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Tractor Supply Company's conference call to discuss Q2 2026 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 and return to the queue for additional questions. Please note that the queue for our question and answer session did not open until the start of this call. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, operator. 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 Chief Financial Officer. We will also have Seth Estep, EVP and Chief Merchant, Rob Mills, EVP of Digital, IT, and Pet Services, John Ordus, EVP and Chief Stores Officer, and Craig Ledbetter, our SVP and Chief Supply Chain Officer, join the call for the Q&A portion. Following our prepared remarks, we will open the floor for questions. Let me reference the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risk 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 also cause 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 takes no obligation to update any information discussed in this call. As we move into the Q&A session, please limit yourself to one 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 any further discussions. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating margin, adjusted diluted earnings per share. For a reconciliation for these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website. It is my pleasure to turn the call over to Hal.

Thank you, Mary Winn. Good morning, everyone, and thank you for joining us today. I'd like to begin by thanking our more than 54,000 team members for their continued dedication to serving our customers and communities. Their commitment to our mission and values remains one of Tractor Supply's greatest strengths and continues to differentiate our business every day. I would also like to welcome the veterinarians, clinic teams, and support professionals joining Tractor Supply through our acquisition of VIP Petcare. We're excited to have them join the family as we continue to strengthen our pet ecosystem. The Tractor Supply business model demonstrated its strength and durability during the Q2. Our core customer remained engaged with healthy retention. Our needs-based categories continued to perform well, and our competitive position remained solid. We had positive comparable store sales in both April and June.

However, they were more than offset by unusually adverse conditions in May, which drove Q2 results below our expectations. Taken together, we believe the underlying business remains healthy. Before turning to our Q2 results, it's worth spending a moment on May. Fuel prices peaked during the height of our spring selling season, putting meaningful pressure on our customers' discretionary spending at the most important time of the quarter. Our customers often drive longer distances to shop, frequently in pickup trucks, many of which are diesel-powered, making them especially sensitive to higher fuel cost. At the same time, persistent drought conditions across several key southeastern markets limited normal seasonal activity and reduced demand for lawn care and other outdoor-related purchases.

To put that in perspective, performance in our big ticket categories and hard lines spring goods during May alone reduced our Q2 comp sales by approximately two percentage points, highlighting how concentrated the softness was within the quarter. These conditions disproportionately affected discretionary and project-oriented categories, while our needs-based businesses remained resilient. With that context, let me turn to our Q2 results. Net sales increased approximately 2% to $4.5 billion, driven by new store growth and partially offset by lower comparable store sales. Comp sales declined approximately 1.5%, reflecting lower transaction counts, which were most pronounced in May, along with modest inflation and softer discretionary demand, particularly in big ticket. Consumable, usable, and edible categories remained positive during the quarter. Big ticket declined in mid-single digits, again led by softness in spring and summer categories in May.

Digital sales once again experienced double-digit growth, driven by strong deliver-from-store performance, higher traffic, and improved conversion. Net income and earnings per share were below our expectations for the quarter. Even with significant sales pressure during our largest month of the quarter, the team maintained disciplined expense management and continued to deliver productivity improvements that mitigated the impact of the sales pressure. Looking beyond the quarter, our conviction in the business has not changed. At the same time, we recognize that generating modest, positive comp sales is not where Tractor Supply should perform over the long term. We're not satisfied with our business, and we're taking decisive actions to improve it. Tractor Supply has successfully navigated changing economic environments for nearly 90 years, and we remain confident in the durability of our business model. We operate in end markets that are currently experiencing several discrete headwinds.

Approximately 40% of our addressable market is tied to farm and ranch and rural economies, where customers continue to navigate a challenging operating environment shaped by elevated gas costs, persistent drought, and more cautious discretionary spending. Approximately 20% is tied to pet, where industry growth remains challenged, and another 20% is tied to home improvement and property maintenance, where demand continues to be constrained by a prolonged period of historically low housing turnover. While these pressures had notable impacts on our H1 performance, they do not change our confidence in the long-term opportunity. What has not changed is customer engagement. What has changed is customer spending behavior. Customers continue to invest in the care of their pets, animals, farms, and properties, but they're shopping more deliberately, consolidating trips, and prioritizing needs-based items while taking a more measured approach to discretionary purchases.

Against that backdrop, despite May's performance, our Q2 fell short of expectations. We are not satisfied with the results, we are addressing the challenges facing the business. At the same time, we believe that the fundamentals supporting the rural lifestyle, pet ownership, and property maintenance remain attractive. Like we've done throughout our history, we're not waiting for the environment to improve. We understand the moment we're in, we're responding with urgency, much of that work has already begun. As we shared on our last earnings call, we began taking action in two areas where we saw the greatest near-term opportunity, strengthening our pet business and reinforcing our value proposition through pricing and everyday value. While pet performance remains below where we want it to be, trends improved sequentially from the Q1, we continue to hold share.

