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 30, 2017 (our fiscal years 2017, 2016 and 2015). 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.

Tractor Supply reports its financial results in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Tractor Supply also uses certain non-GAAP measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior reported results. Non-GAAP measures do not have standardized definitions and are not defined by U.S. GAAP. Therefore, Tractor Supply’s non-GAAP measures are unlikely to be comparable to similar measures presented by other companies. The presentation of these non-GAAP measures should not be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with U.S. GAAP.

Overview

Founded in 1938, Tractor Supply Company is the largest operator of rural lifestyle retail stores in the United States (“U.S.”). 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 30, 2017, we operated 1,853 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.

Tractor Supply believes we can grow our business by being the most dependable supplier of relevant products and services for the “Out Here” lifestyle, creating customer loyalty through personalized experiences and providing convenience that our customers expect at anytime, anywhere, and in any way they choose. Our long-term growth strategy is to: (1) drive profitable growth through new store openings and by expanding omni-channel capabilities, thus tying together our website product content, social media, digital and online shopping experience, attracting new customers and driving loyalty, (2) build customer-centric engagement by leveraging analytics to deliver legendary customer service, seasoned advice and personalized experiences, (3) offer relevant assortments and services across all channels through exclusive and national brands and continue to introduce new products through our test and learn strategy, (4) enhance our core and foundational capabilities by investing in infrastructure and process improvements which will support growth, scale and agility while improving the customer experience, and (5) 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.

Achieving this strategy will require a foundational focus on: (1) organizing, optimizing and empowering our team members for growth by developing skills, talent and leadership across the organization, and (2) implementing operational efficiency initiatives to align our cost structure to support new business capabilities for margin improvement and cost reductions.

Over the past five years, we have experienced considerable growth in stores, growing from 1,176 stores at the end of 2012 to 1,853 stores (1,685 Tractor Supply and Del’s retail stores and 168 Petsense retail stores) at the end of fiscal 2017, and in sales, with a compounded annual growth rate of approximately 9.2%. 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 800 additional opportunities for new Tractor Supply stores. We also believe that there is opportunity for up to 1,000 Petsense stores.

Executive Summary

In 2017, we opened 101 new Tractor Supply stores in 39 states and 25 new Petsense stores in 11 states. In 2016, we opened 113 new Tractor Supply stores and began operating 143 Petsense stores. This resulted in a selling square footage increase of approximately 6.3% in fiscal 2017 and approximately 10.8% in fiscal 2016.

Index

Net sales increased 7.0% to $7.26 billion in fiscal 2017 (52 weeks) from $6.78 billion in fiscal 2016 (53 weeks). Comparable store sales increased 2.7% in fiscal 2017 versus a 1.6% increase in fiscal 2016. Gross profit increased 7.2% to $2.49 billion in fiscal 2017 from $2.33 billion in fiscal 2016, and gross margin remained flat to prior year at 34.3% as a percentage of net sales. Operating income decreased 80 basis points to 9.4% of net sales in fiscal 2017 from 10.2% of net sales in fiscal 2016. For fiscal 2017, net income was $422.6 million, or $3.30 per diluted share, compared to $437.1 million, or $3.27 per diluted share, in fiscal 2016. Excluding the impact of the revaluation of the Company’s net deferred tax asset resulting in a one-time, non-cash charge of approximately $4.9 million, or $0.03 per diluted share, adjusted net income for fiscal 2017 was $427.5 million, or $3.33 per diluted share.

We ended the year with $109.1 million in cash and outstanding debt of $426.1 million, after returning $503.2 million to our stockholders through stock repurchases and quarterly cash dividends.

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 U.S. GAAP. 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 30, 2017, would have affected net income by approximately $0.5 million in fiscal 2017.

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 30, 2017, would have affected net income by approximately $1.7 million in fiscal 2017.
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 vendor support and 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 2017. If a 10% reserve had been applied against our outstanding vendor funding due as of December 30, 2017, net income would have been affected by approximately $1.4 million in fiscal 2017. 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 30, 2017, net income would have been affected by approximately $7.8 million in fiscal 2017.

