Good morning and in honor of the 40,000 team members of Tractor Supply, welcome to our third quarter 2020 Enhanced Earnings Event. Thanks for taking the time today to join us and I do hope you're all staying safe and well. And on behalf of all of us at Tractor Supply, I also want to thank frontline workers around the country, including our own team members who work so hard to ensure that our stores can continue to provide our products and services to the communities we call home. Today, we have a packed agenda. First, we're here to discuss our third quarter results with Hal Lawton, our CEO; and Kurt Barton, our CFO. After that, we'll be joined by members of TSC's executive team, who will go into greater detail on some of Tractor Supply's key initiatives to support our company's long-term plans. Following their presentations, there will be an extensive Q&A period when they will take your questions. Our goal is to allow about an hour for the Q&A session and we plan to conclude our event by noon, Central Time. A replay of the webcast as well as the Q&A session will be available on our website at irtractorsupply.com under Events and Presentations. But before we get too far down the road, I'd like to ask you to take note of our safe harbor statement. Please note, some of the discussions, presentations and statements that we make today regarding our business, operation and financial performance may be considered forward-looking. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially. 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 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. Because we use select non-GAAP measures to describe our business performance, we've provided a reconciliation of these measures to the most directly comparable GAAP measures, which is included in the appendix of this presentation and will be posted on the IR section of our website as part of today's call. The information contained in this webcast is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this webcast. Thank you for your time and attention. Now we'd like to share a video featuring one of our many team members who lives our lifestyle and brings the Tractor Supply story to life.

Hello, everyone and thank you for joining us today. When I first saw the video that we just shared with you, I thought it really captured the essence of Tractor Supply as a purpose-driven company. It is who we are. It is what we do. In retail today, having meaning and purpose with customers makes all the difference. It is a pleasure to speak with everyone today not only about our third quarter results but also about our Life Out Here strategy. We see opportunities to capture tremendous growth ahead of us. As we're in the midst of a global health crisis and all that comes along with that, we didn't feel that it was appropriate to do a full investor community day. Rather, it's our goal today to share our Life Out Here strategic framework and provide greater insights on our initiatives as we plan for 2021 and beyond. Over time, as the world normalizes, our goal would be to host another event in the future as appropriate. Tractor Supply is well positioned to leverage our stores and capitalize on our omnichannel capabilities. We have a large total addressable market with an attractive position and are gaining market share. We're focused on operational excellence, execution discipline and making investments from a position of strength for long-term value creation. We're on a multiyear journey to evolve the future of our company. We are thriving as our second and third quarter results indicate. And with the actions we're taking, we're committed to emerging from the pandemic stronger than before. My sincere thanks and appreciation go out to our more than 40,000 team members of Tractor Supply that delivered these strong results. This is a team that's been operating during a global pandemic, supporting recovery from multiple natural disasters and executing at…

Thank you, Hal and good morning, everyone. I will go through more of the third quarter financial highlights and then come back as part of our strategy update. At that time, I'll share with you greater details on our focus to generate shareholder value. First, I want to build on the overview of our sales that Hal shared earlier and provide a couple of additional highlights. We did have marginal sales benefit from emergency response products as our teams work to support the communities impacted from multiple hurricanes and the wildfires out West. In addition, much like the second quarter, we had ideal weather conditions for the quarter also contributing to the comp sales performance. Another highlight for the quarter is that we continue to achieve strong year-over-year growth in our private label credit card sales. The largest growth in our PLCC tender came from standard financing while also seeing strength in our big ticket sales. We continue to see strong growth in this program, providing us the confidence that our 5% reward program is resonating with our customers. Gross profit as a percentage of sales was 36.4% in the third quarter. That's an increase of 138 basis points. This increase was driven principally by a reduction in frequency and depth of promotions and a lower level of clearance, both of them as a result of strong demand for our product categories and our focus on everyday low price. We also benefited from lower transportation costs as a percentage of net sales as most of our cost inputs were favorable to the prior year, such as domestic carrier costs, imports and fuel costs. We did begin to see a meaningful shift in the domestic and import carrier costs beginning in the third quarter, which will begin to flow through the…

Thanks, Kurt. We've been operating in this challenging environment for more than seven months now and our team continues to show great resilience, determination and commitment. Once again, I'd like to express my deepest gratitude and appreciation for the remarkable performance across the entire Tractor Supply team. Thank you.

Thank you, Hal and Kurt. I believe that our results year-to-date create an environment where we can continue to strengthen and grow our business well into the future. Now let's turn our focus to our Life Out Here strategy. This approach builds on Tractor Supply's strong heritage of over 80 years as a dependable and convenient supplier for the Out Here lifestyle. Hal will now share more details around the strategy and his insights.

For the next hour or so, you'll hear from myself, John Ordus, Seth Estep, Rob Mills and Kurt Barton on our Life Out Here strategy. As mentioned, these presentations will be followed by Q&A. All right. So let's jump into it. Tractor Supply has a strong heritage of being the dependable and convenient supplier for the Out Here lifestyle. We are a purpose-driven company. We're deeply rooted in our mission and values. We have a resilient business model and a track record of performance. And importantly, we see an exciting future with compelling opportunities for growth and value creation. We're an integral part of our customers' lives. We equip a way of life, a way of life that we respect, love and often live ourselves. We serve the lifestyle needs of recreational farmers and ranchers as well as those who simply enjoy the rural lifestyle. We have a diversified retail footprint of over 1,900 stores across 49 states. Our footprint is a competitive advantage for us and it allows us to address the needs of our customers better than anyone else in this fragmented market. Our size also allows us to have strong relationships with our vendor partners and to efficiently invest in technology and supply chain infrastructure. One of our special sauces is our ability to leverage this footprint and while being nationally strong, also being able to tailor to the needs of our local community. Our culture is a competitive advantage. Our mission is work hard, have fun and make money. This mission is supported by 10 values. Combined, they serve as the underpinning of our culture and guiding principles for how we conduct our business. Our focus on Life Out Here, in combination with our culture and our store footprint, has been our foundation for our business…

Thank you, Hal. For more details on how we're executing the Life Out Here strategy, let's hear from our deep and experienced executive team. First up, Executive Vice President and Chief Merchandising Officer, Seth Estep. Seth will share some exciting developments within our product portfolio and provide updates on several initiatives focused on driving productivity of the space inside and outside of our stores.

Thank you, Mary Winn and hello, everyone. I'm excited to be here today to share with you some of the key merchandising initiatives to drive sustained top and bottom line performance. We believe we have a significant opportunity to add science, enhanced analytics and category expansions to drive sales and become an even more integral part of the Out Here lifestyle. Specifically, as we look to drive consistent mid-single-digit comp sales, a maniacal focus must be given to driving space productivity. As you can see when looking at the productivity of our stores versus other retailers in the peer group, we believe we have considerable opportunity to close the gap and we have several key initiatives that we'd like to share with you today on how we can shift these metrics up and to the right. At Tractor Supply, we have a lot of exciting merchandising programs in the works, but there are 3 initiatives I want to highlight for you today that we believe will help drive our space productivity in our stores. First, we recently implemented new technology that dramatically enhances our ability to leverage AI and data analytics to optimize our product assortments and meet the local and regional needs of our customers. This technology unlocks vast amounts of data and insights to help us make decisions at both the store, category and SKU level. Second is Project Fusion, tractor Supply's first true remodel program that will help enhance our customer shopping experience, drive convenience and bring forth our latest merchandising initiatives to our existing store base. And third, we have our Side Lot Transformation project that we believe is a significant opportunity to grow sales, increase trips and improve convenience by leveraging our outdoor selling space to live up to our commitment to have everything our…

Thank you, Seth. Tractor Supply has become the largest rural lifestyle retailer in the U.S. by focusing on the continued improvement of our customers' experience inside our stores. We call it operating The Tractor Way and it's how TSC drives productivity and efficiencies to elevate customer service. Here to tell us more about operating The Tractor Way and its positive effect across all 1,900 stores is Executive Vice President and Chief Stores Officer, John Ordus.

