Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the three-year period ended December 31, 2016 (our fiscal years 2016, 2015 and 2014). This discussion should be read in conjunction with our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this report. This discussion contains forward-looking statements. See “Forward-Looking Statements” and “Risk Factors” included elsewhere in this report.

Overview

Founded in 1938, Tractor Supply Company is the largest operator of rural lifestyle retail stores in the United States. The Company is focused on supplying the needs of recreational farmers and ranchers and others who enjoy the rural lifestyle (which we refer to as the “Out Here” lifestyle), as well as tradesmen and small businesses. As of December 31, 2016, we operated 1,738 retail stores in 49 states under the names Tractor Supply Company, Del’s Feed & Farm Supply and Petsense. We also operate websites under the names TractorSupply.com and Petsense.com. Our stores are located primarily in towns outlying major metropolitan markets and in rural communities, and they offer the following comprehensive selection of merchandise:

•	Equine, livestock, pet and small animal products, including items necessary for their health, care, growth and containment;

•	Hardware, truck, towing and tool products;

•	Seasonal products, including heating, lawn and garden items, power equipment, gifts and toys;

•	Work/recreational clothing and footwear; and

•	Maintenance products for agricultural and rural use.

Our current and long-term growth strategy is to: (1) expand domestic geographic market presence through opening new retail stores, (2) enhance financial performance through comparable store sales growth achieved through targeted merchandising and marketing programs with an “everyday value price” philosophy supported by strong customer service, (3) enhance product margin through strategic product sourcing, inventory and markdown management, a strong exclusive brand offering, and optimization of product pricing and transportation costs, (4) leverage operating costs by focusing on opportunities for continuous improvement and elimination of waste in all of our processes, (5) expand market opportunities via omni-channel enhancements, tying together our website product content, social media, digital and online shopping experience, and (6) expand through selective acquisitions, as such opportunities arise, to add complementary businesses and to enhance penetration into new and existing markets to supplement organic growth.

Over the past five years, we have experienced considerable growth in stores, growing from 1,085 stores at the end of 2011 to 1,738 stores (1,595 Tractor Supply and Del’s retail stores and 143 Petsense retail stores) at the end of fiscal 2016, and in sales, with a compounded annual growth rate of approximately 9.9%. Given the size of the communities that we target, we believe that there is ample opportunity for new store growth in existing and new markets. We have developed a proven method for selecting store sites and have identified approximately 900 additional opportunities for new Tractor Supply stores. We also believe that there is opportunity for up to 1,000 Petsense stores.

Executive Summary

In 2016, we opened 113 new Tractor Supply stores in 37 states and began operating 143 Petsense stores in 26 states, as compared to 114 new Tractor Supply stores in 2015, resulting in a selling square footage increase of approximately 10.8% in fiscal 2016 and approximately 8.0% in fiscal 2015.

Net sales increased 8.9% to $6.78 billion in fiscal 2016 from $6.23 billion in fiscal 2015. Comparable store sales increased 1.6% in fiscal 2016 versus a 3.1% increase in fiscal 2015. Gross profit increased 8.5% to $2.33 billion in fiscal 2016 from $2.14 billion in fiscal 2015, and gross margin decreased 10 basis points to 34.3% of net sales in fiscal 2016 from 34.4% of net sales in fiscal 2015. Operating income decreased 20 basis points to 10.2% of net sales in fiscal 2016 from 10.4% of net sales in fiscal 2015. In fiscal 2016, diluted earnings per share grew 9.0% to $3.27 compared to $3.00 in fiscal 2015.

We ended the year with $53.9 million in cash and outstanding debt of $275.0 million, after returning $454.0 million to our stockholders through stock repurchases and dividends.

Index

Significant Accounting Policies and Estimates

Management’s discussion and analysis of our financial position and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make informed estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Our financial position and/or results of operations may be materially different when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Our significant accounting policies are disclosed in Note 1 to our Consolidated Financial Statements. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.

Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Inventory Valuation:
Inventory Impairment
We identify potentially excess and slow-moving inventory by evaluating turn rates, historical and expected future sales trends, age of merchandise, overall inventory levels, current cost of inventory and other benchmarks. We have established an inventory valuation reserve to recognize the estimated impairment in value (i.e., an inability to realize the full carrying value) based on our aggregate assessment of these valuation indicators under prevailing market conditions and current merchandising strategies.		We do not believe our merchandise inventories are subject to significant risk of obsolescence in the near term. However, changes in market conditions or consumer purchasing patterns could result in the need for additional reserves. Our impairment reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding forecasted customer demand and the promotional environment.		We have not made any material changes in the accounting methodology used to recognize inventory impairment reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate impairment. However, if assumptions regarding consumer demand or clearance potential for certain products are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our impairment reserve as of December 31, 2016, would have affected net income by approximately $0.5 million in fiscal 2016.