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 insurance and general liability (including product 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 30, 2017, would have affected net income by approximately $3.6 million in fiscal 2017.
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 tax 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 30, 2017, would have affected net income by approximately $0.9 million in fiscal 2017.

Index

Description		Judgments and Uncertainties		Effect if Actual Results Differ from Assumptions
Tax Contingencies:
Our income tax returns are periodically audited by U.S. 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. The effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits.		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 30, 2017, would have affected net income by approximately $0.1 million in fiscal 2017.

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.		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.

Index

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 impairment test for goodwill 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, an impairment charge would be recorded to the Company’s operations, for the amount, if any, in which the carrying amount exceeds the reporting unit’s fair value. 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.		The valuation approaches utilized to estimate fair value for the purposes of the impairment tests of goodwill and other indefinite-lived intangible assets require the use of assumptions and estimates, which involve a degree of uncertainty. 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 non-cash impairment losses that could be material.

Index

Quarterly Financial Data

Our unaudited quarterly operating results for each fiscal quarter of 2017 and 2016 are shown below (in thousands, except per share amounts):

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
2017		(13 weeks)				(13 weeks)				(13 weeks)				(13 weeks)				(52 weeks)
Net sales		$	1,564,078			$	2,017,762			$	1,721,704			$	1,952,838			$	7,256,382
Gross profit		518,203				704,708				600,456				668,598				2,491,965
Operating income		96,362				257,925				148,253				183,842				686,382
Net income		60,311				160,649				91,896				109,743				422,599
Net income per share:
Basic		$	0.46			$	1.25			$	0.73			$	0.87			$	3.31
Diluted		$	0.46			$	1.25			$	0.72			$	0.87			$	3.30
Comparable store sales (decrease) increase (a)		(2.2		)%		2.2		%		6.6		%		4.0		%		2.7		%

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Total
2016 (b)		(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) (a)		4.9		%		(0.5		)%		(0.6		)%		3.1		%		1.6		%

(a) 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. Acquired Petsense stores are considered comparable stores beginning in the fourth quarter of fiscal 2017.

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

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.

	2017			2016			2015
Net sales	100.0	%		100.0	%		100.0	%
Cost of merchandise sold (a)	65.7			65.7			65.6
Gross margin (a)	34.3			34.3			34.4
Selling, general and administrative expenses (a)	22.6			22.0			22.0
Depreciation and amortization	2.3			2.1			2.0
Operating income	9.4			10.2			10.4
Interest expense, net	0.2			0.1			—
Income before income taxes	9.2			10.1			10.4
Income tax provision	3.4			3.7			3.8
Net income	5.8	%		6.4	%		6.6	%

(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 2017 Compared to Fiscal 2016

Net sales increased 7.0% to $7.26 billion in fiscal 2017 from $6.78 billion in fiscal 2016. The prior year included an extra sales week as a part of the Company’s 53-week calendar in 2016, which negatively impacted the overall sales increase by approximately 1.6 percentage points. Comparable store sales for fiscal 2017 were $6.85 billion, a 2.7% increase over fiscal 2016. This compares to a 1.6% comparable store sales increase in the prior year. The comparable store transaction count increased 2.2% and comparable store average ticket increased 0.5% for fiscal 2017.

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. Acquired Petsense stores are considered comparable beginning in the fourth quarter of fiscal 2017.

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, primarily animal- and pet-related merchandise. Warmer than normal weather patterns early in the first quarter negatively impacted the sales of winter seasonal items and winter storms in March had an unfavorable impact on the start to the spring selling season. Beginning in the second quarter, we experienced broad-based improvement through the remainder of the year in all geographic regions and major product categories driven by strength in sales of everyday basic items in C.U.E. and year-round products. The third quarter experienced an additional benefit from an extended spring and summer selling season and strong sales of emergency response products related to hurricanes during the quarter while the fourth quarter experienced an additional benefit from solid sales in cold weather and other seasonal products.