Thank you, Mary Winn. It's great to talk to you all today about operating The Tractor Way. Before we talk about Tractor Way, I'm going to talk to you about our opportunity. At Tractor Supply, we have a solid operating foundation in place across our more than 1,900 stores. At the same time, we believe there's an opportunity to increase labor productivity. Based on our industry benchmarking, we know we have room to grow to be best-in-class on customer-facing sales-driving initiatives. Our teams have made progress over the last couple of years with a nearly 400 basis point improvement in customer service by adding workforce planning, task management and the rollover of our Tractor Way program. There is still a lot more that we can do to help drive efficiency in our operating processes and structure to free up hours to focus on customer service. We are going to continue to reinvest in labor efficiencies and the customer experience. We are also going to continue to invest in new stores with a target of 75 to 80 new stores a year, drive productivity of our existing stores, take task work out of our stores and use technology-like initiatives like in-store communication, labor management, interfaces that give team members actionable information and capabilities and optimizing payroll by store. The foundation of our strategic pillar, operate The Tractor Way, is The Tractor Way program we first launched chain-wide in 2019 as a way to make our freight and recovery process more efficient and reinvest the hours from operational efficiency into customer experience. Our initial program focused on our most time-intensive and high-customer impact processes, things like freight, recovery, daily maintenance, zero-outs and feed the floor. The focus was to drive value to the customers through more time for customer service, improved in-stock…

Thank you, John. Now is a good time to press pause and give you a very quick break. So when we return, Chief Technology Officer Rob Mills will share details on digital's expanding role in our Life Out Here strategy and CFO Kurt Barton will conclude our presentations with our strategy for delivering healthy shareholder return. We'll see you back here in a few minutes.

Welcome back. We're glad you're with us. Now before we dive back in, a quick reminder. In just a little over half an hour, we'll have a Q&A session with members of our management team, so please stay with us. At the top of today's presentation, our CEO, Hal Lawton, explained our Life Out Here strategy and its commitment to our customers to deliver the products they need, however, whenever and wherever they need them. Joining us now to share how investment in our digital platforms is allowing us to honor that commitment both now and in the future, here's Rob Mills, our EVP, Chief Technology, Digital Commerce and Strategy Officer.

Hello, everyone. It's great to be here with you virtually today. A few years ago, we introduced our ONETractor strategy. This strategy drove significant progress for Tractor Supply, making great strides in providing a seamless customer experience. Further, the capabilities we introduced as a part of ONETractor have helped to fuel our growth during recent shifts in consumer behaviors and habits, many of which that are here to stay. The past 6 months have accelerated digital adoption across the retail sector. Our digital strategies are a key part of our plans to sustain and grow not only with our new and reengaged customers but with our core customers who are more digitally engaged than ever. Our digital growth has been driven by introducing new capabilities and improving the shopping journey. Even with this significant growth, we still have a tremendous opportunity ahead of us compared to other hardline and specialty retailers. Just a few years ago, e-commerce represented less than 1% of our business. And today, we are nearing 6% with continued plans to grow that share. Our online conversion rates continued to improve with double-digit growth in recent years as we evolve that shopping experience through new capabilities and have provided an intuitive checkout with efficient and fast fulfillment options. An example of this is how we introduced curbside pickup earlier this year. Delivering legendary customer experience is our top priority, making certain that the customer experience has always ranked above our peer group, leveraging industry benchmarks such as 4C. While these capabilities we have built are serving us well today, we will continue to invest in furthering those capabilities in 3 ways: by implementing a best-in-class platform and technology, hiring and developing the best technology team and growing our digital expertise across the company. Our goal is to…

There are certainly some exciting developments coming from our digital team. In addition to meeting the needs of our customers, one of the pillars of our Life Out Here strategy is to generate healthy investor returns. Here's our CFO, Kurt Barton, to take a deeper dive into that subject.

Good morning again, everyone. In these incredibly uncertain and complex times, the Tractor Supply team has found a way to truly thrive. It is a testament to each and every one of our team members and our resilient business model that we have found a way to really be there for our customers, serving them with care and doing our best to have the right products and services for them at the right price and available anytime, anywhere, any way they choose to shop. Our Life Out Here strategy is grounded in our focus on delivering strong and sustainable total shareholder return. We are humbled by our strong operating financial performance year-to-date, which is a true testament to our differentiated and durable core business. And as you have heard from Hal and others, given our extremely strong financial performance and resources, we plan to make significant investments to enable us to continue to gain market share. We are confident that our planned growth and margin-driving initiatives such as Fusion, Side Lot and FAST, will strengthen our foundation and enable us to emerge even stronger on the other side of the pandemic. My goal is to provide deeper insights on how our disciplined capital stewardship supports our business strategy and can deliver strong and sustainable TSR. I will first highlight our strong and durable financial performance and the free cash flows that enables us to make the critically important organic investments that we have been discussing with you. These investments will allow us to build on our strong growth platform and strengthen our advantage. I will also highlight how we plan to return excess cash to our shareholders through both dividends and share repurchases. And then finally, I will reinforce our commitment to a healthy and resilient balance sheet with investment-grade…

Thank you, Kurt. Well, we've certainly shared a lot of information with you today and our hope is that you've gained some insight into our Life Out Here strategy. Now for a few takeaways and closing remarks, here's Hal Lawton.

We are all about the Out Here lifestyle. Our Life Out Here strategy is focused on being an integral part of our customers' lives. And as we close out our prepared remarks, I hope you take away that we're a market leader with strong omnichannel capabilities, that our culture is a competitive advantage, that we have a resilient business model with compelling growth opportunities and we have the resources and are committed to allocating them to effectively execute our Life Out Here strategy. Thank you for joining us today and I look forward to answering your questions in just a bit.

Our executive panel Q&A session is right around the corner. But first, we'll step away for a quick break. We'll be right back.

Welcome back to the Q&A session of Tractor Supply's enhanced earning event. We've assembled today's presenters and they are ready to take your questions. A couple of housekeeping notes first. [Operator Instructions]. For anyone just tuning in, a quick introduction of our team: President and CEO, Hal Lawton; CFO, Treasurer, Kurt Barton; Chief Merchandising Officer, Seth Estep; Chief Stores Officer, John Ordus; Chief Technology Officer, Rob Mills. We have a line of folks standing by, so let's take our first question. First up is Zach Fadem from Wells Fargo.

Thanks for hosting a great event today, really well done. So first question for me on the 4% to 5% long-term comp outlook. This compares to about 3%-plus previously. And I'm hoping you could bridge the gap for us, talk about how you're quantifying the impact of the initiatives you've discussed today. And then what impact would you assign towards changes that are more structural, like the urbanization, rising pet ownership and other external factors due to COVID?

Yes, great. I'll take that. Zach, it's great to see you this morning and thanks for joining us for our enhanced earnings day. The way I think what Kurt in his presentation tried to kind of outline is we anticipate that COVID will -- we'll be dealing with COVID. It will be part of the U.S. economy and consumer mentality for the better part of next year. And then as we start to comp on top of that, that will create some period of uncertainty, really depending with a lot of parameters impacting that. It could be the pace of the adoption of a vaccine, the effectiveness of a vaccine and then how user behavior changes afterwards. What I would say is, from our view, the longer that kind of COVID -- the COVID pandemic is here, we think the longer, the more structural a lot of the trends are that we're seeing. If you think about as an example, year-to-date, we've sold 11 million birds. Pet adoption and ownership at an all-time high. Those are annuity streams that are going to continue on. Work from home and kind of this investment in your home, because you're there more frequently, that's going to continue even post COVID. So as we think about kind of the 12 months post COVID, there's some period of kind of settling out but we're becoming more confident in that. And then once we get to the end of that, then we think we get back to a more normal routine run rate. And if our previous long-term guidance had been about 3%, what we're starting to do is add on top of that 3% the initiatives that we're announcing today. That would be the initiatives of maintaining our new customer base that we've seen and starting to -- continuing to have business from that group that's sustaining our levels that we're already operating at but also growing on top of it. But it also comes down to our existing store base, the productivity we're going to get from the existing store base both inside the store as well as outside of the store and then the continued growth from our digital business. As you know, we've got, I think, over 30 quarters of double-digit growth. And the last two quarters have been over 100% comps. And so we see that continuing to play out. So we feel very good about the increase of our comp guidance from previously 3% to 4% to 5% based on kind of that waterfall of initiatives.