We believe the deliberate actions we're taking to strengthen our competitive position and capture additional share wallet are beginning to gain traction. While still in the early stages, we're confident they will continue to build momentum through the back half of the year. The category resets we outlined last quarter are complete, introducing more localized assortments, expanding our presence in faster-growing premium nutrition segments, and strengthening our exclusive brand portfolio to better meet the evolving needs of pet parents. We're encouraged by the early results. Our rollout of Freshpet continues to perform well. The program was in approximately 250 stores at the end of the Q2, we remain on track to expand to at least 700 stores in total by year-end.

We're also leveraging the broader pet ecosystem we've built through services while strengthening our marketing, enhancing the digital pet shopping experience, expanding subscription capabilities, and improving in-store execution. Together, these initiatives create a more connected experience for pet parents while strengthening customer loyalty. Additionally, during the quarter, we completed the acquisition of VIP Petcare, which adds relationships with approximately 1 million pets annually through a network of 2,500 veterinarians across 39 states. The acquisition fills an important gap in our pet ecosystem, allowing us to connect veterinary services, prescriptions, and products across physical and digital channels. At the same time, we're reinforcing our price perception through the launch of our unbeatable price campaign, clearer everyday value messaging, and targeted promotional activity. Consumable, usable, and edible products remain the foundation of Tractor Supply, we're committed to reinforcing our value proposition where it matters most to our customers.

These investments are already generating encouraging customer response. We're also using this period to critically evaluate our priorities, sharpen our strategic focus, and ensure we're allocating capital to the highest opportunities generating the strongest customer response and strong long-term returns. As part of that work, in light of our updated 2026 outlook, we have decided to withdraw our long-term financial framework. We recognize the importance of providing investors with a clear long-term roadmap, and we're committed to introducing an updated framework in conjunction with our Q4 2026 earnings announcement. That work has already led us to several important conclusions that we'll be sharing with you today. Following a disciplined review of Petsense, we've decided to close approximately 75 underperforming stores. We believe these actions will improve returns, simplify the business, and allow us to direct resources towards higher growth, higher return opportunities.

We've also concluded that while our new stores continue to generate attractive returns, driving stronger comp sales and improving the productivity of our existing assets are critical priorities in this environment. To support these priorities, we plan to open approximately 85-90 new stores in 2027, compared with our previous expectation of 100 new stores. We will redeploy that capital toward initiatives such as Project Fusion remodels, store locations, and Final Mile delivery. Project Fusion remains one of our most important initiatives to improve the performance of our existing store base. We will continue to evolve the program by investing behind the elements delivering the strongest returns, including greater localization and expanded pet wash, both of which are contributing meaningful to the performance of Fusion stores.

We will also continue investing in our existing stores through technology enhancements, expanded Tractor Vision capabilities, and merchandising concepts such as outdoor recreation where we're seeing encouraging customer response. Final Mile remains one of our most compelling growth opportunities, with customer adoption continuing to exceed our expectations and economics improving as we scale the business. Through the H1 of the year, we've already completed as many Final Mile deliveries as we did during all of 2025, underscoring the strong customer demand and momentum behind this capability. As a result, we expect to accelerate the rollout ahead of our original timeline. Together, these investments will improve the customer experience, enhance store execution and productivity, and drive stronger returns across our existing store base. This work is ongoing.

Today's announcements represent important first steps, we look forward to sharing additional actions and our updated long-term framework over the coming quarters. We remain confident in Tractor Supply's future. We have a differentiated business model, strong balance sheet, and a proven ability to create long-term shareholder value. The actions we're taking today are designed to further strengthen our competitive position, improve productivity, and position Tractor Supply for long-term success. With that, I'll turn the call over to Kurt.

Thank you, Hal, and good morning, everyone. As Hal outlined, we're taking decisive steps to strengthen the business and improve our long-term earnings power. The quarter reflected continued pressure on discretionary demand while our needs-based categories remained resilient. Those trends shaped our financial performance during the quarter. I'll build on Hal's comments by focusing on profitability, our updated outlook, and the capital allocation decisions supporting our long-term strategy. Reported gross profit increased 2.6% to $1.68 billion, and gross margin expanded 11 basis points to 37.1%. Results for the quarter included a $5.9 million inventory write-down related to the planned closure of approximately 75 Petsense stores. On an adjusted basis, gross profit increased 3.0% to $1.69 billion, and gross margin expanded 24 basis points to 37.2% of net sales.

Disciplined product cost management and benefits from tariff refunds more than offset pressure from higher freight expense and investments to strengthen our price-value position. We've been encouraged by the early customer response to our improved value offerings in core queue items, which gives us confidence that these investments are resonating with our customers. Turning to SG&A. Reported SG&A increased 14.4% from the prior year to $1.22 billion and included two significant items this quarter, a $65.8 million charge related to the Petsense business and $9.5 million of acquisition costs associated with our acquisition of VIP Petcare. Excluding those items, adjusted SG&A increased 7.3% and deleveraged approximately 118 basis points as a % of sales. The level of spending was largely in line with our expectations entering the quarter, with the deleverage driven principally by lower comparable sales.