In addition to comparable store sales growth in fiscal 2017, sales from stores opened less than one year, including Petsense, were $405.0 million in fiscal 2017, which represented 6.0 percentage points of the 7.0% increase over fiscal 2016 net sales. 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.

The following table summarizes our store growth during fiscal 2017 and 2016:

Tractor Supply	2017			2016
Store count, beginning of period	1,595			1,488
New stores opened	101			113
Stores closed	(11	)		(6	)
Store count, end of period	1,685			1,595
Petsense
Beginning of period	143			—
Stores acquired	—			136
New stores opened	25			8
Stores closed	—			(1	)
End of period	168			143
Consolidated end of period	1,853			1,738
Stores relocated	3			3

Index

The following table indicates the percentage of net sales represented by each of our major product categories during fiscal 2017 and 2016:

	Percent of Net Sales
Product Category:	2017			2016
Livestock and Pet	47	%		46	%
Hardware, Tools and Truck	22			22
Seasonal, Gift and Toy Products	19			19
Clothing and Footwear	8			8
Agriculture	4			5
Total	100	%		100	%

Gross profit increased 7.2% to $2.49 billion in fiscal 2017 compared to $2.33 billion in fiscal 2016. As a percent of net sales, gross margin remained flat to prior year at 34.3%. Gross margin percentage was negatively impacted by higher markdowns on cold weather merchandise and targeted promotional activity in the first quarter, as well as a higher freight expense throughout the year due to higher carrier costs, increased average fuel costs and a shift in product mix towards more freight intensive products. These declines in gross margin were offset by strong sell-through rates and solid price and inventory management, particularly in the back half of the year.

Total selling, general and administrative (“SG&A”) expenses, including depreciation and amortization, for fiscal 2017 increased 10.7% to $1.81 billion from $1.63 billion in fiscal 2016. SG&A expenses, as a percent of net sales, increased 80 basis points to 24.9% in fiscal 2017 from 24.1% in fiscal 2016. The increase in SG&A as a percent of net sales was primarily attributable to higher store payroll from wage inflation and our continued effort to enhance customer service, increased incentive compensation at the store level from the strong year-over-year growth in comparable store sales, the deleverage of occupancy and other fixed costs resulting from the integration of Petsense expenses and the 53rd week of sales in fiscal 2016 that did not reoccur in fiscal 2017, and investments in infrastructure and technology to support our strategic long-term growth initiatives.

Our effective tax rate increased to 37.2% for fiscal 2017 compared to 36.5% in fiscal 2016. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Act”). The Act makes broad and complex changes to the U.S. tax code including, but not limited to, a reduction of the federal income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. We have made a reasonable estimate of the effects of the Act on our existing deferred tax balances as of December 30, 2017, and recognized a provisional amount of $4.9 million, which is included as a component of income tax expense from continuing operations. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances in future periods. Excluding the impacts of the Act, our effective income tax rate in 2017 would have been 36.4%.

For fiscal 2017, net income was $422.6 million, or $3.30 per diluted share, compared to $437.1 million, or $3.27 per diluted share, in fiscal 2016. Excluding the impact of the revaluation of the Company’s net deferred tax asset resulting in a one-time, non-cash charge of approximately $4.9 million, or $0.03 per diluted share, adjusted net income for fiscal 2017 was $427.5 million, or $3.33 per diluted share. Adjusted net income is a non-GAAP measure which has been provided in order to enhance comparability for the periods presented.

During fiscal 2017, we repurchased approximately 5.9 million shares of the Company’s common stock at a total cost of $369.4 million as part of our $3 billion share repurchase program. In fiscal 2016, we repurchased approximately 4.4 million shares at a total cost of $331.7 million.

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 percentage points 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

Index

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 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 table 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

The following table 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 and Truck	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.