Index

Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Shrinkage
We perform physical inventories at least once a year for each store that has been open more than 12 months, and we have established a reserve for estimating inventory shrinkage between physical inventory counts. The reserve is established by assessing the chain-wide average shrinkage experience rate, applied to the related periods’ sales volumes. Such assessments are updated on a regular basis for the most recent individual store experiences.		The estimated store inventory shrink rate is based on historical experience. We believe historical rates are a reasonably accurate reflection of future trends. Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding future shrinkage trends, the effect of loss prevention measures and new merchandising strategies.		We have not made any material changes in the accounting methodology used to recognize shrinkage in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our shrinkage reserve. However, if our estimates regarding inventory losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our shrinkage reserve as of December 31, 2016, would have affected net income by approximately $1.4 million in fiscal 2016.
Vendor Funding
We receive funding from substantially all of our significant merchandise vendors, in support of our business initiatives, through a variety of programs and arrangements, including vendor support funds (“vendor support”) and volume-based rebate funds (“volume rebates”). The amounts received are subject to terms of vendor agreements, most of which are “evergreen”, reflecting the on-going relationship with our significant merchandise vendors. Certain of our agreements, primarily volume rebates, are renegotiated annually, based on expected annual purchases of the vendor’s product. Vendor funding is initially deferred as a reduction of the purchase price of inventory and then recognized as a reduction of cost of merchandise as the related inventory is sold. During interim periods, the amount of volume rebates is estimated based upon initial commitments and anticipated purchase levels with applicable vendors.		The estimated purchase volume (and related vendor funding) is based on our current knowledge of inventory levels, sales trends and expected customer demand, as well as planned new store openings and relocations. Although we believe we can reasonably estimate purchase volume and related volume rebates at interim periods, it is possible that actual year-end results could be different from previously estimated amounts. Our allocation methodology contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding customer demand, purchasing activity, target thresholds, vendor attrition and collectability.		We have not made any material changes in the accounting methodology used to establish our vendor funding reserves in the financial periods presented. At the end of each fiscal year, a significant portion of the actual purchase activity is known. Thus, we do not believe there is a reasonable likelihood that there will be a material change in the amounts recorded as vendor funding. We do not believe there is a significant collectability risk related to vendor funding amounts due to us at the end of fiscal 2016. If a 10% reserve had been applied against our outstanding vendor funding due as of December 31, 2016, net income would have been affected by approximately $1.3 million in fiscal 2016. Although it is unlikely that there will be any significant reduction in historical levels of vendor funding, if such a reduction were to occur in future periods, the Company could experience a higher inventory balance and higher cost of sales.
Freight
We incur various types of transportation and delivery costs in connection with inventory purchases and distribution. Such costs are included as a component of the overall cost of inventories (on an aggregate basis) and recognized as a component of cost of merchandise sold as the related inventory is sold.		We allocate freight as a component of total cost of sales without regard to inventory mix or unique freight burden of certain categories. This assumption has been consistently applied for all years presented.		We have not made any material changes in the accounting methodology used to establish our capitalized freight balance or freight allocation in the financial periods presented. If a 10% increase or decrease had been applied against our current inventory capitalized freight balance as of December 31, 2016, net income would have been affected by approximately $6.9 million in fiscal 2016.

Index

Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Self-Insurance Reserves:
We self-insure a significant portion of our employee medical insurance, workers’ compensation and general liability insurance plans. We have stop-loss insurance policies to protect from individual losses over specified dollar values. Provisions for losses related to our self-insured liabilities are based upon periodic independent actuarially determined estimates that consider a number of factors including historical claims experience, demographic factors and severity factors.		The full extent of certain claims, especially workers’ compensation and general liability claims, may not become fully determined for several years. Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date based upon historical data and experience, including actuarial calculations.		We have not made any material changes in the accounting methodology used to establish our self-insurance reserves in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate insurance reserves. However, if we experience a significant increase in the number of claims or the cost associated with these claims, we may be exposed to losses that could be material. A 10% change in our self-insurance reserves as of December 31, 2016, would have affected net income by approximately $3.5 million in fiscal 2016.
Sales Tax Audit Reserve:
A portion of our sales are to tax-exempt customers, predominantly agricultural-based. We obtain exemption information as a necessary part of each tax-exempt transaction. Many of the states in which we conduct business will perform audits to verify our compliance with applicable sales tax laws. The business activities of our customers and the intended use of the unique products sold by us create a challenging and complex compliance environment. These circumstances also create some risk that we could be challenged as to the accuracy of our sales tax compliance. When establishing our sales tax audit reserve, we review our past audit experience and assessments with applicable states to continually determine if we have potential exposure for non-compliance. Any estimated liability is based on an initial assessment of compliance risk as well as our historical experience with each respective state.		We continually reassess the exposure based on historical audit results, changes in policies, preliminary and final assessments made by state sales tax auditors, and additional documentation that may be provided to reduce the assessment. Our sales tax audit reserve contains uncertainties because management is required to make assumptions and to apply judgment regarding the complexity of agricultural-based exemptions, the ambiguity in state tax regulations, the number of ongoing audits and the length of time required to settle with the state taxing authorities.		We have not made any material changes to our sales tax audit assessment methodology in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate the sales tax liability reserve. However, if our estimates regarding the ultimate sales tax liability are inaccurate, we may be exposed to losses or gains that could be material. A 10% change in our sales tax audit reserve as of December 31, 2016, would have affected net income by approximately $0.7 million in fiscal 2016.

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Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Tax Contingencies:
Our income tax returns are periodically audited by United States federal and state tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record a liability for uncertain tax positions taken or expected to be taken in a tax return. A number of years may elapse before a particular matter, for which we have established a reserve, is audited and fully resolved or clarified. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differs from our established reserve, the statute of limitations expires for the relevant tax authority to examine the tax position or when more information becomes available.		Our tax contingencies reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions and whether or not the minimum requirements for recognition of tax benefits have been met.		We have not made any material changes in the accounting methodology used to establish our tax contingencies in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the reserves established for tax benefits not recognized. Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution. A 10% change in our uncertain tax position reserve as of December 31, 2016 would have affected net income by approximately $0.1 million in fiscal 2016.