We remained committed to investing in labor to deliver a strong customer experience during our peak selling season. Adjusted SG&A growth also reflected unplanned costs related to medical claims and certain legal settlements, which increased adjusted SG&A as a % of net sales by approximately 35 basis points. At the same time, we continued to execute our productivity agenda across the business. Strong execution in our distribution centers and ongoing labor productivity improvements at the store level through our Field Activity Support Teams helped partially offset investments in our strategic initiatives and other discrete expenses. While we remain committed to investing in the capabilities that strengthen our competitive position, we are equally focused on ensuring those investments generate attractive returns and that our cost structure remains aligned with the current demand environment. On an adjusted basis, operating income was $548.3 million and diluted EPS were $0.81.

Our inventory remains in good shape, with the average inventory per store increase of approximately 6.5%, primarily reflecting inflation, inclusive of tariff costs, with some carryover of spring seasonal goods. We view the incremental inventory as low risk and appropriately positioned to support ongoing spring and summer demand. While still early in the quarter, we've seen a continuation of the June seasonal selling trends into July. From a financial perspective, we are operating the business with discipline and aligning our investments and resource allocation with the demand environment we are operating in today. Importantly, this does not represent an increase in spending, but rather a disciplined and relatively modest reallocation of existing capital and resources toward the opportunities we believe will drive the strongest near-term sales growth and financial returns.

In the near term, we are focused on improving the consistency of comparable sales performance and driving greater productivity across the business. We are managing gross margin with a balanced approach across pricing, product mix, and promotional activity while continuing to navigate a dynamic cost environment. We continue to maintain a strong expense discipline while investing in the opportunities we believe will generate the strongest long-term returns. Our objective is straightforward, improve comp sales performance and strengthen flow-through across the P&L. Turning to our outlook. Given our year-to-date performance and our expectations for the balance of the year, we are updating our fiscal 2026 outlook. We now expect net sales growth of approximately 2.5%-3.5%, comparable store sales in the range of -1% to flat, Adjusted operating margin between 8.5% and 8.8%, and adjusted diluted EPS between $1.90 and $2.00.

Looking ahead to the H2 of the year, our base case assumes modest sequential improvement in comparable sales as our recent actions continue to drive improvement and comparisons ease as the H2 progresses. That said, we continue to operate in an uncertain environment, and our guidance range reflects both the possibility that current pressures persist and the opportunity for improving customer demand as we move through the balance of the year. To put our H2 outlook in context, the comparisons are not uniform across the period. Last year's Q3 was the strongest in July. It moderated in August and was approximately flat in September, creating a different cadence as we move through the quarter. Against that backdrop, we are encouraged by the two-year trend, with seasonal demand holding up well and solid performance across several areas of the business.

While it is still early, the Q3 trends are tracking in line with our expectations. More broadly, while the comparison patterns differ between the third and Q4s, we expect both quarters to remain within the comparable sales range of the implied H2 guidance. On the gross margin side, we expect freight costs, including fuel, to remain elevated, while tariff refunds are expected to be less of a benefit in the H2 than they were in the Q2. As a result, we are forecasting gross margin below the prior year for the H2, with greater pressure in the Q3 than the fourth, primarily due to the prior year compares and the supply chain benefits from the new distribution center beginning in the Q4. To that point, we plan to open our 11th distribution center early in the Q4.

For modeling purposes, start-up costs will begin in the Q3 and continue into the Q4, resulting in an SG&A headwind in both periods. We expect the impact to be approximately 20 basis points in both the third and Q4. There is no expected gross margin benefit in the Q3. Supply chain efficiency should begin to benefit Q4 gross margin by approximately 20 basis points. This cadence is consistent with our historical experience and our original guidance for the year. As a result, we continue to expect earnings to be more heavily weighted toward the Q4. We expect Q3 profitability to be more pressured, reflecting the new distribution center costs, the gross margin dynamics we discussed, and more challenging year-over-year comparisons. While investing in the business remains our top capital allocation priority, we continue to balance those investments with meaningful returns to shareholders.

We view our shares as an attractive investment opportunity and expect repurchase activity to be toward the high end of our original guidance of $375 million-$450 million. In addition, we remain committed to our longstanding approach of returning capital to shareholders through a growing dividend. Before moving on, I'd like to address the long-term financial algorithm we introduced at our Investor Day in December 2024. When we established those targets, they reflected both the operating environment at the time and our expectations for the contribution from our strategic initiatives. Today, several of those underlying assumptions have changed. The broader farm and ranch market has softened, and a number of our key end markets continue to experience pressure. While we believe these conditions will moderate over time, they have weighed on the underlying performance of the business.

At the same time, our strategic initiatives continue to perform well and strengthen our competitive position. However, their contribution is currently being more than offset by the pressure we're experiencing in the base business, resulting in a different earnings trajectory than we anticipated when we established our long-term framework. These market dynamics also informed our decision to optimize our portfolio and allocate capital toward the opportunities that we believe will generate the strongest long-term returns. As a result, we no longer believe it is appropriate to anchor investors to the long-term financial algorithm we previously outlined, and we are withdrawing that framework. Importantly, this decision does not change our confidence in the long-term opportunity for Tractor Supply. We remain confident in our ability to grow market share, generate attractive returns on our strategic initiatives, and create long-term shareholder value.

