Good afternoon, ladies and gentlemen, and welcome to Tractor Supply Company’s Conference Call to discuss Fourth Quarter and Full-Year 2018 results. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be – will follow at that time. We ask that all participants limit themselves to one question and one related follow-up. 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, Vice President of Investor Relations and Public Relations for Tractor Supply Company. Mary Winn, please go ahead.

Thank you, David. Good morning, everyone. On the call today are Greg Sandfort, our CEO; Steve Barbarick, President and Chief Operating Officer; and Kurt Barton, our CFO. Let me now reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company’s filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that these statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. After our prepared remarks, we’ll open the call up for your questions. Please limit your questions to one and one related follow-up question, if necessary. And I appreciate your cooperation as we’ve got a lot of people in the queue. We will be available for the call – after the call for follow-up. Now, it’s my pleasure to turn the call over to Greg.

Thank you, Mary Winn, and good morning to everyone joining us on the call this morning. Fiscal 2018 was another record year for our business. For both the quarter and the full-year, we delivered strong comparable store sales, driven by continued increases in both average ticket and transaction counts. Our Tractor Supply team executed well across store operations, merchandising, supply chain and planning and placement. Our teams did a great job of developing and executing plans that resonated with our customers and that were seasonally relevant, which continued to drive transactions and our average ticket. We continue to be in stock for our customers with our everyday consumables assortments that we know our customers depend on from Tractor Supply to help them live their Out Here lifestyle. I want to thank the more than 30,000 now Tractor Supply and Petsense team members across the country for strong 2018. Our teams did an excellent job of capitalizing on the strong macroeconomic backdrop for our consumer, while executing our many initiatives and our ONETractor strategy. We know our customers look to Tractor Supply for their everyday basic needs in living a rural lifestyle. We believe the continued convergence of our physical and digital storefronts and the updates to our in-store and online shopping experience are resonating with our customers. Now let me touch on a few financial highlights for the fourth quarter and the full-year. For the year, net sales increased 9% to a record $7.9 billion, as we continued our strategy to open new stores to gain market share. Comparable store sales increased a strong 5.7% in the quarter and 5.1% for the year, with both transaction count and average ticket increasing in the quarter and full-year. This was our best annual comp store sales growth in six years. Our fourth…

Thank you, Greg, and good morning, everyone. I’m pleased with our overall company performance this past year. During the year, we achieved a number of milestones against our ONETractor strategy, while executing across all teams at high levels. The combination of the two resulted in a solid financial performance that exceeded our expectations. For the quarter, our comp sales growth was driven by both average ticket, as well as ongoing increases in customer traffic. We experienced broad-based growth across the number of product categories and in all geographic regions. This is yet another indication that our merchandising plans and marketing events continue to resonate with our customers. Our store teams and supply chain network executed well during the quarter, with the lowest level of store manager turnover in recent years, which I believe has been a significant contributor to our strong customer satisfaction scores. In addition, our on-time service level – levels from our distribution centers to our stores reached the highest level in five years. As a company, our ability to execute resulted in a comp store sales increase of 5.7% for the quarter, representing a two-year stack of nearly 10%. Many of the performance factors that we experienced earlier in the year continue to benefit us in the fourth quarter. Our strong average ticket growth of 3% was driven by strength and product mix, inflation, and to a lesser extent, growth in big ticket categories. Commodity inflation across categories such as livestock feed, pet food, steel and oil-based products contributed approximately 100 basis points to our average ticket performance. Our average ticket improvement experienced some benefit from big ticket sales. The growth was driven across several product lines, including generators, compressors, heating and chainsaws. Our supply chain’s ability to be responsive and nimble allowed us to capitalize on…