Index

Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Impairment of Long-Lived Assets:
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). The evaluation for long-lived assets is performed at the lowest level of identifiable cash flows, which is generally the individual store level. The significant assumptions used to determine estimated undiscounted cash flows include cash inflows and outflows directly resulting from the use of those assets in operations, including margin on net sales, payroll and related items, occupancy costs, insurance allocations and other costs to operate a store. If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on an estimated future cash flow model. We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining estimated useful life of that asset.		Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.		We have not made any material changes in our impairment loss assessment methodology in the financial periods presented. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. None of these estimates and assumptions are significantly sensitive, and a 10% change in any of these estimates would not have a material impact on our analysis. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

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Description		Judgments and Uncertainties		Effect if Actual Results Differ From Assumptions
Impairment of Goodwill and Other Indefinite-Lived Intangible Assets:
Goodwill and other indefinite-lived intangible assets are evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In accordance with the accounting standards, an entity has the option first to assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that goodwill or an indefinite-lived intangible asset is impaired. If after such assessment an entity concludes that the asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the asset using a quantitative impairment test, and if impaired, the associated assets must be written down to fair value. The quantitative test for goodwill impairment is a two-step process. The first step of the goodwill impairment test, used to identify the potential for impairment, compares the fair value of a reporting unit with the carrying value of its net assets, including goodwill. If the fair value of the reporting unit is less than the carrying value of the reporting unit, the second step of the goodwill impairment test is performed to measure the amount of impairment loss to be recorded, if any. The second step, if required, would compare the implied fair value of goodwill with the current carrying amount of goodwill. If the implied fair value of goodwill is less than the carrying value, an impairment charge would be recorded to the Company’s operations. We determine fair values for each reporting unit using the market approach, when available and appropriate, or the income approach, or a combination of both. If multiple valuation methodologies are used, the results are weighted appropriately. The quantitative impairment test for other indefinite-lived intangible assets involves comparing the carrying amount of the asset to the sum of the discounted cash flows expected to be generated by the asset. If the implied fair value of the indefinite-lived intangible asset is less than the carrying value, an impairment charge would be recorded to the Company’s operations.		Our impairment loss calculation contains uncertainties because they require management to make assumptions and to apply judgment to qualitative factors as well as estimate future cash flows and asset fair values, including forecasting prospective financial information and selecting the discount rate that reflects the risk inherent in future cash flows.		We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate indefinite-lived asset impairment losses. None of these estimates and assumptions are significantly sensitive, and a 10% change in any of these estimates would not have a material impact on our analysis. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.

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Quarterly Financial Data

Our unaudited quarterly operating results for each fiscal quarter of 2016 and 2015 are shown below (in thousands, except per share amounts):

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
2016 (a)		(13 weeks)				(13 weeks)				(13 weeks)				(14 weeks)				(53 weeks)
Net sales		$	1,467,797			$	1,852,534			$	1,542,706			$	1,916,542			$	6,779,579
Gross profit		494,444				649,222				535,274				646,262				2,325,202
Operating income		108,195				249,249				142,020				194,616				694,080
Net income		67,668				156,425				89,444				123,583				437,120
Net income per share:
Basic		$	0.51			$	1.17			$	0.67			$	0.94			$	3.29
Diluted		$	0.50			$	1.16			$	0.67			$	0.94			$	3.27
Comparable store sales increase (decrease) (b)		4.9		%		(0.5		)%		(0.6		)%		3.1		%		1.6		%

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
2015		(13 weeks)				(13 weeks)				(13 weeks)				(13 weeks)				(52 weeks)
Net sales		$	1,331,352			$	1,772,900			$	1,475,645			$	1,646,610			$	6,226,507
Gross profit		444,605				625,320				512,248				561,001				2,143,174
Operating income		92,847				245,165				139,208				173,288				650,508
Net income		58,040				153,331				87,312				111,712				410,395
Net income per share:
Basic		$	0.43			$	1.13			$	0.64			$	0.83			$	3.03
Diluted		$	0.42			$	1.12			$	0.64			$	0.82			$	3.00
Comparable store sales increase (decrease) (b)		5.7		%		5.6		%		2.9		%		(1.4		)%		3.1		%

(a) Beginning in the fourth quarter ended December 31, 2016, selected financial and operating information includes the consolidation of Petsense, unless otherwise noted.

(b) Comparable store metrics are calculated using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Closed stores are removed from our comparable store metrics calculations. Stores relocated during the periods being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Petsense stores are not considered comparable stores until 12 months after the date of acquisition.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our Consolidated Statements of Income expressed as a percentage of net sales.

	2016			2015			2014
Net sales	100.0	%		100.0	%		100.0	%
Cost of merchandise sold (a)	65.7			65.6			65.9
Gross margin (a)	34.3			34.4			34.1
Selling, general and administrative expenses(a)	22.0			22.0			21.8
Depreciation and amortization	2.1			2.0			2.0
Operating income	10.2			10.4			10.3
Interest expense, net	0.1			—			—
Income before income taxes	10.1			10.4			10.3
Income tax provision	3.7			3.8			3.8
Net income	6.4	%		6.6	%		6.5	%

(a) Our gross margin amounts may not be comparable to those of other retailers since some retailers include all of the costs related to their distribution network in cost of merchandise sold and others (like our Company) exclude a portion of these distribution network costs from gross margin and instead include them in selling, general and administrative expenses; refer to Note 1 – Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8 Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Index

Fiscal 2016 Compared to Fiscal 2015

Net sales increased 8.9% to $6.78 billion in fiscal 2016 from $6.23 billion in fiscal 2015. The fourth quarter included an extra sales week as a part of the Company’s 53-week calendar in 2016, which represented 1.6% of the overall 8.9% sales increase over prior year. Comparable store sales for fiscal 2016 were $6.41 billion, a 1.6% increase over fiscal 2015. This compares to a 3.1% comparable store sales increase in the prior year. The comparable store transaction count increased 2.6%, while comparable store average ticket decreased 0.9% for fiscal 2016.

Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Stores closed during the year are removed from our comparable store metrics calculations. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations. Petsense stores are not considered comparable stores until 12 months after the date of acquisition.