We intend to provide an updated long-term framework in conjunction with our Q4 2026 earnings announcement that better reflects our plans and the trajectory of the business. Turning to capital allocation. As Hal shared, we continue to prioritize investments that generate attractive customer and shareholder returns while maintaining flexibility in how we deploy capital. As always, every capital allocation decision we're making today is being evaluated against expected returns and long-term shareholder value creation. Importantly, we continue to see strong returns across our core investment priorities. Our new stores continue to perform well and generate attractive returns. Our Fusion remodel program continues to drive productivity improvements across the existing store base. These are proven initiatives, and we remain confident they will continue to strengthen our business over the long term.

Additionally, the strategic repositioning of Petsense is expected to create a healthier, more profitable business that better complements our Tractor Supply stores and strengthens our ability to serve pet customers across our integrated pet ecosystem. Tractor Supply remains in a strong financial position. We continue to generate healthy cash flow, maintain a strong balance sheet, and preserve significant financial flexibility. That flexibility allows us to invest through the cycle, pursue attractive growth opportunities, and continue returning capital to shareholders. While we remain focused on navigating the near-term environment, we are equally focused on making disciplined decisions that strengthen the business and position Tractor Supply to deliver sustainable growth, attractive returns, and long-term shareholder value. With that, we will now open the call for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. The first question comes from Steven Forbes with Guggenheim. You may proceed.

Companion animal trends. Specifically hoping if you can provide some deeper insight into what you're seeing, both in terms of the market itself and member wallet share dynamics. As we think about some of the recent sort of moves you've made, including the announcement with Instacart, and what appears to be more of a pricing value proposition reset. Curious if there's any way to frame up when we should expect those trends to stabilize, if there's line of sight to that, and just how committed you are to sort of progressing the business back to a share gainer, and shoring up the share position of the business.

Thanks, Steven. Your first part of the question we didn't hear exactly, but I think we've got most of it, so we'll jump in with Seth.

Hey, Steven. Thanks for the question. I think, hey, the first part of that question is more about a little bit more trends that we're seeing from pet and animal more in general, just to address that one quickly. As mentioned in prepared remarks, obviously, we did see some sequential improvement from Q1. As well, just some broader share, some stabilization continue to happen throughout the quarter. As we went through the quarter, all of our initiatives are starting to come under play. All of our reset activity across all dog and cat did get complete.

I'll tell you that we are pleased with the initial results as those continue to roll out, as we see continued progression in things like our 4-H being strong, new items being strong, our Freshpet continuing to expand in the initial results from that as we're now over 250 stores. With that, I would tell you that Freshpet specifically, now that we're in the 250 stores, we're seeing those results be to our expectation. I think one of the most encouraging things with that is that we're seeing over 40% of those buyers in Freshpet, specifically Freshpet, be either new pet food buyers at Tractor Supply or reactivated buyers at Tractor Supply. I think it's just kind of one example as we continue to iterate on the assortment.

We're continuing to make sure that we're going where the consumer trends are going and making sure that we can not only stabilize share, but continue back to our share gain that we've done in the past. Also, we're continuing to lean in on other things like in our digital enhancements. Subscription is going well with that as well. We're continuing to see adoption there with a lot of improvements. Just in general, just very pleased with the overall enterprise execution with our pet re-acceleration strategy, and with the goal to continue to see those sequential improvements as we go through the full back half of this year. As far as the second part of your question, just kind of on pricing and stabilization there. Really pleased with the initial results of kind of our value initiatives that we've gone after.

As you've seen, we've gone after our Unbeatable Price program, which is really at the core of our business with really good consumer response, specifically around that. We've seen customers' engagement on that be strong across all of our customer cohorts. With that as well, we've seen about 180 basis point improvement year-over-year from our customer survey results that we have just on their perception of our price-value perception with Tractor Supply, and that's continuing to improve not only year-over-year, but we saw it improve sequentially in June and even stronger here in July. You'll see us continue to lean in on that. Overall, pleased with both those initiatives that we outlined on the last earnings call, and you'll see us continue to lean into those as we go through the balance of the year.

Thank you. The next question comes from Steven Zaccone with Citigroup. You may proceed.

Very good morning. Thanks very much for taking my question. I wanted to ask about the H2 same-store sales outlook, because it sounds like you're expecting to be down 1% to flat. Comparison gets a little bit tougher in the Q3. Could you just elaborate on that a little bit more? It sounds like some of the seasonal trends you saw in June have continued into July. Should we interpret that as kind of positive trends have continued? Thank you.

Hey, Steven, it's Kurt. On the H2 cadence, you hit one key point, that is just to reiterate, as I mentioned in my remarks, that we do expect both Q3 and Q4 to fall in its comp sales range in the implied range of the H2. Relatively tight range in regards to that. Some of the base assumptions on that is that, as already mentioned, we are seeing sequential improvement in key categories like pet. We're seeing improvement throughout the business. It's important just to mention the performance of the Q2. While May was a strong headwind on the quarter, the performance of the core business, in the consumables in particular, was solid in all three months of the quarter, we like the progression that we're seeing in the business.