Thank you, Steve, and good morning, everyone. I would echo what Greg and Steve have shared as they reviewed the highlights of the year. Tractor Supply had a strong year in 2018. The fourth quarter of 2018 exceeded our expectation on comp store sales performance, while the quarterly components from gross margin and SG&A played out in many ways, as we expected. During the quarter, we made some strategic business decisions that impacted our gross margin and SG&A performance. Although these actions pressured our results, they were the right steps for the business long-term. Looking at the detail. For the fourth quarter, gross margin decreased 66 basis points to 33.6%. Importantly, these results were in line with our expectations. As we shared with you both at the beginning of the year and again last quarter, we anticipated the fourth quarter gross margin rate to be down to a greater degree than we had experienced coming into the quarter, as we were cycling a 50 basis point improvement in gross margin in the fourth quarter of 2017. The decrease in gross margin was primarily attributable to an increase in freight expense, driven by higher carrier rates and increased diesel fuel prices, as well as an impact from product mix. The increased clearance of Petsense inventory from store closures and inventory rationalization also negatively impacted our gross margin. Partially offsetting these items was the strength of our price management program. Including depreciation and amortization, SG&A as a percentage of sales increased by 30 basis points to 25.1% from 24.8% in the prior year’s quarter. The increase was primarily attributable to higher incentive compensation from strong year-over-year performance. Along with planned investments in infrastructure, labor wages and technology to support our strategic long-term growth initiatives. Examples of these investments include the usage of…

Thank you, Kurt. In closing, as we’re moving forward and executing our ONETractor strategy, we continue to make operational progress in our business. We are passionate about our future. Our commitment to providing legendary service and great products everyday at low prices will continue to be the foundation of our growth. And with that Mary Winn, we’d now like to open the line for questions.

Okay. David, we’ll take our first call.

Thank you. The question-and-answer session will be conducted electronically. [Operator Instructions] And we’ll take our first question from Michael Lasser with UBS.

Good morning. Thanks for taking my question. The first question is on tariffs. What did you assume in your guidance as far as tariffs? And if we don’t go to 25%, how should that impact the model over the course of the year?

Sure. Michael, this is Kurt. Our modeling guidance does anticipate that the lift in tariffs and does assume the potential for the March additional tariffs to impact. As we execute that internally, what we do is layer in these tariffs into our model. So if those tariffs were not to occur, we would basically unlayer those and not really have an impact on the guidance that we’ve given to you. So we feel that we’re able to be nimble in an environment with tariffs in the guidance range that we’ve given you.

Okay. So if the tariffs don’t go to 25%, it shouldn’t really impact your guidance anyway?

Correct.

And then my follow-up question is on the weather. It was a little funky during your fourth quarter. What impact can you quantify, do you think the weather had on your performance during the fourth quarter?

Yes, Michael, this is Steve. We talked about our customers living the Out Here lifestyle. Weather certainly can have an impact on our business and it did in the early part of the quarter. I will tell you, I applaud the team for, the supply chain team, the merchant team in planning and allocation, because we really took advantage of it with the nimble supply chain that we’ve got. We would estimate that it’s probably somewhere less than 100 basis points of impact to the business and it was certainly in the earlier part of the quarter than the latter.

Got it. Thank you so much and good luck with the year.

Thank you.

Thanks, Michael.

And next, we’ll go to Chuck Grom with Gordon Haskett.

Hey, thanks. Good morning. Just on the first quarter guide. Maybe you can just hold our hands as to what your expectation is for margin compression as a result of those factors that you spoke to? And also on the Easter shift, if maybe you could quantify that for us based on what you’ve seen historically?

Sure. Chuck, this is Kurt. In regard to the first quarter operating profit, as I indicated, we anticipate seeing some modest decline in there. And it’s simply a timing thing specific to a few items that are discrete to the quarter. As I mentioned, the Frankfort DC preopening costs will be in the first quarter. That’s about $0.02 on earnings per share. And as you recall, back in March, I think, third quarter 2017 when we introduced the plans to open the Frankfort DC, we said that it would have roughly about $0.04 impact on earnings per share. And so we’ve had about $0.02 of that impact in the fourth quarter and the other part of that is really the other $0.02 that’s impacting the first quarter. The other additional items, as I mentioned, transportation cost pressures, we do continue to see that. Although, we anticipate that easing in 2019, we’re really not cycling the significant lift until about midyear. So that will have some impact on operating profit in first quarter. And then the third thing is our profit improvement initiatives that are a key part of our strategy for operating margin improvement in 2019, really begin to take hold more in the second-half of the year. So as a reminder, with the first quarter being the smallest quarter, those few things can have an impact and we look at it as timing items that are discrete to the first quarter. In regard to the Easter shift, yes, the Easter shift has really a modest impact in there. We’re not quantifying exactly that. We should remind you that with having Friday and Saturday before Easter falling into the first quarter last year, you lose a slight benefit of that, but not a significant factor into the overall comps. For first quarter, we still anticipate with the easiest compare that first quarter is probably more, in our assumption, at the higher-end of the guided range for the year.