The comparable store sales increase was driven by an increase in traffic counts and the year-round strength of consumable, usable, and edible ("C.U.E.") products, principally animal- and pet-related merchandise. Livestock equipment and hardline products such as fencing and trailers also performed well throughout the year. The full year sales performance was negatively impacted by unpredictable weather patterns during the spring selling season and unseasonably warm weather in the key cold months of the year which drove softness in cold weather seasonal categories and big ticket items such as log splitters and stoves. Additionally, the Company believes that economic conditions in the energy producing markets negatively impacted consumer spending primarily in the Midwest and South Central regions.

In addition to comparable store sales growth in fiscal 2016, sales from stores opened less than one year, including Petsense, were $378.9 million in fiscal 2016, which represented 6.1 percentage points of the 8.9% increase over fiscal 2015 net sales. Sales from stores opened less than one year were $351.0 million in fiscal 2015, which represented 6.1 percentage points of the 9.0% increase over fiscal 2014 net sales.

The following chart summarizes our store growth during fiscal 2016 and 2015:

Tractor Supply	2016			2015
Store count, beginning of period	1,488			1,382
New stores opened	113			114
Stores closed	(6	)		(8	)
Store count, end of period	1,595			1,488
Petsense
Beginning of period	—			—
Stores acquired	136			—
New stores opened	8			—
Stores closed	(1	)		—
End of period	143			—
Consolidated end of period	1,738			1,488
Stores relocated	3			6

Index

The following chart indicates the percentage of net sales represented by each of our major product categories during fiscal 2016 and 2015:

	Percent of Net Sales
Product Category:	2016			2015
Livestock and Pet	46	%		44	%
Hardware, Tools, Truck and Towing	22			23
Seasonal, Gift and Toy Products	19			20
Clothing and Footwear	8			8
Agriculture	5			5
Total	100	%		100	%

Gross profit increased 8.5% to $2.33 billion in fiscal 2016 compared to $2.14 billion in fiscal 2015. As a percent of net sales, gross margin decreased 10 basis points to 34.3% for fiscal 2016 compared to 34.4% for fiscal 2015. This decrease in gross margin percentage principally reflects a higher mix of C.U.E. products, which generally carry below chain average gross margin, partially offset by benefits from our key margin driving initiatives. Freight expense as a percent of net sales experienced a marginal increase in fiscal 2016 as compared to the prior year due principally to an increase in inbound miles and domestic transportation costs, partially offset by lower diesel fuel prices and import container costs.

Selling, general and administrative (“SG&A”) expenses, including depreciation and amortization, as a percent of net sales increased 10 basis points to 24.1% in fiscal 2016 from 24.0% in fiscal 2015. SG&A expenses as a percent of net sales increased due to incremental costs associated with our new distribution facilities that began operations in late fiscal 2015, as well as acquisition and operating expenses associated with the Petsense purchase. These increases were partially offset by leverage of occupancy costs, as well as lower year-over-year incentive compensation expense. Total SG&A expenses, including depreciation and amortization, for fiscal 2016 increased 9.3% to $1.63 billion from $1.49 billion in fiscal 2015. The increase in SG&A expenses primarily reflects new store growth, incremental costs from operating the new distribution facilities, variable costs associated with our comparable store sales growth and the extra sales week during the year and incremental expenses associated with the Petsense acquisition and its operations.

Our effective tax rate decreased to 36.5% for fiscal 2016 compared to 36.6% in fiscal 2015. The decrease in the effective income tax rate was due principally to the availability of federal and state tax incentives.

As a result of the foregoing factors, net income for fiscal 2016 increased 6.5% to $437.1 million, or $3.27 per diluted share, as compared to net income of $410.4 million, or $3.00 per diluted share, in fiscal 2015.

During fiscal 2016, we repurchased approximately 4.4 million shares of the Company’s common stock at a total cost of $331.7 million as part of our $3 billion share repurchase program. In fiscal 2015, we repurchased approximately 3.4 million shares at a total cost of $292.7 million.

Fiscal 2015 Compared to Fiscal 2014

Net sales increased 9.0% to $6.23 billion in fiscal 2015 from $5.71 billion in fiscal 2014. Comparable store sales for fiscal 2015 were $5.89 billion, a 3.1% increase over fiscal 2014. This compares to a 3.8% comparable store sales increase in the prior year. The comparable store transaction count increased 3.3%, while comparable store average ticket decreased 0.2% for fiscal 2015.

Comparable store metrics are calculated on an annual basis using sales generated from all stores open at least one year and all online sales, excluding certain adjustments to net sales. Beginning in fiscal 2015, stores closed during the year are removed from our comparable store metrics calculations. This change in the calculation methodology did not have a material impact on the comparable store metrics reported in prior periods due to the minimal number of stores closed in those periods. Stores relocated during the years being compared are not removed from our comparable store metrics. If the effect of relocated stores on our comparable store metrics becomes material, we would remove relocated stores from the calculations.

The comparable store sales increase was driven by an increase in traffic counts and the year-round strength of C.U.E. products, principally animal- and pet-related merchandise. Hardline products such as fencing, trailers and towing also performed well throughout the year. The full year sales performance was negatively impacted by fourth quarter weakness in the key cold weather seasonal categories of heating (stoves and fuel) and insulated outerwear along with softness in seasonal big ticket items such as snow blowers, log splitters and generators.

Index

In addition to comparable store sales growth in fiscal 2015, sales from stores opened less than one year were $351.0 million in fiscal 2015, which represented 6.1 percentage points of the 9.0% increase over fiscal 2014 net sales. Sales from stores opened less than one year were $353.4 million in fiscal 2014, which represented 6.8 percentage points of the 10.6% increase over fiscal 2013 net sales.

