.

*These are our unabridged quick thoughts and notes from the call. We get them out as soon as possible after the call ends (not edited). Management has given some topics to dig deeper into and will circle back afterwards with much more in depth work on what was mentioned. You can find that work (and more on Tractor Supply and other retail/consumer research) at our website here: M Squared Capital

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Originally posted on X and Substack.