Got it. I appreciate that. And then quickly moving to the long-term EBIT margin of 9% to 9.5%. This looks to be a bit of a step-down from about 10% this year. Obviously, given the tough compares next year and the step-up in investments, I'm curious if the 9% to 9.5% margin is the right way to frame expectations during this fiscal '21, '22 transition period or after the near-term investments or both.

Yes. Zach, this is Kurt. I'll take that question. In regards to our long-term target, we've been very specific in saying that this COVID pandemic, there's uncertainty as to how long it lasts and when does this 12-month of a cycling begin. And some of that may fall into 2021 and so there may be some noise on exactly the level of performance on a top line that would certainly impact it. What you've heard from us on our initiatives are that we believe that this business has got strong sustainable growth. We can begin to not only achieve top level sales growth but sustain this level. And then for 2021, the operating margin that we gave could have a little bit of variability in it. But a 9.0% to 9.5% in our long-term target is a really good sweet spot for us. We feel like the opportunity and our primary focus of gaining market share and being able to have a 9% to 9.5% operating margin range gives the most optimal overall earnings per share and value to our shareholders. And so our focus is on the long term in both top line revenue and that operating margin.

Okay. We have our next question and that question is from Peter Benedict at Baird.

Thanks for doing this event. Extremely well done, very helpful particularly with everything going on. So thanks for doing this. My first question, I guess, Hal, you threw out the TAM, $110 billion TAM in your remarks. Wondering if you could unpack that a bit, where you see kind of the most potential for gains, the most opportunity. And how do the services play into that? I know in the past, you've talked a little bit about tool rental, things like that, but I'm just curious if that's kind of -- if that's part of the current thinking here as you're moving through the next few years. That's my first question.

Yes. Good morning, Peter and thanks for joining us on our enhanced earnings day here and I appreciate the comments. Over the last 6 to 9 months, as we've been both dealing with COVID, responding to numerous natural disasters and also dealing with the -- kind of operating at these elevated volume levels, we've also been preparing and kind of laying the foundation for the future of the company. And part of that really started with, what is our total addressable market? And that allows us to understand where share gains can be had and where our opportunities are. And so we spent a good bit of time really digging in each of our categories, understanding where we participate in each of those categories, what the size of those markets are and then really also thinking about the markets that we address. So really, it's really a rural-suburban kind of cut of the categories that we participate in. And after doing that work, we came to $110 billion market, a large market. One with a significant amount of opportunity, one where we have nice share at kind of 10-ish percent but one that presents a lot of opportunity for growth in front of us. And as we've talked about, we think there's a lot of opportunity to do more with our existing assets. We think there's opportunities to continue to build stores to our $2,500 target. And there's also opportunity to continue to grow our digital footprint that's dominantly with and through our stores. As it relates to the categories, I'm going to toss it to Seth and he could talk a little bit about some of the categories that we're making big investments in and where we think there's some growth.

Yes. Thanks, Hal. Thanks, Peter. I like the cap, by the way. Yes, when we think about the total addressable market, that's one data point that the merchants have utilized in coming up with where we're really going to focus and, as Hal mentioned, where we're going to make some of these big investments. To put it in perspective, we showed earlier today the investments in the garden center. And you think about the size of the traditional lawn and garden category that's out there, excluding OPE where we've been strong in for a long time and that's over a $20 billion industry that's out there. So for every share point that we can go out and get, where today we're low single digits when we think about where we are there, that's $200 million of opportunity in revenue growth. So as we think about these things and the data points -- we've looked at that in tools and DIY, obviously, where we are with pet and animal -- we've gone around the store. And as we think about Fusion and how we have laid out the category expansions, where we've looked at those footprints, we've really partnered with our vendor base, use all the different analytics points to really figure out where we're going to go invest in and whether that be in lawn and garden, again, whether it be pet and animal, whether it be in home setting categories, going after market share in those DIY areas and then utilizing our drive aisle to really go after that backyard, that activity and that's what that drives aisles are really for today, right? Take advantage of the current trends that's out there to build a basket. So hopefully, that helps a little bit in kind of how we're looking at the TAM and how we're building our category strategies accordingly.

That sure does. And Seth, I guess, sticking with the garden center, just curious how you guys are approaching that. Are you going to own the live goods? Are you going to go consignment model? Just curious on kind of the margin and return profile, just how you're going to attack that business.

Peter, yes, it's a variation. So as we're rolling this out, I mean, we're in the initial phases of this. We partnered with some outside resources as well that are very much experts in this area. Again, I think we mentioned earlier, we've identified growers for over 75% of our current store base that we know that we have an opportunity to go out there and build these garden centers. So obviously, live goods are one component. It varies by different product segment of how -- whether we'll be owning it or whether it will be kind of scan-based type product. But then also, the other big thing in the garden center as well, it's really going to open up other categories like grilling, outdoor decor, some of those other things that can be very margin accretive as well as we build not just the live goods themselves. But that's really kind of the footstep driver to then build the basket.

Okay. We'll go on to our next question and our next question comes from Steve Forbes at Guggenheim.

And again, really great to see the visual representation here. So thank you for all the effort. I wanted to start with a multipart question as it pertains to the side lots. So maybe for Hal or Seth, if you could speak to the cadence behind the initiative. Is the goal to have all 150, 200 stores done by spring, seasonal? And should we expect the program to be completed by -- within that five year time frame that you laid out by 2025? Is that where we should expect all 60% to 75% of stores to be done?

Yes, Steven and thanks for joining us on the enhanced earnings day today. And as it relates to the side lot, again, we're very bullish on the opportunity, significant opportunity to expand our sales per square foot and better utilize the side lot, the concrete pad outside of our stores. And I thought Seth really laid out that opportunity in his prepared remarks earlier very well. As it relates to the cadence, as Seth said, we're looking somewhere in that kind of 50% to 65% range of stores for this year to accomplish. We're learning a lot as we go. We've got a real -- we've got great muscles built around building new stores and we're starting to adapt and tailor those muscles to being able to remodel stores. And doing that in the context of COVID, where you've got a lot of permitting that you've got to do and you've got town halls that -- have more virtual meetings now and those sorts of things. But we're working through that, building those muscles, building that flywheel and we feel very good about the progress we're making this year. Next year as we move forward, we do anticipate getting at least half of those stores up and running in advance of the spring season. And then the remainder will happen through Q2 and Q3. And then as it relates to the 5-year outlook, once we get through midway into next year, we'll have a better sense of what our capacity and capabilities are for rollout in 2022 and beyond. We certainly have aspirations of addressing the -- Seth has said in his prepared remarks, I believe, he said 60% to 75% of our stores were applicable for side lot. And we have aspirations of addressing all those over a 5-year time frame. But what we do in years 2, 3 and 4 and 5 will vary a little bit based on just kind of our learnings as we roll it out next year in terms of our capacity and capability.

Then just a follow up on pet ownership and the pet food trends. Probably for you, Hal. Would love to sort of hear your thoughts on the importance of this category as you think about ongoing share gains at the local level and would love to sort of speak to both existing and new customer trends right in this particular category, just with all the excitements around pet ownership post COVID here.