The following chart summarizes our store growth during fiscal 2015 and 2014:

	2015			2014
Store Count, Beginning of Period	1,382			1,276
New Stores Opened	114			107
Stores Closed	(8	)		(1	)
Store Count, End of Period	1,488			1,382
Stores Relocated	6			2

The following chart indicates the percentage of net sales represented by each of our major product categories during fiscal 2015 and 2014:

	Percent of Net Sales
Product Category:	2015			2014
Livestock and Pet	44	%		44	%
Hardware, Tools, Truck and Towing	23			22
Seasonal, Gift and Toy Products	20			20
Clothing and Footwear	8			9
Agriculture	5			5
Total	100	%		100	%

Gross profit increased 9.9% to $2.14 billion in fiscal 2015 compared to $1.95 billion in fiscal 2014. As a percent of net sales, gross margin increased 30 basis points to 34.4% for fiscal 2015 compared to 34.1% for fiscal 2014. This increase in gross margin principally reflects improved direct product margin. Direct product margin increased as a result of strong execution on our four strategic margin initiatives which include inventory and markdown management, strategic sourcing, exclusive branding and retail price management.

As a percent of net sales, SG&A expenses, including depreciation and amortization, increased 20 basis points to 24.0% in fiscal 2015 from 23.8% in fiscal 2014. This increase in SG&A expense as a percent of net sales was mainly related to deleverage in rent and other occupancy costs at the stores and incremental costs associated with our two new mixing centers and our new distribution facility in Casa Grande, Arizona. Total SG&A expenses, including depreciation and amortization, for fiscal 2015 increased 9.7% to $1.49 billion from $1.36 billion in fiscal 2014. The increase in SG&A expense primarily reflects new store growth and variable costs associated with our comparable store sales growth.

Our effective tax rate decreased to 36.6% for fiscal 2015 compared to 36.9% in fiscal 2014 predominantly as a result of the reversal of various reserves for uncertain tax positions.

As a result of the foregoing factors, net income for fiscal 2015 increased 10.7% to $410.4 million, or $3.00 per diluted share, as compared to net income of $370.9 million, or $2.66 per diluted share, in fiscal 2014.

During fiscal 2015, we repurchased approximately 3.4 million shares of the Company’s common stock at a total cost of $292.7 million as part of our share repurchase program. In fiscal 2014, we repurchased approximately 4.7 million shares at a total cost of $298.5 million.

Liquidity and Capital Resources

In addition to normal operating expenses, our primary ongoing cash requirements are for new store expansion, remodeling and relocation programs, distribution facilities capacity and improvements, information technology, inventory purchases, share repurchases, cash dividends and selective acquisitions as opportunities arise. Our primary ongoing sources of liquidity are existing

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cash balances, cash provided from operations, funds available under our senior credit facility (as discussed in Note 5 to the Consolidated Financial Statements), capital and operating leases and normal trade credit. Our inventory and accounts payable levels typically build in the first and third fiscal quarters to support the higher sales volume of the spring and cold-weather selling seasons, respectively.

Working Capital

At December 31, 2016, the Company had working capital of $740.6 million, which decreased $27.6 million from December 26, 2015. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

	2016 (a)				2015 (a)				Variance
Current assets:
Cash and cash equivalents	$	53.9			$	63.8			$	(9.9	)
Inventories	1,369.7				1,284.4				85.3
Prepaid expenses and other current assets	90.6				87.5				3.1
Income taxes receivable	3.6				3.8				(0.2		)
Total current assets	1,517.8				1,439.5				78.3
Current liabilities:
Accounts payable	519.5				427.2				92.3
Accrued employee compensation	25.2				42.7				(17.5		)
Other accrued expenses	215.7				195.0				20.7
Current portion of long-term debt	10.0				—				10.0
Current portion of capital lease obligation	1.3				0.9				0.4
Income taxes payable	5.5				5.5				—
Total current liabilities	777.2				671.3				105.9
Working capital	$	740.6			$	768.2			$	(27.6	)

(a) Working capital for 2016 and 2015 reflects deferred tax assets as non-current as a result of the adoption of ASU 2015-17 in 2016 (which is discussed in Note 15 to the Consolidated Financial Statements).

In comparison to December 26, 2015, working capital as of December 31, 2016 was impacted most significantly by changes in our inventory and accounts payable.

•

The increase in inventory resulted from the purchase of additional inventory to support new store growth as well as the acquisition of Petsense. We actively manage our inventory balances and in-stock levels at our stores. Average inventory per store decreased year-over-year principally due to an improvement in inventory turns of seasonal and cold-weather merchandise at the end of fiscal 2016 compared to fiscal 2015.

•	Accounts payable increased primarily as a result of new store growth along with timing of payments to vendors.

•	The decrease in accrued employee compensation is due to lower year-over-year incentive compensation and the timing of payroll accruals.

•	The increase in other accrued expenses is a result of Company growth and the timing of payments.

•	The current portion of long-term debt relates to the term loan which was entered into in fiscal 2016.

Borrowings and Senior Credit Facility

On February 19, 2016, the Company entered into a senior credit facility (the “2016 Senior Credit Facility”) consisting of a $200 million term loan and a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans). This agreement is unsecured and matures on February 19, 2021.

During the period of October 24, 2011 through February 19, 2016, the Company was party to a senior credit facility (the “2011 Senior Credit Facility”), which provided for borrowings up to $400 million (with a sublimit of $30 million for swingline loans) as of December 26, 2015.

2016 Senior Credit Facility

The 2016 Senior Credit Facility contains a $200 million term loan which requires quarterly payments totaling $10 million per year in years one and two and $20 million per year in years three through five, with the remaining balance due in full on the maturity

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date of February 19, 2021. The 2016 Senior Credit Facility also contains a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans).

