Tractor Supply Company

Good morning ladies and gentlemen and welcome to Tractor Supply Company's conference call to discuss second quarter 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 And 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'll open the floor for questions. 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 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, and for reconciliation for these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website. Now it's my pleasure to turn the call over to Hal.

Thank you, Mary Winn, and 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 Pet Care. 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 second quarter. Our core customer remain engaged with healthy retention. Our needs-based categories continue to perform well, and our competitive position remains solid. Thank you for joining us. 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. Thank you for joining us. To put that in perspective, performance in our big ticket categories and hard lines spring goods during May alone reduced our second quarter 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 second quarter 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 NN 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 first half 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. Thank you for watching. Against that backdrop, and despite May's performance, our second quarter fell short of expectations. We are not satisfied with the results, and 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. Thank you for joining us today. While pet performance remains below where we want it to be, trends improved sequentially from the first quarter and we continue to hold share. We believe the deliberate actions we're taking to strengthen our competitive position and capture additional share of 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 Fresh Pet continues to perform well. The program was in approximately 250 stores at the end of the second quarter, and 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 Pet Care, 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, clear everyday value messaging, and targeted promotional activity. Consumable, usable, and edible products remain the foundation of Tractor Supply, and we're committed to reinforcing our value proposition where it matters most to our customers. And 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 and in light of our updated 2026 outlook, we've decided to withdraw our long-term financial framework. Thank you for joining us 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 toward 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 to 90 new stores in 2027, compared with our previous expectation of 100 new stores. And we will redeploy that capital toward initiatives such as Project Fusion remodels, store locations, and final mile delivery. Thank you for joining us today. 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 first half 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. And 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, and 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. And 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. 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 percent 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 percentage of net sales by approximately 35 basis points. We continue 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. and many more. Thank you for joining us. 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. and many more. Looking ahead to the second half 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 second half 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 second half outlook in context, the comparisons are not uniform across the period. Last year's third quarter 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 third quarter trends are tracking in line with our expectations. More broadly, while the comparison patterns differs between the third and fourth quarters, we expect both quarters to remain within the comparable sales range of the implied second half 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 second half than they were in the second quarter. As a result, we are forecasting gross margin below the prior year for the second half. with greater pressure in the third quarter than the fourth, primarily due to the prior year compares and the supply chain benefits from the new distribution center beginning in the fourth quarter. To that point, we plan to open our 11th distribution center early in the fourth quarter. For modeling purposes, startup costs will begin in the third quarter and continue into the fourth quarter, resulting in an SG&A headwind in both periods. Thank you for joining us. Thank you for joining us. Thank you for joining us today. Thank you for joining us. Thank you for joining us. Thank you for joining us. 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 fourth quarter 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. Thank you for joining us. 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.

Compendium 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. And then 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 sort of shoring up the share position of the business.

Thanks, Steve. 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 up.

Hey, Steve, 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 and more in general, just to address that one quickly. You know, I just kind of mentioned prepared remarks. Obviously, we did see some sequential improvement from Q1 and as well, like just on broader share, really some stabilization continued to happen throughout the quarter. You know, as we went through the quarter, all of our initiatives really are starting to really 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 and things like our for health being strong, new items being strong, our fresh continuing to expand in the initial quarter. Thank you for joining us. Thank you for joining us. You know, also like 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. And just in general, just very pleased with the overall enterprise execution with our pet reacceleration strategy. And, you know, 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. And 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. And you'll see us continue to lean in on that. So 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 second half same sort of sales outlook because it sounds like you're expecting to be down one to flat. Comparison gets a little bit tough on the third quarter. So could you just elaborate on that a little bit more? and it sounds like some of the seasonal trends you saw in June have continued into July. So should we interpret that as positive trends have continued? Thank you.

Hey Steve, it's Kurt. On the second half cadence, you hit one key point, and 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 second half. So relatively tight range in regards to that. All right, let's get started. 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. And we like the progression that we're seeing in the business. As far as Q3 and Q4, on the second half 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. And so that's the strongest compare. And then with a year where there was really no named storms. Thank you for joining us. and the potential for that extended spring selling season. So the business continues 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. So we consider that. And then I would just reiterate, while we recognize there's uncertainty and 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 second half of the year.

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

Well, great. Good morning and thanks for taking my question. Appreciate all the commentary on pricing and just wanted to kind of drill down on that if I could. So, you know, as we think about some of these price investments in 2Q and potentially further price investments in the second half, how do you think about kind of your price gaps relative to different channels of competition? whether it be kind of, you know, 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. Yeah, this is Seth. Thank you for the question. Yeah, 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 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. And 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. And 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 to open up new distribution centers and go after those as well. So 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. And 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 Fadim 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, etc. The first question is whether you think you're moving fast enough or why not go faster? And then second question, separate question, could you talk about what the benefit was from tariff refunds in Q2?