Yes, absolutely. So first on pet, I want to be really clear. We are gaining share in pet food and gaining share in the pet category. And while that industry certainly, there's a rising tide there, we are gaining share in the context of that rising tide. As you mentioned, you've got both pet ownership at all-time highs combined with the humanization of the pet really reinforced because people are in their homes more around their pets. And so consequently, that's driving significant volume in the category. It is a very strategically important category for us. It's a core part of what we call our CUE business. It drives footsteps, it drives transactions. And it's a cart-starter to build the basket for our customers in the store. And as we talked about our CUE business, I believe Kurt mentioned it, it was in the mid double-digit comps in Q2, up from high-kind-of-teens in Q2. So we did see a step-up in our CUE business and a part of that improvement was driven by our pet business. We saw a significant improvement in the trend in that business from Q2 to Q3. It is being driven by both our new customers, our reacquired customers and our existing customers. We're seeing increased transactions and larger baskets from our existing customers, but we're also seeing a strong number of new customers in the pet category shopping with us. And their repeats are at much higher rates than we've seen in the past. So it's not a one-and-done or even a two-and-done and are qualitatively, as those customers indicate the vast majority in that they plan on incorporating Tractor Supply in their future shopping patterns. Also online, our pet business is one of the big drivers of our online triple-digit comps. And that's both happening direct ship to people's homes but also the pickup in store. So we feel like we've got a strong pet business. It's important to us strategically and that we are gaining share both in our stores and online across all the customer base.

All right. Well, thank you very much. We'll move on to our next question which is from Simeon Gutman at Morgan Stanley.

Good job this year. By the way, Mary Winn said my picture -- my mouth will move, so just watch out. And my first question is strategic and financial. The question is this, Hal, how much of the spending that -- in this plan is influenced by COVID and how well you've done? Were you thinking of these investments irrespective a year ago? Because it looks like you're spending a lot of additional capital. At the moment, the business is growing very fast, so it makes sense but there's a big step-up. And so it looks like the incremental return maybe can't be as good as where they are today. And yes, you're going to get faster revenue growth, but the EPS growth is -- it looks like it's going to slow. So if you can sort of take that all together.

Yes, Simeon. So hit a few things. First off on how much of this was stimulated by COVID. I'd say we were working our strategy at the same time as we've been operating through the last 9 months. So the two were really much more in parallel than interrelated. What I would say is we do recognize that we're investing from a position of strength. We're committed to emerging from the pandemic a much stronger company and we are confident that we will do so. As it relates to kind of the initiatives and the EPS, what I would say, 2 things: one, remind you we're at a much higher base now that we're operating at than we were 9 months ago. And certainly, 2 or 3 years ago, we did our long-term guidance previously. And then the second thing I'd say is every single one of our initiatives and kind of the strategies that they kind of roll up into, we've done business cases for every single one of those. We know what the NPV and the NRRs are. We've modeled the TSR implications of those investments. And they are all kind of in the numbers that we've delivered to you today. And every single one of those investments, we're confident that it -- they generate healthy shareholder returns and generate value in the business.

And is the shape of the EPS growth and margins the same throughout the investment cycle? Or does it -- is it heavier upfront and then it accelerates later on?

Yes. Go ahead. Go ahead.

I'll take it. I'll take it. Simeon, this is Kurt. In regards to the time frame, first, I'll just point out and remind that slide I gave on the trajectory. There's a lot of uncertainty, there's the COVID pandemic, then there's that 1-year cycling. In regards to the investments, there's more consistency in regards to our expectation as to when to -- the cadence of that investment. The impact on the timing, we're not going to try to go ahead and at this point try to peg over time. But what we are confident is that we can achieve with these investments, as Hal said, investing right now in a position of strength. We're making those investments now. We've got the cash to be able to do that and these investments will begin to provide that level of return. The exciting thing about this is this level of EPS growth, the operating margin that we believe we can sustain through that is during this period of time where we're committing to and making a stepped-up investment in the business. That's exciting for the near term. It's really exciting for the long-term and the overall total shareholder return.

All right. We'll move on to our next question, please. We'll go to Michael Lasser at UBS.

Very nice job. So comparing your current guidance from an operating margin perspective of 9% to 9.5% to the 9% to 9.4% that you'd previously rolled out pre COVID, it would seem like based on updated comp expectation that the incremental profitability contribution from the 100 to 200 basis points that you're presumably going to get from the initiatives like Side Lot and Project Fusion are going to come in at a lower-than-average profitability that you'll offset with some incremental sales leverage on fixed costs. So why wouldn't the margin be higher given these incremental comp expectations?

Yes, Michael, this is Kurt. Thank you for the question. Just build on the -- I'll build on the last explanation I gave earlier. The important factor here is that we're making these investments. It's a significant step-up. These investments are for the long term. These investments are the opportunity to achieve greater market share, sustain the stepped-up growth. And when you make this level of investment, in stores in particular, the Side Lot and Fusion are investments in our leasehold assets. And so these stores have 5-, 7-, 10-year leases. There's a burden in that time frame that we've baked into the financials. And so we think it's a very compelling algorithm to be able to produce the same and stepped-up level of operating margin during this time of investment to be able to continue to grow this business. As Hal mentioned, the last long-term targets that we set out back in 2018. If you think about the size of the business, say, $7.5 billion revenue business on a $4 EPS, we're certainly well beyond those numbers and be able to have the level of EPS growth while returning even greater shares -- greater cash to our shareholders, a commitment to a stronger level of dividend and a consistent share buyback. Overall, I'll just continue to emphasize, for the long term, our focus is total shareholder return. We think it's a very compelling -- much better compelling offer than a previous long-term targets.

And Michael, the only thing I would kind of tactically call out is that the new sales are not dilutive. If you think about a 9%-ish to 9.4% on a 3% comp and then the investments we're making, particularly as it relates to capital and the depreciation that comes along with that and then our target that we shared today of 9% to 9.5%, they really are flowing through basically at the same operating margin rate that the base business, so to speak, was. So I just wanted to clarify that that's not the case when we modeled it out.

Okay. That's helpful. And just a follow-up on that. Can you provide more detail on the geography of how this is going to impact both the gross margin? Presumably, D&A is going to step up and so it will be -- that will flow through to higher SG&A. And as part of that, how should we think about what this adds to the operational complexity of running a Tractor Supply store either from incremental staffing or the shrink associated with having more expensive space and products that are more subject to obsolescence?

Yes. Thanks, Michael. So what -- I'm going to ask John first to just talk about the operational models and the adjustments we've made in the Side Lot and Fusion stores that we've rolled out. Just to be clear, those are reflected in the numbers that we shared today. But John, maybe you can talk about that. And then, Kurt, you can come back to the broader geography questions.

Sure. Michael, so what we've done is we put together a store productivity team a couple of years ago. And what that team has done is they continue to look at how we can make things more efficient inside the store. We're doing that, we're able to make sure that we have hours out in the side lot for all open hours of store. So we have people out there to do both the feed floor, the curbside, make sure the propane is taken care of and then also to make sure we have that greenhouse staff outside there. So as we continue to look at more efficiency inside the store, we can continue to make sure that we take hours, reinvest it in customer service and continue with those all-time customer service -- all-time high customer service scores we have.

Yes. Thanks, John. And in regards to geography, the -- over a 3- to 5-year period of time, I'll stay rather directional and really hit 3 points. Starting with the gross margin, that is an area that we believe we have growth opportunity when you compare to the previous guide or the base year of 2019 for a number of the things that you heard today. But just to hit a few key points on gross margin, we will continue to focus on our supply chain and our sourcing. There's opportunity to be able to take costs out of that part of the business as well as leveraging the scale that we've got and, from the fast program and from fusion and the productivity, does drive some performance in gross margin, so the opportunities in gross margin. When it comes to the investments, to your point that you pointed out, the burden is principally in the -- from the depreciation from capital. So that's going to hit that SG&A area. And that is offset from very promising, strong, strategic initiatives on profit improvement. So we believe we can mostly offset the SG&A burden and we believe there's opportunity to achieve on the gross margin. All of that plays out to growing the operating margin modestly over this period of time.