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

Index

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 from the 53rd week of sales in fiscal 2016, 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 2018 Outlook

Our guidance for fiscal 2018 anticipates net sales of $7.69 billion to $7.77 billion, reflecting a comparable store sales increase of 2.0% to 3.0% as well as the opening of approximately 80 Tractor Supply stores and 20 Petsense stores. At the mid-point of our guidance range, we anticipate that operating profit as a percentage of net sales will decrease from 9.4% in fiscal 2017 to 8.8% in fiscal 2018. Included in this estimate are anticipated cost pressures associated with rising diesel fuel prices and transportation costs, wage investments for our team members in our stores and distribution centers, investments to support our growth strategy, and incremental pre-opening and other operating expenses from our new distribution center which is currently under construction in Frankfort, New York. Lastly, as a result of the Act reducing the statutory federal income tax rate from 35% to 21%, our effective tax rate in fiscal 2018 is expected to range from 23.0% to 23.5%. As a result of the foregoing factors, we estimate net income for fiscal 2018 of $490 million to $515 million, or $3.95 to $4.15 per diluted share.

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 facility capacity and improvements, information technology, inventory purchases, repayment of

existing borrowings under our debt facilities, share repurchases, cash dividends and selective acquisitions as opportunities arise.

Our primary ongoing sources of liquidity are existing cash balances, cash provided from operations, remaining funds available under our debt facilities, 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.

We believe that our existing cash balances, expected cash flow from future operations, funds available under our debt facilities, 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 2018.

Index

Working Capital

At December 30, 2017, the Company had working capital of $806.2 million, which increased $65.6 million from December 31, 2016. The shifts in working capital were attributable to changes in the following components of current assets and current liabilities (in millions):

	2017				2016				Variance
Current assets:
Cash and cash equivalents	$	109.1			$	53.9			$	55.2
Inventories	1,453.2				1,369.7				83.5
Prepaid expenses and other current assets	88.3				90.6				(2.3		)
Income taxes receivable	4.8				3.6				1.2
Total current assets	1,655.4				1,517.8				137.6
Current liabilities:
Accounts payable	576.6				519.5				57.1
Accrued employee compensation	31.6				25.2				6.4
Other accrued expenses	201.7				215.7				(14.0		)
Current portion of long-term debt	25.0				10.0				15.0
Current portion of capital lease obligation	3.5				1.3				2.2
Income taxes payable	10.8				5.5				5.3
Total current liabilities	849.2				777.2				72.0
Working capital	$	806.2			$	740.6			$	65.6

In comparison to December 31, 2016, working capital as of December 30, 2017 was impacted most significantly by changes in our cash, inventory and accounts payable.

•	The cash balance increased primarily due to strong inventory turns at the end of fiscal 2017 stemming from the sale of cold weather seasonal merchandise.

•	The increase in inventory resulted from the purchase of additional inventory to support new store growth. We actively manage our inventory balances and in-stock levels at our stores. Average inventory per store decreased slightly year-over-year principally due to an improvement in inventory turns of seasonal and cold-weather merchandise at the end of fiscal 2017 as compared to fiscal 2016.

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

Debt

The following table summarizes the Company’s outstanding debt as of the dates indicated (in millions):

		December 30, 2017				December 31, 2016
Senior Notes		$	150.0			$	—
Senior Credit Facility:
February 2016 Term Loan		180.0				190.0
June 2017 Term Loan		97.5				—
Revolving credit loans		—				85.0
Total outstanding borrowings		427.5				275.0
Less: unamortized debt issuance costs		(1.4		)		(1.1		)
Total debt		426.1				273.9
Less: current portion of long-term debt		(25.0		)		(10.0		)
Long-term debt		$	401.1			$	263.9
Outstanding letters of credit		$	39.6			$	44.3

Index

Senior Notes

On August 14, 2017, the Company entered into a note purchase and private shelf agreement (the “Note Purchase Agreement”), pursuant to which the Company agreed to sell $150 million aggregate principal amount of senior unsecured notes due August 14, 2029 (the “2029 Notes”) in a private placement. The 2029 Notes bear interest at 3.70% per annum with interest payable semi-annually in arrears on each annual and semi-annual anniversary of the issuance date. The obligations under the Note Purchase Agreement are unsecured, but guaranteed by each of the Company’s material subsidiaries.