Okay, great. That’s very helpful. And then just bigger picture on the macro, particularly in some of these oil markets that you operate. Just curious if you’ve seen any change in basket size, trip frequency, et cetera? Just any overall feel for the consumer right now? Thank you.

Hey, Chuck, this is Greg. I’ll take that one. We’re really not seeing any real difference right now in the oil markets, and we are in contact with those stores in the West Texas region, which is primarily where this would be impacted. We talked to them about rig counts and employments and everything seems to be fairly stable. Remember, this is about 10% or less of our stores right now. This is not like what it was in the past when we had many more stores involved in Ohio and Pennsylvania and up to the Oklahoma and the Dakota areas, okay? It’s geographically limited. And I would tell you that one of the advantages we see out of this is, if lower diesel prices can come as a result of lower oil prices, that’s a benefit to us and to our customers. It actually puts a few more dollars in their pocket and can help us on our margin line. So no real difference right now.

Very helpful. Thanks, and good luck.

And next, we’ll go to Simeon Gutman with Morgan Stanley.

Thanks. Good morning, everyone. So the 3% comp midpoint…

Good morning.

…good morning. The 3% comp midpoint guide for 2019, it seems like a nice solid guide against the 5% for 2018. And so can we talk about the building blocks, Neighbor’s Club inflation and anything that’s give – giving you a little more confidence in putting up another good number?

Yes, Simeon, this is Kurt. You know what – when we modeled out 2019, we basically balanced a number of things in there. And I’d say, we were aware and acknowledged some of the macro headwinds facing retail that’s out there, as well as the strong fundamentals of the business and the initiatives that we see driving it. And you mentioned the key factors, as Steve said, our key initiatives are just early in their days and beginning to take traction. So we anticipate the efforts that we’ve got and the traction from Neighbor’s Club, our financing programs with the private label credit card and continued growth in Buy Online Pickup in Store, those are a number of the factors that we believe allows Tractor Supply to continue to make progress in spite of looking at a year where there is some macro uncertainties facing the industry.

Okay. And then connected to this, maybe for Greg or Steve. You’ve always done a pretty good job assorting regionally. You probably have gotten better. You have – now you have Neighbor’s Club, you have a private label credit card you called out and I think that’s helping big ticket and then you mentioned a lot of your business is consumable. And so, even though we talked about the weather, it still comes up, is there signs to you that the business is becoming less weather dependent that we won’t be talking about to have this as much as we had in the past?

One of the things I would tell you Simeon is that, we look at weather as quite frankly, an advantage to Tractor Supply Company. Our customers live the Out Here lifestyle. Now that what I will tell you is that, we benefit, because we are in 49 states. So we’re a bit more desensitized to maybe what we were 10 years ago when we had more stores up North. There are a lot of key fundamental initiatives, as Kurt mentioned, that are very strategic that I think are drivers for the business in the future. But I would always tell you, there will likely be some sensitivity to weather just in the nature of who and what our customers are in the lifestyle they live.

Okay. Thank you.

And as a reminder, we ask that all participants please limit yourself to one question and one related follow-up to allow everyone an opportunity to ask a question. We’ll take our next question from Peter Benedict with Robert W. Baird.

Hi, guys, thanks. Yes, first question is around some of the ONETractor learnings you’ve got in the stores. In the new stores, you’ve got a different layout than generally what you’ve got in the rest of the chain. And I’m just curious how that’s going? And what kind of the thought process is in terms of potentially at some point layering some of those learnings into a broader mix of the stores throughout the chain? That’s my first question.

Yes, Peter, this is Kurt, I’ll take that. Let me just look back on 2018 and just remind that in 2018 what we accomplished on that, we converted 38 existing stores to the new format and opened up 62 new stores on that format. Our assessment on that new stores, we clearly like the results. Our customers are responding well and our team members like the efficiency of the layout and the format of it existing stores. As you mentioned, we’re continuing to take learning from those tests and apply it to the chain. We do see that in some aspects of the chain, there are more beneficial than others. And an important thing for us is, we’re trying to look for the most benefit with the least amount of capital on existing stores if we were to retrofit it. So looking forward to 2019, we’ll continue to roll out in some existing stores and continue to refine the test and look for the benefits that we can roll out to the rest of the chain. There’s not an official plan to roll out to all stores at this point, but we’ll keep you updated on the positive outcomes and the aspects of the reformat changes, as it may apply to the full chain.