All right. Thank you very much. Our next question comes from Karen Short with Barclays.

I wanted to ask a couple of questions just on the side lot opportunity. Could you maybe give a little bit of color on what you think the possible sales per square foot to be on the side lot and then maybe what you're seeing currently and/or what the range is? And then I have one other question.

We are not disclosing at this time kind of the individual pieces of our strategic initiatives. You can expect to hear more from us on that over time. But what I would say is the composition of our new customers and providing the -- kind of retaining them, also our omnichannel efforts, combined with side lot infusion, are reflected in our updated comp guidance. What I would say is we're very pleased with the early results of our -- of the stores that we've implemented the side lot. Seth showed you the Rome, Georgia store today in a video and talked you through it. But we're very pleased with the early results and that's given us the conviction to do between 150 and 200 stores next year and allocate the capital that's required to do that and the incremental capital dollars that we shared with you today. And more to come, but we think there's a big opportunity in garden. As Seth mentioned, it's the #1 category that we are not a destination for, that our customers really participate in and so big opportunity there. In feed, where we have the feed drive-through, we are the largest player in bagged dog feed in the country. And an opportunity for us always is to make that process more efficient for our customers. And I really do think the time that it requires to load up a customer's truck or trailer with feed as they begin their day is -- does drive the difference in people going left or right. So that will make a big difference in our ability to keep gaining share in a market that we're already the #1 player. And we're very excited, bullish and going to be investing into the side lot initiative.

Okay. That's helpful. And then I wanted to just ask about the digitization of the store. So I'm just wondering if you could give a little more color on how many stores are digitized and then how you think that would contribute to, I guess, splitting the assets? Because it seems like that's a little bit more of a newer nuance to the story that you haven't talked about that much in the past.

Yes. Great. So I'm going to ask Seth to do that. And specifically, what you're going to hear from him is teeing up kind of the systems implementations we've done around macro and then the systems implementations we've done around micro that kind of come together through our line review process to deliver kind of more optimal outcomes.

Yes. Thanks, Hal. Yes, so we talked a little bit earlier about some of the systems that we are currently implementing, as Hal mentioned. It's both on a macro and a micro level. We are really starting on the micro level right now as we are going through all of our line review processes, whether that be through our store clustering on each individual category as well as then that being the assortment optimization that comes with that. And our tools that -- the Blue Yonder tool that we've been implementing is space aware, so it's integrated throughout all of our merchandising processes and systems. That really allow us to get smarter, better, more scientific and apply the merchandising art to that as well on each individual micro, call it, planogram space within the store. The next step of that as well is within the software as well as through some projects, will be more the macro store clustering project that we'll be embarking on as well so that we can, again, get better on a local and a regional level and that we can start to tailor space accordingly to what those store clusters look like. Whether that be in opening up new stores or as we go on, on this Project Fusion and side lot journey, those store clusters will -- the macro store clusters will be a big part of that on, call it, what floor plan goes in there. In addition to those two systems, we also have another system where it's the site-level CADs, where every store itself -- we have a significant number of stores that aren't, call it, a prototype, a stand-alone building that can have some nuances in there, could be a little bit larger than the 15,500, that we don't have great visibility to today on how much, call it, flex planogram space might be in a store. We've now got over 500 stores that we have site-level CADs that were out there today where we can now identify what those flex spaces are. Then as you just think about that and apply the space productivity metrics to it, over time, that can be a really good flywheel to drive comp, knowing that there's a big piece of the store base that has that flex space that now we can take and strategically drive planogram and space activity, too.

Okay. Thank you. Next question is from Chuck Grom with Gordon Haskett.

My question is on new customer adoption, 10 million alone, I believe, in the second and third quarter. I'm curious on how that shopper is behaving both on trip frequency and basket size versus a more mature Tractor shopper and how that maturation curve could play out over the next couple of years.

As it relates to new customers, to your point, as we remarked in our opening comments, 10 million new and reacquired customers between Q2 and Q3. And what I'd say is, first off, the pace of new customers really did not slow from Q2 to Q3 kind of the new customer counts that we were seeing on a weekly basis, with the exception of some modest seasonalization between Q2 and Q3, really continued at the same levels, meaning that we were really attracting new customers at the same pace in Q3. Some of that's driven by our continued advertising. But I think a lot of it's driven by just the lifestyle that people embrace in the Out Here Lifestyle and finding Tractor Supply a very relevant shopping destination for them in that lifestyle. And we are laser-focused on retaining those customers. We're doing that through both our marketing efforts with robust CRM activities and digital marketing activities as well as bringing people into our Neighbor's Club, which we continue to increase our number of millions of customers that are members there, but also just in our stores and focusing on what's important to these new customers, delivering that legendary service and staying really focused on it. As I mentioned earlier, the reshop rates with these customers are exceeding the historic rates we have of reshop rates with new customers not only on the second but also third time. And that gives us more confidence in the structural-oriented -- that there's more structural-ness versus transitory in those new customers. John, I know -- I'd let him speak a little bit in terms of having all-time customer SAP scores but also the focus on cleanliness and safety that we've had in our stores to really maybe bring some of that to life.

Yes. So since COVID started, we've really spent a lot of time on cleanliness inside of our stores. We wanted -- we saw it coming. We wanted to make sure we saw some benchmarking out there as well. And what we've done is we've invested in that. We've invested in making sure that we're cleaning top to bottom throughout our stores all the time throughout Monday through Friday and then Saturday and Sunday, on the weekends, when our customers are in our stores. We want to make sure we had a clean environment for them. Bathrooms, everything throughout the store are cleaned. And we've seen that we're over-indexing now compared to other retailers as far as where we're at on cleaning. As far as customer experience goes, I talked a little bit about it earlier today, just customer experience, that high five, the GURA, we rolled out fast. It allowed us to take some of our people that we've hired that are more task-driven and moved them over into a task-driven environment. Now the other team members that we have inside of our stores, what they do is they love to sell. They live that lifestyle. They love talking about that lifestyle. We hire for attitude. We hire farmers, welders, ranchers, horse owners. And then they're inside the store and they're doing what they really love, that GURA selling skills that are out there in our stores. We're also investing in training of them. What that's driven us throughout this year is our GURA scores are up about 90 basis points over where they were last year. Over the last 4 years, they're up about 700 basis points. And then overall satisfaction scores continue to go up as well.

Okay. Thank you.

That's great. So actually, some -- I guess my follow-up would be for Kurt. You spoke to the operating environment until the third quarter of next year may be at a minimum. So I guess if that's the case, I'm curious how you're thinking comps could shake out in 2021 particularly as you begin to cycle some of these big prints from the share.

Yes. Well, I'll share a little bit of information. The -- we're not going to begin to give guidance or any indication on our 2021 plan, but we are beginning to and have been looking at and have multiple scenarios for 2021. We look at and watch closely all of the indications on how the COVID pandemic is playing out. And certainly, an important factor for us is when does this pandemic begin to bring a level of normalcy back to the consumer. And vaccines and therapeutics are going to be key. And so I want to first say that the timing of when vaccines become available to the public, the therapeutic measurements improve, we believe, as most, that there's some level of normalcy that may return back to the consumer spending and the consumer behavior. And it's very hard to tell when. As we try to plan, we plan that, that may be mid- to late 2021. And so in that environment, we feel strong about the first half of the year, the first quarter, certainly. And I think we're planning on and investing and being able to have a strong performance in the second quarter. And then as I indicated, as the chart that I showed indicated as well, that whenever that 1-year period of time to comp, there's some variability in it. We may have some positive growth still, they may be flattish and there's potential for even some downside in those numbers. And so we plan that the first half of the year, there's still a lot of indications for the strength and demand in our business is based on all the macro social distancing and emphasis at home. And then at some point in time, that will begin to fade as there's a level of normalcy that returns. And I think at this point that giving you guys a structure of how we think about it is about the best I can do at this point before we give any 2021 guidance.