The Company may from time to time issue and sell additional senior unsecured notes (the “Shelf Notes”) pursuant to the Note Purchase Agreement, in an aggregate principal amount of up to $150 million. The Shelf Notes will have a maturity date of no more than 12 years after the date of original issuance and may be issued through August 14, 2020, unless earlier terminated in accordance with the terms of the Note Purchase Agreement.

Pursuant to the Note Purchase Agreement, the 2029 Notes and any Shelf Notes (collectively, the "Notes") are redeemable by the Company, in whole at any time or in part from time to time, at 100% of the principal amount of the Notes being redeemed, together with accrued and unpaid interest thereon and a make whole amount calculated by discounting all remaining scheduled payments on the Notes by the yield on the U.S. Treasury security with a maturity equal to the remaining average life of the Notes plus 0.50%.

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 (the “February 2016 Term Loan”) and a $500 million revolving credit facility (the “Revolver”) with a sublimit of $50 million for swingline loans. This agreement is unsecured. On February 16, 2018, the maturity date was extended from February 19, 2021 to February 19, 2022.

On June 15, 2017, pursuant to an accordion feature available under the 2016 Senior Credit Facility, the Company entered into an incremental term loan agreement (the “June 2017 Term Loan”) which increased the term loan capacity under the 2016 Senior Credit Facility by $100 million. This agreement is unsecured and matures on June 15, 2022.

The February 2016 Term Loan of $200 million requires quarterly payments totaling $10 million per year in years one and two and $20 million per year in years three through the maturity date, with the remaining balance due in full on the maturity date of February 19, 2022. The June 2017 Term Loan of $100 million requires quarterly payments totaling $5 million per year in years one and two and $10 million per year in years three through the maturity date, with the remaining balance due in full on the maturity date of June 15, 2022. The 2016 Senior Credit Facility also contains a $500 million revolving credit facility (with a sublimit of $50 million for swingline loans).

Borrowings under the February 2016 Term Loan and Revolver bear interest at either the bank’s base rate (4.500% at December 30, 2017) or the London Inter-Bank Offer Rate (“LIBOR”) (1.564% at December 30, 2017) plus an additional amount ranging from 0.500% to 1.125% per annum (0.750% at December 30, 2017), 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 (0.125% at December 30, 2017), adjusted quarterly based on the Company’s leverage ratio. Borrowings under the June 2017 Term Loan bear interest at either the bank’s base rate (4.500% at December 30, 2017) or LIBOR (1.564% at December 30, 2017) plus an additional 1.000% per annum. As further described in Note 6 to the Consolidated Financial Statements, the Company has entered into interest rate swap agreements in order to hedge our exposure to variable rate interest payments associated with each of the term loans under the 2016 Senior Credit Facility.

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.

Covenants and Default Provisions of the Debt Agreements

The 2016 Senior Credit Facility and the Note Purchase Agreement (collectively, the “Debt Agreements”) require 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 to 1.0 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

Index

or equal to 4.00 to 1.0 as of the last day of each fiscal quarter. The Debt Agreements also contain 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 30, 2017, the Company was in compliance with all debt covenants.

The Debt Agreements contain customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events and invalidity of loan documents. Upon certain changes of control, payment under the Debt Agreements could become due and payable. In addition, under the Note Purchase Agreement, upon an event of default or change of control, the make whole payment described above may become due and payable.

The Note Purchase Agreement also requires that, in the event the Company amends its 2016 Senior Credit Facility, or any subsequent credit facility of $100 million or greater, such that it contains covenant or default provisions that are not provided in the Note Purchase Agreement or that are similar to those contained in the Note Purchase Agreement but which contain percentages, amounts, formulas or grace periods that are more restrictive than those set forth in the Note Purchase Agreement or are otherwise more beneficial to the lenders thereunder, the Note Purchase Agreement shall be automatically amended to include such additional or amended covenants and/or default provisions.