As far as Q3 and Q4, on the H2 of the year, the strongest compares that we're going up against are the beginning of Q3. We had a really solid, strong extended spring selling season with big ticket in July, that's the strongest compare. With a year where there was really no name storms, there was no real winter weather in the back half of the year. As we look at the cadence of it, the toughest compares are really July. As I mentioned in my remarks, we like when we see signs of any extended spring selling season. While the business has pressure from drought, a majority of the geographies are showing signs of extra precipitation and the potential for that extended spring selling season. The business continued to show solid spring selling momentum from June into July.

It's only one month, but we like what we're seeing. Pleased with the performance in July. We consider that, I would just reiterate, we recognize there's uncertainty, we factored in to our guidance that there could be headwinds with the consumer. There's a lot of uncertainty. We do see optimism within our range and have baked that in that we see sequential improvement throughout the cadence of the H2 of the year.

Thank you. The next question comes from Jonathan Matuszewski with Jefferies. You may proceed.

Well, great. Good morning, thanks for taking my question. Appreciate all the commentary on pricing, just wanted to kind of drill down on that if I could. As we think about some of these price investments in Q2 and potentially further price investments in the H2, how do you think about kind of your price gaps, relative to different channels of competition, whether it be kind of farm and ranch or the mass channel or digital? Can you kind of maybe just frame for us how your pricing versus peers may look maybe at the end of this year versus maybe at the beginning of the year as a result of the pricing actions? Thanks.

Hey, Jonathan. This is Seth. Thank you for the question. As you notated, we've continued to really go after the price value proposition at the end of the quarter and continue to look at that in the back half of this year, as consumers are definitely looking for value and how we can be their advocate to kind of help them live their lifestyle. From a historical perspective, we've always had really good, robust tools in place where we index and track across farm and ranch, across mass, across digital-only players. We've always indexed to make sure on those core items that we have, that we are in a very solid price position to make sure that we can drive market share, while also making sure that we can appropriately manage margins.

I would just state that right now, our price perception and our price index continues to be equal to or even slightly better than historical as we've gone after these kind of unbeatables in particular. You'll see us to continue to invest in that in the back half this year, and with the appropriate support from our supplier partners, as well as leverage our landed cost initiatives as we continue to open up new distribution centers, go after those as well. In terms of price indexing and what we're going to see there, again, consumers are looking for value. We're going to lean into that. We're committed to driving market share, balancing that appropriately where we need to with our margin management.

Again, we've been indexing that for years, and our index position where we are right now is equal to or stronger than it's even been, in recent years.

Thank you. The next question comes from Zach Fadem with Wells Fargo. You may proceed.

Hey, good morning. You mentioned a favorable early assessment on the changes you've been making inside the stores, pricing, promo, assortment, et cetera. The first question is whether you think you're moving fast enough or why not go faster? Second question, separate question, could you talk about what the benefit was from tariff refunds in Q2?

I'll take those two questions and maybe bundle them together because I think there's a correlation there. Let me just frame up the gross margin and our approach to pricing and some of the even cost headwinds of freight in the industry right now. I think that really, in a sense, answers somewhat of your question on pricing. Do we have the right timing? Are we going fast enough, et cetera? If you just step back on cost pressures or cost of gross margin drivers in the business, and this is more of a macro across retail, you've got freight hitting unexpected high. The fuel costs are higher than most anticipated and certainly even the rates on freight. There's a burden across retail on freight in general. There is a tariff benefit that all or most retailers like us are experiencing at this point.

As we manage all of the factors that go through gross margin, in this environment right now, there is a strong appetite and looking for from the consumers on value. As we're stepping into a value proposition, as we're looking for ways to not drive higher cost from freight, we're using the benefits that we're receiving at this point with tariff refunds. Tariff refunds are a bit choppy, and we said and expected there'd be uncertainty and some choppiness across that. The benefits may not exactly land at the same timeframe as some of the pricing initiatives that we're placing throughout this year.

We're benefiting in utilizing tariffs to be able to drive value to our customers, give us a strong position, especially in farm and ranch, and to be able to be competitive in an environment that we view across retail as a renewed competitive environment as the consumer is pushing for value. Very much like 2018 and 2019. We believe we're stepping in at exactly the right level, as Seth mentioned, to manage both market share, and we're seeing that movement in regards to, as he mentioned, the level of engagement across existing, or even accelerating new or reengaging customers across our core queue consumable business. We're utilizing throughout this year the tariff benefits to be able to invest in those areas and avoid price increases for freight, and be able to drive value.

To that extent, I'll just mention that I said it's choppy, and you heard my prepared remarks on gross margin that we saw a benefit, an increase in gross margin the Q2, while we see gross margin in the back half and even particularly stronger in Q3. That's really stronger in regards to decline year-over-year in Q3. It really has to do with some of that lumpiness of when tariff benefits are coming in and our commitment to utilizing that to ensure we're driving value. In particular, gross margin, as I indicated, year-over-year, it's down a bit in the H2, heavier pressure in Q3. I'd look at it from this standpoint. Q3 versus Q2 may have 50-75 basis points difference in the level of year-over-year performance in gross margin.