As of December 31, 2016, the Company had outstanding total borrowings of $275.0 million under the 2016 Senior Credit Facility consisting of $190.0 million in borrowings under the term loan and $85.0 million in borrowings under the revolving credit facility. Unamortized debt issuance costs recorded as an offset to the outstanding borrowings were approximately $1.1 million at December 31, 2016. Additionally, there were $44.3 million of outstanding letters of credit under the 2016 Senior Credit Facility as of December 31, 2016.

Borrowings under both the term loan and the revolver bear interest at either the bank’s base rate (3.750% at December 31, 2016) or the London Inter-Bank Offer Rate (“LIBOR”) (0.772% at December 31, 2016) plus an additional amount ranging from 0.500% to 1.125% per annum (0.625% at December 31, 2016), adjusted quarterly based on our leverage ratio. The Company is also required to pay, quarterly in arrears, a commitment fee for unused capacity ranging from 0.075% to 0.200% per annum (0.100% at December 31, 2016), adjusted quarterly based on the Company’s leverage ratio.

Proceeds from the 2016 Senior Credit Facility may be used for working capital, capital expenditures, dividends, share repurchases, and other matters. There are no compensating balance requirements associated with the 2016 Senior Credit Facility.

The 2016 Senior Credit Facility requires quarterly compliance with respect to two material covenants: a fixed charge coverage ratio and a leverage ratio. Both ratios are calculated on a trailing twelve-month basis at the end of each fiscal quarter. The fixed charge coverage ratio compares earnings before interest, taxes, depreciation, amortization, share-based compensation and rent expense (“consolidated EBITDAR”) to the sum of interest paid and rental expense (excluding any straight-line rent adjustments). The fixed charge coverage ratio shall be greater than or equal to 2.00 as of the last day of each fiscal quarter. The leverage ratio compares rental expense (excluding any straight-line rent adjustments) multiplied by a factor of six plus total debt to consolidated EBITDAR. The leverage ratio shall be less than or equal to 4.00 as of the last day of each fiscal quarter. The 2016 Senior Credit Facility also contains certain other restrictions regarding additional indebtedness, capital expenditures, business operations, guarantees, investments, mergers, consolidations and sales of assets, transactions with subsidiaries or affiliates, and liens. As of December 31, 2016, the Company was in compliance with all debt covenants.

2011 Senior Credit Facility

Under the 2011 Senior Credit Facility, the Company had outstanding borrowings of $150.0 million as of December 26, 2015. In addition, there were $48.7 million of outstanding letters of credit under the 2011 Senior Credit Facility as of December 26, 2015.

Interest Rate Swap

On March 28, 2016, the Company entered into an interest rate swap agreement which became effective on March 31, 2016 with a maturity date of February 19, 2021. The interest rate swap was executed for risk management and is not held for trading purposes. The objective of the interest rate swap is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap is intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. The notional amount of the interest rate swap began at $197.5 million (the principal amount of the term loan borrowings as of March 31, 2016) and will amortize at the same time and in the same amount as the term loan borrowings as described in Note 5 to the Consolidated Financial Statements. As of December 31, 2016, the notional amount of the interest rate swap was $190.0 million. The interest rate swap entitles the Company to receive, at specified intervals, a variable rate of interest based on LIBOR in exchange for the payment of a fixed rate of interest throughout the life of the agreement without exchange of the underlying notional amount.

Sources and Uses of Cash

Our primary source of liquidity is cash provided by operations and funds available under our senior credit facility (as discussed in Note 5 to the Consolidated Financial Statements). Principal uses of cash for investing activities are capital expenditures, while principal uses of cash for financing activities are repurchase of the Company’s common stock, cash dividends paid to stockholders and selective acquisitions as opportunities arise.

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The following table presents a summary of cash flows provided by or used in operating, investing and financing activities for the last three fiscal years (in millions):

	2016				2015				2014
Net cash provided by operating activities	$	639.0			$	429.2			$	409.2
Net cash used in investing activities	(369.2		)		(235.9		)		(160.3		)
Net cash used in financing activities	(279.7		)		(180.6		)		(340.5		)
Net (decrease) increase in cash and cash equivalents	$	(9.9	)		$	12.7			$	(91.6	)

Operating Activities

Operating activities provided net cash of $639.0 million, $429.2 million and $409.2 million in fiscal 2016, 2015 and 2014, respectively. The $209.8 million increase in net cash provided by operating activities in fiscal 2016 compared to fiscal 2015 was primarily due to changes in the following (in millions):

	2016				2015				Variance
Net income	$	437.1			$	410.4			$	26.7
Depreciation and amortization	143.0				123.6				19.4
Share-based compensation expense	23.6				19.4				4.2
Excess tax benefit of stock options exercised	(11.7		)		(27.0		)		15.3
Deferred income taxes	10.0				(5.5		)		15.5
Inventories and accounts payable	14.8				(112.5		)		127.3
Prepaid expenses and other current assets	1.8				(21.1		)		22.9
Accrued expenses	2.1				16.9				(14.8		)
Income taxes	11.8				16.3				(4.5		)
Other, net	6.5				8.7				(2.2		)
Net cash provided by operating activities	$	639.0			$	429.2			$	209.8

The $209.8 million increase in net cash provided by operating activities in fiscal 2016 compared with fiscal 2015 primarily reflects incremental profitability and the impact of effective management of inventory and accounts payable levels. Average inventory per store decreased year-over-year principally due to an improvement in inventory turns of seasonal and cold-weather merchandise at the end of fiscal 2016 compared to fiscal 2015. Additionally, the timing of payments to vendors more closely aligned with receipt of inventory at the end of fiscal 2016 in comparison with the end of fiscal 2015, resulting in an improvement in cash flow year-over-year.