Interest Rate Swaps

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 notional amount of this swap agreement began at $197.5 million (the principal amount of the February 2016 Term Loan borrowings as of March 31, 2016) and will amortize at the same time and in the same amount as the February 2016 Term Loan borrowings as described in Note 5 to the Consolidated Financial Statements, up to the maturity date of the interest rate swap agreement on February 19, 2021. As of December 30, 2017, the notional amount of the interest rate swap was $180.0 million.

The Company entered into a second interest rate swap agreement which became effective on June 30, 2017, with a maturity date of June 15, 2022. The notional amount of this swap agreement began at $100 million (the principal amount of the June 2017 Term Loan borrowings as of June 30, 2017) and will amortize at the same time and in the same amount as the June 2017 Term Loan borrowings as described in Note 5 to the Consolidated Financial Statements. As of December 30, 2017, the notional amount of the interest rate swap was $97.5 million.

The Company’s interest rate swap agreements are executed for risk management and are not held for trading purposes. The objective of the interest rate swap agreements is to mitigate interest rate risk associated with future changes in interest rates. To accomplish this objective, the interest rate swap agreements are intended to hedge the variable cash flows associated with the variable rate term loan borrowings under the 2016 Senior Credit Facility. Both interest rate swap agreements entitle 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 debt facilities. Principal uses of cash for investing activities are capital expenditures and selective acquisitions, while principal uses of cash for financing activities are repurchase of the Company’s common stock and cash dividends paid to stockholders.

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):

	2017				2016(a)				2015(a)
	(52 weeks)				(53 weeks)				(52 weeks)
Net cash provided by operating activities	$	631.5			$	650.7			$	456.2
Net cash used in investing activities	(238.0		)		(369.3		)		(235.9		)
Net cash used in financing activities	(338.3		)		(291.3		)		(207.6		)
Net increase (decrease) in cash and cash equivalents	$	55.2			$	(9.9	)		$	12.7

(a) As a result of the adoption of ASU 2016-09 (discussed in Note 15 to the Consolidated Financial Statements), excess tax benefits on stock options exercised are no longer presented as a separate line item in the statement of cash flows. The presentation of fiscal 2016 and fiscal 2015 have been adjusted to conform to the current presentation.

Index

Operating Activities

Operating activities provided net cash of $631.5 million, $650.7 million and $456.2 million in fiscal 2017, 2016 and 2015, respectively. The $19.2 million decrease in net cash provided by operating activities in fiscal 2017 compared to fiscal 2016 was due to changes in the following (in millions):

	2017				2016(a)				Variance
	(52 weeks)				(53 weeks)
Net income	$	422.6			$	437.1			$	(14.5	)
Depreciation and amortization	165.8				143.0				22.8
Share-based compensation expense	29.2				23.6				5.6
Deferred income taxes	26.7				10.0				16.7
Inventories and accounts payable	(26.5		)		14.8				(41.3		)
Prepaid expenses and other current assets	2.3				1.8				0.5
Accrued expenses	(3.9		)		2.1				(6.0		)
Income taxes	4.2				11.8				(7.6		)
Other, net	11.1				6.5				4.6
Net cash provided by operating activities	$	631.5			$	650.7			$	(19.2	)

(a) As a result of the adoption of ASU 2016-09 (discussed in Note 15 to the Consolidated Financial Statements), excess tax benefits on stock options exercised are no longer presented as a separate line item in the statement of cash flows. The presentation of fiscal 2016 has been adjusted to conform to the current presentation.

The $19.2 million decrease in net cash provided by operating activities in fiscal 2017 compared with fiscal 2016 primarily reflects the timing of receipts and payments in relation to inventory and accounts payable partially offset by increased depreciation and amortization due to new store growth and investments in information technology and infrastructure.