While there's a few factors that go into this, the largest portion of that is the level of timing of tariff benefit being stronger in Q2. A little bit of cadence on information on timing, and, hopefully, that helps you understand. We have confidence that we've hit the right measure on our pricing and will continue into the H2.

Thank you. The following comes from Michael Lasser with UBS. You may proceed.

Good morning. Thank you so much for taking my question. At this point, the market recognizes that the back half of the year is going to be what it is, but the focus is really starting and increasingly going to be on 2027. To that, two simple questions. One, given that you did remove the long-term framework, how should we think about what a realistic comp number over the intermediate term is for Tractor Supply's business? Recognizing that you're not going to give a specific number, but is there anything different moving forward that we should not rest on maybe the average over the last 10 years that we should consider as we start to lay out our outlooks for the next couple of years?

Two, it sounds like there's a lot of moving pieces between tariff refunds, lower tariff rates, some transitory expenses that are going to impact this year. This is probably best for Kurt. To the extent that we want to calibrate our models for 2027, what would you consider unique in this year from a profitability perspective that we should factor in as we estimate what Tractor Supply's profitability looks like next year?

Hey, Michael, it's Hal Lawton, and good to speak with you today. Thanks for being on the call. I'll make a couple comments on our long-term guidance. As I said, on the prepared remarks, we very much recognize the fact that our investors expect and deserve to have a long-term guidance framework to operate around. We are committed to delivering an updated long-term guidance framework in concert with our 2027 outlook. I'll say a couple of things on that. As it relates to sales, we continue to believe we are a growth company, and we are very pleased, as Kurtis said, with all the actions we've been taking over the last 90, 120 days to accelerate the business. You can expect us to continue to accelerate these initiatives and also, as we shared with you today, some structural changes we're making.

You can expect to hear more updates from us on that as well. I would reiterate, we continue to believe that we have growth in our horizons, both on the comp side and on the new store side. As it relates to op margin, would acknowledge we're at a recently historically low op margin

We still believe that we continue to leverage at a 2% plus comp as we move forward. Really the historical operating margin that we have right now is a by-product of our last two plus years of really modest positive comps, which have driven deleverage in the business. We continue to have a lot of optimism around the business. We continue to be pleased with the actions we've taken in the last 90 days and the results we're seeing in the business. Kurt talked a lot about seasonal, pet, and value. I'll hit on just a couple other things, but we did a lot of sales driving initiative work, say in our truck tool and hardware business. We released some press releases on that with our new electrical set and also our new power tool set. We're seeing results and performance there.

In clothing and gift, we've made a lot of introductions in the last 60, 90, 120 days. We're seeing very good results there as well. Also outdoor rec. We're upping up over 700 stores this year with outdoor rec. That continues to go very well. The last thing I'll talk about is our seasonal center court programs. Last year, those programs set late, and they were affected by the tariff that came in last minute as those programs were being finalized. This year, we don't have those complications. Many of those programs have already set. Many of them are on their way to set in the next week or two with the right price points and the right quantities, and we're seeing strong performance in our center court activity year over year as well.

Those are all just examples of reasons that we have confidence in the business and, as I said, we look forward to sharing with you more on our long-term guidance as well as our 2027 outlook, in our Q4 earnings call.

Thank you. The next question comes from Spencer Hanus with Wolfe Research. You may proceed.

Good morning. Thanks for the question. I just wanted to ask on what the initial takeaways have been from the pet resets that you've done so far. How have sales been trending pre and post those resets? As we look around the other parts of the store, what do you see as other low-hanging fruit, maybe side lot or other things that you guys can look at to help improve some of the comp momentum from a merchandising standpoint? Thanks.

Hey, Spencer. Seth. Thanks for the question. Hey, from the recent pet resets pre-post, like we've mentioned already, sequentially, we're seeing some nice improvements in our pet business overall. As we went through this last pet reset, a couple key things happened with those. One being obviously some new brand expansions and introductions, and how we make sure that we have the brand expanded and introductions on a regional, more localized level. The team put a lot of work in making sure that we have the right brands and the right stores, and we're seeing that have favorable impact right out of the gate. Second is we already talked about Fresh. We're introducing Fresh. We're seeing nice adoption with that and where we're not necessarily at significant scale with that yet. We haven't really put any significant marketing behind that.

As we continue to scale that, you'll see us get even more marketing behind that activity, which we think will continue to drive some market share opportunities for us. We've also seen some really strong results related to our cat reset recently. That was the one that just happened a few weeks ago. We expanded pretty significantly our cat wet offering that we have there. That has shown a really nice improvement from Q1-Q2 and even in post-reset. One last thing too, we continue to iterate on our Project Fusion pet layout. As we continue to iterate on that to be able to make sure that we are having the right footages by categories, the latest Project Fusion format as well, we call it our Pet Plus format, it is outperforming the balance of the chain as well.