Okay, that – that’s helpful. Thank you. And then just on the private label credit effort, can you talk about, maybe what percentage of sales that was this year or maybe the change year-over-year? And as we cycle the initial, I guess, relaunch of that program in March, kind of what’s untapped to continue to build penetration on private label credit? Where do you think you guys take that maybe over the next couple of years? Thank you.

So Peter, this is Steve, I’ll go ahead and take that question. First off, we started from a very low base, which is a good thing. So while we saw really nice double-digit comps in the card, the applications and sales on the card, there’s tremendous upside for us in the future. We haven’t targeted a specific number at this point or said anything publicly. But I can tell you the more training we do with our team members, the more comfortable they get. And then long-term, how we tie that back into our loyalty program, I think, that’s where we can get the greatest benefit. So, again, we’re very early in the process here and I would tell you, there’s still a lot more upside.

Okay. Great, guys. Thanks very much.

Thank you.

Next we’ll go to Scott Mushkin with Wolfe Research.

Hey, guys, thanks for taking my questions. So – a question with follow-up. So the – what I want to kind of poke out a little bit and understand better is, one just kind of a understanding of your pet business, how much is private label versus branded? And with that, we’re anticipating Blue Buffalo is going to be rolled into Walmart, probably March, April. And I was wondering if you guys think that’s going to have any kind of impact on you?

Yes, Scott, this is Steve. I will tell you, we have been very fortunate to get out ahead of this year as we go as we developed our 4 line – our 4health product line, as well as the growth we’ve seen in Retriever. We continue to see our pet business growing, both in sales dollars and units. Over the years, we have knowing that a lot of this is coming in terms of some of these national brands that migrate into mass or grocery. We’ve been reducing space and increasing space in more channel specific brands. And one comment or statistic I would share with you is that, over 70% of our assortment is not found in mass or grocery. So, we don’t have nearly the exposure that many others have, as we’ve developed our own private brands and those brands that are more channel specific.

All right, thanks for that. Do you give out publicly what’s branded versus private label in your pet business?

No, we’ve never shared that data.

Never shared the data. Okay, I think that’s the – I think that was my question follow-up. Also, I have couple more, but I’ll take it offline. Thanks, guys. I appreciate it.

Okay. Thank you, Scott.

Thank you, Scott.

And next we’ll go to Matt McClintock with Barclays.

Yes. Good morning, everyone. So Kurt, I was just wondering, you talked about this was the year for trough. This was the trough year in operating margin and that was consistent with the Investor Day last year when you put out your long-term targets. So I was just wondering if you could maybe update us in the sense of how we’re progressing towards those long-term targets? It would seem like the comp certainly performs better than originally expected. Maybe there were some margin pressures that were somewhat incremental. And I’m kind of more focused on the transport cost, because I know you baked some of that pressure into those long-term targets, but are we running a little bit light on margin flow-through just because of transport costs, or is there anything else that we should be aware of in terms of the puts and takes of assessing where you are towards those long-term goals? Thanks.

Yes, sure, this is Kurt. You hit a couple of the key things. In regards to 2018, we anticipated, set out in the beginning of that year to see some transportation pressures. Those pressures were greater than our original plan. So that was a key factor in regards to how 2018 performed in regards to over operating profit margin. And addition to that, we – throughout the year, we took, as we mentioned, some strategic decisions on investments throughout the business to really manage for the long-term. In regards to 2019, as I mentioned, we got a solid plan that now allows for as part of our strategic plan to grow operating margin. We’ve got some cost pressures, as I mentioned, but our plan considers a normalized incentive comp. We’ll be cycling some of those cost increases. And on transportation, in particular, we anticipate seeing some easing of those cost pressures, along with the profit improvement issues we have to offset some of the pressures on transportation. Those are a lot of the key factors that allow us to pivot from the pressures from 2018 into a more profitable 2019.

So not trying to put words in your mouth and please feel free to deny this or just not even answer it. But just, would that mean that – would that imply that should you achieve a similar level of comp performance that you did relative to maybe the long-term plan in 2018, we would see it a little bit more margin flow-through on those years and the out years if that’s this year, next year, the year after that, et cetera?