The only thing I'll add to Kurt's comments is we are staffing and buying to a Q2 that is dealing with the COVID pandemic. And we know we had elevated volume levels last year. We knew we were -- we were short on inventory in certain programs as we got into the middle of Q2 because we weren't anticipating obviously when we placed our import orders in the November, December time frame for 38% comps. We now know how consumers behave in the midst of the COVID pandemic and we're working both on our -- with our import partners as well as our domestic partners to build inventory levels to meet that demand this coming Q2. And we also are building staffing plans to meet that demand as well.

So great questions as always. [Operator Instructions]. So with that, our next question is from Oliver Wintermantel at Evercore ISI.

Yes. So Kurt, maybe it's for you. It's a question about free cash flow. You mentioned $3.5 billion over the next five years. So I just wanted to see if there's any -- from the cadence, is that more back-end loaded or have investments there an impact? And then on the share buybacks, you mentioned that you're going back into share buybacks. Is there any timing? And the size, is that also flat then over the next few years? Any color into buybacks.

Okay. Yes. Thanks, Oliver. So there's two questions in there, free cash flow over time and then buybacks. I'll hit on the free cash flow. Certainly, as a reminder, the timing of the pandemic can play, bid into it, but in general, we've planned for a rather consistent pattern on the free cash flow over time. The investments maybe shift between years as to when a distribution center is loaded, but $450 million to $550 million investments into the business over time with a very continued strong level of operating cash flow from this business, we believe it will be relatively consistent throughout the period of time. And we think that's a really strong, compelling part of our business. It then leaves us the ability to be able to return cash to our shareholders. And that a really purposeful, important part of the Life Out Here strategy for us is the capital allocation. And our first priority, as we've mentioned, is investing organically in the business with all the things that we've just been talking about. But it is exciting that in that period of time, we estimate or targeting returning $4 billion to our shareholders. The dividends are an important piece of our model. We're targeting to be able to get back to a 30% payout ratio, so there's some strong allocation to dividend. But on the buybacks, we've said in the beginning of the pandemic, we were temporarily pausing that and we did. And it was purposely a planned temporary pause. We do see that as we come out over the last couple of quarters, the business is strong, that share buybacks, as I indicated, are a plan in our capital allocation. So in the next couple of weeks, we'll be talking with our Board about our plans to reengage on the share repurchases and we'll have more information in the near term as to the timing of that.

Okay. We'll move on to our next question, which is from Peter Keith at Piper Sandler, please.

A great quarter. I know it's difficult to execute in this environment, but some really nice numbers today. You guys have a lot of interesting things going on. I was hoping at a high level, you could just talk about your competitive positioning and how these investments you feel might be structurally enhancing your competitive positioning relative to the competition. And maybe interested in how you might prioritize or rank those in order of importance. And then as a follow-on, just in the pet category, it's good to hear you're gaining share. But maybe specifically to pet, what are you doing there to enhance the competitive positioning?

Yes. Peter, thanks for joining us today and appreciate your remarks about our quarter. I'd first start out with we had the opportunity of participating in an incredibly attractive market, $110 billion in size, fragmented, very favorable profitability structure. It's demand-driven, needs-based. And we had the benefit of being a scaled player in that with significant opportunity still ahead of us. As we think about a competitive positioning, we think about it a little bit less about the competitive positioning and more about the customer. And the whole focus is to stay ahead of where the customers' expectations are. And that the entire focus of Life Out Here strategy is to address that lifestyle need, that Out Here Lifestyle need and make sure that our offerings, our capabilities are best-in-class out there and surpassing what the customers' expectations are. And we firmly believe that if we do that, we will gain share in a very attractive market. And we are confident right now across all the categories that we compete in, no matter what the categories in our stores, that we are gaining substantive share. Specifically as it relates to pet, as I said earlier, we are gaining share in pet. We know that when we look at the overall kind of industry-level data and also when we look at our data and when we talk with our customers -- our manufacturers. And what I'll talk with -- and I'll let Seth talk a little bit about kind of marketing and merchandising activity that we have going on there.

Yes. So thanks, Hal. So yes, from the pet space, for example, obviously, we spend a tremendous amount of time analyzing the space, analyzing market trends. From a product assortment standpoint, the team has absolutely done a fantastic job responding to the dynamics of the industry over the course of last year. Actually, in Q3, every single pet consumable category was touched and reset and really had the consumer obviously at the heart of all those resets, going from, they call it, a grain-free assortment north of 40% prior to the August reset, now sub-25% and really leaning into some of those science-based brands, introducing new brands like Victor, partnering with Miranda Lambert MuttNation and getting those type of exclusive partnerships out there that can really engage with our consumer base. But we're also continuing to go after things, like you saw today, like pet wash. We're looking at ways to be that convenient solution and a value-oriented solution for mobile vet clinics, where we have that in over 1,500 stores today. We partnered and have over 20 full-blown wellness clinics now in pilot in some of our stores. And we're talking to some of our partners out there as well on how we can look to incorporate some of that in next year's project -- at some select Project Fusion layouts. And then obviously, a lot of the investments that we're also making in the digital space are really, really going after this consumer, not only being there for their products but try to really build that relationship with them in the digital space and then obviously with John and his team in the stores. So...

Okay. Our next question is from Chris Horvers at JPMorgan.

So I had one question in two parts. First, can you talk about how much of the business that you would classify as truly repeating in nature? I guess some of animal adoption includes crates and beds and that will, per se, repeat next year. So how do you think about true short replacement cycle as a percentage of your mix? At the same time, buying a riding mower is in short cycle and can you give the other side of it, which is what is -- what portion of the mix would you create as sort of a multiyear replacement cycle business? And the second part of the question is you mentioned expecting positive comps in the first half of next year given COVID sticks around and mentioning chasing demand in 2Q '20. Would that suggest that you could potentially lap 2Q with the positive comp?

Yes. Again, thanks for joining us today. As Kurt mentioned in his remarks and also in last quarter's remarks, we see about 50% of our elevated comps being more structural and about half of it being a little bit more transitory. And there's a variety of kind of different ways that we look at it to kind of come to that conclusion, but we feel very good about that. And I'd say, if anything, we're becoming more comfortable on the structural side as the pandemic progresses. To your point, say, on dogs, certainly, you might not buy that crate again. But if you bought a small bed, then you're going to upgrade to a larger bed. Or if you got a small ball for your pet, it's very much an annuity-type business. And then on garden, while certainly we have very strong share in things like riders, there's a lot of opportunity, as Seth shared, for us to gain a broader share in the garden business, whether it's in soils and fertilizers, certainly live goods, outdoor power more broadly. And those are the sorts of categories that you can see us really emphasizing, grilling, you can see us leaning into those. So as we start to cycle some of the bigger-ticket purchases, we're looking for those other categories to really offset that and drive those kind of comp sales in those sorts of businesses. As it relates to Q2, as I said, we're leaning in on it. We're buying for it. We're going to staff for it. And then we'll see how it evolves as we get into next year. There's a lot of uncertainties, as Kurt's laid out, not only the pandemic but how the economy is going to be, what the economic conditions are going to be, unemployment, stimulus, those sorts of things. So we'll -- there's a lot of uncertainty out there, but know that we are leaning into Q2.

Okay. We'll move on to our next question, which is Brian Nagel at Oppenheimer.