There's optimism on the activities that the teams are continuing to put behind this. You put that along with all the activity going into our digital enhancements, as well as our marketing activities behind it, and then couple that with our pet ecosystem that we're continuing to invest in. We think that has the opportunity to be incredibly sticky for us going forward, relative to pet. Other merchandising activities kind of excited about as we approach the back half. Hal just mentioned a couple of them. First, I'd just say, basically our center court activity, those are the things that really come to life in the back half and where we really can drive incrementality. Last year, those were the most impacted of categories and events that we had from tariffs.

Was proud of the work the team did last year to minimize those impacts, but obviously it wasn't necessarily optimal and optimized based off when they were getting planned to when the tariffs actually rolled out. This year, I think the team has done a remarkable job bringing incredible value, innovation, and new programs across our tool days event, our deer event, our holiday event, and as we approach holiday later in the year, just some special buys, unique products, that's going to be innovation, and I think at values that consumers are going to really respond to. Lastly, Hal mentioned also our rec aisle. Our wildlife business has been very strong over the last few years. At this point, we have over 200 stores that we've gone in and back remodeled, a dedicated rec department, wildlife focused more on deer and hunting.

That's opening up space in center court to even expand that category further, and that's really an effort of localization, particularly across the states that are very meaningful in those categories, and we're seeing really good customer response on that right now. That season is in front of us. A lot of activity from the merchant perspective ahead, and optimistic about the programs that are coming to life.

Thank you. The next question comes from Chuck Grom with Gordon Haskett Research Advisors. You may proceed.

Hey, morning everyone. Can we dissect the compression on traffic a bit more? Curious if there's any common themes by geographic market, income cohorts, and also driving distance from the store. Just separately, Kurt, inventory is up about 14% year-over-year more than the recent trend. How are you feeling about the currency of that inventory today? Thank you.

Yeah, Chuck, this is Kurt. I'll hit both of those. In regards to traffic, I'll start by saying it's important to note that when we entered 2026, we said we expected that we would benefit more from ticket than the business being transaction or traffic led, and that has certainly played out. That said, both Q1 and Q2 have certainly had traffic and transaction counts below our expectations. The traffic activity was very much in line with the overall trends of the business. I'll hit some of those key points. We saw only a modest level of comp transaction decline in April and June. Flat to slightly down. The majority of this transaction decline that you're seeing in the numbers are very much in line with the results of May.

What we saw in May was certainly the biggest pressure was on big ticket, seasonal big ticket, such as riding lawn mowers, those area, seasonal big ticket of wrecked vehicles and so forth. We saw a lot of the spring seasonal activity that's a bit more discretionary based, we saw transaction decline. Certainly part of the transaction across all the quarter was consistent in being down related to companion animal, but as we mentioned, we saw sequential improvement. The pressures that occurred in May were somewhat in certain geographies where there were drought based off of that.

I'd give a stronger impact from overall May as Hal's remarks mentioned to be very much consistent with the overall consumer sentiment at some of its low, and the rural customer, as even you indicated, certainly having driving more distance impacting their own lifestyle, even if they're the hobby farmer in diesel with their equipment and a greater percentage of our customers driving diesel trucks. We looked across the geographies and there was a consistent theme during those four weeks. By the way, those four weeks are historically four of the six largest volume weeks, and we saw a noticeable across our geographies. We saw more meaningful decline in areas where there were some droughts such as the South, the Southeast areas, et cetera. We do like and are really more leaning on the more normalized traffic, which has been consistently only modestly down year-over-year.

In regards to our inventory, as I mentioned, a larger portion of that 6% growth in average inventory per store is inflation or cost basis. The other portion of that is more heavily related to the seasonal goods. We don't see risk in those areas, and we actually believe even more at this time that it's benefiting us as in certain markets, we're seeing a continued demand for the spring seasonal goods. We don't see any real significant concerns. We're certainly working to drive our average inventory per store down and expect and targeting those numbers on an average inventory per store growth rates to decline as we go throughout the cadence of this year. As we want to just be able to be more efficient across all aspects of our business. We don't see a concern with inventory at this time.

Thank you. The following comes from Jeff Lick with Stephens. You may proceed.

Great. Thanks for taking my question. I think if you would have polled all the analysts, either buy side or sell side, we would have thought that pet was a bigger impact than it was. Then now you're talking about May and big ticket. I wonder maybe if you could unpack that a little more and then also just give specific reference to, you've talked about how your initiatives are a net positive, but they're kind of being overwhelmed by, it doesn't seem like it's pet, it's the other category. Maybe if you take that wherever you'd like, but just like a lot of the analysts, just trying to forecast and unpack the sales trajectory and where you're going.

Hey, it's Hal. I'll just try to use that to reiterate some of the previous comments we've given. First, we saw positive comps, as we've said many times, in April and June. We have a very strong two year lap. We had a high single-digit comp in the month of July last year, and we are very pleased with our two year lap on that. As we've said, we've seen sequential improvement in really all aspects of our business from Q1-Q2, inclusive of pet and importantly pet, given its concentration in our business. As I mentioned in just a few Q&As ago, we've also seen improvement in other areas that we've made investments, such as I mentioned in electrical and power tools. Seth reinforced that. Our center court activity, also in clothing and gift. Those sorts of investments, outdoor rec is another area.