The $194.5 million increase in net cash provided by operating activities in fiscal 2016 over fiscal 2015 was due to changes in the following (in millions):

	2016(a)				2015(a)				Variance
	(53 weeks)				(52 weeks)
Net income	$	437.1			$	410.4			$	26.7
Depreciation and amortization	143.0				123.6				19.4
Stock compensation expense	23.6				19.4				4.2
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 payable	11.8				16.3				(4.5		)
Other, net	6.5				8.7				(2.2		)
Net cash provided by operating activities	$	650.7			$	456.2			$	194.5

(a) As a result of the adoption of ASU 2016-09 (discussed in Note 15 to the Consolidated Financial Statements), excess tax benefits on stock options exercised are no longer presented as a separate line item in the statement of cash flows. The presentation of fiscal 2016 and fiscal 2015 has been adjusted to conform to the current presentation.

The $194.5 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.

Index

Investing Activities

Investing activities used cash of $238.0 million, $369.3 million and $235.9 million in fiscal 2017, 2016 and 2015, respectively. Fiscal 2016 had a significant cash outflow from investing activities related to the acquisition of Petsense. Other than cash flows related to the acquisition of Petsense, cash flows from investing activities in the years presented are primarily composed of capital expenditures. Capital expenditures for fiscal 2017, 2016 and 2015 were as follows (in millions):

	2017				2016				2015
	(52 weeks)				(53 weeks)				(52 weeks)
Information technology	$	82.1			$	40.5			$	35.8
New and relocated stores and stores not yet opened	79.3				111.2				96.7
Distribution center capacity and improvements	45.8				21.0				80.2
Existing stores	43.0				53.1				23.1
Corporate and other	0.2				0.2				0.7
Total capital expenditures	$	250.4			$	226.0			$	236.5

The above table reflects an investment in 101 new Tractor Supply stores and three store relocations, as well as 25 new Petsense stores during fiscal 2017. In 2016, we opened 113 new Tractor Supply stores, had three store relocations and began operating 143 Petsense stores as compared to 114 new Tractor Supply stores and six store relocations in fiscal 2015. Existing store expenditures were higher in fiscal 2016 and fiscal 2017, as compared to fiscal 2015, due to the investment in the chain-wide LED lighting retrofit initiative, which was 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 database and other strategic initiatives.

Spending for distribution center capacity and improvements increased in fiscal 2017 as we began construction of a new northeast distribution center in Frankfort, New York, and expansion of our distribution center in Waverly, Nebraska. Distribution center spending was also higher 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.

We currently estimate that capital expenditures in fiscal 2018 will range between $260 million and $300 million.

•	We plan to open approximately 80 Tractor Supply stores and 20 Petsense stores in fiscal 2018.

•	We plan to continue to invest in the development of our new northeast distribution center. We also plan to invest in two additional mixing centers and an East Coast import center.

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

Financing Activities

Financing activities used cash of $338.3 million, $291.3 million and $207.6 million in fiscal 2017, 2016 and 2015, respectively.

The $47.0 million increase in net cash used in financing activities in fiscal 2017 compared to fiscal 2016 was due to changes in the following (in millions):

	2017				2016(a)				Variance
	(52 weeks)				(53 weeks)
Net borrowings and repayments under debt facilities	$	152.5			$	125.0			$	27.5
Repurchase of common stock	(369.4		)		(331.7		)		(37.7		)
Net proceeds from issuance of common stock	16.3				41.0				(24.7		)
Cash dividends paid to stockholders	(133.8		)		(122.3		)		(11.5		)
Other, net	(3.9		)		(3.3		)		(0.6		)
Net cash used in financing activities	$	(338.3	)		$	(291.3	)		$	(47.0	)

(a) As a result of the adoption of ASU 2016-09 (discussed in Note 15 to the Consolidated Financial Statements), excess tax benefits on stock options exercised are no longer presented as a separate line item in the statement of cash flows. The presentation of fiscal 2016 has been adjusted to conform to the current presentation.