Great results. Congratulations. So my question and I'll keep it to one just with respect to Mary Winn's request. It's shorter term in nature, so I apologize. We talked a lot about the potential for -- Kurt, you talked about in your presentation the potential for normalization after COVID. If you look at the results now, clearly, a historically strong comp in second quarter and that's -- I'm sorry, third quarter, I apologize, very strong comp in the second quarter. The guidance for Q4 does assume some kind of moderation. I'm assuming there's likely conservatism in that. But the question I have is, are you starting to see -- even with COVID still there, are you starting to see some indication that your consumer is beginning to normalize in their buying patterns? Is that a factor behind whatever is in the report?

Do you want to take it?

Yes, I'll take it. What I would say is our business has been remarkably consistent. And we've seen no trailing off of consumer behavior at all. And in fact, we're seeing right now simultaneous strength in even some extended spring goods and summer goods, say, like riders as well as strength in more seasonal goods like patio heaters, log splitters, chain saws and outerwear as people are starting to think about the winter and as the fall and winter season approaches. And they're really approaching it with the same mentality as they approached spring. And in fact, we're seeing a little bit more of even of some stock-up behavior, where I think those who were last in line, so to speak, in the spring and summer, they didn't -- they weren't able to get the patio furniture. They weren't able to get that pool put in. They weren't able to do some of the things that they wanted to do to their backyard. And they're not going to miss out on that here as they go into the fall and into the winter time. So our comps month-by-month in Q3 were very consistent. Our comps across geographies, very consistent. Our comps across categories, very consistent. We're seeing that continue into Q4 here. And we're seeing the same level of behavior from our customers as we saw in the previous two quarters, with the exception of it just moderating based on the types of categories that are in season right now.

All right. Keep moving down our questions. Let's see, we'll go to Scott Ciccarelli at RBC.

So I guess I have another follow-up question on the side lots since that seems to be the initiative that you guys are expecting to have the biggest impact on your business. Can you tell us what percent of sales today comes from the side lot? And just related to that, is your expectation that your sales maybe reaches your in-store levels? Or would you expect that, given the nature of those side lots, to continue to lag what you generate in the store?

Yes. Scott, this is Kurt. In the side lot, I think the important thing to remember is that the side lot today, you've walked it, it's productive. It has a portion of it that you'd view as storage for that large, bulky agricultural-type equipment. And so some of that product outside, is inside other areas, we don't get specific to the productivity of the side lot pre or post on this initiative in there. What we see is a great opportunity for that product itself to be able to sell at or at a greater pace in the modified reduced space for the ag equipment and then reallocate that space to create that environment that's a shopping -- an actual pleasant shopping experience, a convenient shopping experience, leverage it even for the drive-through aspect of the business to capitalize on convenience. And so it's -- one, it's very early, so it's hard for us to go and say here's what it would -- the productivity is going to be like. But it's also more of a holistic store productivity view for us. And that's how we encourage you to look at it as the convenience that it drives and the new categories that Seth talked about. And what you see in our projections of the stepped-up comps in a normal post-COVID is a primary indicator as you work the number of stores that we roll this out, you can see the level between fusion and side lot and what that's going to be doing to drive productivity in our existing space today. And we will certainly have more opportunity to share as these first rounds of stores really begin over the next 6, 9 months to show us some true trends in that business. But you certainly can see the excitement of what it does holistically for the store.

Okay. Next up on our Q&A is Matt McClintock with Raymond James.

So my question is what are some of the buckets that you have the flexibility to spend on. Should significant upside remain to your current plan? And I asked this because it seems like you're pretty flexible or nimble on marketing spend the last few quarters and how simply that helps with new customer acquisition.

Yes. Matt, I'm going to turn it over to Rob here in just a minute to talk a little about technology. And I think that's one of the areas that we've really shown a significant amount of flexibility this year. As you mentioned in other areas also in marketing, as soon as the pandemic kicked in, we transitioned from a dominantly kind of more traditional print-based marketing plan to a digital and television-based marketing plan as we thought that there was going to -- the consumer is going to be right to kind of open their aperture on consideration of what retailers to shop. And certainly, the new customers that we've seen have proven that hypothesis to be true. I think Seth demonstrated a lot of agility and flexibility in digital. I'll turn to Rob to maybe talk a little bit about some of the things we've done but, importantly, a lot of the things that we have on the horizon.

Great. So as Hal mentioned, yes, a lot of flexibility and agility built into IT, which is not uncommon, but this year was a great example where we really leaned in and focusing on what that flexibility and agility would look like especially in the digital space. We started this year with a clear road map of improving that customer experience online, really striving to be that best-in-class, world-class omni-channel provider. And with that, earlier and within COVID, it was obvious that our customer was adopting very quickly to digital, coming to the website, but also looking for convenience. And this is where the partnership with John's team of implementing curbside pickup very rapidly, expanding our capabilities of delivering to the customer's home very rapidly across the entire store base. And then looking even in the future, we really have 3 core pillars. One is how do we continue to build that flexibility around finding the product, the navigation, search that will improve the quality of the traffic coming to the website as well as just making it a simpler and easier shopping experience for the customer. The second is really around that convenience factor leveraging curbside but delivering the product to the customer much more faster and efficiently with the goal of 90% of our deliveries occurring same day or within near the same day. And then lastly, really leveraging on that expertise that I've talked about earlier, providing that -- the content, the video, that know-how-to expertise for our customers, that they come to us more. We're clearly trusted with our customer base and how do we bring that through the mobile device and at all times. You've seen throughout this year, we've changed our deployment strategy from the technology, really focused on agility where we're doing online twice a month, sometimes more frequent, new capabilities that's impacting the stores as well as within the digital space. So really excited about the technology advancements that we're making. We have flexibility to scale up through partners as well as our internal team members and aligning it to our short-term and long-term goals.

All right. Thanks so much, Matt. We'll move on to our next question that comes from Daniel Imbro with Stephens.

I'll add my congrats to the list. Maybe a follow-up to the last answer on digital investments, how are you guys thinking about the new mobile app? Obviously, engagement looks like it's growing nicely, but is it more of a transactional tool or a research tool for your customers? And while it's only been a few months, can you maybe talk about how you're working to ensure it's truly incremental to sales and not just a channel shift?

Right. Do you want me to take it?

Yes.

All right. Thanks a lot. So mobile is a key part of our strategy. It has been for several years. Our customers clearly told us mobile first is very important. We have shared in the past that majority of our site, our traffic comes through a mobile device and that's not changing. We accelerated this year the mobile device -- or the mobile application and closed it by 6 to 9 months. And originally out of the gate, it was to provide some basic selling tools and ensure that we can provide a customer transaction and the ability to pick up within store, but we're very rapidly building on those capabilities related to convenience. And with that is also focusing on the content. So it's a little bit of both. You're going to see us clearly, we want a simple, convenient shopping experience for that customer. But at the same time, we want to always be with them. They come into our stores looking for that product expertise, that service knowledge. That's a differentiator for Tractor. You've heard us talk about how we hire our customers. We want that mobile device to always be with them, that mobile app always available. So if they have questions while they're on their property or questions about their animal or health or wellness being, how are we always there to ask and answer those questions, some through automation, some through ask the experts, so live interaction; and then also at the same time have the products available both in stores as well as at extended assortment, so they can transact. We see both the sales coming from, in some cases, a shift; in other cases, being incremental and that's what we've seen so far. We're really pleased with the adoption. We have extreme focus and I'm really excited about what's going to be coming in the next couple of quarters with additional capabilities focusing on content and that convenience play.

Thanks, Rob. I hope everybody has downloaded the Tractor Supply app. For every download up to 1 million, we're donating $1 to the American Connection Project Broadband Coalition. And as you know, that's a real need in our rural communities, so thank you all for taking the time to download the app. Our next question comes from Brad Thomas at KeyBanc.