Those sorts of investments have also provided sequential improvement in all of our businesses from Q1-Q2. Certainly seasonal was what put pressure on us in Q2. That seasonal business has continued to perform in Q3. As Kurt mentioned, we're very pleased that we carried that inventory over. We are seeing the sell down on that as we expected through July. We continue to see improvement sequentially in the core business as I mentioned earlier. It's those elements that give us confidence in our implied Q3 and Q4 outlooks.

Yeah. We have a question from Peter Benedict with Baird. You may proceed.

Hi. Good morning, guys. The H2 EBIT margins, I guess, are implied like 7.7% or down 75 basis points at the midpoint. I'm wondering, Kurt, can you help us unpack the drivers there? Not necessarily gross margin versus SG&A, which you've given some on, but more what's driving that with the DC costs, the natural deleverage on the negative comp, to what extent price investment might be playing a role, medical, I think there were some timing things for tariffs. Anyway, if you can just maybe break that 75 basis points down so we can kind of understand what's maybe temporal here or what maybe continues as we look into 2027. Thank you.

Yeah, I'll just give you a few things to kind of pack in there as for your modeling purposes. The tariffs, as I mentioned, are a bit choppy and lumpy, where they've been offsetting some of the freight and fuel pressures, they're also allowing to provide an offset to some of the value that we're driving the business. We expect for the back half of the year, the freight pressures to be relatively consistent, in both Q3 and Q4 that we had in the H1 of the year. We are committed to our everyday low pricing and the value we're driving right now in the business. I think there's not that much difference between Q2 versus the H2 in those factors. The things that generally are different on the gross margin is principally the choppiness on the tariffs.

Additionally, in Q4, we're anticipating roughly a 20 basis point benefit from the supply chain with the new distribution center. On the SG&A side, our numbers implied in the H2 of the year should provide an improved SG&A as a percentage of sales, while deleveraging shows some improvement, although somewhat offset by having the startup costs from the distribution center. It's really a bit of the choppiness on the tariffs. There's a stronger overall performance from sales in Q4, gross margin improvement from the new distribution center in Q4. If you take all that together, and I think what might be helpful for the modeling as we see this, and this has been kind of going back to somewhat of a historical norm, I would package the growth earnings potential of the H2 of the year.

Q3 is roughly 45% to 45, 50% of the earnings, and the Q4 is more the 55% of it. That's going to really help you understand just the timing, because there are a number of things that, as you mentioned, are playing into a timing across even the quarters.

Operator, we've got time for one more question.

Absolutely. The final question comes from Kate McShane with Goldman Sachs. You may proceed.

Hi. Good morning. Thanks for taking our question. We wanted to go back to what you announced on Petsense today. What do the 75 store closures mean for the fleet? Were they unprofitable stores that you were closing? Just what is the longer term strategy there? Just second to that, I don't think we heard much about Neighbor's Club today in the prepared comments, and just wondered if anything was being leveraged there in a more meaningful way to help drive customer acquisition or improve transaction growth.

Yes. Hey, Kate, it's Hal. Thanks for the question today. Appreciate that. On Petsense, I would frame Petsense as part of the broader strategic work that we're doing. As I mentioned, leading up to a re kind of sharing of a new long-term algorithm in concert with our Q4 earnings call. As I mentioned in my prepared remarks, we're going through a significant amount of work. As we make decisions through that work, we're committed to being transparent and sharing those publicly. One of those decisions was around Petsense. The Petsense chain has north of a couple of hundred stores. The performance across those stores has a wide range. The 75 stores that we announced today that we're shutting down are negative four-wall cash flow.

We will be able to use that negative four-wall cash flow once we shut those stores down and reinvest that back into the core of our business. We think that's a kind of smart shareholder capital allocation approach. Reiterate that after that, we think we'll have a very strong, profitable Petsense business. It will work well with the broader pet ecosystem that we're building with Allivet as well as with VIP Petcare. I will reiterate that while those two businesses, VIP Petcare and Allivet, do integrate and we fully expect them to be core parts of our integration with Tractor Supply, the Petsense business is not directly connected to the core Tractor Supply business. We feel like that this doesn't do anything in terms of impacting our pet re-acceleration in the core Tractor Supply business.

On Neighbor's Club, we continue to be very pleased with Neighbor's Club. It's 80% plus north of our overall sales volume. We continue to add members. In particular, as we've been looking to drive improved value positioning in the marketplace, Neighbor's Club has really played a role in that because we've been able to target the cohorts, get the message out. Seth mentioned our consumers' price perception in our business has increased significantly from Q1-Q2 and year-over-year. Certainly Neighbor's Club and the depth of understanding we have on those customers has allowed us to effectively reach them and get that message across.

All right. We've hit the top of the hour, so we'll wrap our call up there. Rena, Clayton, and I are around for any follow-ups. Thank you all for joining our call today. We'll look forward to talking to you on our Q3 call in October.

This concludes today's conference call. Thank you for your participation. You may now disconnect.