Yes. I think with less pressure from a variable cost like transportation where we’ve mitigated that, there’s more opportunity with the upside on comps in 2019 and future years.

Perfect. And then my second question, just on Petsense. I know it’s small, so I don’t want to focus too much attention on it. But could you just maybe give us a sense of what happened in those 10 stores relative to the rest of the chain, where you decided to reevaluate that decision, et cetera? Just trying to understand as you start to integrate and further integrate Petsense into the bigger chain, the overall chain, where you’ve had some issues where things could be improved, just an update? Thanks.

Yes, Matt, this is Greg. I’ll start and I’ll pass a little bit to Kurt. Those closings were really related to the new model that we developed for store openings in Petsense. We have a very sophisticated model in Tractor. We’ve taken a very similar modeling approach to Petsense. And when we looked at the whole portfolio, we said, these stores are underperforming and there’s really they’re not the locations we would want moving forward as the rest of the fleet. These were some of the early on stores in the Petsense operation when they started out being in, we’ll call it, discount centers and things of that nature. And so these were early stores that have been targeted even from the beginnings when we had purchased it to say, if we can’t get these moving in the right direction, plus now we developed a new model, it’s best to go ahead and close those. We’re very comfortable now that we’ve got the new model, now that we’ve got a good understanding of what we have and how we’re starting to integrate out of the back house cost in Petsense that we can accelerate the model over the next couple of years and it will be additive to the EPS of the company.

Yes. And what we saw as a strategic opportunity without a significant impact in 2018, we looked at the opportunity to take those underperforming stores and take those exit costs in 2018. And as Greg mentioned, the profit improvement driven from those 10 stores gives us about $1 million of increased profitability from Petsense in 2019.

Thank you very much for that color. I appreciate it.

And next we’ll go to Mike Baker with Deutsche Bank.

Hi, thanks. A question and a follow-up on your sales outlook. So first, first quarter, you said you should be at the high-end of the plan, which presumably is a 4. Is that based on what you’re seeing now in January, or what do you expect to play out, I think, understanding, correct me if I’m wrong, but you have easier comparisons as the quarter progresses?

Yes. Mike, this is Steve. It’s still early in the quarter. And our first quarter is heavily weighted to the back-half of the quarter. So I want to make sure that we’re clear there. And then while the cool weather of north has certainly been helpful for those stores, we are geographically dispersed across the entire U.S. And we continue to talk about the haves, not the quarters, because there is an interesting dynamic between March and April every year that plays out and when spring will actually occur. So I think we feel pretty comfortable in telling you that we think Q1 will be at the higher-end of our comp range at this point from what we know.

And Mike, this is Kurt. And to your point, it’s knowing the strength of fundamentals of the core of the business, it’s more about the easier compare in Q1 versus the other three quarters going forward.

Okay. And the follow-up, more – taking the offset, more of a longer-term question. Your long-term guidance, I believe is for annual sales growth of 7% to 9%. You are at the high-end of that this year. But the guidance for 2019 is only 5% to 7%. Seems to embed a little bit lower new store productivity boost in our math. So can you talk about why you wouldn’t see better sales – total sales on that 2% comp given your store growth?

Yes. Mike this is Kurt. The 7% to 9% guide assumes a mix of a certain percentage of new stores and as well a mix and that can fluctuate on the comp basis. In this particular year, it’s more about the timing of the new stores, both with Tractor Supply and Petsense. So with 80 new stores and those – the cadence of those as well as, as Greg mentioned with Petsense, are focused on getting through the integration, allowing us to have the new systems and the formats and then begin to open those stores that plays into the amount of new stores even from Petsense. And so there’s a few things really more about timing in 2019 that would impact where we landed in the range compared to that long-term guidance.

Okay. But you did say the cadence of openings will be similar in 2019 versus 2018, is that right?

Yes, you’re right. The cadence for 2019 with Tractor Supply stores similar to 2018, you also had the fact that the previous year prior to 2018, we opened about 100 stores, giving some of that benefit in – falling into 2018. So there’s some factor from coming off the year of 100 store openings from 2017.

Understood. Okay, thank you.

Next, we’ll go to Seth Sigman with Credit Suisse.