Index

The increase in net cash used in financing activities in fiscal 2017 compared to fiscal 2016 is largely due to incremental share repurchases of common stock and a reduction in proceeds from the issuance of common stock, partially offset by an increase in borrowings, net of repayments, under our debt facilities.

The $83.7 million increase in net cash used in financing activities in fiscal 2016 compared to fiscal 2015 was due to changes in the following (in millions):

	2016(a)				2015(a)				Variance
	(53 weeks)				(52 weeks)
Net borrowings and repayments under debt facilities	$	125.0			$	150.0			$	(25.0	)
Repurchase of common stock	(331.7		)		(292.7		)		(39.0		)
Net proceeds from issuance of common stock	41.0				41.7				(0.7		)
Cash dividends paid to stockholders	(122.3		)		(103.1		)		(19.2		)
Other, net	(3.3		)		(3.5		)		0.2
Net cash used in financing activities	$	(291.3	)		$	(207.6	)		$	(83.7	)

(a) As a result of the adoption of ASU 2016-09 (discussed in Note 15 to the Consolidated Financial Statements), excess tax benefits on stock options exercised are no longer presented as a separate line item in the statement of cash flows. The presentation of fiscal 2016 and fiscal 2015 has been adjusted to conform to the current presentation.

The increase in net cash used in financing activities in fiscal 2016 as compared to fiscal 2015 is due to incremental share repurchases of common stock, fewer borrowings, net of repayments, under our debt facilities, and an increase in quarterly cash dividends paid to stockholders.

Repurchase of Common Stock

The Company’s Board of Directors has authorized common stock repurchases under a share repurchase program of up to $3 billion, exclusive of any fees, commissions or other expenses related to such repurchases 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.

We repurchased approximately 5.9 million, 4.4 million and 3.4 million shares of common stock under the share repurchase program at a total cost of $369.4 million, $331.7 million and $292.7 million in fiscal 2017, 2016 and 2015, respectively. As of December 30, 2017, we had remaining authorization under the share repurchase program of $0.9 billion, exclusive of any fees, commissions, or other expenses.

Cash Dividends Paid to Stockholders

We paid cash dividends totaling $133.8 million, $122.3 million and $103.1 million in fiscal 2017, 2016 and 2015, respectively. In fiscal 2017, we declared and paid cash dividends to stockholders of $1.05 per common share outstanding as compared to $0.92 and $0.76 per common share outstanding in fiscal 2016 and fiscal 2015, respectively. These payments reflect an increase in the quarterly dividend in the second quarter of fiscal 2017 to $0.27 per share from $0.24 per share and an increase in the quarterly dividend in the second quarter of fiscal 2016 to $0.24 per share from $0.20 per share.

It is the present intention of the Board of Directors to continue to pay a quarterly cash dividend; however, the declaration and payment of future dividends will be determined by the Board of Directors in its sole discretion and will depend upon the earnings, financial condition and capital needs of the Company, as well as other factors which the Board of Directors deem relevant.

Index

Significant Contractual Obligations and Commercial Commitments

The following table reflects our future obligations and commitments as of December 30, 2017 (in thousands):

		Payment Due by Period
		Total				2018				2019-2020				2021-2022				Thereafter
Operating leases		$	2,680,687			$	324,813			$	611,835			$	524,991			$	1,219,048
Capital leases(a)		48,265				5,201				10,449				9,466				23,149
Long-term debt (b)		512,400				36,222				78,280				211,114				186,784
Construction commitments (c)		55,000				55,000				—				—				—
		$	3,296,352			$	421,236			$	700,564			$	745,571			$	1,428,981

(a) Capital lease obligations include related interest.

(b) Long-term debt obligations include an estimate of related interest after consideration of the interest rate swap agreements. See Notes 5 and 6 to the Consolidated Financial Statements for additional information regarding our interest rates.

(c) Represents contractual commitments related to the ongoing construction of a new distribution center in Frankfort, New York, and the expansion of our existing distribution center in Waverly, Nebraska.

At December 30, 2017, there were $39.6 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

Refer to Note 15 to the Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 30, 2017.

Index