Thank you so much for having me. Thank you for joining us. There is a tariff benefit that all or most retailers like us are experiencing at this point. And 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. So 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. Now, tariff refunds are a bit choppy, and we said and expected to be uncertainty and some choppiness across that. And so the benefits may not exactly match. Thank you for joining us. 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 markets. or even accelerating new or reengaging customers across our core Q consumable business. And 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. You heard my prepared remarks on gross margin that we saw a benefit and increase in gross margin the second quarter. While we see gross margin in the back half and even particularly stronger in Q3, and 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. And in particular, gross margin, as I indicated year over year, it's down a bit in the second half, 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 and 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. So a little bit of cadence 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 second half.

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. And so to that, two simple questions. One, given that you did remove the long-term How should we think about what a realistic comp number over the intermediate term is for tractor supplies 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? It sounds like there's a lot of moving pieces between tariff refunds, tariff, lower tariff rates, some transitory expenses that are going to impact this year. And this is probably best for Kurt. But 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 Surprise profitability looks like in next year.

Hey, Michael, it's Hal Lawton and good to speak with you today. Thanks for being on the call. Thank you very much. Kurt Barton, Robert Mills, and you can expect us to continue to accelerate these initiatives and also as we share with you today some more structural changes we're making you can expect to hear more updates from us on that as well but 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 there we're at a recently historically low op margin Thank you for joining us. Kurt Barton, Robert Mills, Thomas Sabatino, New Electrical Set and Power Tool Set and many more. Those are all just examples of reasons that we have confidence in the business. And, you know, as I said, we look forward to sharing with you more on our long-term guidance as well as our 2020 SEND Outlook in our Q4 earnings call.

Thank you. The next question comes from Spencer Haynes with Wolf Research. You may proceed.

Good morning. Thanks for the question. I just wanted to ask them 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? And then 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, yeah, from the recent pet resets, kind of like pre-post, like we've mentioned already, you know, kind of sequentially, we're seeing some nice improvements in our pet business overall. You know, as we went through this last pet reset, a couple of 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 and more localized level. So 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 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 to Q2 and even in post-reset. As well as one last thing too, we continue to iterate on our Project Fusion pet layout. Thank you for watching. Thank you for joining us today. 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. I 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 or when the tariffs actually rolled out. And 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, really respond to. And then 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 a couple hundred stores that we've gone in and back remodeled. A dedicated rec department, wildlife focused more on deer and hunting. Now 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 and that season is in front of us. So 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 in traffic a bit more? Curious if there's any common themes by geographic market, income cohorts, and also driving distance from the store. And then 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.

Chuck, this is Kurt. 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. And what we saw in May was certainly the biggest pressure was on big ticket, seasonal big tickets, such as riding lawnmowers, those area seasonal big ticket of wrecked vehicles. and so forth but then 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 so 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. Thank you so much for joining us. Four of like 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, etc. So we do like in our pit 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. And 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 growth. demand for this spring seasonal good. So 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. But we don't see a concern with inventory at this time.

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

Great. Thanks for taking my question. You know, I think if you would have pulled all the analysts, either buy side or sell side, we would have thought, you know, that PET was a bigger impact than it was. And then, you know, now you're talking about, you know, May and big ticket. You know, I wonder maybe if you could you know unpack that a little more and then also just give specific reference to you know you've talked about how your initiatives are a net positive but they're you know kind of being overwhelmed by you know it doesn't seem like it's pet it's the other category so maybe if you take that wherever you'd like but just you know like a lot of the analysts just trying to you know forecast and unpack you know 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. Thank you for joining us. 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 to 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. And we continue to see improvement sequentially in the core businesses I mentioned earlier. And it's those elements that give us confidence in our implied Q3 and Q4 outlooks.

Yeah, we have a question from Peter Benedict with Bayard. You may proceed.

Good morning, guys. So the second half 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 S&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 there. 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 27. Thank you.

Thank you so much for joining us. The freight pressures to be relatively consistent in both Q3 and Q4 that we had in the first half of the year. We are committed to our everyday low pricing and the value we're driving right now in the business. And so I think there's not that much difference between Q2 versus the second half and those factors. The things that generally are different on the gross margin is principally the choppiness on the tariffs. and then 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 second half of the year should provide and improved SG&A as a percentage of sales while deleveraging shows some improvement, although somewhat offset by having the startup costs from the distribution centers. So it's really a bit of the choppiness on the tariffs. And there's a stronger overall performance from sales in Q4, gross margin improvement from the new distribution center in Q4. And if you take all that 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 like the potential, the growth earnings potential of the second half of the year. Q3 is roughly 45% to 45-50% of the earnings and the Q4 is more than 55% of it. And 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? And just what is the longer term strategy there? And then just second to that, I don't think we heard much about neighbors 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. And 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-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 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 flows. and so 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 and 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 Alivet as well as with VIP Pet Care. And I will reiterate that while those two businesses, VIP Pet Care and Alivet, do integrate and we fully expect them to be core parts of our integration with Tractor Supply, PetSense Business Thank you for joining us. because we've been able to target the cohorts, get the message out. And Seth mentioned our consumers price perception in our business has increased significantly from Q1 to Q2 and year over year. And certainly Neighbors 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, and 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.