Thanks a lot. Good morning, guys. A nice job on all the progress. My question is really around the gross margin. I guess, first, if you could size up the mix impact and also the clearance activity in the quarter in Q4 related to Petsense just to give us a sense there? And then the second part, I’ll just combine it. If I heard you right, more of the opportunities on gross margin in 2019, you discussed starting to lap the higher freight by midyear. If you could also address mix and then the price management program, how you’re thinking about that and where you are in that initiative and how that actually starts to gain traction throughout the year, that would be helpful? Thanks.

Yes. So, Seth, this is Kurt. There’s a few questions in there. Let me go through there. Steven and I are making some notes, and let me address the first question on Q4. We called out the key factors on the gross margin comparison fourth quarter. The most important thing is just keeping in mind, we’re cycling a 50 basis point improvement in the prior year, where there were some discrete benefits in the prior year and then additionally, the freight cost pressures and the mix shift of product. The least of the things we mentioned was really the liquidation of the Petsense. I can just tell you that was less than 10 basis points of the overall gross margin impact on fourth quarter, but we wanted to call that out as part of it. And then if you wouldn’t mind, I think you had some questions more about 2019, if you could just give that back to us, we’ll try to address that.

Yes. I just love to get a little bit more color specifically on the price management program, where you are in that initiative? Any examples on on how you’re using it? And then you did mention as an offset, I guess, how meaningful is that today? Where can that go over time? Thanks.

Yes, Seth, this is Steve. We are continuing our journey with price management and we’ve talked significantly about it over the years. And it’s really an elasticity tool that allows us to go out through the number of zones that we have and understand what customer demand does whenever prices go up or down based on how we put them into a category management model here. We think that will be a key instrument or tool for us as we go through what could be more tariffs or, however, we want to manage our business regarding market share. So that will be a key, I guess, tool for us as we move forward. So there’s still a lot of upside, still a lot of opportunity that we haven’t fully capitalized on and that’s how we’ll use it.

Okay. Thank you.

And next, we’ll go to Seth Basham with Wedbush Securities.

Thanks a lot, and good morning. I just had a follow-up question around the tariff scenario. You mentioned that you don’t expect any change to your 2019 outlook, whether or not we stay at 10% tariffs or go to 25% tariffs. Last quarter, Greg, I believe you indicated, you expect margin pressure from a 25% tariff scenario. So has that thought process changed?

I’ll quickly address and then probably pass either to Steve or Kurt. That comment was made more about, we were uncertain at that time what it was going to look like. We’ve just been to two rounds, if you remember, of tariff impacts. We were trying to estimate at that point if we went to 25%, what do we think would happen and anticipating that we had to put a plan in place to address it. We’ve now done that. We feel very comfortable with the plan. So I would say, now we’re not as concerned about that pressure. We’ve got it handled. We know what we need to do. I would hope that we can avoid this. But if it does happen, we are well-prepared and ready to act upon it and we don’t see it as a real margin drain.

Got it. And what about from a comp perspective? Will you expect your comp outlook to be different if we stay at 10% tariff versus 25% tariff?

That’s the question that no one can answer, okay? We’re – look, we’re very fortunate as a company that we have a business that is grounded in staples. And those staples will continue to sell whether we’re through a recession or we’re through a major tariff impact or what have you. But some of the discretionary products, we could see some pressure. But right now, we’re not seeing really anything significant. So I guess, what I would say to you is, we’ll have to wait and see, but we’ll be very well priced regardless of this. We’ve got some leverage with some of our manufacturers, as you can imagine, with our size. And at this point, it’s a wait and see.

Thank you.

Next we’ll go to Scot Ciccarelli with RBC Capital Markets.

Good morning, guys.

Good morning, Scot.

So – hi. So I know you guys have posted three straight quarters now of average ticket growth of, let’s call it, 3%-plus after, call it, five years of pretty much flattish performance. Can you, number one, rank order kind of what has inflected positive on average ticket, because I know you’ve got a couple of initiatives in there? And then second, can you provide any specifics or quantify the impact that your deferred financing program has had on average ticket? It can’t be completely coincidental that you launched the deferred financing in March of 2018 and then you come away with three straight quarters of 3%-plus average ticket growth? Thanks.