The $20.0 million increase in net cash provided by operating activities in fiscal 2015 over fiscal 2014 was primarily due to changes in the following (in millions):

	2015				2014				Variance
Net income	$	410.4			$	370.9			$	39.5
Depreciation and amortization	123.6				114.6				9.0
Stock compensation expense	19.4				16.2				3.2
Excess tax benefit of stock options exercised	(27.0		)		(18.8		)		(8.2		)
Deferred income taxes	(5.5		)		(19.8		)		14.3
Inventories and accounts payable	(112.5		)		(81.8		)		(30.7		)
Prepaid expenses and other current assets	(21.1		)		(9.1		)		(12.0		)
Accrued expenses	16.9				6.8				10.1
Income taxes payable	16.3				21.9				(5.6		)
Other, net	8.7				8.3				0.4
Net cash provided by operating activities	$	429.2			$	409.2			$	20.0

The $20.0 million increase in net cash provided by operating activities in fiscal 2015 compared with fiscal 2014 primarily reflects earnings growth, the favorable impact from the timing of deferred taxes partially offset by a net increase in inventories and accounts payable. Inventory increased due to store growth, the carry-over of cold-weather merchandise, additional investment in C.U.E.

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products and the timing of spring seasonal receipts while accounts payable grew at a lower rate due mainly to the timing of payments.

Investing Activities

Investing activities used cash of $369.3 million, $235.9 million and $160.3 million in fiscal 2016, 2015 and 2014, respectively. The changes in cash used for investing activities primarily reflects the acquisition of Petsense and changes in capital expenditures. Capital expenditures for fiscal 2016, 2015 and 2014 were as follows (in millions):

	2016				2015				2014
New and relocated stores and stores not yet opened	$	111.2			$	96.7			$	80.8
Existing stores	53.1				23.1				20.0
Information technology	40.5				35.8				22.7
Distribution center capacity and improvements	21.0				80.2				9.2
Corporate and other	0.2				0.7				27.9
Total capital expenditures	$	226.0			$	236.5			$	160.6

The above table reflects 113 new Tractor Supply stores and three relocations, as well as eight new Petsense stores during fiscal 2016, 114 new stores and six relocations during fiscal 2015 and 107 new stores and two relocations during fiscal 2014. The increase in spending on existing stores in fiscal 2016 primarily reflects an investment in the chain-wide LED lighting retrofit, which will be completed in fiscal 2017. The sustained increase in spending on information technology represents continued support of our store growth and our omni-channel platform as well as improvements in security and compliance, enhancements to our customer relationship management and other strategic initiatives. Spending for distribution center capacity and improvements increased substantially in fiscal 2015 as a result of the construction of two mixing centers in Texas and the southwest distribution center in Casa Grande, Arizona, all of which began operations in fiscal 2015. Lastly, the construction of our Store Support Center in Brentwood, Tennessee, resulted in higher costs in fiscal 2014 for corporate and other spending.

We currently estimate that capital expenditures in fiscal 2017 will range between $270 million and $290 million.

•	We plan to open approximately 100 Tractor Supply stores and 25 to 30 Petsense stores in fiscal 2017.

•	We will to continue to invest in our ongoing sustainability efforts to retrofit our stores with LED lighting, a chain-wide initiative which began in fiscal 2016 and will be completed in fiscal 2017.

•	We also plan to invest in the initial development of a new northeast distribution center, expansion of our distribution center in Waverly, Nebraska, and an investment to improve our warehouse management system.

•	Additionally, we will continue to enhance our digital and omni-channel capabilities.

Financing Activities

Financing activities used cash of $279.7 million, $180.6 million, and $340.5 million in fiscal 2016, 2015 and 2014, respectively. The net cash used in financing activities in fiscal 2016 was mainly the result of repurchases of common stock and quarterly cash dividends paid to stockholders, partially offset by net borrowings under the senior credit facility, net proceeds from issuance of common stock related to share-based compensation and excess tax benefits recognized on stock options exercised.

The increase in net cash used in financing activities in fiscal 2016 compared to fiscal 2015 is largely due to incremental share repurchases of common stock and quarterly cash dividends paid to stockholders, as well as a year-over-year decrease in net borrowings under the senior credit facility and a reduced excess tax benefit recognized on stock options exercised. The decrease in net cash used in financing activities in fiscal 2015 compared to fiscal 2014 is largely due to $150 million of net borrowings under the senior credit facility.

The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program. On October 31, 2016, the Board of Directors authorized a $1 billion increase to the existing share repurchase program, bringing the total amount authorized to $3 billion, exclusive of any fees, commissions, or other expenses related to such repurchases and extended the program through December 31, 2020. The repurchases may be made from time to time on the open market or in privately negotiated transactions. The timing and amount of any shares repurchased under the program will depend on a variety of factors, including price, corporate and regulatory requirements, capital availability, and other market conditions. Repurchased shares are accounted for at cost and will be held in treasury for future issuance. The program may be limited or terminated at any time, without prior notice.

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We repurchased approximately 4.4 million, 3.4 million and 4.7 million shares of common stock under the share repurchase program at a total cost of $331.7 million, $292.7 million and $298.5 million in fiscal 2016, 2015 and 2014, respectively. As of December 31, 2016, we had remaining authorization under the share repurchase program of $1.2 billion, exclusive of any fees, commissions, or other expenses.

In the second quarter of fiscal 2016, we increased our quarterly dividend from $0.20 per share to $0.24 per share and, in the second quarter of fiscal 2015, we increased our quarterly dividend from $0.16 per share to $0.20 per share. We paid dividends totaling $122.3 million, $103.1 million and $84.1 million in fiscal 2016, 2015 and 2014, respectively.