Congrats on the great results. I want to circle back on a question of trying to model 2021 and I recognize you're not ready to give guidance and none of us know how the top line is going to play out next year. But I was hoping we could just talk about some expense buckets that maybe we know about at this point. As I'm counting it, the wage increases roll into next year, presumably some of the COVID expenses roll into next year. You've now disclosed $12 million to $15 million of strategic growth investments in the fourth quarter. Kurt, are those now expected to roll through next year? And are there any other items that we should be thinking about that you can call out this time as we think about some of the margin or expense puts and takes for next year?

Yes. Brad, that's good question. And so let me give you some of the directional information as you think about 2021. In regards to COVID, very similar to how it's framed up, how we're looking at 2021, potentially, you would anticipate, we anticipate that the expenses that we've incurred in COVID would continue but yet would likely fade as you move out of a COVID pandemic into a bit of normalcy. On the COVID expenses, the vast majority of that is labor and supplies focused on safety, cleaning, sanitation, as John talked about. And then there's -- the lesser extent would be medical and sick-related costs and contact tracing, case management. And so you can see how as we transition out of a COVID pandemic, that those costs could dissipate in there as well. Yes, the permanent wage benefits, we would model that into 2021. On the strategic growth initiatives, the strategy that we just laid out, the primary cost would be in the capital spend and would start to introduce into the depreciation. On the strategic initiatives that we're pointing out today, like in third quarter and even in fourth quarter, the most significant factor was the rollout of the FAST Program, which we said we would do hiring, training, all of that and we would incur that initial burden of the ramp-up of it. And some of that incurs and it's a primary factor in fourth quarter as well. Third quarter was the next largest piece of the strategic growth initiatives we're advertising. And as Hal mentioned, that's something we may flex in or out as we anticipate. So as we talk about strategic growth initiatives in Q3 and Q4, those are something specific to the back half of the year. And going forward, it's more specific items to these strategic initiatives and may not be at those same levels and likely to be, on a quarterly basis, a level that's lesser than the $12 million to $15 million on a per-quarter basis in 2021.

You want to say something about incentive compensation, Kurt, because that's a big swing.

Yes. I mean certainly, incentive compensation, as you model that out, I mean, with the performance in 2021, there's record-level performance and super excited to be able to provide our team members a record level of incentive compensation. And we've talked often, the frontline team members, those in the stores, distribution centers, getting a real strong portion of that incentive compensation. But as we lap that next year, the way that our incentive plans are built, that's actually a leverage point for us in 2021.

All right. Thank you, Kurt. We'll go to Seth Sigman with Crédit Suisse now.

I'll add my congrats as well. I want to follow up on that last question. As we're hopefully trying to figure out if demand remains elevated here, should we be thinking about the flow-through next year in '21 being more or less favorable than this past year? And so you clearly have been spending already. Some of that may continue, but you'll also start to lap some of that, you'll lap the incentive comp, but then you'll also have some incremental investments coming in. So just to summarize, like how would we be thinking about the flow-through more or less favorable than what we've seen recently? And then also, if you can speak specifically about the gross margin, Kurt, because you also noted some incremental pressures hitting the fourth quarter and Tractor is clearly not alone in that. But are you expecting those headwinds to continue? And how do you feel about the offsets to that, things that helped this past year like less promotional activity and all the effectiveness with discounting, would those serve as offsets next year?

Okay. Yes, Seth, I think I heard two questions in there. One was a little bit of guidance and I'll stay very directional on 2021 and the flow-through. And then there was a gross margin question on Q4 and maybe a little bit on 2021. Directionally, I would guide towards staying somewhat consistent on the flow-through in 2021 principally because what you've seen and what we've seen in this environment today, with the step-up of demand that the COVID pandemic creates for all the things we talked about, the cost of doing business is also elevated. And as the demand for the product may shift as you move out of a peak COVID, so does some of the expenses that goes with it. So I'd stay somewhere in the range that you've seen in 2020, albeit 2020 is going to have a high level of flow-through. And we'll give more guidance on that on our fourth quarter call. In regards to gross -- in the gross margin, there are some specific things as I called out the fourth quarter. And so the past 2 quarters had tremendous gross margin growth year-over-year on the rate. And fourth quarter last year, we began to see some of our benefits play out and we had our strongest gross margin performance and we'll cycle that. And there are some things that are transitory to the fourth quarter specific to it. How long some of the newer pressures in the transportation business sticks may impact 2021. And then particularly to the fourth quarter, as I pointed out, that's typically just generally a more promotional-type environment with the holiday season. So we anticipate some of the benefit of less promotional in Q2, Q3 puts pressure on the fourth quarter to be able to maintain that. Looking out to 2021, I would just emphasize we will continue to focus on everyday low pricing benefit there and not necessarily going back to a heavier promotional. So we do anticipate focusing on maintaining as much of the gross margin rate benefit that we've seen of late go forward.

Thank you, Kurt. So we let it go just a little bit longer than our 1-hour mark for Q&A, but we'll wrap up with one final question. That question comes from the line of Joe Feldman with TAG.

Again, I'll offer congratulations on the quarter and a good event. So I wanted to wrap up with which categories do you think you see the most opportunity for, from the analytics and technology that you're talking about and Project Fusion, not just product categories but space within the stores. As I'm thinking about it, I'm just trying to think like is apparel your biggest opportunity, where there's most upside? Or what are those kind of categories we should look for? And then if I could kind of tie this together with another question on pets was -- and I apologize if I missed it, but I don't think I heard the word Petsense at all today and I'm just wondering what you're thinking about that.

Yes. So I'll take the Petsense piece and then I'll turn it to Seth. And Seth, maybe you can walk through kind of the merchandising category portfolio strategy and kind of the 6 kind of must-wins that your team is focused on.

Yes, absolutely.

Yes. So Petsense, the business is doing very well. It's -- it too is benefiting from kind of the strength in pet adoption and pet humanization. The management team is doing well. We feel really good about the business. It is continuing to grow. It's reasonably immaterial to the overall Tractor Supply portfolio and size and scale. And kind of more to come, I guess, on Petsense, but the Petsense business is doing very well. We're really pleased with it. Seth, I'll turn it over to you to maybe talk a little bit about our category strategies and where we're really focusing.

Yes, absolutely. So yes, we talked a little bit earlier about some of the category strategies that we're going after. And over the course of -- it actually -- it was -- really started this process even, call it, pre-COVID and then just continued to assess the opportunity as we've gone throughout this COVID environment. And there's really five fundamental areas that we're focused in on. First and foremost, we are going to win at pet and animal. We think we still have a significant opportunity to not only maintain our market-leading status in things like large animal feed that Hal talked about earlier but also continue to gain share there as well, really not only going with our product assortment in stores but some of the convenience play, the digital piece, delivery, et cetera. Pet is the other piece of that as well. Our customers love their animals. They love pet. We look at that and we know we have the ability to continue not only win with new customers but win with that share of wallet. And so we're -- our goal there is, first and foremost, win in pet and animal. The second piece to that is going to be in how do we become that authority in lawn and garden out here. We've talked a lot about that today as we look at our exterior space as well as just some of those categories that we're going to go after. And you'll -- and what we've seen so far just in the limit of obviously early in the garden center test. But it's not only as we've gone after the garden center to see that product sell, we've seen the product sell obviously throughout all the seasonal department that's inside as well as some of those…

Great. Well, that's going to be our final question. I want to thank everyone who took the time to call in today. As always, those were some great questions. I also wanted to take a minute to thank the Tractor Supply IR and PR team who worked so tirelessly behind the scenes on this event. Marianne Denenberg, Mackenzie Goldman and Lindsey Mitchell, I appreciate all your efforts. And thanks to all of you for taking time out of your day to join us virtually. We look forward to speaking to you again on our fourth quarter 2020 call in late January. Take care and please stay safe.