Scot, this is Kurt. I’ll start by answering a bit of the prioritizing of it and Steve may be able to give some color on it. But specific to the fourth quarter, when you look at the average ticket growth, the product mix was the most impactful of it, followed by inflation. As we said, inflation had about 100 basis point impact on average ticket and third to the big ticket. And the big ticket can differ in any particular quarters. And I think, second quarter was probably one of the primary drivers of it. And so for the fourth quarter, those were the three primary drivers. And Steve can maybe speak to anything else on the growth, the average ticket mix.

The only other thing I would mention, you talked about the private label credit card and longer-term financing. And we are seeing customers, as we’ve gotten a program more competitive, take advantage of it, but it’s still a very small portion of our total business. And so there are other things that we’re working on to drive ticket up, because we have good, solid transaction growth. Most of those are operational and in merchandising, and I think we’re seeing some benefits from the work we’re doing there. And in the long haul, I do think that the private label credit card will benefit us in some of the bigger ticket. But as Kurt said, it was probably ranked three in the – on the list of priorities that we saw in the quarter.

Is there any kind of metric we maybe should be looking at, or trying to evaluate on the deferred financing to kind track what kind of impact it could have?

Well, I’ll tell you, Scot, what we look at is and what’s important for us is the number of applications that are in our program, which is growing well. The number of new members, new cardholders, as well as the year-over-year growth. And those – Steve mentioned that all of those are positive in the quarter. We’re focusing not on just how to use it for big ticket one-time sales, but how do we continue to have everyday purchases on there. And so as this program grows from something very small to something that’s meaningful, we’ll be able to share additional information on that. And at this point, we’re excited about coming out of an early program with some positive results. We want to be able to continue to mature it and become part of our long-term strategy, certainly even aligned with our Neighbor’s Club program.

Very helpful. Thanks, guys.

I think we’ll take one more question as we’re about to hit the top of the hour. But we’d have time for one more question, please.

And next, we’ll go to Steve Forbes with Guggenheim Securities.

Good morning.

Good morning.

I want to start with Neighbor’s Club membership. Can you update us on the total membership number as of Q4-end. And then maybe discuss what you’re seeing, right, within the members themselves as it relates to category penetration rate? Are you seeing your member shop new categories as they mature throughout the program?

Let me give you a basic update, Steve, on total. One of the things that we’re seeing are continued positive trends in enrollment. And like what we talked about before, we’re well over $10 million. That number will continue to scale and we see continued growth there. I will share with you a statistic, I think, that’s a milestone, and that was this past quarter, over 50% now of our sales are being generated by our loyalty members, and that’s given us given us some really rich information. A couple of things that we’re looking at is the segmenting of customers based on both product needs and wants, the tiering of our customers by frequency and spend and it’s also giving us a better sense for the demographics that are part of our membership. All that data that we’re taking is being used by our analytics team and we’re sharing it internally, so that we can start modifying assortments and tweaking regional opportunities that we’ve got. But because we’ve got access to all these customers e-mail addresses, we’re able to personalize content that is relevant to them, and we’re seeing some traction. As I said, the members that we’ve had over a year are shopping us more often. And if you look at the top 25% of our stores that have a higher penetration of Neighbor’s Club sales, they are the top performing comp store sales stores that we have. So I would tell you that the program is still early in its maturity. And as we continue to scale, not only the membership, but the quality of the members that we have and that’s our focus. I think, we’re going to learn more and be able to continue to action it.

And then just a real quick follow-up. So you talked about the impact to gross from Petsense inventory rationalization. Well, can you quantify the store exit costs that were also recognized?

Yes, Steven, the store exit costs were not significant. What I will tell you is that, as we exited out of Q4 and looked at the year-end, we had both some cost up with Petsense, as well as a credit on the vacation policy change. The two of those netted to something less material. The adjustments overall were net about a one on those non-recurring items, were about $0.01 to EPS. So it really wasn’t that significant.

Thank you.

Okay.

Thank you.

Thank you.

David, I think that will wrap up our call. Thank you for joining the call today. Marianne and I will be around if you have any questions. We look forward to talking to you on our first quarter call in April. Additionally, we will be hosting our Annual Investment Community Day on May 15 here in Nashville. Hope you can join us, and thank you for your interest in Tractor Supply.

And that does conclude today’s conference. We thank you for your participation. You may now disconnect.