We believe that our existing cash balances, expected cash flow from future operations, funds available under our senior credit facility, operating and capital leases and normal trade credit will be sufficient to fund our operations and our capital expenditure needs, including new store openings, store acquisitions, relocations and renovations and distribution facility capacity through the end of fiscal 2017.

Significant Contractual Obligations and Commercial Commitments

The following table reflects our future obligations and commitments as of December 31, 2016 (in thousands):

		Payment Due by Period
		Total				2017				2018-2019				2020-2021				Thereafter
Operating leases		$	2,533,254			$	299,463			$	573,812			$	500,611			$	1,159,368
Capital leases(a)		39,898				2,936				5,872				5,872				25,218
Senior credit facility		275,000				10,000				35,000				230,000				—
		$	2,848,152			$	312,399			$	614,684			$	736,483			$	1,184,586

(a) Capital lease obligations include related interest.

At December 31, 2016, there were $44.3 million outstanding letters of credit under the 2016 Senior Credit Facility.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements are limited to operating leases and outstanding letters of credit. The balances for these arrangements are previously discussed. We typically lease buildings for retail stores rather than acquiring these assets through purchases. Letters of credit allow us to purchase inventory, primarily sourced overseas, in a timely manner and support certain risk management programs.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which implemented a one-year deferral of ASU 2014-09. As a result of the deferral, the amendments in ASU 2014-09 are effective for reporting periods beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which further clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which further clarifies the aspects of (a) identifying performance obligations and (b) the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which provides implementation guidance in regards to (a) assessing the collectability criterion, (b) the presentation of taxes collected from customers, (c) noncash consideration, (d) contract modification at transition, (e) completed contracts at transition and (f) other technical corrections. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to clarify the codification and to

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correct unintended application of guidance pertaining to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as the effective date and transition requirements of ASU 2014-09. Entities that transition to these standards may either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the updates with an adjustment to retained earnings at the date of adoption. The Company anticipates adopting this guidance in the first quarter of fiscal 2018. Based on an evaluation of the standard as a whole, the Company has identified customer incentives and principal versus agent considerations as the areas that will most likely be affected by the new revenue recognition guidance. The Company continues to evaluate the adoption of this standard, including the transition method; however, adoption is not expected to have a material impact on our Consolidated Financial Statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This update requires that debt issuance costs related to a recognized debt liability be presented in the consolidated balance sheet as a direct reduction from the carrying amount of that debt liability. ASU 2015-03 requires retrospective application and is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted this guidance in the first quarter of fiscal 2016. The adoption of this guidance affected the presentation of debt issuance costs in our Consolidated Balance Sheet but did not have any other material impacts on our Consolidated Financial Statements and related disclosures.

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory.” This update requires an entity that determines the cost of inventory by methods other than last-in, first-out and the retail inventory method to measure inventory at the lower of cost and net realizable value. ASU 2015-11 requires prospective application and is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” This update simplifies the accounting for measurement-period adjustments by eliminating the requirement to retrospectively account for such adjustments. The amendments in ASU 2016-15 require an entity to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The entity must also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The entity must present, separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 requires prospective application and is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance in fiscal 2016. It had no impact on our Consolidated financial statements and related disclosures in fiscal 2016.

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This update requires that deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2016. The Company elected to apply this guidance retrospectively for all periods presented. The adoption of this guidance affected the presentation of the deferred tax liabilities and assets within the Company’s Consolidated Balance Sheet and related disclosures; however, the updated guidance did not affect the accounting for deferred tax liabilities and assets. Other than the change in presentation, the adoption of this guidance did not have any material impact on our Consolidated Financial Statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This update requires a dual approach for lessee accounting under which a lessee will account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability on its balance sheet, with differing methodology for income statement recognition. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The Company is currently assessing the impact that adoption of this guidance will have on its Consolidated Financial Statements and related disclosures.

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In March 2016, the FASB issued ASU 2016-04, “Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products.” This update requires that liabilities related to the sale of prepaid stored-value products (gift cards) be adjusted periodically to reflect breakage. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The guidance can be applied using either a modified retrospective transition method or retrospectively to each period presented. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The update addresses several aspects of the accounting for share-based compensation transactions including: (a) income tax consequences when awards vest or are settled, (b) classification of awards as either equity or liabilities, (c) a policy election to account for forfeitures as they occur rather than on an estimated basis and (d) classification of excess tax impacts on the statement of cash flows. The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. The Company will adopt this guidance in the first quarter of fiscal 2017. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement will be applied prospectively. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the awards are exercised or settled. The Company does not expect the impact to be material to the consolidated results of operations taken as a whole; however, such determination is subject to change based on facts and circumstances at the time when awards vest or settle. The Company will elect to continue estimating forfeitures of share-based awards. The Company will elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using a retrospective transition method, and as a result, excess tax benefits related to share-based awards which are currently classified as cash flows from financing activities will be reclassified as cash flows from operating activities.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This update clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by U.S. GAAP and thereby reduces the current and potential future diversity in practice. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The guidance should be applied using a retrospective transition method to each period presented. The Company does not expect that the adoption of this guidance will have a material impact on our Consolidated Financial Statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This update simplifies the measurement of goodwill by eliminating the second step from the goodwill impairment test, which requires the comparison of the implied fair value of goodwill with the current carrying amount of goodwill. Instead, under the amendments in this guidance, an entity shall perform a goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount and an impairment charge is to be recorded for the amount, if any, in which the carrying value exceeds the reporting unit’s fair value. This guidance should be applied prospectively and is effective for public business entities that are United States Securities and Exchange Commission filers for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017.

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